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EarningCall_500	Good afternoon, and welcome to the First Quarter of Fiscal 2023 Conference Call for Leslie's, Inc. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded and will be available for replay later today on the company's website. Thank you, and good afternoon. I would like to remind everyone that comments made today may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today and will not be updated in the future if circumstances change. Please review the cautionary statements and risk factors contained in the company's earnings press release and recent filings with the SEC. During the call today, management will refer to certain non-GAAP financial measures. A reconciliation between the GAAP and non-GAAP financial measures can be found in the company's earnings press release, which was furnished to the SEC today and posted to the Investor Relations section of Leslie's website at ir.lesliespool.com. On the call today from Leslie's is Mike Egeck, Chief Executive Officer; and Steve Weddell, Chief Financial Officer. Thanks, Caitlin, and good afternoon everyone. Thank you for joining us. Please note that we have posted a short earnings deck to Leslie's IR site and that we will be referring to certain pages in that deck during our call. I'd like to start by reminding everyone that the first quarter is our smallest quarter of the year, representing only about 12% of total year sales. However, it was an important quarter as we take the actions, incur the expenses, and make the appropriate investments to set ourselves up for the all-important second half of our fiscal year, which is pool season across the country. With that in mind, I am pleased that we delivered overall Q1 performance that was in-line with our expectations, despite some very challenging weather in the quarter. Sales for the quarter grew 6% to a record $195 million. Average order value grew 7% and transactions were down 1%. Average revenue per customer grew 6% and our customer file was flat. Residential hot tub grew 35% in the quarter, and PRO pool grew 11%. Residential pool sales decreased 3% in the quarter. Comp sales decreased 4% for the quarter, which contributed to a two-year stack comp of plus 17%. Comp sales for the quarter were negatively impacted by wet and cold weather, particularly in Texas, California, and the Southwest. Sales in Florida benefited from the cleanup associated with Hurricane Ian. In total, a weather service provider calculated that weather was a 5% headwind to comp sales for the quarter. This is the first quarter since the positive impact of the Texas freeze in the second quarter of 2021, that weather has had a significant impact on our overall comp sales. Gross profit for the quarter was 65 million and gross margin rate was down 290 basis points. Please refer to Page 6 of our supplemental deck to review our Q1 margin rate bridge. As you can see, the primary drivers of the change in margin rate are: number one, business mix, driven by acquisitions that disproportionately impacted margins in the quarter; two, incremental product costs in excess of retail price increases; three, incremental DC expense associated with the execution of our strategy to peak store and DC inventory earlier in preparation for pool season; and four, deleverage of occupancy costs driven by a decrease in comp sales. These factors are all reflected in our full-year guidance, and we expect these same factors to impact our Q2 margin rate. To complete our summary of Q1 financial performance, adjusted EBITDA for the quarter was negative 12 million and adjusted diluted earnings per share were negative $0.14. Given the seasonality of our business, the loss in the quarter was anticipated and does not change our expectations for the full-year. Accordingly, we are reaffirming the full-year outlook we provided at our Investor Day in November. As we noted in November, we expected a tougher first half comps this year, and our first quarter results were in-line with our internal expectations. However, the makeup of those results did have some differences from our full-year outlook. As you can see illustrated in the table on Page 9 of the deck, total comp sales of minus 4% was less than our full-year guide of minus 2.5%. Comp sales for nondiscretionary products, ex. Trichlor, were down 3% in the quarter and had a total comp sales contribution of minus 2.5% versus our full-year guide of plus 1.3%. Trichlor comp sales grew 8% in the quarter and had a total comp contribution of plus 1% versus our full-year guide of minus 1.1%. We saw no price deflation versus the prior year's quarter or the fourth quarter of fiscal 2022. Discretionary product comp sales were down 11% in the quarter and had a total comp contribution of minus 2.5% versus a planned comp contribution of minus 2.7% for the year. Non-comp sales in the quarter were plus 9.6% versus our full-year guide of plus 5%. In summary, nondiscretionary sales, ex. Trichlor, were not as strong as we expected due to adverse weather. Discretionary sales overall performed in-line with our expectations although hot tub sales were somewhat better than we expected. Trichlor outperformed as retail prices remained stable and non-comp sales outperformed, driven by acquisitions and new stores. As we look to the second quarter, weather is projected to be less of a headwind, but we do expect our hot tub business to decelerate such that we continue to anticipate first half comps to be as we described at our Investor Day. Moving to the industry backdrop. The pool and hot tub industry experienced reduced consumer demand in the quarter. As you can see on Page 10 of the deck, our specialty pool retail competitors, based on third-party aggregated credit card data, experienced a decline in sales of 7.2% in the quarter. This softening demand has two primary components. First, as will be discussed concerning our own results, weather was a significant negative factor year-over-year for most markets. Second, consumers were less confident based on the challenging macroeconomic backdrop. For our business, we saw this decreased confidence, manifested in consumer behavior changes, including purchases of smaller sizes of our two key sanitizers, Trichlor and [indiscernible] and reduced units per transaction. UPT for the quarter was down 2%. Against this backdrop of reduced demand, the competitive advantages derived from our integrated system of physical and digital assets and our associates' strong execution of our diversified growth initiatives drove continued market share gains. Turning now to the performance of our strategic growth initiatives. First, despite the macroeconomic and weather challenges in the quarter, our consumer file was flat versus the prior year's quarter and improved 200 basis points from our fiscal Q4 2022. Next, we continue to deepen our relationship with our consumers. Average revenue per consumer grew 6% in the quarter, and the number of loyalty members increased 15% over the prior year's quarter. With regard to our PRO initiative, we ended the quarter with 2,850 PRO [indiscernible] contracts in place, and we are currently operating 80 PRO locations. Our plan to convert 15 PRO locations and build three new PRO locations in 2023 remains on track, and all 18 locations are scheduled to be operating by the start of the pool season. PRO consumer group sales grew 11% in the quarter, with comp sales down 4%. Our PRO comps were affected by the same factors we discussed for our overall business, as well as some product availability challenges with one equipment vendor. M&A was the standout contributor to the quarter, accounting for more than 15 million in non-comp sales. Year-to-date, we have closed on two acquisitions that added six locations. And we have another five acquisitions under LOI that would add 13 locations. We expect to close the acquisitions under LOI prior to the start of pool season. The [Technical Difficulty] conditions in the pool and hot tub industry have created additional attractive acquisition opportunities, and we plan to continue accelerating this initiative. Regarding our residential white space initiative, in the quarter, we added five locations through acquisitions, opened one new store and closed two stores for a net increase of four locations. We currently operate more than 990 locations, and we're on track to operate over 1,000 locations by the start of the pool season. For AccuBlue Home, we have finished consumer testing on the version 2.0 device and remain on track to launch this initiative for pool season 2023. With regard to corporate governance, we have published a proxy for our Annual Shareholding Meeting scheduled for March 16, 2023. In the proxy, we announced that Ms. Jodee Kozlak will not be seeking reelection to our Board, and then Mr. Marc Magliacano of L Catterton will be resigning from our Board, effective with the completion of our annual meeting. We thank Jodee and Marc for their service and many contributions to Leslie's. In conjunction with these changes, we also announced that our Board will be revised from 10 to 8 members. Thank you, Mike, and good afternoon, everyone. As Mike mentioned, our first quarter results were in-line with our expectations, and we reported record sales for the quarter. We're grateful for our team as they continue to execute against our initiatives and prepare for pool season in 2023. For the first quarter, we reported record sales of 195 million, an increase of 6% or 10 million when compared to the first quarter of fiscal 2022. Our comparable sales decreased 4% or 7 million. This decrease is on top of our comparable sales growth of 21% in the first quarter of fiscal 2022 and calendar adjusted comparable sales growth of 26% in the first quarter of fiscal 2021. Our comparable sales growth on a two-year stack basis was 17%, and on a three-year stack basis was 42%. Our noncomparable sales totaled $17 million in the first quarter of fiscal 2023, which was driven by seven completed acquisitions that added 32 locations, as well as eight net new store openings since the end of fiscal 2021. Our comparable sales decreased by 4% for residential pool, 4% for PRO pool, and 2% for residential hot tub. On a two-year stack basis, we generated comparable sales growth of 14% for residential pool, 36% for PRO pool, and 4% for residential hot tub. Unfavorable weather had a 5% impact on sales growth during the first quarter with the Texas market experiencing the largest impact. Gross profit decreased 3% or 2 million when compared to the first quarter of fiscal 2022, and gross margin rate, which decreased in-line with expectations was down 290 basis points to 33.5% from 36.4% in the prior year. On Page 6 of our supplemental deck, I'll review our Q1 gross margin rate bridge in more detail. During the quarter, gross margins were impacted by the following: first, business mix lowered gross margins by 130 basis points, primarily related to M&A completed during the last 12 months. Second, lower product margins had a 40 basis point impact as a result of higher input costs. During the quarter, promotional activity was flat to slightly down and did not have a material impact on our gross margins. Third, occupancy costs deleveraged by 85 basis points due to rent increases and negative comparable sales growth. And finally, incremental distribution expenses lowered gross margin by 35 basis points. Distribution expenses were elevated as we executed on our plans to receive in and distribute more product to our store network earlier than last year in preparation for the coming pool season. Now, I'll turn to SG&A. SG&A increased 16% or 12 million when compared to the first quarter of fiscal 2022. We estimate inflation during the quarter increased SG&A by approximately 5 million, primarily related to payroll and digital marketing spend. The current year quarter also has an additional 4 million of noncomparable SG&A associated with acquired businesses. Adjusted EBITDA was negative 12 million for the first quarter of fiscal 2023, which was slightly ahead of internal expectations. Adjusted net loss was 25 million in the first quarter of fiscal 2023, compared to a loss of 11 million in the first quarter of fiscal 2022. Interest expense increased to 13 million during the quarter from 7 million in the first quarter of fiscal 2022. And our effective tax rate remained consistent at 25%. Adjusted diluted earnings per share was negative $0.14 in the first quarter of fiscal 2023, compared to negative $0.06 in the prior year. And basic and diluted weighted average shares outstanding were 184 million in the first quarter of fiscal 2023, compared to 189 million shares in the first quarter of fiscal 2022. Moving to the balance sheet. We finished the first quarter of fiscal 2023 with cash of 3 million, and we had 91 million outstanding on our revolver compared to cash of 53 million and no borrowings on our revolver at the end of the first quarter of fiscal 2022. The reduction in net cash was primarily due to investments in inventory and higher M&A activity during the past 12 months. At the end of the first quarter of fiscal 2023, we had 99 million available on our revolver. We ended the first quarter of fiscal 2023 with 430 million of inventory, an increase of 185 million or 76%, compared to 245 million at the end of the first quarter of fiscal 2022. The increase in inventory is primarily related to equipment, chemicals, and M&A activity. Both the equipment and chemical product categories are nondiscretionary in nature and are not subject to technology or fashion risk. And as previously stated, our first priority is to put the company in a position to meet consumer demand for the season. In furtherance of that objective, we continue to view our current elevated inventory position as appropriate and sensible given the uncertainty of supply. We also have the ability to use our balance sheet as a competitive advantage and invest in higher inventory levels in both our stores and our distribution centers. When we believe we have sufficient inventory to meet consumer demand through season, and after we see supply chains across the industry become more predictable, then we will strategically manage inventory levels down. On debt, at the end of the first quarter of fiscal 2023, we had 796 million outstanding on our secured term loan facility, compared to 804 million at the end of the first quarter of fiscal 2022. The applicable rate on our term loan during the first quarter was LIBOR plus 250 basis points, and our effective interest rate was 6.1%, compared to an effective interest rate of 3% during the first quarter of fiscal 2022. Before I wrap up our first quarter performance, I'd like to share an update on our supply chain readiness. In November, we discussed specific actions we were taking to improve our supply chain across three key areas. First, expand capacity by implementing the two-shift seven-day-a-week model during pool season for our distribution centers and by adding additional three PLs to our network; second, stock more inventory across our network; and third, diversify our supply base. I'm pleased to report that we have made significant progress against all three of these areas, and our team is focused on meeting consumer demand across our entire network during the upcoming pool season. Now, let me turn to our outlook for fiscal 2023. Our performance in the first quarter of fiscal 2023 was in-line with expectations. And today, we are reaffirming the outlook we issued at the end of November. As we discussed a couple of months ago, we're expecting a more uncertain macroeconomic environment in fiscal 2023, up to and including a recession that will pressure industry sales, margins, and earnings growth. Approximately 80% of our sales are nondiscretionary products and services, which will mitigate, but not eliminate a recessionary impact on our business. For fiscal 2023, we continue to expect sales of 1.56 billion to 1.64 billion, gross profit of 667 million to 708 million, adjusted EBITDA of 280 million to 310 million, net income of 131 million to 146 million, adjusted net income of 145 million to 160 million, and diluted adjusted earnings per share of $0.78 to $0.86, and diluted share count of 185 million shares to 187 million shares. Finally, on our outlook, I want to remind everyone of the natural seasonality within our business. Our primary selling season occurs during our fiscal third and fourth quarters, which span April through September. We invest in our business throughout the year, including in operating expenses, working capital and capital expenditures related to our growth initiatives. While these investments drive performance during our primary selling season, they reduced our earnings and cash flow during the first half of our fiscal year. Consistent with our commentary in November in fiscal 2023, we expect negative comparable sales growth and significant gross margin declines in the first half of the fiscal year, given the strength of the comparable periods in fiscal 2022 and fixed cost deleverage. We also expect to generate all of our adjusted EBITDA and earnings in the second half of the fiscal year. In summary, during the first quarter of fiscal 2023, we generated record sales and performed in-line with our expectations. We're grateful for the contributions of our entire team as they continue to execute against our initiatives and prepare for the 2023 pool season. And we will continue our relentless focus on enhancing our customers' experience and executing our initiatives to drive growth and market share gains. Thanks, Steve. The pool and spa industry has proven over time to be one of the most durable and advantaged consumer products categories, but it does have some sensitivity to macroeconomic conditions. In addition, during periods that are not prime pool season, consumers can take some shortcuts in maintenance with less danger of lost swimming days, safety concerns, and equipment damage from poor water care and maintenance. In the first quarter, we did see some indications of reduced confidence and demand from pool and spa owners, especially for discretionary products. This reduced confidence, combined with some very unfavorable weather, made for a challenging industry backdrop. Against that backdrop, we feel good about meeting our internal profit expectations and growing our top line 6%. These results are a testament to our teams performing at a high level into the ability of our diversified strategic initiatives to drive growth in adverse macro conditions. And importantly, we feel very good about the progress we made against our plans to de-risk our supply chain and ensure that we are in a position to win big during the 2023 pool season. Hey, good afternoon everyone. Hope you are good. I think you've talked about this in the past. I wanted to ask what recession could look like for you. And I think there's a lot of puts and takes and who knows how the consumer will spend on travel and maybe it comes back into this category, but if there is a history lesson â and then just to clarify, minus 5% to flat, is that bracketing a potential recession or that is a non-recession scenario? Yes. Thanks for the question, Simeon. The full-year guidance does include challenging macro conditions up to including a recession. So that does bracket it, to answer your question. And you're right, there's a lot of puts and takes in there, right. A recession could slow down spend on travel and could keep more people at home. You could also look for people to just try to skip some steps in pool maintenance, but they can only do that for a period of time, as you know. So, yes, we're comfortable that our full-year guidance sufficiently brackets economic conditions up to and including a recession. Okay. And then a quick follow-up. How are â I don't know if it's deflation or disinflation or price tracking relative to expectations? And then demand for durables. You mentioned you're starting to see some pockets or durables, but I guess, units per se. How are units tracking versus how you thought? And how is price tracking versus how you thought? Yes, start with price. Inflation was a little higher than we anticipated in the quarter, but came down across all of our product categories. So, definitely heading in the direction we anticipate. It doesn't change our outlook for 5% for the full-year. And in terms of durables, or if you would, big ticket items, we have seen some weakness in equipment. And at the same time, our equipment repair and parts businesses have picked up. So, there's a little bit of a signal that some people are looking to repair versus replace or upgrade right now. But I think we've got to keep in mind that this is a very small quarter for us. And it's not â we internally try very specifically not to take the trends we see in Q1 and apply them to the balance of the year. Such a small quarter that a little bit of changes in consumer behavior or in this case, a really challenging weather, have an outsized impact in the quarter that just don't impact the full-year. This is Rene Marin on for Steven Forbes. I wanted to touch on the first side of the business. Can you discuss any incremental learnings from this customer? Additionally, can you discuss any notable trends with pricing in this segment? Thank you. Yes. Our PRO business is run through our residential stores predominantly. And so, in the PRO business, we saw a similar impact as we did in residential due to the weather. So, comps were down 4%. We looked very closely to see if we saw any signs of an increase in DIY behavior among our consumers, and maybe some reduction in their use of PROs. And we did not see anything of that nature in the data that we got. So, I think for us, focused on smaller PROs and servicing them through our own retail stores, the PRO conversation is very similar to the residential conversation. We did see some of the PROs buying some smaller quantities of sanitizers. I think there's a feeling in the PRO market that chemical prices could come down. And I think they're trying to wait it out, frankly, a little bit, but we have not seen any indication of any deflation in chemicals at this point. Hi guys. Thanks for taking the question. Can we start with inventory, Mike? The inventory kind of pops off the page and pop up a bit sequentially. How much is safety stock? And when do you see inventory normalizing? Yes. It's a great question, Ryan. Thank you for that. And as we think about our inventory growth, I mean there's two key reasons that inventory is up, one is sales growth over the last year â last few years. And then importantly, the strategic decision that we made to intentionally pull forward 2023 receipts in advance of season. We believe that pull forward is appropriate. When you look at the last two years, the industry has had a number of supply chain challenges and we've had far too many out of stocks on key products and we're not â unable to serve consumers. So, the pull forward allows us to load our stores with more product and facilitate the replenishment cycle during the early part of our season. And it's also one of the reasons that you saw some of the distribution costs be a little bit higher in the last quarter as well. But again, the inventory that we're procuring today is for this season. And it's inventory that is being brought in earlier in preparation for season. It's not stocking up for longer-term needs. Yes, very purposeful. And the only thing I would add, Ryan, is with our omnichannel capabilities, the ability to load up the stores, kind of maximum capacity early and then to keep it there year-round, allows us to take advantage of ship-from-store. Okay. And then my second question, I wanted to dig in on the discretionary sales, I think you mentioned down 11%. Can you just unpack some of the weaker categories? And I know you mentioned equipment, but what else is in there? Yes. We consider, most all equipment, nondiscretionary, right? Heater is probably the one we've talked about in the past that you don't have to have a heater to keep a pool maintained. And we did see heater sales down very much in-line with what we saw in Q4 as well. In terms of other discretionary categories, as you might imagine, we've seen the above ground pool business be very weak. Prices have come down considerably. There's a lot of excess inventory in the market. We're not playing a price game on that. So, we've seen our sales come down as well. And then recreation products in general, floats, and [noodles] [ph] and things like that, have are down considerably as we anticipated. And aboveground pools as we anticipated as well. We saw that start to occur very â actually in the fourth quarter and then also very early in Q1. Hi guys. Thanks for taking the question. First one on gross margins. It does seem to be back at Q1 of [2020] [ph] levels. And even though sales were almost 40% lower back then. So, how should we think about the mix impact going forward? Is that the largest headwind we should keep in mind as we update our models here? And is that discretionary piece also playing into that as well? Yes. So, remember back, our guidance in November was flat to negative 35 basis points for the year. So, we do anticipate a reduction in gross margins for the year. We talked about the first half being lower or down significantly, I should say, with some improvement in the back half. So, the core question that you're getting at is, will the current quarter impacts persist? And if not, why might they change as we work through the year. And so, I may kind of walk through each of the individual line items, but business mix, number one, related to M&A that we completed primarily in the back half of last year. As we work through this full-year, it will be much less impactful on $1.6 billion of sales versus the first quarter sales of $195 million. When you think about product cost, we're in the off season. So, our expectation is that by the time that pool season starts, industry retail pricing will have caught up with industry cost increases. We have seen somewhat of a slow adoption of some of those higher costs in the current environment, but absolutely expect that to occur. And then D.C. expenses in the first quarter, those expenses will moderate as we get into the full-year as well. We talked a lot about the challenges we had in our New Jersey, DC and vendor delivery cadence last year. And since we brought forward some of the inventory receipts and movement of that inventory around our network, we've also pulled forward some of those expenses as well. And then again, as we look to the second half and better comps, we're going to see occupancy normalize as well. So, no change to overall outlook that we provided back in November, again, the [290] [ph] basis point decline this quarter in-line with our expectations and see a path to what we previously provided. Got it. That's very helpful. And just my follow-up here on Mike, some of your ending comments in the prepared remarks, just on the indications of reduced confidence in the category. So, are you hearing that from your PRO customers, as well as some of the larger PROs particularly? And I'm just curious, if we were to see a wider slowdown across pool, would you see that more pronounced from the PRO or the DIY customer at first? Maybe just give us some thoughts there. Yes. Look, I think the way to think about demand is to keep in mind, it's a very small quarter, right, for the whole industry. And I know we've said that a lot, but again, trying to extrapolate trends from this first quarter, which is, a, small; and b, had a really outsized weather impact, I just think that's tricky. And internally, we're trying not to do that. In terms of DIY versus PRO, as I said in the earlier question, very similar behavior that we saw in both channels. And we look really hard for any indication that there might be some switch from PRO to DIY, and we did not see that. So, we expect the PRO business to play out for the year as anticipated when we put out our guide, and we expect the residential business to do the same. Hi, thank you. Just wondering if you could speak on the impact of Trichlor. Obviously, it's held in here, and you've said in the past you plan to hold on to it as much as you possibly can, but just given the big delta between how resilient pricing has been so far versus what's in your guidance, so I was wondering if you could maybe provide some perspective on if you would anticipate pricing to come down? And when might that be or if there's any signs of weakness there that you're seeing at this point at all? Yes, Garik. Thanks for the question. The pricing for pool season really gets set Memorial Day weekend. We've talked about that a little bit before at some conferences as well as calls. That's when I would say the industry settles in on price for the balance of the pool season. So, up until that point, we try not to make any assumptions. We talked about at our Investor Day that there's a case for price deflation in Trichlor. We have not seen any evidence of that. We know that Trichlor costing is up. I think that is now set in the industry, and it would be unusual for the industry to discount off of that. But there's a lot of chatter about that potential outcome. So, we're not discounting it, which is why we have it in our guide as a possibility, but to date, we haven't seen any inclination of price deflation in PRO or Residential. And just to reiterate, there's plenty of inventory in the channel. I would say everybody is fully inventoried in Trichlor. Got it. That's helpful. Follow-up question is just you spoke to the weather impacts on the quarter. It sounds like most of that was on the nondiscretionary side, but I'm just wondering if there might possibly be any pent-up demand from any purchases that might have been pushed out due to the weather or should we assume that those sales were effective, they lost with the poor weather in the quarter? Yes. I think of the interest to see, I think chemicals, right, that sales opportunity has probably passed. I think it remains to be seen on equipment because with the weather being as challenging it was, it impacted store traffic, site traffic. And pools were not on people's mind. So, I think there's an opportunity to recover that. And again, super small quarter, upsized weather impact, weâre being very careful not to draw any trends for the full-year from it. And we didn't see anything despite those two factors that would tell us we need to. Yes. I'd add to it, Garik, that I think the loss sanitization days in the calendar fourth quarter were de minimis right? So, I think Mike's right, it's more along the lines of traffic. And could that have deferred some purchases around standardizers, but lot sanitization days, just not meaningful. Hi, good afternoon everyone. I want to follow up a little bit on the prior question around Trichlor. Mike had noted there's a lot of Trichlor inventory in the industry. So, we'll see what happens with pricing. I guess, in the event there is some price cuts when we get close to Memorial Day. How would that impact your product margins? Are you guys already, kind of brought up on a lot of the Trichlor inventory and sort of stuck with your cost? How should we think about that flow-through if deflation comes to be? Yes. I believe our costs are set for Trichlor. So, if we â and I would say the industry costs are set. So, if we see price deflation from this point, retail price deflation, that would be an impact on margins. It's also the reason we don't think we're going to see it in the industry. I don't believe there is a need for any price deflation. And in our mind, inventory, demand, supply, both domestic and import, has all kind of settled in at a specific price and a specific volume, and we consider the category healthy at the moment. Okay. And then maybe just on that same topic, there seems to be some concern or some speculation that you and others in the industry are sitting on elevated chemical or Trichlor margins versus historic margins, where are you relative to like a 2019 level? Are you in-line or above on Trichlor or what does that margin profile look like? Yes. Peter, I'm sorry, I'm going to have to pull the competitive information on that one. We have grown margins throughout the quarters. So, as David brought up earlier on a question, we're closer to 2019 currently overall, but we expect to end the year in a better position than we were in 2019. And so margins are up overall for the business. And I would say our Trichlor margins are higher, but to go into specifics, I'm going to have to decline that one. Thank you very much. Good evening. What I wanted to ask is, you mentioned the smaller pack sizes are something you're seeing as a potential sign of consumer weaknesses. I guess how do you compare those â that percentage of the volume versus, say, before the big Trichlor disruption where there was a 35-pound bucket of tabs and people thought they couldn't get anything, they'd grab it? Second thing I'd ask is wouldn't the smaller pack size be accretive to you from a product margin standpoint? And finally, depending on how you extrapolate that, is it an easy switch if you're over-inventoried at the store of big pack sizes to make that correction given pack sizes or are you stuck with it? Anything you can help out with there? Thanks. Yes. Thanks, Andrew, for the question. The smaller sizes are a little more profitable for us. We do, particularly now that we do the bulk of our own tableting, have the ability to switch between bucket sizes during the season. The advantage we have this season is we're just fully inventoried across all sizes. But the behavior we're seeing in going to smaller sizes, and this is â I'm going to say this is anecdotal from our stores, but we have a lot of stores, and it's a fairly common explanation when we ask our general managers what's going on, and that people seem to be coming in with a monthly budget, if you would, for their pool. And so, they seem to be â you can't manage sanitizers down because your pool size doesn't change. What you can do is spread sanitizer purchases out by buying smaller buckets at a time. We think that's what we're seeing right now. But again, it's a small quarter, weather, try not to draw any trends from it. Appreciate that. Second question I would ask you, and this kind of goes back to where you've kind of consistently shown that you've outcome the industry. I know you said costs are set for you on Trichlor, costs are set for the industry. How do you think of the risk of your competitors sitting on too much inventory and that really being the leg down in deflation? And what's your visibility into that to be able to react quickly and be preemptive or whatever on that? Thanks. Yes. I don't â I can only speculate about the level of competitors' inventory. What we do know is that industry is fully inventoried. So, in that case, there is an opportunity for some rational behavior. We have â like I said, we haven't seen that. I don't think we expect to see it. However, as we said at our Investor Day, when we laid out our full-year guidance, we're more than prepared to compete if we need to. What we're not going to do is lose market share and sanitizers. And we believe that we have a cost structure where we are more than able to do that. Great. Good afternoon and thanks for taking my question. My first question was just a follow-up on inventory. Curious if you could just break out, Steve, maybe just the increase in units versus price. I'm not sure if you could get as granular as the Trichlor units versus price, but that would be helpful. And then just a second piece of that first question is how you're thinking about the rate of inventory growth in fiscal 2Q, right? So, I think overall inventory balances were up around 74% this quarter. Just thinking how should we expect that rate of growth in fiscal 2Q? That's my first question. Thanks. Yes. Both good questions. I certainly expect inventory to be up again in Q2. We typically will peak in our inventory the last couple of weeks of March, first couple of weeks of April. And then we start getting into, kind of replenishment cycle as season starts to kick off. So, would expect inventory to be up again in Q2, less so than in Q1, but still dollar increase. When you think about inflation, I guess, like stand out, and I talked through a fourth factor, it's equipment, it's chemicals, it's M&A and it's inflationary. And inflation was a Top 4 contributor to the increase year-on-year. Definitely have a larger increase from a unit perspective than from a cost perspective, but certainly have seen those costs flow through to the inventory balances as well. We feel good about the inventory that we have in our facilities and in our stores. Again, when you think about that composition of product that we're bringing in early, it's high-turn product, top SKUs that we know we need for full season and where last year we talked a lot about, kind of getting behind the curve and replenishment cycle, we have more inventory available to distribute out to whether e-commerce, customers or to our retail locations to serve those consumers as season really gets kicked off. And again, consistent with prior years, I can't tell you the day or the week that season will really kick off, but it will be typically in the month of May. So, I feel good with the position we have in inventory today. That's super helpful. And then just a follow-up question on Trichlor, Mike, I think you mentioned you weren't seeing any evidence of price deflation, I think we've seen some online retailers maybe cutting price in January. I'm not sure if that's just a seasonal, kind of promotion that they typically do, but any commentary on that would be helpful. Thanks. Yes, there's a little bit of import â [indiscernible] to actually call it questionable import [indiscernible] running through Amazon at the moment, but it's quite small and it's literally small buckets. And there was something similar last year for a short period of time and then it disappeared. And I think we're probably in a similar situation. There's always some competition around the edges, but in terms of our retail price competitors and our scale digital competitors, I think the Trichlor pricing is acting pretty rationally. Hi, Mike, Steve, just a couple of questions. First, just on the sector supply chain. Maybe what â just help us. What's still not operating efficiently? And you're bringing a lot of inventory in. I'm just curious, what areas of the business are you still, kind of concerned about or maybe aren't operating, I guess, fluidly at this point? That's my first question. Yes. Peter is â you'll remember in Q3 and Q4 last year, we had some challenges with specialty chemicals in particular. And we said, we would address that in two ways. We buy more earlier, which we've done. And we'd also diversify our vendors there, which we've done as well. So, if I was to point to one area that would be probably predominant. In terms of equipment, the equipment vendors have done a nice job getting themselves back on schedule, fairly recent. And we have taken in a lot of equipment inventory purposely so that we won't be looking necessarily to reorder in season. We [obviously] [ph], trying to buy it upfront, which I think we've successfully done with all except maybe one vendor. And then in Trichlor, that's really us, and we control most of that supply chain now, particularly with our â particularly with our investment in stellar for tableting. So, we feel good about where we are with Trichlor, but we've also bulked up the inventory there as well, with the idea that we're going to preposition a much higher percentage of it into the stores themselves. And the only other area that's a little â thatâs been a little bit challenging, but it's coming along nicely now is [indiscernible], kind of the second largest sanitizer in the industry that was in rather short supply in Q4 and is just really now, in December and January, coming online in the volumes we'd like. All right. That's very helpful. Thanks Mike. And then just on the loyalty file, I think you said it was up 15%, I think that's an improvement in the rate of growth relative to what was running, kind of last year, maybe talk about what's driving that and the â maybe the complexion of who you're bringing [indiscernible] the trial? Yes. We're just â we're really pleased that the loyalty file is performing. It's now up to about 75% of our total sales. Membership continues to grow, and the members are continuing to get more productive for us, but probably what's most encouraging for us is, as we look at the different cohorts in our file, we have a â I'm going to say, a limited number of loyalty members who are in our top cohort, despite in total accounting for 75% of sales. And the way we look at that is really a significant opportunity to continue to trade people up through those cohorts. So, a lot of the loyalty growth is coming from reactivations, right? Customers who have not â were in a loyalty program, maybe much earlier several years ago and have come back in as we [put the] [ph] marketing of it. And also, we're signing up at a nice rate, new loyalty members from our existing base, that's predominantly in stores. And then also digitally, and those are predominantly brand-new customers to Leslie's. So good, we feel really, really good about the loyalty file, not just for this quarter, but long-term as we continue to build its productivity. We have reached the end of our question-and-answer session. I would like to turn the conference back over to Mike for closing comments. Thank you, operator, and thank you all for joining us this afternoon. For those of you with pools, we'd suggest you start thinking about pool season because as I believe we made it clear at our call today, we certainly are preparing for it and looking forward to it. Thank you. Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
EarningCall_501	Good morning and welcome to the AGCO Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Greg Peterson, AGCO Head of Investor Relations. Please go ahead. Thanks Anthony and good morning. Welcome to those of you joining us for AGCOâs fourth quarter 2022 earnings conference call. We will refer to a slide presentation this morning thatâs posted on our website at www.agcocorp.com. The non-GAAP measures used in that presentation are reconciled to GAAP metrics in the appendix of that presentation. We will also make forward-looking statements this morning on our call with respect to demand, product development and capital expenditure plans, production levels, engineering expense, exchange rates, pricing, share repurchases, dividends, interest rates, future commodity prices, crop production, supply chain disruption, inflation, component delivery, sales, margins, earnings, cash flow, tax rates and other financial metrics. We wish to caution you that these statements are predictions and that actual events may differ materially. We refer you to the periodic reports that we file from time-to-time with the Securities and Exchange Commission, including the companyâs Form 10-K for the year ended December 31, 2021. These documents discuss important factors that could cause the actual results to differ materially from those contained in our forward-looking statements. These factors include, but are not limited to, adverse developments in the agricultural industry, including those resulting from COVID-19, such as plant closings, workforce availability and product demand. They also include supply chain disruption, weather, exchange rate volatility, commodity prices and changes in product demand. We disclaim any obligation to update any forward-looking statements except as required by law. A replay of this call will be available on our corporate website later today. On the call with me this morning are Eric Hansotia, our Chairman, President and Chief Executive Officer; and Damon Audia, our Senior Vice President and Chief Financial Officer. With that, Eric, please go ahead. Thanks, Greg. Good morning. Itâs great to be with you. We finished 2022 incredibly well from both an operational and financial perspective. But before we get into those details, I want to start with a quick recap of the Investor Day we hosted in December. Those of you that attended will recognize this slide from that meeting. Itâs the foundation of our strategy all in one page. The purpose, vision and overarching strategy we laid out at the 2021 investor meeting havenât changed. We are concentrated on delivering farmer-focused solutions to sustainably feed our world. These solutions are more than machinery. They are all about the data, technology, connectivity and digital solutions around the machines. Sustainability is also key to who we are. It weaves through our day-to-day activities and is a cornerstone of our strategy. Finally, feeding the world energizes our purpose. While our strategy hasnât changed, we are doubling down on our key strategic initiatives, growing faster than the market, optimizing our business and fostering a culture that enables success. We have raised the bar on our technology commitments and our financial performance, particularly in our operating margin performance. You will see that as we move to our fourth quarter results. This focus is already paying off in terms of strong top line growth and a very healthy margin expansion. Slide 4 highlights our great finish to 2022. We posted a record fourth quarter and full year in terms of sales, operating margin and earnings. I would like to deeply thank AGCOâs 25,000 employees for their hard work that resulted in the world class support for our farmer customers throughout this challenging year. These efforts helped deliver fourth quarter sales growth of 24%, with adjusted operating margins expanding by 340 basis points to 12%. For the full year, our net sales reached almost $12.7 billion. Adjusted operating margins improved to 120 basis points to 10.3% and adjusted earnings per share hit $12.42. Now, these are all records for AGCO. During 2022, while delivering record results, we also executed an ambitious investment plan to expand our smart farming solutions and enhance our digital capabilities through increased engineering spend and several key acquisitions. Overall, I could not be prouder of our team. These record results are a testament to our focused execution on our strategy while continuing to deal with supply chain challenges during the year. While the supply chain has improved over the last couple of quarters, we continue to experience significant component shortages that are impacting our production volumes. The encouraging news is that despite the global supply bottlenecks and inflationary pressures, farmer economics remain healthy and the global end market demand remains strong. We expect supportive market conditions to continue into 2023. Our financial outlook for â23 reflects this optimism, which will allow us to accelerate technology-related investments as well as continue to return cash to our shareholders. Slide 5 details industry unit retail sales by region for the full year of 2022. Support of farmer economics resulted in robust demand for larger agricultural equipment as farmers continued to replace aging machines during the year. Supply chain constraints limited industry production and dealer inventory levels of new and used large ag equipment remain well below normal levels across the industry. For 2022, global industry retail sales of farm equipment were lower in North America and Europe despite significantly higher sales of larger machines. North America industry retail tractor sales were down approximately 5% for the full year compared to 2021. Smaller tractor sales declined from record levels in 2021, while increased sales of higher horsepower units helped dampen the decline. Industry retail tractor sales in Western Europe, which also were restricted by supply chain challenges, decreased approximately 9% in 2022 compared to robust levels in 2021. In South America, industry retail tractor sales increased 3% during 2022. Strong growth in Argentina and the smaller South American markets offset modestly lower overall sales in Brazil, despite strong demand for large ag equipment. Healthy crop production and favorable margins are supporting farm profitability. These supportive economics are expected to drive healthy demand in South America again throughout 2023. We are very positive about the underlying ag fundamentals supporting strong industry demand in 2023. Stocks-to-use levels of green all around the world remain at very low levels, supporting healthy commodity prices. With Chinaâs reopening, we donât think that will change anytime soon. The dealer channel for new and used equipment is still below target levels from the constrained supply. Input costs like fertilizer and fuel are down significantly from their peaks last year. While farm income maybe down modestly in 2023 from record levels in â22, we think it will remain at a very good level in 2023 and be supportive for industry demand. Currently, we donât see that changing much for 2024. AGCOâs 2022 factory production hours are shown on Slide 6. You can see that our production increased in 2022 in line with our expectations. Although we continued to face supply chain and logistics challenges, we were successful in reducing our inventory as semi-finished products. In the fourth quarter, we reduced the work-in-process inventory by nearly $275 million compared to the level at the end of the third quarter. For the full year, production hours increased approximately 6% compared to the 2021 levels as we worked to satisfy the strong demand. Based on our industry and market share forecast, we are projecting a 3% to 5% increase in production hours for 2023. At year end, AGCOâs global order board remained extended and is approximately flat compared to the strong December of 2021 level. Orders for tractors and combines were higher in Western Europe and South America compared to a year ago. In North America, orders were down from 2021 levels as we have elected to limit our order intake to improve our on-time delivery rates. Our order coverage extends through the third quarter of 2023 in Western Europe and North America and through the second quarter of 2023 in Brazil where we continue to limit our orders to around one quarter in advance to give ourselves more pricing flexibility. The bottom line, demand for our farmer-focused products remains very strong. Youâll recognize Slide 7 which highlights our focus on three high-margin growth areas. These opportunities provide significant growth potential at higher margins and less variability during the cyclical downturns. The first focus area is taking our Fendt full-line brand global. We continue to grow the business along two vectors. The first, we expanded the Fendt product line beyond tractors to now include key products like sprayers, planters, combines and more. The second mention is taking this full line of Fendt products global. As you can see in our results, interest continues to grow for our premium Fendt product lines in both North and South America. In 2022, our Fendt branded sales in those markets increased over 31% compared to 2021. Our Fendt and Challenger sales in North and South America are expected to double over the next 4 to 6 years. The second focus area is our global parts and service business. AGCO is already in a leading position in fill rates, which is just effectively having the right part at the right place when the farmer needs it. We are building from a solid foundation to capture more of the dealers and farmers business. We are helping dealers become better and more proactive with their service and parts offerings with our smart solutions and expanding digital capabilities. As a result, we expect our high margin after-sales and parts business to continue to grow and have higher penetration rates. The third focus area involves precision agriculture. At AGCO, we address the Precision Ag market in two ways. First is through our Precision Planting business, which has become one of the most successful ag tech companies in the world. Precision Planting has been a leader in providing automation and intelligence to planters. Over the last couple of years, itâs growing beyond planters into the other parts of the crop cycle, like spraying, soil testing and harvesting. In addition to its impressive technology, Precision Plantingâs success is generated through their unique OEM-agnostic retrofit approach, which reduces the farmerâs upfront investment and increases their ROI regardless of the equipment brand that they own. By offering solutions through this retrofit approach, we are expanding the addressable market well beyond AGCO brands to all industry brands. The other way we address the Precision Ag opportunity is Fuse, which provides OEM solutions for our AGCO equipment. Regarding advanced technology, we remain focused on driving technology innovations that help our farmers improve their productivity, profitability and sustainability. As we have seen multiple times, these types of innovations are receiving strong recognition in the form of industry awards. Just recently, AGCO won 10 Innovation AE50 awards from ASABE, which recognizes the best innovations and technologies for agriculture, food and biological systems. Not only was this the most awards of any company but more than our top two competitors combined. Going a little deeper into our technology, our unique retrofit approach caters to a huge audience. There is nowhere better to showcase this and to educate our farmers than our Precision Planting Winter Conference which held its annual event last month. At this event, we hosted nearly 7,000 of the best farmers in the world to hear directly from our engineers and agronomists about product development and research we have done in the field. I attend this program myself every year. I had the chance to have lunch with farmers from Kazakhstan, Ukraine and Poland. All those that attended had the opportunity to see the latest Precision Planting technologies and learn how these advancements can help improve the productivity on their farms. Historically, the new product introductions had been focused on planters. However, starting last year, Precision Planting broke from that tradition and made a big announcement as they brought five needed solutions to the sprayer, including adding a neural network onto the 2020 architecture, leveraging artificial intelligence capabilities for targeted spraying solutions. The team continued their momentum of solving the farmersâ biggest problems this past summer by announcing it was revolutionizing soil testing with the introduction of Radicle Agronomics soil testing technology. Radicle boasts the worldâs first fully-automated soil laboratory and one of the AE50 Award winners this year. This new product disrupts the 100-year-old soil testing model and puts the capability into the hands of local agronomists with faster and more reliable results. Understanding how to improve soil health is great for farm productivity, but also great for the emerging need of carbon sequestration. At this yearâs conference, our Precision Planting team made another disruptive launch with their new Panorama Data app. The new app, pictured on Slide 9, makes Precision Planting data the most usable, portable and shareable planter information on the planet. Panorama modernizes the way our 2020 controller interacts with the world. It helps farmers better utilize collected data by allowing for easy uploads to the platform of their choice. Panorama allows farmers an unobstructed view of the data collected in their cab, whether on their app or through moving data to the platform of their choice. Panorama will feature map viewing, reporting and the ability for a farmer to allow their Precision Planting dealer to provide remote technology support. We are very excited about continuing to bring these types of precision ag technologies to our farmer customers, with our core focus of trying to solve their biggest challenges which will also contribute to our growth and margin expansion goals for AGCO. With that, I will now hand over the call to Damon who will provide you more information about our fourth quarter results. Thank you, Eric and good morning everyone. I will start on Slide 10 with an overview of AGCOâs regional net sales performance for the fourth quarter and the full year. Net sales were up approximately 33% in the quarter compared to the strong fourth quarter of 2021 when excluding the negative effects of currency translation. Pricing in the quarter, which was around 13% contributed to higher sales, along with strong growth in high horsepower tractors, combines and precision ag products. By region, the Europe/Middle East segment reported an increase in net sales in the fourth quarter of approximately 38%, excluding the negative effect of currency translation compared to the prior year. The increase in sales was the result of solid execution of product deliveries, coupled with favorable pricing and strong retail demand in Germany, France and Turkey. In South America, net sales in the fourth quarter grew approximately 58% year-over-year, excluding favorable currency translation, driven by significant pricing as well as increased volume and positive mix. Sales were up strongly across the South American markets with high horsepower tractors and combines showing the largest increases. Net sales in North America increased approximately 23%, excluding the unfavorable impact of currency translation compared to the fourth quarter of 2021. The increase resulted from higher sales of large tractors, Precision Planting products and combines as well as strong year-over-year price increases. On a constant currency basis, net sales in our Asia/Pacific/Africa segment decreased about 15% compared to the fourth quarter of 2021. Delays of shipments from our European factories resulted in lower sales across the Asia/Pacific/Africa markets relative to the strong fourth quarter last year. Finally, consolidated replacement parts sales were approximately $366 million for the fourth quarter, approximately flat year-over-year. Unfavorable currency effects were around 10% during the fourth quarter. Turning to Slide 11, the fourth quarter adjusted operating margin improved by approximately 340 basis points versus 2021. Margins in the quarter benefited from higher sales and production, a richer mix and positive net pricing compared to the fourth quarter of 2021. Price increases in the quarter of approximately 13% more than offset significant material and freight cost inflation on a dollar basis and were positive on a margin basis. For the full year, net pricing was positive and contributed to the overall margin improvement. By region, the Europe/Middle East segment reported an increase of approximately $100 million in operating income compared to the fourth quarter of 2021 and margins improved approximately 250 basis points. Higher sales and healthy products mix contributed to the improvement. North American operating income for the fourth quarter increased approximately $37 million year-over-year. Higher sales of margin-rich products more than offset higher operating expenses. Operating margins in South America reached 20% in the fourth quarter and operating income improved over $85 million versus the same period in 2021. Continued significant increases in end market demand, along with strong pricing and a healthy sales mix supported the year-over-year growth. Finally, in our Asia/Pacific/Africa segment, operating income declined approximately $19 million in the fourth quarter, reflecting the delivery timing challenges I mentioned earlier. With margin expansion in the last 2 years in our North American, South American, Asia-Pacific, Africa regions from our strategy execution and disciplined pricing, we expect AGCOâs margin profile to be more balanced across the globe in the years ahead. Slide 12 summarizes our Precision Ag business. As you can see, we are focused on expanding our addressable market from just traditional agriculture machinery spend, which today is in the low to mid-teens. With our Precision Ag portfolio, our sites are set around 70% for all non-land areas. We believe that the investment in Precision Ag positions us well as we will play a major role in achieving global sustainability targets that are being established while simultaneously helping our farmers improve their profitability. Finally, we recorded $700 million in Precision Ag revenue in 2022, a 29% increase from 2021. Unfavorable foreign currency effects were around 3% in 2022. As we announced during our December Investor Day, we now expect our high-margin Precision Ag business to grow to $1 billion by 2025. Slide 13 details our full year free cash flow for 2022 and 2021. As a reminder, free cash flow represents cash used in or provided by operating activities less capital expenditures. And free cash flow conversion is defined as free cash flow divided by adjusted net income. While we made significant sequential progress in reducing our work-in-process inventory in the fourth quarter and generated over $1 billion in free cash flow, working capital requirements related to supply chain challenges continue to result in higher than traditional inventory levels. This affected free cash flow in both 2021 and 2022. Despite that, AGCO generated $450 million in free cash flow in 2022, up 15% versus 2021. For 2023, we expect our raw material and work-in-process inventory to remain somewhat elevated, given supply chain challenges, but we expect it to be a modest source of cash versus 2022. We expect our free cash flow conversion to range from 75% to 100% of adjusted net income, a significant increase from 2022. Our capital allocation priorities remain unchanged and will continue to include investments in our Precision Ag offerings and digital capabilities as well as opportunistically adding bolt-on acquisitions to help position AGCO for long-term success. In addition, we remain focused on our direct returns to investors during 2022 with a regular quarterly dividend that we increased 20% to $0.24 per share and a variable special dividend of $4.50 per share. Future returns of cash to shareholders will be based on cash flow generation, our investment needs, which include capital expenditures and acquisition opportunities as well as our market outlook. Slide 14 highlights our 2023 retail market forecast for our three major regions. Globally, driven by strong commodity prices, we expect healthy farm economics to support another year of strong end market demand. For North America, we expect similar demand compared to the healthy levels in 2022. We expect continued growth in high horsepower row crop equipment segment to be offset by softer demand for smaller equipment after the several years of strong growth. Increasing interest rates are expected to continue to slow the smaller equipment segment of the market. In South America, we expect industry sales to be flat to up 5%, moderated by supply chain constraints. This region remains one of the strongest end markets, especially in Brazil, where they are forecasting record production and strong farmer profitability, which we expect to drive demand for large ag equipment beyond 2023. As grain exports from Brazil are expected to increase over the next several years and they continue to increase arable land, we expect the demand for our large ag equipment to remain strong. Shifting to Western Europe, the industry is forecasted to be relatively flat compared to 2022. Farm fundamentals in the region are generally healthy with grain prices continuing to outpace input inflation. Meanwhile, supply chain constraints last year are extending the equipment replacement into 2023. Slide 15 highlights a few key assumptions underlying our 2023 outlook. In addition to focus on meeting the robust end market demand, we will also make significant investments in the development of new solutions to support our Farmer First strategy. Although we see strong market demand, AGCOâs results will still be dependent upon our supply chain performance in 2023. Our sales plan includes market share gains along with price increases of approximately 8% aimed at offsetting material cost inflation. We expect currency translation to negatively impact sales by about 1%. Engineering expenses are expected to increase by approximately 20% compared to 2022. The increase is targeted at investments in smart farming and precision ag products. Operating margins are expected to improve to around 10.5%, driven by higher sales and production, favorable pricing, net of material cost, and improved factory productivity, partially offset by increased investments in our engineering and digital initiatives as well as inflationary cost pressures. With increasing interest rates and higher sales forecasted, we expect other expenses mainly related to accounts receivable sales to increase approximately $50 million year-over-year, with the majority of that in the first half of 2023. We are targeting an effective tax rate in the range of 27% to 28%. Turning to Slide 16. Our financial goals remain unchanged from what we highlighted at our December Investor Day. We are currently expecting net sales to be in the range of $14 billion. Earnings per share should be around $13.50 in 2023. We are targeting capital expenditures of $375 million. As I mentioned earlier, free cash flow conversion should be in the range of 75% to 100% of adjusted net income, consistent with our long-term target. Good morning, and congrats on a nice quarter. I guess my first question, just South America, I donât think Iâve ever seen a 20% margin for you guys in South America. But just as we think about the margin performance that you put up in 2022, how much is sort of structural or related to increased sales of Fendt or aftermarket or Precision Ag versus just pricing power? And Iâm just wondering how I think about the margins longer-term, just given the strength you guys have seen in 2022. And then my second question, again, strong margin performance. What parts of the portfolio are underperforming, if any? Perhaps GSI, can you help us with where GSI margins ended this year versus the opportunity going forward? Thank you. Yes. Sure, Jamie. So if we look at South America, your first point, as weâve said for the last couple of quarters now, the margins have been exceptional and really twofold. One has been the structural improvements that weâve made in South America over the last several years to really move to the higher horsepower type tractors, introducing Fendt there, and that has created some structural differences to our overall operating performance. That, coupled with probably the strongest end market that we have right now around the world, is really catering to stronger pricing. So like you said, the 20% in the quarter was exceptional. As we tried to guide, we do think margins will come down a little bit here in 2023 as our pricing, our team down there has done a really good job in pricing in advance of material costs rising. So we know that will come down. What we would say is longer term we do expect to see South America structurally different and sort of in that low to mid-teens for the long-term. So again, a lot of improvement over the past couple of years, but weâre at sort of a high point, and we continue to expect to see that at least for the foreseeable future but a little bit lower as we move into 2023. To your second part of your question on some of the underperforming areas, I think we would say the grain and protein group did struggle a little bit relative to what we were expecting. It was sort of challenged by a couple of things in the start of the year with the steel prices really affected here in North America. We dealt with the cyber event, as you recall, in the second quarter, which really put incremental pressure on grain and protein here in North America. And then the Asia-Pacific part of grain and protein was really challenged by the challenges in China with the COVID lockdowns affecting a lot of the business there. So those two parts of grain and protein, I would say, were below what we were hoping. South America grain and protein did quite well, was a contributor there. Weâve taken some structural actions, as you know, to really improve that business. Weâve done some factory closures. Weâve added some technology-type acquisitions as part of that portfolio. So as we move into â23, we are expecting it to improve profitability. It was profitable here in 2022, I would say, low single digits, but again, overall profitable business with a big improvement or a bigger improvement expected here in 2023. Hi, thanks. This is Sean McMullen on for Tami. Last quarter, I think you mentioned around $300 million of sales that got pushed into 4Q. Can you just provide an update on where kind of red-tag units stand today and whether that all got worked through at year-end? And then also in your prepared remarks, you mentioned the mix shipments in APA. Can you provide just some quantification or details on whether that all kind of gets delivered in 1Q? Yes, Sean. So I think the team did a really good job in working through the semi-finished inventory around the world. Asia â Iâd say Europe did an exceptional job where very little, if any, left over there. Iâd say the one region where we still have a little bit of semi-finished inventory was here in North America. And again, that was driven more by some supply challenges. As things are getting better, there are still one or two suppliers that pop up. And so we had a little bit of semi-finished inventory here in North America. But overall, the teams around the world did a very good job. My comment about the in-transit inventory again, as we work through some of the products, again, a couple of hundred million are probably on the water here that we would expect to move through the system, depending on the selling season, more likely in the first half of 2023 rather than just the first quarter. But again, thatâs more of a hopefully a timing issue for us than anything. Great. Thanks, Damon. And my second question is more focused on Precision Ag. Can you just kind of give the split of kind of your expectations for growth this year as well as kind of Precision Planting versus Fuse? And then also, do you expect kind of more normal seasonality for Precision Planting this year? Yes. I think, Sean, historically, it was much more of a first half weighted sales, given the planting season. Last year, with the strong demand, some supply chain disruptions, we saw more of an equal cadence of sales. I would tell you, as we look at the demand right now, weâre probably going to see something similar to what we had in 2022, so a little bit more balanced than the historical first half, second half. But overall, still strong demand there. Precision Planting itself was up around 39% last year, so very strong demand, a little bit stronger than what we saw in Fuse again. And thatâs given that OEM-agnostic backdrop where weâre able to cater to all OEMs from a retrofit basis. So very strong demand there. And again, as we think about that growth from $700 million this year to our target of $1 billion by 2025, a lot of that is coming from our Precision Planting business. So we see good growth coming here in â23 as well. Yes. Hi, good morning, everyone. Eric, I wonder if we could just talk about in North America, considering how strong the margins are of the Precision Planting product, it looks like on the legacy tractor products, you folks might be running in the mid-single digit margin range. And so given the Fendt rollout, can you just talk about how much line of sight do you have to use that rollout as a tool to take North America margins higher? Whatâs an opportunity set? Yes, the demand generation is well on track for Fendt in North America and South America, our globalization of the full Fendt product line. Weâre step-by-step establishing more and more dealers that meet the stringent qualifications of being a Fendt dealer. And so thatâs in place. In reality, we underserved that demand in 2022. We could have sold a lot more, and weâve actually got a few dealers that are frustrated. They want to grow with this new product line, and we werenât able to feed that enough. So weâre working very hard in â23 to make sure that we can match supply and demand more closely. But so far, what weâre seeing is the Fendt experience, the brand value proposition is being maintained in terms of the best of the best for product and support. The dealers are doing a great job of delivering that. The products are living up to the expectations and itâs really about us just feeding the channel. Okay. And can I ask in terms of on the used inventory side over the past, call it, 3 months, where weâve seen increases in 100, 200-horsepower used tractor inventories in North America. Is that what youâre seeing as well? Can you just comment on the demand cadence for those product lines? Specifically, I know you spoke about large ag being very healthy. Iâm wondering can you address that product range specifically? Yes, I would say there is an inflection point right around the 150 horsepower. So below 150 horsepower, the market is softening. And itâs tied more to â directly to GDP. There is a lot of â over COVID time, there is a lot of pull-ahead buying, we would say, strong market demand there for low horsepower tractors. Thatâs cooled off, and weâve been seeing that now for a few quarters that, that order rate is cooling off. Dealer inventory levels are back closer to target on the low horsepower. When you get above 150 horsepower, the demand is still strong. There is just simply not enough grain in the marketplace and so prices are staying high. Fertilizer prices and fuel prices are coming down off their peaks from last year. So even though the grain prices have moderated a little bit, so have some of the input costs. So farmer profitability was very strong in 2022. We expect it to be very strong in 2023, and we expect large ag purchase power to be strong. And the channel is still lean, both in new and used, and we donât expect that to change throughout the full 2023 season. Hi, good morning. Thank you for the question. I was wondering if you could talk a little bit about your expectations for margin cadence in 2023. I mean, you noted some of the unusual seasonality in Precision Planting. Obviously, the cyber issue in 2Q. Just help us in terms of how youâre thinking about the cadence for margins and incremental margins as we go through the year. Thank you. Yes. I think, Kristen, maybe a couple of comments. I would say couple of differences year-over-year. Again, you alluded to Q2, I would say, given the cyber event we experienced last year, you would expect to see a significant improvement in margin in Q2 year-over-year. I would say, Q4, so the very strong performance that we just delivered here based on South America, the pricing, maybe not as much of an incremental increase year-over-year. So I think those are probably two unique quarters. If I think about the pricing, the 8% pricing that we talked about, a lot of that is carryover. So as you move through the year here, youâre going to see probably a little bit pricing stronger in the first half. We will assess the markets as we always do. But then as we look at that carryover sort of tailing off in the back half of the year, so youâll see the pricing sort of tail out. And then the other income and expense line as â in my opening comments, I said would be up around $50 million. The majority of that would be in the first half of the year as well. And then youâll start to see that come back down year-over-year as we start to lap some of these higher interest rates. So thatâs sort of how weâre thinking through the sequential or the movements year-over-year on a quarterly basis. Thatâs really helpful. Thank you. And then just as a follow-up to one of the previous questions, at a high level, you talked about doubling North and South American Fendt revenue over the next 4 to 6 years. Just help us understand how much of that incremental penetration is baked into your outlook for market share gains in 2023. Thank you. So we do have market share growth planned in both North America and South America related to the Fendt rollout, as Eric alluded to, for one of our challenges is getting more products to our dealers and our farmers here. I donât think weâre going to give a specific forward-looking market share gain plan, but we do have plans to grow that in both regions in Fendt next year or this current year. Yes, thanks. Damon, just to piggyback on the last one, as you kind of sum up everything you mentioned, just from a bottom-line perspective, in first quarter, you would expect to be up, presumably, on a year-over-year basis? Is that correct? I know that a pretty big headwind from other expense, but should we be thinking first quarter compared to the like 239 first quarter of this year? Should that be up year-over-year? Yes, Tim. I think we â even with the incremental operating expenses, we do see good pricing, as I said, alluded, weâre going to have a strong pricing in the first quarter. So hopefully, we would expect to be up Q1 versus the prior year. Got it, okay. And then maybe one for you, Eric, just forecasting these markets and I am asking specifically about large ag, can be challenging for a number of reasons in terms of predicting things like the weather or geopolitical events. But as you look out and you talk to dealers and customers, how are you thinking about managing the business as you look beyond? I mean I think itâs pretty clear what kind of the demand profile appears to be in this year. But how are you thinking about as you think about staffing and just running the business, itâs kind of the longevity of the cycle, which we know has been unique for a number of reasons. But again, just trying to get your perspective for how this cycle potentially, it kind of shapes up, looking beyond this year. I would be interested in any thoughts you have on that. Thank you. Yes. The way we view this cycle is that itâs been peak-shaved because of capacity. So, we likely would have sold more in 2021 and 2022 if we could have built more, but we couldnât and neither could our competitors. And so the whole market was starved, which essentially pushes that peak out into the future. And so 2023, we have got the order board solid already right now into quarter three for most of our products, especially for large ag and the channel is very light on inventory, and our order rates continue strong. And you say, well, what are the underlying leading indicators you look at? Well, there is still drought conditions in much of the production ag portions of the world that suggests and that we are still in the La NiÃ±a weather cycle, which suggests drier weather in the production areas. So, until the market can replenish those stocks, they are all in â itâs like 5-year to 8-year lows for the stock-to-use ratios on all the primary grains wheat, soybeans, corn. Until those can get replenished, the prices are likely to stay high. And if the prices stay high and as long as these input costs continue to moderate, farmer profitability will be strong. So, we are expecting â23 to be very strong. And right now, unless something dramatic happens, we think â24 will also be a good year. But thatâs a ways out. So, a lot of things will come into play. We will be watching how the spring harvest goes in the Southern Hemisphere, see how much grain comes in through that and then watch the demand for â24 and how the planting season happens in the Northern Hemisphere. Those are good indicators for 6 months to 18 months out. Thank you. Good morning everybody. In the prepared remarks, you mentioned future cash returns based on cash flow gen investment needs, obviously, given the strong outlook, balance sheet, etcetera, can you discuss how you are thinking about it this year? Are you leaning towards a special dividend, maybe some buyback, or is there potential M&A out there? Yes. Larry, I think for us, as I have said in my remarks, we will stay disciplined on how we have approached this. We will look at our quarterly dividend on an annual basis as we normally have. Last year, we raised that 20%. We will look at that relative to our sustainable cash flow generation, see whether that $0.24 still makes sense. As we have talked before, we have an active M&A pipeline, looking for opportunities to accelerate our technology where we can buy that rather than having to invest and build it. And so we do have an active pipeline, and we will look at the potential costs associated with those acquisitions, along with the macro outlook. And as Eric said, we expect â23 to be good. We expect â24 to be good based on we see it today. And so based on those things, that would sort of drive what we come down to on any sort of special variable dividend we would pay in 2023. Historically, our repurchases have been more in the line of keeping our shares outstanding at around 75 million shares. And so again, I expect as we look at â23 to probably follow that similar path. And we will revisit the special variable dividend, probably more in the Q2 timeframe as we have in the last couple of years. Okay. That makes sense. Thank you. And then we have heard a lot about Fendt, and you guys have obviously grown that business quite a bit more to go. But can you sort of layer in the IDEAL combine? How is that doing? Whatâs the performance like? And are you bundling the combine with the Fendt tractors, or just maybe an overall update on there, because we have heard a lot about that for a couple of years and now here obviously a lot more about Fendt tractors? Thank you. Yes. The IDEAL combine, we walked ourselves slowly into the market to make sure that we had both great productivity and great reliability. This past year was the year where we really turned the corner on. We have always had a great performing machine, but we had some early reliability issues in the first couple of years. 2022 was a year where we felt really great about reliability in all the major markets. And so now we are ready to allow that product to ramp up more aggressively. And so we have got plans over the next couple of years to put more capacity in place and things like that. We generally donât bundle it with other products. The bundling that would happen would be with our Momentum planter and the tractor. Those two often get bundled together. But the combine is one that will stand on its own and sell based on its own performance. And Larry, just to maybe give you a couple of statistics of the strength of the IDEAL combine, in both North America and South America, it was up over 70% in sales in â22 versus â21. So, itâs a very strong demand and performing quite well. Hey guys. Good morning. I wanted to just ask about, there was a comment in the prepared remarks about limiting the order intake in North America. I wanted to just see if you could expand on that. Is that supply chain-driven? Is it AGCOâs production constraints driven, or just any more color around that? Thanks. Yes. I talked about it. There is a couple of dynamics at play here. One is that we are launching the Fendt product line, bringing on new dealers and getting that business accelerating. While we are doing that, we want to â we are taking on new customers as well with that product. And so we want to have a great first impression. The product impression has been great and the dealer service has been great. The fly in the ointment in that whole system has been our ability to deliver on time. Thatâs been our biggest negative in our ramp-up opportunity. And so because of that, we decided to, instead of having an open order book, we shortened the order book window to be able to give higher reliability on our commitment dates. And this is happening with some of our competitors as well. Itâs the volatility that still remains in the supply chain of suppliers having issues that then constrain our ability to finish the machine and delay the production. So, itâs all around that issue, nothing else. Well, itâs because thatâs a growth market. The supply chain in South America is â we already â the order book, we already were going one quarter at a time. So, that was in place. Europe is a bit more of a stable market strategy, whereas North America and South America, itâs a conquest where we are adding a new brand to the market. And so we are establishing more new first impressions. And we want to be a little bit more cautious and certain with the delivery dates that we are giving in those markets because we are first, engaging with new customers. We want the entire experience to be positive. We had deep relationships â yes, the relationships in Europe are deep and long-lasting and they understand the one issue â they already know the product, they already know the dealer. Itâs delivery uncertainty, and we feel like we can manage that in the relationship there. But we wanted to tighten it up in North America and South America. Got it. Okay. Thank you. And then just there are a couple of times your comments around the strength in Brazil. I just wanted to make sure â your guys, your dealers, the guys on the feet on the street, you are not hearing anything about any hiccups related to the election or any changes in sentiment around or pausing just around the election that occurred down there? I mean at a tactical level for a short period, there were disruptions in transportation and a few things like that because some of the streets were blocked. But thatâs very â is very tactical, short-lived, kind of spot-related. Big picture, farmers are still making fantastic profits in South America. They are the ones adding more ground into production to feed the global demand gap that exists. And so farmer profitability is extremely strong. Demand pulling from that market continuing to grow. We expect a very strong year in 2023. And we donât see anything of significance structurally coming from the new government to try and slowdown that vital part of their economy. Thank you. Good morning. I also want to ask a question on the orders. You talked about them being relatively flat to 2020 â relative to the prior year. But obviously, there is quite a few limitations that you still have in a way you structured the order book. Is there a way to talk about it on an apples-to-apples basis to kind of have a better sense for where the underlying demand is? And what do you need to see in order to be able to maybe open these order books a little bit first? Well, right now, what we need to see is more stability in our supply chain. Thatâs it, itâs pretty straightforward in that regard. We continue to see macro overall easing of the supply chain challenges, but not enough to where itâs stable. Itâs getting better and better every quarter, but itâs still our number one challenge to having a predictable supply chain system. So, thatâs â and I think thatâs what we would say. Anything else? Mig, I think the two markets probably that had somewhat â have changed a little bit just in terms of how we are handling orders is North America. And I think Damon and Eric did a nice job explaining how we are limiting there. In South America, last year, we really curtailed order intake to handle inflation and pricing. That situation maybe is getting a little better. So, maybe we are a little looser in South America and a little tighter in North America. But on balance, I would say itâs not too far from apples-and-apples. Okay. Then my follow-up, just a question on the margin outlook, I donât know if I understand you properly. But it seems that Latin America, we are going to see lower margins in 2023. Is it fair to assume that the other segments are going to see margin expansion? Yes. I think Mig, the â if I think about the margins in â23 versus â22, I think the two primary drivers that will dampen the improvement year-over-year, one is the engineering. So, we are going to be increasing engineering spend approximately $100 million year-over-year. So, thatâs going to tamp down the margins. Thatâs sort of global, more in the North America, Europe markets, but we are doing that. And then the second primary driver is going to be the sort of contraction in our South American margins. So, those two things coupled with a couple of one-offs here and there about the euro-dollar exchange of importing European products are sort of whatâs tamping down a little bit the margins. But generally, itâs going to be engineering in those couple of regions and then South America. Hey guys. Thanks for taking me in here. Damon, I think it was you who said that as we go forward, you would expect the margins to be more balanced among the regions. I guess for that to happen, North America probably has to make the strongest positive move. So, is that just all about sort of mix and more Fendt and more Precision, or is there something else that you guys can do to help the North American margins get better? I think, Steve, itâs a couple of things. Itâs continuing the growth of our big three, so Fendt growth in North America, precision ag growth in North America and then parts. I think the other two drivers there is, remember, grain and protein is a business that really struggled in â22 in North America, given the steel costs, given the cyber event. We still see good recovery there, good margin, which will help to enhance the underlying margin. And then the Massey Ferguson Group, itâs been â probably itâs been turning around its performance over the last couple of years, did really well. We still see opportunities for cost improvements in the Massey brand as well. So, those two coupled with the big three growth initiatives are sort of the drivers for North America. Okay. Great. And maybe a quick follow-up for Eric about bringing GSI, letâs call it. And I am curious, you have been in your seat for a while now, but you sort of inherited this thing. Is this sort of core to your plans going forward? Does it really fit with the rest of the strategy in your view? Just how are you thinking about GSI sort of over the longerâ¦ Yes. Steve, itâs core to our business today. We are putting a lot of scrutiny on that business, though, to extract the value out of the transformation. We launched two major transformations over the last couple of years in addition to the growth engines. The South America transformation has delivered. And now itâs also had some nice tailwinds of a strong market, but itâs delivered and we have got that business turned around nicely. Grain and protein have gone through the actions. This year, we just had a lot of headwinds, China shutdowns, steel prices, the cyber attack. But we have made moves. We have consolidated factories, reduced the amount of brands, reduced the amount of business, things like that. We think that will shine through in â23. But we also recognize that itâs got to deliver. And the team is very, very clear about needing to deliver strong results and earn the right to grow further. I think Chris [ph] already asked about like the quarterly cadence of margins, and that was some helpful color. But anything on the quarterly cadence of revenue, should we expect like the normal seasonal pattern versus disruption over the past several years? Yes. Again, I have to say, Nicole again, similar to the prop margin, Q2, again, given the cyber event, you might see a little bit of above traditional and then Q4 is we had a very strong quarter here sort of outpacing our own expectations that you might see a little bit of a less, smaller sort of year-over-year change relative to Q1 and Q3, but nothing significant. Okay. Thank you. And then working capital, what have you guys embedded for working capital improvement in the conversion guidance or free cash flow conversions for the guidance for the full year? Yes. What we â I think as I have said in my scripted remarks, we expect it to be a modest positive in â23. In â22, it was a use of cash as we were â had built up some inventory, given the supply chain challenges. It was â I think we were about $350 million to $400 million of a use of working capital in 2022. We still expect inventories to be elevated. But as we see supply chain hopefully improving, I think what I said is a modest positive in â23. This concludes our question-and-answer session. I would like to turn the conference back over to Eric Hansotia for any closing remarks. Well, I will just close today by saying thank you very much for your participation and your support of AGCO. We are really, really proud of what we have accomplished in 2022. It was a record year in many, many ways. If you peel back the onion, you will see that the key success areas are right at the core of the strategy that we shared with you in December, and the origin of it was back in 2021. Our focus is on growing our margin-rich businesses like Fendt, parts and service and our precision ag smart machine business. We have also committed to you to improve some of our other businesses like Massey Ferguson and our grain and protein business. In â23, you will see the results come through in all of those, whether they are improvement businesses or our growth businesses. We have been investing heavily in the last few years. And in â23, we are making even bigger investments to continue the development of these farmer-focused solutions that are solving critical farmer problems with â many of them with very short paybacks. Yes, we target essentially 1 year, 2 years max. we are seeing take rates that are very high and the margins are very high. We are also seeing our innovations receive strong recognition in the form of industry awards. Most recently, the 10 Innovation Awards at AE50 that I mentioned earlier in my comments. We are using our precision ag tools to really engage strongly on sustainability, putting more and more of our technology efforts there, capturing a lot more data, helping our farmers make the transition to not only more productive farming, but more sustainable farming. Lastly, the large ag markets are very strong globally. Farm fundamentals are healthy and supporting farmersâ investments. So, we are excited about 2023 and beyond. We are convinced that the best days of AGCO are still in front of us.
EarningCall_502	Greetings, and welcome to the Leggett & Platt Fourth Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Susan McCoy, Senior Vice President of Investor Relations. Thank you. You may begin. Good morning, and thank you for taking part in Leggett Platt's Fourth Quarter Conference Call. On the call today are Mitch Dollof, President and CEO; Jeff Tate, Executive Vice President and CFO; Steve Henderson, Executive Vice President and President of the Specialized Products and Furniture, Flooring and Textile Products segments; Tyson Hagale, Senior Vice President and President of the Bedding Products segment; and Cassie Branscum, Senior Director of IR. The agenda for our call this morning is as follows: Mitch will start with a summary of the main points we made in yesterday's press release and discuss operating results and demand trends. Jeff will cover financial details and address our outlook for 2023 and the group will answer any questions you have. This conference call is being recorded for Leggett & Platt and is copyrighted material. This call may not be transcribed, recorded or broadcast without our expressed permission. A replay is available from the IR portion of Leggettâs website. We posted to the IR portion of Leggett's â of the website yesterdayâs press release and a set of PowerPoint slides that contain summary financial information, along with segment details. Those documents supplement the information we discuss on this call, including non-GAAP reconciliations. I need to remind you that remarks today concerning future expectations, events, objectives, strategies, trends or results constitute forward-looking statements. Actual results or events may differ materially due to a number of risks and uncertainties, and the company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to yesterdayâs press release in the sections in our most recent 10-K and subsequent 10-Q entitled Risk Factors and Forward-Looking Statements. Good morning and thank you for participating in our fourth quarter call. Leggett & Platt diverse portfolio of businesses, strong cash discipline and the ingenuity and agility of our employees helped us deliver solid results in 2022 despite weak demand in residential end markets. Sales grew 1% in 2022 to a record from continuing operations of $5.15 billion, primarily from acquisitions. Organic sales were flat, with volume declines of 7% and negative currency impact of 2%, offset by raw material-related selling price increases of 9%. Acquisitions, net of divestitures, added 1% to sales growth. Volume declines were driven by demand softness in residential end markets, partially offset by growth in automotive and industrial end markets. 2022 EBIT was $485 million, a decrease of $111 million versus 2021 EBIT and a decrease of $83 million versus 2021 adjusted EBIT, primarily from lower volume, lower overhead absorption from reduced production, operational inefficiencies in specialty foam, and higher raw material and transportation costs and operational inefficiencies in automotive. These decreases were partially offset by metal margin expansion in our Steel Rod business and pricing discipline in the Furniture, Flooring and Textile Products segment. EBIT margin was 9.4%, down from 2021's EBIT margin of 11.7% and adjusted EBIT margin of 11.2%. Earnings per share in 2022 was $2.27, a decrease of 23% versus EPS of $2.94 in 2021 and a decrease of 18% versus adjusted EPS of $2.78. Cash flow from operations was $441 million, a 63% increase versus 2021. The current global macroeconomic environment and its impact on the consumer negatively impacted our fourth quarter results. Sales were $1.2 billion, EBIT was $91 million, and earnings per share was $0.39. Sales in the quarter were down 10% versus fourth quarter 2021, primarily from lower volume and currency impact, partially offset by raw material-related price increases. Acquisitions added 2% to sales. The volume decline was driven by continued demand softness in residential end markets, partially offset by growth in automotive, aerospace, and hydraulic cylinders. EBIT decreased 40% versus fourth quarter 2021, primarily from lower volume and lower overhead absorption as we intentionally cut production in our Steel Rod business below demand to reduce inventory levels. These declines were partially offset by metal margin expansion. As a result of these impacts and inflation, EBIT margin was 7.6%, down from 11.4% in the fourth quarter of 2021. Earnings per share decreased 49% versus fourth quarter 2021. During the year, we completed four strategic acquisitions. In late August, we acquired a leading global manufacturer of hydraulic cylinders for heavy construction equipment with operations in Germany, China, and the US and annualized sales of approximately $100 million. This acquisition builds scale in our Hydraulic Cylinders growth platform and brings us into an attractive segment of the market that aligns well with trends in automation and autonomous equipment. Also in August, we acquired a small textiles business that converts and distributes construction fabrics for the furniture and bedding industries with annual sales under $10 million. In early October and mid-December, we acquired two Canadian-based distributor of products used for erosion control, storm water management, and various other applications with combined sales of approximately $50 million. We have successfully expanded our textiles business over the years through small and strategic acquisitions that leverage textile supply chain expertise in attractive end markets. Now, moving on to the segments. Sales in our Bedding Products segment were down 19% versus fourth quarter of 2021 and decreased 4% for the full year. Demand in the US bedding market softened during the fourth quarter as macroeconomic impacts on consumer spending persisted. We expect demand in 2023 to remain consistent with levels experienced in 2022 with relatively consistent sequential volumes continuing in the first half of the year and modest increases in the second half of the year. Volume in US Spring was down 22% in 2022, which is comparable to the domestic mattress market. After a mid-single-digit share loss early in the pandemic related to supply shortages, we estimate that our share of the innerspring mattress market has remained stable over the last two years despite a volatile environment. Although, consistent demand is assumed in 2023, we expect to increase production after limiting output in 2022 to align inventory with lower demand levels. Strong trade demand for rod and wire provided earnings benefit in the first half of the year. However, trade raw demand slowed considerably in the back half of 2022. And as a result, we cut production significantly to reduce inventory. Steel rod production in 2023 is expected to be in line with 2022 but remain well below normal levels. We expect higher internal consumption to offset lower trade demand. Increased metal margin provided earnings benefit throughout the year but to a lesser extent in the latter part of the year as steel prices soften. While it is difficult to predict steel pricing, we anticipate continued softening in 2023. However, we expect rod pricing and metal margins to remain at historically elevated levels due to higher conversion costs. Demand in European bedding has stabilized in recent months, and we expect demand in 2023 to be relatively flat with 2022. The actions we took in 2022 to reduce inventory across the segment have brought levels back in line with those needed to support current demand. With the capacity we have in place, we are prepared to respond quickly to changing demand, and we remain focused on servicing customer requirements. Full year 2022 segment earnings were significantly impacted by difficulties experienced in our specialty foam business. About two-thirds of the earnings challenge in specialty foam was a result of low demand, which dropped quickly in the fourth quarter of 2021 and remained at depressed levels throughout 2022. Demand was impacted from three areas. The first being the general bedding market decline of approximately 20% following demand surges in 2020 and 2021, and chemical shortages in 2021. The second was channel-focused. Finished goods production in specialty foam is weighted heaviest to digitally native brands, which declined more than the overall market due to changes in consumer privacy laws and customer cash constraints. And finally, we suffered share loss from a small number of customers with sales shifting from finished goods to components in some cases. Specialty Foam earnings were also impacted by the volatile chemical supply environment. Like all other phone producers, we experienced significant chemical inflation through the course of 2021, and costs remained at historically high levels in 2022. Given the level of material costs, additionally, pouring and converting foam is of even greater importance than normal. However, because of high demand in 2021 and chemical shortages, our first priority became servicing customers. Between paused integration and the need to service customers, we have not operated at target material efficiency levels. Material inefficiencies at these high chemical costs had a detrimental impact on earnings. While it will take some time to see improvements in specialty phone, especially with the continued challenging demand environment, we're confident in our recovery plan and are making progress. Our team has a strong pipeline of opportunities influenced by our Specialty Foam technologies. We've also focused on driving improvement in material margins through both process and equipment changes. We remain confident that our Specialty Foam business will drive long-term profitable growth for the segment and are placing our highest level of attention on short-term improvements in sales and material management. Sales in our Specialized Products segment increased 15% versus fourth quarter of 2021 and were up 12% for the full year. The January forecast for global automotive production shows approximately 4% growth in the major markets in 2023. While improving year-over-year, automotive industry production forecast could remain dynamic as supply chain, macroeconomic, geopolitical, and COVID impacts bring continued volatility. Cost recovery is continuing in automotive, and we expect to make further progress in 2023. In our Aerospace business, we expect continued strong demand in 2023. However, raw material and labor shortages are creating some volatility across the industry. End market demand in hydraulic cylinders is strong and order backlogs in both the material handling and heavy construction equipment market segments remain at elevated levels. Demand is expected to remain strong into the first half of 2023 with some potential slowing in the back half of the year as backlogs eased. Sales in our Furniture, Flooring & Textile Products segment were down 12% versus fourth quarter of 2021 and up 3% for the full year. Home Furniture demand slowed during the quarter at both the mid- and high end of the market, and customer backlogs largely have been depleted. Demand at lower price points remained extremely weak and customers across all price points are working to reduce inventory levels. This demand softness also impacted volume in fabric converting. We expect lower market volume through at least the first half of 2023. Work Furniture sales decreased in the fourth quarter as contract demand slowed and demand for products with residential exposure continued to soften. We expect this trend to continue into 2023. In Flooring Products, residential demand has softened modestly with the slowing housing market and lower home improvement activity. Hospitality demand is slowly improving, but remains well below pre-pandemic levels. Geo Components demand remains solid heading into 2023, particularly in the civil construction market and to a somewhat lesser extent in retail. As we move through 2023, we are focused on improving the things that we can control and continuing to mitigate the impacts of market challenges on our business. We are working with our customers on new product opportunities, continuing our focus on improving operating efficiency, and driving strong cash management. Our financial strength gives us confidence in our ability to successfully navigate challenging markets, while investing in long-term opportunities. Finally, I would like to thank our employees for your strength, tenacity, and dedication to driving long-term results. Your commitment to our values results in the collaboration, agility and ingenuity required to drive our company forward despite challenging macroeconomic circumstances. Each of you is key to our continued success. Thank you, Mitch and good morning everyone. In 2022, we generated cash from operations of $441 million, $170 million higher than the $271 million we generated in 2021. This large increase reflects a much smaller use of cash for working capital, partially offset by lower earnings. Working capital increased significantly in 2021 due to restocking efforts following inventory depletion in 2020, but increased to a much lesser extent in 2022 as we return to inventory levels more reflective of current demand. This improvement was partially offset by a decrease in accounts payable as purchases slowed due to lower volume and our efforts to reduce inventory levels. We ended the year with adjusted working capital as a percentage of annualized sales of 15.3%. Cash from operations is expected to be $450 million to $500 million in 2023 as we continue to focus on optimizing working capital in a softer macroeconomic environment. Our long-term priorities for use of cash are consistent and unchanged. They include an order priority, funding organic growth, paying dividends funding strategic acquisitions and share repurchases with available cash. Total capital expenditures in 2022 were $100 million, reflecting a balance of investing for the future while controlling our spending. We raised our annual dividend for the 51st consecutive year in 2022, honoring our ongoing commitment to return value to our shareholders. In November, our Board of Directors declared a quarterly dividend of $0.44 per share, $0.02 or 5% higher than last year's fourth quarter dividend. At an annual indicated dividend of $1.76, the yield is 4.7% based upon Friday's closing price, one of the highest among the dividend kings. We used $83 million during the year for the four strategic acquisitions that Mitch discussed earlier. With the deleveraging we accomplished over the past few years, share repurchases returned as one of our uses of cash in 2022. During the year, we used $60 million to repurchase 1.7 million shares at an average price of $35.94. We used our commercial paper program to repay $300 million of 3.4% 10-year bonds that matured in August. We ended the year with net debt to trailing 12-month adjusted EBITDA of 2.66 times, and total liquidity of $1 billion. Our strong financial base gives us flexibility when making capital and investment decisions. We remain focused on cash generation while maintaining our balance sheet strength and deploying capital in a balanced and disciplined manner. Now moving to the 2023 full year guidance. 2023 sales are expected to be $4.8 billion to $5.2 billion or down 7% to up 1% versus 2022, reflecting macro uncertainty across our markets. Volume at the midpoint of our guidance is expected to be down low single digits with bedding products down low single digits, specialized products up high single digits and Furniture, Flooring and Textile Products down low single digits. The guidance also assumes the impact of deflation in currency combined is expected to reduce sales mid-single digits and acquisitions in 2022 should add approximately 3% to sales growth in 2023. Volume growth is expected to continue in automotive, aerospace, hydraulic cylinders and geo components with declines expected in work furniture, home furniture, adjustable bed, and trade sales of Steel Rod and Drawn Wire. We expect generally stable demand in our other bedding businesses, reflecting continued low volume levels. 2023 earnings per share are expected to be in the range of $1.50 to $1.90. The midpoint primarily reflects lower metal margins in our Steel Rod business, lower volume in some of our businesses, and moderate pricing pressure from deflation. Based upon this guidance framework, our 2023 full year EBIT margin range is expected to be 7.5% to 8%. Earnings per share guidance assumes a full year effective tax rate of 24%, depreciation and amortization of approximately $200 million, net interest expense of approximately $85 million, and fully diluted shares of $137 million. For the full year 2023, we expect capital expenditures of approximately $100 million, in line with 2022. Dividends of approximately $240 million and spending for acquisitions and share repurchases are expected to be minimal as we focus on conserving cash. And while we're not providing quarterly guidance, we do expect first quarter earnings to be down meaningfully versus fourth quarter 2022, primarily due to the timing of performance-based compensation accruals, which are typically highest in the first quarter, as well as normal seasonality in some of our businesses. We expect the continuation of normal seasonality with higher earnings in the second and third quarters of the year. In closing, while the macroeconomic environment remains challenging, especially in the first half of the year, Leggett is well-positioned to navigate these challenges with continued operating and financial discipline. We are keenly focused on strong cash generation and our enduring fundamentals give us confidence in our ability to continue creating long-term value for our shareholders. That concludes our prepared remarks. We thank you for your attention, and we'll be glad to answer your questions. Operator, we're ready to begin the Q&A session. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] One Our first questions come from the line of Susan Maklari with Goldman Sachs. Please proceed with your question. My question is -- and thank you for all the details in the prepared comments, I think it was very helpful. When you think about the efforts in Specialty Foam and you walk through some of those changes that you're making, can you give us a sense of where you are within that process? And how we should be thinking about the benefits of that starting to flow through to the results perhaps later this year, or is it something that will be more of a 2024 event? Yes, that's a great question, Susan, and thanks for listening in on the comments. I know it was long, but we wanted to try and provide some clarification there. Tyson, I'll let you comment on ECS. I know you've been working really diligently with the team there to assess where we are and put some recovery plans in place. Sure, thanks and, good morning Susan. I'll start with the commercial side of our plans. As was noted in the prerecorded remarks, it's tough in a slow demand environment, especially where we've weighted our business historically, but our commercial team has done a really good job even in the slow environment building our commercial pipeline and looking at opportunities to diversify our customer base. So despite some near-term headwinds just with the overall market slowness, I feel good about our pipeline there. And especially, because we're able to really return and our customers are interested in returning to looking at some of our specialty foam technologies. When chemicals got really short, our development team really had to pivot and spend more of their time and resources working on formulations just to make sure we could continue servicing our customers. But as those have improved as our constraints have eased and our customers have returned to looking at differentiation and other new product introductions, we've been able to get back to that as well. So I feel good about our pipeline, both from the quality of leads and opportunities that we have, and those are developing throughout the year. We'll start to see some of the benefits in the back half of the year, I think, from some of the business were being awarded. But still, overall, with slow demand and the full benefit probably coming into next year, but also the fact that we're using our specialty phone technologies as part of those projects as well. So, on the commercial side of things, that's how we feel about it. The operations, which we've mentioned as well, working through challenges there, I feel good about the team that's being put together both from the team that came along with the acquisition and also filling in some gaps along the way. So we're in a good place with our operational leadership. Some of the things that we've talked about, I think, before as well, just being able to really get back to the integration of four companies now being brought under the L&P umbrella. But heavy focus just on our overall data and process control, and I feel good about the steps we're taking there. And I think we'll see those really take hold as we move through the year. We're also investing and rolling out an improved IT system that's already underway, but we're being â I would â not cautious but realistic about the time frame to install the IT system across all of our specialty phone business. We also, during the pandemic made investments in equipment, especially focused on automation and helping us control material efficiency that equipment is starting to arrive. But like a lot of investments over the last couple of years, lead times are pretty long. So even if they start to show up, it will take some time to get it integrated and up and running to full efficiency. So I would say back half of this year and into next year, we'll start to see more of the benefits from our equipment investments. So I know that was a lot, but just to give you a little bit of a frame reference, both on the commercial and operational side just how things are rolling out. Yeah. No, that's very helpful. Thank you. And I guess following up on that, as we do think about the outlook that you gave us for 2023, especially as it does relate to some of the different parts of the bedding business. How are you thinking about the cadence of the margins in that segment for this year? When you think about normal seasonality on top of some of these company-specific dynamics that are coming through, any thoughts on how we should be thinking about where that margin eventually gets to and the path of getting from where we are today to that endpoint? Susan, Cassie, do you have any detail there that you'd like to share? I think for us, the biggest â one of the biggest impact is what happens from a scratch or rod spread. And it's really difficult to precisely predict that we have anticipated some contraction over the course of the year. That's probably that in volume would be the biggest impact. And also just one more comment. Yes, we do see the market returning to more normal seasonal patterns. And also, we talked about this before as well. But over the course of the last year, as demand was soft, but we were also really intentional about bringing down our inventory. Our production was below even the demand level so that we could control that, which is tough to do in a slow demand environment, but our team really did a good job in pushing that through reason towards the end of the year. So, I think even as we get back to this year and more seasonal patterns, we should be back to a place we're producing and have better overhead recovery. So, that was a real challenge for us over the last year. Yes, particularly at the end of the year. I think that's a great point, Tyson. So, if we looked at the first half of the year, call it, or even a little longer, we had really strong trade rod volume, right? And now we're anticipating that to be a little bit lower than last year, but pretty similar, but much more consistent, right, as opposed to the big -- high levels we had the first part of the year and lower in the last half of the year. And then similarly, as you said, with just overall production being more similar. So, I think it would just be a bit more normalized hopefully than what we saw last year. Okay, Susan thatâs very helpful. Yes. Susan a little bit specific on your margin question. We talked about lower first quarter expectations for the company overall that holds true with bedding with a return to more seasonal patterns as we move through the year. So, that all helps treat bedding with, again, their historically highest seasonal quarter has been third quarter. So, a step-up in margins as we move through the year from a margin percentage perspective, what we're showing. Thank you. I guess you had indicated the slow start to the year in the first quarter. Are you still planning to see Rod Production curtailments into the first quarter? Is that playing a role? Sure. Good morning Keith. Yes, really Keith thatâs something at this point we're playing really throughout the year. As we got into the back half of 2022 and we saw trade demand slow, we had to take more aggressive actions in the back half year. So, it was really heavily weighted towards the third and fourth quarter and pulling our production down, especially in the fourth quarter. So, overall, through the course of this year, we expect things to be relatively consistent from a total production standpoint but more evenly balanced throughout the year. So, Tyson, if we looked at it from sequentially from the fourth quarter 2022 to the first quarter of 2023, we would see increased production. But if we looked at it year-over-year, we see significantly lower production because it was so strong in Q1 in 2022. Is that right way to think about it? Okay. And so if that's the case, I'm a little confused with why the EPS is going to be so much lower, another seasonal change always seasonally, your EPS comes down from the first, given the seasonality in the business. But it seems like some higher production would be offsetting that. Is -- are you assuming the metal margin steps down a lot in the first quarter? Versus last year, we're starting to expect -- well, we are expecting and experiencing some modest decline in overall metal margin, especially compared to the first part of last year when the conflict in Ukraine, and just overall market capacity constraints really drove things up higher in the first part of the year. So it's overall relatively modest, but still less than the first half of last year, when we look at our production and metal margin. Okay. And are you assuming for the guidance for 2023, are you assuming those metal margins deteriorate all through the year? And kind of what do they end up at the end of the year? Sure. So through the course of the year, we have some modest compression. It's really hard to predict. It's been especially difficult over the last couple of years. But for the full year, yes, it's down modestly as we move through the year. And if we looked at the year in total, so 2023 versus 2022 on a percentage basis, we would expect right now that all margin to be down in the mid-teens. And to get a little deeper here, I should. But in the first â I guess, probably three quarters, we saw metal markets continuing to expand and then in the fourth quarter contracted a little bit like. That's right. And fourth quarter was a little difficult an indicator just because I think the overall steel market was soft as people got to end of the year, and there was quite a bit of uncertainty. People bringing inventory or consumers bringing inventories down, might be a little tough to predict, especially as we started off 2023, scrap has been a little higher in demand. Prices have been going up, conversion costs remain high. So, it's still pretty dynamic and trying to predict, but that's right, Mitch. So one final question, sorry to pass the call here. But â so particularly at the low end of the range, it's a pretty substantial reduction in EPS from what we saw â if you had to kind of list one, two, three, the biggest drivers for that, what would those be for the reduction? Keith, as always, volume is the driver we're trying to predict what's happening with metal margin and frankly, nobody knows that. So we have our assumption built into the forecast. But if it drops more than we're expecting, then that's also meaningful downsize. So number one would be volume and then things like metal margin and maybe some deflation would be secondary drivers. Is that a fair statement? Yes, that's a fair statement. It definitely leads with volume. That's where probably the greatest amount of uncertainty exists in this environment. And it could be up, it could be down. That's why we've got such a wide range. Good morning, everybody. Thanks for taking my questions. I appreciate the detail there on the metal margins. Always hard to predict, but helpful to know what the underlying assumption is in the guidance. I guess, first, Mitch, I wanted to ask about specialized products and where you guys are in the journey of the cost recovery and kind of what's embedded for 2023. I was admittedly a little surprised to kind of see them step back down sequentially despite a little bit better volume sequentially. But I understand that there is a lot moving around inside that segment. So, maybe just kind of given how each business is recovering at a different rate. Can you talk about what the drivers would be kind of for those margins in 2023 and where you and the company are on the journey of trying to get back the very high margins that you guys used to be able to do in those businesses? Sure. Good morning Bobby. And Steve, I'll make a few comments, but then invite you to join in as well. So, yes, it is a little bit dynamic for sure. We continue to see strong volume gains and specialized across all three of the businesses and expect those to continue as we go into 2023. We definitely had some impacts in the fourth quarter and particularly in automotive, we had a little bit higher material costs, as you mentioned, we've been working on those, but also some labor inflation, particularly where we had increased overtime premiums in China when the COVID restrictions were lifted. And then there is the large outbreak there that certainly impacted us like the rest of the country pretty much. And we surge in our employees who were -- had to be -- had not come to work, and so that led to additional overtime for some of those. So, that was a bit of a one-off there. I would say in automotive overall, I don't want to go in too much detail here, but we continue to make good progress in the pricing recovery, the cost recovery. I'd say that we got about 60% to 65% of it recovered with the balance we expect to come in 2023. We've talked about that it's a challenging thing to accomplish. The team has done a great job, and we're confident in our ability to close that. But we have made really good progress there. From the outlook for production in automotive see the major markets forecast to be about 3.6% year-over-year, which is good, continued progress. It continues to be dynamic, right? There's supply chain labor shortages throughout the supply chain at the OEM level as well, but making progress, continue to see really low inventories and vehicles age rates at very high levels that were around 12 years or so in the US. So, I think that outlook is good. We see that kind of 3% to 4% growth forecasted for the next three years to 2023 to 2025. But I would just remind to the folks that if we look at the forecast for major market production in 2023 is about 70 million vehicles just below that, improving back in 2019, which is actually a down year, it's still $75 million. So, we're still below where we were pre pandemic. But I think what it does provide is a long-term tailwind for the recovery in the automotive market. I think we've seen the really strong backlogs in Hydraulic Cylinders, and that's, I think, a strong benefit for our business there. We also see strong demand in Aerospace, although it's hard to start anything up really fast, especially with the long time lead-times that we see there. But I think those tailwinds and the outlook for all three of those businesses is very positive for us. Steve, let me pause my rambling there and let you chime in as well. Good morning Bobby. I think, Mitch, you hit most of it. In Hydraulics, we have seen orders continue to increase as the OEMs recover their production challenges, and we expect that to continue through the year. And as Mitch said, we're hopeful that, that will carry on into the second half of the year. we did have a few operational challenges that the team has done a really good job of dealing with. So, looking for continued growth there in aerospace, air travel continues to recover. We don't see business travel recovering until 2025. So, there's still some tailwinds there, kind of, as Mitch has alluded to, the operation performance across the supply chain, it's kind of similar to automotive as they look to ramp back up and we're seeing the same types of order changes and cancellations, short lead times and other things that are making it really challenging to respond, but the long-term fundamentals are definitely there for continued growth in Aerospace. Thank you. I appreciate the detail. And Mitch, maybe on CapEx, just thinking out a little further, is there a catch-up period that's going to have to come on capital spending? And I guess I'm just asking in the context that I think pre-COVID, this was $140 million to $150 million a year CapEx business, at least in 2019. And we're not going on two years of just $100 million, and it's running well below D&A. So as the business has changed, where the capital requirements are just not as much, or is there going to be kind of a catch-up period here if the economy improves, that we have to kind of spend a little bit more on the capital side? Yeah, that's a great question, Bobby. Thanks for asking that. I don't see that, there's a big catch-up. We haven't been constraining any kind of critical investment. In fact, we've had some things like, for example, IT that we've had to increase our investment and we think that those are critical to do. We continue to do so. I think historically, the biggest use of CapEx comes in bedding US Spring historically as well. I think we've done a good job of managing that a little bit differently. Not that, we don't invest in capacity or in innovation. We'll continue to do so, but we think we can do that a little bit more efficiently. And then the second one would be in automotive. And I think part of the impact there has been with all the volatility there's been just less new programs starting and so some of that has been pushed out as well. So but it's not like it's going to get pushed out. It's just going to change the whole time frame. So you don't get double the investment in one year. It's just going to change the time frame a little bit. So I think we probably will as we get back to stronger growth environment, increase our CapEx, but I don't see any big catch-up or big surge that will negatively impact us. Thank you. [Operator Instructions] Our next question is come from the line of Peter Keith with Piper Sandler. Please proceed with your question. Good morning. This is Matt Egger on for Peter. Thanks for taking our question. First off for me, we're just curious what happens to gross profit dollars if we see commodity led price decreases? And maybe you can compare to what you would expect to see now versus what historically happened with the Leggett accounting change? That's my first one. Okay. Thanks. Good question. And I'll take the easy part of it and then turn it over to Susan or Cassie, for the LIFO piece. But I think in general, we've talked about as inflation has occurred throughout the last couple of years that we can be successful in passing it on, but largely passing on the dollar amounts, right, for the most part. And so that's had a drag on our margin. So I think as we see deflation, and we pass that along to our customers. We see that same dollar change, but we shouldn't see a big impact in our margin profile. There's some pluses and minuses. Some of that is timing around what kind of inventory we have. And for the most part, we're in very good shape. They don't have a lot of high-cost inventory and sometimes timing around how it moves through our spin or how contractual agreements work. But overall, I think it should stand up to reflect what we've been commenting on we've passed on the inflation that we've done that largely on a dollar basis, and we expect to see the same thing as we see a little bit of deflation as well. Susan, Cassie, anything you would add to that, particularly on the--? Yes. LIFO is our favorite topic. It's actually directionally very predictable in an inflationary environment. LIFO will, without fail, generate expense in the deflationary environment as predictably, it would generate a benefit. So, that's just high level, what to expect. And thankfully, we don't have to deal with that anymore. Great. Thanks. And then secondly, can you walk us through the Furniture segment and maybe explain why the year-over-year volumes in Furniture are starting to kind of chop off. Yes, sure. Steve, I'll ask you to jump in there. But it's really a couple of dynamics. I mean we have to -- after a big surge in Home Furniture that we saw over last year and in the beginning of this year, we really saw that soften across the industry. That's not -- shouldn't really be new news. And then if we look at Work Furniture, that is probably the change where after being so soft, we saw a strong recovery in the first three quarters of 2022 and then really started to see the contract business, which had been recovering slowdown in the fourth quarter. So, that's been the biggest change there. But Steve, I'll let you chime in as well. Yes, thanks good morning. Yes, from a Home Furniture perspective, the answer is much, much lower retail demand. So, we had seen the low end drop, but then we saw the mid and high price points drop even further than what we expected. And that's led to some fairly significant inventory levels, which we couldn't see earlier in 2022, and we expect those to be worked off here hopefully in the first half of 2023 and start to return to a more normalized demand level. And from a Work Furniture perspective, as Mitch said, our customers are reporting volume declines and incoming contract orders. And that's really driven by the surge of back to office that they saw and that's worked its way through, and now they're seeing a little bit more lower level of return to office trends, particularly in the Americas, which is lowering that demand. And then you can add on top of that the retail residential slowdown that we spoke to from a Home Furniture perspective. So, those are the two big issues that are impacting Work Furniture at this point in time. Yes. Steve, if I remember right, this forecast, which would be for North America was down about 8% or so for this year. Yes, yes. So in line with industry dynamics there, unfortunately. And as we've mentioned before, so the fabric converting side of our Textiles business also moves along largely with Bedding and Home Furniture. So, we see that down. But what does not is the geo textiles component side of that, and we see that driven by industry to be -- continue to be strong as we go into 2023. Thank you. My first question is on input costs. And we've touched a bit on this across the questions. But can you give us a sense of what you're actually seeing in the various inputs, maybe upside, especially of the metal margins? And how you're thinking about the puts and takes there for 2023? Yeah, I'll make a general comment and then tie to Steve asked you to join it. But Susan, I think that we see inflation moderating. Maybe in some things, we see a little bit of deflation kicking in. but we don't see any really significant declines across the board, in fact, really anywhere that I can think of. And so I think it remains â I think for the large part, commodity costs are â remain at elevated levels are generally neutralizing or starting to come down a little bit, but we just don't see huge, huge declines, but Tyson, anything different you'd see in chemicals or anything? Mostly the same as what you just said, Mitch, we talked quite a little bit about metal margins. But part of the reason why that's been difficult to predict is because our conversion costs, not just the scrap input cost, but the cost of everything else that goes to converting that into rod, energy costs, the consumables in re-fractories and electrodes and everything else. Those have increased significantly as well. So when all of those input items even go into our overall costs are increasing as well, it becomes difficult to predict. But overall, I agree with what you said, Mitch, the some general moderation in some of those costs. On chemicals, we've seen some of that as well. some moderation but not dropping off a cliff because of a lot of the same issues, energy costs being high, there's still global constraints around certain types of chemicals and just overall capacity in the market to produce still makes it difficult to see exactly where those will land, but it's been relatively stable. Yeah. Okay. Thanks. And Steve, I think that holds up pretty much across specialized that we don't see a lot of change there. Maybe in Flooring & Textile can be a little bit more dynamic, but anything that you would add? No. I would just say most of the inputs are stabilizing, but we have seen relatively few signs of deflation outside of certain types of steel, but like Tyson said, resins, chemicals or other things remain at an elevated level. There's a lot of talk of them coming down, but we haven't seen that turn into reality at this point. Okay. And then I have one more, which is on the cash flow side of things. Can you talk about the ability to generate cash this year even when we think about the EPS guide that you have put out there? And maybe just any commentary on some of the uses of that cash, you did several small acquisitions in 2022? How is that pipeline coming together? And perhaps how you think about the opportunities there or other uses of the money? Yeah. Sure. That's a great question, Susan. And Jeff, I'll chime in the first and then ask you to come in on the uses. But Susan, I feel really confident about our cash flow generation. You saw us this year. And I think even though we see a lot of our businesses, volume levels low, I think we feel a little bit more stability as we talked about with inflation and things like that. So we've done â the team has done an incredible job managing our working capital, in particular, as we â even as the pandemic hit in the first part of the crisis, it just improving our receivables management, and we continue to maintain that in a really, really good spot. We talked about how we work through the second half of the year, particularly in the fourth quarter to bring down inventory levels, to align with the slower demand and taking they can â a lot of time out of the rod mill was painful from a margin standpoint, but it certainly got us to the right place in our cash flow and from an inventory standpoint. So we're starting in a really good position there. And then I think hopefully a little bit less volatile arena, it will be a little bit easier to manage that working capital. So, I suspect inventory, especially. So, I expect to see less volatility there. And then the other thing you probably noticed is that our payables were down significantly as we ended the year and not surprising, right, as we're taking down inventory, we're buying less. So, I think from a working capital standpoint, we're in a very good position to manage that. While we wish we had more volume, they'll continue to drive cash through the company. And Jeff mentioned our CapEx, we expect it to be pretty consistent with where we were in 2022. So, I don't think we have any big plans for acquisitions at this time or share repurchases continue to focus on funding the dividend. And Jeff, let me turn it over to you anything that I missed. Thanks Mitch and good morning Susan. Just a couple of other comments I would make. Susan, as you look at the company's history of operating cash flow and the ability to have that operating cash flow exceed our CapEx spend as well as our dividend support, we have been able to exceed that 33 out of the past 34 years with the one year that we did not was when we needed to replenish the inventory, which we talked about earlier in 2021. So, we've got a strong trend of being able to demonstrate that ability to do so. And as Mitch mentioned earlier, on the CapEx side, we feel reasonably comfortable there with the $100 million that we're guiding towards. In terms of our acquisitions, we spent $83 million in 2022 on acquisitions. You can expect that number to be lower in 2023, and we spent $60 million in 2022 on share repurchases. And you can definitely expect that number to be lower in 2023 as well. So, as we discussed in the prepared remarks, definitely minimal participation in activity around share repurchases as well as M&A activity for the upcoming year. Thank you. there are no further questions at this time, I would now like to turn the floor back over to Susan McCoy for any closing comments. Thank you for joining us today. We'll speak to you again on May 2nd after we report first quarter results. If you have questions, please contact us using the information in yesterday's press release. Thank you. Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your day.
EarningCall_503	Good day and thank you for standing by. Welcome to the Fourth Quarter 2022 Black Hills Corporation's Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. Thank you. Good morning, everyone. Welcome to Black Hills Corporation's fourth quarter and full year 2022 earnings conference call. You can find our earnings release and materials for our call this morning at our website at www.blackhillscorp.com under the Investor Relations heading. Leading our quarterly earnings discussion today are Linn Evans, President and Chief Executive Officer; Rich Kinzley, Senior Vice President and Chief Financial Officer; and Kimberly Nooney, Vice President and Treasurer. During our earnings discussion today, some of the comments we make may contain forward-looking statements as defined by the Securities and Exchange Commission, and there are a number of uncertainties inherent in such comments. Although we believe that our expectations and beliefs are based on reasonable assumptions, actual results may differ materially. We direct you to our earnings release, Slide 2 of the investor presentation on our website and our most recent Form 10-K and Form 10-Q filed with the Securities and Exchange Commission for a list of some of the factors that could cause future results to differ materially from our expectations. As we announced last quarter, Rich will be retiring mid-year, so he gets one final opportunity this morning to provide the year-end financial review. Kimberly, as our incoming CFO, will provide the financial outlook for 2023 and beyond. I'll start on Slide 4, with some key takeaways. While we successfully offset the impacts of the rapid macroeconomic shift through most of 2022, the increase carrying costs driven by natural gas prices and current interest rates are weighing on our expectations for 2023 and into 2024. I'll dive into those details shortly, but before I do that, I want to recognize our team's strong execution on what was within our control in 2022. Once again, our team delivered exceptional operational results, and we delivered earnings within our guidance range. This was no small feat considering the challenging macroeconomic and business conditions that impacted fourth quarter financial performance. I'm very proud of what our team accomplished as we executed our regulatory strategy and advance our strategic initiatives for system-wide resiliency, growth and a successful energy future. We also made strides towards strengthening our balance sheet, which remains a key focus for us in 2023. To our Black Hills team listening today, thank you for your dedication to excellence in serving our customers. I'm very proud of what we achieved together in 2022, with more wins than we can adequately cover on this call. To that point, Slide 5, highlights the excellent operational performance of our team in our electric and natural gas assets. I'm particularly pleased with the continued industry-leading electric reliability we provide our customers. All three of our electric utilities maintain top quartile for reliability for the fourth consecutive year, by the latest EEI Survey for safety, reliability. And two of the three performed in the upper half of the top quartile. That's solid work by our team. We continue to serve growing customer demand for our products and services, which is reflected in the 11 new all-time or winter peak loads at our electric utilities last year. These peaks continue to affirm the population and business migration we're witnessing into our service territories. Notably, at our Wyoming Electric Utility, we have served a remarkable nine consecutive years of increasing peak customer demand. To put this in perspective, this past year's new peak of 294 megawatts represents a 53% increase over the 192 megawatt peak we served 10 years ago. In December, we also served new winter peak loads at all three of our electric utilities during Winter Storm Elliot, while avoiding rolling blackouts experienced by others in some regions of the country. The reliability and resiliency of our infrastructure is perhaps more critical than ever given growing demand. The ongoing energy transition and a more interconnected energy network in our cold weather climate resiliency and reliability go hand in hand with safety and are absolute priority of keeping our customers comfortable and safe during dangerously cold weather. Our excellent performance through the bitter cold of Winter Storm Elliot, in December, highlights once again the critical need for immediately dispatchable generation capacity and resilient electric and natural gas infrastructure. During our summer and winter peak load days, our electric utilities typically received minimal contributions from our renewable resources. For example, our wind assets serving Colorado Electric, include three wind farms, that total about 150 megawatts. On December 22, we experienced a winter peak load of 334 megawatts. During that peak, our wind farm was producing only 17 megawatts of its potential 150 megawatts. This highlights the need for a balanced mix of generation resources until such time that technology can provide more economic and reliable battery storage or other similar energy capacity. And finally, on this slide, we continue to make progress with enhancing our customer experience. During the year, we implemented voice response and live chat enhancements and we were recognized by JD Power for our effective communications with customers. Moving to financial and regulatory execution on Slide 6, where we delivered a 6% year-over-year increase in EPS. We also increased the annual dividend by 5%, extending our track record to 52 consecutive years of increased dividends to shareholders. Our team managed through supply chain challenges and successfully executed our $600 million capital program. On the regulatory front, negotiating effective solutions for customers and shareholders remains a core strategic strength of our team. Over the last year, we reached constructive settlements and approvals for rate reviews and investment rider requests for both Arkansas Gas and Wyoming Electric. Our Wyoming Electric settlement was recently approved by the commission and includes an electric transmission investment rider. That rider will support transmission expansion to enhance resiliency for our customer. We filed a rate review last October for our Rocky Mountain Natural Gas pipeline in Colorado, which is advancing through the regulatory process as planned. We anticipate new rates in the third quarter of this year. In addition to our rate review activity, we finalized approvals for all remaining applications for the recovery of $546 million of incremental fuel costs, incurred during Winter Storm Uri and we have recovered more than one-third of those costs to date. Moving to Slide 7, we advanced our strategy to enhance resiliency, to support customer growth and comply with emissions legislation. For our electric utilities, we've made progress with our ongoing resource plans in Colorado and for our jointly operated system in South Dakota and Wyoming. We expect these plans to provide investment opportunities to renewable resources, to reduce greenhouse gas emissions intensity 70% by 2040 off a 2005 base year. The economic incentives for renewable energy from the Inflation Reduction Act, will help make these resources more accessible and more economic for our customers, while helping us achieve our emissions goals. We had a hearing last week before the Colorado Commission regarding our constructive unanimous settlement agreement for our Clean Energy Plan. The settlement includes the addition of 400 megawatts of renewable generation needed to achieve an 80% reduction in greenhouse gas emissions by 2030. Half of the 400 megawatts will be owned by our utility. This would result in approximately 70% of our Colorado customers' annual electricity being generated by renewable resources. If the settlement agreement is approved as presented to the Commission last week, a competitive bidding process for the new resources is expected to commence in the second quarter, again with the utility owning half of the 400 megawatts of resources we will seek. We also advanced our 2021 Integrated Resource Plan that we submitted for South Dakota, which proposes the addition of 100 megawatts of renewable resources and the exploration of 10 megawatts of battery storage. We're planning to issue an RFP for those resources later this quarter. With respect to transmission opportunities, we received approval from the Wyoming Commission last October to construct our Ready Wyoming transmission line, a 260-mile project in Southeastern Wyoming. Construction is planned to start this year, with final completion by the end of 2025. We're pursuing additional growth opportunities in our renewable natural gas business. We've already placed into service a number of RNG interconnects across our agriculture-rich territories and we're developing a variety of investment possibilities to expand our RNG offerings and business. We also continue to pursue additional opportunities to serve hyperscale datacenters and blockchain customers. We're upbeat about our first blockchain customer in Cheyenne, going into service shortly and other prospects we're developing in the region. We also continue to make progress on our sustainability vision for the energy future. I already mentioned our electric emissions goals. And during the year, we enhanced our gas utility emission goals to net zero by 2035. We will achieve this goal through ongoing infrastructure investment, enhanced processes and advanced leak detection, reducing third-party line hits and integrating low carbon fuels such as RNG and perhaps hydrogen. Our published sustainability report includes details about our emissions goals. It also includes our initial TCFD disclosure and other relevant information. Our financial outlook is summarized on Slide 8. Rich and Kimberly will cover the details in their remarks and I'll share my perspective. Taking a step back, solid execution is reflected in our 2022 earnings. When we issued 2022 earnings guidance two years ago, it was before Winter Storm Uri, inflation was less than 2% and before 425 basis points of interest rate hikes in elevated natural gas prices. Through this volatile economic environment, our experienced team managed our business to achieve our guidance range, a significant accomplishment. Since early 2020, we successfully managed through COVID. We absorbed and financed significant cost for customers related to Storm Uri and from elevated interest rates in energy pricing. We executed multiple years of financial discipline and cost control measures. We've navigated supply chain constraints and successfully executed on our capital plan and we completed numerous regulatory recovery request, all with constructive results. I could go on, but I believe you get the idea, it was a great team effort. That said, I know you share our frustration that a solid 2022 is overshadowed by the near-term macroeconomic environment. We're addressing increased carrying costs and inflationary impacts on expenses necessary to serve our customers. Although, we expect these pressures to ease over the next 12 months to 18 months, the near-term earnings impact is beyond what can be fully offset through short-term financial discipline and cost control measures. Importantly, our business strategy remains strong and intact. We remain optimistic about our future growth profile as we work through 2023 and 2024 and expect to achieve 4% to 6% long-term EPS growth of a 2023 base year. As we will discuss in more detail, we revised our long-term EPS growth target, primarily due to three general factors. First, increases in our working capital and interest rates, which are driving increased interest expense. Second, inflationary pressures in expenses not yet included in our rate structures. And finally, the equity we intend to issue to capitalize our business support the regulatory construct and maintain our solid credit rating as we improve our balance sheet. Slide 9 summarizes our strategic growth plan. We rolled our capital plan forward by one year, maintaining our five-year forecast total of $3.5 billion. This translates to a run rate of approximately $700 million per year. We've kept our 2023 capital forecast at approximately $600 million to help strengthen our balance sheet while prudently investing capital to maintain a safe system. Our forecast for 2024 is approximately $800 million, reflecting Ready Wyoming and our intentional deferral of some projects. I'll note the base plan does not include any renewable generation assets resulting from our Colorado Clean Energy Plan, or our South Dakota and Wyoming Resource Plan, which are examples of incremental investment opportunities. Other incremental investments could arise from transmission projects beyond Ready Wyoming and we're always evaluating our capital needs, including natural gas pipeline and storage projects and additional programmatic investments. We're also pursuing other earnings drivers, especially those that require little to no capital investment. As I mentioned already, population migration across our service territories continues to drive organic growth with 5% growth in customer counts since 2018. This has translated into increased customer usage, with the electric utilities, total retail megawatt hours sold since 2018, up over 6%. And our natural gas utilities usage also increasing by more than 4%. We're also fostering ongoing sustainable cost savings through innovation and continuous improvement in how we do business and how we serve our customers. I'll complete my prepared comments by once again welcoming Kimberly to our call, who many of you have already had the pleasure to interact with in recent years. Kimberly has 26 years of deep experience with Black Hills and was appointed to be Rich's successor as CFO effective April 1st. It's just like her to already be working ahead of the curve and joining us today. I'm confident she is the right CFO to help lead our success going forward. But before we hear from Kimberly, Rich is still on the clock and he is finishing with his knees high and he will provide a review of our 2022 results. Rich? Since this is my last earnings update, I want to thank all the investors and analysts I've had the privilege to work with over the last eight years as CFO. It's been an honor to represent the Black Hills Corporation team. And I've appreciated the conversations and friendships developed over the many years. As I transition to retirement, I want to assure you that you're in good hands with Kimberly. I'll start my comments on Slide 11, where we've laid out earnings per share for the full year and by quarter for 2022 compared to 2021. We delivered EPS for the full year of $3.97 compared to $3.74 last year, a 6% increase and then $1.11 for the quarter, consistent with Q4 2021. Slide 12 and 13 illustrate the detailed drivers of change in net income year-over-year for the fourth quarter and full year. All amounts listed on these slides are after tax. I'll focus on the full year on Slide 13. Higher margin was driven by $32 million from new rates and investment riders, $3.8 million of increased margin from customer growth and higher usage per customer, especially at our electric utilities, and $5.9 million of wholesale energy sales. Results for the year benefited from warm summer weather and higher than normal heating degree days in early Q1 and late Q4. Compared to normal weather benefited earnings by $0.05 per share for the fourth quarter and $0.19 per share for the full year. Compared to 2021, and a record-breaking warm weather in Q4 2021, weather benefited earnings by $0.21 per share for the fourth quarter and $0.26 for the full year. O&M expenses increased 9% year-over-year, driven generally by the inflationary environment. O&M increased due to higher fuel and materials costs, and higher expenses for outside services, bad debt, labor, cloud computing and property taxes. DD&A increased due to our capital investment program. Interest expense increased due to higher short-term debt balances, which were driven by volatile natural gas prices and increased short-term rates. Additional details on quarter-over-quarter and year-over-year changes in margin and operating expenses are available in yesterday's earnings release and in our 10-K to be filed early next week. Slide 14 reflects our long-term track record. These charts show our strong rate base and earnings growth, with EPS growth being tempered by equity issuances to strengthen our balance sheet after the 2016 SourceGas acquisition. Before I dive into the details, I would like to revisit what Linn said earlier. During the last three years, we've managed through some extraordinary times, including COVID, Winter Storm Uri and more recently decades high inflation, aggressive monetary policy and geopolitical turmoil, resulting in higher interest rates and volatile energy markets. The charts on Slide 16 reflect the macroeconomic environment we operate in today. Specifically, we experienced volatile and higher natural gas spot prices and basis differentials in our service territories at the end of the year. This contributed to a significant increase in working capital needs, which we fund through our commercial paper program. We had approximately $200 million more short-term debt at year-end 2022 than we had anticipate only a couple of months earlier. Our higher short-term debt balance coupled with higher short-term borrowing rates increased our interest expense in the fourth quarter. As we recover deferred gas costs and pay down these balances, we expect elevated interest expense in the near-term. Slide 17 presents the revised outlook for our 2023 earnings guidance range of $3.65 to $3.85 per share. This bridge identifies the major drivers leading to our revised guidance. Moving from left to right on this slide, we expect increased margins on new investments and ongoing customer growth, which offset non-recurring 2022 margin benefits. Although, inflation continues to impact expenses, we expect to manage O&M to a level below 2022. Additionally, as a predominantly pure play utility, higher deferred gas costs are magnifying regulatory lag within our gas cost recovery mechanism. This combined with higher short-term interest rates has resulted in rapidly increase in interest expense. We expect recovery of these deferred costs over the next 12 months to 18 months, which are impacting our financing activities this year. We now expect two debt issuances in 2023 instead of one as previously planned. You'll find our updated guidance assumptions in the appendix in our earnings release issued yesterday. Slide 18 outlines our financial position through the lens of credit quality, capital structure and liquidity. We're committed to maintaining our solid investment grade credit ratings and we continue to maintain adequate liquidity and a manageable debt maturity schedule. We're targeting a debt to total capitalization ratio of mid-50s by late 2023 or early '24. Our progress toward this goal was interrupted by Winter Storm Uri in early 2021, driven by deferred fuel costs and the associated debt. We made progress in 2022 by reducing this ratio even with the upward pressure on short-term borrowings, I discussed earlier. In the fourth quarter, Moody's and Fitch affirmed our credit ratings with a stable outlook. We're also providing our leverage ratio target of 14% to 15% for FFO to debt and five times FFO adjusted leverage, which we expect to achieve by year-end. We are very intentional about strengthening our balance sheet and maintaining our credit ratings as we leverage strong future cash flows to repay short-term debt, continue to exercise financial discipline and issue equity. We're also maintaining our capital expenditures at approximately $600 million for the second consecutive year, while prudently investing for our customers. Regarding equity, we issued $90 million through our aftermarket equity program in 2022 and expect to issue a $140 million to $160 million in 2023. In our last quarterly call, we discussed options to strengthen our balance sheet, including a minority investment in our gas utilities. After extensive due diligence and rapidly changing market conditions, we elected not to pursue a transaction at this time. We're always evaluating tools to manage our capital and businesses, and this will remain an alternative for ongoing consideration. Our gas utilities continue to be a valuable long-term business that is essential to the safety of those who live and work in our cold weather service territories. Slide 19 lays out our long-term growth outlook. We remain confident in our strategy and the long-term growth opportunities, particularly around renewable generation and transmission, ongoing population migration and hyperscale datacenters and blockchain, which are upsides to our base capital forecast. Most of these incremental investment opportunities benefit earnings in the latter part of our five-year plan and beyond and we assume a more normalized macroeconomic environment beyond 2024. As a result, we are targeting long-term EPS growth of 4% to 6% of 2023 as a base year. Also a dependable and increasing dividend is a critical component of our strategy for growing long-term value for our shareholders. We expect to continue our 52-year track record of dividend increases and we're targeting a long-term payout ratio of 55% to 65%. In closing, I am confident in our strategy. When I look at our experienced and agile team, our strategic position and the pipeline of opportunities we are developing, I'm optimistic that we are well positioned for sustainable and long-term success. Once again, I'm very pleased with what our team accomplished in 2022, including safe and reliable service for our customers, solid financial results, regulatory execution and advancing resiliency and supporting our customers' growth. We successfully adapted to overcome a variety of challenges while maintaining our long-term focus and financial discipline and we will continue to do so as we migrate through a dynamic financial landscape and leverage the long-term opportunities in front of us. Hi, good morning. Thanks, guys. Hi, listen, just wanted to come back to the core update here if we can. Can you talk first maybe about the updated dividend payout ratio. The midpoint of the guidance implies slightly above the top-end of the new payout ratio. Why not change your target to something that aligns with the updated '23, I get that you wanted to move things, why not align at there? And then, secondly, more critical question here. How do you think about your earned returns and the structural nature of the reset lower here from 5% to 7% to 4% to 6%. Considering many the dynamics that you point to, well, obviously, interest rates are more structural, gas prices see more transient, for instance, that you can speak about, you know, how you think about the longer-dated '25, '26 earnings trajectory? Yes, good morning, Julien. This is Kimberly. So, regarding your dividend payout ratio question, we're really confident in our long-term strategy. As we noted there, we believe that our 52-year growth target is -- growth track record is pretty evident of how we think about our dividend payout ratio. We felt the increase of 55% to 65% given some of the other changes was warranted. And as we talk about and think about the longer-term vision for the company 55% to 65% made sense to us. Julien, this is Linn. I would go to the latter part of your questions. We feel confident in our business strategy and the growth projects and prospects we have in front of you -- front of us. But what we've got is some of these early headwinds are going to last for a while. You mentioned the gas prices are moderating. That is true at places like Henry Hub, et cetera, but we have price differential with our basis differentials we're watching. We incurred some pretty significant gas price, costs, expenses. In December, especially during Winter Storm Elliot, the El Paso pipeline, for example, not being at full capacity, et cetera, caused some extraordinary prices that we had to absorb in December alone, which of course we did not forecast. Otherwise, things like Winter Storm Elliot will be a good thing for us in terms of gas that we sold, et cetera. But in that particular circumstance, we had to spend a lot more money than we anticipated. And now we have significant debt that we are financing. And then you think about as a predominantly pure play utility, we do have good gas cost adjustments in our states. However, when we have this extraordinary basis differential blow out, if you will, it's going to take us 12 months to 18 months before we really recoup those costs. So again that's debt that we're financing, et cetera. So these headwinds, especially that came up in December for us, are going to linger into the next year or two. And we have just general inflation that we're managing as well as I hope you know and recognize we've done a nice job of controlling O&M. And we were able to absorb general inflation, higher employee cost and things of that nature through programs that we had in place to help us with our expenses. However, after what we experienced in late fourth quarter, that just piles onto the challenge that we have before us. But I want to once again comment, you know, the structure of the business is sound, we've got some great growth opportunities, we have things crystallizing with respect to our Clean Energy Plan in Colorado, our IRP in South Dakota. So we've got some good opportunities ahead of us and are not reflected currently, for example, in our capital program. Yes, understood. I mean and maybe this becomes a little bit more of a specific state-level type of question. How do you think about the recovery of those associated costs, right, i.e., the elevated interest costs here, the elevated gas costs incurred as a function of Elliot, and then ultimately, how does that make its way through cost recovery? Understand that inflation is here to stay or at least some of them should be structural. But as you think about maybe moving beyond the near-term '23, '24 and say '25 and '26, how do you think about the specifics of going back in for recovery here, and ultimately being able to get closer to your authorized returns if you will, if these are great lag items? Sorry to interrupt your question there, Julien, good question. Again, this is Linn. We recognized that our regulatory strategy will have to be adjusted. We've often said, we would always have two or three rate reviews going on at any one time. We still see that -- those three rate reviews per year, if not more. We'll also as we go for those rate reviews be looking very close to -- at our riders that we have, what could be amended change tweaked with respect to those. So we recognize and understand and we will be adjusting our regulatory frequency, our regulatory cadence, if you will, going forward. And of course we'll have different kinds of requests in those as we go forward. We're also very sensitive to customer bill pressures. Our customers are seeing general inflation across the economy, not just with their energy bill. So we recognize that fact, we're sensitive to that fact and we will be as innovative as we possibly can be as we strive to reduce our own expenses. I'm glad that for more than a year now, we've had our program that we call energy forward going on within our organization, as we focus on innovative and less expensive and efficient ways that we can serve our customers recognizing the bills that they have. So, to summarize, to your point, we do recognize we'll have a different cadence for regulatory reviews going forward. Hi, everybody. How are you? Rich, good luck with retirement. Hope it goes as you had hoped. The supply chain issues that you referenced, is that more on the cost side or really the supply side? And since the third quarter, have sort of cost of equipment risen faster than you anticipated? Good morning, Chris. Yes, I would generally say that the same pressures that we're feeling, our vendors are feeling. And they are working to try to determine how to pass on some of those elevated costs to our company as well. So, yes, it's both from an availability perspective, we're starting to see some ease, but yet the timing of being able to receive the materials is still delayed, but we are continuing to see those elevated prices from our vendors being pushed through. I would say, it's trying to stabilize, but overall, it's still a real issue. Yes, it's a great question, Chris. And this is Linn. And I would really complement our team in how they've been on top of all of our projects, analyzing them as a bulk, analyzing them individually and we have been able to push them out, which will help us with respect to overall capital expense and the impact on our customers. So real pleased with how our team has managed through that and we'll continue to. Okay. You know, could sort of see in your interest expense guidance, the Storm Elliot impact to a degree, but was some of the increase in your interest expense expectations a change in your interest rate outlook since the third quarter? Yes, that's a great question, Chris. So we finance all of this through our commercial paper program. If you look at the A2/P2 rates over the last couple of months, right, it elevated 100 basis points alone. And so when you think about that with the inverted curve, we're just paying more from an interest perspective, interest rate perspective on short-term rates and so that was higher than we had originally forecasted. Okay. So you have some things that are not in the growth guidance, the Colorado, South Dakota. Clearly, there's a lot of transmission, what you call them, events or opportunities, do you have a chance to get back into that 5% to 7% former growth rate with some of the upside opportunities? Good question, Chris. This is Linn. I'll be cautious, I suppose, when we put out a 4% to 6% because that's what we will achieve, can achieve. You're right, I will recognize and we recognized that the Clean Energy Plan in Colorado is crystallizing. We have a unanimous settlement that would allow our utilities to own 50% of 400 megawatts of new generation to achieve that plan of 80% reduction in our greenhouse gas emissions. So, yes, that's not in our program, our plan. But it's going to take a little bit of time for that to get done. In other words, we will issue RFPs, I believe, next quarter, and we're looking forward to getting that out there and done. So that will be an opportunity for us that, yes, we'll begin to impact our outer years. We've got the Integrated Resource Plan in South Dakota, we have been meeting with our stakeholders with respect to that one, and we're starting to crystallize around what we think we can perhaps build and own there. We're not yet ready to make that public quite yet, but issue RFPs on that this quarter. So those are both exciting. Of course, we've got the Wyoming ready and you mentioned transmission as part of our approved rate review in Wyoming this past year recently approved in January. We do have a transmission rider, that will be effective for us as well. So there are several opportunities as you indicated and intimated in your question that are beginning to crystallize for us. We're very excited about them and that's going to be some great opportunity for us in our company. Okay. Great. Lastly, you didn't really address dividend growth, but given the payout range, does this sort of suggest we should assume slightly lower than in a recent dividend growth rate? So, Chris, from a dividend growth rate perspective, we view this from a long-term perspective just given our history. Obviously, we've noted here in the short-term from a 2023 and 2024 perspective, that it may be a slower growth rate. But overall, as Linn just mentioned, as we think about the long-term growth of the company, we're very confident in where we're going and we think that the dividends are crucial component of the overall return for shareholders. So that's just how we're viewing it. Yes. This is Linn. Kimberly did a nice job answering that. We value the dividend, we understand our shareholders' perspective on that. Increasing 52 straight years is a record that we intend to keep and to maintain, of course, subject to our Board approval. As we migrate these -- navigate these waters in front of us, flexibility for a bit might be very important to us, but we can anticipate that will continue to increase the dividend. Hi, good morning, everyone. I want to follow up on a couple of questions that have been asked. So, first, on the 4% to 6%, you call it, long-term, in the past you had it defined a little bit more clearly. So, I guess, my question is, given the macro headwinds going into '24, should we expect growth to accelerate in '25 plus? And you also clarified an average annual compound growth rate. Does that mean that 2024 growth might be at or below that 4%, the low end? Andrew, this is Linn. Great question. Thanks for bringing it forward. We anticipate the headwinds that we're seeing in 2023 may go into 2024. We don't know that, but that's how we're planning for that. We're planning for the worst if you will with respect to what we will continue to see into next year. So I think your observation, I'll say is right. Yes, we do see more growth on the back end of this five-year plan, but we're going to focus on being sure we're growing each year including after 2023. Hopefully, that's responsive to your question, Andrew. Okay, great. Next question on the gas price recovery, how often do you reset your rates in your biggest jurisdictions? Obviously, the volatility up and down means you're always kind of playing catch up, but how often are they reset and is this one of the potential changes you might pursue in some states? Yes, thank you for that question. Andrew, this is Linn again. It varies by state, that's where I'll start. Some states, we get fairly quick immediate recovery; some states, we have a full-year lag, some are more than that. Sometimes we are based off of a forecast and frankly some of our recent gas cost adjustments were based on forecast that turned out not to be accurate in the hindsight. So it varies by state and that's what we will evaluate as we go forward is what is the most fair to customers and fair to shareholders with respect to timeliness, so that we're sending price signals appropriately and things of that nature. So again probably for the third time, it really varies by state. Okay. Fair enough. Then lastly, you mentioned potentially accelerating the regulatory calendar, where specifically might we see the next filings? Is it beyond what's currently underway? Yes. Thank you for that question. Andrew, this is Linn again. We're not quite prepared to announce that. We will probably do that relatively soon, maybe next quarter. Our regulatory team does a fantastic job of managing relationships and expectations. And of course we want to make sure we're sitting down and talking to our stakeholders in that regard before we make public announcements. And we're just not quite ready to do that, but you can anticipate, we will probably still have the three typical rate reviews in 2023 that we will file. Hi, Linn, hi Rich, hi Kimberly. Quick question, for your 4% to 6% range, I guess, where does the capital plan currently puts you there, are you in the middle and what gets you to 6% and what gets you to 4%? Thank you for that question, Brandon. This is Linn again. We'll stay silent on that. It's important that we just know that, that EPS growth rate is out there. And it will -- our capital program is going to be a foundation fundamental part of that. And then I also -- we've got other growth opportunities with respect to continuing to serve our expanding hyperscale, datacenters, blockchain mining. Our first blockchain miner turns on here very soon. We're very excited about that. We've got incoming migration into our service territories, more business is coming. So all those fundamentals are strong. So with the combination of all the things that we have in our current plan and in our current forecast that put us in that growth range target. Thank you. And this concludes the Q&A session. I'd now like to turn it back to Linn Evans for any closing remarks. Thank you very much. Well, we look forward to providing our customers and shareholders value. As we migrate through these current interest rate and macro environment, I'm more confident than ever in our team, and what we can do. And these headwinds that we're facing today are going to make us a better and stronger company. I hope you hear the optimism in our voices about the future, despite the short-term and near-term challenges that we will migrate through and we'll migrate through successfully in. In closing, I again extend my sincere gratitude to each one of my co-workers for their dedication to safety, their dedication to serving our customers. I'm very privileged to work alongside each of you every day. So best wishes to all of you for a Black Hills Energy Safe Day, and a very productive day and we appreciate the questions this morning. Thank you.
EarningCall_504	Good morning or good afternoon, all, and welcome to the Valvoline First Quarter FY â23 Earnings Webcast. My name is Adam, and I'll be your operator for today. [Operator Instructions] I will now hand the floor over to Elizabeth Russell to begin. So Elizabeth, please go ahead when you are ready. Thanks, Adam. Good morning, and welcome to Valvoline's first quarter fiscal 2023 conference call and webcast. On February 7, at approximately 7:00 a.m. Eastern Time, Valvoline released results for the first quarter ended December 31, 2022. This presentation should be viewed in conjunction with that earnings release, a copy of which is available on our Investor Relations website at investors.valvoline.com. Please note that these results are preliminary until we file our Form 10-Q with the Securities and Exchange Commission. On this morning's call is Sam Mitchell, our CEO, Lori Flees, our President of Retail Services; and Mary Meixelsperger, our CFO. As shown on slide two, any of our remarks today that are not statements of historical facts are forward-looking statements. These forward-looking statements are based on current assumptions as of the date of this presentation and are subject to certain risks and uncertainties that may cause actual results to differ materially from such statements. Valvoline assumes no obligation to update any forward-looking statements unless required by law. In this presentation and in our remarks, we will be discussing our results on an adjusted non-GAAP basis, unless otherwise noted. Non-GAAP results are adjusted for key items, which are unusual, non-operational or restructuring in nature. We believe this approach enhances the understanding of our ongoing business. A reconciliation of our adjusted non-GAAP results to amounts reported under GAAP and a discussion of management's use of non-GAAP and key business measures is included in the presentation appendix. The information provided is used by our management and may not be comparable to similar measures used by other companies. As a reminder, the announcement that Valvoline signed a definitive agreement to sell its global products business resulted in the former Global Products segment being classified as discontinued operations for purposes of GAAP reporting, with the Retail Services segment becoming the company's continuing operations. On slide three, you'll see the agenda for today's call. We'll begin by providing an update on the sales of products that we announced in August of 2022. We will then talk about our first quarter highlights, share operational insights and end with a review of our first quarter results and guidance. Thanks, Elizabeth, and thank you all for joining us today. Today's call will focus on the results of the continuing operations of our retail services business. But first, I want to share an update on the progress we are making to complete the sale of the Global Products business. Our team is working diligently to finalize the separation and we still anticipate the closing to occur early this calendar year. We expect total proceeds from the transaction to be $2.65 billion in cash and approximately $2.25 billion after tax and other adjustments. We expect to return the majority of the proceeds to shareholders through share buybacks. The remaining portion of the net proceeds will be used for debt reduction, which will further strengthen our capital structure and position our company for long-term success. With the anticipated closing of the sale of the Global Products business, we are excited to focus on driving growth and increasing value of the new Valvoline. The new Valvoline is a high-growth, high-margin business with lower capital intensity. Our strong balance sheet will allow us to make more targeted investments to capture attractive growth opportunities in an evolving car park, while returning excess cash to shareholders. As we laid out in our November call, we are focusing a significant acceleration, forecasting a significant acceleration in our five-year financial outlook with top line revenue growing 14% to 16% and an adjusted EBITDA compound annual growth rate of between 16% and 18%. Our retail business model is simple, but highly effective and has repeatedly proven to deliver growth. Turning to slide eight. I'd like to share some key highlights from the quarter that demonstrate our positive continued performance. We are focused on driving strong top line growth for both company-operated and franchised locations with $644 million in system-wide store sales for the quarter, which is nearly a 17% increase over prior year. For same-store sales, we saw just under 12% growth with company-operated units having 13% year-over-year growth and 11% for franchise units. Our profits performed slightly ahead of the strong quarter we posted in fiscal 2022. We anticipate the profit growth to accelerate in the balance of the year, and we remain confident in our EBITDA guidance target of between $370 million and $390 million for fiscal year 2023. Let's turn to slide nine. Our simple growth algorithm of driving same-store sales plus adding units and incremental services continues to deliver. We have an impressive long-term track record of driving same-store sales performance and unit growth, and our Q1 results are in line with that continued growth trajectory. However, adjusted EBITDA grew only 1.2% year-over-year, while Q1 is typically our lowest profit quarter of the year, due to a seasonality effect, which I'll explain on the next slide, there were also short-term factors impacting this quarter, which Lori will address in a moment. Turning to slide 10. As the new Valvoline transitions to being a pure-play retailer in the preventive maintenance space, the seasonality of the business is an important dynamic to understand. For Q1, our retail services business performed in line with the typical seasonality that we have come to expect. We generally see volumes following the driving patterns of our customers, which tend to increase throughout the spring and summer, coinciding with the second half of our fiscal year. It is also typical for us to see profit and margin improve as the fiscal year progresses. The margin improvement is driven by the leverage of fixed costs as volumes increase with our customersâ increased driving. Accounting for the appropriate seasonality in the later quarters of the year, we remain confident in our $370 million to $390 million EBITDA guidance. Thank you, Sam, and good morning. As Sam shared, Q1 was generally -- is generally our lowest profit quarter for the year. Valvoline's EBITDA for Q1 â23 was modestly below management expectations. Versus the prior year, there are two things that impacted EBITDA margin in the first quarter of the year. First, about a third of the year-over-year difference is due to a higher relative weighting of company operations contributing to our overall margins. While company stores generate high returns, the margin rate on our franchise business is approximately 3 times higher and thus, a change in mix will impact our overall margin rate. That said, we are accelerating our franchise growth over the next five years. Then the remainder of the year-over-year margin reduction is a result of cost of goods inflation. Most was expected given at fiscal year 2022, saw considerable inflation on both product cost and wages. For the company stores, we've been pleased with our ability to pass through pricing to deliver higher unit margins per vehicle served, but these actions have not recaptured the full percent margin. As we shared in our last earnings call, we have established a central operations team to focus on driving efficiencies through both process improvement and technology enablement. For our franchise business, the announced base oil decreases to start fiscal â23 took longer to materialize, and margin was further eroded by increased additive and delivery cost. We've taken actions necessary to mitigate the cost increases, thus limiting the full-year impact on EBITDA. For the full-year, we still expect to deliver EBITDA margins within the long-term target range that we shared in our five-year plan. The key drivers for the full -- for the higher full-year margin rate include: first, the impact of seasonality related to driving behaviors of our customers as Sam shared, increased transactions drive higher labor efficiency and SG&A leverage for the balance of the year. Second, the actions we've taken to mitigate the cost of goods increase in Q1 will benefit the second half of the year. And last, our quarterly SG&A for the remainder of the year will not repeat expenses from Q1 and for key meetings with both our franchise partners and store managers that always kick off our financial year. Now let's turn to slide 13, to discuss the strength of the same-store sales. We delivered strong top line growth this past quarter with same-store sales increasing approximately 12%. Just over 60% of the same-store sales growth was driven by pricing actions taken in the second half of last year, with the most recent pricing done in September. The balance was driven -- the balance of growth was driven by volume, premium mix and non-oil change revenue growth. On the volume side, we're pleased to see continued customer growth of over 3% year-over-year in our same stores. A non-oil change revenue growth. Last year, I shared that we had invested in training and new reporting or last quarter, sorry, I talked about the investment in training and new reporting to drive more consistent process execution across company-operated stores. We're encouraged by the early results of these actions and the right hand of this slide highlights the impact we're seeing. Our bottom quartile stores accelerated non-oil change revenue growth at nearly 3 times the rate of our top quartile stores. And our top quartile stores showed us that there's still room for growth even in our very best stores. The team has done an excellent job and still sees opportunity to improve as they learn from the initial rollout. Closing the performance gap between the bottom and the top quartile stores across our system is expected to be an important contributor to the delivery of our long-term same-store sales growth. Turning to slide 14. We continue to believe we can double our unit count over time. We delivered 31 units in the first quarter and expect unit delivery to accelerate in the remaining quarters. We have significant opportunity to improve our geographic coverage and this quarter, we want to share more details around our confidence to deliver the new units. Our real estate team has completed a detailed market prioritization that is helping us focus our development team resources to markets with the highest potential. The work has identified target trade areas attractive for new builds and those attractive for acquisitions or combination. Our current pipeline is robust. Valvoline has a diligent but efficient process to ensure that new sites, whether for new build or acquisition meet our standards to deliver high returns. Over 220 sites have been approved by our new unit review committee and are in various stages of the deal process. Our new build sites continue to accelerate system-wide and the Quick Lube market remains highly fragmented, providing ample opportunity for acquisition. We have over 90 sites that are currently in construction or under a signed purchase agreement to be acquired. Our degree of confidence in opening these sites is incredibly high. It's important to note that the normal timing on acquisition opportunities for both us and our franchisees means these figures do not fully capture our expected full-year growth from acquisitions. With our current momentum, though, we are confident in our full-year forecast. Our objective is to accelerate unit growth across the system, and I'm very pleased with our progress toward achieving this long-term goal. Thanks, Lori. Our Q1 results are summarized on slide 16. Although we are comping against a strong Q1 in the prior year, we saw top line growth with sales from continuing operations increasing 17%. Sales for the quarter were largely driven by ticket as we continue to see benefit from pricing adjustments, premiumization and non-oil change revenue growth. GAAP operating income from continuing operations was $29.3 million. This was unfavorably impacted by a large nonrecurring key item related to legacy tax assets. The impact includes $24 million of pretax expense that was offset by a $26 million tax benefit below the line. As Sam mentioned earlier, the first quarter also saw tremendous work by our team working towards the anticipated close of the sale of the Global Products business. We continue to focus on the regulatory and administrative steps necessary to complete the transaction and are on track to do that in early calendar 2023, with just a handful of pre-closing conditions remaining. Thanks, Mary. We will continue to drive same-store sales through our proven model of quick, easy and trusted service. This allows us to continue taking market share and build on our strong customer loyalty. Our opportunity to add both company-operated and franchise units remain strong and we continue to work towards our goal of 3,500-plus stores. We also have the opportunity for enhanced margin as we move to a pure play retail business. As I noted at the beginning of the call, we're in the final stages of completing the sale of the Global Products business. The separation will allow us to enhance our capital structure and capital allocation policy and drive shareholder value over time. Subject to market conditions, we continue to expect to return $1.6 billion to shareholders via share repurchases within 18-months following close. I'd like to express my thanks to our teams around the world for their hard work and dedication on getting this work done and supporting the growth and long-term success of Valvoline. Thanks, Sam. Before we start the Q&A, I want to remind everyone to limit your question to one and a follow-up, so that we can get to everyone on the line. With that, Adam, please open the line. [Operator Instructions] And our first question today comes from Simeon Gutman from Morgan Stanley. Simeon, please go ahead. Your line is open. Hi, good morning, everyone. My question is on the margins, seasonality and pricing power. So I think last quarter, we talked about that we would be in a better place on pricing after the previous quarters, I guess, a little bit of a miss given that base oil prices were stabilizing. And it sounds like we had some incremental cost pressure. But one, how confident are you that these actions that you're taking have, I guess, narrowed the gap? And then structurally, I guess, pricing power at the front end for the consumer, is there something that's holding it back? Or is there ability to keep changing that so that you can keep marking to this, I guess, to this current cost environment? Thanks, Simeon, good questions. First of all, on pricing, in FY â22, we saw significant cost increases in we did -- and we do believe that the base oil pricing is starting to normalize. Now we made pricing changes throughout the year, mostly in the back half, starting in April, as you remember, as we started Q3, but we also made additional changes in September to actually start to ensure that our unit margins on every vehicle served were increasing. So we feel really good about that. Now we continue to analyze pricing on a regional level, and we look at that relative to competition. And we also look at what's happening with the non-Quick Lube focused players to make sure that our pricing is in line when they start to try to market to bring customers back to dealerships, for example, because they want to sell cars. So we want to be very thoughtful about our price increases. We want to make sure that we are positioned in every market relative to our competition and ensure that we're priced appropriately for our service, but not go too high. We have been looking at our consumer behavior, both in markets where the demographics are lower income across the board and we are not seeing any instance that there is inflationary pressures impacting the customersâ demand, both in terms of when they get service and/or the services they're getting, and we've been able to manage discounting. So we feel really good about where we're at. I will say some of the other actions that we've taken around additives and delivery costs were to change some of the incentives to our franchisees. We always look at incentives to try to drive growth. And so we have implemented some changes to our franchisee incentives, which will have an impact in the back half and counter some of the inflation that we've seen continue, but we also know that the base oil decreases will start to come through as we continue on in the year. A couple of things that we're putting in place in advance of to ensure that we're managing our cost of goods is our central operations team is focused on labor scheduling. We've implemented a new labor scheduling tool to try to get better schedule optimization and tools to pull down labor when we have weather patterns, which we definitely had at the back half right around Christmas to make sure that we're not spending the labor if we don't have the vehicles. And the other part is we've set up a new supply chain team and a procurement team focused specifically on retail services to look for more procurement efficiencies. And so those are things that we expect will continue to help us with cost of goods margin or cost of goods decrease to help us with margins as well. So we feel really good about where our pricing is, though we continue to look at it. We feel good about the changes we've made, and that's why we are reiterating our guidance, our confidence around the guidance. I'll just add one more point to Loriâs answer in when we look forward, the inflationary dynamics seem to be moderating quite a bit. So we've absorbed a tremendous amount of inflation over the last couple of years and particularly last year with product cost in the last couple of years of significant labor inflation. So we believe we're -- when we look at our product costs, even though we're absorbing a little bit more additive increase, the base oil market looks to be more positive in terms of moderating price or potential price reduction. And on the labor front, much more manageable increases in terms of what we're forecasting and some of the trends that we're seeing in our hiring and retention are very positive. You mentioned that you expect earnings to be accelerating as fiscal â23 goes on and I think the seasonality point is well understood. But maybe just give some additional color on how you guys are seeing the EBITDA cadence particularly as we're looking at Q2 and kind of refining our estimates, so that you can get to your guidance range? And maybe with the slower start in Q1 relative to your expectations, is it fair to say that the outlook is in the lower half of the guidance range? Or do you think the midpoint is still the right place to be guiding to? The guidance that we've given, we think, is very appropriate. So we're -- as we've said, we're very confident in that. So I think the key thing to adjust in models would be the understanding and factoring in the seasonality. And so when you take a look at the Valvoline Retail business over the last number of years, typically, the first half is going to deliver around 45% of the full-year EBITDA with the back half making up for that with increased leverage and increased volume. This year, with a little bit softer on the profit delivery than we would have expected for Q1 we'll see a good step up in Q2 in profitability and then importantly, another step-up in profitability year-over-year growth in Q3 and Q4. Yes. So Mike, on -- as you're thinking about modeling, I would say -- we had an extraordinarily strong Q1 last year. So if you looked at last year, the seasonality was 45% front half, 55% back half. This year, we're more in the 40 -- low 40% front half and high 50% back half, with a little bit more weighting towards the back half of this year. And I agree with Sam, we typically don't point you anywhere within the range from a guidance perspective. We still believe that, that's a very good range. All right. That's very helpful. And then I wanted to look at the SG&A costs. Obviously, a pretty big step-up there year-on-year. You mentioned that maybe there were some additional like sales kickoff meetings or, I guess, maybe things that were in person this year that were virtual in the prior year. But maybe talk also about what you guys are seeing in terms of advertising costs or corporate costs. And I guess we're just trying to get a better sense of where that SG&A expense number should be for the rest of the year. Yes. So you're right, Mike. We do have our both company and franchise meetings occur in the first quarter of each fiscal year, and we saw that again this year. This is the second-year post-COVID that we've done those meetings in person. But because of the number of stores increasing and our need to continue to develop a pipeline of talent to feed future growth, the attendance at those meetings has grown pretty significantly. So the overall cost of those meetings did drive an increase in the SG&A year-over-year, about a third of the SG&A increases relates to direct advertising that is in support of the increased unit count. And we're seeing and measuring very strong return on that investment driving growth in new customers, as well as retention of existing customers, and I feel really good about that advertising investment. And then finally, we've also made some investments in people as we continue to drive growth in the model. And we've had some indirect cost increase, as well just in relationship to the separation and the fact that we're seeing a little bit higher indirect expense as a percentage of sales as a result of some deleverage that we've seen as a part of the separation. So I would tell you that it's very much a big focus for us to ensure that we have the right balance of SG&A investment relative to growth and efficiency, and we'll be spending more time just making certain that we're being as efficient as possible, while not still being able to ensure that we're investing appropriately to meet our growth targets. Good morning, everyone. It's Dan Rizzo on for Laurence. Thank you for taking my call or my question. So I think you mentioned having a target of 55% franchisees and the rest store owned in your, I think, your long-term target? But it seems that you're opening more company-owned stores. I was just wondering when we can expect the mix to shift and what will kind of change it or how we should expect that to kind of play out? I do. If you look at Q1 â22, we had a franchise mix of 55%. And given the pace of our builds and our acquisitions on the company side over the last 15-months, the mix has dropped to 53%. And I think the question is valid. We are working with our franchise partners in both looking at existing development agreements, as well as incentives around new units. And how we bring in new franchise partners. Those activities will take time, and I think we talked about accelerating the franchise new unit growth to 150 units. But that would take us some time. I think FY â27 is when we would project to get there, though we are working hard to accelerate that even further. So if you just look at adding 100 stores on the company side, which we won't get to this year, but we'll move to 100 additional stores on the company side and then accelerate franchise, you can see when the math flips to getting us back to 55%, but it happens later in the five-year forecast. Okay. And does a recession -- I would think so. But does the recession kind of make it that much harder to attract new franchisees or historically speaking, has it not been that much of a factor. Yes. We're -- some of the discussions that we're having with potential new franchisees have been very positive. And so the strength of the model, the fact that it's a strong cash-generating model and the competitive advantages that our model has is really a strong draw. And so as Lori described in our goal to increase our franchise growth, we're seeing -- we're having some very good conversations, productive conversations with our existing franchisees. And again, we focus on well-capitalized professionally managed franchisees to partner with us to deliver that great customer service. We expect stronger growth from our existing franchisees, but then also bringing in a handful of new partners and we see some opportunities to do that, and it's just going to take a little bit of time to make that happen. But as it happens, we do expect to see that franchise growth to accelerate. I'll just add, Sam, to your point, there are over 4,000 at least that we no independent Quick Lube operators and we're having active dialogue with between 50 and 100 of them every year. And what I would say is through COVID and the war for talent and the increased in inflation, we're finding that many of the independent operators are looking for help to drive the kind of performance that they may have seen previous to COVID. And so the conversations that we're having are accelerating whether they want to be a franchisee and what help would that provide, but also is now the time for them to sell their business. And either remain a part of it and/or they exit completely. And so we're seeing that the inflationary pressures are changing the game for the independent Quick Lube operators and that will help us both on the acquisition front, but also on the franchise recruitment front. I wanted to -- I just want to get a handle on the quarter itself a little bit more. I guess what â internally, was the surprise for you on the cost side, the mix between franchise and company-owned stores? Or was it the sales I know sales growth was strong, but were you expecting something even stronger at some point? I'm just trying to figure out where the -- maybe internally, you guys, kind of, missed. Sure. I'll speak to it, and Mary can add. Relative to our internal plan, the piece that was not planned was â we had expected a base oil decreases to come through in our cost of goods. And when we pass on product cost to our franchisees. We have a very clear mechanism that is tied to the base oil index. And so as base oil index pricing is announced, we have very clear rules around how those get passed on to our franchise partners. When there is a lag on when we pass those versus when they materialize and through the inventory movement, when there is a gap that will cause a price or margin pressure to us. And in addition, we saw additive and delivery costs go up further than what the base oil index is going down, but those costs were going up. Those were the two major things that we had not planned for. And so the team quickly put in some initiatives to mitigate those, both in the franchisee part of our business, but then also more broadly in our operations. And Chris, I would mention that our internal expectation, the mist was relatively modest, right around 5%. So it wasn't a material miss in relationship to what our internal expectations were. Got it. And then there was a reference to weather more about scheduling labor during the quarter. And I know that's I'm sure it's pretty typical of these quarters now, but was weather a meaningful impact at all this quarter? Or was it pretty similar to typical winter quarters? Well, we did have more weather in the Q4 than what we would typically see in that moved volume around. We saw more extreme weather in November in Minnesota and the Pacific Northwest. Our Q1, sorry, in the calendar quarter. But there was a bit of a push, because of the major freeze that happened right around Christmas that pushed a little bit of volume from the last week that we would typically see in December into January. So across the year, we feel good that we captured the demand, and we're right on pace when we look at a rolling 30-days. But within the quarter, within the calendar quarter Q1, we hit our plan, but we were -- we would have been pacing slightly over plan and vehicle served and overall sales than where we ended. But we feel really good how we started Q1. Hi, just a couple more for me. First of all, I'm intrigued by slide 13, where you break out the non-oil change revenue growth by quartile -- maybe just give a little bit more color on, I guess, what you were seeing in terms of pricing and non-oil change revenue in the quarter and maybe non-oil change revenue improvement relative to your expectations? So on slide 13, on the right-hand side, we put in an initiative, and we did have that in our sales plan to actually improve our non-oil change revenue penetration. So we saw variation as we were working on our plan for the year and where we were going to drive sales growth and growth in profit and we saw a manual change penetration as an opportunity where our execution in some stores was not as consistent and leading to different outcomes from a non-oil-change revenue percentage of sales. So we went after that hard in our annual meeting and the company stores in October. And we reemphasized around presentation how to present the non-oil change services based on the success in our top quartile stores, and we basically rolled that out with all the store managers and then through the month of October, rolled that to every CSA or Customer Service Assistant in our store, so that they were consistently presenting the non-oil change services. And what you see is a significant improvement in penetration across the system. And so the stores that were lagging have gotten more consistent. There's still opportunity. Obviously, in retail, there's opportunity every day to present better to the customer, but you can see a significant improvement. And Mike, it's primarily driven by the penetration increase, not by pricing. We did do some pricing in non-oil change services that had a modest benefit, but where we really saw the biggest benefit was on the penetration because of the improved presentations. Yes. I guess what I was trying to get at is understanding how the improvement in non-oil change revenue, compared to the pricing that you got overall, including oil changes. Yes. So if you look at our overall comps, we said just over 60% of the comp was driven by pricing changes. And we saw a more significant impact from ticket overall. So I would tell you the non-oil change revenue was worth between 2% and 3% of our comp increase. Perfect. And then the other question I had is with regard to the global product sale. It sounded like you're still waiting for a couple of pre-closing conditions to get passed. And I guess, I wanted to understand if those are internal pre-closing issues that you're working through or if they are related to government approvals or other third-party approvals? And I guess, any additional precision that you can provide on the timing? I feel like we're in early calendar â23. So just trying to understand if the timing is imminent or if you're guiding more towards first half of â23? First of all, there are no barriers to close, and we're continuing to make good progress. And we are really down to just a handful of regulatory approvals that need to come through. And so largely external. And based on our understanding of expected timing, where we continue to be very confident in the guidance that we've given that we will close in the early part of calendar 2023. All right. Thank you. I appreciate everyone listening in today. We are really confident about the performance in the business, the strength of the consumer, our customers and the trends that we're seeing in our businesses. We enter our second quarter and look at the trends for the back part of the year. And as we've stated, we're confident in the incomplete in the sale in the early part of 2023 of global products, and that will set up the new Valvoline for what will be an exciting year for us. Actions have been taken to address some of the margin shortfall in Q1. And so that, again, gives us confidence along with the consumer trends that we are going to have an excellent year. So again, thank you for your participation today.
EarningCall_505	Greetings. And welcome to the Vishay Intertechnologyâs Fourth Quarter 2022 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, Mr. Peter Henrici, Investor Relations for Vishay Intertechnology. Thank you. You may begin. Thank you, Melissa. Good morning. And welcome to Vishay Intertechnologyâs fourth quarter 2022 earnings conference call. I am joined today by Joel Smejkal, our President and Chief Executive Officer; and by Lori Lipcaman, our Chief Financial Officer. This morning we reported results for our fourth quarter. A copy of our earnings release is available in the Investor Relations section of our website at ir.vishay.com. This call is being broadcast live over the web and can be accessed through our website. In addition, todayâs call is being recorded and will be available via replay on our website. During the call, we will be referring to the slide presentation, which we also posted at ir.vishay.com. You should be aware that in todayâs conference call, we will be making certain forward-looking statements that discuss future events and performance. These statements are subject to risks and uncertainties that could cause actual results to differ from the forward-looking statements. For a discussion of factors that could cause results to differ, please see todayâs press release and Vishayâs Form 10-K and Form 10-Q filings with the Securities and Exchange Commission. We are including information in our press release and on this conference call on various GAAP and non-GAAP measures. We have included a full GAAP to non-GAAP reconciliation in our press release, as well as in the presentation posted on ir.vishay.com, which we believe you will find useful when comparing our GAAP and non-GAAP results. We use non-GAAP measures because we believe they provide useful information about the operating performance of our businesses and should be considered by investors in conjunction with GAAP measures. Thank you, Peter. Good morning, everyone. I am Joel Smejkal and it is my pleasure to be speaking with you today on my inaugural call as Vishayâs new Chief Executive Officer. On todayâs call, I am going to open with some brief remarks about my background and my assessment of the company today. Then I will turn the call over to our CFO, Lori Lipcaman, who will go over our financial results for the fourth quarter and then the first quarter guidance. After that, I will share with you our ambitions for the company in the future and our plans for 2023. Letâs begin with slide number three. Over the course of my at Vishay, in my positions in engineering, marketing, sales, operation and business development, I have worked with colleagues throughout the organization to identify new business opportunities, develop next-generation products and to broaden Vishayâs participation across its market segments and business channels, always with a mindset to enable our customers to be successful. From my engineering, marketing and operational roles, I have worked inside the Vishay organization and gained an understanding of the internal dynamics of the company. In my sales and business development roles, I have seen Vishay from the outside in. I have seen Vishay from the eyes of the customer. Behind the scenes, I have been working to guide a shift at Vishay towards growth, to influence an increase in capacity, to push us forward in our product innovation, the investment in silicon carbide and to broaden our attention to serving new customers. As such, I have a unique background to lead Vishay in my new position as CEO. To see with the clear view where we have missed opportunities, where we have underperformed and what we need to do to unleash the potential of Vishay. The customers clearly expect more from Vishay. What else do I see? Vishay is a financially strong company, with a broad product portfolio of discrete semiconductors and passive components. Vishay has strong operational discipline and a terrific, hard working and smart workforce. We have a pristine balance sheet that gives us stability, but also the capability to grow at greater rates. We have a global manufacturing footprint with multiple manufacturing locations for a number of product lines that positions us to meet our customerâs need for supply in their region of consumption. And we are a supplier to all market segments, with strong technology position in automotive, industrial, military, avionics and medical. Supporting the megatrends of electrification, data storage and wireless communications are critical to our future success. In automotive, where EV and electronic content and new sensing features are rapidly growing. In industrial, where factory automation, renewable energy collection and energy transmission are propelling greater electronic component demand. In military, where governments are increasing the funding on defense programs and customers are developing more advanced radar systems and missile guidance systems. To commercial aerospace, where dollars are flowing into satellite communications and flight systems. And in medical technology, where companies are innovating new medical diagnostic equipment, instruments and implantable devices. One might say that Vishay is a sleeping giant, often capacity constrained with long lead times. We have underinvested in CapEx and technical resources. We have to change and reshape the company to drive growth and optimize returns and shareholder value. Under my leadership we are going to reorient Vishay. We are going to reorient from an operations focused company to a customer and market focused company, from a cash flow managed business to a P&L driven company, while upholding our capital return policy, from a company that fulfills customer orders to one that anticipates customer need and is ready to support, from a company focus on the present to one that is forward-looking and from a proficient organization to when itâs dynamic and rewards risk taking. In the month leading up to my taking control as the CEO, I spent a great deal of time with Vishayâs new leadership team, so that we could collectively hit the ground running on January 1st. Itâs critical that we start immediately. Externally, I have met with key customers, both distributors and OEMs, to dig deeper into their needs and share where Vishay will be going in this new era. Internally, I have met with nearly 70 senior leaders one-on-one to hear their views on our opportunities to grow and the operational apps that we must close. I have been injecting new ideas and changes to our business processes using multiple employee communications to start creating a business minded organization. I have stressed that in order to propel our growth and meet the increasing demand for our products, we must shift our mindset to think customer first in everything we do. I will provide more detail about what we have planned for the future after Lori has completed her review of the financial results. Lori, please proceed. Thank you, Joel. Good morning, everyone. I will start my review of our fourth quarter results on slide four. Revenues for the fourth quarter were $855 million, slightly below the low end of our guidance, reflecting in part the impact of COVID-related absences at our plants in China, and in part, lower than expected sales to distribution, reflecting the start of an inventory correction. Distribution inventory at quarter end was 19 weeks, compared to 16 weeks for the third quarter. Revenues decreased 7.5% versus the third quarter, reflecting stable -- relatively stable pricing and 8.0% decline in volumes. As expected, volumes came down from the spike in the third quarter when we were catching up on loss set shipments after the shutdown in Shanghai during the second quarter. Revenues were 1.5% higher than fourth quarter last year on pricing, offset by flat volumes. EPS was $0.51 per share. Adjusted EPS was $0.69 per share, compared to $0.98 per share and $0.93 per share, respectively, for the third quarter. Adjusted earnings for these two quarters reflect differences in tax expense. I will elaborate further on these items in a few moments. CapEx for the year increased $106.9 million or 49% versus 2021 to $325.3 million in line with our expectations of spending $325 million. Nearly all of the increase related to capacity expansion outside of China. We returned a total of $140.2 million to shareholders, well above the target of 70% of free cash flow and well above the $100 million that we anticipated at the time we announced our new stockholder return policy last February. Slide five presents a breakdown of revenues by sales channel and end markets. I want to call your attention to a few data points. Sales to distribution decreased 12.4% from the third quarter. As mentioned earlier, we have started to see indications of an inventory correction. For our two largest markets by revenues, revenues from the automotive market decreased 6.4% versus the third quarter, primarily reflecting the third quarter catch-up in MOSFET volume out of our Shanghai facility. In addition, automotive OEMs pulled less inventory as they focused on consuming inventory by year-end. In fact, in the fourth quarter of 2021, automotive revenues were up 7.1%. Revenues from industrial customers decreased 10.0% versus the third quarter, along with a decrease in distribution revenues. On slide six, you can see the revenue breakdown for the fourth quarter by business segment and by region. Although revenue in Asia declined by 12.8%, POS in the region declined modestly. Please turn to slide seven. Gross profit was $249.1 million for a margin of 29.1%, compared to 31.3% for the third quarter reflecting lower volumes. Compared to our guidance of 30%, plus or minus 50 basis points, gross profit margin was impacted by lower than expected volumes and some input cost inflation. Operating expenses were $113.8 million, above quarter operating expenses of $106.4 million, primarily reflecting the addition of MaxPower. As a result of the reduction in gross profit and higher operating expenses, operating income decreased by $47.8 million to $135.3 million versus the third quarter. Operating income increased $13.7 million or 11.2% over 4Q 2021. Operating margin was 15.8%, compared to 19.8% for the third quarter and 14.4% for the fourth quarter of 2021. EBITDA was $171.0 million for an EBITDA margin of 20.0%. During 4Q, we made the determination that substantially all unremitted earnings in Germany are no longer indefinitely reinvested. As a result, we recorded additional tax expense of $60 million. Change in indefinite reinvestment assertion will provide greater access to the companyâs offshore cash balances and enable us to sustainably fund our growth plans and our stockholder return policy. With the change in assertion -- while the change in assertion provide access to these foreign cash balances, these amounts will be repatriated only as needed. Also during 4Q, we recognized a tax benefit of $34 million upon the release of a valuation allowance. Our U.S. GAAP tax rate for the year includes these unusual items and was approximately 28%, which mathematically yields a rate of 46% for 4Q. Our normalized effective tax rate, which excludes these unusual items, and for full year 2022, excludes the tax effect of the COVID cost in China in 2Q was approximately 23% for the quarter and 24% for the year. The change in indefinite reinvestment assertion also impacts our assertion on future earnings. Our consolidated effective tax rate is based on an assumed level of mix of income among various tax jurisdiction. We expect the normalized effective tax rate for full year 2023 of approximately 30%. On slide eight, we present cash conversion cycle metrics. DSOs were 45 days, compared to 42 days for the third quarter, as we receive payments from several of our customers in Asia shortly after quarter end. Inventory was $618.9 million at quarter end, essentially flat versus third quarter, primarily due to exchange rate impacts. Inventory days outstanding were 93 days, compared to 90 days for the third quarter. DPOs were 31 days, compared to 33 days for the third quarter, bringing the cash conversion cycle for the fourth quarter to 107 days. Turning to slide nine, you can see that Vishay continues its track record of strong cash flow generation. Cash from operations for the quarter was $165.5 million. CapEx was $153.1 million for the quarter with $101.5 million invested in capacity expansion, primarily in Mexico and bringing the total CapEx for expansion in 2022 to $214.6 million, an increase of 52% compared to 2021. Full year total CapEx was 9.3% of revenues, compared to 6.7% for 2021. Free cash flow for the quarter was $14.1 million and for the full year was $160.2 million. Under our stockholder return policy, we have committed to return at least 70% of annual free cash flow to stockholders directly in the form of dividends or indirectly in the form of stock repurchases. We announced the policy in February of 2022. We set an expectation to return at least $100 million in 2022. For the fourth quarter, our stockholder return amounted to $42.4 million, consisting of $14.1 million for our quarterly dividend and $28.3 million for share repurchases. We purchased a total of 4.2 million shares at an average price of $19.57 during the year. This brings the total stockholder returns for 2022 to $140.2 million or 87.5% of annual free cash flow. Total liquidity at quarter end was $1.6 billion, including cash and structural investments of $916.1 million and $707.1 million availability on our revolving credit facility. As mentioned on past earnings calls, we use the revolver from time-to-time to make short-term financial -- financing needs. Turning to slide 10 for our guidance. For the first quarter of 2023, revenues are expected to be between $825 million and $865 million, reflecting ongoing inventory correction and stable pricing. Gross profit margin is expected to be in the range of 28.0%, plus or minus 50 basis points. Operating expenses are expected to be between $116 million and $119 million for the quarter and between $475 million and $485 million for the full year at current exchange rates. For 2023, as mentioned earlier, we expect a normalized effective tax rate of approximately 30%. Consistent with our stockholder return policy, we plan to distribute at least 70% of our free cash flow to shareholders in the form of dividends and stock repurchases. For 2023, we expect to return at least $100 million. Thank you, Lori. Letâs please turn to slide 11. While we work through what we expect will be a narrow inventory correction with our distributor customers during the first quarter and likely into the second quarter, we embarked on a new era at Vishay. I shared with you earlier my ideas about what Vishay has been and what it has the potential to become. To drive growth and margin expansion, over the next three years, we are committed to investing around $1.2 billion in CapEx and investing to enhance our operational capabilities. Our strong liquidity means that we can invest more heavily over the next couple of years to position Vishay for greater growth without sacrificing our stockholder return policy and with free cash flow expected to stay around its historical average. 2023 is our first year to drive change at Vishay and stage the company for the future. We know that we need to become a company that anticipates customer need, supports increasing customer demand and is delivering revenue growth and expanding margins. We are already implementing a number of initiatives in 2023. In 2024, we will advance many of these initiatives and begin to have increased manufacturing capacity available. Beginning late 2024 and into 2025, we will be in better shape to capture the next steps of the growing demand for electrification in our key end markets. Letâs take a look at slide 12. Slide 12 I have laid out our near-term initiatives. First, we have many great products across our semiconductor and passive component technologies. We have identified 30 key product lines for growth across each business segment. Most of these product lines serve multiple market segments, applications and business channels. These products are in high demand today and our customers are telling us they want more. We are developing go-to-market strategies for each one of these product lines, concentrating our resources on improving the technical performance of non-commodity custom products to better position Vishay to support the mega trends toward electrification and data communication. Second, we are expanding capacity internally and externally. In 2019 and 2020, Vishay somewhat slowed capacity investment and it is imperative that we make up for past underinvestment to be able to reduce our lead times and drive growth. We are not only planning to spend more, but we are going to spend judiciously on those 30 identified growth product lines. In 2023, we expect to increase CapEx to approximately $385 million, mostly on capacity expansion projects outside of China. These include our new power inductor site in Mexico, a resistor expansion also in Mexico, diode manufacturing in Taiwan and the new MOSFET 12-inch fab in Itzehoe, Germany. Today, much of our capacity is committed. MOSFETs and resistors have lead times that extend over one year. Our goal is to continue to grow with established customers, but to also have capacity to sell for new and emerging customers. To achieve that objective and create room for growth, we are identifying opportunities to subcontract production of commodity products and expect to have resources qualified throughout the year. We are also identifying additional foundries to alleviate the most constrained semiconductor product lines. This way we will have incremental capacity to allocate to serve more customers and end markets. Third, we are shipping our thinking about channel management. Today, Vishay places a priority on strategic accounts. By growing our capacity and capabilities, we are going to enhance our ability to support all of the business channels of OEM, distribution and EMS, while maximizing the profitability of each one through a focus on high-margin customers. Fourth, increasing our technical resources that face customers and also filling gaps internally in market segment coverage and intensifying our activities in R&D. We will see an increase in operating expenses over the next couple of years as we add these engineering talents, fill gaps in our technology and become a preferred supplier to more customers and more broadly sell our portfolio. The acquisition of MaxPower and the silicon carbide technology last October is an illustration of this increased investment. Fifth, we are moving towards solution selling. Customer engineers look for suppliers who can provide solutions to advance their technologies. Vishay semiconductor and passives can populate greater than 80% of the components on a circuit board in many applications. We need to be sure we are technically speaking to customer engineers about applications and the performance improvement that Vishay components can bring from the full array of our portfolio. We recently started introducing Vishayâs Solutions at Electronic in last November in Munich, Germany, we showed six automotive reference design applications. These were a mix of onboard chargers, converters, intelligent battery management systems and DC-to-DC converters to be promoted online or engineers to test and observe the performance of the Vishayâs components in these high demand solutions. Sixth, we are implementing organizational and structural change at Vishay. Vishay has operated in separate silos between sales and marketing to become a more responsive company that maneuvers and reacts favorably to customer requests. We are fostering collaboration internally and externally, particularly in the functions connected to customer programs. As part of this effort, we are flattening the organizational structure and redefining some leadership roles. We decided in favor of empowering the regional sales leader and our strategic account leaders to drive business growth in their area of responsibility rather than filling the position of Executive Vice President Global Sales. We have combined the sales and marketing functions by region under regional sales leaders, bringing together the commercial, technical and strategic resources to meet our customerâs needs. These regional sales heads will report directly to me. Our Chief Technical Officer, Roy Shoshani, is taking on a broader mandate to reenergize our product innovation, grow our preferred supplier status and develop closely connected to our customer CTOs and understand the direction of their technology. Reenergizing our product innovation to align with our customer technology roadmap, will involve both internal R&D investments and acquisitions depending on which avenue is most suitable. Finally, our Chief Operating Officer, Jeff Webster, a new position at Vishay, now drives the operations of both passive and semiconductors under one responsibility. This change is designed to break down barriers between passive and semis. Under Jeffâs expertise and leadership, we are determined to drive operational excellence, cost reduction, capacity expansions, subcontractor qualifications, all resulting in a greater service by Vishay to our customers. We are pushing down decision-making into the organization to empower our leaders and to facilitate timely action. They will create more speed within Vishay. We are going to reward collaboration, enable forward-looking behavior and empower risk taking. And we are going to build accountability, both individual and shared, within the organization by aligning incentive compensation to personal and company growth and profitability initiatives. These are significant changes for Vishay. The six initiatives I laid out for you are the foundation for our ambition to unleash the potential at Vishay, realizing the full value of our broad product portfolio and becoming a customer first serving company and for our goals of driving topline growth and expanding margins. Letâs go to slide 13. Slide 13 drills down into our goals for 2023. By the end of 2023, we intend to have qualified and signed agreements with a number of subcontractors and completed an evaluation of where to build Vishayâs next manufacturing factories, as we continue to deemphasize China in favor of other low cost locations. Designed and implementing our go-to-market strategies for each of the 30 key product lines by region and end market to put more horsepower behind them. Third, the MaxPower acquisition is progressing well. Samples of 600-volt and 1200-volt planar technology MOSFETs will be available to customers in Q3 of 2023. We target to release both of these voltages and move them to production in the first quarter of 2024. Our development of the 1200-volt FRED technology also moves forward as we continue to engineer and evaluate this productâs targeted high competitive performance. Our design and activities in the 1200-volt automotive and industrial applications continue. In closing, the electrification of our world and the need to communicate more data brings exciting growth opportunities for Vishay. We have the right products, a well-established and expanding manufacturing footprint and the right people to do more for our customers. We are aligning the organization towards faster growth and greater profitability. With the new management team in place, we are setting the stage for substantial growth starting in 2025 and I am excited to be leading Vishay through these changes ahead and into the future. Thank you. [Operator Instructions] Our first question comes from the line of Joshua Buchalter with Cowen and Company. Please proceed with your question. Thanks for taking my question, and Joel, congratulations on the first earnings call as CEO. I wanted to start with a shorter term question, can you walk us through some of the confidence and the assumptions behind the timing of the inventory digestion and wrapping up in the first half of 2023, is there any particular end markets that you have assumptions for improvement in the shorter term and it would be helpful to hear what you are seeing by end market, given some divergent trends we are hearing across the mixed signal space in several of your markets? Thank you. Okay. Joshua, thanks for the question. End markets, automotive, anything EV vehicle production or design and EV related for charging stations, this continues to be very strong. Our design activity is strong and also the demand thatâs pulled through the distributors will help deplete that inventory in the first quarter. Industrial overall is a strong segment for us, as you know. Industrial design and factory automation, robotics, most things towards electrification continue. So that will help pull through some of our inventory. If we get into industrial where we talk about power tools and things like that, I think, thereâs going to be some slowness there. Military defense that continues to be stable to growing. And medical as well, I have met with a couple of medical customers and the projections for growth are strong and this will help us move that inventory. This is why we feel in the first quarter and second quarter, it should move rather quickly. We feel we have a good position in our core market segments and we also feel because Vishay has had long lead times that the amount of stock is not so excessive. Yeah. Thanks for all the color there. And then, I guess, longer term -- thanks for the details on the capacity expansion plans. I guess I was trying to square away, it sounds like you are going to outsource more of the commoditized parts. How should we think about what level you are investing and whatâs your expected total capacity increases over the next few years? And given you are planning to outsource an increased portion of your products, is any of these predicated on fabs, some of your smaller fabs closing and while investing in the larger ones? Thank you. Yeah. We have a couple of approaches here since for semiconductors and also passives. Talk about passives first. Thereâs a number of product lines which are commodity. We have commodity products, non-commodity products and customs in each of our portfolios. We look at the commodities and we want to qualify subcontractors to help us there. We can qualify subcontractors in 2023. We will be able to use that capacity to support customer demand on commodities and use our internal capacity on the non-commodity and custom products to also improve the delivery of those products. We have got a number of subcons that we are in process of qualifying now. So we see this as an intermediate improvement into our ability to supply products in 2023. On the semiconductor side, you are right, itâs about foundries, itâs about getting wafer capacity. We have spoken to a number of wafer fabs, we are aligning capacity and starting some qualification steps. As far as investment, we havenât had to make a significant investment, thereâs capacity that we found available and this as well will help us with the front end of semiconductors 2023. Thank you. If I could squeeze one last one in. There were reports of, I think, it was a fire at one of your subcontractors happening in earlier this year. Was that -- did that play it all into the guidance, I just wanted to confirm if thereâs anything baked in for the subcontractor issue? Thank you. There was a fire at a plating facility in China. The name is Welnew. We have through Jeffâs efforts leading our operation. This is one example of Jeff being responsible for the semiconductors passage to the complete organization. We have internal plating capacity that we found in one of the diodes facilities. This plating line was supporting MOSFET. So Jeff was able to move the production to the plating lines in Vishay and we feel that in the first quarter, we will be able to overcome this issue, and yes, itâs included in our guidance. We believe by the end of Q1 we will have overcome that problem. Yes. Thank you very much and good morning. Just want to get a sense of how you see margins playing out this year. You talked about the inventory correction, obviously, weighing on volumes and you have also got some investments, it sounds like perhaps some OpEx pruning as well. You are guiding margins down several hundred basis points year-over-year on gross margin. Does that bottom here at 28% or should it go lower, particularly if Q2 was down? How should we think about margins? Well, okay, so we guided to the 28% plus minus 50 basis points. We believe margins will be relatively stable throughout the year with potentially a slight increase towards the end of the year, but relatively flat. I can add more to that. We have a year of staging Vishay. Thereâs some operational expenses, as you talked about, that are going to be required and you compare it to prior years. So we have got a year of 2023 to stage Vishay and OpEx is required to better position the company and through some of those operational gaps that I talked about after meeting with 70 employees. We see pressure always on input costs. We see pressure on inflation. We see pressure on wages. So with materials seem to be relatively stable, our gross margins at this point seem to be flat or stable through the rest of the year because of the activities internally and also be able to maintain our price level. We see the pricing will be stable throughout the year. If we have excessive increases in our input costs, then we are going to have to raise prices as well. But there was quite a large price increase that was done in 2022. So, I think, overall, as Lori said, we will see margins be stable through the forward quarters of this year. Okay. Thanks for that. And then on the CapEx increase, could you give us an idea of the revenue generated from that CapEx? Is it 1:1 in terms of revenue, what kind of capacity are we talking about in terms of volumes? It will be better than 1:1. The inductor expansion that we are putting in Mexico, we expect to double our capacity, the inductors. The resistor expansion in Mexico pushes us as well almost to doubling and thatâs one of our metal strip technology. So these capacity increases are going to be quite significant. When we talk about $1.2 billion over three years is significant compared to prior history in Vishay of $160 million per year. So you are going to see Vishay positioning ourselves for substantially greater growth. Is there a concern that there may be too much supply, particularly if we are in a tough macro environment for the next couple of years? It sounds like you said, some of this capacity is already accounted for in terms of customers, so have you been working with customers to ensure that you are going to be able to shift to orders? Yes. With our backlog now at eight months. Thatâs eight months backlog with the customer base that we call strategic accounts at our distributor partners. We are meeting with a lot of customers beyond that and they have greater demand for Vishay product. When we talk about these 30 focused products, these are exciting products in Vishay that support multiple segments and multiple applications. So itâs our responsibility to position Vishay to grow and these products are in high demand. So shifting, we are not concerned about it at the moment, because we have a lot of customer demand thatâs developing and our design activities are strong. Itâs really positioning this company for greater growth. There will be bumps in the road. Itâs a cyclical business that we are in. But Vishay has a great potential to grow significantly in the future. Thank you. [Operator Instructions] Our next question comes from the line of Ruplu Bhattacharya with Bank of America. Please proceed with your question. Hi. Thank you for taking my questions and congrats on the new role Joel. Letâs have you on board. In your slide on near-term initiatives, you talked about two things. You talked about enhanced -- enhancing the channel management and you talked about solution selling. So I was wondering if you can elaborate more on that. What do you think needs to change in terms of channel management? And can you give us a sense of like when you say solution selling, what does that bring, what is that exactly and what is the margin differential between what you sell as individual products versus solutions? Okay. The enhanced channel management, as mentioned, we had our priorities on the strategic accounts. Many of them were a small set of automotive customers or industrial customers, could be telecom as well. Distribution is a large part of our business, as you know, itâs nearly 60%. We have had long lead times and we were not supporting the channel of distribution to the level we could have based on the opportunities that were in front of us. The EMS segment, meeting with a number of the EMS, the leading EMS companies, they have significant demand for Vishay. Vishay is well positioned on build [ph] of materials. They try to buy Vishay as one of their first sources, but if our lead times are long and we are not able to support them, they have to ship, they have to look at other suppliers or go back to the OEM and ask for another source to be qualified. So we have not been able to support that business. We have the opportunity to do it. Our design and activities at SGA and OEM are strong. But we need to be able to support those design wins through the channel of distribution as well, if itâs not direct to customer and also through the EMS. So itâs really supporting all business channels, OEM, distribution and EMS at a greater rate, having the capacity to enjoy our design wins. Your second question was about solution selling. Vishay is a quite unique company by having semiconductors through passive. As we go to engineers at our customer and we speak about one technology, we can actually sell many technologies and design in many products to support their solution. In the past, maybe we sold based on a data sheet a particular product. In the future, we are going to talk about applications and solutions. Silicon carbide, this acquisition is going to be very helpful for Vishay. Silicon carbide is an enabling technology. Itâs a technology thatâs in the first discussion with the customer as they talk about 400-volt or 800-volt inverter designs. Having Vishay offering silicon carbide puts us in those first discussions with customers and then it allows us to bring in our discrete semiconductor portfolio and the passives in that same conversation. We feel we are uniquely positioned as one of the few suppliers that can do this. Okay. Thanks for the details there. Maybe I can ask one for Lori. On slide 15, you are talking about the company changed its indefinite reinvestment assertion. Does that impact your thoughts on share buybacks and how you repatriate cash and can you just remind us on the priorities for your capital allocation and how should we think about the pace of buybacks? Okay. So it absolutely does enable us to bring back in a sustainable manner cash to the U.S. So that we can fulfill our commitment to the shareholder return policy. Okay. And maybe I will ask one more for Joel. So you have laid out a $1.2 billion CapEx plan for the next three years. Beyond what you have stated for fiscal 2023, I think, $380 something million, should we assume an equal amount in each of the outer two years, 2024 and 2025? And can you give us some more details on what specifically you are investing in, like what are some of the areas where -- which product lines are you investing in CapEx and how should we think about these facilities coming online, like, how quickly does supply come online based on your investments? Okay. The capital, as we said, this year is $385 million. When we get into 2024 or 2025, it will be $400 million or greater in each of those two years. Looking across our products, it goes to these 30 focused part numbers. Thereâs resistor products that require more investment. The inductors we spoke about expanding with a new facility in Mexico. That facility is built, and we are starting to stage the new lines in it now, but thereâs production space available in the building. So over the next two years to three years, that capacity will continue to grow and fill that power inductor facility. Custom magnetics is another part of inductors -- of our inductor portfolio. We sell heavily to medical and military, but we need to expand that portfolio, because we have more opportunities in automotive and in industrial inverters. Capacitors, we look at the polymer tantalum and Vishay has a technology that we need to enhance the ability to supply. We have polymers growing to over $1 billion TAM and we need to be a bigger player in capacitors with the polymer tantalum. We move over to OPTO coupler sensing in automotive and industrial. We have got proximity sensors. We have got sensors for light sensor. We have rain sensors. We have got a number of products for automotive that require us to enhance our offering, increase our capacity on the sensing products. Diodes with silicon carbide diodes and I mentioned silicon carbide on MOSFET, we have to invest there as well. So these 30 products, as we put our go-to-market strategies together and the dollars attached to it, thatâs where you are going to see the products, itâs really quite broad across Vishay investment. Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I will turn the floor back to Mr. Smejkal for any final comments. Thank you, Melissa. And thank you for everyone for joining our call today. I look forward to meeting and talking with you over the coming weeks and also to speaking with you again in early May when we report our first quarter 2023 financial results. Thank you very much.
EarningCall_506	Thank you for waiting. Thank you very much for joining us today for this briefing session. Our Financial Results Announcement for Q3 FY 2022 for NYK Line, Nippon Yusen Kaisha Line. My name is Shimomura, I staff as facilitator for this meeting. Thank you. So Mr. Soga, CFO is going to explain about the Q3 results of FY 2022, followed by Q&A [ph] session. I'd like to explain how you can ask questions later on. And Mr. Harada is going to make a few remarks at the end of the meeting, and we are scheduled to finish at 4 o'clock. And the materials available on the homepage, so please refer to them. In today's meeting, including Q&A, [indiscernible] will be available on-demand basis. Hello, everyone. I am Soga, CFO of NYK Line. Thank you very much for joining us today despite your tight schedule. Today, using the materials at your hand or materials on the screen, I'd like to explain first about Q3 2022 results overview and then full year forecast and its revision for the fiscal year 2022. After the presentation, we will move on to Q&A. Before presenting materials for 2022, I will be the final picture, I would like to present that first. In November, we talked about the second half forecast as well and we said that the performance and results in the first half will be the peak and in the second half, especially for container shipping normalization, logistics confusion will be improved. So, for the second half of the year, the results will go on a downtrend -- downside trend, that's what we said. And the third quarter results and the forecast for the fourth quarter, based on that information, in short, compared to November forecast, the final picture will be more or less the same as that November forecast. Depending on segments, and also, there are some differences between third quarter and the fourth quarter between different business segments. But in the third quarter, it was actually better than our expectation. And in the fourth quarter forecast compared to our forecast, it will be rather on the downside. And on a full year basis, slightly, we have revised the forecast -- revised down the forecast, but more or less in line with our expectation. That is our view. Now, please refer to the materials at hand or the materials on the screen, Q3 overview results. Please look at page six and it's table. On the right-hand side, in the blue column, as shown in Q1, Q2 and Q3 cumulative numbers, revenue Â¥2050.1 billion; operating profit, Â¥249.4 billion; recurring profit, Â¥1005.9 billion, net income Â¥920.3 billion. Each item exceeded the same period this year hitting the record high profit. That said, as I mentioned earlier, we are on the trending down, namely recurring profit, which was increasing from the first quarter of 2021. But this time in Q3 2022, it's now changed to trending down and in the background is the slowdown of earnings of our equity-method company, ONE. And on that point, on page 7, I'd like to give you more details when I talk about each business segment results in terms of recurring profits. First, Liner Trade. On the right-hand side, the blue column, the lower line in each segment box is recurring profit. Recurring revenue is Â¥728.8 billion or up Â¥224.3 billion. The major reason is other good business ONE container shipping business, our equity-method company. But for Q3 alone compared to Q1 and Q2, profit level is much lower. Still, the Â¥161.7 billion of recurring profit was booked. In location of consumption, mainly in Europe and America, consumer goods have been built up. And combined with inflation, transportation demand decreased. The port congestion improved increasing container vessel transportation space. And since this summer, the spot freight is on the downside trend â downward trend. And the cap movement itself is slowing down. ONE could maintain a high freight level through the first half of the year, managing good results in Q3. Next, Air Cargo. Recurring profit is Â¥56.4 billion, exactly the same number as the same period of last year. Partial shift of ocean freight to airfreight is weakening. And the robust cargo demand typical for Q3 was not observed this year, and the handling volume decreased year-on-year. However, the same conductor related firm transportation demand and multiyear longer-term contracts supported the Q3 to book Â¥12.3 billion. Next, Logistics business. Recurring profit, Â¥50.2 billion were up Â¥4.5 billion year-on-year. In the forwarding section, in air freight business, as I mentioned, for Air Cargo business, usually busy Q3 was not materialized this year, and the cargo movement was not strong, handling volume as well as profit level decreased. In the ocean freight business, handling volume itself underperformed, the same period last year, but the declining procurement price of container vessels supported the solid profit level because the spread between our procurement price and the other price that our customers paid was quite good. Contract Logistics business in Europe and America, personnel cost, liquidity cost rose markedly leading to price revision. And the business progressed very steadily. Next, Bulk Shipping business. Recurring profit, Â¥174.4 billion or up Â¥80.5 billion year-on-year. For automotive transportation, chip shortage and the pandemic reduced car production. But in the third quarter, the situation has improved. Better vessel deployment and substitute cargo also helped increasing transportation volume year-on-year, resulting in good performance. Dry bulk business for all vessel sizes, markets did not grow since the first -- the second quarter, underperforming the same period last year. But in the first quarter, we acquired a small mid-sized bulk carrier transportation contracts, which helped to produce good result. Energy business. For VLCC, with the firmness in VLCC and VLGC business, we were able to enjoy a very strong improvement in market conditions and also backed by stable and long-term contract, LNG and ocean businesses both performed very well. In summary, overall, from the second quarter of fiscal year, we achieved a peak and then we -- the business turned to a downtrend from the third quarter onwards, and this was mainly due to the flattening of the container vessel market. And also for the bulk shipping business, the bulker market sluggishness was covered up by the favorable automotive transportation business. And that was the summary. All I just mentioned are illustrated on Pages 4 to 5 of the presentation. So please refer to them when you have time. Now for the cumulative period from the first to the third quarter, we achieved a record high profits. In addition to the cargo movements, one of the major factors behind this was the weaker yen. So if you can look at Page 8 of the presentation, as you can see, the recurring profit increased by Â¥307.6 billion compared to the same period of last fiscal year, out of which Â¥130 billion or so was affected by the weaker yen according to analysis. So that was about the financial results for the first three quarters of fiscal 2022. Now moving on to the full year forecast of fiscal 2022. And I would like you to see Page 12 of the presentation, if you can look at the blue numbers on the right-hand side of the table. For the full year forecast of fiscal 2022, we have conducted a review on the forecast for the last time based on the prevailing market conditions. As a consequence, for revenue, recurring profit and net profit overall we -- for each of these items, compared to the last forecast announced in November, we made a slight downward revision. The full year revenue was reduced by JPY 100 billion compared to the last forecast announced in November, and now we are forecasting JPY 2,600 billion. Operating profit was down by JPY 220 billion -- increase of JPY 20 billion compared to the last forecast at JPY 290 billion. Recurring profit is down by JPY 30 million compared to last forecast at JPY 1,080 billion. Net profit was decreased by JPY 30 billion compared to last forecast at JPY 1 trillion. This is our new forecast. However, out of the JPY 30 billion reduction in recurring profit, approximately JPY 23 billion is due to the changes in the foreign exchange assumptions. In the last forecast, for both the third and fourth quarters, we were assuming for JPY 143 to the dollar in a foreign exchange function. However, this time around, for the fourth quarter, we are assuming for JPY 130 to the dollar, and this calculation is reflected in the new forecast. For the recurring profit of the fourth quarter, as I just mentioned earlier, after hitting the peak in the second quarter this year from the third quarter, we have entered a downtrend in the fourth quarter, this will come down further to JPY 74.1 billion according to our projection. Now to give you a breakdown by segment and if you can open Page 14, you see the changes from the last forecast on the far right column for each of the segments. O&E and Other Liner Trade business as well as the Air Cargo Transport business are recording a remarkable decrease for Liner and Logistics business altogether, there was a reduction of JPY 55 billion to JPY 880 [ph] billion is the new forecast of recurring profit. On the other hand, for the Bulk Shipping business, we have increased the forecast by JPY 25 billion to JPY 205 billion in recurring profit from this business. In the Bulk Shipping businesses profit growth is driven mainly by the continuous favorable conditions of the automotive transport business. Now next page, you see the changes in recurring profit in fiscal 2022 in a graph. As you can see from here, for the Liner Logistics business, the supply chain is now coming back to normal conditions. However, the inventory level is coming up at the place of consumption, inflation has also resulted in decrease of demand and the spot rate of container vessels have come down. And for the air cargo business, and usually in the third quarter, we see a peak season and the cargo movement remained sluggish this year. And those were the major factors behind the decrease of recurring profit. As you can see from the graph, I think it's self-explanatory that first quarter, second quarter, those were the peak of the business. And now after that, those periods, we are now seeing a downtrend as we move towards the normalization. For the Bulk Shipping business, the dry bulk market suffered a decline, but this was offset by the favorable automotive transportation business. So the dry bulk decline was covered up by this and also with the mid to long-term contract supporting of the firmness of the energy transport, we managed to minimize the decline, which we believe is quite a good number for us. All that I just mentioned are summarized on Pages 9 to 11 of the presentation. So please look at these numbers for each segment when you have time. Now finally, I would like to talk about the dividend forecast. And if you could go back to Page 9 of the presentation, you see the bottom section of the paper. As I just mentioned, in our full year forecast, we are expecting a slight downward revision compared to the last forecast for our net profit. However, for the year-end dividend, we will maintain the dividend forecast at JPY 160 per share, unchanged from the last presentation. When this is converted into pre-stock level, it's just not that you have to triple this, but this represents -- this is equal to JPY 480 of dividends per one share. And if you combine with interim dividend of JPY 1,050 per one share at the pre stocks split level for the full year. This is equal to JPY 1,530 per share, which is -- represents dividend payout ratio of 25.9%. As you know, the stocks split was conducted with the record date of September 30 last year and the effective date October 1. So we conducted a 3-for-1 stock split for our common shares. With this, that was about the overview of the first three quarter results of fiscal 2022. And also, I have announced a revised full year forecast. Also, as you had may have learned from our homepage descriptions, the new medium-term management plan starting from fiscal 2023 will be announced on March 10. Our future growth strategies as well as our new capital policies will be presented in this new medium-term management. So please look forward to them. That's all for myself. Thank you very much. That's the end of the presentation. Now we move on to Q&A session. So the container shipping is on the down trend. If this trend continues and contributing to the decreased profit next year, where your balance sheet is very strong right now. payout ratio of 25% could be raised in a worse to keep higher the payout ratio going forward? This is Soga, answering your question. Thank you for the good question. As to dividend ratio, dividend payout ratio and shareholders' return policy. That is a very big part of our capital policy. As I mentioned at the end of my presentation, on March 10, we are going to pronounce â announce a new mid-term management plan. And actually, that part will be a very big chunk of that plan. So as of today, I cannot go into details, but we are now exploring something different. Next question as to O&E and its balance sheet, whether they have quite a big figure of net cash. What is the actual size of the net cash? Mr. Harada, please. This is Harada. In this quarter, in the color of Magenta, they have accumulated the profit on a cumulative basis of the three quarters. They announced the cumulative number. And especially for the past 2.5 years, it was strong. Excluding dividend, the rest is cumulated in the capital -- as capital. And of course, investment will start. So, the part of that cash will be used for investments, so in terms of its balance sheet, it is more than sound including dividend. That's what they have achieved. That said, we have been considering their business, adequate business in the window of 10 years to think about the dividend, the policy for shareholders. With 2023, 2024, about 29% of the capacity will be provided by newly built vessels compared to existing vessels. So there will be some changes in the tracking path of the company. So the shareholder companies, parent companies are discussing how to deal with that potential situation for NEE [ph]. Thank you, very much for the question. May be we'd like to move on to the next question. Thank you. I have two questions. One is about the container business profit outlook. According to other company's presentation, even with the current spot rates, they shall be able to achieve profits and avoid any losses. Do you agree with that view, especially if the current rate of spot rates continue as is, with the new contracts coming -- renewal in May, I think the situation will become very difficult, and we will still be able to achieve profit at that level. So that's the thing that I'm not really sure about. So can you comment on that point? Second is about the cargo and also air transportation and also our logistics. We have seen a steeper deceleration from the third and fourth quarter. So, what's your forecast about the speed of rate adjustments in the future and the outlook for the future? Which quarter will it -- will be the bottom quarter if you have any forecast on that, please comment on them? Thank you very much for the questions and that will be explained by Harada san. Thank you very much for the questions. Regarding the first question, I was anticipating this question. The container businesses profit and loss outlook, of course, other companies made a presentation in which they talked about that if the current rate is maintained, they shall be able to maintain profitability. And you were asking our opinions and also for the renewal from May, the service contract for North America will be up for renewal. So, regarding our view, regarding the freight outlook, of course, I'm not in a capacity to talk about the other companies' comments regarding the freight outlook. But in our view, if the current spot rate of -- or use for all of the opportunities, it will just be breakeven. So we believe, it's going to be very tough if the current spot rate is maintained. So for that reason, if the spot rate declines -- we haven't seen any decline from the current level. So, I think, because the timing of the freight return is slow, so the North America transport is slightly moving. But the current spot rate is a very tough situation from -- when you look at it from the breakeven point. So again, from this reason, the spot rate has come down, but it is now leveling off, and we are not seeing any further decline at this moment. That's one reason. But on the other hand, towards the renewal in May, each company right now generally before and after that, the cargo volume is now reducing. So, therefore, the service submission is now conducted. They are skipping the services, but still the volume is not coming back. So the volume shortage is the major reason behind us. And, of course, North America inventory program is still there, and of course in Europe and other regions, the war is there. And of course, the general economic conditions are also another factor. So depending on the timing, I think the situation will change and towards the May period, the renewal, the spot rate at which level the annual rate will be determined will have an impact on the forecast, and we'll be able to see that when that becomes -- when we have visibility on that. But if the current rate continues, that will be the case. But, of course, in the fourth quarter, the reason why we are expecting our profitability is because we have the annual contract, and that's making a great contribution to our profits right now. And actually, the annual rates are maintained and observed with a higher probability. And as a consequence, the long-term contracts compared to the short-term have been coming down in terms of total proportion and the short-term contracts are now increasing in proportion. However, the long-term contract has been observed more than anticipated. So that is making a good contribution. And, therefore, what happens to this level going forward will have a significant impact on the PL for 2023. So we are keeping close eye on this trend. And the second question regarding the airfreight and also logistics business, in the fourth quarter, again, the profit level is likely to plunge or reduce significantly. And where are we likely to hit the bottom? I think that was a question from you. For aircraft and also for logistics, for both of them, the program right now is the shortage of cargo, and that is the biggest -- single biggest problem, especially when it comes to air cargo, in November, December, or the delivery from Japan has seen a bottom, and we have already have the flash numbers for November and December. But compared to 2019 pre-COVID level, this is the lowest monthly number, of course, it depends slightly and differently from the destination for North America, Asia and other in the region, the November number was the lowest over the last several years. So the volume is small. And, of course, because of container vessels, there has been a reduction. So in our forecast, in our projection in terms of higher grade, despite this limited volume, the air freight has been maintained at a certain level, which is something noteworthy, I believe. So in that regard -- of course, that's partly because we have secured long-term contracts. But, of course, the business per se, the dedicated cargo trade, the view of how to secure the space might have changed, but of course, we have to keep a close eye before making a decision. But anyway, despite the low quantity level, the freight has been maintained fairly well. The deterioration of the IPO performance is dependent on the volume, I think. So, there's nothing we can do right now for the fourth quarter. But likewise, the same applies to Logistics. The AFF also be affected by but also for the ocean OFS, as it was explained by the CFO, there's a timing difference issue here because we have a contract in place with customers, and there are -- the freight determined by the contract, but actually, the space per se from the carrier because the spot rate is coming down and as a result of the renewal, so there is a spread of the prices. Before the contract expire -- until the contract expiry with the customers, that kind of spread will continue to happen because of the timing difference. And that is going to have impact on the OFS business. But this will diminish and go away in the future, but right now, this is still remaining as we speak today. So, the yield from this business or -- and when are we going to hit the bottom from this business. For the Ocean Freight, I think it seems that we won't likely come down further from the breakeven point any longer. But of course, for the forwarder, when the customer prices are decided, the timing difference spread will become smaller. So, I think we are going to see a further deterioration on that part. But as far as the airfreight is concerned, as we talked about the yield, one is going to happen from now onwards will have to be seen. But I think it seems that we are doing well despite those conditions. If the volume comes down further -- the cargo volume comes down further, like the daily prices for the passenger planes that could also have another impact on us. So, I don't think that we will have another bottom, but we have to keep a close eye on the future trends. That's all for myself. Thank you. Regarding your first answer, any -- in order for them to secure annual contract from North America to generate profits, the spot rates have to increase further. Is that the right interpretation, or wasnât that your explanation? Yes, we said that. But another point is that throughout the pandemic -- as a result of the pandemic, the value of the space were very much appreciated. So, the contracts that we enter into will be one year and the US economy given the piling-up of the inventories, how will that -- the US economy come back is another issue that we have to keep an eye on. Of course, the US economy is very strong, and I think we are not going to foresee a real deep recession, so the purchases will continue to continue. So, towards the end of the year, there might be a shortage of spaces and there is a potential -- we want to roll out the possibility of swap freight prices surging. So, how to secure the supply of spaces and how to secure the right prices for that is something that we have to work on. I have two questions. First about container and the second question is about air freight. The first question, container vessels, long-term contract and the level of freight and how to think about it? Historically, this spot rate discount basically, the freight that had some discount in the long-term contract, but their demand is weak. Is it really possible to set the freight for the long-term contract higher than the spot? And the second question, the yield and the air cargo â air freight. The profit level and the freight level might be coming down since going forward, when the volume situation does not change much. What will be the retrospective of the freight? Would it go down, or would it be maintained? These two questions. Thank you. Here's Harada. First, about the container ship long-term contract and the freight level. In the past, whether there's a price of the volume to some extent. And so compared to the spot rate, there will be some discount. There have been discount, you're right. It depends on the certain spot level that could be the expectation on the part of the customers. But against the spot freight and the fluctuations of spot in the future, whether the customer would go for a discount or even willing to pay out premium to get the space in May â in April and in May when the renewal comes, it is still invisible. It seems that the customers are watching closely. We can see mood about the spot rate. So based on that sentiment, there will be either a discount or premium. In the negotiations, if the customers think that there should be premium, actually, there are such customers. So it's not necessary discount that will happen. It depends on negotiations, what kind of sentiment for the future, and that will determine the rates for the long-term contracts. In any case, the situation is very tough to break even. So, on a long-term basis we supply the space on a very long term that will make the situation for us even tougher. So â at this moment, it is invisible how the rates will be determined for the long-term contracts? Next question, NCA margin of the cargo and the volume is not likely to recover very soon. So, how are we looking at it? Well, as I mentioned earlier, the volume movement and the other freight in that relationship compared to the pre-COVID the volume is weak, but yield is maintained. And of course, we need to watch closely, but it is doing rather well. So the value of the space is being appreciated. As to Japan, there are more than two years contracts exist from Japan. The space from Japan is sold off. Part of it is already sold off. So we can get other freight as the predetermined. And the renewal of freight from Asia through Narita to North America, it's already happening, but compared to the current spot rates, there's premium on the rates with customers. So especially the passenger flights, the belly space is not dictating the freight determination overall, but we are going to watch closely. Thank you very much for the presentation. I have three questions. First of all, in relation to your previous answer, the annual contract renewal for Europe and also the early board for North America, is there anything that you can add as an explanation and supplement your explanation? I would like to hear that. Second is about the container spot rate. It's close to break even. So you're saying that, it's close to the bottom according to your explanation. I understand that. But from here, with new vessels being completed and the demand recovery alone may still be very tough on you in terms of your supply and demand situation. So if you are able to absorb the new vessels completion and still sustain the freight from plunging further, I think you have to work very hard on that. Otherwise, I don't think that it's going -- you will be able to achieve that ambition. Is that correct? So that's my second question. My third question is about YLK logistics, we look at the fourth quarter projection of Â¥4.8 billion in profit, so how to see this profit level? From an outsider's point of view, the forwarder profit is almost nothing. And only contractor logistics profit is the only component here. Is that correct? If that is correct, I think the forwarders profit is almost breakeven. Maybe breakeven with forwarder is not really usually. So I think I'm sure you have been securing some spread, but other burdens are higher. So maybe can you give some more color to that? That's something that I would like to hear. Okay. Harada, please. Thank you very much for the question. So I would like to answer to those three questions. I'll try to be concise. First of all, regarding the early board results for North America and Europe, of course, early board is usually contracted on a calendar year basis, and the results are already available. Initially, the spot rates have come down, but still the spot and the -- in the middle between the spot rates and also the previous year's level, it was decided. That was a trend that we have seen, but it turns out that it has dragged mostly heavily by the spot rates, prevailing spot rates, in many cases, for the early board. Of course, that's still within the range of our earlier assumptions, but a certain amount of volume has been -- is maintained. So therefore, because we're choosing this, it doesn't mean that we are losing money. It's not we are generating losses because of securing these contracts. So in general, those rates were determined in line with our range of assumptions. All right. So the issue of breakeven. Let's say if today's breakeven level and as I said earlier, with the new vessels being delivered in 2023 and 29% of the fixed vessels, that's the new vessels becoming available. And then the recovery of demand alone will not solve all the problems because there might be a concern of oversupply. Of course, certainly, in terms of supply and demand, the supply will increase there. But in the case of container business, the -- compared to the capital of the vessel expenses, the fixed cost that's related to the service, and that's quite excessive, that quite a large burden. So -- in essence, there's a sense â there's a vessel. And if all the vessels have been deployed and if the â if everybody is playing on that with all the vessels, they are being operated, I think that is going to be a hell for all the players. So if the demand is not really recovering to the fullest, then even if the vessel is there, we are not going to operate the vessel. That is the prevailing view in the market. So by doing so, we can save the fixed cost for operations and the freight will not suffer a decline. So its â itâs up to each company's decisions and the alliances decision. But of course, the availability of vessels and if the demand does not recover fuller â as fully -- it doesn't mean that the freight will just free fall and plunge. That's our current assumption. But of course, it has to be determined by each company, and we have to keep an eye keep â keep an eye and see what happens. But of course, then as a result of this, those global players -- there's only seven companies, who can be claimed as seven companies. And these seven companies are different in sizes and the cost competitiveness of each company is not really significantly different. And the breakeven point are not likely to be significantly different among the certain companies. Given that situation, those vessels that is going to transport air even because the vessels are complete, not all of them -- not all of the players are going to operate all of them. That's my personal view. And finally, regarding our Logistics business, for the fourth quarter of logistics Y&K [ph] in particular, compared to the first three quarters, the reason why the fourth number is like this is because of the G&A factor, the Y&K business segment. We also have our G&A. And the bonuses and the G&A expenses increases generally in the fourth quarter because those are allocated for the first quarter. So therefore, the general and admin expenses in the fourth quarter is higher compared to the other three quarters. And because of the business performance, it looks as though the fourth quarter profit is lower, but it's not that certain segment is running on losses. That's not the case. So of course, the contract logistics is a very stable business, relatively speaking. So the -- when the cargo volume is not really changing that significantly, so on a relative basis compared to other quarters, the performance is really comparable to other quarters. However, as I said earlier, the group employees, SG&A expenses, checking here. So compared to other quarters, the profit level look appears to be smaller compared to other quarters. But for other businesses, like SG&A, it's not that this business is expected to generate losses. As of the number for the quarter in the fourth quarter, as I said, because of the reasons there are some seasonality factors here, especially because of the fourth quarter, the seasonalities are there, and that's the reason why we are projecting this number. That's all from myself. Thank you. I have two questions. First, bulk shipping profit on page 7, on a quarterly basis, the structure there, dry bulk, automotive and tanker. Second quarter, third quarter, absolute amount are not so different. But the breakdown is different, I understand. So specifically for automotive transportation and how much will dry bulk. And that's what I'd like to know? And then the fourth quarter will be the impact on automotive, tanker and dry bulk and what is your plan for each of these segments in the bulk shipping business? My second question is not about the financial results. But you have announced the different changes, Mr. Soga, CFO is going to be the new President. Is there anything that you can share with us at this moment as to the organizational things, what are the nature of things that you can share with us? Thank you. Your first question, the bulk shipping, the recurring profits and its breakdown, as you mentioned, for this fiscal year, second quarter and the third quarter, absolute figures of recurring, the profits are almost the same in the first quarter, a bit better than the second quarter, third quarter. But all-in-all, on the same level. But, of course, the breakdown is different for each section and its numbers, we do not disclose them. So we cannot talk about figures themselves. But in the first quarter, JPY64.1 billion, that's the recurring profit. And the main driver there was dry bulk, and the market in the first quarter was quite good. And before that, in the previous fiscal year first quarter, from there, usually in winter because of the seasonality, the bulk shipping is not so robust. But FY 2021 fourth quarter, actually, the results were quite good. In the first quarter also, dry bulk had a very good performance. And in the second -- in the third quarter, dry bulk market aggravated. So the dry back numbers reduced, while automotive transportation numbers rose. So the overall numbers were about the same between the quarters, but the other breakdown is different, automotive transportation replacing dry bulk in the level of contribution. It's not that the dry bulk is running in the red, it is producing good numbers. And in the fourth quarter forecast, if you look at the page 13, we have the bulk shipping forecast. JPY 30.6 billion, JPY 55 billion for the third quarter, so down by about JPY 2.5 billion. Here, dry bulk market, was expected to go up more, especially in September and onwards. We thought that it would go into recovery phase, but the economy in China and its Zero COVID policy, the sentiment aggravated. So there was no such growth. It was actually coming down. That's the dry bulk market. And so, the fourth quarter, the forecast is based on that situation. So as I mentioned earlier, from the first quarter, dry bulk started to come down potentially. It's not operating in the red, but the downward trend through the fourth quarter. As to automotive transportation, from the second quarter and onwards, it is growing in the third quarter, covering the reduction in the dry bulk. So that, overall, the bulk shipping number is maintained. And in the fourth quarter, automotive transportation will do well, but not as much as JPY 55 billion, that level. That's our forecast for bulk shipping business. But going forward, FY 2023, probably the China internal policies, for example, for real estate, the government policy change, real estate companies will be -- thus supported are now being supported already by the Chinese government. So the sentiment is expected to improve greatly in China. So from April or from May, in any case, from the early part of the year, we will see recovery and improvement. That's what we expect in compiling the budget for the next fiscal year. Your second question about management structure, as you said from 4/1, I'm going to be -- Iâm going to succeed Mr. Nagasawa, as President of NYK. What I can talk about right now is as follows. So on the March 10, we are going to announce the new midterm management plan and for the coming four years and then eight years, up until 2030. We are going to look ahead to 2030, and then compile our management strategies. And as I mentioned earlier, new capital policy will be in place. So based on that new plan that we are going to have very specific action programs and without any hesitation, we are going to execute those plans. Another point about the organization, ESG -- first year of ESG, that was 2021, it was by Mr. Nagasawa. So 2022 is the second year, and the next year is the third year. So to promote ESG management and the enlightenment of our employees has already been completed, more or less. So from the next year on, we are going to go into the next phase. So we are going to announce the specific action programs as much as possible in the midterm plan. And to execute all that, we have seven headquarters for divisions. And from focus, we are going to a newer, which is named ESG strategy region, so ESG management, implementation of ESG management that will be led by this new division starting on April 1st. I cannot talk about in a very comprehensive one, but I just want to touch up on these two key points. Thank you. Actually, my biggest concern since last year is specific trade from Japan to America and will be the changes, especially up until before summer last year, because of interest rates rising in the North America, there was a high -- the probability to start recession toward the end of last year pressuring down the production sales in automobiles. So, we should not increase the space we thought. But according to more recent comments by analysts or automobile manufacturers, in the US, the retail balance sheet or the individuals are improved. So they buy cars, even with some rising interest rates, the things like cars continue to be purchased. They will continue to buy cars according to some analysis. In the current US economy, it's not probably a recession. It will make some good soft landing. If that's the case, the will to purchase cars and the other capability of buying cars will be maintained. So in North America, in particular, the other transportation and the demand will not go down probably during 2023. And so that will be a driving force and in the Southeast Asia area or to European market, though we will not see the bad situations. Actually, there might be some improvements. Thank you. Thank you. Thank you very much for the question. So we are running out of time, and we are approaching the schedule time to finish this meeting. If there's no further objections, we would like to finish the Q&A session at this juncture. So as we have informed you earlier, I would like to have Mr. Harada san comment to finish this meeting. Once again, Liner & Logistics, Head of the business. My name is Harada. Once again, very nice to meet you. 2018 Ocean Network Express was inaugurated and ever since for the five years. Whenever I had this -- I always attended the IR presentation and talked about the L&L businesses. Ocean Network Express when it was established recorded a teething problem because of many issues happened one after another, and we caused here a lot of concerns. However, after the third year onwards, because of the pandemic, the situation in the world changed dramatically and especially the supply/demand situation was impacted significantly by COVID. As a consequence, we have seen unprecedented numbers on a continuous basis, and amid the situation in order to explain the L&L business in the most easy-to-understand way, we -- I have tried to make explanations during the IR session, but I'm sure that my efforts were not sufficient to some extent, in some cases, I would like to extend my apologies here. The L&L business and also the L&L business in this trend of normalization, unfortunately, we are seeing a certain -- there might be a certain occasions that we see a setback in the future. However, ONE, YLK, NCA all their businesses after all because the population is growing around the world and as long as the economy is growing, these businesses will definitely continue to grow. Therefore, including these three companies, I hope that you will continue support to these three companies and overall to the NYK Line business. Thank you very much for all your support over the last five years. With this we would like to finish the financial presentation for the first three quarters of fiscal 2022. Thank you very much. And there's a survey, please we will call for it -- we appreciate your cooperation. Thank you very much once again for your participation today.
EarningCall_507	Ladies and gentlemen, welcome to the Arrowhead Pharmaceuticals Conference Call. [Operator Instructions] I will now hand the conference over to Vincent Anzalone, Vice President of Investor Relations for Arrowhead. Please go ahead, Vince. Thanks so much. Good afternoon and thank you for joining us today to discuss Arrowheadâs results for its fiscal 2023 first quarter ended December 31, 2022. With us today from management are President and CEO, Dr. Christopher Anzalone, who will provide an overview of the quarter; Dr. Javier San Martin, our Chief Medical Officer, who will provide an update on our mid and later-stage clinical pipeline; Dr. James Hamilton, our Chief of Discovery and Translational Medicine, who will provide an update on our earlier stage programs; and Ken Myszkowski, our Chief Financial Officer, who will give a review of the financials. In addition, Tracy Oliver, our Chief Commercial Officer and Patrick OâBrien, our Chief Operating Officer and General Counsel, will be available during the Q&A portion of the call. Before we begin, I would like to remind you that comments made during todayâs call contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact are forward-looking statements and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those expressed in any forward-looking statements. For further details concerning these risks and uncertainties, please refer to our SEC filings, including our most recent annual report on Form 10-K and our quarterly reports on Form 10-Q. Thanks, Vince. Good afternoon, everyone and thank you for joining us today. Arrowhead currently occupies a unique position within the biopharma world. I believe that RNAiâs modality and our proprietary TRiM platform, in particular, are considered increasingly validated. RNAi is a potentially powerful way to treat many disease states. It appears to largely work as intended across numerous clinical studies, has the potential to be highly specific and has been generally well tolerated. Overlay on top of this, a scarcity premium. There is a clear scarcity of companies capable of developing RNAi therapeutics well and extreme scarcity of those capable of bringing RNAi outside the liver. These factors combined to position Arrowhead to create substantial value for our shareholders and the patients who rely on us for life altering new medicines. I think this also frames how we should view Arrowhead currently, the progress we will discuss today and what these mean for the future. The two primary components of this sort of analysis are the ways in which we are expanding our technological reach and the ways in which we are leveraging our more proven technology. Letâs begin with how we are expanding our reach. As you know, our pulmonary franchise is currently comprised of three clinical candidates: ARO-RAGE, ARO-MUC5AC and ARO-MMP7. With our announcement last week that the ARO-MMP7 Phase 1/2 study initiated, we are now treating subjects in all three programs. We remain on track to begin early data disclosures for ARO-RAGE and ARO-MUC5AC in the second quarter. This is an important milestone for us. We view the lungs as a target-rich environment and donât see two or three drugs coming out of that franchise, but rather potentially 8 or 9 as with hepatocytes, once we have clinical validation that we are able to address the cell type and reduce expression of a target gene in a well-tolerated fashion. We believe the franchise will be substantially derisked. At that point, we have an expectation of success for future programs in terms of our ability to safely file the target gene. As such, clinical proof-of-concept in the first one or two programs within a cell type has a potential to unlock substantial value. We believe we will be there for our pulmonary franchise next quarter. And given what we learned with ARO-ENaC and our non-clinical data using ARO-RAGE, ARO-MUC5AC and ARO-MMP7 across several animal models, we are optimistic that we will see clinically relevant gene knockdown in a well-tolerated fashion. We have not spoken about our muscle targeting franchise for some time and I am pleased to announce today that we intend to move ARO-DUX4, our candidate designed to treat facioscapulohumeral muscular dystrophy, or FSHD, into clinical studies next quarter. This is another example of our drive to apply RNAi to unmet medical needs wherever they are. We have completed a large number of non-clinical studies, including acute and chronic GLP toxicity studies and we look forward to bringing this potentially important medicine to the patients who need it. Another important milestone relating to technology expansion that we expect next quarter, the disclosure of the next cell type we will be targeting and a presentation of our supporting non-clinical data. This and our work in the pulmonary and skeletal muscle spaces represent substantial growth opportunities for the company and would bring RNAi closer to reaching its full promise as a revolutionary therapeutic modality with the potential to address many new diseases. These programs are early, but they are the next great leaps forward for Arrowhead. The second calendar quarter of 2023 is indeed a busy time for demonstrating Arrowhead innovation. Letâs now turn to our liver programs. We have demonstrated across multiple candidates in many clinical studies and in thousands of patients that our liver-directed candidates appear to achieve high levels of target engagement and have encouraging safety and tolerability profiles. As such, we are focused on executing on our current liver programs and aggressively expanding our pipeline where we can. Last month, we announced top line results for the Phase 2 SEQUOIA clinical study of fazirsiran for the treatment of liver disease associated with alpha-1 antitrypsin deficiency. The active treatment arm had results that were highly consistent with the AROAAT-2002 open-label study, which we previously published in the New England Journal of Medicine. Fazisiran appears to be active against its targets with all treated patients achieving a high level of reduction mutant Z-AAT protein, which is known to be the root cause of AATD liver disease. This reduction over 12 months led to promising downstream changes in markers of liver disease, including reductions in inflammation and 50% of patients experienced a regression in fibrosis. These encouraging results are exactly what we had hoped for. The only data point that was a bit difficult to interpret was in the placebo arm. There, 3 of 8 patients with paired biopsies showed an improvement in fibrosis. We know that scoring fibrosis is a notoriously noisy measure and a way to smooth out such data is to ensure a large enough sample size. Unfortunately, with just 8 patients, a single patient in either direction can lead to confusing percentages. We believe that is what happened here. Fortunately, we can look to previous studies for guidance on what fibrosis should look like in untreated patients. For instance, a previous natural history study that followed over 50 AATD patients showed about 15% had improvement in fibrosis. We believe that the 50% of patients who showed improvement in fibrosis on fazisiran, is a reliable measure, because a), the treatment groups had a larger sample size than placebo; and b), the improvements in fibrosis was part of a larger dataset that made sense together. Patients on fazisiran had dramatic reductions in AAT monomer, globules, and they demonstrated decreased inflammation. The patients in the placebo arm showed none of these features. Takeda is now initiating a Phase 3 study that will enroll up to 160 patients, which is designed to be sufficiently large to smooth that variability to approximately the levels expected on natural history. Arrowhead is eligible to receive a milestone payment from Takeda when the Phase 3 study begins. During the previous quarter, two of our other partner programs generated milestone payments as they advanced into the next stage of development. Horizon Therapeutics enrolled the first subject in a Phase 1 study of HZN-457, formerly called ARO-XDH for the treatment of gout, earning Arrowhead a $15 million milestone payment. In addition, we earned a $25 million milestone payment from Amgen after the first subject was enrolled in Amgenâs Phase 3 trial of olpasiran for the treatment of cardiovascular disease. We believe in that program and in the potential of olpasiran to help patients with the risk of cardiovascular disease associated with elevated levels of Lp(a). However, with the recent presentation and publication of positive Phase 2 data, we determined that the timing was right to monetize our royalty stream associated with potential future olpasiran sales. To that end, in exchange for rights to the olpasiran royalties, Royalty Pharma paid us $250 million in cash upfront and up to $160 million in additional payments contingent on the achievement of certain clinical, regulatory and sales milestones. In addition, we retained rights to $400 million in development, regulatory and sales milestone payments potentially due from Amgen from the 2016 license agreement including the $25 million milestone payment I just mentioned. During the quarter, promising new clinical data across three late-breaking presentations were presented at the American Heart Association meeting on three investigational candidates for cardiometabolic diseases, ARO-APOC3, ARO-ANG3 and olpasiran. The totality of these data demonstrates the significant progress achieved in RNAi drug development and they specifically suggest a potential future treatment paradigm where RNAi maybe prominently leveraged in preventative cardiology. As I mentioned, a Phase 3 study has already been initiated with olpasiran. ARO-APOC3 is also being investigated in a Phase 3 study against FCS. And we expect that 48-week study to be fully enrolled next quarter. We also expect end of Phase 2 meetings this year to speak with the regulators about Phase 3 studies using ARO-APOC3 in sHTG patients as well as broad mixed dyslipidemia populations. My expectation is that we will launch those Phase 3 studies at the end of the year. Similarly, I expect that we will move ARO-ANG3 into Phase 3 studies in familial hyperclitherolemia this year. I also expect several data presentations from four Phase 2 studies with these candidates throughout the year. Finally, we continue to make progress in our Phase 1/2 study of ARO-C3, our candidate designed to treat several complement-mediated diseases. I expect to release initial data next quarter. Janssen has also made progress with their Phase 1 study in JNJ-0795, our partnered candidate against NASH, and we expect a data disclosure that includes liver fat reduction this quarter. Turning to JNJ-3989, we have seen the media reports about Janssen deprioritizing HBV broadly and that is consistent with our understanding. We have not received a termination letter for our license agreement and it is our understanding that some legacy HBV studies are continuing, but we do not know where JNJ-3989 will ultimately end up. We will assess our options and rights when Janssen decides the path forward for the program. Thank you, Chris and good afternoon everyone. I want to describe the fazirsiran SEQUOIA data that we presented last month and then give an update on where we are with mid and late-stage studies of our cardiometabolic candidates. As Chris mentioned earlier, the SEQUOIA data from the treatment arms were very encouraging and consistent with the prior data generated from the 2002 open-label study. This is what we and our partners at Takeda wanted to see. Patients receiving 25, 100, or 200 milligrams of fazirsiran who had baseline fibrosis demonstrated a dose dependent mean reduction in serum Z-AAT concentration at week 48 of 74%, 89%, and 94% respectively. All three doses led to a dramatic reduction in total liver Z-AAT with a median reduction of 94% at the post-baseline liver biopsy visit. In addition, PAS-D globule burden, a histological measure of Z-AAT accumulation, had a mean reduction of 68%. Improvement in portal inflammation was observed in 42% of patients while only 7% showed worsening. Lastly, 50% of patients achieved an improvement in fibrosis of at least 1 point by METAVIR stage. In contrast, by week 48 patients receiving placebo who had baseline fibrosis saw no meaningful changes from baseline in serum Z-AAT, had a 26% increase in liver Z-AAT, and had no meaningful change in PAS-D globule burden. No placebo patients experienced an improvement in portal inflammation while 44% experienced worsening. 3 of the 8 placebo patients experienced an improvement in fibrosis at the post-baseline liver biopsy visit. This finding highlights the known variability on histologic fibrosis assessment. With a larger sample size, like in the planned Phase 3 study, the rate of improvement in patients receiving placebo may more closely approximate results from natural history studies of untreated patients with AATD. Fazirsiran has been well tolerated with treatment emergent adverse events reported to-date generally well balanced between fazirsiran and placebo groups. There were no treatment-emergent adverse events leading to drug discontinuation, dose interruptions, or premature study withdrawals in any study group. Compared with placebo, no dose-dependent or clinically meaningful changes were observed in pulmonary function tests over 1 year with fazirsiran. These are all encouraging signs for the program and for patients. We know this is a progressive disease of the liver caused by one thing: the accumulation of the mutant Z-AAT protein, which cannot efficiently get out of the liver. The data suggest that fazirsiran can reduce the production of new Z-AAT and then the liver starts the process of breaking down and clearing the accumulated Z-AAT in the liver, reducing inflammation and ultimately regressing fibrosis. This is essentially the cascade of progressive liver disease in reverse. We believe that this reversal can only start with the removal of the insult to the liver, which is the accumulation of the mutant Z-AAT protein. These data represent hope for physicians and their patients with this disease who have no approved treatment options. We also announced that Takeda is initiating a randomized, double-blind, placebo-controlled, Phase 3 study to evaluate the efficacy and safety of fazirsiran in patients with F2 to F4 fibrosis. Approximately 160 patients will be randomized 1:1 to receive fazirsiran or placebo. The primary endpoint of this study is the decrease from baseline of at least one stage of histological fibrosis METAVIR staging in the centrally read liver biopsy done at Week 106 in patients with METAVIR stages F2 or F3. I also want to give a brief update on where we are with our cardiometabolic candidates, ARO-APOC3 and ARO-ANG3. ARO-APOC3 is our investigational RNAi therapeutic targeting apolipoprotein C3, or APOC3, being developed as a treatment for patients with mixed dyslipidemia, severe hypertriglyceridemia, and familial chylomicronemia syndrome. APOC3 is a key regulator of lipid and lipoprotein metabolism that inhibits lipoprotein lipase and mediates hepatic uptake of remnant particles in the LPL-independent pathway. In clinical studies, ARO-APOC3 improved multiple lipid parameters and may provide clinical benefit in a broad population with dyslipidemias. For ARO-APOC3 we have the following ongoing studies: the SHASTA-2 Phase 2 study in patients with severe hypertriglyceridemia; the MUIR Phase 2 study in patients with mixed dyslipidemia; and the PALISADE Phase 3 study in patients with familial chylomicronemia syndrome. SHASTA-2 and MUIR are on schedule for data readouts later this year. These studies will inform the development path, regulatory interactions, and Phase 3 study design. PALISADE continues to enroll patients efficiently and we believe we will achieve full enrollment in the second quarter of 2023. It is a year long study, so this will allow study completion in Q2 2024. ARO-ANG3 is our investigational RNAi therapeutic designed to silence the hepatic expression of angiopoietin-like protein 3, or ANGPTL3, being developed as a treatment for homozygous familial hypercholesterolemia, or HoFH and heterozygous familial hypercholesterolemia, or HeFH. ANGPTL3 is a key regulator of lipid and lipoprotein metabolism that inhibits Lipoprotein Lipase and Endothelial Lipase. ARO-ANG3 has a unique mechanical action to address hypercholesterolemia distinct from other LDL-cholesterol lowering therapies. For ARO-ANG3, we have the following ongoing studies. The ARCHES-2 Phase 2 study in patients with mixed dyslipidemia and the GATEWAY Phase 2 study in patients with heterozygous familial hypercholesterolemia. All patients in the ARCHES-2 have completed treatment and we should have data processed and analyze in the middle of the year. GATEWAY is fully enrolled, and we should have initial data around the middle of this year as well. We intend to interact with regulators about our plans for Phase 3 studies year. Thank you, Javier. We announced last week the initiation of a Phase 1/2 study of ARO-MMP7. So I want to talk about that first. ARO-MMP7 is designed to reduce expression of matrix metalloproteinase 7 or MMP7 as a potential treatment for idiopathic pulmonary fibrosis, or IPF. MMP7 is thought to play multiple roles in IPF pathogenesis, including promoting inflammation and aberrant epithelial repair in fibrosis. Significant unmet medical need exists for patients with IPF who experience progressive decline of lung function despite current therapies. ARO-MMP7-1001 is a Phase 1/2a single ascending dose and multiple ascending dose study to evaluate the safety, tolerability, pharmacokinetics and pharmacodynamics of ARO-MMP7 in up to 56 healthy volunteers and in up to 21 patients with IPF. Now moving on to our two other pulmonary programs, ARO-MUC5AC and ARO-RAGE, our investigational RNAi therapeutics designed to reduce production of mucin 5AC or MUC5AC, and the receptor for advanced glycation and products, RAGE, respectively, as potential treatments for various muco-obstructive and inflammatory pulmonary diseases. As Chris mentioned, we are on schedule to have initial data from the healthy volunteer portion of the Phase 1/2 studies in the first half of this year. The healthy volunteer portion of these studies has two parts, a single ascending dose part and a multiple ascending dose component. The studies are designed to assess safety and tolerability, pharmacokinetics and pharmacodynamics. We will be assessing pharmacodynamics by measuring available biomarkers in bronchoalveolar lavage fluid, induced sputum and for RAGE, we are also measuring serum sRAGE protein. The second portion of the studies is in patients with moderate to severe asthma. We recently initiated enrollment in asthma patient cohorts in both the ARO-MUC5AC and ARO-RAGE studies. Initial data should be available around the end of the year. Finally, moving on to ARO-C3, which is our investigational hepatocyte targeted RNAi therapeutic targeting hepatic C3 expression as a potential treatment for complement-mediated hematologic and renal diseases. We remain on track to report data from Part 1 of the study in healthy volunteers in the first half of this year. Based on an analysis of data from the healthy volunteer single and multiple escalation dose cohorts, we anticipate selecting doses for the Part 2 open-label patient cohorts this month and we are on track to open patient cohort enrollment in the first half of this year. Thank you, James, and good afternoon, everyone. As we reported today, our net loss for the quarter ended December 31, 2022 was $41.3 million or $0.39 per share based on 106 million fully diluted weighted average shares outstanding. This compares with a net loss of $62.9 million or $0.60 per share based on 104.5 million fully diluted weighted average shares outstanding for the quarter ended December 31, 2021. Revenue for the quarter ended December 31, 2022, was $62.5 million compared to $27.4 million for the quarter ended December 31, 2021. Revenue in the current period primarily relates to our collaboration agreements with Amgen, Horizon and Takeda. Revenues recognized as we complete our performance obligations, which include managing the ongoing AAT Phase 2 clinical trials for Takeda and delivering a Phase 1 ready candidate to Horizon. There remains $107 million of revenue be recognized associated with the Takeda collaboration, which we anticipate will be recognized over the next 1 to 2 years. Additionally, Horizon enrolled the first subject in a Phase 1 trial of HZN-457 formerly known as ARO-XDH, which triggered a $15 million milestone payment to us, and Amgen enrolled the first subject in its Phase 3 registrational trial of Olpasiran, which triggered a $25 million milestone payment to us. Both milestone payments were received in the second quarter of fiscal 2023. Revenue in the prior period primarily related to the recognition of a portion of the payments received from our license and collaboration agreements with Takeda and Horizon. Total operating expenses for the quarter ended December 31, 2022, were $104.7 million compared to $90.8 million for the quarter ended December 31, 2021. The key driver in this change was increased candidate costs and salaries as the companyâs pipeline of clinical candidates has both increased and advance into later stages of development. Net cash used by operating activities during the quarter ended December 31, 2022, was $75.5 million compared to $61.3 million for the quarter ended December 31, 2021. The increase in cash used by operating activities is driven primarily by higher research and development expenses. We expect our operating cash burn to be $70 million to $90 million per quarter in fiscal 2023 and capital expenditures up to $200 million as we approach completion on our footprint expansion projects, including GMP manufacturing. Turning to our balance sheet. Our cash and investments totaled $617.6 million at December 31, 2022 compared to $482.3 million at September 30, 2022. The increase in our cash and investments was primarily related to the $250 million payment from Royalty Pharma, offset by our operating cash burn along with continuing capital projects. Our common shares outstanding at December 31, 2022, were $106.1 million. Thanks, Ken. Weâre making good progress on our 20 and 25 initiative, where we expect to have 20 individual drug candidates in clinical trials or at market in the year 2025. We currently have 12 drug candidates in clinical studies, six of which are wholly owned and six are partnered. I expect that 12 to become 15 or 16 by the end of this year. I mentioned ARO-DUX4 moving into the clinic next quarter, and I expect two or three additional new drug candidates and we have never talked about them publicly. Having such a large clinical pipeline provides us with a broad base for which to build value and spread risk, and it also gives us consistent opportunities to share data and progress. In the near term, we think these opportunities include the following: Phase 1 NASH data from JNJ-0795 this quarter, fazirsiran SEQUOIA full 12-month biopsy data in the second quarter; initiation of ARO-HSD Phase 2b in Q1 or Q2. Early ARO-RAGE Phase 1/2 data in the second quarter, early ARO-MUC5AC Phase 1/2 data in the second quarter early ARO-C3 Phase 1/2 data in the second quarter; initiation of the ARO-DUX4 Phase 1/2 study in the second quarter, disclosure of our next cell type and supporting data in the second quarter. ARO-APOC3 data throughout the year, ARO-ANG3 data throughout the year, initiation of two to three new Phase 1 studies toward the end of the year, initiation of JNJ-0795 Phase 2 in Q3 or Q4, early ARO-MMP7 data in Q4, initiation of ARO-ANG3 Phase 3 studies in Q4 and initiation of additional ARO-APOC3 Phase 3 studies in Q4. As you can see, we expect a busy 2023. Thank you for joining us today, and I would now like to open the call to questions. Operator? Hi, thank you so much for taking my question. Just in terms of the data in the second quarter from the pulmonary franchise, I guess, what exactly are we getting in terms of the number of patients and dose levels? And what are you looking to see, I guess, what degree of lowering used dose levels is sort of the target levels that youâre looking for and will confirm, I guess, kind of this target engagement that weâre hoping to see? Thanks. So look, I donât know that we have a target knockdown threshold that weâre looking for. This is our first â this will be our first data in the UN subjects. So see what sort of knockdown we catch. Again, I donât know that we have out. James, do you want to talk about some of the cohorts we have seen? Sure, right. So the â we will have data in the SAD cohorts for the first four dose levels and then likely as well the MAD cohorts through at least the first three cohorts, the two dose cohorts. Thatâs all in the healthy volunteers. We wonât have any patient data at that point. Thank you. [Operator Instructions] Our next question comes from the line of Maury Raycroft of Jefferies. Your line is open, Maury. Thanks for taking my question. I had a question about the pulmonary data as well. Wondering if you expect the bronchoalveolar lavage data to correspond with the RAD serum PD biomarker data, I guess, maybe you talk a little bit more on just what kind of proof of concept we should be looking for in this update. James? Yes. I think directionally, I would expect, based on what weâve seen in animals and monkeys specifically that the lavage data should the sRAGE lavage data should directionally behave the same as the serum data. And my thing on that is that we will see what they look like. But my sense is that the lavage data make give us more accurate knockdown because itâs local, of course, the challenge with the systemic is that there may be extra pulmonary sources of RAGE. And so that may muddy the data a bit. But that will give us better idea of duration because weâre not bringing these individuals more than once. Got it. Okay. Thatâs helpful. And also just with the JNJ media reports, Iâm wondering if youâve had any discussions with JNJ regarding 398 ongoing studies and have a sense of when they could make a decision on the program? And what are some options youâre considering if JNJ terminates the license agreement. So this is all new for us. And so I donât have too much to comment on this at this point. Again, we understand that they are deprioritizing HBV broadly this doesnât have anything to do with our candidate as I understand it. And so they do not have, again, my understanding and Patrick OâBrien can correct me wrong. My understanding is that they donât have the right to sublicense this, but they could assign it. And so we will see what they decide to do there. If they do decide to assign it, it requires our approval, otherwise it will come back to us. And so we donât know what their goals are here, and we will just have to wait to see. But look, we believe in that program. I think that drug clearly does what it is designed to do. Weâre seeing substantial reduction in viral antigens. I think thatâs important that is maybe the critical component to getting to a functional cure. Itâs not the only component, but I think itâs the critical one, and they were interrogating a number of different strategies to what they can combine with that to get to functional cures. We look forward to seeing more of those data because we are only so close to it at this point, of course. Hi, thanks for taking questions. Looks like a busy year 2023 for you than last year. So maybe just following up on the pulmonary programs. on the safety and tolerability data that we will have for RAGE and MUC5A, could you talk about sort of the implications of that broadly for your delivery system? And just maybe remind us of the nebulizer system is the same across the different programs. And a second part question on the MMP7. What is the frequency of administration youâre looking to target there? As you know, in IPF. Now there is a lot of progress in the pipeline with some antibody approaches also coming in. Sure. Yes. So I think the safety data that we will have for RAGE and MUC5AC, I think while it will be candidate specific and target specific, I think will be applicable to the broader platform and will help to support the pulmonary delivery platform generally. In terms of the nebulizer question, this is â itâs the same nebulizer system that weâre using across the three different programs. Itâs different than what we used with ARO-ENaC. So this is a more efficient nebulizer versus what we used with ENaC. And then there was a third question there, I think... So the initial dosing interval for MMP7 is every 2 weeks in the MAD cohorts. In the SAD, of course, we just do single doses, but then weâre investigating day 1, 15 and 29 in MM7 similar to what weâre doing in the MAD cohorts for MUC5AC. Now that may not be the dosing regimen going forward. Thatâs sort of a more intensive regimen consistent with what we used in the animals to generate maximum knockdown. We will have to see what the duration of knockdown is after both a single dose and after the multi-dose administration. Got it. And then just a quick follow-up on JNJ-0795, can you just remind us what the target there is and sort of the progress â how far along that program is â I know itâs a J&J partnered program. And then just broadly on the on sort of the partnership with J&J. Is it product program-by-program, I am assuming and whatever happens with 3989 has no implications on how things may progress with 0795? Yes. Those are different divisions within Janssen. The target is PNPLA3 a â gosh, maybe the most genetically validated target for NASH. They are in a Phase 1 study that includes SAD as well as the MAD portion. And it is my expectation that we can start to report at least some, not at least certainly some SAD data this quarter. Thank you. Our next question comes from the line of Joel Beatty of Baird. Your line is open, Joel. Again Joel Beatty of Baird, your line is open. So, for the lung programs and the data coming in Q2, could you elaborate on how meaningful the data is for other programs? In the prepared remarks, you talked about eight or nine programs that could come for long. How de-risking is this data that we get in Q2? I think itâs substantially de-risking. This will be the first clinical data from our lung franchise. The structure of these candidates is really quite similar between MMP7, MUC5AC, RAGE, and future ones. They are simple conjugates, as you know. Itâs simple RNAi, trigger that is chemically modified linked to targeting. So, to the extent that that it is well tolerated and can get into these pulmonary epithelial cells, I think it is telling as it relates to future candidates. These cells donât care what the sequence of the RNAi trigger is. Once you get into this cell and get loaded into the risk complex, it can be any sequence. So, I think that it is a substantial de-risking event, again, to the extent that we do show clinically relevant knockdown in a well-tolerated fashion. Great. Thatâs helpful. And then for AAT, are you going to discuss the powering assumptions or otherwise, just kind of speak at a high level as to what gives you confidence in the powering for the 160-patient registrational Phase 3 of this plan? Yes. I can give you a high-level concept, but this is Takedaâs protocol design and is already in the public domain in clinicaltrial.gov. But essentially, if you look at what Takeda has been thinking is taking a conservative approach for the active treatment group, and not as conservative for the placebo group. But with that made the assumptions and the typical standard deviations that are expected and with that in mind to power calculation, they took, we think, good and conservative approach with regard to the duration, which is 106 weeks, so 2 years essentially and the sample size and the patient population they selected. So, itâs not just the assumption, but itâs the assumption in the context of sample size of 160 patients, a 2-year observation and all patients we have at least a F2 fibrosis stage patients with NAFLD. So, when you look at the totality of the study design, we believe this study is well set to show the benefit in fibrosis levels. And then the details for Takeda will eventually come out with more details. Great. Thanks for taking our questions. So I guess our first one relates to the idea in the lung of which cell type matters? And how do you think about in various pulmonary indications targeting the lung epileptic cells in the lung epithelium versus, say, other cell types that are just present in the lung, particularly immune cells in the lung. How do you kind of thread that needle? And then kind of secondly, along the question of threading the needle, how do you think the phenomenon of knockdown pretty powerful inflammatory modulars where want suppress the enough so that you reduce the kind of autoimmune functions, but you donât suppress them so much that you reduce the viral protective solutions. How do you think about kind of that balance? Sure. So well, first of all, regarding the epithelial cells that are the cells that we are trying to target those are generally the cell types where we are looking for targets. So, we are looking for targets that are expressed by lung epithelial cells. And if there is a target that is related to a disease that we could knockdown, thatâs the ideal situation. I think thatâs where our system performs the best is in getting into those cell types and knocking down targets expressed in pulmonary epithelial cells or some of the derivatives, something like the basaloid cells in â that are more specific to an IPF patient population. Right now, we are not targeting any gene targets in macrophages or other immune cells in the one. We are pretty focused on the epithelial or epithelia cell-derived types of cells. And then the other question was about modulating inflammation. So, for something like RAGE that knocking down RAGE, like you said, could be fairly powerful as an anti-inflammatory. There are other â there is redundancies built into the system. So, I think some of the innate immune functions that would be inhibited by silencing range can also be activated through a TLR4 pathway. So, you are not completely wiping out the innate immune system altogether. There is some redundancy there. Hi. Good afternoon. This is [indiscernible]. First question, we had a question regarding the pulmonary program. What would be the level of knockdown that will be expected in order to reach functional benefit in the clinical setting? We donât know the answer to that. There are advantages and disadvantages to being pioneers here. The advantages are the way the first one the disadvantages are that no one has done this before. And so we will be learning the field as we go. So, I donât have a good answer for you on that, unfortunately. Alright. I guess we will have to asking you a little later. And so I guess maybe just a different question in terms of the HBV program. So, should the assets be returned by J&J, what would be your development line? Would you consider â given that most assets in this particular sector, our partner, especially for the combination program? Would you consider developing it internally or seeking out a new partner? Yes, thatâs a good question. So, look again, as I mentioned, that drug is doing what itâs designed to do, and thatâs exciting. Janssen has done a phenomenal job with a number of very large studies. And so they are sitting on a ton of data. We are familiar with some of those data, but not all of them. And so itâs hard for us to make â itâs impossible for us to make a decision about how we might develop that drug until we get into those data. We are certainly interested, again because the drug it appears to be doing what we intended to do. And so we just have to take a look at all the data to see what the path forward will be. I do firmly believe that there is a path forward. I just donât know what it is until we see the data. Thank you. And I guess lastly, would there be any sense of timing in terms of maybe when you would be able to either get maybe more clarity from J&J access to the data so you could make an informed decision? I donât have an answer for that, unfortunately. I donât know what their time line is. As I mentioned in prepared remarks, my understanding is that there are some ongoing studies, I assume that those are still ongoing, but I donât know, to be honest. I think this is all happening real time, and my expectation is that we will have better clarity from Janssen over the next coming weeks. Thank you. Our next question comes from the line of Luca Issi of RBC Capital Markets. Your line is open, Luca. Alright. Thanks so much for taking my question. I have two. Maybe circling on A1AT, circling back on the prior question, Javier, can you just talk a little bit more about the powering assumption here in the Phase 3 at 160 patients in the primary endpoint of 2 years, what is the minimum delta in fibrosis between the active arm and placebo that is actually sufficient to hit the stat? Any color there would be great. And then maybe on DUX4, can you just talk a little bit more about that program. I think in the past, you have mentioned that expression could be quite variable there. So, wondering how you are planning to mitigate their risk, I mean maybe more broadly how confident are you in that program? Yes. Luca, so I donât know how much detail I can provide on the specifics that the Takeda team and this situation, the work they did to power the study or to size the study with 160 patients. And like I said, the primary endpoint or the primary analysis is at 2 years, 106 when all patients with F2 and F3 that would be about 110 or so complete the 2-year study. So, that gives you really for what we learned so far and we can take this 50% reduction in fibrosis that we observed twice in two different studies with the same and similar patient population as a good point of reference, I would say. And then, you need to look at the natural history data versus the SEQUOIA data and go somewhere in between. And if you do that exercise, you will come out with the same number, more likely. So, thatâs how I will address this comment. But Chris... And importantly, as Javier mentioned that, that 2-year time point is at around 110 patients, not the full 160. And importantly, it was powered based on that. So, given their assumptions, they determined that 110 should be sufficient. James, do you want toâ¦ Sure. Yes, the DUX question. Itâs correct that the expression of DUX4 is static [ph]. And or the measurement of the protein in the muscle and the downstream DUX4 affected genes can be challenging at least one other company has demonstrated. And that was one of the reasons, if you recall that we wanted to be sure that we had the tox coverage to cover a longer Phase 2 study, something if we werenât able to see any knockdown in gene expression that we could do a longer study and see some proof of concept efficacy with imaging, specifically with MRI or with functional endpoints, things like reachable workspace, we now have that tox coverage at least from the chronic monkey study. I think the chronic rat readout should be available shortly. So, we have the ability to design a study that not only could potentially give us biomarker readouts if we are able to measure DUX4 and downstream gene expression, but also a study that would have MRI and functional endpoints built into it as well. Hi. This is Prakhar from Cantor. Thanks for taking my questions. So, first on ARO-AAT, how long do you think will it take to enroll the Phase 3 trial, the clinical trial entry for it suggest primary completion date of March 2027. So, that would imply roughly 2 years for enrollment. Is that the right proxy to think about the timing of this readout, or would the timelines be expedited? And I had a quick follow-up. Yes. I think itâs inappropriate for us to opine on that since Takeda will be running that. I think probably best to ask them what their expectations are. Okay. And second on ARO-APOC3, any comments on how you are thinking about the trial size and duration for the CV outcomes trial? And what do you think you need to show on the CV outcomes for that asset to have a broad uptake in the smash population? Thank you. Yes. Well at the very beginning of that process, as you know, itâs not a simple process. We will work with a group of experts. We are at the beginning of establishing the governance on how to design and execute that study. As we said during this call, we are wrapping up the Phase 2 study within the next quarter or two quarters, that will be the way that we will define the study design. We are planning to have interaction with the FDA to talk about that this year. And the expectation is that we will start this study in 2023. So, the beginning of the process, a lot of work that needs to be done. Some important decisions that will be related to the specific of the study design, how loading will last. Itâs likely to be of course, an event-driven trial as most of these studies are. So, a lot to come, I would like to talk about it in the next few quarters. There are at least a couple of things that are gating for us to figure out what those CVOTs might look like. And one thing is, look, we still havenât read out the entire Phase 2 studies yet. We have interim analyst that looks quite positive and we are excited about. But we need to finish those studies and see what those look like. Thatâs the first. Second is that we havenât had discussions with the FDA about their expectations. We have to have those. I think once we get through those two issues, we will have â we can have a better idea about what these things might look like. Thank you. At this time, I would like to turn the call back over to Dr. Chris Anzalone, President and CEO, for closing remarks. Sir?
EarningCall_508	Good morning and welcome to the Haynes International First Quarter Fiscal 2023 Financial Results Conference Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. [Operator Instructions]. It is now my pleasure to turn the floor over to your host, David Van Bibber, Controller and Chief Accounting Officer. David, the floor is yours. Thank you very much for joining us today. With me today are Mike Shor, President and CEO of Haynes International; and Dan Maudlin, Vice President and Chief Financial Officer. Before we get started, I would like to read a brief cautionary note regarding forward-looking statements. This conference call contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities and Exchange Act of 1934. The words believe, anticipate, plan, and similar expressions are intended to identify forward-looking statements. Although, we believe our plans, intentions, and expectations regarding or suggested by such forward-looking statements are reasonable, such statements are subject to a number of risks and uncertainties, and we can provide no assurances such plans, intentions or expectations will be achieved. Many of these risks are discussed in detail in the company's filings with the Securities and Exchange Commission in particular, Form 10-K for the fiscal year ended September 30, 2022. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. With that, let me turn the call over to Mike. Thank you Dave. Good morning everyone. The work of our Haynes team has resulted in significantly improved performance. I would like to talk about this improvement over three time periods, fiscal 2018 to fiscal 2022, our current quarter of Q1 of fiscal 2023, and what we continue to expect from this point forward. My point of emphasis here is that yes, our team has accomplished a great deal but also that we believe based on the markets we serve and the actions our team continues to take that the best is yet to come for us. We continue to forecast sustained growth in revenues and earnings over the next three years. First, looking at the fiscal 2018 to fiscal 2022 time period, our improvement journey has resulted in fundamental and sustainable changes to our business. I reviewed the impact of our significant year-on-year and quarter-on-quarter improvements in my comments last quarter. Our teamâs focus, dedication, and accountability for results has resulted in a proven 25% reduction in our breakeven point. We have been able to accomplish this by maintaining and even enhancing our competitive advantages by pricing for the value provided, by reducing our variable cost, and by accomplishing market share gains resulting in above average key market segment growth rates. The 25% breakeven reduction has resulted in a gross margin that is now consistently been over 20% when removing both the positive and negative impacts of raw material fluctuations. Achieving steady state gross margins over 20% has quickly moved from a stretch goal to an expected result every quarter based on the efforts of each of our approximately 1225 employees around the world. Next, as I transition to talk about our recently completed first quarter of fiscal 2023, I'd like to start with safety. Our entire team continues to relentlessly communicate the need for ongoing improvement and safety in all of our facilities through leadership, daily interaction and communication, and where needed process change. Safety continues to be our core and our overarching principle. As far as our financial results for the first quarter of fiscal 2023 we were able to overcome an estimated $5.6 million unfavorable impact in raw material headwinds related to the drop in both nickel and cobalt prices and achieved a gross margin of 17.4% leading to a net income of $7.7 million. When we remove the negative estimated impact of the raw material headwind from our first quarter, our adjusted gross margin calculates to be 21.6%. The results of our first quarter when compared to Q1 of fiscal 2022 were 33% higher in revenue, 47% higher in adjusted EBITDA, and 66% higher in net income. Our seven major takeaways from the quarter are as follows; first, related to continued alloy and application development, our research and technology teams are continually developing data to help promote our proprietary alloys into new applications for us. One important hurdle to clear for new alloys is the need to be included in industrial codes and standards. Such inclusion often requires a considerable amount of testing. Recently, an ASME or American Society of Mechanical Engineers code case has been approved for Haynes HR-235 alloy. This alloy was developed by our team at Haynes for use in the petrochemical industry, especially syngas production and in the processing of ammonia, methanol, hydrogen, and liquefied natural gas. The new code case will open doors for our HR-235 alloy to a number of high temperature, high pressure applications. Another approach to developing new applications for our proprietary alloys is by developing alternative -- alternate processing routes to optimize properties which are key to a particular application. A recent example is the invention of a new heat treatment for HAYNES 282 alloy, which results in a significant improvement in intermediate temperature ductility. This new patented heat treatment enables our 282 alloy to be considered for several new applications, including turbine cases and other components requiring a combination of high strength and ductility. Second in our list of takeaways for the quarter, our efforts on our variable cost reduction initiatives continue. We continue to see significant bottom line results related to yield improvement projects and process changes to improve variable costs on our key products. Next, we continue to find opportunities to price for the value that we are providing to our customers. Our competitive advantages related to alloy and application development, providing high quality products typically in relatively small quantities, our mill and company owned service center combination, and our outstanding technical and customer service allow us to continue to differentiate ourselves in the market segments we serve. We have now had favorable updates to our calendar year 2023 contracts and based on that, we are anticipating a positive margin impact across fiscal 2023 despite many inflationary issues we all face. As far as market performance, our aerospace volume increased 17.3% along with a 13.5% increase in aerospace average selling price, resulting in a 33.2% aerospace revenue increase compared to the prior year. This increase is primarily driven by the single aisle recovery. We continue to see solid demand in the aerospace market driven by both consumer demand and the need for more fuel efficient engines using more advanced alloys. Volumes into the chemical processing industry slightly decreased 1%. However, CPI average selling price increased 31.5% resulting in a 30.2% CPI revenue increase compared to the prior year. Continuing, industrial gas turbine volumes were up 61.3% along with a 10.5% increase in the IGT average selling price, resulting in a 78.3% IGT revenue increase compared to the prior year. Other markets revenue increased by 1.6% and other revenue increased by 5.7%. We continue to remain bullish on the demand we are seeing in all of our markets going forward. Continuing with our takeaways from the first quarter of 2023, as far as backlog and book-to-bill, our backlog is now at a company record of $408 million. Our book-to-bill ratio calculated from revenue dollars was 1.3 for the quarter, with aerospace at 1.3 and industrial gas turbines at 1.7. Both our CPI and other markets backlogs declined slightly with book-to-bill ratios at 0.9, driven in part by our mixed management initiatives. Next, I'll cover our investment and inventory. In response to our record backlog levels, we have deployed cash to work in process inventory to drive higher top line revenue. Given this occurred at the same time as increases in raw material prices, this required a draw on our revolver, which at the end of the quarter was $88 million. We believe this temporary investment will yield a solid return with the growth of our business in particular in the second-half of the year. And finally on ESG, we continue to make significant progress. The recent highlights include Haynes alloy application development to support customer and end market carbon reduction programs, social programs to support our employees and our communities, our ongoing ESG related disclosures by our ESG and sustainability program manager, supplier audits of supply chain partners, and the initiation now of our second solar project, this one being planned as a rooftop solar array at our two facility in Arcadia, Louisiana. Now transitioning and what's next for Haynes. Based on our current performance and our ongoing improvement actions, we continue to anticipate excellent growth opportunities with improved year-on-year financial performance. Specifically, as far as improving margins are calculated, Q1 adjusted gross margin percent when removing the nickel and cobalt related raw material headwinds was 21.6%. We expect to incrementally improve on that assuming neutral raw materials for the balance of fiscal 2023 despite the inflationary pressures we face. This is because of the benefit of increased volumes along with our ongoing work on costs and providing high value differentiated products and services to our customers. Next, we expect to set a revenue record within our aerospace market in fiscal year 2023, despite the industry supply chain issues and the slow ramp up of twin aisle builds. As far as full year performance, our current bookings and book-to-bill levels supports our current anticipated growth rate of 15% to 20% year-on-year for both revenue and earnings. We're also projecting operating cash flow to turn positive beginning mid fiscal year 2023 as our higher levels for order entry turned into higher shipments and raw material purchases are more in line with our order entry. Finally, on the pension, we are currently near 94% funded for the U.S. pension plan with a net liability as of December 31, 2022 of $19.6 million compared to $106.8 million just 27 months ago. We continue to be pleased with the stability of our funding percentage even in volatile market conditions. In addition, we will continue to keep the pension funding and our capital allocation considerations as we pursue 100% funding of the plan. Okay, I'll now hand this over to Dan for additional comments and perspectives on our first quarter. Thank you, Mike. We had a solid start to the new fiscal year with year-on-year revenue up 33.4% and strong revenue growth in our three major end markets compared to last year's Q1. We had a moderate sequential drop in revenue of just under 8%. However, Q1 is typically sequentially lower due to holiday schedules, planned maintenance outages, and customers managing their calendar year end balance sheets. Historically, this Q1 sequential drop has generally been larger than 8% in many cases. Net income was 7.7 million and an EPS of $0.61, which is consistent with the company guidance we provided. This was achieved even though the raw material headwind related to nickel and cobalt was higher than expected. The estimated gross margin impact from nickel and cobalt price fluctuations is derived from a model developed by the company to measure how the commodity price changes flow through net revenues and cost of sales. This incorporates revenue flow across each different type of pricing mechanism and the timing of how the cost of nickel and cobalt flow to cost of goods sold, including the impact of the commodity price exposure on our scrap cycle. Our model calculated a headwind of $5.6 million compared to our assumption at the beginning of the quarter of $4.5 million. The difference was primarily driven by the headwind created by the price drop in cobalt. If we look at our gross margin of 17.4% and exclude this estimated $5.6 million impact, the gross margin excluding this headwind would calculate to 21.6%. This 21.6% compares to 21.5% sequentially last quarter in Q4 of FY22 for the same methodology and compares to last year's Q1 of 16.2%. PR analysis of the impact of raw material tailwinds and headwinds and the effect on gross margins in our press release contained in Schedule 6 which describes this non-GAAP measure. We are expecting this headwind to neutralize over the next quarter, but of course this will depend on where raw material prices actually move over that time period. This gross margin was accomplished at a lower volume level of 4,552,000 pounds shipped. We have described in prior calls our successful efforts to lower our breakeven point by 25%. This has now provided us with the profitability leverage to enable a solid net income result even at Q1 volumes below Â£5 million, plus a heavy raw material quarterly headwind. This lower breakeven is expected to be an ongoing financial benefit as volumes grow. Like every industrial business, we continue to encounter inflationary pressures such as electricity rates, a tough labor market, and supply chain delays. Our team continues to successfully navigate our way around these issues and find successful solutions or offsets. Our goal continues to be offsetting inflationary pressure with price increases and/or cost reductions such as improving yields, productivity enhancements, and process improvements. Our efforts to increase melt rates and product flow, driven by our continued investment in inventory, combined with our increase in production employees and a strong backlog provide an optimistic forward outlook, especially in the second-half of fiscal 2023. As this process takes some time, we expect product flow to gain traction and meaningfully increase shipping volumes in Q3 and Q4, driving increased second-half top line sales and earnings. Our leverage on SG&A costs continued to improve with SG&A including research and technical expenses at $11.9 million in the first quarter or 9% of net sales as compared to last year's Q1 of 12.3%. Operating income was $11.1 million this quarter, which is double last year's first quarter. Non-operating retirement benefit income was 0.4 million, which was less favorable to last year's quarterly benefit of $1.1 million due to the actuarial valuation at 9/30/22. A portion of this change was offset by a favorable service cost change within our cost of sales. The U.S. pension funding percentage strengthened to nearly 94% even during recent market volatility due to our customized liability driven investment strategy. Our U.S. net liability at 12/31/22 is at 19.6 million, a significant improvement from the 106 million at 9/30/2020 not that long ago. Our effective tax rate for the first quarter was 22.5%. Current estimates for the remaining quarters of FY 2023 are moderately higher, in line with federal and state statutory rates. Order entry and backlog continued to be at high levels. Backlog again set a company record at 408.2 million, up 34.4 million or 9.2% over the quarter, and up 190.7 million, or 87.7% from the first quarter of fiscal 2022. This represents 22 months of growing backlog and strong demand signals. This growing backlog level continued to drive our cash deployment into inventory. Inventory increased 33 million over the quarter with about 80% of that from inventory pounds increasing. This increased our utilization of the credit facility with the balance on the revolver at 88 million at 12/31/22. Looking across fiscal year 2023, we estimate that with our improved profitability combined with our melt rates continuing to come in more in line with shipping levels, the growing utilization of the revolver should ease and free cash flow is expected to turn positive mid-year fiscal 2023. We expect to be using this positive cash flow in the back half of the year to begin to pay down the revolver. Our expanded 160 million credit facility provides strong liquidity moving forward. Capital spending was 3.3 million in the first quarter of fiscal 2023, similar to last year's first quarter. We are forecasting to spend 20 million to 24 million in fiscal year 2023, which puts the remaining orders of this year's capital spending at a higher pace than Q1. Outlook for next quarter and full fiscal 2023. Given the strength of our record backlog along with the manpower and work in process inventory being put into place, we expect revenue and earnings in the second quarter of fiscal 2023 to be higher than both the first quarter of fiscal 2023, as well as the second quarter of last year. Further, the company expects full year fiscal 2023 to be 15% to 20% higher than fiscal 2022 for both revenue and earnings. In conclusion, Q1 was a solid start to the year, even with the higher than expected raw material headwinds. We believe that our cash investment into inventory and our increase in production headcount will provide a solid return on investment with increased revenues and earnings in the second half of the fiscal year. Demands in our primary markets remain strong as reflected in our backlog growth. These factors, along with strong management team execution provide an optimistic forward view of growing shareholder value. Mike, with that, I will now turn the discussion back over to you. Thank you, Dan. Wrapping up, I want to thank our workforce for a job well done. I would match this entire team against any out there. They're hardworking, focused on being best in class, and have the expertise to continue to expand the gap versus others related to our core competencies, competitive advantages, level of innovation, and business performance. At this point, I'll ask our operator, Tom, to please open the call up for questions. [Operator Instructions]. And the first question this morning is coming from Steve Ferazani from Sidoti & Company. Steve, your line is live. Please go ahead. Morning, Mike. Morning Dan. Thanks for taking my questions. I just wanted to start with the commodity headwinds. You clearly had guided for this impact this quarter. You were very slightly off, but you expected this quarter specifically to be where you would see the impact and you expected more neutral in the remaining three quarters given what we've seen in nickel recently, any shift in your view on that? We believe that at, by the time we get to the end of the second quarter, that we will neutralize these headwinds. Obviously it continues to depend on what happens to the price of these elements, but what we were caught by the way, Steve before in this current quarter is the huge drop in cobalt, which was more than we had estimated, which is why we were off in our original estimate versus where we are now. But yeah, we expect these to subside towards the -- as we get through this quarter and then turn positive in the back half of the year. Yeah, and I concur with that. The model that I mentioned in my prepared remarks kind of calculates what we believe the estimated actual impact is over a quarter. And it also, we use that for some forecasting as well, and that works pretty well with nickel. We forecasted 4.3 million or actually we forecasted 4.5 million for nickel and it came in at 4.3 million, so quite close. It was the cobalt side of the forecast that we had a problem with. That was a headwind calculated to be 1.3 million and that's where it was unexpected. And Steve, the key for us is, what happens with nickel price? You're making these assumptions based on assuming nickel will level out, and the only thing I can guarantee is it's never level, it's going to move one way. Understood, understood. In terms of you talked last quarter about resource allocation, particularly pricing out of potentially lower margin business given how strong backlog was and demand, it looks like we saw some of that in chemical processing when we look at volume and pricing, is that what we're seeing and would you expect given that your backlog continues to grow to continue those efforts? Yeah, we will continue to manage mix and we will continue to look at higher volume opportunities that are lower margin opportunities to determine if we want to do that. You said it correctly, our volume was down 1% by shipments, but our revenues were up in CPI 30%. And the main reason for that is because we have something we've talked about on and off, which is very high volume, very low margin business called flu gas to sulfurization. And when you look three months, these three months versus prior year our FTD participation was down almost 81%. So yeah, we're certainly going to pick and choose and we're certainly going to make sure that our customers that are long-term critical customers get ahead of the queue there. Great, just last one for me. In terms of you talking about turning cash flow positive the second half of the year, obviously raw material prices have leveled off. But as your orders continue to build that would indicate continuing needs to grow inventory, given the strength of your backlog, are you still confident you can go cash flow positive second half? We are confident as long as raw materials remain neutral. We look at the back half of this year, given our bookings, which are consistently over 50 million a month. We look at the back half of the year as extremely strong for us. So we are melting for that now. So we are still melting at an elevated level as compared to what we are shipping as this product begins to get through the employees that are now in and are being trained or getting ready to process this. So we expect the second half of the year be based on the bookings we have and based on the manpower we have in place and the training that is ongoing right now to be very strong. And so, yes, the answer is we're already melting for that. We just want to get to the point where we're leveling out our shipments with what we're currently melting. Thank you. And your next question this morning is coming from Michael Leshock from KeyBanc Capital Markets. Michael, your line is live. Please go ahead. I wanted to start off on CAPEX, as you had mentioned, it was lower this quarter and your guidance implies an increase throughout the remainder of the year. Are you still seeing some constraints there to get the work done or is that easing now? And then maybe secondly, could you talk about some of the projects that you have underway or that are planned for the balance of the year? Sure. As far as the constraints, the constraints that we have are really getting what we need in for each of the components of our CAPEX projects. So we -- it's not at this point any longer, any type of internal constraint. Our plan would be when we take equipment down to upgrade it, we would build an inventory after that and from there, be able to do these outages that we need. So our issues right now in CAPEX are clearly related to getting the equipment in. We obviously had a very light first quarter in CAPEX to be frank, that wasn't intentional. It's just that we're not getting in what we need to get into our company, as far as equipment and components to put things together for us. I was going to mention some of the projects. I think we've mentioned, some of the reliability of equipment and alleviating some of the bottlenecks as it goes through the process. There's an A&K line, for example, where we're spending a sizable amount of CAPEX around $5 million. So we're going to be upgrading that line as well. So, yeahâ¦ Just to give you a list of what we've got going on right now. We've got what was in process or recently completed is our solar field at the wire facility. We're now beginning work on the solar field in our tube facility. We have water jet cutting, incremental water jet cutting in our LaPorte service center. We've completed our Haynes Wire Cleaning. We've done some control upgrade work for manufacturing for security purposes of our systems, some grinders. We are in the process of putting the final touches on what's called the automatic gauge control system at the four high. Most critical piece of equipment that's truly the brain of the operation, and some other grinders. And then of course our big upgrade coming is our A&K line, and that's Mike in between the four mill and finishing. And, that we've got about $5.5 million in the budget. We're just waiting for the equipment to come in. So beyond that, cranes, tow motors, some equipment for our cold finish, flat area, a little of everything really just to keep us moving forward. Got it. That's really helpful. And then I wanted to ask on other markets, I know that's a smaller market for you, but given the ASP at nearly double the rest of your market, it can have a meaningful swing to earnings. So I wanted to ask what the driver has been there over the last couple of quarters and are there any trends that are sustainable that could maybe maintain pricing around these current levels? So one of the things I talked about in the script was some of our new alloys and code cases and getting material in with some of our new alloys. But in other markets, number one, what helped us is flu gas sulfurization going down so much. But the other thing that helped us is we continue to drive our metal, our new alloys into the oil and gas market. And oil and gas year-on-year was up almost 62%. So yeah, we're going to continue to look, we review on a monthly basis with our application engineering team what we're driving in and where we're driving it to. But as you know, our business, our key is getting to the end users and creating a pull from the end users through these products. And that's what we saw this past quarter in oil and gas. Yeah, and we certainly, you'll look at the average selling price in other markets, $50.77 this quarter, which was fantastic. Last quarter was 47, so still quite high. Compare that to a year ago, it was more like 30, you know, between 35 to 40. So you see a lot of volatility in here cause there's a lot of different applications, a lot of different alloys. So as Mike mentioned, a little mixed management to get out of the flu gas to sulfurization side of it really makes a big difference. As far as being a big earnings mover, I mean, yes we certainly love higher ends alloys into these applications, but keep in mind it was 290,000 pounds for the quarter, out of the 4.5. So it's still a smaller part of the pie than say, aerospace, industrial gas turbines, and CPI. And then lastly on the labor environment, is it the hiring side of things or is it training that's the biggest constraint right now? And maybe if you could give an update on where you're at on the hiring front and how much more headcount is there left to go? Thanks. Sure. It depends on the location. In Kokomo, we're nearly fully staffed. We've brought in over a 100 people. In fact, next Monday we have another 12 that are being hired and being brought in. So we feel great in our largest operation in Kokomo where we are. It's just from a safety perspective and from a quality perspective, making sure that people are fully trained on their operation before we let them loosen. That's what we're going through right now. And quite frankly making very good progress with that. So feel good about on the production side being fully staffed. I think also in Kokomo, everyone in the world is having some issues related to the trait and we are aggressively pursuing, making sure that we have long-term stability in our key trades in Kokomo. Now in our other facilities, that being that the major ones being our wire facility, our tube facility, and our LaPorte Indiana distribution facility. Little tougher to have access to talent. They've done a great job of making sure they hit their forecast on a monthly basis, but it's a little more difficult there than it's been in Kokomo. Thank you. [Operator Instructions]. And there are no further questions in queue at this time. I'd now like to turn the floor back over to management. Thank you to our shareholders and our audience on the call today. We really appreciate your ongoing interest in Haynes and for being part of our ongoing improvement journey. We look forward to talking to you again next quarter. Thank you. Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
EarningCall_509	Welcome to Post Holdingsâ First Quarter 2023 Earnings Conference Call and Webcast. Hosting the call today from Post are Rob Vitale, President and Chief Executive Officer; and Matt Mainer, Chief Financial Officer and Treasurer. Todayâs call is being recorded and will be available for replay beginning at 12:00 p.m. Eastern Time. The dial-in number is 800-839-6136. No pass code is required. At this time, all participants have been placed in a listen-only mode. It is now my pleasure to turn the floor over to Jennifer Meyer, Investor Relations of Post Holdings for introductions. You may begin. Good morning and thank you for joining us today for Postâs first quarter fiscal 2023 earnings call. With me today are Rob Vitale, our President and CEO; and Matt Mainer, our CFO and Treasurer. Rob and Matt will begin with prepared remarks. And afterwards, we will have a brief question-and-answer session. The press release that supports these remarks is posted on our website in both the Investors and the SEC filings section at postholdings.com. In addition, the release is available on the SECâs website. Before we continue, I would like to remind you that this call will contain forward-looking statements, which are subject to risks and uncertainties that should be carefully considered by investors as actual results could differ materially from these statements. These forward-looking statements are current as of the date of this call, and management undertakes no obligation to update these statements. As a reminder, this call is being recorded and an audio replay will be available on our website. And finally, this call will discuss certain non-GAAP measures. For a reconciliation of these non-GAAP measures to the nearest GAAP measure, see our press release issued yesterday and posted on our website. Thanks, Jennifer, and thank you all for joining us. Post had quite a solid quarter, while all segments performed well, Foodservice performance exceeded expectations, and contributed to our outlook revision for the balance of fiscal 2023. Most encouragingly, we are confident that the sustainable EBITDA level for Foodservice has reset to approximately $350 million prior to considering the contribution from our ready-to-drink shake plan that comes online late this year. Last quarter, we talked about margin restoration. Compared to last year, we expanded gross margin by 170 basis points. We expect some give and take throughout the balance of the year including a dip in the second quarter. However, this quarter's expansion is expected to largely mirror our full-year results. Key drivers of margin expansion include pricing and supply chain execution, offset by mix. The pricing environment remains inflationary, but at a slower rate. Data Âdriven price increases remain achievable and elasticities in most categories remain relatively low. Supply chains are demonstrably better the fill rates continue to be below pre-pandemic levels. As I have mentioned, we view supply chain recovery as more of an ongoing process than a singular event we once expected it to be. Meanwhile, the shift towards more value price points is a margin headwind than in most of our category is dollar accretive. To give you some more detail and perspective on the individual businesses, Post consumer brands maintained a branded dollar share position of 19.1%. Meanwhile, our private label business grew 13.6%. Interestingly, we have seen a stepped-up level of competitor advertising intensity, which we believe is constructive for the overall category. As I mentioned, Foodservice remained strong both in volume and pricing. For some time, we have signaled our expectation that this business would emerge from the challenges of COVID and avian influenza in an improved position. We believe that is rapidly becoming clear and forms the estimate I gave surrounding sustainable EBITDA. Notably, we expect to operate at approximately that level in the second half of this fiscal year. Refrigerated retail continues to show mixed results. Our supply chain has markedly improved versus this time last year. That recovery supported 12% volume growth in our core side dish category. We do see some expansion of private label distribution. In this category, we do not make private label. We are leaning into heavier brand investment to support both expanded distribution and velocities. Liquid eggs remain under pressure as high path avian influenza costs have driven our pricing and resulted in elasticities among the highest in grocery. Weetabix continues to be well managed in a challenging environment. The margin pressure from elevated energy prices, which we highlighted last year, developed as expected and will persist throughout the year. In addition to higher incremental costs, the impact on consumers drives mix towards private label. Our small acquisition of the UFIT brands has gone exceptionally well with sales up over 30%, when compared to the prior pre-acquisition period. As we mentioned last quarter, we continue to believe the current challenges in the capital markets, especially the debt markets, create opportunities for Post in M&A. We remain interested in opportunities both large and small that could complement an existing business or provide entry to a new category. This quarter, our capital allocation skewed towards bond rather than share repurchases as that same debt market volatility created unusually attractive prices. This quarter, we sold our remaining stake in BellRing brands. All told, our investment of a little over $700 million generated after tax proceeds of $2 billion and resulted in a distribution to shareholders of an additional $2 billion. The future is bright and I'm excited to see the BellRing story continue to develop. Last but not least, we revised our guidance yesterday evening. We increased our outlook to an adjusted EBITDA range of $1.025 billion to $1.065 billion to reflect year-to -date results and an increased optimism in the condition of the business. While we have yet to plan fiscal â24, our initial thinking is that despite some non-repeatable current year benefit, we expect to maintain or grow overall EBITDA in fiscal 2024. Thanks, Rob, and good morning, everyone. First quarter consolidated net sales were $1.6 billion and adjusted EBITDA was $270 million. Net sales increased 17%, driven by pricing actions in each segment as overall volumes were relatively flat. Certain pockets of our business saw a modest shift to private label. We continue to see incremental improvement in supply chain performance and customer order fill rates. However, both remain below optimal levels. And while significant inflation contained in the quarter, there do appear to be signs of moderation. Turning to our segments and starting with Post consumer brands, net sales increased 9% and volumes decreased 1%. Average net pricing increased 11%, driven by pricing actions, partially offset by unfavorable product mix and incremental promotion. We saw strong growth in Peter Pan and private label cereal. These gains were offset by declines in Honey Bunches of Oats, government business and MOM bags. Adjusted EBITDA increased 5% versus prior year as our pricing actions outweighed significant cost inflation and higher manufacturing expenses. Weetabix net sales were flat year-over-year. In local currency, however, sales were up approximately 14%, a significantly weaker British pound caused a foreign currency translation headwind of approximately 1,400 basis points. Net sales benefited from significant list price increases and contribution from last April's acquisition of the UFIT brand. These benefits were partially offset by unfavorable mix reflecting growth in private label products. Excluding the benefit from UFIT, sales declined 6% and volumes declined 1%. Growth in private label was not enough to offset decline in branded products, which were largely driven by supply chain constraints and related shortfalls in order fulfillment. Segment adjusted EBITDA was 18% lower than prior year, primarily because of foreign currency translation headwinds. Additionally, our adjusted EBITDA margin stepped down as supply constraints were compounded by higher input and warehousing costs. Given the challenging macro environment in the U.K., our overall outlook assumes margins are compressed throughout 2023. Turning to Foodservice, net sales and volume grew 37% and 4% respectively. Revenue growth continued to outpace volume growth as revenue reflects the impact of inflation driven pricing actions, the effect of our commodity pass-through pricing model and avian influenza-driven pricing actions to offset higher cost to procure eggs on the spot market. Segment adjusted EBITDA grew to $109 million, benefiting from an improved average net pricing and volume growth, which combined mitigated the impact of higher cost to produce. Refrigerated retail net sales increased 7%, while volumes decreased 5%. Note that excluding the divested Willamette Egg Farms business, net sales increased 10% and volumes increased 1%. Pricing actions drove increases in average net selling -- average net pricing across all products. Side dish volumes increased 12%, reflecting improved inventory levels that allowed us to meet demand for the holiday season. Egg volumes decline is elevated egg cost and limited case free availability from avian influenza hurt both volume and margins. Segment adjusted EBITDA increased 12%, primarily benefiting from access to offset significant cost inflation. Higher volumes also drove improved manufacturing levers. The reinstatement of advertising and promotion wasn't offset to these benefits. Turning to cash flow. In the first quarter, we generated $98 million from continuing operations and was driven by profitability offset by -- higher profitability year-over-year versus higher working capital. Our net leverage decreased half a turn this quarter to 5.1 times driven by growth in adjusted EBITDA. Moving on to capital allocation. In the first quarter, we repurchased 300,000 of our shares at an average price of approximately $85 per share and $71 million of our debt at an average discount of 15%. We have $276 million remaining under our share repurchase authorization. I guess to start, Rob, I think in fiscal 4Q, you talked about the Foodservice segment EBITDA obviously was well ahead of what you see as a normalized run rate. And I think for 1Q, you said you didn't expect it to be as strong as 4Q, but still elevated. And obviously the first quarter did come in similarly strong as 4Q. So I'm trying to get a sense of a little bit more color on what drove that outperformance? Was it the same drivers as in 4Q or different? And I guess what would keep that business from delivering this level of EBITDA into fiscal 2Q or beyond? The drivers were virtually identical 4Q to first Q. And I think the reality is that some of the avian influenza impact has persisted longer than we expected, there has been some occurrences that are outside the normal seasonal patterns that have caused that to linger a bit longer. So that could persist a bit longer. We have tried to strip that out and give you a perspective on what we think is non-related to that and giving you a sustainable EBITDA number. But the conditions that are driving the business really have not changed between 4Q and 1Q. And those conditions, Rob, I mean last quarter you said part of it was just being able to take advantage of let's say competitors that weren't in a -- is advantage the supply position as you were. So that's one of the things I guess that's driving it. But then the other piece is just the pricing part, I was hoping you can get into just a little bit of detail on the pricing versus what you need to pay in the spot market for procurement? And how that helps drive the profitability higher at least for a shorter-term period of time? Well, prices continue to remain elevated. There has been some decline in the cost of breaking stock. What we have tried to do is separate that, so that you can get visibility into the small piece of it that is affecting the quarter. But I don't want to get more details around pricing dynamics. Okay. And then last just -- I thought it was interesting that MOM bag, cereal brands volume was down even though you've talked obviously previously about trading down and incremental shelf distribution. I guess is that purely a function of just pricing and elasticity? Or is there something else there? Because it still sounds like you're seeing trade down just given some of the trends you pointed out in private label? We -- I think we had some price gaps between private label and MOM brands needed to be fixed, those have since been fixed and you should expect to see some correction of that dynamic going forward. The other dynamic is simply the MOM bag, while on a per ounce price point is quite attractive as a steeper peer entry price. So we're seeing a bit of a migration more towards opening price point levels. But I would expect as we go through the balance of the year, you see some of that dynamic with MOM brands start to reverse. Hi. Obviously, you had nice EBITDA guidance here and increased early in the year and obviously, it predicts a lot of confidence in the business. And Rob, you had mentioned that Foodservice is obviously performing ahead of expectations, which clearly is in our model as well. I think you indicated that was probably the main driver of the higher guidance for the year. I just want to get a sense of any other businesses that you would cite whether it be PCB or even refrigerator retail where you're seeing the potential for a little stronger EBITDA performance for the year than what you initially expected? Yes. Well, I would say there's three items. One is the Q1 beat, so we want to make sure to reflect that, but then we also increased our expectation for the remaining three quarters. The second is that we have revised our estimate for currency translation given the fairly significant move in the pound sterling in the first quarter. And then the last would be, we have still taken a meaningful amount of pricing that it's yet to hit the P&L. The uncertainty of course is ongoing elasticities, but I think the potential upside/outside of the -- outside of Weetabix and Foodservice, Weetabix specifically in U.S. dollars would be the relationship between incremental pricing and elasticity. Chris? Hey, good morning, folks. Thanks for [Multiple Speakers] Couple of quick questions. So the -- thank you so much, by the way, for the color on Foodservice, very helpful. And sticking with Foodservice, you mentioned incremental source of growth coming from the shake capacity. Can you bring us up to speed on how that's progressing? When do you expect it to be up and running? How long will it take to get to run rate levels? And most importantly, like how much profit do you expect that business to throw off for you? In reverse order, we've talked about it being $15 million to $20 million of incremental EBITDA. The expectation currently is that we are going to be online right around the very end of the year, so September 30-ish or so. We are building a factory in times that are challenging. We've met every horizon, every milestone so far. But I'm going to hedge that a little bit and say that give it to the end of the calendar year and that will be up and running at full capacity by early 2024, early calendar 2024. Hope we will do a little bit better than that, but I want to hedge that a bit. Yes, yes, I appreciate why you would. And the private label launches into refrigerated side dishes. It sounds like that's sort of a new and mounting threat to your business. Can you put more context around that? And talk about how you're looking to defend, what we should expect from a P&L impact and whether or not there's going to be some price get back more promotional intensity, et cetera? Thank you. Well, our first levers would be more traditional continued innovation, continued revisions of pack sizes and expanded advertising, all of which we think the brand would warrant irrespective of the presence of private label. Private label has been tried a number of times in the category and not worked. We've been quite successful in managing that. We are highlighting it because weâre in a bit of a different environment than we've ever been in this category with inflation as widespread as it is. So we would expect to be successful in managing that incremental competition, but we wanted to highlight it because it is relatively new. Cool. And last question on the cereal side, I think a lot of us are looking at U.S. centric food and we see it abating cost curve and we see residual price seen and we're expecting decent margin recovery. Are those expectations founded in cereal? Or should we be a bit concerned about maybe the rising cost to compete, which I think you sort of alluded to when you mentioned you're seeing more advertising coming in? I don't necessarily think that incremental advertising coming from category leaders is a bad thing for our position in the category. I think we need that kind of support in order to maintain interest in the overall category and we will compete and -- with different forms in terms of packaging and on in-store marketing. So I don't necessarily view that in any way as a negative. We're far more sensitive to promotional intensity than advertising intensity. And I think that's within the normal range. Just a helpful color on fiscal â24 even though it's obviously super early, but just a quick clarification on that. Where you said even with some of the one kind of lifts in this year, you would think it'd be flat to up next year. Would that be sort of like for like excluding the shake capacity or with that driving a little bit of a lift? We're not to that level of granularity that I can say within $15 million to $20 million particularly when you factor in that it's not going to be for the full-year 2024, whether that will matter. What we were trying to communicate is that to the extent that there is some uncertainty around sustainability of the overall EBITDA level. We don't share that concern as we sit here today. But whether that incorporates the -- in your effect of the incremental capacity, that's the level of precision we haven't yet achieved. No, fair enough. But yes, good color still. When you talk about the pressure on Weetabix margins, obviously, we see that in this quarter. Is the magnitude likely to moderate at all? Or how do we just think about, kind of, the run rate over the rest of the year. Is 1Q indicative of what to expect or might that get a little bit better? At the EBITDA level, I think it's indicative of where we will be at the gross margin level that may fluctuate a bit. With inventory levels, but I think we can maintain that EBITDA margin plus or minus. Longer-term, we think it will be restored, but we face a choppy here there. Okay. No, that's helpful. And just one last quick one, you mentioned some pricing that hasn't hit the P&L yet. I may have missed it if this was clear, but is that -- which segment or segments would that apply to? Thanks. Good morning, Rob. I'm curious about the way this year is shaping up in the way that it provides insights about your earnings power as you look ahead to fiscal â24. I know we're not going to get into guidance for an out year, but I would imagine that supply chain improvements will be something that's continuing to happen, particularly in refrigerated and that there's going to be some price net of commodities catch up progressing in consumer brands, but perhaps some give back in foodservice, but those are all hunches. I'm just wondering if you could maybe give a sense of the way this year is going and ways that could leave an imprint for â24? Thanks. I don't think I could answer the question any better than you asked it. The cadence and variables you just went through are spot on. Okay. That was quick. With -- as far as the timing goes on the pricing of the commodities front for cereal, you don't have to be down to a quarter, but when do you think that, that will start to get better? Is that a -- how soon? We have reached the allotted time for Q&A. I will now turn the program back over to our presenters for any additional or closing remarks.
EarningCall_510	Now let me discuss agenda items 1 and 2. Since assuming slides with it in the interest of time, I would like to take some to elaborate on by spending next 30 minutes approximately. Please turn to Page 7, which shows highlights of our consolidated financial results. Net sales went up by 9.3% year-on-year to JPY1,551.1 billion with like-for-like growth of 3.7%, which excludes the impacts of foreign exchange. The operating income came in with JPY110.1 billion, down 23.3% year-on-year with operating margin of 7.1%. The net income attributable to current was JPY86 billion, down 21.5% year-on-year. The basic earnings per share was JPY183.28, down 20.5% year-on-year. The cash dividend per share at the end of the fiscal year is planned to be increased by JPY2 from the year before to JPY74 resulting in a increase of JPY4 to JPY140 per share for the full year. Next, please take a look at Page 8 for key points of the fiscal 2022 results. Looking back on to fiscal 2022, there were environmental changes suggest unprecedented surges in raw material prices, economic slowdowns in China, the Americas and Europe and growing â among consumers concerned about their future living standards in Japan, the impacts and the speed of which we had not been able to catch up with fully. As a result, the operating income varied substantially from the plan. We also realized that we had underestimated the extent of changes in the market. Here you can see the summary, but I will give more detailed analysis of the current status of the three business areas later together with future business portfolio management. Now please move to Page 13. This is the analysis of changes in consolidated operating income, which is about a JPY33.4 billion decline in the operating income. Positive factors are indicated in blue, negatives orange. The result of the fourth quarter alone is shown in the parenthesis. As you can see surges in raw material prices was JPY46 billion and higher freight, logistics expenses to the order of JPY9 billion, totaling JPY55 billion constituted major negative factors. Other items, which added up to about JPY21.6 billion including price hikes, cancelled out about 40% of the JPY55 billion. The biggest contribution came from the strategic price hike of JPY14 billion. In terms of foreign exchange, progress in the yenâs depreciation in fiscal 2022 significantly boosted the impact of currency translation on the profits by overseas subsidiaries into the positive territory, but in the fourth quarter as we had write down of inventories due to the fluctuations in France and all markets. And therefore the impact of currency translation and others round up with a positive JPY2.5 billion. Marketing expenses proactively spent in the third quarter was suppressed compared to the previous year in the fourth quarter, so they were reduced for the full year, as well. In TCR, we achieved a record high of JPY12 billion. Next, let us move on to Page 14 for variance between the fourth quarter forecast and the results. The operating income JPY68.1 billion was set as a goal for the fourth quarter, but we fell short by about JPY35 billion. At the earnings briefing for the third quarter, I said that in order to achieve the goal, we would need to increase the operating income from the year before by JPY38.5 billion, of which JPY18 billion will be attained through increased marginal profits based on the growth in sales and the remaining JPY20 billion through price raise TCR and fixed costs. And the JPY18 billion rise in marginal profits would have required an 8% growth in sales. But as you can see in this chart, first of all, there was extra hike in raw material prices of JPY3 billion, which also reflected energy cost and changes in the mix, although strategic price raises were mostly as planned, we still fell short by JPY1 billion. As for other, we have been planning to sell a piece of land, but it has been delayed into the fiscal 2023, which turn out to be a major contributor. What proved to be miscalculation on our part was in chemicals business where the inventory write-downs, profit decreased due to decrease in sales prices, as well as sales volume decrease, especially in the Americas and Europe where economic slowdown led to a reduction in inventories totaled as much as JPY4.5 billion in negative factors. The biggest issue was a drop in profits of JPY24 billion in consumer products. More details are given in the box below. Due to gap in the market growth forecast, our sales in H&PC in Japan, which has been expected to grow 8% turned out to be growing only 0%, while there was a 12% growth over achieving the forecast of 10% in cosmetics in Japan. In Asia, especially in China, cosmetics went down by as much as 31% and H&PC down by 28%. In Americas and Europe, where we would normally see a boost in the fourth quarter, inflation-led economic slowdown pushed down the market by 3% or JPY5 billion, which was another miscalculation on our part. This ultimately means we had underestimated the changes in the market, but this resulted in a big variance from the forecast. Please move to Page 15 where we put a summary of strategic price increases. Various strategic price increases are approaches are described here and together, we succeeded in achieving JPY14 billion was our price hikes. But this managed to cancel out the raw material price surges by only about 30%, which is not nearly sufficient yet. As we explain more later, we are planning to change our approach in our price hikes in fiscal 2023. Please turn to Page 16. We implemented price hikes from the second quarter in fiscal 2022, and this is a graphic representation of the results of keeping track of the effects by quarter. You have seen the effects up to the third quarter and in the fourth quarter, home care improved with price hikes and effects of new products, but unfortunately fabric treatments suffered declines in both in its market share and sales prices partly due to the price cuts by competitors. Please take a look at Page 17, which should be the last page of the financial results of the fiscal 2022. Here you see the main initiatives and the results of the three areas. In the growth driver area, we enjoyed an 8.5% growth in sales and JPY1 billion rise in operating income. Though the situation was very challenging, successful Chinese cosmetics business, we succeeded in securing sales and profits mostly as planned. On the other hand, in the stable earnings area, sales went up slightly but the operating income fell by JPY22.9 billion. Though fabric softeners still have some issues left, laundry detergents and home care saw their shares expand. Now, about 60% of the total rise in raw materials prices were concentrated in this area. They were positively offset by price hikes, we believe the biggest reason for the profit decline overall was the fact that we were affected by the soaring raw materials prices in this stable earnings area closed. Now in the business transformation area, most sales and operating income are the negative cause. Sanitary napkins in China continue to grow in both sales and profits, but either segments including baby diapers and hair care products continued to struggle with some issues left. I will elaborate on this later. Next let me discuss the consolidated operating results forecast for 2023. Please turn to Page 19. Here, you see the business environment assumptions. In consumer products, moderate growth of 3.4% is expected globally. On the other hand for chemicals, the fats and oils prices are stable and a further decline in prices is not likely. However, the automotive and semiconductor markets and economic slowdown due to inflation are causes of concern leading to a negative growth forecast of minus 2.3%. Net sales is expected to grow by JPY36 billion year-on-year. On the other hand, the impact from change in raw material prices is estimated to be JPY12 billion. In response to this, total strategic price increase is expected to have a JPY20 billion positive impact. Total cost reduction activities are expected to have a JPY10 billion impact. Capital expenditure and exchange rate assumptions are as you see here. Now please turn to Page 20. Consolidated operating results forecast for 2023, net sales is forecasted at JPY1.58 trillion or 2.3% like-for-like growth from the previous year, operating income of JPY120 billion, an increase of JPY9.9 billion year-on-year. Net income attributable to owners of the parent of JPY88 billion, a year-on-year increase of JPY2 billion. Basic earnings per share, a JPY189.31 billion, a 3.3% increase. Cash dividends per share JPY115, a increase of JPY2. Please turn to Page 22 for the expected opportunities and risks. There is no doubt that 2023 remains to be uncertain. Therefore, we assumed that the environment will be almost the same as that in 2022 with opportunities being offset by risks. Please turn to Page 23 for the graph of impact of hikes in raw material prices on consumer products business. We presented this slide last year as well, where material prices shown as a comparison to 2015 prices. The further up you go on the graph, the higher the negative impact. You can see how big the negative impact was in 2022, compared to the past but we forecast an additional JPY12 billion of negative impact. Of note, is that natural fats and oil in green and petrochemical raw materials in blue had a major impact in 2022. But the impact of these two will be reduced to 30% of total impact in 2023. Petrochemical packaging materials and inorganic materials like silicon and fragrances, paper pulp and cardboard, and electricity and other energy costs will be major factors in 2023. In case of natural fats and oils, and petrochemical raw materials price fluctuations can be predicted based on price formulary. But for the others, prices are determined by the market. Market conditions differ from item-to-item. So it is very difficult to predict prices. In addition to that, price hikes include energy cost and labor cost and therefore, prices are unlikely to be reduced now. Now please turn to Page 24. In this environment, how should we raise prices? In fiscal year 2023, at least we want to recover the JPY12 billion in raw material cost increase from 2022. Furthermore, we want to recover more than 60% of total material cost increase up to now by raising prices. As the breakdown of raw material price increases differs from 2022 and the prices of a broader range of materials including packaging material, paper and cardboard and energy went up, we were aimed at increasing the price for all products. The increase for each product will be small, but by covering a broad range of products, we intend to increase the total amount recovered by the hikes. We hope the market which is in livelihood protection mode now will be more receptive with broad but small increases in product price. Now please turn to Page 25 for the consolidated operating income analysis of change. This graph shows measures to be taken in order to achieve JPY120 billion in operating income in 2023. As we can see clearly from the graph, marketing expenses will be higher than last year. Having said that, last yearâs marketing expenses were lower than the year before. So marketing expenses will be up JPY6 billion, compared to two years ago. With this, we plan to increase sales which will push up marginal profit, plus, as already mentioned, strategic price increases of JPY20 billion will be the key to achieving JPY120 billion. The environment continues to be difficult, but we will work towards achieving this goal. Please turn to Page 26. This shows the trend in EVA. KAO introduced EVA in 1999, which was the first in Japan. We still use EVA to make decisions on investments. At the company level, we constantly use EVA to develop plans, while we expanded business categories, we were not able to sufficiently do business-by-business management. From fiscal year 2023, we were introduced business-by-business ROIC for improved capital efficiency in day-to-day management. In particular in 2023, in an effort to reduce capital cost, we will reduce inventory and CapEx that does not generate profits. Sales measures will be made more efficient and low cost product developments will be done to improve EVA. Please turn to the next page, Page 27. The vertical access is business growth and the horizontal access is ROIC, representing profitability. Last year, we divided our businesses into three areas. Those businesses are shown in four quadrants here. Those in green are gross businesses, those in blue are stable earnings businesses, those in orange are for business transformation. The three businesses in the top right are performing solidly despite the difficult environment last year and are making profits. The stable earnings business in blue was hit significantly by increasing material price. However, if we maintain our share, we can expect stable earnings again once material prices return to previous levels. In these businesses, we are rebuilding our strategy towards strengthening the profit structure. The sanitary napkins products for hair salons and hair care businesses in the business transformation area on the left hand side require structural reform including efficiency improvements. For paper diapers, we need to decide on the direction to take. Now, Mr. Hasebe, our President will explain the management policy including the strategy and reform measures. That concludes my presentation. Thank you for your attention. [Interpreted] Thank you, very much, Mr. Negoro. Now we like to invite President, Hasebe to discuss management policies. President, Hasebe please. I am President, Hasebe. First of all, as the President I feel deep responsibility for our failure to achieve the publicly announced numbers for four consecutive fiscal years. For the past two years as President, I have been working to improve the business management, but our business transformation has not been fast enough to catch up with the changes in the business environment. First of all, let me explain about the future, along with the business portfolio management, which was discussed by Negoro earlier. The growth driver area indicated at the top right shows a strong result last year. We are hoping to build the growth trajectory, not just in Japan, but globally in this area. However, the problem lies in the stable earnings area shown on the right bottom, which is built on mass production with its core business in Japan. We were not able to offset the impact from the rising raw materials prices with the planned extent of price hikes alone. That said, we were the first company to declare price hikes in this category in Japan and went ahead with this strategy which I believe was not wrong. This year, taking advantage of our experiences last year, we hope to expand profitability in this area and increase the share in further. Moreover, the adjacent hair care business, we will work to solve issues in both business structure and marketing, so that we can bring the business into the zones in the right. On the other hand, sanitary napkins and products for hair salons were we still have some issues to solve, still have enough potential to become global core businesses and reform initiatives are now underway to transform the business in that direction. However, what is in sales travel is the left bottom quadrant or diaper business. Next please. Now, today, weâd like to announce the drastic structural reforms for KAO. First of all, with regard to the diaper business mentioned earlier, we will conduct fundamental review of its business strategy. As you know, this business at one time used to be a growth engine for KAO, but we have not been able to respond to rapid changes fully in this business where China have began the main battlefield and we are going through discussions from different perspectives. And we have now reached a point where we need to make decisions on this matter including the way the business should be. Weâd like to have a separate opportunity to explain to you by the end of this fiscal year. That said however, in Indonesia, Japan and China, there are extremely popular products and therefore we will never draw a simple conclusion. Furthermore, for the business transformation area, as described below that there are unprofitable brands and businesses which limits to their future potential. For them, we have been turning out analysis using â monitories and detailed discussions on the potential of the businesses. For a certain portion of the area, we intend to proceed with clear ROIC in a planned manner. The other item is drastic reform of fixed cost structure together with the business transformation area mentioned earlier, we will proceed with reorganization work and systemic reform. If we use ROIC three as a basis, we can derive fixed cost indispensable for each business and we will aim for a goal of maximizing the business productivity. Moreover, given the current status of KAO, a separate briefing is scheduled to be held on the progress of KAO Group return plan 2025 K25 announced in 2020. Next let me explain about the organizational and structural changes for growth. The first one is financial reform based on work that emphasizes capital efficiency as we have been explaining from the outset in order to supervise accounting, procurement and human capital assets comprehensively as assets, we will strengthen management finance. For this, Mr. Negoro, who just spoke earlier will lead the efforts. This means that there will be rigorous supervision on day-to-day statuses of everything. This will enter strict supervision over the status on a daily basis of not just businesses, but each of the individual products. Next is business reform. At KAO, business management and sales management was not effectively integrated in the past. This was because the sales organization focused on net sales as the core indicator to manage. From now on, business and sales will be managed by EVA focusing on profitable sales. In order to do so, integrated management of business and sales based on financial management will be implemented globally. Today, we talked about strategic price increase. If business and sales work together our strategic price negotiations, execution of strategy by retail team, marketing based on a speedy business model that responds to changes, I am confident that KAO will be stronger. An urgent task is to reform product development which has not been up to our expectations lately. We want to revive KAOâs reputation for marketing and innovation. To do so, we will switch to a scrum type process where all divisions from our business leading to a transformed speed and level of work. In the past, KAO took a matrix approach to management, but this will not upgrade speed or level. In recognition of this, we introduced scrum type management this January. Speed and level will be changed, so that KAO will regain its reputation for marketing and innovation this year. And lastly, physical transformation. Mr. Murakami, who has led reforming the cosmetics business will shift his focus to DX. 2023 will be positioned as the starting year of digital KAO. Please look forward to a uniquely KAO digital transformation. Next page please. I will not go into the details of each business, but this slide summarizes the business strategy direction of the three domains. For stable earnings businesses, we will continue to pursue expansion of share and profitability which we discussed before. On the other hand, we will place more emphasis on the growth drivers. In cosmetics, at last, we are seeing post-COVID momentum. Last year, makeup products were very popular. Not shifting to our focus to skincare products was a major weakness of KAO, but now, having both makeup and skincare products will give us momentum to be a strong player. In chemicals business, we will expand globally, number one growth businesses and adapt to niche technologies. In skincare, we will expand globally with a highly appreciated UV care products that have tangible advantages in feel of use and performance as a core product. As this tangible effect to UV care product is extremely well accepted, in Brazil, this year with this product, we hope to expand this business by citing local production. In the business transformation area, we were aimed at converting the sanitary napkin business into a growth business. In hair care, by capitalizing upon all technologies and marketing know how that KAO has, we aim to have it rebuilt as a core business. Lastly, for hair salon products, as the challenges are cleared, we will move quickly to transform this business into a high profitability business. Lastly, let me explain the policy that Mr. Negoro and I developed. This year, we will more consciously focus on achieving targets set at the beginning of the year. We believe this is the only way we can regain the trust in us. Although there are major challenges, this will be our number one target this year. What is important is the change to a resilient business structure that does not depend on market conditions. As we have already mentioned, expanding strategic price increases to all categories is a must. Based on business from last year, we will strategically raise prices slightly for a broad range of products. The direction is to minimize the burden on consumers and retailers, while we steadily improve our profit structure. At the same time, this yearâs new products target high value add and high profitability from the beginning. Second, we will promote focused management based on portfolio management. My Kao Mall, our direct sales channel started in December last year. By summer of this year, we intend to cover all product categories by this channel. Third, another KAO, our new business area, which I call live skincare area. We will expand sales of products for prevention of Vector-Borne infections. This year, we expect to be able to report to you commercialization of two new areas in the chemical business. We will also be announcing the commercialization of the RNA test business next month. This will be our first product in the digital life platform business. This year again, social change including material price increases are difficult to predict. We expect Q1 and Q2 to be most difficult. But we will endeavor to reduce the negative impacts to the minimum, so that we can achieve our final target. This is all from myself. Thank you for your attention.
EarningCall_511	Hello, and welcome to the American Vanguard Business Update Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Chairman and CEO, Eric Wintemute. Please go ahead, sir. Let me start by putting a point on what we had outlined in the press release that we issued on Friday. We expect our full year 2022 financial performance will exceed that of 2021 in all material respects. Furthermore, we expect to achieve significant growth and profitability in 2023 over 2022, and we will be giving you specific performance targets for the '23 year in about six weeks on our March earnings call. In the fourth quarter, we were forced to delay roughly $15 million of high margin sales due to a supply chain disruption. Now that we have fixed this supply disruption, we expect to largely recoup the sales that we lost in Q4, such that they will shift forward and benefit 2023 performance. With a strong balance sheet and favorable market conditions, we believe we are poised to enjoy strong growth in all metrics for this coming year. I'll show you -- here is the safe harbor. Okay. So on Slide 3, the global supply chain has been an unsettled state for the past three years due to the pandemic and shifting buying practices. At one time or another, we have witnessed shortages in containers, ships, warehouses and trucks used to transport many goods across multiple sectors. Within our industry, these factors have interrupted production of raw materials and intermediates particularly those sourced in Asia. In spite of these conditions, our supply chain team had succeeded in sourcing virtually all raws, intermediates and packaging without interruption over the past three years of the pandemic. I am proud of the work that we have done as this has required near constant attention and preplanning. However, in the fall of '22, our domestic supplier of a key intermediate that is used to produce Aztec our leading corn soil insecticide was unable to start production due to capacity constraints. This persisted for several months. Accordingly, we positioned one of our China based suppliers to commence production of that input. Synthesizing this intermediate involves a very complex multistep process. While technically capable of filling our requirements, the Chinese supplier was caught in continual lockdowns from China's Zero-COVID policy, which once lifted resulted in nearly everyone in the facility contracting COVID. This culminated with a mandatory closure of the entire industrial park during the New Year. With the return of its full workforce, our Chinese supplier has resumed manufacturing the key intermediate. Also our domestic supplier is back online. Further, we have started synthesis of Aztec at our own facility in Alabama. As we continue to receive this key intermediate, we will be producing Aztec over the next 75 days or so. In short, we have prepared the supply chain and are looking forward to returning to business as usual. In parallel, let me focus on how we are managing this disruption with our customers. We are a leading manufacturer of corn soil insecticides. As you can see on Slide 4, the many brands that we market in the U. S. and abroad. As it became clear that our inventory of Aztec was going to be impacted by supply disruption, we began working with our customers to meet the grower needs through increased supply of these other CSIs, especially Counter, Force and SmartChoice. While unable to make up for the sales of Aztec that we anticipated in Q4, consolidated net sales for the period were equal to those of Q4 '21. Further, we have now orders in hand at Aztec in the amount that is 3x to 4x higher than what we typically have during the first quarter. In short, subject to achieving full production, we expect the net sales and gross profits that we anticipated from Aztec in Q4 to shift forward into Q1s and Q2 of '23 as we supply growers in time for the upcoming planting season. Before looking forward, let's take a quick step back to recap last year. As per our press release, we have revised our 2022 performance targets on Slide 5. The overarching point here is that despite the temporaries unavailability of our leading high margin corn and soil insecticide during the fourth period, we generated sound financial results on a full year basis. Bear in mind that the figures I'm about to discuss are based upon preliminary on audit financial data. Going from top of the P&L to the bottom, our revenue is forecast to grow at about 10% which is within our targeted range. Similarly, gross profit margin at 40% and OpEx as a percent of sales at 33% are also in range. Interest expense will be about 5% above the target for 2021, which given all of the rate hikes that occurred over the course of this last year is excellent. The debt-to-EBITDA target is within range and well below our 2.5x max rate. Net income is not yet known as it will depend upon tax and final accounting. And our adjusted EBITDA at 15% to 18% growth rate will fall below the range previously given. Please be mindful that we are reporting on '22 estimates versus our own targets. When we look at how '22 stacks up against '21, we expect that our financial performance will exceed the prior year in all material respects. Before turning to the '23 outlook, let me note that over the past several quarters, we have placed an emphasis on maintaining a strong balance sheet. As you can see on Slide 6, we ended 2022 cash with cash available in the amount of $198 million. Further, our debt net of cash was $31 million as compared to $36 million at the end of '21. In addition, our net average which is debt net of cash divided by EBITDA, was 0.42. In other words, we started the year virtually debt free with ample cash and cash equivalents to meet working capital needs while funding R&D further commercializing technologies like SIMPAS and Ultimus and completing accretive acquisitions. In addition, we achieved this very low debt position after having spent $34 million on repurchasing of 1,668,892 of our shares through two share repurchase programs, a $20 million accelerated share repurchase, which we have completed and a $20 million 10b5-1 plan, which still has $6 million of capital available for future purchases. Further, we increased our cash dividend to shareholders by 25% thereby returning a portion of our profits to our shareholders. There are two key takeaways on this Slide 7 that I want to emphasize. First, our Q4 miss was due to a supply chain issue that is now resolved. This effect should boost our corn soil insecticide sales in the first half of '23. As mentioned, our current Aztec orders are 3x to 4x times higher than they would be normally at this time of year. And second, we expect to achieve significant growth in revenue and earnings in 2023. Finally, we are well positioned to address the market and expand our business. As you'll note on Slide 8, the outlook for '23 presents ideal conditions for the company's strong financial performance. As mentioned, we anticipate higher sales of our corn soil insecticides during the first half. Second, we expect to benefit from lower cost of goods and an improved supply chain for raws and intermediates. This should enable us to build inventory to meet demand. Third, freight costs, which peaked in 2022 has settled down and are returning to more reasonable levels. Fourth, the level of AMVAC products in the distribution channel is comparatively low. In addition, our new formulations, expanded portfolio of green product solutions and improved market access, for example, into Australia and Brazil, should enable us to participate more fully in a strong global Ag economy. In summary, we expect to achieve significant growth and profitability in 2023 and we'll be giving you more specific performance targets in our March earnings call. Finally, thank you for your continued support of American Vanguard. Good morning, Eric, Bob, thanks for taking my call this morning. Just a couple of questions. It sounded like the shortfall is on the Aztec product is going to push. It's going to entirely -- I'm not sure if that's your words, but those are my words, it's going to push into the first half of '23. I'm also just curious if there's any impact on margin on that business just because you had to find alternatives or pay up for pricing or anything like that? Or is this just -- we should just look at it as a push to -- in the first half of '23. Yes. As far as increased cost, the only increased costs, we have are air freighting, this -- we're going to be air freighting all of the material that's being made in China and the material, obviously, domestic is -- it's up in Wisconsin, so that won't be air freight. But we'll have some additional costs, but it will be relatively immaterial in the overall margin. Got it. And then you did touch upon this, I think, in your comments, but it sounds maybe just a little bit more commentary on supply chain overall. It feels like things are loosening up across the board. I know you've been fighting a lot of headwinds on that side and you've done pretty well. You can't always bet a thousand. But is it a fair assumption to say things are loosening up across the board? Any commentary on maybe tightness in any markets or inputs for '23? Well, one of the key areas since we do a lot of phosphate business is that the phosphorus supply chain was really, really bad in '21 and not only increases but [Kazakhstan] shutdown, China was not supplying for P4 anymore. So a number of our phosphorus suppliers had filed or claimed force majeure. But yes, that's probably for us specifically, that was maybe our biggest challenge, which phosphorus has come back down, everybody is back online and so availability of our raws is much easier than what we had dealt with last year. So -- and we're seeing, again, with some being -- some raws having a strong tie like methanol. Those prices were high. But again, those are coming back down as well. Natural gas is coming back down. So overall, yes, we're going into this year, we're feeling a lot more comfortable with our raw material chain. That brings to my last question. Obviously, raw material price, it -- looking at Slide 8, raw material pricing down, low inventory in the channel, transportation costs coming down. All big tailwinds. And obviously, you also had the Aztec pushing into this year, which will be a benefit, but sort of one time. But any headwinds, I mean you're -- in spite of the Aztec miss, you're sort of painting a pretty good picture for '23, even though you haven't put official guidance out there, but I'm just curious if anything that concerns you for '23. Yes. Right now, I think -- I mean, there's always the possibility of having shortages of different pieces. We're -- with our SIMPAS equipment, we're installing equipment now. We're getting things built. Different parts are -- when you have something that has a lot of different components, there's always concern that you don't get everything on time. But overall, optimism looks fine. I mean, obviously, there are factors that could happen such as escalations of conflicts that would be out of our control. But we -- I mean, the farm economy is really strong. There's -- the food banks are low. The reserves are not there and talking with experts in the field, they think that this should continue into '26. So I'm not identifying anything right now that is a major concern. Good morning. Just a follow-up on that last question, headwinds, tailwinds. The -- given that raw material costs are easing supply chain generally, notwithstanding this Aztec issue, easing lower transportation. Just curious how ag chem pricing from your vantage is holding up juxtaposed against kind of what could be viewed as lower cost environment? Yes. So I mean, I think the biggest shift is fertilizer. That took the biggest increase as availability is coming. I think prices are coming down there. We're seeing some downward pricing on some of the commodities such as glyphosate, glufosinate, some of the more generic insecticides, fungicides. With regard to our products, we're not seeing a position where we're going to need to re-adjust our pricing downward. So I think that's right now. We're -- in most of our products, certainly, we're in a better position because we're kind of the only supplier of that particular chemistry. And some of our distribution business, let's say, in Central America and maybe in Australia, there may be maybe pressure on some of the products that they sell that are commodity. But again, we're seeing lower costs coming through. So some of that lower cost may need to be passed through to be competitive. But overall, yes, I think growers are a shift that has occurred for the '23 season versus the '22 season. As growers are going into the '22 season, we're just concerned about getting supply at any cost. And so the push was get everything in Q4, make sure it's in the barn. For this year, I think people are seeing that prices softening are looking at -- we're looking at Q4 as, okay, we don't have to have it right now, we can do more just in time and hope that prices come down before we actually purchase and plant. So I think that's kind of what we're seeing. So as far as our margins, I think we feel pretty good about where we are. Got it. That's helpful. And twice, you mentioned that Aztec orders are at this juncture in the first quarter, 3x to 4x "normal seasonal level." So I'm just looking for some more context around that. Is that simply because some of the orders that were not fulfilled in the fourth quarter? Is there double ordering for -- from certain customers to try to get safety stock? Or how much of this is a function of simply higher corn acreage this year. Have you -- and a follow-up on that, maybe looking at the USDA forecast for higher corn, how much of that is in kind of the addressable market for these soil corn insecticides, which is really just the heart of the corn belt. Additional context might be helpful. Yes. I mean, going into the year, we did see growers stepping up for what they anticipated. One, be a strong commodity price, two, corn rootworm pressure seems to be increasing year-over-year. But the bulk of what I'm addressing is these are orders that didn't get filled in fourth quarter. And we -- our team went out to everybody as we had this Aztec issue and said, okay, here's the amount of Aztec. We feel comfortable, we may get to everything that you need for Aztec. But for now, let's place kind of supply chain. This is what H1 kind of allocated out would get for Aztec and then some additional orders for Counter, Force and SmartChoice that would make sure that they're going to be able to meet customer demand. So we'll -- as we go through the next 1.5 months, we'll get a much better picture of what percent of the original Aztec will be met with Aztec and if we do all of it, great, but we produce more of the other corn soil insecticides to make sure that every grower out there gets corn soil insecticide in order to treat this field. Eric, what are the chances or the risk that because of this issue, you will have lost some opportunity or acres with an alternative to soil corn insecticides. I mean the alternatives are really us, right? I mean Syngenta has force and bag, but going through the SmartBox system and SIMPAS, obviously, that is our business. And so I don't think -- I mean I think growers will use the product they intended to use and so I don't think they're going to not use product. I think it's more a function of what of our corn soil insecticides they will use. Got it. And last one, the -- since you weren't manufacturer, synthesizing or compounding this product, I guess, in the fourth quarter, -- just curious if you -- what -- if you could quantify the impact to the absorption variances and gross margins? And does that carry through into '23 at all? Or is it isolated in '20 -- in fourth quarter '22. Thank you. Yes. So fourth quarter, there was the other half of the Aztec molecule that we were not able to make. But there's another section that does get made, and we've -- we continue to make that at the Axis facility in Q4. So though the second half of the molecule that then gets combined with the first piece, we didn't make which is true. So absorption wasn't as high. But again, we're doing that in Q1 and into the beginning of Q2. So overall, we're not seeing any major impact. Thank you. We've reached end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments. Okay. Well, thank you, everybody, for getting on the call this morning. We're looking forward to this '23 year and we'll be giving kind of the normal guidance that we do for the year at the next call, which I think we're currently scheduled for March 13. So I look forward to updating you at that point and have a great day. Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
EarningCall_512	Good morning, and welcome to the Piper Sandler Companies conference call to discuss the Financial Results for the fourth quarter and full year of 2022. During the question-and-answer session, securities industry professionals may ask questions of management. The company has asked that I remind you that statements on this call that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements that involve inherent risks and uncertainties. Factors that could cause actual results to differ materially from those anticipated are identified in the company's earnings release and reports on file with the SEC, which are available on the company's website at www.pipersandler.com, and on the SEC website at www.sec.gov. This call will also include statements regarding certain non-GAAP financial measures. The non-GAAP measures should be considered in addition to, and not a substitute for, measures of financial performance prepared in accordance with GAAP. Please refer to the company's earnings release issued today for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure. The earnings release is available on the Investor Relations page of the company's website and at the SEC website. As a reminder, this call is being recorded. Good morning and thank you for joining us. I am here with Deb Schoneman, our President, and Tim Carter, our CFO. We will go through our prepared remarks, and then open up the call for questions. Our diversified platform continues to perform well despite the challenging market backdrop. We finished 2022 with the fourth quarter representing our strongest quarter of the year. We generated adjusted net revenues of $391 million, a 19.3% operating margin, and adjusted EPS of $3.33. On a full year basis, adjusted net revenues were $1.4 billion, generating an 18.8% operating margin, and adjusted EPS of $11.26. 2022 was our second strongest year on record behind 2021. There are a number of highlights worth noting from 2022. We acquired DBO Partners, which doubled our technology banking platform, and positions us well for further growth in this important sector. The acquisition of Cornerstone Macro added a high quality macro, thematic, and quantitative research product, that has proven to be synergistic with our equities business. We acquired Stamford Partners, a specialist M&A boutique focused on European food and beverage companies, which represents a natural expansion of one of our existing industry power allies. We generated advisory revenues of over $770 million, representing 54% of our total net revenues, and our second best advisory year ever. We grew market share in our equities brokerage business, generating record revenues in that business line, and we grew investment banking managing director headcount on a net basis, finishing the year with 159 MDs, the most in our history. Overall, 2022 marks a successful year as we continue to make significant strides in expanding our market presence, and in increasing the earnings capacity and resiliency of our platform. Now, I'll provide an update on our corporate investment banking business. We generated total corporate investment banking revenues of $258 million for the fourth quarter of 2022, up 20% sequentially, driven by strong performance in our advisory business. For the full year, investment banking revenues of $902 million, declined 35% from our record 2021 performance. Sector performance was relatively broad, led by financial services, and included record years from both our energy and power and restructuring groups. Our performance within financial services was led by depositories, and included strong contributions from insurance, real estate, specialty finance, asset management, and fintech. When we combined with Sandler, one of our growth objectives was to expand our non-depository business, and we are experiencing strong momentum on that front. In 2022, non-depository revenues represented nearly 50% of our total financial services investment banking revenues, which compares to 32% for 2019 before the group joined our platform. Since the combination in early 2020, we have been adding headcount to expand our insurance, asset management, and real estate practices, and have nearly doubled our non-depository revenues during that time. By leveraging our broad financial sponsor coverage, we're winning more and larger mandates on a regular basis in these sub-sectors. At the same time, we have maintained our market-leading position in depositories. We were the number one advisor in US bank M&A based on number of announced transactions, and we have advised on seven of the 10 largest bank mergers and acquisitions announced during 2022. Another sector with strong performance in 2022 was our energy and power group. We retained our leadership in oil field services, where we were the number one advisor based on number of completed deals. In addition, over the last few years, we have diversified our business and built a solid presence in upstream and renewable energy. With one of the largest and most tenured teams on the Street, we feel great about the outlook for this group. Specific to advisory services, we generated $221 million of revenues during the fourth quarter, up 26% sequentially, a strong finish, but given the market headwinds, this was less than the typical seasonal pickup of our fourth quarters historically. For the year, we generated $776 million of advisory revenues, the second strongest year in our history, behind an exceptional 2021. We benefited from the sector diversification of our business, along with balanced coverage between strategic and private equity clients. Our revenues from strategic clients during the year were resilient and on par with strong 2021. Advisory revenues from strategic clients represented approximately 54% of total advisory revenues, compared to approximately 42% for 2021, which helped offset lower revenues from private equity clients. Rising and volatile interest rates have reduced financing options for financial sponsors, and negatively impacted deal activity with these clients. That said, that said, PE firms and portfolio companies continue to maintain record amounts of capital to deploy. With one of the largest middle market PE advisory businesses on the Street, we are well positioned to advise this client base when markets improve. During 2022, we closed or announced 230 M&A deals, with over 82 billion in aggregate transaction value. With a core focus on taking longer strides rather than taking more, the trend of advising on larger transactions and generating larger average fees, continues to be a key driver of our advisory results. We were able to hold our average fee size, notwithstanding softer market conditions. We continue to take market share, and for the fourth quarter of 2022, we were the number one advisor on announced US M&A deals under $1 billion. And for the full year, we ranked as the number two advisor. Looking forward, our advisory pipelines remain solid. However, the current economic conditions make conversion of those pipelines uncertain. We expect our advisory business to have a slow start to 2023, and anticipate our first quarter revenues to decline relative to the first quarter of 2022. Turning to corporate financing, we generated $37 million of financing revenues for the fourth quarter, slightly lower than the fourth quarter, as debt financings declined. For the year, financing revenues of $125 million, declined sharply from 2021 record results. Increased volatility, declining valuations, and reduced demand, have largely kept equity issuers on the sidelines during 2022. For context, the equity market fee pool for 2022 was the lowest in over 20 years, and declined more than 60% from the average of the last 10 years. Against this backdrop, we completed 55 equity financings during 2022, raising $40 billion of capital for our clients. Healthcare financings represented the bulk of our 2022 activity. Our financial services group completed 30 debt and preferred stock offerings, raising $8 billion of capital for depositories and other financial services companies. We expect financing activity to increase in 2023, as companies raise needed capital to execute on their strategic plans. Turning to investment banking managing director headcount, we finished the year at 159 managing directors, the most in firm history. We remain focused on filling white spaces within investment banking. In addition to the acquisitions of DBO and Stamford, during the year, we added talent to strengthen and broaden our industry and product coverage, notably in healthcare services, automotive aftermarket, transportation and logistics, and restructuring. Our success, culture, and momentum, resonate in the marketplace, and we remain a destination of choice for top tier talent. Historically, periods of market downturn have yielded compelling opportunities to add talent. As we have in the past, we remain disciplined and selective with the investments we make. Before I turn it over to Deb and Tim, let me make a couple of concluding remarks. Over the last decade, we have executed our strategic vision and delivered strong growth and shareholder returns. We have built a diverse and resilient platform with significant scale, margin, and cash flow. Within investment banking over the last 10 years, we have expanded our industry verticals to seven, now covering most of the economy, and have grown managing director headcount from 44 to 159. We are more relevant, provide more deal flow, and offer more product capabilities to a larger, more diverse client base. In addition, we have doubled the size of our equity brokerage and fixed income businesses over the last few years. The enhanced scale and capabilities of our platform have increased margins and profitability, while providing meaningful opportunities for growth. Our integration and execution strategy is a key differentiator in the marketplace, and has enabled our new partners to deepen their client relationships and grow revenues on our platform. As I noted last year, we continue to execute on the path to grow annual corporate investment banking revenues to over $2 billion over the next several years, using the same playbook as the last decade, scaling industry groups, product share gains, increasing transaction and fee size, and corporate development. Thanks, Chad. I'll begin with an update on our public finance business. In the fourth quarter, we generated $19 million of municipal financing revenues, down 30% from the sequential quarter. This business is experiencing unfavorable market conditions, as higher nominal rates, interest rate volatility, and lack of investor demand, have significantly reduced municipal issuances. For the full year of 2022, we generated $108 million of municipal financing revenues, down 34% from last year. We underwrote 571 municipal negotiated transactions, raising $15 billion of par value for our clients. Based on number of municipal underwritings through the year, we maintained our number two ranking. Overall market issuance for 2022 declined approximately 20% from the prior year. However, high yield new issuance decreased approximately 40% due to significant fund outflows. This impacted our performance, as a meaningful component of our public finance business is in high yield specialty sectors. Our pipeline is strong, but it remains uncertain when conditions will become more conducive to closing transactions. As we look ahead to 2023, we expect market conditions to remain challenging. Higher rates have sharply curtailed refinancing activity, depressing new issuance volumes. However, we expect that our market leadership and diversification in the business, will provide some resiliency to market headwinds. Turning to equity brokerage. Equity markets continue to experience elevated volatility and volumes, driving record equity brokerage revenues of $56 million for the fourth quarter, up 7% sequentially. For the full year, equity brokerage generated revenues of $210 million, to succeed at the goal we set for ourselves at the beginning of the year to build an equity brokerage business with revenues of $200 million. Performance on the platform was broad-based, with our high-touch program, derivatives and algo trading, all generating strong activity. Heightened volatility through most of the year provided tailwinds. During 2022, 79% of the trading days experienced intraday volatility between 1% to 3%, more than double the last three-year average. The strength of our platform helped clients navigate the volatility, and we traded $11 billion shares for over 1,700 unique clients. Strong collaboration between our fundamental analysts and our macro research analysts, is bringing a valuable and differentiated view to our clients, recognized by increasing client votes. We maintain one of the largest research platforms in the small and mid-cap space, with approximately 1,000 stocks under coverage. As we look forward to 2023, we see a more challenging market environment, with a lower fee pool and likely less volatility. We have increased market share in each of the last five quarters, and we believe that cross-selling our products will result in further market share gains and mitigate most of these headwinds. Lastly, turning to our fixed income business. For the fourth quarter of 2022, we generated fixed income revenues of $50 million, up 34% on a sequential basis, and flat compared to the fourth quarter of last year. With a perception that interest rate increases may be slowing, clients were more active during the fourth quarter. Our depository clients were active in repositioning their portfolios ahead of the new year, and our municipal clients were active with tax loss selling, as well as taking advantage of higher yields and the relative value municipals provides. For the full year of 2022, we produced $195 million of revenues, down 17% from last year. Volatility and uncertainty regarding the terminal level of interest rates, combined with an inverted yield curve, negatively impacted client activity. We continue to invest in this business, and we made several targeted sales and analytical hires in 2022 that increased our product depth and client specialization. The current market dislocation should provide opportunity for more targeted hiring in 2023, as we look to continue elevating our platform. From an outlook perspective, in 2023, we expect clients to be more active relative to the last six months. With higher nominal rates, the fixed income asset class represents an increasingly attractive investment opportunity. Now I will turn the call over to Tim to review our financial results and provide an update on capital use. Thanks, Deb. As a reminder, my comments will be focused on our adjusted non-gap financial results. We generated net revenues of $391 million for the fourth quarter of 2022, up 17% from the third quarter, driven by solid performances across our advisory and brokerage businesses. Net revenues decreased 38% from the record fourth quarter of 2021 due to lower corporate investment banking and municipal financing revenues. Net revenues for 2022 totaled $1.4 billion, down 28% from the exceptional prior year, which benefited from record corporate investment banking, municipal financing, and fixed income brokerage activity. Market volatility had an adverse impact on most of our businesses during 2022. However, despite tough conditions, our absolute performance was good, and represents our second strongest year in firm history for revenues and earnings. Turning to operating expenses and margin, our compensation ratio for the fourth quarter of 2022 was 62.3%. And on a full year basis, our compensation ratio was 62.5%, in line with our guided ratio. Looking ahead, we continued to maintain our philosophy of managing compensation levels to be a balance of employee retention, investment opportunities, and operating margins. In 2023, based on our current outlook, we estimate our compensation ratio will be fairly consistent with 2022 levels. Non-compensation expenses, excluding reimbursed deal expenses for the fourth quarter of 2022, was $62 million, up 3% compared to the third quarter of this year, and consistent with our expectations. Non-compensation costs for 2022, excluding reimburse deal expenses, totaled $237 million, an increase of 19% compared to 2021, driven by increased travel costs, as well as the addition of Cornerstone Macro, Stamford, and DBO to our platform. We remain disciplined in managing costs, and with the challenging outlook, we are focused on actionable expenses. Looking to 2023, we expect our non-compensation costs to continue around this fourth quarter level. During the fourth quarter, we generated operating income of $76 million, and an operating margin of 19.3%, our strongest quarter this year. For the year, operating income totaled $269 million, with an operating margin of 18.8%, both solid on an absolute basis, highlighting the scale we have built over the last few years. Our adjusted tax rate was 19% for the fourth quarter of 2022. Income tax expense was reduced in the fourth quarter by $5 million, as we reversed a deferred tax asset valuation allowance on our UK legal entity, and recognized a smaller benefit related to restricted stock vestings at prices higher than the grant date price. Excluding these items, our fourth quarter tax rate was 25.7%. Our full year effective tax rate was 23.4%, which included tax benefits totaling $10 million related to restricted stock vesting at prices higher than the grant date price, and the UK valuation reserve adjustment. Excluding these items, the adjusted tax rate for 2022 was 27.2%. Going forward, we expect our full year adjusted tax rate will be within a range of 20% to 29%, excluding the impact from stock vestings. During the fourth quarter of 2022, we generated net income of $60 million and diluted EPS of $3.33. For 2022, net income totaled $201 million, and diluted EEPs was $11.26. Let me finish with an update on capital. We remain committed to deploying capital to drive shareholder returns. Our earnings capacity, combined with our capital-light approach, enables us to generate significant levels of cash to deploy through corporate development, share buybacks, and dividends. 2022 has been an active year on all fronts. We've deployed capital during the year to build out our platform capabilities and drive long-term growth through the acquisition of Cornerstone, Stamford, and DBO. During 2022, we repurchased approximately 1.4 million shares of our common stock for $187 million, which more than offset the share count dilution from this year's annual stock grants and our acquisitions. Combined with our dividends paid during the year, we have returned an aggregate of $295 million to shareholders. Given our level of earnings and strong capital position, today, the board approved a special cash dividend of $1.25 per share related to our 2022 full year results. Including this special dividend, our total dividend for fiscal year 2022 equals $3.65, or a payout ratio of 32% of adjusted net income. This is at the lower end of our 30% to 50% payout ratio, given the active year of capital deployed towards strategic acquisitions and share repurchases during the year. In addition, the board approved a quarterly cash dividend of $0.60 per share. Both the special and quarterly dividend will be paid on March 17th to shareholders of record as of the close of business on March 3rd. Overall, 2022 marked another successful year for Piper Sandler, as we generated solid results and furthered the strategic expansion of our business. We've made great strides over the last few years to increase the long-term earnings capacity of our platform, and we are excited to continue executing on our strategic plans, while balancing profitability metrics with opportunities to drive long-term growth. Good. Chad, maybe I'll start with you on the advisory outlook and commentary. So, obviously heard the comment that the backlog is strong, but expect a slower start to the year, which makes sense. Weâre hearing from a number of your peers, one middle market centric peer was talking about of the pipeline of mandates is kind of at a record level, but just deals aren't progressing. And it sounds like you're saying something similar just in terms of the progression of deals. So, just love to maybe frame a little bit more around the pipeline, how you guys look at it, and then whether you're seeing any kind of incremental move in here, one direction or another. We're also hearing a little bit of green shoots just with the better start to the year and sentiment is a little bit better. So, curious kind of how that's affecting things. Is it - and is it really financing that's broken, or is it the just confidence in the macro view and just that needs to improve to see some of this stuff move forward? Yes, certainly. Obviously, on advisory on a relative basis, we thought we had a pretty good Q4. You can never me measure advisory just on a quarter. We got a lot of stuff closed probably relative to what we thought at the start of the quarter. So, some - so that certainly impacts the beginning of the year. I think relative to pipeline, I mean, we do have - it's not like a lot of mandates are dying. What I would say is, people are kind of getting ready. They've got the books ready. They're updating the packages, but it's just really slow on launching new transactions. So, I think based on pattern recognition, everybody thinks the back half is going to be better, but that's not incredibly scientific. And what I would say relative to just strategic and private equity, while I think you're seeing a little bit better financing conditions, itâs still pretty tough. And obviously, that drives a lot of private equity. We did relatively, we think, pretty well on the strategic M&A side in this quarter and in Q4 and last year. And that's probably going a little bit better to start the year. But yes, I think in general, we expect advisory to start slow. And if this cycle is like others, we expect it to pick up by the second half, but we're certainly cautious from the start here. Okay, great. Thanks for that. One for Deb, I guess on your muni finance and some of the commentaries. So, it sounds like some of the headwinds there could persist, but those will be partially offset by just market share improvement within Piper. I guess just bigger picture, trying to think about what normalization in this business looks like. I mean, you had a just tremendous 2021. We've come off of that level quite a bit here. And so, I guess the question, is normal in your mind something in between maybe where we are right now, fourth quarter kind of jumping off point, and what the company did in 2021? I think it was $165 million in revenue. Just trying to kind of think about where that could settle in when the markets settle down and maybe weâre in a little bit more constructive environment. Yes, Devin, I'd say, and the key part of that is when the markets settle down and become more constructive, and that's the part that is a little difficult to predict. But I would say, one of the things you saw significantly in 2022 is the amount of refunding coming down. I mean, that was the biggest driver by far of the decline in issuance. And so, some of that ultimately is where due rates settle out and where does that ultimately - how much of that comes back into the marketplace. The other thing for us is, given the diversification of our business and the specialty groups that we have, which are more reliant on the high yield market, that's another piece that we're going to need to see. Our inflows coming back into those funds, which the year started out with some inflows coming back in after a year of outflows consistently month after month, but it's one month. And so, that's just another piece of it for us. You think about our business is really pretty balanced over time between those specialty and governmental sides of the business. So, definitely see, to your point, it landing somewhere between those two, but just how quickly it gets there is a bit of a question. Yep, completely understood, but no, thank you. Just last one here on just the balance between kind of focus on costs as I think Tim talked about, the flip side, there's a lot of opportunity to still grow the firm and you guys had a great 2022 in terms of both external recruiting and also some nice tuck-in M&A. And so, just curious as you look ahead, kind of the appetite to maybe do as much as you did in 2022, in 2023, just given that dynamic of kind of balancing the opportunity versus that upfront cost that is going to create a little bit of a drag in the near term. Yes, and I think when we look at that, we're really breaking it into two buckets. We're still focused on driving growth. So, where we see an opportunity on a senior hire that's directly driving revenue and production really across banking, fixed income, public finance, weâre going to continue to do that. I would say headcount in general, we're being quite cautious, focused on when we have attrition less - not replacing every spot, being very careful on just new junior hiring in banking and other areas. But weâve got to try to find that balance so we've got the capacity when some of that picks up. But in general, you're right, probably a little more careful on that hiring front. Good morning. Congrats on the great quarter. I just wanted to turn to corporate financing, and start with you Chad. Obviously, industry ECM remains quite soft. Maybe if you could just provide some color on what you hear from clients in terms of when they might consider transiting in 2023. And then specifically on the healthcare ECM side of the business, should we expect this to remain a tailwind for the corporate financing business in 2023? And sort of how close is this sector to being back to a normalized cadence of activity? Yes, what I would say about ECM, I mean, for us with the start in January, we've done a handful of healthcare deals. And so, I would say our pace for ECM, at least for this quarter, feels fairly close to Q4 of last year and Q3 of last year, which is quite a bit better than obviously Q1, Q2. I mean, last January, February, March, I mean, we did almost no ECM. So, I would say, we're slowly doing transactions. I would say the urgency from clients that need to do a financing this year, I think price expectations are more normalized. So, we certainly think this will be a better year for ECM. I'm not sure I would call it normalized. I mean, itâs still probably nowhere near the overall â20 and â21 fee pool size, but the flip side of that is, â22 was just incredibly low. So, probably somewhere in between, and that's certainly how the year has started for us. Got it. That makes a lot of sense. Just thinking about the fixed income business, they were obviously quite strong this quarter and better than most peers, and obviously there was a strong recovery relative to the third quarter. When you think about the Fed continuing its quantitative tightening, Deb, and that does drain bank liquidity. And I would imagine that would sort of dampen securities demand. Is there any risk that fixed income ticks back down to more - to closer to that 3Q level? Or should we think about this quarter's result as a more normalized run rate for â23? Yes, James, I think I would actually go right in the middle of what you just said. We did see in Q4, activity picked up related to banks repositioning balance sheets going into year-end. And so, that's what contributed to some of the strength that we had in the fourth quarter. At the same time, I would say, at the end of the day, let me put it this way, there's so much that clients are just trying to figure out relative to where these interest rates are going. And as that becomes more and more clear, those clients tend to step back into the market, which is why I don't think it goes back to the levels of Q3 that you're talking about. Longer term, higher rates are good for the fixed income business. We just need to see more clarity in the outlook of where those rates are going. So, in the interim, our goal is to continue to build a more diversified platform away from just the banks, which has been more of a strength of ours, especially with the combination with Sandler. So, trying to have that, what you alluded to, what's going on with the banksâ balance sheets being a little less of an impact to our overall fixed income business. Hi, good morning. So, I wanted to wanted to start off with a question you must have been asked in terms of like some of the topline trends, was probably to unpack some of the commentary around non-com, since the seasonality in your business tends to be pretty pronounced. Is the right way for us to be thinking about the non-com trajectory for â23, that somewhere around a $72 million per quarter run rate is reasonable, while just adjusting for seasonality? So, somewhere like the $290 million zone. Just want to make sure I'm thinking about that appropriately, because 4Q is typically the high watermark on the year. Yes, Steve, I can take that. I think the 72, and that includes - that would include reimbursed deal expenses, we tend to talk about it excluding that. And I think sort of at the 62 level, excluding in the fourth quarter, is what we think that looks like from a go-forward perspective. The reimburse deal is a little bit more variable based on levels of activity, particularly capital markets. But at a high level, Chad just talked about if capital markets sort of stays at the levels we saw in Q3, Q4, I think that all in, 72 going forward is sort of the right level. Got it. Very helpful. And we touch on trends covering like all the different categories of your investment banking business and the trading or the brokerage business. As you guys went through the budgeting process for this year, I think based on the trends that we've seen so far, ECM better, the brokerage commentary overall positive, advisory outlook still challenged. Is your expectation that you could actually grow revenues in â23 relative to â22? Just providing a more holistic picture would be really helpful. Yes. I mean, obviously, we don't give annual guidance, but what I would say generally is, I think your trends are correct there. We certainly think if the first half of this year is better for ECM, and we have more quarters like Q3 and Q4, which we don't think by any means is robust ECM, that financing certainly could be better. I think the brokerage businesses are going to depend on the market. And obviously, the wild card is advisory. I think in our commentary, we certainly think the first half can still be slow and challenged here. And so, to grow revenues for the entire year is going to be based on what sort of outlook you have for advisory in the second half. And that's going to depend on the market conditions. Right. And it might be helpful since like the strategic piece is a big contributor to strength, this past year, I know historically you guys have benefited from having really strong sponsor relationships. Just what you're hearing from your sponsor clients, what they need to see in terms of clarity around the macro to make them more willing or inclined to transact here. Yes. I mean, I think we're really fighting two things. First, it takes a while. I always try to get - people try to pin you down on how many quarters does it take for buy or seller sort of price expectations to come in line. I would say, the conversations I'm part of, that's much more realistic now. We're very - we're closer there. So, I think that will help transactions. And then it's just financings. Can people get financings done? And certainly, the larger ones, that's still difficult. Obviously, where it's middle market credit funds, those deals are getting done. It might be a little less leverage, which impacts price. But all of that, we expect will slowly change. How that changes throughout the year, will impact how much the back half picks up in advisory. Hey, thanks, guys. Hey, I noticed on the first page in the press release, you mentioned scaled and diversified roughly three times. And I think historically, we know about healthcare, financial services, and energy more recently, but dating to the Simmons acquisition, what other verticals do you really want to highlight with that statement, Chad? Consumer, industrials, you talked about seven verticals now. Can you just kind of emphasize what you really want us to emphasize, or acknowledge whatâs sort of scaled and diversified? Yes, I would say relative to our investment banking industry teams, financials was by far and away the biggest, had a really good year. Healthcare was the second biggest, and usually is there, but in general, it was a pretty difficult year for healthcare, which is always one of our strengths. A lot of that - we did well in advisory, but a lot of that was just the drop in ECM really impacts healthcare. And then frankly, like you said, energy was really strong for us, a record. I think we acquired Simmons seven or eight years ago, and just obviously the energy market and after a couple of really tough years, energy was strong. But then our other two real scale businesses there are consumer and industrials. And even though they were off the â21 paces, they're still much larger than they were four or five years ago, and help that diversification. And then I would say, the other business that we would like to become significantly bigger and contribute in the same way those other industry teams do is technology. And having done our DBO acquisition towards the end of the year, we expect over time and over cycles, our tech wear and software practice to be much, much bigger. We acknowledge that the - one of the toughest markets in M&A right now is technology. So, obviously, we'll need a recovery there, but we believe over time that business should rival our top three businesses in terms of size. Got it. And then did DBO have much of a contribution in the fourth quarter? And then maybe, what's your appetite and what does the pipeline look for continued tuck-in acquisitions? Yes. So, we closed DBO in October, and no, there wasn't a lot of contribution from new transactions in Q4. And then, what was the second question, Mike? Yes, I would say, if you just look at the track record the last five or six years, itâs really helped us drive scale. And obviously, it gets harder and harder the larger we get, to find sort of white space and good fits. But frankly, some of the best deals we've done have been over time in more challenged markets. So, I would say, we have a good appetite. We are seeing things, obviously in this market, we've got to be careful. Youâve got to look at pipelines. If pipelines are back half-weighted, youâve really kind of got to understand where we're headed there. But yes, we're going to continue to be active as that's a major source of capital use for us. Got it. And then maybe lastly, just for Deb. Deb, fixed income trading seemed to have a really strong 4Q. And I think you called out some of the trading from depository institutions. What do you think is like a quarterly run rate? How should we think of that for the business? Yes. As I was mentioning before, it is so challenging right now. We always say it's hard to look into the crystal ball. And crystal ball here is really foggy just given when do rates settle out a little more. And we talked about looking at the second half of 2022 and believing that we're going to see some improvement from that. But the extent to which we see improvement over that is going to be a little dependent on just volatility of interest rates and more certainty around where they're going to land. And there are no further questions at this time, so I'll turn things back over to Mr. Abraham for any additional or closing remarks. Thank you, operator, and thanks everyone. We look forward to updating you on the first quarter results. Have a great day.
EarningCall_513	Good day and thank you for standing by. Welcome to the ZoomInfo Fourth Quarter and Full Year 2022 Financial Results. At this time, all participants are in a listen-only mode. After the speakersâ presentation, there will be a question-and-answer session. âOperator Instructions] Please be advised that todayâs conference call is being recorded. I would now like to hand the conference over to your speaker for today, Jerry Sisitsky. Please go ahead. . Thanks, Lisa. Welcome to ZoomInfoâs financial results conference call for the fourth quarter and full year 2022. With me on the call today are Henry Schuck, Founder and CEO of ZoomInfo; and Cameron Hyzer, our CFO. After their remarks, we will open the call to Q&A. During this call, any forward-looking statements are made pursuant to the Safe Harbor provisions of U.S. securities laws. Expressions of future goals, including business outlook, expectations for future financial performance and similar items, including, without limitation, expressions using the terminology may, will, expect, anticipate and believe and expressions which reflect something other than historical facts are intended to identify forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section of our SEC filings. Actual results may differ materially from any forward-looking statements. The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law. For more information, please refer to the cautionary statement on the slides posted to our Investor Relations website at ir.zoominfo.com. All metrics on this call are non-GAAP, unless otherwise noted. A reconciliation can be found in the financial results press release or in the slides posted to our IR website. Thank you, Jerry, and welcome, everyone. A year ago, you joined me on our earnings call as we talked about our expectations for 36% revenue growth for 2022. A lot has happened between that initial guidance and now, and even in the face of a more challenging economic environment, we continuously raise our guidance as we move through the year and delivered 47% revenue growth in 2022. We delivered that growth efficiently, with an adjusted operating income margin of 41% for the year and more than $450 million in unlevered free cash flow. In the fourth quarter, we delivered over $300 million in revenue with a 42% adjusted operating income margin, which was up 100 basis points sequentially and up more than 350 basis points from Q4 last year. Structurally, we are a profitable company, and we remain committed to driving topline growth while expanding profitability and efficiently growing free cash flow. This combination of growth and profitability differentiates us from many other growth oriented software companies that have struggled with a clear path to profitability. We have always operated with discipline, efficiency and a focus that allowed us to generate profitable growth and we will continue to do so. While these are good results, we can be doing better. Our customers are challenged by the current state of the economy, within our largest vertical software, companies are laying off employees and cutting back spending. Many companies, regardless of size or vertical, have materially lower growth prospects than they did a year ago. All companies are looking to do more with less. We remain early in the digital transformation of B2B sales and while our platform drives meaningful efficiencies for companies in all industries as our customers reduce their sales budgets and headcount, they take a harder look at all their spending. As we had indicated earlier in the year, the more challenging economic environment has impacted our upsell and cross-sell motions with increased customer scrutiny causing an elongation of sales cycles. The economy has had a direct impact on our business to be sure. But to continue to grow and scale through this time, we will be intensely focused on four priorities, surrounding ourselves with the right people, investing in enterprise solutions, delivering delightful product experiences and executing with excellence and efficiency. I continue to dedicate my energy to those priorities every day. And as I have communicated to everyone in the company, if it is not driving us forward across these four initiatives, it is not a priority. With regard to the first priority, I have made significant changes to the leadership team over the last few months. We announced last week that our CTO, Nir Keren is leaving ZoomInfo. Nir joined ZoomInfo in its startup phase and has helped us grow the engineering team from its very earliest days. I want to thank him for being a strong leader and a great partner. The new executives we have hired bring strong relevant experience, leading great teams, driving customer success and building highly scalable world-class products. These leaders and others across the organization will help create the foundation we need to scale for the next phase of growth. First, Ali Dasdan joins us as our new Chief Technology Officer from Atlassian, where he was Head of Engineering for Work Management, Confluence, Trello, Jira and Atlas. He is coming from an organization that is universally recognized as having the best product led growth motion supported by a remarkably well integrated underlying platform and he brings more than two decades of experience scaling global technology companies. We are excited to have him join the company and lead our innovation and development efforts. Also, Dave Justice is joining ZoomInfo as our Chief Revenue Officer. Dave has more than two decades of experience leading global sales in the software space, serving as Chief Revenue Officer of PagerDuty for the past three years. Between PagerDuty, Salesforce and Cisco, he has helped sales positions at all levels of the organization, with a particular focus on enterprise sales. We need the right people in the right roles focus on the things that matter most and I believe we have that now. With regard to the second corporate priority, investing in our enterprise business, we recently surveyed thousands of ZoomInfo users to understand the impact our tools and data have on their day-to-day productivity, and the value that they derive from the platform. Their responses underscore just how essential we are at a time when companies are trying to hit their targets with fewer resources. 67% of sales leaders reported immediate topline revenue gains after implementing ZoomInfo. Sales development representatives cut their time researching prospects in half. Account executives reduced deal cycles by nearly 40% and increased win rates by more than 45%. STRâs, AEs and account managers increased quota attainment by more than 50% and the average quota attainment with ZoomInfo was more than 90%. 70% of marketers reduced spend due to more accurate targeting and the average recruiter using ZoomInfo reduced the time to higher by 20%. These results tell us that the ZoomInfo platform is mission-critical for our customers and delivers tremendous ROI. With our platform, marketers are able to reduce spend and target leads more accurately. Sales teams spend less time researching and more time selling, and with more accurate data, more than double the response rates. Recruiters find better candidates and get them in the door faster. When our customers win, we win and we will continue to ensure their success as we cement ZoomInfo as the essential revenue operating system for efficient businesses. Our net retention rate, which was 104% was a disappointment this year and in large part reflected the more difficult operating environment. The biggest driver in terms of lower net retention in 2022 was a lower level of upselling as the continued elongation of sales cycles impacted our repâs ability to sell more seats and more data into our installed base. Customers continue to renew as our gross retention rate remained in the 90s, but upsell opportunities were diminished as customers look to cut costs, particularly in the second half. We ended the year with 1,926 customers who spend more than $100,000 annually with us, up approximately 30% year-over-year and advanced functionality now represents 31% of ACV. There is a tremendous opportunity with enterprise customers and we are making it even more of a priority to unlock that opportunity. During the quarter, we closed transactions with leading organizations like Amazon Web Services, Bank of the West, Barclays, Cigna, Edward Jones, Goodwin Proctor, FedEx, Panasonic, ServiceNow, Sodexo and Waste Management. Companies are increasingly looking to work with fewer vendors and consolidate their tech stack. They choose ZoomInfo because our integrated platform aligns sales and marketing teams to optimize conversion and it can expand with them as they grow and develop a more sophisticated go-to-market strategy. As examples, a leading provider of human capital management solutions traditionally only leveraged company data from ZoomInfo to drive their territory planning activities, after a Sales OS pilot that delivered significant ROI in a short amount of time, they rolled out Sales OS to thousands of their account executives expanding their use of the platform. One of the largest financial institutions in the world doubled its investment in ZoomInfo, adding more Sales OS seats and is now integrating our data into sales force for their commercial banking unit, while leveraging intent data to improve their targeting efforts. We are focusing our 2023 development efforts on extending our lead in data excellence, delivering a scalable enterprise experience, developing and training customers on high impact plays that drive go-to-market efficiencies directly from the ZoomInfo platform and investing behind more product led growth opportunities. We will continue to invest in accuracy and coverage to further extend our data leadership and optimize our search experience. We will also invest in more robust bidirectional sync with CRMs and APIs to meet the needs of our enterprise customers, and in holistic signals and unified scoring mechanisms to meet the needs of sales and marketing teams that use ZoomInfo as their shared source of data truth. When I think about building a world-class enterprise experience, it comes down to the scalability and simplicity of our product to create a delightful experience for users. As we move upmarket to serve larger global enterprises and deliver predictable and efficient performance for our customers, our product focus is shifting to driving scalability, automating workflows and simplifying everyday tasks for our users and their admin. We will invest more in enterprise-grade settings and permissions for admin, simplified account setups and integration, in product analytics and performance dashboards for leadership and a better self-guided product onboarding experience to help unlock value along the user journey. In the recent G2 Winter Grid report, ZoomInfo ranked in first place across 29 grids and was listed as the number one enterprise solution in eight different sections. For the eighth straight quarter, we led all four of the sales intelligence, marketing account intelligence, accounts data management and lead intelligence enterprise grids. We are also doubling down on our investments in Marketing OS. We will continue to build out our advertising capabilities related to our proprietary B2B demand side platform, build deeper account based marketing functionality, expand reporting capabilities and invest more in unified scoring mechanisms. Marketing OS is a common upsell pathway after customers have successfully implemented Sales OS, and we are seeing more traction with sales and marketing teams who want to share the same foundational data, tools and processes. We will also invest heavily in supporting our customers to execute high impact go-to-market plays. Customers are looking to do more with less, whether that means with smaller teams or fewer advertising dollars. Being able to take timely action on signal is key to successful and sustainable go-to-market motion. We will continue to invest in both user level workflows enabled through Sales OS and Marketing OS, and organization-wide workflows and workflow management through Operations OS. Scalable workflow supported by our RingLead and DAS offerings have been integral for companies looking to become more efficient and automate time consuming motion. In closing, I am confident that we have the team, the platform and the strategy to win this market. A huge opportunity remains ahead of us and we are well positioned to capitalize on it as more and more sales teams use data and insights to find, acquire and grow customers. Our customers are generating significant ROI and our users are reporting phenomenal results as they leverage the ZoomInfo platform. We have added a number of leaders who will continue to help us grow and scale, and who bring a wealth of enterprise experience and a customer first mentality to the organization. As I mentioned last quarter, while we canât control the macro, we can control how we manage the business. I am all in, the team is all in and we are ensuring that we are consistently delivering the results that you have come to expect from us. While Cameron will be sharing our specific guidance for next year, I will share with you the framework we use in developing our guidance. We have assumed that the economic environment does not get better, and at the low end of the guidance, we have assumed that things get progressively worse. We understand that while our new leadership is great for the long-term, we may see some disruption while the team gets up to speed. We remain steadfast in our belief that we will continue to expand profitability and we will continue to lead with efficiency, focusing on compounding free cash flow growth over the long-term. Thanks, Henry. In Q4, we delivered revenue of $302 million, up 36% year-over-year, which implies 5% to 6% sequential growth compared to Q3 2022. Excluding the impact of products acquired within the last 12 months, our organic revenue growth for the quarter was 34%. Adjusted operating income in Q4 was $127 million, a margin of 42%, up 100 basis points sequentially and up 360 basis points compared to the fourth quarter of last year. For the full year, we delivered revenue of $1.1 billion, up 47% compared to 2021 and meaningfully better than our initial full year guidance of 36% growth. Organic revenue growth in 2022 was 41%. Adjusted operating income was $448 million, a margin of 41% and unlevered free cash flow was $457 million. We were GAAP profitable for the year, with net income of $63 million in GAAP EPS of $0.16 per share. Non-GAAP EPS was $0.88 per share. We are initiating guidance for 2023 with revenue growth at 17% at the midpoint, with an implied AOI margin of 41%, up 50 basis points compared to 2022. For 2023, we expect to deliver $512 million in unlevered free cash flow at the midpoint of guidance, which implies more than $450 million in free cash flow for the year. It is no secret that the tech sector is seeing layoffs and companies regardless of vertical are being pressured to cut costs and drive efficiency. We believe that our focus on driving an efficient go-to-market motion for our customers, and the strong and near median ROI from our platform provides across verticals has enabled us to continue to deliver a leading combination of revenue growth and profitability even in this more challenging environment. Longer sales cycles and the increased time our reps are spending on renewals has impacted our ability to upsell and cross-sell existing customers, which was a meaningful driver of growth and net revenue retention expansion in the past. As Henry indicated, net revenue retention for the year was 104% as we operate in this more challenging economic environment. Bridging from our prior net revenue retention, the biggest driver, approximately 10 points of the change was driven by reduced upsell. Similar to many other software companies, our sales reps continue to spend more time on deals and renewals than they have in the past, limiting their ability to drive more upsell opportunities with existing customers. In addition to adding more capacity, we have shifted account loads, reallocated resources to hire potential customers and automated low end tasks, creating the potential to improve efficiency. While we believe these efforts will yield positive results, we are cognizant of the ongoing macro challenges and acknowledge that our improvements could be offset by further deterioration in buyer sentiment and behavior. As a result, we think it is prudent to model net revenue retention at lower levels for the foreseeable future. New customer additions remain a larger driver of revenue growth in 2023 and our expectation is that will continue to be true in 2023. International customers contributed 13% of revenue in the quarter, which grew 49% relative to Q4 2021. International markets are seeing a similar and in some cases worse economic environment relative to the U.S. During the year, we grew our employee base approximately 30%, which was slower than revenue growth. In the second half, we intentionally moderated the pace of headcount growth, raised the bar with respect to performance and eliminated some positions. As a result, we are currently at a headcount level below where we ended September. In 2023, we expect to realize operating leverage in the business as we continue to grow our overall team less quickly than revenue while focusing on adding sales capacity. Turning to cash flow, operating cash flow in Q4 was $120 million, which included approximately $6 million of interest payments. Unlevered free cash flow for the quarter was $122 million or 96% of adjusted operating income. For the full year, unlevered free cash flow was $457 million or 102% of adjusted operating income, yielding a margin of 42%. Going forward, we expect unlevered free cash flow conversion in the range of 95% to 100% for the year. With respect to the balance sheet, we ended the fourth quarter with $546 million in cash, cash equivalents and short-term investments. At the end of Q4, we continue to carry $1.25 billion in gross debt, all of which has fixed or hedged interest rates, with about half of that coming due in 2026 and the remainder coming due in 2029. Additionally, we successfully transitioned from LIBOR to SOFR during the quarter. We again drove an improvement to our leverage ratios, with a net leverage ratio of 1.5 times trailing 12 months adjusted EBITDA and 1.3 times trailing 12 months cash EBITDA, which is defined as consolidated EBITDA in our credit agreement. This represents approximately a full turn improvement from the beginning of the year. With respect to liabilities and future performance obligations, unearned revenue at the end of the year was $420 million and remaining performance obligations or RPO were $1.1 billion, of which $842 million are expected to be delivered in the next 12 months. We believe that calculated billings, bookings and RPO are imprecise metrics to assess in-period activity and forward momentum. Because of the inherent noise in those metrics, we focus on days adjusted sequential revenue growth, which was 5% in the fourth quarter. As we move to guidance, we have developed a prudent set of assumptions. The low end of guidance includes an expectation that there is a further deterioration of the macro environment and buyer sentiment in 2023, as well as some near-term disruption as we onboard new leaders. With that, I will provide our outlook for the first quarter and initial outlook for the full year 2023. For Q1, we expect revenue in the range of $299 million to $301 million, reflecting the fewer days of recognition -- revenue recognition in Q1 relative to Q4. We expect adjusted operating income in the range of $118 million to $120 million and non-GAAP net income in the range of $0.12 -- $0.21 per share to $0.22 per share. Our Q1 guidance implies year-over-year revenue growth of 24% and an adjusted operating income margin of 40% at the midpoint of guidance. We are providing initial full year 2022 guidance as follows. We expect revenue in the range of $1.275 billion to $1.285 billion, adjusted operating income in the range of $523 million to $533 million and non-GAAP net income in the range of $0.98 per share to $1 per share based on 418 million weighted average diluted shares outstanding. For unlevered free cash flow, we expect to generate between $507 million and $517 million. Our full year guidance implies 17% revenue growth at the midpoint and both adjusted operating income margin and unlevered free cash flow margin at or above 40%. Thank you. One moment while we prepare for our Q&A session. First question that I have is coming from Mark Murphy of JPMorgan. Your line is open. Yeah. Thank you very much. So I wanted to drill in, just given your exposure to the software vertical, I believe itâs around 40% of ARR. What are you embedding into the guidance there? In other words, do you assume that this wave of layoffs continues to intensify through the year? We hear of SDR teams being let go and that that would put more pressure on seat expansions into the software vertical or do you see a scenario where perhaps that would kind of level off sometime in the next couple of quarters? And then I have a quick follow-up. Yeah. Thanks, Mark. And certainly our guidance contemplates that we continue to see a challenging macro environment and I think that would be continuing to see layoffs occur. We did experience a bunch of that in Q4, as I am sure you can imagine, and the guidance assumes that things will get worse as we go through the year. Okay. As a follow-up that we had heard some feedback that seat growth is obviously very, very sluggish, very challenged out there broadly across the entire software vertical. But that -- there are cases where companies are continuing to consume kind of the bulk credits or the data credits, is that something that aligns with your observations or do you think the trajectories are pretty similar if we toggle between the seat growth and the bulk credit growth? So I think that when you look at the -- look internally at the results, the bulk credit usage is performing better than the seat growth or at or NEC downsell that we see and part of our strategy for 2023 has been to focus on our Data-as-a-Service offerings, our RingLead plus enrichment offerings, our Databrick that are available inside of Snowflake and Google BigQuery and Amazon AWS. Those are performing better in this environment. Okay. And sorry, one final question for you. Cameron, I believe you are guiding above actually on the unlevered free cash flow for 2023. I know itâs above our model. Could you remind us what is it that is underpinning your ability to preserve margin like this and to drive free cash flow better than the rest of the industry even when we have such challenges out there in the environment? We are continually focusing on managing the business and driving kind of better margin. Overall, I think, our expectation is that, operating income as a percentage of revenue will increase by about 50 basis points in 2023. We are expecting a little bit less free cash flow conversion. But, overall, obviously, we are laser focused on continuing to be efficient and drive efficiency in the business, which has been a core thesis of ours since I have been here. Thank you. One moment while we prepare for our next question. And our next question will be coming from Elizabeth Porter of Morgan Stanley. Thank you so much for the question. I first wanted to ask just about the management changes. Can you provide some more clarity on what Dave is expected to change within the sales organization and how we should think about the impact from disruptions? Is it something that might take us the quarter to work through or is it going to extend through a greater period of time? Thank you. Yeah. So we are super excited about having Dave here. If you followed his tenure at PagerDuty, Dave was known for building a really strong land-and-expand motion and re-architecting that business for growth. He has a long tenure of enterprise leadership and thatâs an area where we believe we have a tremendous amount of opportunity. So where we think we are going to get quick impact from Dave is really driving that land-and-expand motion within our customer base and really driving our opportunity within the enterprise. We are especially excited about that. From a timing or a disruption perspective, we are hopeful that Dave hits the ground running quickly and heâs making an impact right away. That being said, we are being really conservative about that impact, and when we guide forward, we are assuming sometime of disruption before we are feeling the full impact of his tenure here. Got it. And then just as a follow-up, I think, that the headwinds on kind of the expansion of seats are pretty well understood. But I was hoping if you could give some more color on just the top of funnel demand trends and changes over the last three months and kind of what the outlook on particularly the new customer side is thatâs incorporated into guidance? Yeah. Sure. So with respect to guidance, we are expecting that the environment becomes more challenging in 2023 and that includes both the customer side, as well as a new sales side, where we are expecting flat to lower new sales in 2023 versus what we what we had in 2022. I think from a pipeline perspective, we continue to see more pipeline than we have ever had, and win rates are actually modestly starting to improve if we look at Q4 relative to what we have seen previously. Thank you. One moment while we prepare for our next question. Our next question is coming from Raimo Lenschow of Barclays. Your line is open. Hey. Thank you. Could we talk a little bit about the seasonality that you guys are expecting for the year? So the issue on the kind of missing upsell or less upsell is kind of something that should kind of play out as people come up for renewal. So should I just kind of think about that thatâs kind of being like a Q1, Q2, Q3, Q4 until you go through this big one year of renewals and then are we kind of there or is there the other factors we should think about? So I think when you think about seasonality, Raimo, I think, that thereâs potential upside as we lap people that have maybe down sold, because they went through a restructuring of their firm or down sold for another reason as we get into the second half of the year. But thatâs not explicitly contemplated in terms of our guidance. So I donât -- we donât see evidence of that happening yet, and certainly, while it may be upside, I wouldnât -- we are not counting on that being a big driver of growth this year. Yeah. And then if you think about the -- obviously, we kind of have like every week almost or every day like an announcement where people are looking at their internal kind of cost internal investment levels, et cetera. You, obviously, as Henry, as you said, you were always kind of much more profitable and much better build. Like how do you think about this dynamic about like revisiting some of the stuff internally? We have a process where we do revisit our kind of trajectory and plans on a monthly basis and make bigger moves on a quarterly basis. So, yeah, I think thatâs a big part of the reason why we were able to look at our business as we were exiting Q2 and into Q3, adjustment of our kind of hiring plans and investments, and drive to an improvement in the as we got through to the end of the year. Thank you. One moment while we prepare for our next question. And our next question will be coming from Siti Panigrahi of Mizuho. You can go ahead. Your line is open. Hi. Siti Panigrahi. Thanks for taking my question. Just want to ask on NRR 104%, so looking at that upsell opportunity, Henry, what can you do to improve the upsell opportunity? Are you seeing the demand, is it more on the company go-to-market strategy changes that can drive demand or whatâs your view on upsell -- driving more upsell given the RevOS platform you built last couple of years? Yeah. I think the part of the way that we are thinking about this is, where do our -- where do we see the most opportunity within our customer base. And we see a tremendous opportunity in the enterprise, we see it around our Marketing OS products and our DAS product. And so really making sure that our organization, our go-to-market organization, is designed to go after those opportunities is how we are thinking about it and so we have made a number of ships in the back half of the year to make sure that we are resourced to drive data as a service, to drive Marketing OS, which are higher dollar ASP into that enterprise and upper end of the mid-market customer base. We think that will drive efficiency and will use our resources the best. When our customers buy our Marketing OS platform, the ASP is over 5x our average Sales OS pricing. When our prospects by our Marketing OS platform, the ASP is over 3x our sales is pricing. And so itâs looking for opportunities where the return on our resource investment is the highest and making sure that we have our resources dedicated to those areas. And -- thanks for that color. And when you think about growth opportunity, where does international expansion stand, what are you seeing right now on the international front? We continue to have a strong international team thatâs driving new business and expansion. But certainly, I think, there are areas particularly we were most focused in Europe where the economic environment might be more challenging than in the U.S. So I think that long-term, thereâs a real opportunity for international to be a much larger percentage of overall revenue, but thatâs not something that I think we see in the short-term. Thank you. One moment while we prepare for our next question. Our next question will be coming from Brad Zelnick of Deutsche Bank. Your line is open. Oh! Excellent. Thank you so much for the question. First for you, Cameron. Just if we look at the Q1 sequential guide, I believe you have guided to 2% sequential growth days adjusted. So just curious, what trends are you seeing in January that inform your view and if anything has really changed or downtick in terms of your view into customer budgets this year? Yeah. So I think there are two things. January has gone reasonably well. We actually had less change in linearity with respect to Q4, where there was less activity in the last couple of weeks of the year that is partially impacting Q1 as well. And additionally, certainly, Q1 and -- is the kind of timeframe where we are at least contemplating some disruption from the management changes that we have executed, and therefore, I think, we want to make sure that we are prudent with respect to the guide there as well. I would add that our pipeline in January was the strongest itâs ever been. We generated more MQLs than we ever have in our history. So thereâs real demand out there in the market for our products. But ultimately, what we are ending up seeing is customers are waiting, they are not making purchase decisions at the level -- the velocity levels as they were a year ago. But there is real demand out there. We are generating it. We are generating that pipeline and so we will continue to do that and feel like as the uncertainty phase will be in a really great position to accelerate through that. Thatâs helpful color. And Henry, maybe a follow-up for you, your message has been fairly consistent to say that the headwinds you faced to date are macro related, which makes complete sense. But now you are bringing in a new CRO from the outside, which you are saying could potentially be disruptive. Why is now an external CRO the right hire, especially by the way, given your unique go-to-market? You got somebody externally thatâs going to bring their experiences and I guess whatâs the risk or opportunity, frankly, to modify your go-to-market under Dave to be more like some of the other great companies heâs worked for in the past? I think the big thing that we know today is that, there is a real growth opportunity within our enterprise customer base. Today, we have 35,000 customers and we are driving real growth across our enterprise customers. But when we look within the enterprise, we think we can significantly accelerate that and so bringing in a Chief Revenue Officer who has a ton of experience within the enterprise, this felt like the right time to do it. We see that segment as the biggest growth opportunity and we wanted to bring somebody in who had significant experience in that land and expand motion and especially across the enterprise. Thank you. One moment while we prepare for our next question. And our next question will be coming from Brian Peterson of Raymond James. Your line is open. One for Cameron. Just given the magnitude of the kind of upsell, down-sell dynamic of the 10 points you referenced. Iâd love to understand any linearity changes you can provide third quarter, fourth quarter, how did that trend? And I think you mentioned that we should be modeling a lower NRR going forward, what was the reference point on that, is that versus the 104%? I just want to make sure we are all clear on what that comment meant? Thanks, guys. Yeah. So the reference point there is against the 104%, which is -- reflects the activity that we saw for the year. Certainly, most of our -- kind of most of our backlog from 2021 expired in the last four months of the quarter when we are seeing a lot of macroeconomic pressure, so I think that we are expecting that, that will continue and perhaps get worse in 2023, and therefore, I think, the expectation is, is that at least base case that, net revenue retention could be lower in 2023. Thanks. Anything on the linearity of how that trended over the course of the year, I donât know if you could comment on fourth quarter versus third quarter or how that progressed over the course of the year? Yeah. And it certainly got worse as particularly in the last four months of the year. That being said, if you are waiting the environment, almost half of our bookings from 2022 or 2021 were in those last four months, which is a good indication of when we are renewing those contracts as well. Thank you. One moment while we prepare for our next question. Our next question is coming from DJ Hynes of Canaccord Genuity. Your line is open. I am sorry, Brent Bracelin of Piper Sandler. Your line is open. Okay. Perfect. A little confusion there. Maybe I will start with you Cameron here. As we think about what sounds like an increasing enterprise opportunity and enterprise focus going forward, what is the revenue split today as you think about customers over $100,000. What are they generating overall of the mix versus the smaller customers? And then one quick follow-up for, Henry, if I could. Yeah. So the $100,000 customers generate roughly 45% of overall revenue. And yeah, I think that, the number of customers has grown, but also the revenue on a per customer basis is the highest level we have seen. Got it. Super helpful color there. And then, Cameron, I guess, the million dollar question here is really how quickly and what else are you contemplating besides the new CRO to really accelerate the pipeline and the pipeline build outside of software? Clearly, you have built a great business, de facto standard in that kind of software ecosystem. How do you replicate that outside of software and how fast can you pivot? I think, first, we are. The rest of the industries outside of software are growing faster than our software and technology base of customers. We talked about companies like Waste Management and Barclays and ABM Industries, who are large clients of ours, Capital One. And so we continue to grow our share in non-tech companies. They also present a really large opportunity for us in the enterprise that we are focused on. We will do some specific vertical mapping as well in the customer base and so for the first time, we will have account managers who are aligned to a financial services vertical and account managers who are aligned to a business services vertical. So itâs a little bit more specialized service that where they can build relationships with the customers and put ourselves in a position to continue to upsell within those non-tech customer -- in that non-tech customer base. Thank you. One moment while we prepare for our next question. And our next question is coming from DJ Hynes of Canaccord Genuity. Your line is open. All right. We are back. Hey, guys. So, look, in the context of the layoffs we are seeing in the tech space, when you have customers coming to you, looking to trim back on their commitments, what are the levers you have in place to stave off that partial churn, like, are you throwing in additional modules to preserve ACV, like how often is that happening? Any color on that front would be helpful as we think about NRR dynamics. Yeah. So, and certainly, we have seen a reduction in seats driven by layoffs and that impacts both upsells and downsells and that definitely occurred in Q4. We are always looking to run plays against that and those plays obviously include additional functionality or looking for other pockets of the organization that could benefit from our software. But realistically, those plays havenât worked as well as we want to, particularly given that the buyer behavior is much more fragile in that moment when people are executing a restructuring and kind of worried about their own team. But in some cases, we do see that work, but in many cases, particularly here in Q4, Iâd say that, there was an impact related to that. Yeah. Okay, okay. And then, Henry, a follow-up for you, whatâs the appetite for M&A in 2023? I mean do you batten down how it catches, make sure the house is in order first or do you want to be opportunistic as a consolidator of some of your peers I am sure are facing similar challenges? Look, thereâs nothing on the near-term horizon from an M&A perspective. Short-term, we are really just focused on driving the business. Our criteria around M&A remains the same, but Iâd tell you we have a much higher bar around this and so the criteria around improving the customer experience fits within the go-to-market motion is accretive in the short- to medium-term. We are going to be meaningfully more selective in this environment, and again, nothing on the near-term horizon and I am pretty focused on making sure we are driving the business, landing these executives and growing the topline and doing that profitably. Thank you. One moment while we prepare for our next question. Our next question is coming from Alex Zukin of Wolfe. I am sorry, the participant just jumped. Itâs Taylor McGinnis of UBS. Hi. Thanks so much for taking the question. So it sounds like in terms of growth drivers this year that new business is expected to hold up. So, Cameron, can you just give some color on the mix of new logo versus existing maybe implied in this growth guide this year and how that might compare to last year or what we have seen historically? Well, when you look at the organic growth of 34% in the quarter and net revenue retention at 104% that obviously implies that the remainder of that, roughly 30% came from new business in 2022. I think our guidance certainly contemplates both new business and net revenue retention will be challenged. So Iâd expect that new business is likely flat to down based on a deteriorating level of buyer behavior and the macro environment, and that similarly net revenue retention will be more challenged as well. Got it. Thanks. And just one follow-up is just on margins, so with the potential for NRR to deteriorate and I guess some of the risks that you mentioned on the sales side and continued investments in capacity. Does that serve at all a risk to the margin upside this year, and if not, maybe you can just talk about the areas of leverage that serve as an offset? Yeah. So we are always focused on being more efficient and harvesting the operating leverage thatâs natural in the business. As you mentioned, the -- with a more challenging environment that, obviously, impacts our efficiency with respect to sales and marketing, but we do expect to be able to realize operating leverage from other areas of business. I expect cost of revenue to decrease as a percentage of revenue, and probably, be the biggest driver of operating leverage, but we will also get some from G&A and even from R&D as we get further into the year. Thank you. One moment while we prepare for our next question. Next question is coming from Alex Zukin of Wolfe. Your line is open. Yeah. Hi, guys. It sounds like having some Operator trouble today. But, Henry, first question for you, I guess, with respect to the sales cycles, the demand environment, do you feel like we have reached kind of peak uncertainty or at least a trough in terms of the demand and is it getting better or is it still the level of uncertainty persisting kind of in real time in the market? And have you had to deal with more competitive intensity, particularly on calls as cost is often mentioned as an issue with respect to actually getting deals done? Yeah. Look, there hasnât been any material change in buyer behavior that we are seeing out in the market as it relates to uncertainty or the macroeconomic environment. So we havenât seen any change in that. What I will tell you from a demand and pipeline generation perspective. January, we saw our largest pipeline we have ever generated. We are generating more MQLs than we have had in our history. When buyers are buying, they are buying decisively and at strong ASPs and we are seeing less competition in our deals in Q4. And where we do see competition primarily in the SMB segment of our business, we are seeing the highest in month win rate ever for a non end of the quarter month and so all of that tells me that while there is room for improvement from an execution perspective, it really is customerâs uncertainty about the broader economic environment thatâs holding us back from delivering more topline growth. So as the uncertainty fades I am confident that we will be in a great position to accelerate out, we havenât seen that stating yet. Perfect. And then Cameron, for you, on the margin side, if I look at the free cash flow margin guide versus the operating margin guide, they are a little inverted from where they have been previously. Historically, free cash flow margins have exceeded operating margins, so just walk us through kind of what are the assumptions there. And then in general, obviously, we all love to see margin leverage, but with the growth moderating and modulating to the extent that it is, do you -- kind of what is the decision point when you potentially unlock greater margin leverage, is that in the cards or not? Sure. So with respect to the free cash flow conversion, we are expecting free cash flow conversion to be at 95% to 100% this year as opposed to historically rose above 100%. And the real big factors that impact that are really, A, that our customers are shifting a little bit more to pay quarterly or at least not annually upfront. That certainly has an impact on the kind of cash flow part of the unlevered free cash flow conversion. And additionally, lower growth impacts the weighting of those upfront payments in the second half of the year. So that is another impact. With respect to unlocking the ultimate margin growth, certainly, our expectation is, is that we will be able to improve sales and marketing efficiency over time, particularly as the environment stabilizes a little bit more and that will enable us to either accelerate growth when we get to that stabilization point or harvest more of that operating leverage that you would expect on the sales and marketing side. Thank you. One moment while we prepare for our next question. Our next question is coming from Parker Lane of Stifel. Your line is open. Yeah. Hi, guys. Thanks for taking the questions. Cameron, when you look at the cohort of customers that have announced layoffs or cost reduction plans. Can you give us a sense of the share of them that have already come up for renewal and as we think about 2023, do you the impact of those renewals be evenly spread through the year or more skewed towards the third quarter, fourth quarter timeframe that you referenced earlier? I think that the kind of timing of those renewals are maybe slightly more kind of set into Q4. So I think thatâs when we have a bigger cohort of software companies that are renewing. So we have seen a bunch of that, either people that already announced and then come up for renewal or in some cases, people who are renewing with an expectation that something like that might happen. But, overall, itâs not that heavily weighted to Q4, so Iâd expect that itâs a similar percentage to the almost half of our customers that are renewing in the last four months of the year and the remaining renew in kind of the first eight months of the year. Got it. And then a quick follow-up here, circling back to the headcount reductions that you said that you did during the September to year end timeframe. Was that pretty evenly distributed across the organization or were there particular areas that faced a higher degree of headcount trimming? Thanks. We are super focused on continuing to raise the bar in terms of our performance expectations. So while it may have been somewhat more focused in R&D areas or G&A areas, it was pretty consistent across the Board in terms of really making sure that we have the best team around us and that we have team members that are supporting the overall growth of the company. Thank you. One moment while we prepare for our next question. And our next question will be coming from Koji Ikeda of Bank of America. Your line is open. Yeah. Hey, guys. Thanks for taking the questions. I wanted to go back to net revenue retention. You ended the year at 104%. And I believe you said maybe a good place to start is a tableau that for 2023, so I guess a tableau that, call it, I donât know, 102%, would you categorize that as an improvement from the exit MRR rate for the fourth quarter? Your first question there. And then thinking about the 17% guide for 2023, assuming that low single-digit net revenue retention, mid-teens growth coming from new customers, I guess the question is, maybe where are you most excited from a vertical perspective outside of software or maybe what products are you most excited about as growth drivers for 2023? Thanks, guys. So, Koji, I will start with the first part. Yeah. I think that, certainly, in relation to our guidance, 102% would be higher than whatâs implied there. I think we are expecting, particularly in a worsening environment that we will see retention below that. I will let Henry go into the kind of most exciting other verticals. Yeah. I think we are seeing a lot of success in financial services. Thatâs one of the key areas that we have reorganized specialists across on the account management side and see continuing opportunity there. You see quotes in the slides we included from Capital One that ZoomInfo will become an integral part of their business, without it, there will be a huge gap in the sales enablement strategy and they would be scrambling to figure out how to fill. We think that, that same sentiment applies to any financial services company that sells to other businesses and so we think we can really capitalize on that. I think in addition to that, I have mentioned the success we are seeing in Marketing OS, our new ABM platform, where we are seeing ASPs on the customer side at 5x over average Sales OS pricing and we are seeing ASP on the new customer side, prospect side at 3x over the Sales OS pricing. And so people are really understanding the value unlock that you get when you deploy an ABM platform, but also the unlock you get when you align sales and marketing together with sales on Sales OS and marketing on Marketing OS. And in addition to that, we continue to see better net retention stats with our Data-as-a-Service platform and products. And so we continue to invest behind that and we see a good uptake of those products inside of the upper mid-market in the enterprise and so we will continue to focus on DAS, which includes our enrichment solutions and RingLead and our Marketing OS ABM platform. We see those as meaningful drivers in todayâs economic environment and we feel good about those. Thank you. One moment while we prepare for our next question. And our next question is coming from Michael Turrin of Wells Fargo. Your line is open. Hey. Thanks. Appreciate you taking the question. So I mean there are some moving pieces in the guide from the full year relative to Q1. The optics are flat sequential growth is in Q1 than a return to sequential growth. You have talked about days adjusted a little bit, but also worsening macro. So can you just help us out by maybe spelling out how much of the days adjusted portion impacts Q1 and what else we should be just taking into account from a model perspective and thinking through the sequential growth trend beyond for the rest of the year? Sure. So because there are fewer days in Q1, there are 90 days versus 92 days in Q4, thatâs roughly a 2% headwind to the absolute level of revenue that you will see. So the revenue guide at the midpoint implies a 2% sequential growth improvement, and our expectation is that, particularly given that the linearity in Q4 is different than it normally would be that the seasonality of Q1 is a little different than what you would have normally seen historically. And then, I think, just by doing the math, you will see a slightly better sequential growth in the latter part of the year based on getting to the 17% overall growth. And just -- I mean just squaring the improving sequential growth with the worsening macro. So just help us understand your -- just the inputs you are using and what informs that just so I think just so itâs clear on the call. Yeah. So, certainly, I think, in starting out the year, we do have a higher mix of ramped sales folks. So our ability to go out and get through the pipeline that we have has improved and we will continue to grow that capacity over the course of the year. And then -- but then we do have an assumption embedded within the guidance, but we will see some disruption in the early part of the year related to the management changes that we have instituted. Thank you. One moment while we prepare for our next question. And our next question is coming from Terry Tillman of Truist. Your line is open. Hi, guys. Thanks for taking the question. This is Joe Meares on for Terry. Just the first one, in the context of the weaker economy, can you give us some updated thoughts on your ability to drive vendor consolidation and displaced point solution vendors in areas like conversational intelligence and sales engagement? Yeah. Definitely. We are continuing to drive consolidation, particularly around sales engagement providers, conversation intelligence, products and ancillary data providers, data partners. We see that as a meaningful part of our strategy in 2023 and we will be releasing in February an integrated experience that brings sales engagement and conversation intelligence natively inside of the Sales OS platform and so we are excited about that and so we are continuing to look for and drive consolidation opportunities. They are around those three things, sales engagement, conversation intelligence and then ancillary data providers. Great. Thatâs helpful. And then just as a follow-up. Last quarter, you noted an eight-figure expansion, your largest expansion ever and you also had a $1 million plus land, which was your first ever that size. I am just curious if there are any more successes like you speak of in the fourth quarter and how does the macro effect the size of your land and the logos? Thanks again. Yeah. We didnât give the name of the company, but we talked about an HCM company that grew thousands of additional seats across their sales and account executive teams. That was a seven-figure transaction that happened in the quarter. That leaves a lot of room for expansion, too. In a typical deal, what you would have saw on that transaction in Q4 was instead of being across, call it, 2,000 seats you would have seen that be across 7,000 or 8,000 seats. So it ratchets back in Q4, but we still see tremendous upside to grow there. So thatâs one of the examples of sort of large transactions we saw in the quarter. Thank you for your question. One moment while we prepare for our next question. And the next question will be coming from Jacob Satel [ph] of Goldman Sachs. Your line is open. Hi. Thank you very much, Henry and Cameron. You guys are probably arguably the first to see the impact of the downturn, because people are cutting back on sales and even when they announced the layoff. Their intention is to clearly freeze activity on the front office side as it relates to productivity tools. But your product also has tremendous productivity at the same time. We really love a lot of statistics. So what is holding back the customer, because it is very useful, especially in this economy, right? Secondly, letâs just go with a logic that it is very useful, too, shouldnât we start to see the benefit, because since you are early to see the cutoffs and the layoffs, shouldnât you be the first to start to see the improvement especially, because I look at your CRPO in Q3 of 2022 that start to show some signs of new business struggle? So we have easy comps coming up in third quarter. We will have cycled through the layoffs, hopefully, over the next couple of quarters, the industry probably stabilizes. So wouldnât you see better business conditions in the second half based on this logic or if I am out to lunch with this, please let me know? Thank you. And I think that logic certainly outlines an upside case, but the way we operate our business is we donât necessarily kind of hope for the upside. I think we are looking more to drive better efficiency of our teams. And ultimately, I do think that, as we do see stabilization in the environment and largely in terms of buyer behavior but also the macro that there is an opportunity for us to accelerate. I just -- I donât necessarily have the crystal ball to say that thatâs definitely coming in Q3 or whenever else. But so, I think, we will see when that occurs. But certainly, I think, we are really investing into the company at this point in order to have the potential to realize that upside when the environment stabilizes. Got it. And I would add, look, itâs still really early in this category, which means that itâs still an evangelistic sale. Our category is not a Gartner-blessed budget line item. So executives are in condition to think of our value-add as table stakes for their organization. And then we are selling into a challenging environment in our customer base within tech companies, we have exposure there and the slowdown isnât unique to us. If you look at other companies in our space who sell sales products to B2B organization, you see a similar trajectory and slowdown. We obviously donât expect that slowdown to last forever and we are incredibly confident as that uncertainty fades away that we are going to be able to accelerate through it. Got it. Henry and Cameron, if you take the non-tech slice of your business, which is remaining 50%, 60%. What are the business trends there and what is the net new ACV or revenue growth rate there and how much better is it relative to your guidance for the overall company? Thank you so much. Thatâs it for me. Yeah. So, and it is better, I wouldnât say that, itâs so meaningfully better that you would expect a totally different outcome. I think for what we have seen in Q3 and Q4 is that, software is more impacted, particularly from a layoff perspective, but all companies are looking to cut costs. They are looking to really manage into is perceived recession thatâs coming, so I think itâs challenging regardless of vertical. I mean, yeah, look, I definitely focus more on buyer behavior than I do on the macroeconomics. I think throughout this past year, they have been aligned. But, yeah, itâs more a question of whether buyer behavior changes than just what happens in the economy. Thank you. This concludes todayâs Q&A session. I would like to turn the call back over to Henry Schuck for closing remarks. Great. Thank you everyone for joining us tonight. We look forward to sharing our continued progress with you at our upcoming investor events. Thank you.
EarningCall_514	I would now like to turn the call over to Angela Bitting, Senior Vice President of Corporate Affairs and Chief ESG Officer. Thank you, operator. Good morning, everyone. I would like to thank all of you for joining us today for the Twist Bioscience conference call to review our fiscal 2023 first quarter financial results and business progress. We issued our financial results release this morning, which is available at our website at www.twistbioscience.com. With me on today's call are Dr. Emily Leproust, CEO and Co-Founder of Twist; and Jim Thorburn, CFO of Twist. Emily will begin with a review of our recent progress on Twist businesses. Jim will report on our financial and operational performance. Emily will come back to discuss our upcoming milestones and direction, and then we'll open the call for questions. (Operator Instructions) As a reminder, this call is being recorded. The audio portion will be archived in the Investors section of our website and will be available for 2 weeks. During today's presentation, we will be making forward-looking statements within the meaning of the U.S. Federal Securities Laws. Forward-looking statements generally relate to future events to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize and actual results and financial periods 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 as well as those 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. Thank you, Angela, and good morning, everyone. For the first quarter of fiscal '23, we reported revenues of $54.2 million, consistent with our guidance shared on our fiscal year-end call in November, and we posted strong orders of $64.7 million. When we turned the first quarter across SynBio and NGS is a story of an expanding customer base, making it for a larger percentage of our revenue, meaning that we are lending more customers with an increasing potential to extend within existing accounts. Beginning with SynBio, we reported revenues of $21.7 million, above our guidance of $21 million. In addition, we reported orders of $26.6 million. We continue to ship our clonal genes starting at 10 business days. Gene Fragments and Oligo Pools in ex U.S. 5 days, and we see this consistent around time benefiting our expanding share of the DNA buyers market. We shipped our first revenue [indiscernible] products out of the Factory of the Future last week, which, as we said previously, means that we are now delivering the same products with turnaround time equivalent to our South San Francisco site. We shipped Oligo Pools and Gene Fragments from our Wilsonville site and leveraged our low balancing software to send orders to the right location. And we expect to be shipping clonal genes next month. In addition, we'll be focused on decreasing turnaround time for clonal genes significantly with the launch of our fast genes offering expected this fall, which will enable us to tap into new markets, specifically with DNA makers market. We shared our competitive advantage across all platforms during our Factory of the Future visit at the end of November. Virtually every product we make build out of our silicon platform to manufacture synthetic DNA at scale. This front-end proprietary advantage enables a significantly different variable cost profile for Twist Oligo synthesis, which then feeds into all of our product lines. Speaking specifically to the cost of making a gene, today, our variable cost for oligo synthesis is less than $1 for clonal genes, with total viable cost of approximately $35 to $40 per gene. This cost profile enables us to continue to serve our customers as the low-cost, high-quality provider, while still achieving a contribution margin of 65% to 70% for SynBio products. In addition, a key component of our cost advantage is the scale we have built and continue to drive. Moving forward, we expect to continue to leverage this advantage to pursue the customers who currently make their own DNA because they need it faster, the group we call the DNA maker. We believe we'll be able to command premium pricing for these genes. To provide a bit more context around who makes the makers market, these are medical and academic research scientists who make their own DNA rather than buying. We know from the Bureau of Labor Statistics field research that as of 2019, there were 270,000 of these scientists in the United States alone. These are all potential customers. We believe the maker market is the right for disruption with wrapping DNA synthesis and within reasonable price offering. While the process of price discovery to analyze the way to maximize margins for this particular product. Genes are available today from competitors at a fast turnaround time but their capacity is limited and the cost can be up to $1 per day, which is cost primitive for most researchers. The analogy of a market that has been disrupted in a similar way, they use engineers to purify DNA. It was a complicated process that requires making it better and many time-consuming steps. This market was disrupted by offering a kit that contain a ready-to-use components to make the process simple and seamless. Initially, some scientists exited it, it's whether based on price, but today, these kits are used globally due to . We see a direct parallel here in commencing DNA makers into DNA buyers by applying similarly appealing products to convert behavior. Beyond 5 genes, we believe we have an opportunity to launch additional products out of our Wilsonville facility, including RNA, long fragments, and GMP DNA. Moving to NGS. We reported revenue of $24.4 million, just short of our guidance and orders of $31.2 million for the quarter. As we shared last quarter, we see another back-half loaded here, with larger customers ordering in the last 2 quarters of our fiscal year. As expected, we saw a few key customers move orders out from December into the first calendar quarter. We remain confident in our fiscal year guidance that NGS will continue to grow substantially year-over-year. We see this business continue to expand with new sequencing offerings and game-changing clinical application. Our targeted solution leverage, the higher degree of shipment [indiscernible] from our oligos. Therefore, our solution decreases the cost percent for our customers, and we are essentially selling a gross margin improvement. We continue to work with the various existing and new sequencing companies, and we are sequencer agnostic. As this cost of sequencing comes down, we believe volumes will continue to increase as we have seen over the last 2 decades. Importantly, we believe that for indications like oncology, where clinical applications, including liquid biopsy and minimal residual disease require deep sequencing, panel and exome sequencing will continue to be the mainstay. And we see the reduction of sequencing costs driving reimbursement across key areas, encouraging access by a broader group of patients, which will create subsequent volume increases. In addition, we continue to expand our COVID control offering in new disease areas as well as cancer with our latest COVID control release during the quarter. While we see consistent ordering, it is not material due to evolving nature of the pandemic. As a royalty note, we do not plan to file a 510(k) application for our SARS-CoV-2 panel that received emergency use authorization from the FDA in 2021, as revenue was not material for this product. We believe the opportunity across cancer continues to grow while COVID products are decelerating. For Biopharma, we recorded $8.2 million in revenue, a bit ahead of our guidance and $6.9 million of orders. Of note, we signed a multi-target agreement with Astellas that was announced in January. We are now focused on enabling our sales team to sell the integrated offering between our South San Francisco and Boston offices. In the one roof, we offer in vitro synthetic library, in vivo discovery and screening, and in silico lead optimization, candidate selection and optimization with AI and machine learning. We believe this offers a fully integrated antibody discovery engine with a guarantee deliverable. As we are now operating as an integrated team, our total partners active and completed programs will include the historical average business. As of December 31, 2022, we have served 278 partners, with 95 active programs and 63 of our programs have milestones and/or royalties associated with the project. In addition, we continue to advance many internal candidates through the early discovery stage and we have several antibodies that have reached the preclinical stage and are closer to potential out licensing by biotech-Biopharma partners. Turning to data storage. We continue development work on our first data storage system, which combines our proof-of-concept chip with the recently assembled proof-of-concept writer. We have engineered a scalable end-to-end system to store data and DNA and are now writing software to coordinate all the steps required to code, write, to sequence and decode digital data. Once completed, we will begin to run the system in pilot production. All of this work is in support of the release of early access to our first product, the Century archive, which we expect to be available towards the end of calendar year. Revenue for quarter 1 was $54.2 million, which is year-over-year growth of 29% and a sequential decline of 5%, which is in line with our guidance of $54 million. Orders were $64.7 million for the quarter, a sequential increase of 4% and 30% growth year-over-year. Gross margin for the quarter was 45.7% and we shipped approximately 2,100 customers, and that's up from approximately 1,800 customers in quarter 1 fiscal '22 and we ended quarter 1 with cash and investments of approximately $439 million. For NGS revenue for quarter 1 was 24.4%, slightly below our guidance and 27% year-over-year growth. As we noted in our previous earnings call, we had a strong fourth quarter and a couple of our larger customers pushed shipments from December quarter into January and were negatively impacted by the COVID pandemic in China, which continues to impact our China revenue in the current quarter. Our first quarter orders were $31.2 million, which is a record. It represents sequential growth of 10% and 43% growth year-over-year. And this growth reflects the strength of our product portfolio with the top 10 customers accounted for approximately 40% of our NGS revenue and we served approximately 600 NGS customers in fiscal quarter 1. Our pipeline for larger opportunities continues to scale, and we're now tracking 264 accounts, and that's up from 257 noted in our last earnings call and 130 are now adopted to Twist and that's an increase from 131 last quarter. Now turning to SynBio, which includes genes, DNA preps, IgG, libraries and Oligo Pools. SynBio revenue for the quarter was $21.7 million, and that's exceeding our guidance and representing a year-over-year increase of approximately 21%. Orders for the quarter were $26.6 million which represents 20% growth year-over-year. Some of the highlights include shipping to approximately 1,600 SynBio customers, which has grown from approximately 1,270 in quarter 1 fiscal '22. The customer base, as Emily noted previously, includes biotech and large pharma companies. Genes revenue increased to $16.2 million, and that's up from $13.5 million in the first quarter of fiscal '22 and last year-over-year growth of approximately 20%, and we shipped 134,000 genes in the quarter, and that's an increase of 7% year-over-year. Oligo Pools were in our strong quarter with revenue of $3.7 million and demand came primarily from the health care segments. Now to Biopharma, we continue to scale our antibody discovery business. Biopharma revenue for fiscal first quarter '23 was $8.2 million, and that's year-over-year growth of 70% and is consistent with our prior guidance. Orders for the quarter were $6.9 million, down sequentially from $9.4 million in the fourth quarter. Biopharma orders have been impacted by an overall weaker environment, and we did not see the Pharma Christmas in the quarter as we've seen in past years. That said, we added four more milestone and royalty agreements, which brings the total up to $63 million, and that's up from the $59 million we noted in the previous earnings call. While Emily reported total Biopharma metrics, including historical adverse agreements, solely for the first quarter of fiscal '23, we had 95 active programs for the combined Twist and various antibody services. I'll give a quick update in terms of breakdown by industry and a quick update on our regional progress. Health care for the first quarter was $30 million as compared to $21.1 million in the same period of fiscal '22. Industrial Chemical revenue was $13.6 million in the first quarter of '23 as compared to $12.5 million in the first quarter of '22 and academic revenue was $10 million in the first quarter of '23 compared to approximately $8 million in the same period of fiscal '22. On a regional basis, EMEA revenue rose to $16.3 million in the first quarter of fiscal '23 compared to $15.4 million in Q1 fiscal '22. As we noted earlier, APAC was negatively impacted by the COVID pandemic in China, but had a slight increase in revenue to $4.3 million as compared to $4 million for the same period of fiscal '22. U.S., including Americas revenue increased to $33.6 million in the first quarter as compared to $22.6 million for the same period of '22. Now moving down the P&L. Our gross margin for quarter 1 was 45.7% with cost of revenue for the quarter of $29.4 million. Cost of revenue does include $1.1 million of stock-based compensation expenses and $3 million depreciation. Net to operating expenses, our operating expenses for the fiscal quarter, including R&D, SG&A and change in fair value and mark-to-market adjustments of acquisitions were approximately $69.4 million as compared to $78.9 million in Q1 fiscal '22. To break it down, R&D for the fiscal quarter was $31.2 million, and that's an increase from $22.6 million in the same period of fiscal '22. This does include DNA story spend of $6.1 million and Biopharma spend of $7.7 million in the first quarter of fiscal '23. The major contributors to the increased R&D spend were primarily increased compensation costs of $5 million associated with increased number of employees, which does include adding additional 12 [indiscernible] DNA data storage. Depreciation for R&D in quarter 1 was approximately $1 million. SG&A in Q1 includes approximately $18 million credit due to a combination of stock forfeitures associated with departing employees and the release of annual hold back as we determine that various [indiscernible] revenue hurdle. The Abveris team came very close to achieving the earning, and we look forward to fully integrating the Boston team into Twist organization. We remain very enthusiastic with the team and the potential opportunity for the combined Abveris and Twist organization. Factory of the Future pre-commercialization costs include Included in SG&A were $12.5 million in the first quarter, which includes compensation costs of $4.3 million; material expenses of $4.7 million associated with pre-commercialization trading activities; facilities and depreciation costs of $1.8 million as well as services of $1.2 million. Stock-based compensation for the quarter was a credit of $2 million due to the aforementioned credits primarily associated with the Abveris acquisition. We will now cover our outlook for fiscal year '23. We continue to project fiscal '23 revenue in the range of $261 million to $269 million, including SynBio revenue of $104 million to $106 million; NGS revenue, $120 million to $123 million; and Biopharma revenue was $37 million to $40 million. And there has been no change to our revenue projections from our previous guidance during November. For the second quarter of fiscal '23, we anticipate revenue of approximately $56.5 million, which breaks down as follows. SynBio revenue of $24 million, a sequential increase reflecting the higher orders NGS revenue of $25 million. Although orders were strong at approximately $31 million in quarter 1. We see the beneficial impact of those orders translating into revenue in the second half of our fiscal year. Biopharma revenue of approximately $7.5 million, and this reflects the lower orders we saw in quarter 1. We anticipate gross margin for the quarter 2 approximately 30% as we bring on the costs associated with the Wilsonville manufacturing facility. As we scale our revenue in the second half of fiscal '23, we're projecting our gross margin to be 39% to 40% for the year, which is in line with the guidance provided in our previous earnings calls. We decreased our operating expense guidance for the year to approximately $330 million as compared to previous guidance of $365 million primarily to reflect the expected reduction of stock-based compensation. We're now projecting R&D expense of $130 million as compared to $138 million in our previous guidance. We expect SG&A expense of $204 million, and that's a decrease from our previous guidance of $227 million, primarily due to the impact of lower stock-based compensation. Mark-to-market is projected to be a credit of $4 million for the year. Depreciation and amortization is projected to be approximately $29 million and our projection for stock-based compensation that declined from $83 million to $50 million for fiscal '23 due to the combination of the aforementioned credits. And in addition, we reduced a number of projected shares granted to our executives, employees to approximately 1 million stock awards at a lower share price than originally projected. Net loss for the year is projected to be approximately $225 million, and that's a decrease from $260 million. With CapEx projected to be $50 million and our ending cash is projected to be approximately $300 million. In summary, we had a robust start to our fiscal year with record orders in quarter 1. We shipped our initial commercial products from the Factory of the Future in January, and we're focused on scaling our business to achieve adjusted EBITDA breakeven in our core and our pharma businesses. Thank you, Jim. In November, we outlined our 3-year plan to adjusted EBITDA breakeven for our core business, and this remains our focus. When we see our shareholders' feedback that achieving profitability is top of mind. This fits with our operating plan that we have been executing in the past few years. Working toward that objective in SynBio, we will ramp our manufacturing capabilities in Wilsonville, Oregon to increase revenue out of our Factory of the Future, building on our first shipment at the end of January. Looking to on the full-time frame, we expect to bring down our current time and offer fast gene products for all of our customers and expand our commercialization efforts into the maker market. For NGS, we expect continued expansion of our customer base as well as a few large customers generating revenue in the back half of the fiscal year. In addition, we are looking towards RNA workflows to augment our DNA workflows with a consistent focus on owning the workflow between the sample and the sequencer. In Biopharma, we are beginning to offer an integrated portfolio of antibody discovery and optimization services, capitalizing on efficiencies between our in vitro, in vivo and in silico approaches. In data storage, we're making good progress to bring up the chip and our new pilot production DNA data storage writer. We plan to launch our Century Archive solution as an early access offering in late Canada 2023. In parallel, we will continue to seek to partner with leaders to set the stage for commercial success while preparing the market for DNA data storage. We remain extremely excited about our opportunities ahead and look forward to keeping you appraised of our progress. My first question is on the DNA makers, there's analogy with in this prep. This thing that people started branching out into. But given the 270,000 commercial, I think a part of them are going to be [indiscernible] which have cheaper like grads flavor. Can you give us a sense of how you're going to track this market to try to find the price to get the adoption in this academic market? And give us a sense of how long it will take for this discovery? Steve. Your line was a very bit choppy, but thank you, You're asking, for the 270,000 gene makers, those that are in academia, will do the price discovery. So -- and now we'll convert them. It's going to be -- 2 things that I'll share. One, in the past, we had a uniform pricing at Twist for academia and industry, meaning that we didn't differentiate pricing between those 2 groups. We've recently started to differentiate a little bit. And I expect that for fast gene, there probably would be a different price -- there possibly could be a different price for academia versus industry just to account for the value of the product to those 2 different groups. That's number one. Number two, what we've been doing for multiple years now is we've been supporting items, [indiscernible] group every year, there is a competition with thousands of students where they apply synthetic biology. And in the past, iGEM team had to do their own cloning. They'll get part from the Gibson assembly and mutagenesis. And we've given, I think, 20,000 bases to every iGEM team for the last few years, and our goal is to get the best and brightest student early on, get them used to not clone any more. And it will take some time, but we think that similarly right now in academia, nobody does their own prep reasons. They'll use kits. I think over time, we can drive this transformation. So we'll be focused on price. And we've been already working in changing the frame of mind that you just don't close just so much easier to and faster to get the clone from companies like us. Okay. Got it. Really appreciate that. And next question, on gross margins, it's a question for Jim. So yes, the gross margins in the quarter was maybe a bit lower than we expected. Can you give us some color on that? And then also some color on the gross margin recovery in fiscal year '24 back up to 49%. Yes. So Steve, if I picked up your question correctly. You said gross margin is a little lower. Gross margin in Q1 was 45.7%. We are projecting that to decline to 30% this quarter as we bring on the costs associated with the Factory of the Future. As we scale the business, and we've touched on the makers market, I mean it's a huge opportunity for us, $1.4 billion. We're already seeing strong SynBio growth over this last year. The orders were used in the first half -- in the first quarter records. So we feel good about the growth in the second half. First half revenue is about 40-odd percent of the business, which is in line with previous years. So we can see growth in the second half driven by continued growth in SynBio, NGS, pharma, pharma picking up. We feel good about the $261 million to $269 million. As we continue to scale, we see gross margins this year, consistent with our previous forecast of 39% to 40% in next year as we continue to scale the business. We see gross margins in the range of 49% as we highlighted below. And that's driven by executing and scaling the Factory of the Future, leveraging our fixed costs and continue to do well in terms of expanding our customer base. This is on for Matt. I realize that you just sort of shipping commercially from Factory of the Future, and you've talked about fast gene being launched in the fall of this year. Could you talk about how you've been able to break into the gene makers market prior to that launch? Or will the launch be an inflection point for getting into that market? Great question. We've been getting into the maker market a little bit over the last few years with our long (technical difficulty). So what we know is that some customers buy short genes then they assemble themselves with short genes to long genes. So they buy short genes, but they are makers of long genes. And when we offer our long gene offering, it is very far, very cost effective and some of our revenue growth comes from us converting some long genes makers. So we are a little bit in the markets -- in the DNA makers market. But we do need the speed, which means that from -- as you pointed out, when we are hedging, that's when we should see an inflection point. Okay. Great. That's helpful. And then what do you think the potential of gross margin uplift is for fast gene this year? Will it ramp enough for us to see it come through in '23 or roll that mostly come in next year? Overall, we see our gross margins. The gross margins in Q1 are just under 46%. This quarter, we see gross margins 30%. We're launching our fast genes in fall of this year. So overall, this year, gross margins are in the range of 39% to 40%. And as fast genes pick up next year, we continue to scale our manufacturing operations, we'll leverage fixed costs, and that's primarily going to be driven by volume and success of fast genes. So that kicks in FY '24. Just to have a couple of high-level end market trend questions. Maybe starting with Biopharma was wondering, obviously, solid growth there, kind of expecting a bit more muted, I think growth for the next quarter. And I was wondering if you might be able to call out kind of the trends you're seeing in the near term, if you -- if there are any kind of differentiated trends across different segments within Biopharma. And also, if you expect the weakness to be prolonged throughout the year? Any kind of color you could provide there? And then the second question is in terms of ex-U.S. markets like China, Europe -- as well as Europe in terms of whether you kind of called out China continuing to see headwinds from the COVID situation. And if you might be able to kind of compare whether that has materially worsened in the current quarter versus what you were seeing last quarter? Just also any additional color there would be very helpful. Thank you, Sung Ji. Maybe I'll answer the first question and Jim will cover the second question on the global markets. So in terms of Biopharma, some of the trends we are seeing is definitely some of our customers have some funding headwinds, some others are very big companies and maybe lesser for the companies that have funding headwinds. I think it is an opportunity for us. It may take time to add them, but what we offer is more short-term goal, and so we basically extend their budget. So I think our offering is very well fit for them. The other trend we see is that people maybe spend a little bit in the balance of the budget. Maybe there is a bit less for upfront discovery and maybe they're balancing more towards later stage work, which means that maybe they will do 10 discovery projects a year and maybe they're shrinking to 8 or less. We're barely penetrated into the market. And so if we just get one project or two projects, it's a win for us, so it's not necessarily a big issue, but something that we are seeing. And so I think in general, we are stepping back and relying on the strength of our platform. And our platform is really best-in-class. We have in vitro, in vivo, in silico. And last year, we were playing a little bit with [indiscernible] back because we are trying to led the Abveris team being as intend as possible to make their earnout. But now we can integrate. We can have one1 team, we can have 1 product offering. I think the integration of those 3, in vitro, in vivo, in silico is a very powerful -- very powerful offering that will enable us to get more than our fair share in the market, even though the market in general is experiencing some headwinds in Biopharma. Jim, do you want to take the second question? Yes. So in terms of China, I actually met with the China team last couple of weeks. So, it was interesting. China is impacted in the first quarter, i.e., December quarter, October, November impacted by the lockdowns. Then obviously, China opened up and then the companies were impacted by COVID. That's extended into January, February. So China sales in Q1 declined to approximately just over $1 million, $1.4 million. We see modest pick up in the second quarter. Our second quarter, which is March. And then we see significant pickup if things normalize in the last half of the year. And if you look at our revenue, you see our first half revenue is about 40%, 42%, 43% of the overall year. You see China having a modest impact from the cost overall. We're seeing some large NGS customers coming in, in the second half of the year. So overall, we're doing well in China. We've added increased -- we've increased our leadership in China, enhanced our leadership and we continue to win good accounts in China, and we're well positioned as the economy starts to normalize there and open up as they're dealing with COVID. In terms of Europe, we actually had -- Europe was up year-over-year. I mean, the December quarter is always a tricky one because of the vacations but continues to be strong in Europe, and we see good opportunity -- see good opportunities in Biopharma. We continue to make inroads with our SynBio portfolio in Europe. NGS is looking good. You've seen some announcements there. And back to why we're winning, it's strengthened portfolio and we're excited about launching the Factory of the Future. I think that gives us great opportunities to engage with some of our larger customers and positions us well for next year. So a couple here for me. Jim, can you just talk about the strength -- or Emily, the strength that you guys had on gross margin in the first quarter. It is usually expected like some type of seasonal step down, but this came in well above, I think, everybody what they were looking for. Yes. So back to the strength of gross margin in the first quarter came in just under 46%, which is a great start to the year. That was driven by -- we've been working in terms of product mix and focusing in terms of continuing to manage our contribution margins. So we saw a strong -- actually contribution margins in both SynBio and in NGS. So it was driven by a richer mix of products. We're excited about that. It continues to reaffirm that we're going in the right direction. Step down in Q2 down to 30% is purely driven by the impact to bring on the fixed costs associated with the Factory of the Future. Yes, okay. And then on the second quarter guide from a revenue perspective, is this mostly being relatively flat. Is this mostly due to a capacity constraint on the Factory of the Future. So I guess what I'm trying to get at is you have a really strong 1Q gross margin, assuming that that's full capacity utilization that you guys are running there. And then as you're bringing the Factory of the Future, you're not really going to be selling a lot out of the factory of the future in the second quarter, and that's why you're taking on all those fixed costs, so your GM steps down massively and your revs kind of stay tight with that first factory going at full capacity? Am I thinking about that right? Yes. So what's interesting is if you look at Q1, South San Francisco was actually at full capacity. The genes revenue, genes volume did pick up. And you're right in terms of the step down is driven by bringing the fixed calls on. What's interesting is we continue to build our customers, we saw SynBio pick up, and we continue to see good marginal improvement in the SynBio and consistent margins in NGS. So part of this is driven by the growth, part of its driven by mix and this focus on expanding our SynBio footprints as well. You're absolutely right, bring fixed cost line in Q2, margin dipped down to 30%. And then as we scale in Q3 and Q4, we see the gross margin for the year in the range of 39% to 40%. Okay. Great. And then lastly, on the bookings, you guys had a really big step up there. Can you talk about what you're seeing from -- is that a lot of the Biopharma because I saw your active program step up really meaningfully. I'm just trying to get the sense of the cadence of the different segments and how they're going to roll on through the rest of the year. Yes. I mean, what's interesting is we had record bookings in NGS. The question is going to be, okay, why isn't Q2 NGS number higher than revenue, much higher than we're projecting. The answer is because those orders impact the second half. We saw good strong. We continue to do well in SynBio, continues to do well in genes, beginning to see some impact on IgG's. I mean, across the SynBio portfolio, we're doing well. And what's driving that is performance, turnaround time, customer experience, the ability to scale and deliver a great value. So if you look at the value proposition, NGS gives our customers a significant reduction in sequencing. A number of larger customers continue to scale. We keep getting adopted into new assays in terms of the SynBio portfolio, particularly in genes, we've brought the turnaround time down. We offer terrific pricing in terms of the market. And because of that, we're winning customers. Because of that, we're seeing a number of small customers come in. That gives us a good platform or springboard for going after the makers market. So I would say we're executing according to [indiscernible] Your price per gene has increased meaningfully here over the last 4 quarters, even more so than what's been a nice trend line over the last few years. Can you just walk through what the key drivers of that increase has been. I think Jim just mentioned IgG had a nice quarter, but what maybe some of the key drivers are ahead of fast genes, which I assume will push that trend line even higher? Yes. Maybe I'll start. Thanks, Matt, for your question. I really like looking at price per gene, but sometimes we have to be a little bit careful -- can be a little bit -- you can have a good story either way. So what happens is our short genes are priced at $0.09 per base. Our long genes are priced at $0.15 per base. And so when we penetrate more into the makers market where they buy long genes instead of buying short genes then the ASP goes up because now it's $0.15 per base. And it's a long gene so the ASP per gene goes up. So from that point of view, that's a great story, that's good. At the same time, when we're doing really well in Biopharma, the average gene size goes down because antibody genes are small. And so from that point of view, the ASP goes down a little bit. And so -- it is a little bit of a mix of -- is the strength in the long gene business that is the strength in the human size genes that are done. And then in addition to that, we have been pushing price increases a little bit. And so on NGS, we did our second annual price increase in January. And then in SynBio, we've increased prices started last summer. So there's a little bit of benefit from that as well. Okay. And then as you look towards fast gene in the back half, just remind us what else is required on your end to get those on the market? I think particularly, you mentioned software and training on that software, but just kind of get us from here to there. No, no, great question. So yes, there's a couple of things. So first of all, we need to be able to make fast genes. And so we developed design the Factory of the Future to be able to do it. And so we have the instruments in place. We are -- and so the instruments in place and the current software enable us to make genes about the same speed as what we do in South San Francisco. And then there is a few more software components we need to deliver and training of the team to have the factory be able to make genes faster. So that's step one. And step 2, we need to have an e-commerce that is adapted to be able to price and book orders for slow versus fast gene, and there's a big effort on the customer experience. If people can't afford fast genes, we don't want them to feel bad. At the same time, if we want to make it like the Apple website where you don't know why, but there is money coming out of your wallet and people are incentivized to choose the fast genes. So there's quite a bit of e-commerce. Software design that needs to happen, so it's beautiful frictionless and intuitive. And then the last piece is continue to develop and enhance our digital marketing engine. A lot of the fast gene gives us another 270,000 customers. We are not going to send an account manager to the lab in the University is just not cost effective. And so we need to reach those customers through a digital approach and there's multiple ways to do that, being at conferences, being part of iGEM so Twist is already part of the mindset. But the other goal is through digital teams, get people on the Twist website, get them on to the e-commerce, have a touchless order where no human interaction and then have it shipped to them in a way that's again, frictionless. So those are the components that we are still refining, a lot of software basically. Emily, maybe my first question is on the set guidance and revenue assumptions. When I look at your order growth here 30% in Q1. In your second quarter revenue guidance at 17%. Is there something going on in on the macro front and apologies if you've commented on this -- was there any China impact or -- and I know in the past, you've spoken about share gains in gene [indiscernible]. Is that still going on? And when I look at the quarter number of $65 million, that annualizes to about $260 million, which is roughly your revenue guidance. Is there some capacity issues here that you're facing as you bring Factory of the Future on line? Well, maybe I'll start and Jim can add as needed. But yes, as you pointed out, the order number trends towards our guidance. The first quarter is 30% above our Q1 last year, which 30% is about the growth that we anticipate delivering this year. And we've mentioned that it would be a back half loaded story. And if we look at the ratio of first half, second half, the ratio for this year the -- as last year or the year before and the year before, it's somewhere between 40%, 45% of first half to second half. So that's what we -- that's the business we've been living in. And the market is there. We have a great technology. We have a sales team that is extremely aggressive and great products. So I think the bases are loaded, but we have to execute and deliver what we said we would. And then Jim, I don't know there's anything else you want to add? I think -- so Vijay, I mean, your correct overall, strong orders in the first quarter, I mean particularly in NGS, we've done a number of large customers come in, place larger orders, getting us well positioned for the second half. I did mention China earlier on the call. So I'll give you the [indiscernible] Notes in China. October and November impacted by lockdown. China was down sequentially from our September quarter then to December. As economy opened up with COVID, people get COVID, and some of our -- some of the weeks in their offices about 8% to staffer out. That's obviously impacted in January, February. So we see a little pickup this quarter in China. And as the pandemic works its way through, we see pickup in the second half. In China last year, put in perspective was about $7 million, even with the first half impact on COVID. We still see a pickup in China to about $9 million this year. And overall, happy with the bookings, and there's more opportunity for us, as Emily highlighted, the commercial organization. I've got tough quarters to meet this year and are aggressively going after that. And we keep building our number of customers. We're getting a lot of interest in terms of the Factory of the Future. Our focus to execute and continue to deliver in terms of our top line and focus on getting to the core business to adjust EBITDA breakeven at $300 million and then continue to focus and grow pharma and get back to adjusted EBITDA breakeven as well. And just maybe one more, Jim, for you on the second half cadence, both on revenues and gross margins, right? I think from a revenue perspective, looking at perhaps sub 25% in the first half that would imply well north of 30%, right, above your annual guidance. Like what is -- like your comps get harder in the second half? What is driving that acceleration. And the same goes for gross margins, right? I think your first half implied is around 37%, 38%. You need to hit about 40% in the back half. Like what is driving this back half strength both from a revenue growth perspective and gross margins? Yes. So I touched on it a little bit with the question. I mean that our bookings in the first quarter, our orders for the first quarter were approximately $65 million. You saw the pickup in terms of NGS. So NGS is driving the overall growth in the second half. If you look at NGS first half, it's about $50 million in terms of revenue. So the growth in the second half has a say, roughly $120 million is $70 million. So what's driving that. You can see there that the orders in Q1 for NGS were in excess of $30 million. We see -- continue to see the SynBio where you see a sequential pickup in SynBio, what's driving that number of customers continue to deliver from a performance point of view. The team in San Francisco has done a fantastic job in terms of aggressively reducing turnaround time, and that's been well received in the market, so it's the execution. In terms of your question around gross margin improvement in the second half, that's about growing the top line, leveraging our fixed costs, we do bring the Factory of the Future costs online less this quarter as the facility is now commercially operational. It is exciting that we actually shipped our first product, and the focus is execution. It's going after the makers market, $1.4 billion opportunity. And the pipeline for NGS continues to scale the number of wins and as this continues to scale. So it's more of execution obviously some new products impacting us as well, has continued to gain share in a growing market. Emily and Jim. So just following up on the NGS side, obviously, book-to-bill, higher. But could you elaborate is this more on the pickup -- in the second half pickup on the NGS is more, are you all driven or more of the liquid biopsy customer demand, sort of just elaborate a bit on that. And then how much of that is volume versus pricing? I mean you're expecting a meaningful pickup here in both growth and as well as, obviously, gross margins, too. So just trying to understand how much of that is pricing and volume in the context of NGS. And given the sort of the fixed cost that you have now and the 30% gross margin that you have for the next quarter? I can start, Emily. So let me just address the 30% gross margin this quarter, Puneet, so appreciate the question. That's primarily driven by the fixed costs coming online in the Factory of the Future. I mean, we're scaling the Factory of the Future this quarter. So -- so we'll give an update in terms of the volumes and in terms of products being through the Factory of the Future in the next earnings call. But we're commercially bringing time fixed cost combined, so we're got under recovery. And that then the consequence of that is our gross margin dips to 30%. And then as we scale the volume in the second Q3, Q4, we'll see our gross margins improve. In terms of NGS, I mean, we've been working at this for a number of years. We've been providing metrics in terms of the larger NGS customers that we continue to service. We define the larger NGS customers as those customers that are -- provide revenue in excess of $250,000 a year. That's continued to scale. We're now tracking approximately 264 of them. And that scale from less than 100, 18 months ago, and we continue to run in terms of assets. And as we continue to win in terms of assets, we see that impact in terms of bookings, placing orders, we continue to gain share, and that's what's picking up. We see the pickup in the second half of this year. So we're well positioned for a strong second half in NGS. And as NGS picks up, revenue picks up and gross margins improve. Okay. Got it. That's helpful. And then just wondering some -- are your reagents peers have talked about softness from the smaller biotechs. Wondering if you're seeing any of that. And then lastly, I appreciate the comments on the makers market, maybe Emily. Just wanted to understand academic customers show a large number of them out there, but more price sensitive. So wondering what's your expectation on both the sort of pricing of the product there and the sort of the quality of product -- liquid biopsy customers. Could you maybe elaborate a bit on that, too? You get [indiscernible] second here. Yes, I think we don't have different quality. It's one grade for academia and it's the same product for academia and companies. And we break the revenues for academia and companies for the entire companies, but not for NGS, but I think we've seen in the past that the majority for our NGS revenues are around clinical product. And on the smaller biotechs, are you seeing any of that in the quarter? And currently, are you seeing any impact? Some of your peers had commented around weakness in the segment for reagents. This is Noah for Rachel. First, if I could just potentially get a little additional clarity here. Just as it relates to NGS, you mentioned that there is an annual price increase that you pushed through in January. So could we get a little commentary regarding the pricing strategy here. How did you see orders trend in NGS pre-price increase versus post-price increase? And then I have one more. Yes. I think we tried to price on value. And I think there's an understanding that costs are going up and so we were able to -- based on the quality of our product, based on the strength of our product we are going to put in a price increase, which has been quite well received. Awesome. And then just regarding the data storage offering, you partnered with some big tech giants to bring DNA data storage into existence. Can you talk about conversations you've had with these partners in recent weeks as we've seen some of the tech industry starting to tighten their belts around investments relating to non-core businesses and do some layoffs. So like how do you expect to push the adoption curve of DNA storage? Or what have you been hearing from your customers regarding time lines for adoption there? Yes. That's a very, very good question. I think the data storage, over the last several years, we've made a concerted efforts in creating an industry, and so it's not just us, but we've created DNA data storage alliance, that alliance got into stand. Now you have data storage conference where on their own, they are putting a DNA to the storage track. And so in the industry. It used to be when I would talk to data storage customers, they will say, never heard of storing a DNA and then it moves to -- I heard a lot about storing DNA but I don't believe it. And now it's, oh, I've heard about DNA storage in DNA where can I buy it. And so there's definitely storing in DNA taking mind shift because there's such a need for deep archive, where paper and hard drive are just not well suited. And so I think it's becoming, in my view, an inevitability just because there is such a strong need on the archiving market to get something that is better than paper and hard drive because people just don't know like it. Thank you very much for joining us today. I apologize following a few minutes late, and we are looking forward to seeing you at AGBT next week and at the Cowen Healthcare and Barclays Conference in March. Thank you.
EarningCall_515	Welcome to the MediaTek 2022 Fourth Quarter Investors Conference Call. Financial results and presentations for today's call are available on the Investors section of company website at www.mediatek.com. And now I would like to turn the call over to Ms. Jessie Wang, Deputy Director of Investor Relations. Ms. Wang, please go ahead. Good afternoon, everyone. Joining us today are Dr. Rick Tsai, MediaTek's CEO; and Mr. David Ku, MediaTek's CFO. Mr. Ku will report our fourth quarter results, and then Dr. Tsai will provide our prepared remarks. After that, we will open for Q&A. As a reminder, today's presentation will provide forward-looking statements based on our current expectations. The statements are subject to various risk factors, which may cause actual results materially different from the statements. The presentation material supplement non-TIFRS financial measures. Earnings distribution will be made included with financial statements based TIFRS. For details, please refer to the safe harbor statement in our presentation slides. In addition, all contents provided in this teleconference are for your reference only, not intended for investment advice. Neither MediaTek nor any of independent providers is responsible for any actions taken in reliance on content provided in today's call. Thank you, Jessie. Good afternoon. Now let's start with the 2022 fourth quarter financial results. The currency here is all in NT dollars. Revenue for the quarter was TWD108.2 billion, down 23.9% sequentially and down 15.9% year-over-year. Full year 2022 revenue total TWD548.8 billion, up 11.2% from 2021. Gross margin for the quarter was 48.3%, down 1 percentage point from the previous quarter and down 1.3 percentage points year-over-year. Gross margin for 2022 was 49.4%, up five percentage points year-over-year. Operating expense for the quarter were TWD34.2 billion compared with TWD37 billion in the previous quarter and TWD34.1 billion in the year ago quarter. Full year 2022 operating expense was TWD144.1 billion compared with TWD123.6 billion in 2021. Operating income for the quarter was TWD18.1 billion, down 45.3% sequentially and down 39.1% year-over-year. Non-TIFRS operating income for the quarter was TWD18.8 billion. Full year 2022 operating income was TWD126.8 billion up 17.4% year-over-year. Non-TIFRS operating income for the year was TWD131.5 billion. Operating margin for the quarter was 16.7%, decreased 6.6 percentage points from the previous quarter and decreased 6.4 percentage points year-over-year. Non-TIFRS operating margin for the quarter was 17.4%. Operating margin for 2022 was 23.1%, up 1.2 percentage points year-over-year Non-TIFRS operating margin for the year was 24%. Net income for the quarter was TWD18.5 billion, down 40.4% sequentially and down 38.6% year-over-year. Non-TIFRS net income for the quarter was TWD19.2 billion. Full year 2022 net income was TWD118.6 billion, up 6% year-over-year. Non-TIFRS net income for the year was TWD122.7 billion. Net profit margin for the quarter was 17.1%, decreased 4.8 percentage points from the previous quarter and decreased 6.3 percentage points year-over-year. Non-TIFRS net profit margin for the quarter was 17.7%. Net margin for 2022 full year was 21.6% down 1.1 percentage points year-over-year. Non-TIFRS net profit margin for the year was 22.4%. EPS for the quarter was TWD11.66 down from TWD19.54 in the previous quarter and down from TWD18.99 in the year ago quarter. Non-TIFRS EPS for the quarter was TWD12.04. For the full year 2022, EPS was TWD74.59 compared with TWD70.56 in 2021. Non-TIFRS EPS for this year was TWD77.07. The reconciliation table for our TIFRS and non-TIFRS financial measurement is attached in our press release for information. Thank you, Jessie. Good afternoon, and the belated happy Chinese New Year, everyone. Our fourth quarter revenue came in at the low end of guidance as customers turned more conservative about demand during the quarter, and demand in China has been weakened due to the fast spread of COVID since ease of restrictions in mid-November last year. Therefore, customers continue to manage their inventory level cautiously at this stage before we could see demand recovery from China's reopening. On the gross margin side, we were at around the midpoint in the fourth quarter, demonstrating our pricing discipline under demand pressure. Looking back at 2022, global semiconductor industry experienced rapid changes in demand amid macro uncertainties. Throughout these changes, MediaTek managed to achieve record revenue and earnings for the full year of 2022. Notably, all three revenue groups, including mobile, Smart Edge platform and Power IC grew year-over-year for the fourth year in a row. This is the result of the solid execution of our technology leadership and global expansion strategies in the past few years. We now have built an industry-leading product portfolio and diversified global customer base, which underpin our business foundation. Now I would like to make some comments on each revenue group for their fourth quarter results. 2022 achievement, 2023 market outlook and recent highlights. In the fourth quarter of 2022, mobile phone business was negatively impacted customers aggressive inventory adjustments, declining 17% year-over-year and 29% quarter-over-quarter to account for 52% of total revenue. For 2022, full year, mobile phone grew 10% year-over-year, and MediaTek continues to be the leader in global semiconductor -- I'm sorry, smartphone market share. We made a very significant move with our 5G flagship Dimensity 9000 Series Solutions. In 2022, we gained greater than 20% of Android flagship market share in China market from 0% in 2021. We expect our flagship market share to continue to expand in 2023 with more solutions and further penetration into more regions. Vivo X90 and X90 Pro flagship smartphone powered by MediaTek, latest Dimensity 9200 is well received by consumers, generated higher sales than the previous model. Dimensity 9000 Plus was also adopted by several latest affordable flagship model. As the smartphones are adopting satellite connectivity, MediaTek is ready for providing 3GPP NTN, which is non-terrestrial network compliance solutions. Given 3GPP R17 standard-based approach for enabling satellite communication, urging existing cellular technology and ecosystem which is easy to grow to larger scale, contrasting to other competing solutions based on proprietary technology. The first smartphone made by Bullitt, the British company that equips with MediaTek's 3GPP NTN solution will hit the market and start to contribute revenue in the first quarter. MediaTek is fully committed in this new exciting application for our customers. For 2023 full year, we think global smartphone shipment is slightly -- declined slightly but 5G penetration rate to increase from high 40% in 2022 to mid-50% in 2023. The higher global 5G penetration rate is expected to come from higher 5G adoption in mainstream segments in emerging regions, such as India, and Southeast Asia, where we have a very strong presence. We are the major beneficiary to capture the trend of 4G to 5G migration. We continue to demonstrate our values to global customers by enabling leading 4G and 5G smartphone efficiently through our complete solutions as well as strong customer support. The solid partnership we have established with our global customers over the years will extend into the future. Now let me move on to the Smart Edge platform, which accounted for 42% of revenue in the fourth quarter. This group declined 14% from last year and 18% from last quarter, due to customers' cautious inventory management. For 2022 full year, our Smart Edge platform grew 13%, among which connectivity grew very strongly as we continue to gain shares and benefit from the ongoing technology migration to WiFi 6, 6E, 5G and 10GPON. We also demonstrated our leadership in WiFi 7 development. In addition, we grew our revenues significantly in consumer and enterprise ASIC as well as automotive products and continue to gain traction with global customers in the U.S. and Europe. Most of our Smart Edge platforms revenue come from consumer-related applications. In a year such as '23, where consumer demand is expected to be weak, our Smart Edge platform business are not immune to broader macro impact. However, technology upgrades will continue. We continue to see higher adoption of our industry-leading WiFi 6, 6E, 5G and 10GPON solutions across all kinds of devices. Our full WiFi 7 ecosystem is also ready to embrace the new technology cycle. We are gaining shares in premium segments, in router, notebook, wired network and TV without WiFi solutions, which already started to generate revenues in the first quarter. In addition, we continue to expand globally by offering strategic values to global customers with our diversified connectivity solutions and strong capability in low-power processors. For example, our business with global top-tier telecom operators continue to grow robustly across broadband, router and CPE. We further deepen our relationship with global customers in collaboration across computing, HR, IoT, ASIC and automotive applications. Those new business initiatives not only partially offset the current market slowdown, but also pave the way for future growth. Now moving on to Power IC, which accounted for 7% of total revenue in the fourth quarter and declined 21% from last year and quarter-over-quarter. In 2022, Power IC grew 13%, among which revenues from automotive and industrial applications were more than doubled. In 2023, we aim to continue to diversify our product mix and support a continued 5G WiFi migration across devices. Before we give the first quarter guidance, I would like to bring the next few points. Numerous industry research reports forecast that the semiconductor industry excluding memory in 2023 is expected to decline by mid-single-digit percentage. As most of our customers maintain a conservative business outlook and have been managing their inventory very cautiously, the current level of inventory is approaching a normal level. However, with the recent reopen of China, a relatively stable global economy, we believe demand visibility will gradually improve in the next few months. and our business start recovering from the second quarter of this year. TV and WiFi, for example, are seeing a modest demand pickup in the first quarter of 2023. Thus, the first quarter of 2023, slightly a low point for MediaTek. In this environment, we will continue to exercise pricing discipline and protect our profitability. We now expect our first quarter revenue to be in the range of TWD93 billion to TWD101.7 billion down 6% to 14% sequentially and down 29% to 35% year-over-year at a forecasted exchange rate of TWD30.5 to USD 1. Gross margin is forecasted at 47.5%, plus or minus 1.5 percentage points. Quarterly operating expense ratio to be at 33% plus or minus two percentage points. For the full year of 2023, there are still a number of uncertainties regarding global macroeconomic conditions. We will need to gain additional visibility with respect to magnitude of recovery in order to give you a full year revenue estimate in the next few months. As to gross margin, we aim to manage it at the level that our first quarter guidance in the base. We are also managing our expenses very cautiously and expect our total operating expenses to be flattish in 2023 compared to that in 2022. Last but not least, we reiterate our shareholder return program. Our cash dividend payment in 2023 will include the regular cash dividend, which is based upon 80% to 85% payout ratio and TWD15 dollar special cash dividend per share. Pretty resilient performance in the margin, especially a couple of things. First, maybe I'll start with your commentary on demand and inventory. Could we get a little bit more detailed color on what you're seeing on inventory in the channel and customers? And also, I think MediaTek inventory on hand has also been coming down, but probably not coming down as much. So how do we see inventory in the channel and customers evolve in Q1? Are we going to be at a normal or slightly below normal level in Q1 already? Do you need to take MediaTek's own inventory down a fair bit still? And also, is the inventory situation in China different from inventory situation in the channel and for customers in the non-China market? It's a long question. I think, our understanding and maybe our observation is that the smartphone inventory, including our customers and channels in China probably at about three to three and half months level. We believe it will go down to probably two months to two and half months this quarter. I think that's what we are expecting to see. I think Chinese New Year time -- during the Chinese New Year time, the sellout in China as far as we understand, it's better fairly good, but definitely better than our customers' expectation. As to the outside of China inventory, what I can say, I don't have specific numbers. What I can say is some of our customers had a little better fourth quarter business than they expected. So I expect -- but they still have inventory at hand, so they're burning their inventory probably at a faster clip than expected. Our own inventory days is still high. However, the inventory of quotas, the inventory volumes continues to go down quite substantially. We have really carefully managed our wafer start for our business. I think this careful management of the wafer start will continue at least for the foreseeable future. But we are also looking very carefully for customers' demand dynamic. I think this is the time of a transition. And we will be very careful in managing our inventory wire fulfilling our customers -- any of our customers' demand. All right. That's very helpful. The second question I had is around 5G pricing, given there is a lot of noise in the market. Could you talk a little bit about what is MediaTek's expectations for overall 5G portfolio pricing this year? You have a few moving parts with the better traction for flagship while you're also moving down to lower segments. And also comment a little bit about how do you see the competitive intensity? Has the competitive intensity with your main competitor changed in the last three to six months? It's David here, so why don't I try to answer that. I think overall, the market is always with a lot of dynamics and competition situation or competitive landscape situation is always part of the dynamic. We understand right now several sell-side analysts and also some investors were worried about the pricing, the price competition, even worry about extend their worry to market share or gross margin. But to be honest, it's not a straight or easy answer, but let me try to answer with you about our overall pricing strategy. I think our pricing strategy is always trying to find a dedicated balance among pricing, the market share and our gross margin. And on top of that three key considerations, we also need to consider about the demand profile, the product life cycle and also the segmentation we get in. So overall, I guess we will not be able to provide a detailed pricing guidance and this low confidential. But probably one of the best way to think about that is actually is the thing about our gross margin. As you can see from a guidance perspective, our gross margin actually holding up fairly okay, fairly good. And actually, just as I told you, overall, the market dynamic or the competition is out there, and we've been there for so many years. We know how to handle that. When necessary, we will respond nicely and strategy really emphatically. I think that's our quick response. So just following up, do you think the competitive intensity has gotten worse in the last three to six months, just relative to, let's say, middle of last year when demand was still a little bit better, or it's largely the same still? So my first question is on your gross margin. So I wonder, there's a few upside and downside drivers going into next couple of quarters. But I guess, the concerns are on the downside from the increasing foundry costs. And also, your competitors are pushing the lower-cost solution and also in the short term, your customers are still digesting inventories. And so could you let us know what gave you confidence that going into next couple of quarters, gross margin could sustain a Q1 level? Okay. Sunny, like I explained earlier, basically, we're trying to find a dedicated balance among pricing, market share and also gross margin. And more importantly, because we do so many guys, we can adjust among different segments. So for example, if we worry about the entry level of competition, but in the meantime, we're also gaining share nicely on the flagship, now that will be a good balance. So overall, I guess, that actually give us the confidence that we can find a dedicated balance among again, pricing market share and gross margin. That's point number one. Point number two, about our cost structure, mainly I think both including the foundry and also in the back end. I think foundry, I guess, due to the market situation, it's actually it's not a pleasant situation but we also have the back end and other vendors. On a combined basis, more importantly, as you can see our overall industry position. We do believe it -- actually it's not pleasant, but that is still manageable, especially when we take into the pricing discipline, also segmentations migrations or expansions into consideration, that actually gives us the confidence. We can actually maintain the gross margin at the current guidance level. Got it. So just a quick follow-up on your pricing strategy. Since you are aiming to remain disciplined whereas your competitor appears to be a bit more aggressive. So do you think in the maybe mainstream product segment going to the next couple of quarters, there will be some risk for your market share position? I think overall, like I said, competitor is always there. And also it's very dynamic. The very [indiscernible] at entry level, it's managing and also the flagship. And we are actually making a pretty strong attack or offense on the flagship. On the entry level side, we are on the defensive growth if our market share is very high. So once we consider the both end and consider the total package, we will just slice and dice, only focused on one sector, I think actually, it's not as bad as actually people worry about that. Got it. Thank you very much. My second question is also to follow up on the destocking situation in China market. Because overnight, your competitor also share some comments and they seem to be a bit more negative and I think the destocking may sustain a bit longer going to second quarter. So I just wonder, maybe from your perspective, what gives you may be a bit more confidence that the destocking could be finished maybe by late Q1, early Q2, and therefore, your business will start to pick up? I think maybe we start from what's the market sell-out demand situation because we got some of the weekly sales numbers and also we've got a close conversation with our customers. I think to make a long story short, I think overall, much -- we see some encouraging final sell-out numbers, the market demand situation. By the way, don't get me wrong, I'm not talking about a strong recovery. We're just talking about it's not -- no more bad news, probably that's the best way to think about that. And when we talk to our customers, when they see the final sell-through situation, most of our customers feel much more comfortable about no more bad news coming in and also consider about the reopen in China, most people will expect there will be some kind of a positive impact or positive move help to overall economy. But we didn't see that coming in yet. But at least we see the sigh of stabilize. So that's point number one. The demand profile is getting better and no more bearings on the demand profile side. The second point is actually is because we know our sell-in numbers, and we kind of know the channel inventory. When the demand side is getting better, and we actually didn't really see that picking up on sell-in yet, that's actually a strong signal about divestment of the channel inventory and the cost inventory. So overall, given the overall volume and also momentum, we do feel fairly confident that actually is the demand profile should be better starting from maybe next quarter. I actually wanted to ask then about the non-smartphone. If you could give a bit more on the outlook, I guess, first, just the power management where the consumer side has been quite weak, how you see that stabilizing? And then for the Smart Edge, I guess, the same way because there's talk about more of the -- both consumer and industrial IoT slowing. So how you see the broader market where we're at in that slowdown plus inventory correction? And then to lift us out, if you could talk a bit about WiFi 7, if you see much this year where it's more a 2024 story and if you're seeing auto move the needle? Sorry, a lot in that. Okay, Randy. On the Power IC side, yes, it is -- we described it has gone through a pretty bad fourth quarter. And -- but what we have been doing is the -- again, to manage the revenue, just like David just said managing the revenue, including pricing, market share and gross margin. We kind of decided not to engage in some of the really bloody competition, so that we manage our margin relatively well. While we continue to move into more -- shall we say higher-end applications, more stable applications such as industrial applications and automotive applications. And that's the direction we're going for some time and some of the effects will start to show up this year. In the first quarter, I mean, we're not doing well but we're not doing badly either. So my thinking about the Power IC is -- I think we're going to get back to a reasonable track soon. On the other Smart Edge products, you asked about the WiFi, our WiFi business did really quite well last year. Fourth quarter, of course, everything went down pretty badly, including WiFi. But overall, our WiFi business improved 28% Q-over-Q. We are quite confident that the demand will come back up, such as the broadband demand get wide gradually. And our market share will be stable and maybe better after that. Our technology in WiFi 7, I think we're really pretty much at an equal status against our two competitors. But we do expect the real revenue, of course, to come in up more in 2024 than in 2023. But the important thing in 2023 is to gain the key design into different segments. I think WiFi 7, a bit of like our 5G strategy is, we are moving to engage in high-end segment at the very beginning rather than very follower role. Do I miss something? That's a very long question. It's a long question. I think actually -- maybe just if you could take the Smart Edge, where you think we're at relative to smartphone? Do you see the same prospect that we start to sign of life lift off in the second quarter? And then when you mentioned just on automotive, if it's moving the needle, like if that's like low mid-single-digit contribution. And is it mostly like modem and like telematics, smart cockpit? Okay. Well, Smart Edge platform in general, I think, actually, if you ask me, I would feel a little better compared to smartphone in terms of this changing of direction shall we say. It is more -- if you look at the business in that what we call the Smart Edge platform is quite diversified, many of which rely in a more stable -- a relatively more stable business segment. So it would hit, yes. But the come back, I think it's a bit sooner and it's more I mean, you have to look at occupied 42% of our revenue in the fourth quarter. And if you add the Power IC, it's the high 40s and 50%. So we're in that sense, now we are quite diversified, especially vis-a-vis 5G overall smartphone. As to automotive, we are -- well, we don't have a lot of revenue right now. But we do have, I would think, quite competitive road map for the smart cockpit segment. We have auto competitive telematics road map. We're engaging in different regions in China, Europe and the U.S. OEMs. Right now, I think the key thing, again, is to win the design, to win the socket. This is a long-term business, as we all know. So we are being patient. We are investing inside the company aggressively. We are determined to gain, I hope our fair share of this high-growth business. And my second one is shorter. Just on the OpEx, maybe David can answer. The move to be flattish. If you could talk a bit what -- if there are certain areas you're diverting to do that? Or is it more of just a discretionary squeeze on everything? Just wanted to see where after being very aggressive the last couple of years on development. Randy, I would say the trouble is that we need to work on both end, a, it's actually very discretionary, b, actually is also very strategic because internally, we need to reshuffle, reallocate our -- the focus of all our engineering resource to the future growth, respective for the two to three years. In the meantime, we need to have to be cautious about the operating expense management according to the external environment. So it's actually we're working on both end. We're working on both ends. Is future growth, should we think that's auto and networking or Smart Edge? I mean, just to think if there's a couple of pieces where you're really putting more resource? I think for the first question is still regarding the smartphone. I think in the first quarter, given your guidance like smartphone businesses is something like 30%, 40% down year-on-year, which obviously, you can see some recovery in the second half. But I wanted to ask what's beyond that? In 2024, onward, smartphone 5G penetration rate is plateauing. It seems to me that the market share movement is not the key growth driver for MediaTek as well. So what can we expect MediaTek to grow in the smartphone business beyond like 2023 when the inventory replenishment play out in the second half? Bruce, again, is actually thinking about the product portfolio, right? We have close to -- for last year or fourth quarter last year, we have close to 50% of the revenue coming out from non-smartphone. And that actually present a lot of growth opportunity. We talked about the Smart Edge, we're talking about IoT, we're talking about Metaverse, PME. And also, if we're judging from the customer segmentation, now we get into the operators, industrial and also from product line, we're also talking about automotive. So that actually presents a pretty sizable growth opportunity. And I want to highlight it start with almost 50% of the revenue contribution already. That's point number one. Point number two, let's come back to the smartphone. Again, smartphone, we think smartphone, we still believe actually say wireless technology. I think we keep talking about that 5G smartphone is part of the 5G cycle, while there are also other applications for 5G. For example, thin modem, right now, the industry talking about reduced capability more than, for example, in the U.S., we are taking a very good market share on the CPE side. So we do believe actually in the last few years and including this year, it's actually lay out a very good 5G foundation from an infrastructure perspective. When we have the infrastructure ready, and we do believe there's going to be more opportunity coming out from the 5G model or 5G technology on top of 5G smartphone. I think for 5G smartphone, given the high penetration, like you said, there's no secret. I mean, the growth rate needs to be saturated or slowing down but doesn't mean again, 5G cycle, product cycle is bigger than 5G is smartphone cycle. I think that's actually is our response. I think your first part of the question actually was my second question, but let's take back to smartphone a little bit. What kind of addressable market for the 5G model can we expect in the coming few years? Again, earlier last year, we kind of announced about the 5G thin modem on the PC application. And also, we talked about 5G CPE, with the operators. And also going forward, we do believe a lot of IoT-related product will require 5G's modem over there. It could be 5G modem for speed, it could be a record modems for the latency and also for the speed and the connectivity. So we do believe -- we think about the broader sense of IoT and have a 5G modem software. Taking this year -- for 2022, our view is actually the 5G overall addressable market is actually around USD 30 billion. And for the full account for $20 billion. So this year, right now, it's actually $10 billion of 5G market already, which, by and large, actually telematics, for example, and also 5G modem as well. I see. Okay. So it's like half of the smartphone market, okay. It's actually a lot bigger than expected. The second question, again, is that you talked about which you answered in the very beginning. If you can help, can you help to link like top three the product, which can grow in the non-smartphone business because you guys talked about a lot? Can we rank it like a top three because everything is like our perspective, we do understand that we have multiple growth drivers from the non-smartphone market, but the absolute number for MediaTek revenue is close to USD 20 billion. So we need something really big enough to move the needle. So we try to dig a bit detail that that's focused on the top two or top three growth product in the non-smartphone business, can we have that? I think you have to look at this in -- I think, in some kind of cadence. Why is for the next two to three years, then the other is probably from the next three to five, six years. Connectivity is definitely a critical growth driver for us, for the next two to three years. It's still a lot of upside for both WiFi and as David just said, 5G modems or reduced capability modems or different -- I think that's still untapped, a lot of untapped market. Therefore WiFi, for us, is moving to much more different higher end as we have done in 5G. So I think these provide already a quite good outlook for next couple of three years. But further out, we are investing heavily in automotive and in some other areas that we probably would prefer now to really discuss. But some of those are -- these are high really with very large TAM. Power IC is another area that will provide us, I think, a really good and stable growth going forward. I have -- it's up TWD1.4 billion of revenue last year. I think having a growth rate for in the [indiscernible] quite achievable for instance. But I think given the market dynamic, we probably need to revisit that. But right now, we like the -- similarly, like for the full year guidance, we probably won't be able to provide that. But we probably will come back with a different view given the market dynamic and material movement in the last years. Rick, I had a question about the recent U.S. restrictions around Huawei. Can you maybe just explain the licensing situation as it looks like Huawei have been shipping good volumes in 4G handsets. Have you been shipping components to Huawei? And if so, what's the impact of the latest restrictions on MediaTek's business? We do not have a license to ship 4G SoC to Huawei. We do not. I think we probably have some license for the smaller components like [ PMEG ] that sort of thing. But really, it doesn't contribute much of the revenue for us. So the impact, the latest -- I don't know if it's a formal announcement or not, but at least the latest story from the press, I don't think will have any kind of a material impact on us. That's clear. And just a follow-up. I think you mentioned in your prepared remarks, you think the smartphone market overall is going to be slightly down this year. But if we focus on domestic China, I think there's various analysts talking about sellout demand last year of about 250 million units. It was quite a depressed year overall in China for obvious reasons. How do you see specifically the China smartphone market playing out this year? Do you see meaningful growth? Or do you think it's going to maintain at these low levels? Or how should we think about that? Well, China's market last year number, I think, 250 million, 260 million depending on who you talk to, but for there. Our view for this year is a mild pickup compared to last year's number, so maybe 10 million more kind of a range. It's not a big pickup -- at this time, any pickup is a good pickup. Interesting. And maybe just a last one, if I can. In the Mobile division, how much do you think you're undershipping to demand at the moment? I mean I guess if I look at your fourth quarter revenue in mobile, it's fallen about 17% year-on-year. Is that -- would that reflect the gap between your sales and overall demand? And I'm just trying to understand how that difference between your business and what was happening on a sell-out basis? To be honest, actually, it's hard to quantify that because currently, we only have -- for this quarter specifically, we only have all the way to end of January, the market sell-out numbers. But if we only based on the first month of this year, I think the gap is very large, but we also need to consider about the Chinese New Year holiday situation. So that will be the first quarter. But if you compare to last quarter, the fourth quarter, I would say, again, it's roughly which indicates the channel inventory, customer inventory is probably in the range of like three months, ballpark range, three plus/minus on the China side. So the first question should be for Rick. Rick, you mentioned about MediaTek continue to hold the technology leadership, and you don't want to be just -- you don't want to be a follower for the future 5G competition. So do you think there's any way to depreciate your technology versus your competitor? And on that matter, I'm wondering what's your view about to migrate to 3-nanometer for your China smartphone product in terms of timing and also the benefits? Charlie, for the 5G competitive landscape, I'm not saying we are necessarily clear, but we are definitely on par with our competitor. And this is basically a 2-player field. So we are -- the definition of leadership is up to anybody's interpretation. But from my end, if I look backward for five years, I would gladly say that we have caught up in technology leadership. So that's one. If you look at the SoC, look at our flagship, I mean the same is different for us. I know that our flagship chip capability, actually branding in China. I think we are really making a strong and great progress. I'm very proud of our people. And for two, the use of the leading-edge process node. And then we are also -- we're being very aggressive. We are definitely engaging with TSMC to use latest 3-nanometer process as soon as we can as soon as we can. I see. So to -- on that point, because you're kind of the veteran on that foundry service, right? So I'm not sure from your perspective or MediaTek perspective, whether it can really bring a big benefit to your company or end users? Just as some preliminary observation that would be great. Well, I believe there will be some advantage, but probably not because TSMC serves all customers. They do not serve just MediaTek. So I do not -- let me put this way. I will not hang on the key competitive advantage. I do believe that we are very good in utilizing the capabilities of TSMC's leading-edge process and converting them into our product capabilities in terms of performances or consumption. But other than that, I think we really need to really work on our own. We have a much better system design or system software. Is our IT competitor, CPUs or GPUs, I think overall, as I said earlier, I believe we are certainly on the par. And my next question is to David, if I may. So company provide the full year OpEx should be flat, right? So I'm wondering about the trend of SG&A, whether that would go up or go down. Specifically, we are hearing that for chip industry, not just a smartphone, right, for CPU. Sometimes you need to provide a rebate to create some incentive. So I'm not sure if MediaTek also need to provide some rebates, even it's just a temporary? And how does that impact your OpEx? Charlie, first of all, when we talk about OpEx, which including the rebate, SG&A, the whole package, okay, so everything is including that line already. So we're not -- we don't really single out only talking about R&D. So again, we're talking about from total operating expense, including R&D, SG&A anything else basically, anything below gross margin line. So from that perspective, we'll be flattish. But everything included, like including but not limited to the question you asked. Yes. But just a very short term, right, given the tough decision that other analysts just described in project. Do you think SG&A or rebate portion will increase in the first half? Charlie, we're talking about the full year. So I don't quite understand what you mean by short term. I'm talking about for full year 2023 versus 2022. Full year OpEx will be flat as just our goal to manage that. And that's including SG&A. But from a quarter-to-quarter, it will depend on the revenue patterns. So it's really hard for me to give out the guidance as a one single line. It will vary from quarter-to-quarter if you look at the quarter to quarter. But I think it will be helpful for you guys to understand from a full year perspective, it'll be flattish. Okay. Yes, that's super helpful. So just in case this question wouldn't be raised because lots of people are asking me a common question about OPPO's internal competition, can management address that issue and whether they will impact MediaTek's long-term pricing power? Charlie, I understand. Let me just be clear on that point because I read your research and I understand you have some concern the question on that, but I'll be really clear and its forthcoming. Our SG&A and also which is part of the OpEx line, it's actually quarter-over-quarter maybe vary, but all within a reasonable range, okay? So we are not trying to do anything funny or strange. Everything will be reflecting properly, what we reflect properly, okay? But from a quarter-to-quarter perspective, it will be vary quarter-over-quarter, but it's not going to be changed substantially. I really don't want to comment on our customers' activities. But suffice to say that we have, I would say, a very strong relationship with our customers. But we do not really come on as much specific, is changing. Just wondering that David already mentioned about the dynamic on the gross margin trend. So I'm just wondering that if there is any chance that MediaTek to renegotiate with your foundry partner, to mitigate the potential gross margin pressure since we all know that the current foundry utilization rate is relatively low. So is there any chance for MediaTek to manage the cost from your foundry? Laura, given the fact that is our foundry's allocation is pretty centralized to vendors, but probably we'll not be able to comment on that question. But let me try and answer from a different perspective. It's a dynamic. So we work actually very closely with our partner, and we will see how it goes. But for the specific guidance, I probably would not be able to provide that guidance given the fact that we only have very large vendors out there. Okay. I understand. And also, I know that because of a lot of uncertainties ahead. So we're not able to provide full year guidance at the moment. But can you also share with us your view on the overall smartphone market outlook? We already talked about a lot about the inventory situation right now. But I'm just wondering that from your perspective, if we expect a gradual recovery starting maybe Q2 this year. Is there any chance to still expect a flat year for MediaTek for 2023? And probably, again, that's actually the same question asked us to provide the full year guidance. Unfortunately, given the market dynamic, we will not be able to provide. But if you ask the possibility, I mean, anything is possible. But actually, it's nothing we can guarantee. But the good news is, like we explained currently, unless we see some stabilization of the market demand, I think that actually -- we will see how it goes. Whether or not you will just stabilize and flat layer or you were coming back, they will affect our answer to your earlier question. And ladies and gentlemen, we thank you for all your questions. I'll hand it over to Ms. Jessie Wang for closing comments. Ms. Wang, please go ahead. Ladies and gentlemen, this concludes MediaTek's 2022 Fourth Quarter Conference Call, and an audio replay will be available in one hour after the call at the Investors section of MediaTek's website. We would like to thank you for your participation, and you may now disconnect. Thank you, Ms. Wang. And ladies and gentlemen, we thank you for your participation in today's conference. You may disconnect now. Thank you. Goodbye.
EarningCall_516	Welcome to ViaSatâs FY 2023 Third Quarter Earnings Conference Call. Your host for todayâs call is Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg. Okay, thanks. Thanks for joining us today. We released our shareholder letter shortly after market close and its available on our website and we will be referring to that on this call. Joining me today on the call are Rick Baldridge, our Vice Chairman; Kevin Harkenrider, our Chief Operating Officer; our Chief Financial Officer, Shawn Duffy, Robert Blair, our General Counsel; and Paul Froelich from Corporate Development; and Peter Lopez from Investor Relations. Thanks Mark. As you know, this discussion will contain forward-looking statements. This is a reminder that factors could cause actual results to differ materially. Additional information concerning these factors is contained in our SEC filings, including our most recent reports on Form 10-K and Form 10-Q. Copies are available from the SEC or from our website. Back to you, Mark. Okay. Thanks, Robert. So, I'll start with a brief overview, and then we'll go right into questions. So, the most important point for today is that construction and test on the ViaSat-3 Americas satellite has been completed. We're scheduled to launch on April 8, which follows a pair of NASA International Space Station missions that have been pushed about one to two weeks later than previously planned because of the [indiscernible] replacement mission to bring back cosmonauts from the ISS. And bringing that satellite into service addresses our most immediate challenge, which is bandwidth constraints. But in the U.S. that have caused us to steadily downsize our residential business to support the strong growth we've had in inflight connectivity. The ViaSat-3 will be able to serve areas that are currently full and to introduce updated plans with higher speeds, more bandwidth, and greater value. It also supports more [Indiscernible] of our existing customers in the Americas and capacity to the good growth we've had in Brazil and Mexico and opens additional new geographic and vertical markets. We're confident it will drive growth. The satellite should reach its orbital site just a couple of weeks after launch and we expect to start initial pay to services promptly and to start scaling during the summer. ViaSat-3, EMEA, Europe, Middle East, and Africa satellite is not far behind, and itâs planned for launch by ULA in September. That adds important coverage to our mobility businesses and capacity to a number of other markets. It's also the catalyst expected to enable us to reach positive free cash flow. The Asia-Pacific satellite is not too far behind now. Overall, new orders are up year-over-year. We're making very good progress on in-flight connectivity, especially. We think one exciting example is the recent announcement by Delta Airlines, making free Wi-Fi available on their full fleet. We've worked methodically with them to be sure, we both understand the growth in demand and how we can deliver the service quality that we expect at scale. Today, we're at about a total of around 3,000 flights a day with free Wi-Fi, now that's between Delta and JetBlue, and that's growing pretty rapidly. And, of course, we also continue to serve all the other airlines we support, including at those same major US cities. We see good opportunities in working with airline partners to scale passenger engagement with Wi-Fi affordably and in ways that best pursuit their business models and brands. We shipped about 240 in-flight terminals in the third quarter for commercial air and brought about 160 planes into service, which is about a 17% year-over-year growth. New orders have been very good with both new and existing customers and we still have over about 1,200 additional planes on order. Our airline customers are seeing delays in some of their new aircraft deliveries probably in the range of about 50 to 60 cumulative by the end of our fiscal 2023. So, we expect deliveries and installs will grow sequentially in the fourth quarter anyway. We've also been equipping Sichuan Airlines in China. The U.S. and China are the largest domestic air travel markets. And we believe the ability to serve international pipes to and from China with our partners there seamlessly will be important to many global airlines as well as to the Chinese international airlines. The other major point for today is around the close of the sale of our TDL business just after the end of the third quarter. Within that, we expected about $1.8 billion in cash, which greatly strengthens our balance sheet. We'll also realize a gain on the sale of over $1.5 billion. So, including that gain, FY â23 will actually be a very profitable year for us. The sale will ensure we can drive our satellite services businesses since we have significantly greater growth potential. As we mentioned last quarter, we have some rightsizing to do as a result of the sale and that's underway. And regarding Inmarsat, the remaining gates to close the transaction are primarily the UK and the European community antitrust approvals. We expect to have good insight into the regulatory -- the regulators current views on the matter this quarter. So, the shareholder data or the shareholder letter also provides our financial data for our third quarter of fiscal 2023 and year-to-date. Those results are below our expectations for the year -- in the quarter with the largest factor being the significant delay in launch of the first ViaSat-3 satellite relative to the schedule we expected entering the year. We've had other challenges on supply chain affecting cost or delivery schedule of some of our products, delayed airplane deliveries to our customers and encryption product certification issues that are not specific to us, but the demand for our products and services is strong, and we've had good year-over-year performance on orders. With the TDL gain, we'll report our highest ever earnings for the fiscal year by a long shot. We expect to start fiscal year 2024 with the launch of the first ViaSat-3 and we think the outlook from there is very exciting, as described in the shareholder letter. The floor is now open for your questions. [Operator Instructions] Our first question comes from the line of Ric Prentiss from Raymond James. Please proceed. Hi. I appreciate the shareholder letter. A couple of - two questions then. First, Mark, you talked about the ViaSat -- first ViaSat-3 coming over the Americas. We've got a launch date, glad to have that. How long are you anticipating -- it sounds like there's pent-up demand from your letter. How long do you think it takes to fill that up? And when are we thinking that we need to be starting to think about ViaSat-4 is the first question? Okay. Well, the way we've operated in the past, which has worked well for us, is we kind of fill it up and then we - people say groom or we basically tend to evolve our service -- our customers' mix to kind of higher-yielding customers, and that -- which is kind of what we're doing here. Think of them as that we've talked multiple times about this hierarchy of value and services, difficulty to serve with government in-flight, maritime, and those types. So, we generally have been filled up the satellite two to three years post-launch. That's typically what weâve tended to do. And then we evolve that subscriber [indiscernible]will a couple of years or so. The - kind of our approach to ViaSat-4, we've been -- what we've been working on is really focused on the technology, making sure that we get the performance that we expect and that we can produce it at a more predictable schedule, but it's pretty much the same platform. So, the timing of that, we will adjust based on our cash flow rate of that current satellites and our assessment of demand. So, we don't -- we're not going to put out a specific timetable for it yet. Okay. Also in the shareholder letter, interesting comment about direct to device and that Inmarsat obviously has L-band spectrum that you're interested in. Can you maybe high level kind of obviously, the deal is not closed, but can you, from a high level, tell us, how do you feel that, that directed device satellite to smartphone is going to come to pass? There's a carrier model in the marketplace. There's handset models in the marketplace or coming into the marketplace, and then a chip backed [ph] one. So, how do you see this market kind of materializing? And do you all need to have a LEO type platform? Or how would that work? So, just high-level thoughts on direct-to-device thoughts. Okay. Well, first, so we're interested in the direct-to-device market, which likely, I think a lot of people expect to be - to address a very large market, but with probably relatively low average revenue per user. And -- but we also see that a lot of the things that -a lot of the things in space and in the ground network that are done to be able to serve that market, also we're going to really enhance the existing mobile satellite services market. It will enable higher speeds, more bandwidth, lower airtime pricing, all of which we expect to also benefit those existing markets for those operators that have access to mobile satellite services spectrum and the tools to address those markets. The big -- I think the big issues or uncertainties around direct-to-satellite or direct-to-handset market are really around what are the speeds certainly that can be delivered to each phone, how many phones can you serve in a geographic area, what will the airtime pricing be, will be used for more than emergency services. And a lot of that, I think, is really going to depend on a lot of the same factors that drive the broadband market, which is as we talked about before is really getting signal - good density of bandwidth adjusted for the spectrum that it's operating in, in the areas where there's going to be the highest demand. And what is interesting about the handset market is it's probably going to be even more geographically concentrated than the broadband markets will be. So, we've actually been looking at design architectures that are both GEO and LEO. We think they're both interesting. We think that should be able to deliver pretty comparable services from each. It will probably take cooperation among some of the spectrum holders to achieve that. And we don't think it's necessarily a GEO or a LEO-specific market. We do have concerns. We've been one of the ones pointing out some of the issues around sustainable space in lower orbit. We are -- we think that there should be concern around just the cross-section area and mass of some of the satellites that have been proposed for this service. We're not sure that's the right -- that's going to be in a good direction, and we do have ambitions to do is to be able to deliver services that are much more interesting than just emergency services and that can be scaled to very large numbers of customers. That's kind of the overview at this point. Hi, this is Nik on for Phil. Thanks for taking the question. I'm wondering if you could provide an update on how churn is trending in fixed broadband? And how any like increased competition may be playing into that? As well as what the strategy would be to return to fixed broadband growth once ViaSat-3 launches just given the competitive intensity? Thank you. Okay. Well, we haven't broken out churn buying markets, specific markets. What I can tell you is recently churn has been subsiding for us. We had -- some of the churn that we saw was probably tied to the COVID timeframe when people signed on for contracts and we're very dependent on broadband at their home. But since those -- since a lot of those are out of contract, that actually churns moderated for us. We think -- we see -- we do see that there's going to be more competition in the markets that are targeted by us. People estimate kind of 10 million to 15-ish million homes that are reasonable candidates for satellite broadband, but the big issue is the value proposition of the service in terms of speed, volume, price. And then I think the other thing that's becoming more and more important and that we're really focused on our -- the ability to stream. Streaming, it's not speed-intensive, but it is very bandwidth-intensive. And so it's difficult for pretty much any satellite terrestrial wireless surface to port that in an unlimited way. We think we're going to be really competitive in that aspect of the market. So, I think for us, we -- the big thing Viasat-3 allows us to do is to update our speed, bandwidth, and pricing. And I think we'll continue to be able to drive churn down with this bandwidth we expect. Thank you. Mark, did you get cut off there? Did you have anything else that you want to add under that? No, no. I think the last thing I said was that we expect churn to continue to improve with the new plans that we can offer. That was the last thing I said. I don't think I cut off or not. Okay. Thanks Mark. So, yes, on my side, I was wondering, Delta finally launching their free Wi-Fi product with you as the partner. They have a target laid out to have global -- this has a global product by the end of 2024, what is the prospect for you to be able to gain retrofits on their international fleet? Or are there regional jets? And then maybe can you just review -- I don't know if you can talk about Delta specifically, but at a higher level potentially, what are your IFC contracts structured in terms of fixed versus variable? And how can we expect ARPA to trend and what are the current ARPA levels and where can those trend in the free Wi-Fi model? Okay. Okay. So, a lot in there. So, on the in-flight Wi-Fi, I think we do have a very good relationship with Delta, they've supported the notion that we'll be their partner, including on the global wide-bodies. I think that's part of what they're looking for is consistent service across all their fleet. So, we think that they're confident in ViaSat-3 is enabling us to do that on a global basis -- in the time frame that they're looking for. The -- on the business models, one of the things that we have done is we've tried to tailor the service models that we offer to different airlines to their -- to what their brand wants and the way they're trying to use in-flight connectivity on their clients. And it varies a little bit by type of plane or routes or length of routes. But there is -- like we've said before, there are fixed and variable components to it, and the variable parts are dependent on the airlines model and the way their pipes are planned sort of their roots are planned. So, it's hard to put a specific number on it. But I think overall, our revenue per plane, all things in -- when you consider kind of the full-service model that we have are very representative of what others in the industry have had. We're not going to break out average revenue per plane in particular. But it's pretty representative of what others that are in these kind of full-service models have patent. What kind of upside can you see under a free Wi-Fi model in terms of percent increases as that model matures? I'm not going to put up a percent increase. I think that what we are seeing and expect, what we expected to see another -- in other places where we used in-flight Wi-Fi, you can see passenger engagement rates go from the 5% or 10% range up to the 30% to 40% range pretty easily. So, I think there will be a lot a lot more uptake. And that's -- I think that's one of the things that makes us attractive for it is the ability to support that. But we're not going to give any numbers about how that will translate into revenue per plane. Understood. And then just one follow-up for Shawn on some of the financial guidance laid out in the letter. Can you maybe just bridge for me how you're getting to the 4.0 leverage target for fiscal 2024 versus the 2.0 pro forma? Sure. So, I think it's a couple of parts. First of all, keep in mind, as we look forward to our EBITDA next year, you need to right-size it with respect to not having TDL business anymore. Obviously, we'll have growth across our business and the continuing operations, but keep that in mind. And then from the capital perspective, this year was about $1.2 billion or so, a little bit over that. Next year, we'll see it about flat tick down a tad, but the mix will change quite a bit as we'll have a lot more on the success-based CapEx for CPE relative to the satellite, which ones are coming up. So kind of -- if you kind of roll that forward on our pro forma debt as the TDL sale, that's where you get to about that mark. Well, I think if you just kind of look about to what that EBITDA inferred relative to that CapEx. I'm not going to give kind of the total cash burn to that number, but I think you can kind of do the math -- if you triangulate that on. Okay. Understood. And then just so I make sure I'm understanding for fiscal 2023, the mid-single-digit guidance from last quarter is now flat, correct? So, what is the is the annual EBITDA number going to be in the low 500s on a continued operations basis? I think what we said is that next year's EBITDA, we expect it to grow in the low double-digits year-over-year. So, I think--. Right. So, for 2023, what we said is you could think of it to 2022 on a continuing operations basis to be about flat to the prior year. Thank you. Can you tell us what, if any, changes there are in the time line with the UK's Competition and Markets Authority Phase 2 review, when you expect that decision? And how soon after that presuming it's favorable, you could close Inmarsat? Hey Mike, this is Robert Blair. So, the timing for the CMA is the end of March is when we would expect them and what they've indicated to us is their plan to be wrapped up if it's favorable, then we should be able to close theoretically shortly thereafter as long as the European Commission and along the same timeline. But that could drag out potentially further after the CMA. So, it really depends on how quickly the European Commission would finish their review if the CMA is done and approved the end of March. But as soon as both of those processes are done, we would expect to be able to close pretty quickly after that. Okay. Thank you. And then the follow-up question is relates to -- you provided your potential satellite launch timeline? Is there any similar information you can give regarding Inmarsat? I think they don't want to see information mostly available through their website. They do -- they are launching one of their satellite another six satellite this month, but they had their follow-on satellites are probably a couple of years behind and I think there's a gap for their I79 satellites. Hey guys. Question about the Link 16 business. So, I'm just curious if -- even though the sale is done, if there is any opportunity for ViaSat to providing sort of state-based Link 16? Or did that all go away with the sale? The Link 16 specific businesses went with the sale. But we do have space contracts that cover a variety of range of communications, wave forms and data links. And we can include Link 16, as one of those waveforms in a multi-waveform space system. And we're doing -- as part of the sale, we're providing a module to Inmarsat enable them to Link 16. So, we'll have that -- we'll have common hardware for that application. Okay. Does that mean there's still opportunity for ViaSat to participate in the space development agencies constellation. I know that's supposed to use Link 16? And then do you still have the satellite that you're building with Blue Canyon or is that something that was sold as well? Thanks for the question. Mark, thinking about how the IFC business scales here, apart from adding all the tremendous increase incapacity from ViaSat-3. What kind of key parts of the business do you think need to scale to address the global opportunity in terms of infrastructure, channel, support, those sorts of things as you think about taking that business global? Thanks. Sure. Yes. Well, I think 1 of the good things about what we're doing with ViaSat-3 is we pretty much have all the business models for the businesses that we've already been doing well in place. So, at least in the -- in residential or in rural in the countries in which we've been operating. We've set up business models where our ability to plug in more bandwidth is pretty straightforward. And I think that includes the in-flight connectivity space because we already have when we've done this pretty purposely -- purposefully, but we have customers in Australia, Asia-Pacific, Latin America, Europe, that and Middle East already that we support with our full-service model. So, I think that, that's one of the -- so one of the things that's most exciting about getting ViaSat-3 on a global basis is that it really is then we can just plug into existing models, especially in in-flight connectivity because that is really kind of a direct to airline business for us. And I think we have a good go-to-market sales force that covers airlines all over the world. And we have the support infrastructure that we can leverage for that as well. Got it. That's great. And just a quick question about the letter about your reallocation of capacity into IFC. How should investors think about the timeframe that it takes you to truly kind of reallocate it? Are we talking months, quarters to reallocate that capacity and move it into a particular new application? Okay. No, that's a good question. So, as the airline business has grown, the main thing that we've done very careful and purposely is to understand what the traffic demand will be on a geographic basis and then also be able to gauge not only where the airplanes are the seats are going to be where, when, but also to match the expected bandwidth demand on each plane in each airline. So, that we have the sufficient bandwidth that is scaled to the demand on those planes. And that, when we do it, what we've had to do. I mean, I think it's a choice that it's a choice that we made deliberately. And I think it's going to be good for the company, definitely been good for our IFC customers. I think it was weakest for shareholders is to plan ahead. And what we've done is we've used natural churn on the residential business, that frees up bandwidth in places where we may need it. And those places where we won't need it for IFC, then we can replace those customers with new customers. When we get ViaSat-3, problems could be way easier as we'll have a lot of bandwidth everywhere, and we'll just be able to add customers on both in-flight connectivity and in airlines and a few other businesses within the US that we think we can start and grow as well. But think of it as the reallocation process is really something we only have to go through when we're full, right? When we have to allocate bandwidth because we don't have enough to serve all the demand we could see in all the markets that we address, right? It's really a question of making choices about what we choose to serve, given all the demand that we see. Following up on Landon's question. does ViaSat have a product/antenna to provide IFC on regional jet aircraft, such as CRJ700s and ERJ175s. I know that you provide connectivity for JetBlue's larger ERJ190s, but do you have a smaller antenna for the smaller regional jet aircraft? Right now, well, a lot of it really depends on the operating model of the airline and the exact type of aircraft that they have. But I think from a commercial business from a commercial business get, probably the E190 is the smallest that we currently have at any kind of scale. No, no. I think we have airline products that we're developing that will go down to smaller planes. We certainly do that. We sort of smaller aircraft with that our business gets or others. It's really a question of coming up with something that amounts well and economically for the specific types that our customers want. And so we are working on more fuselage now did antennas for those smaller class of aircraft. Sounds good. And for the government encryption business, has ViaSat received the product certifications that were previously delayed? And are you out of the woods there? Pretty close. The government -- so the issue is they haven't been issuing certifications across a range of products for the reasons that they know that they have. But there's customer demand for -- especially for a number of our products. And so the kind of evaluated that demand relative to what their certification guidelines are and will be, and they've informed us that they expect to issue those certifications later this month. That's what we can make. Thanks. Great. And One for Shawn, how should we think about the customer premise equipment, CapEx and OpEx costs for ViaSat-3 residential customers when you deploy the new terminals? Okay. So, I think what I would think about the -- on the customer premise equipment. Similar, there's a couple of parts. So, similar to prior years in the early onset right? Those costs are a little higher because it's all brand-new equipment. And then as we have natural turnover in the basin, we get kind of a refer pool and the costs tend to come down over time. The ramp that we have next year when you're thinking about the quantum or the mix of CapEx, I mean, that's going to go up significantly year-over-year. You think of that as about 3x what it is to this year. So, that gives you just an -- we'll have significant investments in that bucket. On the OpEx side, it's primarily I mean we have advertising that you'll definitely feel in the front end as we're starting to prepare for service launch and marketing of our new plans. You'll see those coming in as part of the EBITDA margins in the front end. But I think with respect to the other components of acting, just to remind people, as we look to next year, our full year of ViaSat-3, for example, operating expenses on the ground. We've been talking about that through this year. This year kind of scaled to about the $50 million mark. Next year, we'll have the full weight of theViaSat-3 ground, and then obviously, we'll be scaling our revenues on that. We'll still be building out EMEA and APAC. So, you can think of that number is going to about 85%. So those are kind of some components of some of the capital OpEx. Sounds good. And is there any type of like a benchmark in terms of like for every customer, should there be like $200 of CapEx associated with the customer premise equipment or any other type of round numbers there? Well, we've had -- typically, when we go out with, as Shawn said, with the new generation of satellite, I think $800-ish numbers for -- be it depends on the -- it's a blend of advertising, commissions, equipment installation, it's all those factors. And it won't be -- it likely won't be markedly different. The mix of those costs will depend on what the demand is and what we can support in each region. But that's kind of not opening -- it could be a little. I think at the beginning, China is a little. Okay. And as it relates to the ViaSat-3 EMEA launch that is targeted for September. I mean you mentioned how it's with United Launch Alliance. Is that what their new Vulcan Centaur rocket? Okay. And one final question. This is a bit more speculative, but following up on Ric's question as it relates to satellite direct to device. Would it be possible for you to partner with SpaceX in the future, you used to have an antagonistic relationship with Inmarsat, but now you are merging with them, so things moved over. But is there a scenario in which you could lease a portion of Inmarsat L-band spectrum to SpaceX and partner with them for a direct to handset effort? Or are you committed to like launching and operating your own constellation in a vertically integrated manner? So, it's a good question. I think that in general, we're -- a lot of our value add is in the space systems that we can put together. And so that's still at the end, in dealing with -- any other prospective partner it would just be an economic trade about what's the nature of the partnership, who provides, which resources or capabilities. But personally, we don't rule out partnering with anybody. So, we do -- I think we've shown that we can really add value in the space architectures more than we could just in lease fees for spectrum as an example. We never say never. Thanks for taking a follow-up guys. Just a quick one on the TDL prices, are you guys planning to use that to pay down any debt or anything? Or are you going to keep it as a buffer? Are you still playing with draw on your Inmarsat financing at the close of that transaction? Or is this replacing that in some way, just -- around those items? Hey Landon, this is Shawn. So, -- we definitely on the -- when we got the proceeds when we take down on our revolver. So, we did do that right now, I say with the backdrop of the, the credit markets and our 2025. We can counting a little extra liquidity makes sense. And with respect to the transaction, I would say it gives us a lot of agility. So, we haven't made any commitment there. Yes, I mean I definitely think that we look at the transaction and look at the full-on lens of the capital structure, and I agree with you that where we are today is in a good position there, but we need to take that into consideration overall. But our intention is to be able to be sure we're in a good position with the right capital structure for the financing of the transaction. Understood. And then just one for you, Mark, as well. On the ViaSat-3 as we look forward to that, you guys in the letter talked a lot about the enhanced flexibility of that satellite capabilities. When we think about the gross capacity of the ViaSat-1 and 2, can you comment on what the utilization rate on that gross capacity has ended up being now that those assets are stabilized and what that can look like for ViaSat-3 asset? Okay. So, first of all, it's a really good question. It's a complicated question because different -- I mean, you've probably seen sort of what they call busy hour demand curves from cable companies or others that are in the home residential business. And what you'll see, for instance, there is let's say, from like 6:00 p.m. to 11 P.M. or midnight, you see very intense usage and then it can fall off pretty significantly overnight and maybe a little peak in the morning hours and then not so much in the daytime, the low peak when kids get home from school. You'll see -- example of a utilization curve that would be that would be common to all the users in, let's say, give a time home, right, and that have common applications like residential. So, if you look at in-flight what you'll see is when you look at it, let's say, when you look at it geographically, for Delta, this was an example similar for American and United other major carriers is when they have a hub, if you looked at the sort of the same type of chart, as I described it residential, what you'll see is very high usage when a lot of airplanes and people are in those geographic areas around those hub airports. And lesser usage in between, certainly doesn't go to zero. There's different airlines with different schedules. But you'll see these pronounced peaks. And so when you think about utilization, one of the issues is if you have capacity that's not flexible or if you have satellites that only have views or fixed coverage over specific areas and can't move it around, your utilization tends to reflect the demand in each of those areas when you combine a weighted combination of those markets. But when you look at those -- when you look at those at times when it's not very well-utilized, the thing that ViaSat-3 lets us do is move back in with somewhere else. That's the thing that's really, really unique and doubt about it. We can move it somewhere else, pretty far away so far and not a way where we get -- take advantage of time zone effects or far of where we can take advantage of different connecting times at different airports as an example. And then we're also looking to do similar things with other mobile markets, including land, mobile, and maritime. So what that -- what we think that's going to let us do is get pretty meaningful increases in utilization in these high-demand areas. And kind of the way -- I think the way to think about it is, especially from a capital efficiency perspective, this is one of the things we try to put together and show investors is -- if you think of demand, the demand on the ground or in the air, it's really a property of who your customers are and your space systems and the failure modes or the congestion that occurs tends to be in hot spots. And so by being able to move bandwidth around what we think is we can do a way better job of serving hotspots than other space systems. That's what we're working on. It's a really optimization problem. But I think the economic payoffs are going to be significant. Does that answer your question? But when you say it's a meaningful increase I mean what is ViaSat-2 at today? I mean I assume you guys have a sense of what the utilization on that satellite. I guess what I'm asking is there's 240 gigs of gross capacity, and you guys provision capacity for users and the beams on that satellite are essentially fixed. So, how much of that gross capacity is essentially provisioned you say you don't have capacity limitations, right? So, -- are you bumping into that 70% utilization. That's the issue is that you run into provisioning limitations in specific places. Sometimes before the growth of our in-flight space was pretty much due to residential as we added in-flight users, then we have to provision for the peak demand between the two markets. And so we've got to be -- that's not an easy thing to do. We've got to be pretty good at forecasting and managing to that. And I think our provisioning levels are pretty good. We're pretty efficient and efficient in that we're able to meet the service level agreements that we described. It's a statistical process, but I think that we're pretty close to the provisioning you can get when you don't move bandwidth around. With ViaSat-2, there were some opportunities to do some dynamic scheduling, and we do some of that. ViaSat-3 takes that to another really big level. The thing I would say, though, is if you look -- one of the metrics to look at, and I think this is really important. Think of it as just it was the peak demand to the average demand in a given place or for a given airplane. And those numbers peak to averages can be high, especially for some of the mobility markets like more than 10 to one. So, that just gives you a sense of in key places, what the potential is by doing this as well. Okay. Thanks. So, just in summary, going back to reemphasize the significance of putting that first as a satellite and with having a launch date now in early April just about two months away. And with the Europe, Middle East, Africa, while it's not that far behind. The bandwidth coverage and flexibility it provides really addresses our most immediate growth issues and I think the last question kind of helps emphasize that. And then with the sale of our TDL products business, we've got a lot of financial mover room, the over $1.5 billion gain on that sale will actually make our fiscal 2023, our most profitable year ever, and we think it's indicative of the value we're building in each of our businesses. We continue to believe combining the complementary nature of our businesses, skills and resources with Inmarsat will be good for the companies, our people, our customers, the UK space business, and for our shareholders. So, thanks a lot for joining us this afternoon. Please don't hesitate to contact Peter or anyone on our team if you have any further questions on our results or other topics.
EarningCall_517	Everyone, thank you very much for your participation of this announcement of the Financial Result in the FY '22, Third Quarter. I'm Ikeda from Corporate, Advocacy and Relations, serving as the moderator for today. Before starting the financial results announcement, we would like to make some explanation about the Astellas announcement of a change of a present CEO at the - announced at 11:30 [Technical Difficulty] who is going to make the opening remarks. First of all, that is followed by the explanation by the appointed Representative of April 1, Okamura. Hello, I'm Yasukawa. I would like to thank you for your join. At the Board of Directors meeting here today, we decided to appoint Mr. Naoki Okamura, our CEO effective April 1. I would like to start by saying thank you for your kind attention. I'd like to begin by explaining the background behind this change in CEO. Astellas has been working on its Corporate Strategic Plan 2018 and Corporate Strategic Plan 2021. Since fiscal year 2018 when myself was appointed as President and the CEO, to realize its vision on the forefront of health care change to turn innovative science into value for patients. During this time, Astellas overcame the patent cliff associated with the expiration of products exclusivity that has supported its growth in the past and revenue has turned upward trend after bottoming out in fiscal year 2020. In addition, Astellas moved away from its past business model of creating products with a focus on specific disease areas and promoted a shift to the focus area approach of determining R&D areas. From a multifaceted perspective and it's also making progress in developing a new drug candidates that will drive future revenues. Fiscal year 2023 is the right time to go on - the aggressive to further accelerate growth and Naoki Okamura will take over as a new Presudent and CEO. Astellas has decided that it is best for it to consider and implement strategies for achieving CSP 21, which ends fiscal year 2025 and long-term growth beyond that under the new leadership. The environment surrounding the company is changing rapidly, such as increasing geopolitical risks and the changes in the finances and markets of each country due to the COVID-19 crisis. But the new top management has the ability to be flexible in response to such changes. Since joining the company in 1986, Mr. Okamura has served as the Head of the Business Development and Corporate Planning. In 2018, he became CStO and from fiscal 2019, he participated in management as Representative Director and Vice President overseeing a wide range of business unit and driving the business forward. In addition, he provides leadership in setting direction for organizational health goals in promoting the reorganization of R&D. In a highly uncertain business environment he is not bound by stereotypes or pretty conceived notions, but he'll also be able - he's also able to make decisions with diverse view of the entire Astellas organization free from stereotypes. He places great importance on direct - the growth of employees always speaking to them in his own words and sincerely listening to their voices. He's both logical and passionate, strict and warn service [ph] and humors and has earned the trust of many people within the company. I will assume the position of Representative Director and the Chairman of the Board. I will fulfil the roles not for management execution but management decision-making and supervision of business execution to ensure that Astellas moves in the right direction to meet the expectations and demands of its stakeholders. I will also focus on advocacy activities to let the public know what value the pharmaceutical industry brings in and how it contributes to society. We look forward to your continued support. Thank you very much. As of the April 1st, I'm going to serve as the Representative Director, President and CEO. I am Okamura. In 2016, I was appointed as the Head of Corporate Planning for 7 years, since I am proud that I was at the center of strategic development and its implementation at Astellas. So being able to assume my responsibility in this way is a great honor for me. We are now at a turning point in a year for CSP2021. But in a bigger framework, there is no change in the priorities raised as strategic organizational health and performance goals, I'm going to continue the management policy and the direction of the business in principle. But if you look at each individual goal, the business environment and the progress of the project are changing every day. So I maintain principles and reorganize priorities flexibly so that we can allocate limited management resources appropriately. I'd like to solidify the sustainable growth after LOE [ph] of enzalutamide and XTANDI. And my mission is to hand over to the next leader by doing so. As is shown in Vision and CSP2021, Astellas is aiming to be cutting-edge, a value-driven life science innovator. So creating innovations continuously is our lifeline. So we should learn from mistakes and failures, take wise risks so that each one of the employees can demonstrate leadership to - there is a need to further foster corporate culture aiming for a higher level, as well as Astellas and we would raise ambitious goals to do our best to achieve the goals, but we'd like to be an outcome-driven companies. Astellas are working on degeneration of medicines to improve the root cause of the diseases substantially, like cell therapy and gene therapies, going into the unknown areas entails business risks, but we give a little priority to the safety for the patients with a sense of urgency that patients are waiting. We like to steer the company with a sense of speed. So we appreciate your continued support and guidance for the future. Thank you very much. From here, we would like to start 2022 fiscal year, the third quarter financial results announcement. For this announcement, Zoom webinar and live streaming are available, but the questions are accepted only through Zoom webinar, not from live streaming. Today, including Q&A, Japanese and English simultaneous translation is available. For those participating through Zoom webinar from the screen of Zoom, please select your preferred language. But when it comes to simultaneous interpretation, we as a company do not guarantee the accuracy of that. The participants for today, on top of Yasukawa and Okamura, we have the Minoru Kikuoka, CFO, Yukio Matsui, CCO, Yoshitsugu Shitaka, Chief Scientific Officer; and Tadaaki Taniguchi, Chief Medical Officer. We have four in addition. And the presentation material is available on the website. So please refer to it. The material or presentation by representatives for the company and answers and statements by them in the Q&A session includes forward-looking statements based on assumption of the beliefs in light of the information currently available to management subject to significant risks and uncertainties. Actual financial results may differ materially depending on a number of factors. They contain information on pharmaceuticals, including compounds under development, but this information is not intended to make any representation of advertisement or medical advice. Hello, everyone. I'm Minoru Kikuoka, CFO at Astellas Pharma Inc. Thank you very much for joining our FY 2022 third quarter financial results announcement meeting out of a very busy schedule today. This is a cautionary statement regarding forward-looking information shown on Page 2. This was explained by Ikeda earlier, I'm going to skip this page. This is the agenda for today. I will cover these topics in this order from the next page. Page 4 is an overview of FY 2022 third quarter financial results. Revenue and profit increased in the third quarter. Revenue increased 17% year-on-year and was in line with our full year forecast revised upward in the second quarter. Sales of XTANDI and Strategic products were on track globally. Sales of XTANDI in the United States were in line with our full year forecast, which was revised downward in the second quarter. Sales in Japan and Europe also progressed in line with our full year forecast. Sales of PADCEV were in line with our full year forecast, which was revised upward in the second quarter. I will explain the details of each product on Page 6 and Page 7. Next, on cost items. Cost of sales ratio was as expected. SG&A expenses were on track and decreased year-on-year when ForEx impact was excluded. R&D expenses were on track. As a result, core operating profit increased by 6% year-on-year, in line with our full year forecast. Full basis operating profit was below our full year forecast due to the booking as other expenses of foreign exchange loss caused mainly by the robust depreciation against the euro and the yens rapid depreciation against the dollar from the 150 yen level to the 120 yen level in just two months in the third quarter. On Page 5, I will explain FY 2022 third quarter financial results. Revenue increased to JPY 1,164.4 trillion, up 17.3% year-on-year. The progress against the full year forecast was 76.2%. Core operating profit was JPY 233.7 billion, up by 6.2% year-on-year. The progress was 80.6% of our full year forecast. You can see the ForEx impact on the right-hand side of the table. Revenue increased even when ForEx impact was excluded. On the other hand, core operating profit decreased when excluding the ForEx impact, this is partly due to the booking of JPY 24.1 billion gain on divestiture of intangible assets in the third quarter of FY 2021. The bottom half of this page shows a full basis results. In the right bottom of the table, we included other expenses booked so far. In the first quarter, we booked impairment losses on intangible assets in the gene therapy programs and increased fair value of contingent consideration related to fezolinetant. Also, due to the booking of net foreign exchange losses of JPY 6.7 billion in the third quarter, net foreign exchange gains and losses worsened by JPY a 20.6 billion compared to the second quarter. As for a positive event, Xyphos fair value of contingent consideration increased by JPY 4 billion as we reviewed for development plan for Xyphos-derived initial stage program. As a result, operating profit was JPY 181.3 billion, up by 7% year-on-year, progressing at 67.4% of our full year forecast. Profit increased to JPY 144.8 billion, up 9.3% year-on-year. The progress was 69.6% of our full year forecast. On Page 6, let me explain the third quarter results and the future outlook of XTANDI First, global sales reached JPY 511.9 billion in the third quarter, up by 24% year-on-year and up by 8% when ForEx impact was excluded. Global sales are in line with the full year forecast revised in the second quarter. Regarding the future outlook, XTANDI is expected to meet our full year forecast in all regions. Globally, as a whole, we're expecting near double-digit growth, even excluding ForEx impact, XTANDI is expected to achieve big sales of JPY 670 billion in our full year forecast. Next, let me explain the current situation and the future outlook for each region. In the United States, third quarter sales reached $1.972 billion, growing by 2% year-on-year. This 2% is the growth rate on a local currency basis. Performance is in line with our full year forecast revised downward in the second quarter. Market conditions remain challenging as we included this factor in our forecast. Levels of Patient Assistance Program or PAP ratio. Levels of Patient Assistance Program or PAP ratio and share of Zytiga generic competitors continue to be high, new patient starts have not returned to pre-COVD levels. On the other hand, we don't see any worsening of the situation compared to assumptions reviewed in the second quarter. So we are expecting the achievement of full year forecast of over $260 million. Top line results are expected in the fourth quarter for the future growth driver, M0 CSPC indication from EMBARK study with which we are aiming to obtain the additional indication. This is expected to drive the growth trend after approval. Next, in established markets. Performance is in line with our full year forecast revised significantly upward in the second quarter, contributing the most to global sales increase. In terms of the volume, M1/CSPC continues to grow, especially in Germany, Italy and Canada contributing to strong demand increase by 22% year-on-year. As of now, we don't see any clear impact of Zytiga generic competitors. So we are expecting the achievement of our full year forecast. By the way, commercial segment of Australia was changed from established markets to international markets in the third quarter. Disclosed numbers already reflect this change and actual results of the same period in the previous fiscal year and forecast figures are slightly changed. Also in Japan, performance is in line with the full year forecast revised upward in the second quarter. Market share expanded in all approved indications maintaining number one share. In Greater China, performance looks strong, but this is due to shipment timing. When this factor is excluded, performance is almost in line with our full year forecast. In international markets, performance looks strong due to big ForEx impact, particularly from the ruble, but in line with our full year forecast, excluding this factor. There are some regional differences, but globally as a whole, we continue to expect growth in the next fiscal year as well. On Page 7, let me explain our strategic products. First about PADCEV. Global sales were JPY 33.1 billion, in line with our full year forecast revised upward in the second quarter. Strong performance in Europe is expected to offset a slightly underachieving performance of the United States, resulting in expectations to achieve before year forecast. In the United States, the actual business is progressing in line with our assumptions, and PADCEV is growing steadily. On the other hand, revenue from clinical trial orders are below our expectations, taking this impact into consideration, we anticipate landing slightly behind our full year forecast. We have already acquired a high market share in the current indication. We're expecting significant sales growth after the approval of the additional indication in the first-line settings. We hope this will be a growth driver in the next fiscal year and beyond. In established markets led by Germany, market penetration is exceeding our expectations. Performance is also exceeding our full year forecast revised upward in the second quarter. Furthermore, PADCEV was launched in four more countries compared to the second quarter in a total of 20 countries, reimbursement started in five countries. We're expecting an upside from our full year forecast and further growth into the future. In Japan, progress is in line with our full year forecast to revise significantly upward in the second quarter. New patient start continues to show strong trend and market share is expanding steadily. We're expecting lending [ph] in line with the full year forecast. In international markets, PADCEV was launched in Singapore in July and in UAE in December last year. We are expecting PADCEV to be launched in more countries in the future, hoping it will contribute to sales. Once again, the key to further growth globally in the future will be the expansion of the current indications and the additional first-line indication. Starting with the approval anticipated in the United States in the next fiscal year, we are hoping for significant sales growth. With regards to XOSPATA, sales are increasing in all regions where it's launched. The actual business is growing steadily. Performance looks strong, but this is mainly due to high inventory level in the United States. Assuming the leveling of the inventory level in the fourth quarter, XOSPATA is expected to meet our full year forecast. As for Evrenzo, performance is below expectations even against the downwardly revised full year forecast. Although launch and reimbursement are progressing in Europe, it is slower than expected. Reimbursement was obtained in France in December. We are expecting reimbursement also in Italy and Spain in the near future, we are hoping for sales contribution. On Page 8, I will explain cost items. Cost of sales increased by 16.5% year-on-year, along with revenue increase. COGS ratio was down by 0.1 percentage point year-on-year to reach 19.4%, in line with our expectations. SG&A costs, excluding XTANDI U.S. co-promotion fees increased by 11.8% year-on-year. When ForEx impact was excluded, SG&A expenses decreased by 1.1% or JPY 3.4 billion year-on-year. The ratio to revenue decreased by 1.4 percentage points year-on-year to 28.6%. The progress against our full year forecast was 73% under full control, in line with our full year forecast. Personnel costs fell by about JPY 8 billion year-on-year with global optimization of commercial-related personnel. We are trying to reduce sales promotion costs related to mature products such as mirabegron, which decreased the cost by about JPY 6 billion year-on-year. On the other hand, we are making active investments for new product launch readiness for ADCEV and fezolinetant. Sales promotion expenses rose by about JPY 8 billion year-on-year. We will continue to allocate our resources to strategic products with higher priorities. R&D expenditure increased by 16% year-on-year, but by 3.1% when ForEx impact was excluded. The main reason for this is the booking of onetime expense of JPY 13.8 billion for using a priority review voucher, PRV in the first quarter for the application of fezolinetant. Excluding this cost, R&D expenditure decreased year-on-year. Ratio to revenue was 17.7%, down by 0.2 percentage point year-on-year. The progress against the full year forecast was 74.1% in line with our full year forecast, including the use of PRV for fezolinetant. On a full basis, we booked net foreign exchange losses of JPY 6.7 billion as Other expenses. Net foreign exchange gains were JPY 13.9 billion as of the second quarter, but we booked net foreign exchange losses as expenses, mainly due to the impact of the depreciation of the ruble against the euro for about JPY 10 billion. And the impact of the yen's appreciation against the U.S. dollar for about JPY 9 billion. The net foreign exchange gains and losses worsened by JPY 20.6 billion from the second quarter. Unlike the ForEx impact to occur from a special factor elimination of unrealized profit, excluding the impact from the second quarter, we can say this is the most typical ForEx impact to occur due to adjustment based on the year-end rate for claims and debt denominated in foreign currency, which are currently - non-operating items according to the Japanese Accounting Standards. This time, a relatively big impact occurred because of not only for the yen against the dollar, but also for the ruble because of an impact not only from sales amount in ruble, but also from the relatively loan payment period for receivables normally in ruble and the special circumstances these days. When the ForEx doesn't move much, there is almost no impact on gains and losses. But when it fluctuates a lot, there was a big depreciation of the ruble in December, then there can be a huge impact to occur like this time. So for the future, we would like to consider countermeasures more than before to appropriately manage the impact of ForEx fluctuations. However, regarding the ruble, which caused a huge impact in the third quarter, I don't go into the details, but there are seasonal factors and special factors as well. Also in the fourth quarter, claims denominated in rubles are expected to remain high in value. So we will work to shrink the exposure for the future as much as possible as ForEx hedge costs are high for these currencies. I would like to explain the outlook for FY '22 full year on Page 9. First, on a core basis, we expect revenue and Core OP to be in line with our full year forecast. Therefore, full year focus remain unchanged and our Core OP focus also remain unchanged at JPY 290 billion. On the other hand, we have revised downward our full year profit forecast. As explained earlier, we booked a net foreign exchange loss of JPY 6.7 billion and a fair value increase of contingent consideration due to view of development plans for Xyphos-derived, which totaled JPY 4 billion in Other expenses in the third quarter. In addition, switching to the announcement in the press release, zolbetuximab met its primary endpoint in the Phase III studies. And if we make decisions for regulatory submission globally in the fourth quarter, we expect to recognize the fair value increase of contingent consideration that is over JPY 40 billion as Other expenses in our fourth quarter. The same is true for Xyphos-derived development program, but the increase in the fair value of the contingent consideration reflects positive development progress for the business. The full basis profit has been revised downward, primarily to reflect these events. Operating profit on a full year basis is expected to be JPY 195 billion, a decrease of JPY 74 billion from the previous forecast of JPY 269 billion. And profit is expected to be JPY 150 billion, down JPY 58 billion from the previous forecast of JPY 208 billion. In addition to the aforementioned events which are incorporated in this forecast or not shown on the slide, I would like to explain a few other events that may occur in the fourth quarter and beyond. First, I would like to discuss the possibility of booking and impairment loss on intangible assets of Evrenzo. The amount of the impairment loss has now been incorporated in the forecast for FY '22 full year because it is still undetermined and difficult to estimate the specific amount at this time. The company is currently in the process of obtaining a reimbursement for Evrenzo in Europe and plans to revise its future focus in the fourth quarter, taking into consideration the sales in each country. Depending on the outcome of this review, Evrenzo may record an impairment loss on intangible assets. In addition, other events are currently under scrutiny to optimize the appropriate cost structure looking ahead to FY '24 and '25 in order to achieve this CSP. At this time, we are still in the stage and have now incorporated the cost to be incurred through this optimization in our forecast for FY '22, but we may book onetime costs in the future. Again, we haven't incorporated these factors into our full year focus because they are uncertain at this moment. However, we have shared these two information in advance as they may impact the full basis profit level if they are booked. These are expectations of the FY '22 third quarter results and the outlook for the future. Now I'd like to explain the initiatives for sustainable growth. Page 11 is about XTANDI and Strategic products. Key events are expected in FY '22 to be explained. In December, the filing to the FDA was completed for PADCE for additional indication of first-line locally advanced or metastatic urothelial cancer who are not eligible for cisplatin. This submission received the priority review designation and a target date of April 21, 2023, for completion overview. As shown on the bottom of the slide, other updates include the ongoing Phase III EV-302 study for the global submission for the first-line urothelial cancer completed enrollment in November and top line results are expected in 2023. In addition, the EV-202 study evaluating the efficacy and the safety of zolbetuximab in other solid tumors completed enrollment of all patients in November, and initial data is expected to be disclosed in the first half of 2023. Next, Zolbetuximab, we received top line results from 2 Phase III trials in November and December. Details will be explained in the next slide. For AT132, we submitted our initial response to the FDA regarding the clinical hold in the third quarter of this year, and we are still in ongoing discussions with the agency. Details to be explained later again. Page 12 is about the latest status of zolbetuximab. We have top line results from 2 Phase III studies, SPOTLIGHT and GLOW studies. The SPOTLIGHT study evaluated the efficacy and safety of zolbetuximab in combination with mFOLFOX6, a chemotherapy regimen used primarily in the United States and Europe and GLOW evaluated the efficacy and safety of zolbetuximab in combination with the CAPOX, a chemotherapy regimen used primarily in Asia. In both studies, zolbetuximab demonstrated statistically significant improvements versus placebo in both the primary end point of PFS and the primary secondary endpoint of OS. As we introduced the details of the SPOTLIGHT study at the recent IR meeting, we presented the results at the ASCO GI meeting in January. As shown in the lower right figure, the combination therapy of zolbetuximab and mFOLFOX6 resulted in long overall survival 18 months. However [ph] this data was highly evaluated and accepted the ASCO-GI Based on the results of both studies, we are working for a regulatory submission globally and targeting of the first BLA submission in the first half of fiscal '23. In addition, activities are underway to raise awareness of the importance of Claudin 18.2 the drugs target as a biomarker in preparation for its launch. The combination diagnostics, excuse me, the companion diagnostics needed for patient screening will be marketed by our partner Ventana, in conjunction with the timing of marketing of zolbetuximab. From here, Page 13, I would like to talk about focus approach. As for current status of projects and clinical trial, those that made progress in the past quarter are shown in red. In the genetic regulation, the FDA's clinical hold on AT845 was lifted in January, the details explained on the next slide. In area of bispecific immune cell engager in immuno-oncology, ASP1002 has entered the clinical stage and is scheduled to start Phase I trials in the fourth quarter. The details of the target molecule are not disclosed at this time, but we still introduce them at an appropriate time in the future. This is the third project using bispecific antibodies to interclinical trials following ASP2138, which is a position as a successor to zolbetuximab and ASP2074 announced in the previous fiscal results announcement. Based on the focus area approach concept, projects have been continuously generated. On Page 14, we describe the progress of the genetic regulation programs, AT845 and AT132 to what is the resumption of their respective clinical studies. In AT845, we received a clinical hold from the FDA in June 2022, as has been mentioned already. But we submitted a response in December based on which the clinical hold was lifted in January. The protocol will be modified to reduce the risk of similar adverse events before resuming clinical trials. One is to exclude participants with the history of or risk factors for neuropathy. And the other is to reinforce the safety monitoring further. We are currently working on the necessary procedures for resumption of dosing with a target resumption date of second quarter of FY 2023. Regarding AT132, its initial response to the clinical hold given by FDA on September 2021 was submitted in the third quarter of the current fiscal year. We have had constructive discussions with the U.S. and the European authorities, and we plan to continue to do discussions with them in the fourth quarter. We will update our overall plan based on feedback from the authorities. But at this point, we expect to resume dosing in FY 2024 or later. On Page 15, I will explain our collaboration with Selecta Biosciences in relation to the progress of AT845. First, on the left side of the slide, I will explain about pre-existing immunity or PEI. A certain percentage of people have naturally acquired IgG antibodies that react to adeno-associated virus or AAV. It is difficult to expect such individuals to benefit from gene therapy using AAV capsids. And they are excluded from the eligibility criteria in clinical trials and cannot receive treatment. In estimate that - it is estimated that up to 30% of adults have acquired antibodies to AAV8 using AT845. As shown on the right side of the slide, aiming at dealing with this issue, Selecta has created a Xork an IgG protease that is specifically and efficiently cleave to human IgG. There are other IgG protease under development by other companies, but most of them are derived from human pathogen. So many patients are considered to have antibodies against AAV. Xork, on the other hand, is not derived from human pathogens and is expected to have local cross-reactivity to pre-existing antibodies in human serum, which attenuate the efficacy. Astellas would have the sole and exclusive right to commercialize Xork for use with investigational AT845 in Pompe disease. Through this collaboration, Astellas expects to expand the patient population for AT845. On Page 16, I summarize the progress made in the third quarter toward the achievement of CSP2021. In the upper left-hand corner, revenue from XTANDI and Strategic products are showing progress in line with the revised full year forecast. The U.S. sBLA for PADCEV for the first-line treatment of metastatic urothelial cancer, an important growth driver for us has been accepted and it was designated as priority review. For zolbetuximab we obtained top line results in 2 Phase III studies, both of which met their primary endpoints. And the focus area approach on the left bottom, progress was made on ATt845, including the lifting of the clinical hold and the new collaboration. In addition, one new immuno-oncology project entered in the clinical phase. In terms of Core OP, while securing proactive investments for new product launches continued efforts to thoroughly review costs has been made. As a result SG&A expenses, excluding the impact of foreign exchange were down year-on-year. In the lower right-hand corner, although I did not explain it today, with respect to sustainability, we have revised our greenhouse gas emission reduction targets and have received approval from the SBTi initiative. The details will be explained at the Sustainability Meeting to be held this month. In addition, again, although not shown on the slide, as announced in the press release today, we have decided to acquire our own shares. The share will be up to 29 million shares up to JPY 50 billion, and we conducted from February 7 through March 24. We will continue our efforts to improve capital efficiency and shareholder returns. Page 17, this is the last slide. This is a schedule for upcoming events. We are planning to hold a Sustainability Meeting on February 17. We will introduce in-depth initiatives that are unique to Astellas and that are of great interest to investment community. We are also considering holding a meeting on fezolinetant after it is approved. It is expected to be around March, but we will inform you of the details as soon as they are determined. At the end to summarize, in the third quarter, the basis of the core business is in line with the forecast. But when it comes to business of a full basis, due to the expected matters, including the foreign exchange loss against the ruble, they went down. But this is considered to be a tentative situation. For the full year, our core business has been forecast. And for the full base business, again, due to the impact of the currency and also the progress of the zolbetuximab [ph] which are all positive for us, there's likely to be a downward shift. With the value review of Evrenzo and also further optimization of our cost structure, we believe at least are going to work for us corporate strength. That's all. Thank you very much. That's all for the presentation. We now would like to entertain questions from the audience. You can ask questions only through Zoom webinar. [Operator Instructions] Thank you for waiting. First, Credit Suisse Securities, Mr. Sakai, please. Sakai from Credit Suisse Securities. Thank you very much. I have two simple questions. First, today, there was no update. Scan [ph] What is the current status right now? You overcame patent cliff, as was mentioned. But as for the scan it's not against my expectations, but it has a product with quite a big size. So I'd like to know? Another question is about XTANDI in the United States. My concern is as follows, pre-pandemic levels of patient - new patient starts have not returned to the pre-COVID-19 pandemic level. Is this because of the competition against generics having an impact? Or there's going to be an additional indication for the future. So you mentioned there's going to be a further growth in the next fiscal year and beyond. So I'd like you to explain the situation of XTANDI in the United States once again. So those are my two questions. Thank you very much. Regarding your first question, I'd like to respond. And the second question will be explained by Matsui, CCO. As for Lexiscan, right now, in the lawsuit, we applied for the extension of the petition up to the 31st of March, we received the extension. Regarding the impact on the current fiscal year, it's going to be quite limited. But in the next fiscal year and beyond, we have to closely monitor the situation. In that respect, in the current fiscal year, there's a smaller likelihood of a decrease in sales. Mr. Sakai, thank you very much for your question. Matsui, speaking. As for XTANDI, it's not just about our company, but the diagnosis of cancer for new patients in the United States, companies doing active business in oncology area, you might have heard from them, there is no complete recovery yet. The number of new patients is facing the delayed diagnosis. As for the impact of the generics, there is some impact of generics. But as we mentioned before, in terms of the volume, it's growing. And in FY '23 and beyond, there's going to be a gradual recovery in our view. EMBARK study for the additional indication would be coming in the entire market. What's negatively working is the new patient starts and PAP â P-A-P. Comparing FY 2021 and '22, just likely there is still some impact of PAP even more than the previous fiscal year, but we included this in our budget formation. So we revised forecast. This is in our wish to revised forecast. The ratio is similar to the revised forecast right now. And new patient starts and the -- together with the economic recovery, there's going to be further recovery, then we can see a further increase in the new patient starts. That's all for me. Thank you. Thank you. Let me make one confirmation on [indiscernible] for Lexiscan. Other than what's been presented, there is no new sort of topic. In the next fiscal year, generic injunction, you go into the generic â the generic entering the market. That is also what you have in your mind as the risk or there is a situation with the hospital. So currently we are behind. So in that respect, including risk launch, certain risk has to be incorporated in the next fiscal year. However, litigation is still ongoing. That's the specific number is something I would like to refer from making comment. And today, Yasukawa and Okamura are still here. Of course, this is the financial announcement meeting. However, if there are any questions, we are ready to answer them as well from them. Citigroup Securities, Mr. Yamaguchi, please. Next fiscal year, well, the person will be changed. I don't think this is directly related to it, but [Technical Difficulty] next fiscal year and afterwards, that is extremely important for your growth in the mid-term plan. And the previous meeting, I think you mentioned that from next fiscal year, these products are likely to be a further - funded in a bigger. Of course, final approval is not really given and I've heard that in March you are going to give us the - some explanation. So how do you view about that [Technical Difficulty]? ...information giving activities for this product? In other words, this is awareness activities being continuously ongoing. And in the United States, the doctors and also consumers are highly reacted to our information that is more than expected. So in that way so that we can make this product bigger. We are honestly looking for the effort. One more question. This may be related to the change of the President and CEO, as Dr. Yasukawa mentioned, particularly from the global niche to FA, that's a big change, obviously [Technical Difficulty] strategy looking from outside. But looking at the pipeline, you explained. I'm sure you are heading into this direction overall. But you have to go into this direction for the future. But right now, you're aiming for this. You are making a transformation and a few years have past since the shift, how this is perceived internally and including the results you're achieving externally. I think your direction is not wrong, but what is your comment on this? Yasukawa, speaking. If you look at our initiatives in 2013 [Technical Difficulty] initially one by one was kind of independent. But in the past 1 or 2 years, so differentiation and cultural technologies can be used in immuno-oncologies and gene editing technologies can be used in other areas as well. So we think there was a lot of development in this respect. And also on the other hand, because of the impact of COVID-19, it's not just for Astellas, but also broadly for the entire pharmaceutical industry. Pre-PoC clinical studies from the priority for each study site, it was postponed and deferred. We couldn't see progress as we expected. And cells or genes in recent years, assay or analytical technologies also made progress. [indiscernible] issues we couldnât recognized before and now visible because we can see those issues. We have to ensure the safety of the patients and the issues and impurities [Technical Difficulty] which are now visible. If there are some issues with the cells or empty capsids such technical issues are being improved. Hashiguchi, speaking. There are couple of questions. The first question, the end of the term, the possibility of additional cost to after âreviewing the cost structure Mr. Kikuoka, you mentioned, if there is some distortion or situation happens, you are trying to fill that gap. And in FY '24 and '25, you mentioned some explanation, but the issue considered this time. Well, the FY '25 profit target is difficult to be achieved - is considered in that way. So in order to fill the gap you are trying to do those countermeasures this time? Or in order to add further profit on FY '25, you are trying to introduce such activities? Thank you very much for your question. What I mentioned is that, well, for the number wise, it's still under stress that we are not able to disclose any specific numbers. But before me joining this company, included for various perspectives. So for example, the MD [ph] globalization so that you actively invested so that that the efficiency can be further improved. You are prepared setting for that. And for the go-live of the product, there is increase of the cost sometimes. However, it seems that, that is starting to be offset. We've made investment beforehand. But thanks to that, we started to offset of that. And there are some area that is ramping. So we want to make it further efficient. We are working for the various activities. But especially after I became CFO, we look at the whole debt perspective in a thorough review approach. Well, the situation is not particularly difficult compared to the past. But in order to secure the formal result from what we've been making as an effort. Just like Yasukawa mentioned, we would like to grow further. And for that purpose, so that we can allocate our investment to the strategic area further, we want to increase the efficiency further. In that perspective, for the expenses, well, we are going to come into the details now into the future, but not really booked in FY '22, and it will be probably after FY '24 because in FY '22 and '23, we would like to verify the situation and so that we can prepare for FY '24, where we expect larger expenses. Secondly, about zolbetuximab. In R&D expenditure you booked across [ph] for the increase of the commercial production. This time you [Technical Difficulty] Regarding zolbetuximab I talked about the contingent consideration but only, but by doing this [Technical Difficulty] booking in the R&D expenditure would be seen as product they would be shifted to the inventory. And so we are going to book them - this asset, we are assuming that possibility. So my answer to the first question is yes. As for fezolinetant, there is already a change to the fair value, but we are not expecting a further change to the fair value. So zolbetuximab R&D expenditure would be affected, even including that factor, it's not going to be an impact to affect or have a gap on a full year forecast. Because of the shift in conversion, JPY 6 billion as a short-term profit we are expecting. Lastly, Xyphos collaboration, again the [Technical Difficulty] study development plan and value went up. And that is Xyphos-derived product. That was disclosed. Thank you very much. First, about Evrenzo, I'm sorry to go into the past. But first, - Evrenzo if your outlook with [Technical Difficulty] product you tend to make a mistake or you tend to be wrong. As for Evrenzo what was your expectations? What was not achieved? Could you elaborate on that once again, to clarify? So that's not going to apply to fezolinetant at or. If you don't say that regarding the accuracy of your forecast, we still have some doubtful question. I would like you to clarify. That's my first question. Mr. Koutani, thank you for your question. Thank you for your very tough comments. We take it seriously. Regarding Evrenzo, what was different in our forecast? We do have strong interest. If you look at the response from the physicians on this point, because of the strong comments, skin PHH [ph] would expand more rapidly. We thought that we can maintain a high market share as a company to enter into this market ahead of the competitors. But unfortunately, in our experience in Japan, in the field of nephrology and treatment of anemia, the health care policies are very complicated in a variety of frameworks. From the government, it's strictly controlled by the government. So switching from the existing treatment it's not going to be changed. So quickly based on the speed we assumed, we think that's the reason for our wrong forecast. What's the difference compared to fezolinetant? In the case of Evrenzo, it was the Evrenzo [ph] selection. But as for fezolinetant, particularly in the United States, as you know, consumers, consumers themselves to be highly engaged in the selection of this drug. In the United States, as we mentioned a bit fezolinetant and Evrenzo syndromes for fezolinetant regarding this disease, they are very strong unmet medical needs and patients themselves strongly interested in this track, particularly for the first half [Technical Difficulty] by President of Barack Obama, also commented on this disease is on the Internet. And Oprah, she is very popular MC in the United States. And she's also mentioned this disease recently. Regarding this disease and the drug in this field, patients and women's interest are very high. CKD treatment is more specialized on HPC. As a decision-maker have a higher proportion. But in the case of fezolinetant patients, particularly in the United States, have a big say in the decision-making process. And they have a very high awareness and interest level right now as we observed. So in this sense, we are very confident about fezolinetant that we can grow this to a big product. That's our belief. Thank you very much. So sorry, I was in other companies meeting as well. What you just mentioned is also included within the handout material. No, maybe - you had a better put that in the material, Oprah Winfrey, Michel Obama. Those have a very strong voice to the female of all the American females. Well, they are not directly talking about fezolinetant, but they are talking about this disease and owning as activities related. Well, basically, as for the monetary amount has been really discussed with the partner and that's why the number is seemingly bigger than we expected it. But in the countries where we are aiming at this a bit and further considering the relationship, we come up with a dis-appropriate estimate of the possibility of submission as well to come to this number. So this is in line with our assumption as well. But in this fourth quarter, if this really happens or not? Well, in the beginning of the fiscal year, our assumption is, yes, it will be the next fiscal year. So in that perspective, guidance wise, this is my very sudden information from your perspective. However, when - from the beginning, we are saying that if we come to that kind of situation, then fair value change will be triggered. That is already in our mind. But looking at these couple of months, we believe that the accuracy and the possibility of the submission goes up. So it is likely to be within this fiscal year. In Europe, this year, this is going to be a year of the clawback. This year, in France, clawback. Sales of pharmaceuticals would be regained with excess. And VPAS is rising in U.K. as well. So in Europe the risk of used revenue, what's your view on this? This is my last question. Thank you for the question. You are - you know the details. VPAS in U.K. 5% in 2021, LTE ratio, 5% in '21, '22 15%, 2023 â VPAS clawback, depending on the economic conditions can change a lot. So not only for us, but also for the industry association, are you going to appeal to each country? For us, as you pointed out, regarding the three countries you mentioned, we are factoring this thing as a risk in our forecast. And they have not established yet. They are still under discussion. Somewhere during this year, they're going to be established? No. Regarding those three countries, starting from January, it's already being applied. Good afternoon. I am Muraoka from Morgan Stanley. Thank you very much. Yasukawa, thank you very much for your hard work and Okamura, thank you for the continuous relationship with the community as well. Now the first question its about this midterm plan. You mentioned about the word of flexibility, and there are so many index and there are so many items that you need to look at. However, out of those, I think there are some particular numbers that you definitely like to stick to 8% revenue or be 30% or something like that. Are there anything specific that you would like to particularly stick to â to achieve Okamura? Thank you very much for the question. If I answer all the numbers, that will be the answer, but if you would say, which out of those all? So of course, the sales of the revenue has to increase, otherwise, we cannot gain their profit for reinvestment. So definitely, I would like to - we would like to increase the revenue. In Core OP percentage, 30%. That itself is no goal. This is the - just assumption for the future and saying 30%. So this is - definitely have to achieve. This is a must percentage that we need to achieve. But as we mentioned, rather than thinking about FY '25, but my mission is that - and so there might be pattern expiry still, we can continuously grow ourselves. That is what we have to prepare now. Of course, revenue and profit are both important. But from a focus area approach, we have the product that gives us that perfect. That is something I would like to stick to. This JPY 500 billion for 2023. Well, we have to think about that carefully. But the final view that I have is 2021, five where that we need to see the role of the growth further. Otherwise, we can say that we achieved 2021 CSP. Thank you. Another question to Mr. Okamura to confirm. Last year, I think it was at the time of the second quarter results. Dr. Okamura talked about fezolinetant in the initial year, they meet dozens of billions of yen to be achieved. Unfortunately, in the market, there are some doubt. And I'd like to ask Mr. Okamura to explain this in your own words regarding the numbers mentioned by Dr. Okamura? That's also my belief. How much we explained in our own words repeatedly, the products are going to sell well or there are prescriptions. We have to show evidence on data to you. We're already in such a stage. So Yoshitsugu [ph] and I kind of united. So we are going to believe this â or believe in this, and we are going to show it to you. Thank you very much. Kumagai speaking. Can you hear me? There are two questions. First, fezolinetant, so the disease awareness activities are ongoing, that you mentioned? What is the specific activities? What kind of media are you using? Would you please explain about that? Relating to that, fourth quarter pre-launch cost or expenses that is included within the planned expenses that currently you have as a number? Regarding the expenses, let me answer the second question by myself. And the first question will be answered by Matsui. What you mentioned is probably the cost booking for the launch. That is already incorporated within our financial plan. And for the marketing activities, Matsui is going to answer. As has been mentioned, the patient, HCPs for both [indiscernible] and such symptom challenges. Those are covered by our disease awareness activities. We use TikTok, we use SNS, e-mails, we utilize a little of different media. Of course, depending - of course, those 45 to 65 year out of female that is the target for this drug and we are considering the most appropriate media for such a generation depending on the situation or may do the fine-tuning to make it effective. Thank you very much. Secondly, about AT845 - adding the protocol or change. Xork is going to be available, as is shown on Page 15, there is going to be an increase in the patient population. How should we see the increase or decrease in the patient population? There are some patient subjects to be enrolled with some limitation. But if Xork is going to be available, you can expand the patient population regarding AT845. I would like to explain AT845. As we explained earlier, from FDA, there was clinical hold, which is now lifted by FDA. So continuously, we will discuss with FDA. And what kind of protocol amendment is going to be necessary, we are now discussing with FDA. Patients with prior neuropathy or patient at high risk of neuropathy would be excluded from the clinical study, but then in Phase I right now, we will accumulate data. And in the late stage development, what kind of patients would be your target? And what kind of patients should be excluded from the protocol we are discussing right now? We have the Exclusion criteria in the protocol and those patients excluded cannot use this drug for the future. We don't know yet. That's one thing. As for Xork, AAV patients with AAV antibody, that's around 30%. And we can make efforts to increase the population. So this is not directly linked to the protocol amendment fee we made. But using Xork AAV, because of the AAV antibody, patients were not eligible for the administration, but could be eligible. So this is separate from the protocol amendment. We'd like to make this drug available to broader patient population into the future, we will make efforts. Ueda from Goldman Sachs. Zolbetuximab, fair value increase - contingent consideration is something I would like to double check with you. In your presentation, with the submission and the probability of submission and approval and the launch is - increased. So this probability of success went up, but there is nothing changed about the potential or whatsoever. Yes, your understanding is right. Thank you very much. Secondly, about PADCEV sales trend. Right now, sales are growing steadily right now, but this is the expansion in the current indication. After the announcement of EV-103, Cohort K, it's not used in the first one yet. So it's going to expand after you get the approval for the first-line indication. As explained a bit initially, there may be some additional comments. Matsui would like to add. Actually, I don't have much to add, but you're right. According to our observations off-label use is not so much in principle, in just usage in the current indication, that's the majority of sales right now, according to understanding. Thank you. Third question, the collaboration with the Selecta, with Xork, the efficacy is less likely to be attenuated. But for the gene therapy, do you consider about the usage of this technology for the multiple administration of gene therapy? Yasukawa, is going to explain about it. Thank you for the question. So multiple administration might be possible, thanks to this kind of technology. But for the collaboration with the Selecta this time is only for Pompe. So IgG protease, the immunogenicity with this regard is also needed to be observed. And depending on that there is a possibility of the multiple usage, it will be different. Wakao from JPMorgan. Thank you for your time. My first question is about your forecast for the next fiscal year. I'd like to get a sense of your company. In February, fezolinetant may be approved, then on a full year basis, next fiscal year, fezolinetant is going to contribute to your results. On the other hand, excluding fezolinetant in your existing business, based on the situation not until now, the existing businesses will grow and then fezolinetant will be on top of that, but rather according to my own impression, according to my model, rather than that, the existing business may face challenges and fezolinetant growth can offset the stagnant situation of the existing businesses, in my view. So right now, what is your future outlook of the existing businesses in the next fiscal year, as a negative factor, the yen's appreciation and the stagnant growth of XTANDI and mirabegron and â or they can be generics of Lexiscan? And there are some impact of generics for some products. So in the existing businesses, the next fiscal year may be a challenging year. What do you think? Then I'd like to explain, right now, we are developing our budget internally for the next fiscal year. In terms of our philosophy here, in XTANDI, we reviewed in the second half. So we have to be aware of the mature phase. But still a high sales contribution is what we are expecting, XOSPATA and PADCEV. We are forecasting steady growth and expansion. In principle, the patent cliff for the future, how to deal with this is going to be an issue. But for next fiscal year, fezolinetant will be launched. That's what we're expecting. And regarding the existing products towards the next fiscal year, difficulties. Lexiscan, we will have a severe outlook for Lexiscan, but as a strategic product, we are expecting growth in many of them right now. So by adding fezolinetant toward 2026 and 2027, we'd like to be ready. Thank you very much. Second question, PADCEV first line will be approved in April that will contribute throughout the year that is likely to be the positive factor. But on the other hand, there was not much of the explanation about the mirabegron today. FORTIS, Myfembree the competitor became available. So the situation is getting tougher, I believe you mentioned that. On a dollar basis, situation, if I look at that, quarter basis, quarterly basis, yes, it might be a difficult situation for you. Myfembree is not listed on the Medicare Part D, but from January. So mirabegron is hopefully used for Medicare Part D. So competition is highly likely to be more fierce. Now my question is that it is likely that situation is a bit fragile for you. That's worth thing. And next fiscal year and afterwards, the mirabegron sales might be negatively impacted because of this competition situation? I see. Regarding the U.S. market, first of all, our observation is that Gemtesa market share is within our â as we expected. So, so far, we haven't seen any bigger impact, and we don't see that is a bigger factor causing a difficulty for us. But why this difficult situation for us? Well, market growth, that is about 2%. And our share is gradually increasing 24.13 percentage is the current market share maintained. In this situation, why is it difficult? That's about a price pressure. That is negative impact, and that is likely to be continued. So the competition is getting fierce and that might be what would happen in the United States. But so far in the United States, the competition of the market share with Gemtesa is not really negatively impacting overall Yes, there is an impact of the price, but the Medicare Part D, if your competitor come into that lease, then competition is likely to be tougher. It is not happening now. But for the future, is it better to expect that would happen? Well, as well so that we can do with that situation with the insurance companies, including the contracts, yes, we are working to prepare for that. We wouldn't say that the situation is further worse than what we expected, but we are doing the preparation anyway. Thank you. Lastly, briefly about fezolinetant. In the second quarter, you gave us a rough amount of sales. No change since. According to initial plan, in the second quarter, you had a suggestion, we will have the numbers within that range. Should I understand this way? And also in the Explanatory Meeting previously, it was not approved and the price has not been determined yet. So your strategy in detail numbers were not discussed much. But this time, at this timing, the price should be determined on the approval may be determined. So I think that we can discuss numbers more. Can we have high expectations for the numbers as well? Yasukawa responded to an earlier question. And in principle, we'd like to achieve that level, we will work on that. So in that sense, there's going to be no change. This is before the launch. So as I said at the end, in March, as early as March, we'd like to have an Explanatory Meeting after the launch where we want to explain the details if possible. Thank you so much. We are getting the time to close this meeting. I believe that you are going to join the next other company's call. We have so many questions. But with this, we would like to close this meeting here today. Everyone, thank you very much for your participation. With this, we would like to close today's meeting. Thank you.
EarningCall_518	Greetings, and welcome to Twin Disc Inc. Fiscal Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. Thank you, Doug. On behalf of the management of Twin Disc, we are extremely pleased that you have taken the time to participate in our call, and thank you for joining us to discuss the company's fiscal 2023 second quarter and first half financial results and business outlook. Before introducing management, I would like to remind everyone that certain statements made during this conference call, especially those statements introductions, hopes, beliefs, expectations, or predictions for the future are forward-looking statements. It is important to remember that the company's actual results could differ materially from those projected in such forward-looking statements. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are contained in the company's annual report on Form 10-K, copies of which may be obtained by contacting either the company, or the SEC. By now, you should have received the news release, which was issued this morning before the market opened. If you have not received a copy, please call our office at 262-638-4000, and we will send a release to you. Hosting the call today are John Batten, Twin Disc's Chief Executive Officer; and Jeff Knutson, the company's Vice President of Finance, Chief Financial Officer, Treasurer and Secretary. Thank you, Stan, and good morning, everyone. Welcome to our fiscal 2023 second quarter conference call. As usual, we will begin with a short summary statement, and then we'll be happy to take your questions. Given the inflationary pressures and supply constraints that we saw in the first quarter, we think our teams around the world did a very good job making improvements in almost every area to deliver a better year-over-year and sequential quarter. On the top line in holding at constant currency, sales improved almost 15%. Jeff will cover the details, but most of that growth came in North America with a very healthy improvement in oil and gas rebuild activity. Global Marine and industrial shipments also improved more than what's stated in some percentages once you take the currency into account, half of each business is produced in euros. The late summer and fall months of 2022 delivered another round of cost increases that we had to pass on with new pricing in January. That should further improve gross margins as we finish fiscal 2023. Activity in all of our markets was robust. Vethâs backlog increased nicely and they had very strong shipments in the quarter. Additionally, many of their lower margin projects have now shipped. There was a noticeable improvement quarter-over-quarter in their results. Shipments in Asia declined slightly as demand slowed during some COVID lockdowns, and we also had units waiting for control harnesses and displays. This should improve in the second half of the year. Much of our inventory increase in the quarter can be attributed to this pause in shipments, but we expect this to improve in the second half. Again, other causes increased inventory remain late deliveries on key components like gears from heat treat that keep us from shipping completed transmissions. North America oil and gas had a very good quarter for aftermarket rebuilds, which will continue into the second half. New unit shipments should start later this quarter and into the fourth quarter. As I mentioned last quarter, Grizzly has released a 3,000 horsepower EnviroFracelectric frac rig with our 7,600 transmission on it, and I suspect that you will see this deployed in the field later this calendar year. Other new hybrid and electric applications that have come to the market include the research vessel resilience to be built by Snow & Company in Seattle for the Pacific Northwest National Laboratory. The RV resilience is a 50-foot catamaran that is both diesel and electric motor driven through our master clutches and marine transmissions. This should be in the water by the end of the fiscal year. I encourage everyone to visit our website for the latest updates on all of our hybrid and electric applications. In the quarter, you noticed that we recorded the gain on the sale of our Belgian facility. Through years of supply chain consolidation and our decision to focus mainly on gear production and assembly and test, we're looking for a new smaller and more efficient building for this facility. This process is well underway. Similarly, we are looking to do this with our Italian operations, and we look to be more efficient, both with our organizational and footprint structures. Thanks, John. Good morning, everyone. I'll briefly run through the fiscal 2023 second quarter and year-to-date results. Sales of 63.4 million for the quarter, up 3.5 million or 5.8% from the prior year second quarter. The sales increase reflects improved demand in the company's global oil and gas, industrial, and marine markets. Shipments in the quarter were somewhat limited by the ongoing supply chain constraints mentioned in previous quarters, with electric components remaining the most challenging area to find reliable and predictable supply. With help from improving North American demand for pressure pumping equipment, compared to the prior year second quarter, our transmission product sales improved by 10%. Sales in Industrial products showed a slight decline of 2.5%, while marine and propulsion product sales grew by 2.7%. By region, sales in the North America were up 32%, while sales into Europe were up 3.7%. Sales into the Asia Pacific market declined by 8.3%, due primarily to a temporary pause in the shipment of certain oil and gas-related products into China. Foreign currency exchange was a net negative 5 million impact to sales in the quarter and 9.9 million for the first half. On a constant currency basis, second quarter sales increased 14.2% and 20% for the first half. The second quarter margin percent of 26.9% improved compared to the 22.5% in the prior year second quarter. This improvement in the current year is a function of improved volume, a favorable product mix, operating efficiencies and reduced inflationary impact, thanks to proactive pricing actions. For the first half, gross margin is now 25.4%, compared to 25.0% for the fiscal 2022 first half. Spending on marketing, engineering, and administrative costs for the fiscal 2023 second quarter increased 70,000 or 4.7%, compared to fiscal 2022. The increase in the quarter is primarily due to the impact of prior year COVID subsidies in the Netherlands totaling 700,000, along with inflationary impacts and a return to more normal spending activity in areas such as marketing, travel, salaries, and professional fees, which totaled 1.5 million. These increases were partially offset by a foreign currency translation impact of 800,000. As a percent of revenue for the second quarter, ME&A expenses were 25.2%, compared to 25.5% in the prior year second quarter. And for the first half, ME&A expenses were 26% of revenue, compared to 26.3% in the first half of fiscal 2022. During the second fiscal quarter, we recorded a $4.2 million non-operating gain related to the sale and leaseback of our Belgian facility, as John noted. Similarly, during the prior year first quarter, we recorded a $2.9 million nonoperating gain related to the sale and leaseback of our Swiss facility. The effective tax rate for the first half of fiscal 2023 was 175.9%, compared to a negative 131.1% in the prior year first half. The wide disparity in rates is a function of the full domestic valuation allowance along with the mix of foreign earnings by jurisdiction. Net profit for the second quarter of fiscal 2023 was 1.1 million or $0.08 per diluted share, compared to a net loss of 3.8 million or $0.29 per diluted share for the fiscal 2022 second quarter. And for the first half of fiscal 2023, we had a net loss of 900,000 or $0.07 per diluted share, compared to a net loss of 1.9 million or $0.14 per diluted share in the prior year first half. EBITDA of $6.4 million for the quarter was greatly improved from a slight loss in the prior year second quarter, and for the year-to-date, EBITDA of 6.3 million is 22% improved from the prior year first half of $5.2 million. Turning to the balance sheet. Inventory was up 9.7 million for the year, impacted by a currency-driven decline of 1.5 million. The significant increase, excluding the translation impact as a result of the temporary delay in shipment of certain oil and gas products into China, continued supply chain imbalances, customer delayed shipments, and the timing of shipments through our distribution operations. We anticipate significant improvement in our second half as we continue to focus on and refine inventory planning and sourcing strategies that will drive progress. With the increase in inventory, offsetting improved operating results, operating cash was slightly positive for the first half. Capital spending of 4.7 million for the first half was focused on the modernization of our machine tools, and we expect a similar quarterly run rate in capital spending for the remainder of the year, totaling in the $9 million to $11 million range for the full-year. Thanks, Jeff, and I'll take a quick moment on our outlook. Looking at the backlog and market conditions heading into the second half of the year, we think that we can have a very strong finish to fiscal 2023. As we mentioned, we had to implement another round of pricing to offset the additional increases that we saw in Q1 and Q2. Many of the bottlenecks that we have been dealing with are starting to improve. The most significant improvement has come in our electronic control supply, which covers all of our marine, [arch], and frac transmissions. Additionally, we see demand for oil and gas spare parts continuing throughout 2023. That concludes our prepared remarks. And now Jeff and I will be happy to take your questions. Doug, could you please open the line for questions? Thank you. [Operator Instructions] There are no questions in the queue at this time. I like to hand the call back to management. Thank you, Doug, and thank you for joining our conference call today. We appreciate your continuing interest in Twin Disc and hope that if you do have questions that you will call either Jeff or myself, and we'll try to answer them as quickly as possible. We look forward to speaking to you again following the close of our fiscal 2023 third quarter. Doug, now I'll turn the call back to you. Thank you. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.
EarningCall_519	Good afternoon. My name is Robert, and I'll be your conference facilitator today. At this time, I'd like to welcome everyone to Manhattan Associates Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions] As a reminder, ladies and gentlemen, this call is being recorded today, February 2. I would now like to introduce your host, Mr. Michael Bauer, Head of Investor Relations of Manhattan Associates. Mr. Bauer, you may begin your conference. Thank you, Rob, and good afternoon, everyone. Welcome to Manhattan Associates 2022 fourth quarter earnings call. I will review our cautionary language and then turn the call over to Eddie Capel, our CEO. During this call, including the question-and-answer session, we may make forward-looking statements regarding future events or the future financial performance of Manhattan Associates. You are cautioned that these forward-looking statements involve risks and uncertainties, are not guarantees of future performance and that actual results may differ materially from the projections contained in our forward-looking statements. I refer you to the reports Manhattan Associates files with the SEC for important factors that could cause actual results to differ materially from those in our projections, particularly our Annual Report on Form 10-K for fiscal year 2021 and the risk factor discussion in that report as well as any risk factor updates we provide in our subsequent Form 10-Qs. We note, in particular, the turbulent global macro environment could impact our performance and cause actual results to differ materially from our projections. We are under no obligation to update these statements. In addition, our comments include certain non-GAAP financial measures in an effort to provide additional information to investors. We have reconciled all non-GAAP measures to the related GAAP measures in accordance with SEC rules. You'll find reconciliation schedules in the Form 8-K we submitted to the SEC earlier today and on our website at manh.com. Okay. Thanks, Mike. Well, good afternoon, everyone, and thank you for joining us as we review our fourth quarter and full-year 2022 results, as well as our outlook for 2023. So 2022 is a remarkable year for Manhattan, setting all-time records in total revenue, RPO, operating profit, cash collections and earnings per share. And to drive future growth and innovation, we also invested record amounts in our people and in R&D. In 2022, we spent over $110 million on research and development, which is up 15% from the previous year. We also increased our total headcount by 16% in response to the high demand for our solutions and services. We are confident that these investments will contribute to our already high levels of customer satisfaction and extend our position as the leading innovator in core supply chain execution, omnichannel solutions and retail point-of-sale commerce. And given the size of our opportunity and the long-term favorable business momentum, we plan to continue the investments, including hiring between 400 and 600 new associates in 2023, which we are guiding to be our fourth record revenue year since introducing our goal to become a cloud-first company five years ago. Now while we remain appropriately cautious regarding the global economy, demand for our solutions remains robust, and we are optimistic about our long-term market opportunity. Now recall our solutions are mission-critical and they are key components to our customers' success. And additionally, we are entering 2023 with pretty good visibility in several growth drivers, including, the acquisition of new customers; the conversion of our on-premise customers to the cloud; and cross-selling our unified product portfolio into our customer base. Now specifically pivoting to our quarterly results, Q4 was a record quarter that exceeded our expectations. Revenue increased 16% as a reported $198 million and highlighted by 49% growth in cloud, 22% growth in services and double-digit revenue growth across all of our geographies. And these strong results drove our topline outperformance and solid earnings leverage in the quarter with adjusted earnings per diluted share increasing 69% to $0.81. Now RPO, the leading indicator of that growth, increased 50% to $1.1 billion at the end of 2022. And importantly, customer satisfaction levels are high. Win rates remain at 75% plus, and demand for our cloud solutions continues to be pretty solid across our product portfolio. From a vertical perspective, retail, manufacturing and wholesale continue to drive more than 80% of our bookings in the quarter. And across our solutions, the sub-verticals are pretty diverse. For example in the quarter, cloud deals won include a global cosmetics manufacturer, a grocery retailer, a diversified automotive company, a manufacturer of home goods, a food wholesaler and an e-commerce retailer as well as numerous others. And this contributed to a healthy mix of bookings across sub-verticals for the full-year. And additionally, aided by the clear benefit of resilient modern supply chains, over 40% of our bookings were generated from new logos and over 30% from cross-sell opportunities in 2022. Importantly, that pipeline continues to be strong with solid demand across our product suites. Net new potential customers represent about 35% of that demand. And as of year-end, we had converted less than 10% of our on-premise customers to the cloud. Now turning to the product front. We are coming off of a very exciting National Retail Federation Conference in New York. Customers and prospects were back in force this year, and we have some exciting product innovations to share with them. Those include the work we are doing around fully enabling RFID with our Manhattan Active store solution. We've added native support for RFID directly into checkouts and returns, inventory management and store fulfillment functions so that retailers can make more accurate promises, increased conversion rates and maximize inventory exposure for selling. The value of RFID in stores has proven to be quite significant as the digital experience becomes an integral part of bricks-and-mortar shopping. It's vital that our customers know how much of a particular product that they have and where each specific unit is located inside of their store. And what's more, RFID allows our customers to deliver these improved experiences and to do it with significantly less labor. Now speaking of our store technology, we just finished a very successful retail peak season, and specifically with our point-of-sale application. A number of our customers are showing very positive results from the rollout of our Omnicart capabilities. That's the ability to sell items from alternate locations in a single transaction. And only a unified commerce solution with a built-in point-of-sale and order management capabilities can deliver a seamless Omnicart process. Now regarding implementations, we are seeing some really very positive operational results tied to the first wave of deployments of Manhattan Active Warehouse Management. And I thought I'd share a couple of anecdotes on the positive operational impact from the deployments of our cloud-native WMS. Now I've spoken before about employee engagement, one of the WMS features, which is unique to our application. And one of our early adopter Manhattan Active WM customers who now activated all the features of employee engagement, including enabling their associates to complete in gamified challenges and accumulate points. And these points are redeemable for a variety of tangible items in a digital incentive store. And the result for this customer is an incremental 5% productivity improvement in the DC on top of their traditional engineered labor standards and incentive program. And staying on productivity enhancements for a moment, one of our high-volume apparel customers in Brazil is showing a double-digit throughput increase in their distribution center after implementing Manhattan Active WM. Even though the facility was already outfitted with pretty extensive automation, the workflow optimization inside of Manhattan Active WM is helping them extract record levels of productivity from their material handling automation. Now even in a less automated DC, Manhattan Active WM really shines there, too. One of our large wholesale drug customers is reporting a picking productivity improvement in excess of 30%, and this improvement is attributable to the latest pick path optimization algorithms native to Manhattan Active WM. Now before I hand off to Dennis, I want to take this opportunity to briefly recognize and thank each and every member of the Manhattan global team. And Manhattan is committed to creating an inclusive culture where our team members can advance their careers, contribute to our company-wide goals, feel valued and engaged with the communities in which they live and work. And in 2022, they clearly went above and beyond to deliver a remarkable year with remarkable results for our valued customers. And I'm confident in the future success of this company largely because of this team. So that includes â or concludes my business update. Dennis is going to provide you with an update of our financial performance and outlook. And then I'll close our prepared remarks with a brief summary before we move to Q&A. So Dennis? Thanks, Eddie. As Eddie highlighted in 2022, we set all-time records in RPO, total revenue, operating profit, cash collections and earnings per share. Congratulations to our team members around the globe for great execution. Overall, for the quarter and the year, we delivered a strong balanced financial performance on topline growth and operating margin, with both results comparing favorably to the Rule of 40 and if our revenue growth is normalized for our cloud transition, excluding license and maintenance attrition, both results exceed the Rule of 50. We continue to deliver strong metrics across revenue growth, profitability and cash flow. I'll start with recapping our financial performance for the quarter and year. All growth rates are on a year-over-year basis unless otherwise stated. Additionally, we are also providing constant currency growth to demonstrate apples-to-apples comparisons. Unless otherwise stated, constant currency will compare results as if rates were unchanged from the year ago period. Q4 total revenue was $198 million, up 16% as reported and 19% excluding FX. Full-year revenue totaled $767 million, also up 16% and 18% removing FX. Excluding license and maintenance revenue, which removes the revenue compression by our cloud transition, Q4 revenue growth was 29% and full-year 25%. Q4 cloud revenue totaled $52 million, up 49%, with full-year revenue totaling $176 million, up 44%. We closed out 2022 with RPO of $1.1 billion on the round, growing 50%. This was at the high end of our guidance. If FX rates remain unchanged from the year ago period, RPO growth would be 54%. And if rates remained unchanged from September 30 levels, sequential RPO growth would be 6%. As of December 31, over 97% of our RPO represents true cloud-native subscriptions. Q4 services revenue increased 22% to $100 million, and full-year services revenue increased 18% to $394 million. Both were records as cloud sales continue to fuel services growth globally. Shifting to earnings leverage. Our Q4 adjusted operating income totaled $60 million with an operating margin of 30.2%. The 740 basis point increase was driven by revenue growth. Full-year adjusted operating margin was 27.6%, up 80 basis points on revenue growth. Our Q4 GAAP operating income was $45 million with a 22.6% operating margin, with full-year GAAP operating income totaling $153 million with a 20% operating margin. Our Q4 earnings per share increased 69% to $0.81. Note, our EPS includes $0.05 of tax benefit associated with expiring tax statutes, lowering our effective tax rate in the quarter to 16%. This resulted in full-year EPS of $2.76, which was up 24%, exceeding guidance. Q4 operating cash flow increased 38% to $55 million as Q4 adjusted EBITDA margin was 31% and free cash flow margin was 26.6%. Our full-year operating cash flow was $180 million. Adjusted EBITDA margin was 28.5% and free cash flow margin was 22.6%. Remember, these figures include $58 million in cash taxes paid, which is roughly doubling the amount of cash taxes paid over last year. For more information on the $26 million incremental cash taxes paid associated with the U.S. Tax Cuts and Jobs Act, please refer to Item 8 in our earnings supplemental information schedules. Turning to the balance sheet, deferred revenue increased 36% year-over-year and 23% sequentially to $209 million. We closed 2022 with $225 million in cash and zero debt. For the year, we invested $175 million in share buybacks, including $25 million in Q4. Also, our Board has approved the replenishment of our $75 million share repurchase authority. Now moving to guidance. As consistently mentioned, our financial objective is to deliver sustainable double-digit topline growth and top quartile operating margins benchmarked against enterprise SaaS comps. As Eddie mentioned, we will continue to invest with a balanced approach to growth and profitability. We are raising the midpoint of the preliminary 2023 revenue, operating margin and EPS guidance that we provided last quarter. We are also reiterating our 2023 RPO guidepost midpoint of $1.35 billion. Consistent with our recent earnings releases, our guidepost can be found in today's earnings release, supplemental schedules. As noted on prior earnings calls, we will be updating our RPO outlook on an annual basis. Additionally, as previously discussed, our bookings performance is impacted by the number and relative value of large deals we close in any quarter, which can potentially cause lumpiness or nonlinear bookings throughout the year. For full-year 2023, we expect total revenue of $820 million to $833 million with an $826.5 million midpoint, up from our prior midpoint of $810 million. Excluding license and maintenance attrition, this represents 16% growth. All in, our target is 8%. First half and second half total revenue splits are expected to be about 50-50. For Q1, we expect total revenue of $198 million to $202 million, which at the midpoint represents 21% growth, ex license and maintenance attrition and 12% growth all in. We continue to track ahead of our original margin expectations. And reflective of our higher revenue outlook, we are increasing our 2023 adjusted operating margin range to 25.5% to 26.5%, with a midpoint of 26%, up from our prior guidance of 25.5%. Included in this range is a 260 basis point headwind from the $35 million reduction in maintenance and license revenue from our transition to cloud. At the midpoint, operating margin on a quarterly basis is expected to be roughly: For Q1, 26%; Q2, 26.8%; Q3, 27%; and accounting for retail peak seasonality, 24.3% in Q4. Those are pretty exact targets. This results in a full-year adjusted EPS range of $2.61 to $2.75. The $2.68 midpoint, up from our prior $2.55 midpoint outlook for GAAP EPS, our guidance range is $1.81 to $1.95. Note, if the 2022 below-the-line income taxes and other income were normalized at 2022 levels, 2023 adjusted EPS would be $0.13 higher and GAAP EPS would be $0.14 higher. For Q1, we expect adjusted EPS of $0.64 to $0.66 and GAAP EPS of $0.46 to $0.48. For Q2 through Q4, we expect GAAP EPS to be about $0.20 lower than adjusted EPS per quarter, which accounts for our investment in equity-based compensation. Here are some additional details on our 2023 outlook. For full-year 2023, we are increasing our cloud revenue range to $232 million to $236 million, representing 33% growth at the midpoint and assumes $53.8 million in Q1 with about a $3 million sequential increase per quarter throughout the year. For services revenue, we are increasing our forecast of $428 million to $437 million, representing 10% growth at the midpoint. On a quarterly basis, we expect Q1 services revenue of roughly $103 million; Q2, $111 million; Q3, $114 million; and accounting for retail peak seasonality, $106 million in Q4. On attrition to cloud, we expect maintenance and license to represent about an 8-point headwind in total revenue growth in 2023. For maintenance, we expect a range of $122 million to $124 million, or a 14% decline at the midpoint. On a quarterly basis, we expect Q1 to be $33 million; Q2, $32 million; Q3, $30 million; and Q4, $28 million. We expect license revenue to be roughly $9 million or 1% of 2023 total revenue. For Q1, we expect $3.5 million of license revenue; $2.5 million in Q2; and $1.5 million in both Q3 and Q4. And for hardware, we anticipate approximately $7 million in revenue per quarter. For consolidated subscription, maintenance and services margin, we are targeting about 54% for the full-year. On a quarterly basis, Q1 will be about 53%, Q2 and Q3 is expected to be 54.5%. And accounting for seasonality, Q4 is expected to be about 53.5%. We expect our effective tax rate to be 21.7% and our diluted share count to be 63 million shares, which assumes no buyback activity. In summary, 2022 was a great year, and we expect 2023 to be another year of balanced growth across revenue, profitability and cash flow. Thank you. And back to Eddie for some closing remarks. Terrific. Thanks, Dennis. Well look, 2022 was a very good year for Manhattan. And while we remain appropriately cautious, as I mentioned on the volatile macro conditions out there, we are entering 2023 with solid business momentum, and we are very excited about the many opportunities that lie ahead. So just to recap, our strategic demand for our solutions is solid and seems to be resilient. Our global teams are executing very well, and we are continuing to invest in our business to deliver leading innovation to help our customers with their digital and supply chain transformation journeys. In closing, again, thank you to all of our employees across the globe for a fantastic 2022 as your dedication and commitment to our growing customer base that continues to be one of Manhattan's key differentiators. Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Terry Tillman with Truist Securities. Please proceed with your question. Yes. Hey, Eddie, Dennis and Mike. Congratulations on the results. I'm going to do my standard annoying preamble, and then I'll kind of get to my questions. First, Eddie, I love kind of the different examples of the customers. That helps a lot in terms of understanding how the business has evolved. So I hope you keep doing that. Dennis, modeling, basically, we don't really have anything to do. You basically told us every line item across all four quarters. So thanks for making that easy. Now finally, to my questions. Maybe the first question for you, Eddie, is just given what you've done with the platform, the cloud products, and just nowadays the business models are a lot different and you have omnichannel, when you bring on a new logo and you've been bringing on more than you had in the past, what does the new logo look like versus three or five years ago in terms of the size and scope of that initial deal or project? And then I had a follow-up for you Dennis. Yes. Great question, Terry. So it tends to be a little bit different. In the old world of license revenue, it was more typical for customers to buy multiple products at the same time. In a subscription-based world, it seems to be more popular, not exclusively this way, but more popular, frankly, to buy one product at a time with follow-on upsell later. And you can kind of see that in the results with 30% of our revenue coming from upsell. And that, I think, is also indicative of the unified platform that we have and the bridge from one solution to the other is frankly not very long. Okay. And maybe my follow-up for you, Eddie, and then I had a quick for Dennis. You actually did mention in your prepared remarks visibility for solid or strong visibility, I forgot exactly the description there. But what I'm curious about is you do have the installed base, and we're going to see this maintenance start to kind of decline maybe more meaningfully, so that's one driver. And then the cross-selling. How is the visibility changing or improving? Is one much more notable than the other in terms of driving this visibility? No installed base now starting their journey versus then cross-selling. And like you had just said, they get going and then there's repetition to buy more. Yes, I don't think there's a huge difference in visibility or frankly, confidence of visibility, only because we're pretty close to our customers, Terry. And whether it be an on-premise to cloud conversion, or whether it be an expansion of capability inside the customer base, we're pretty close. We've got long-term relationships with these guys. And generally, they share their road map with us. So no big difference in visibility across the two. Okay. And then finally for you, Dennis, in terms of the free cash flow margin, maybe you could either answer or give a perspective on how to think about free cash flow margin for the year, or just incremental headwinds on that $56 million plus in cash taxes in 2022 and how that looks in 2023? Thank you. Yes. So on the free cash flow, it's going to follow a point or two relative to our operating margin. So I would probably handicap it as two to three points difference between operating margin. And then â I'm sorry, Terry, what was your other? Well, I'm hogging up this call. I should just stop. But it was related to that and the impact from the cash taxes, like does it take another step up? Or are we starting to kind of â we're going to get past the worst of that? We're past the worst of that. So essentially, we're in a mode of about the same amount of taxes on an annual basis now. I wanted to go back to NRF this year. And one thing that really stood at to me was just all the attention on the floor and speaking to folks about order management and also store-related solutions. I would imagine WMS is still going to be the primary driver of bookings for you this year. But do you anticipate a bit of an uptick in interest as it relates to the omni and inventory suites? Well, we certainly hope so, Joe. I don't know that there's going to be a massive step up, frankly. As you know, order management is sort of number 2 on the pecking order of solutions for us. There certainly is a lot of interest. We've clearly continued to make significant investments in that solution, and particularly the integration with the bricks-and-mortar store solutions. So there's no question. There is significant interest there. And we're hoping for continued growth in that and momentum in that particular area. Okay. Great. Eddie I think at one point in time, as you were looking at and kind of thinking about migrating the installed base, I know there's not any sort of timetable customers can move as they're ready. But I want to say maybe six, seven years was contemplated. Do you have any views on â if it's less than 10% of the base today, maybe how long until most of your installed base has a cloud solution from Manhattan? Yes. Still feel the same way. Well, okay, there's two suddenly different questions there, Joe. I definitely â when I look at my crystal ball, I think most of our existing customers will migrate from on-premise to the cloud over the next six to seven years. There's always a few laggards and so forth, but the bulk of our customers will transition from on-premise to the cloud over the next six or seven years. The slight â the second part of the question is when will our customer base own something in the cloud from us? Remember, we are now a cloud-first company. So as we cross-sell and upsell into our customer base, it is quite likely that an on-prem â just hypothetically, an on-premise customer for WMS might well buy a cloud TMS solution, a cloud point-of-sale solution or a cloud OMS solution. So that would mean that, that time horizon would be shorter than six or seven years. Okay. That makes sense. And then I have one quick one if I can squeeze it in. Just any thoughts on just RPO quarter-by-quarter, if you'd expect seasonality or, I guess, if the macros have been tougher, customers might view budgets more on a quarterly basis? Just any way to think about kind of the cadence of RPO bookings throughout 2023? Look, we suspect â we've always said RPO bookings likely will suffer from a little bit of lumpiness just like license revenue did back in the day. We haven't seen a ton of seasonality when it comes to RPO bookings. I said it before, but frankly, these are big strategic purchases and so forth. And frankly, our customers need to â they want to get going whenever they want to get going. And so there isn't generally a particular slowdown in any particular quarter, again, very strategic decisions. Hi. Thanks for taking the question. This is John on for Brian. I wanted to first touch on cross-sell. Eddie, you referenced really good cross-sell numbers here in 2022. I think you said 30%. But I'm curious if you're seeing a change in cadence with customers coming back for additional products? Maybe any geographies you'd call out where you're seeing faster cross-sell? Any color there would be great. Yes. Not particularly, John, to be perfectly honest. The cross-sell across geography is: A, pretty consistent or has been pretty consistent kind of year-over-year and is pretty consistent across that 30% in 2022, number one. And more recently, we've seen a little bit of an uptick in cross-sell, meaning 2022 over the prior years. I think, again, part of that is as we move and have moved into a cloud-first environment, we've seen customers bite off smaller pieces of the product portfolio upfront and then â but move more quickly into a larger portfolio. Okay. That's great color there. Thank you very much. And then also, I want to touch on the TMS product. I see you recall in the past, you called out strength outside of the U.S. I'm curious how the pipes' progressing though within the U.S. And maybe you can give us insight into how the customer conversations are going there? Thank you. Yes, pretty good. I mean, look, honestly, the only reason â the reason that we called out TMS growth outside of the Americas, is historically, that has not been the strongest market for us by design. We tended not to offer TMS outside of the Americas in a very strong way. That's picked up over the last few years. So we were certainly highlighting some of the successes particularly in Europe, particularly in Latin America, particularly in Australia and New Zealand. But the product is doing very well. frankly, and we've talked a little bit about this before, the unification of Manhattan Active WM with Manhattan Active TM is really jump-starting some pretty interesting conversations about, I guess, about half of our more recent Manhattan Active transportation customers or Manhattan Active WM customers. So really starting to benefit from that unification. And we see that as something that will continue on into the future. Great. Thanks for taking my questions, guys and great quarter. I wanted to ask in terms of the new customers you're signing, it seemed like this year was a particularly strong year for net new customers that you brought on to Manhattan. Is there any particular product that you're landing the majority of those with? And where are those customers coming from, typically? Thanks. Yes. Well, the great news there, Matt, is not particularly. It's across the product portfolio. So that's encouraging, number one. And number two, it is across the sub-verticals. So I listed at some of the principal sub-vertical and the product portfolio, and it's a pretty nice spread there across new customers versus existing. Now as you â if you drill in a little bit further on the distribution side of the house, you certainly see verticals that we've maybe not been quite as strong in over the years, kind of bubbling to the surface, particularly CPG, industrial manufacturing and so forth, as they need to reenergize and modernize their supply chains and particularly with a focus on, kind of, direct-to-consumer or direct to consumer ready. Similar things are happening in the OMS space as well. As you see companies that traditionally were not selling direct-to-consumer now either selling direct to consumer or at least being direct-to-consumer ready as they ship into retail channels. So those would be a couple of spots where we've seen some nice growth, which really speaks to not just total addressable market growth, but certainly, verticals that we've not typically been as strong in, which is very nice. Great. And then just to follow up on the margin â operating margin guidance and commentary. Dennis, so it seems like ex the impact of the cloud transition, which is accelerating in 2023, you would actually show year-over-year margin improvement in 2023. Is that correct? And then, what else should we think about, from an expense perspective in terms of wage inflation and then other investment areas that you're making, particularly with the hundreds of people that you plan to add next year or this year? Thanks. Yes, definitely. Look, we guided across all key metrics above this year's â the 2022 performance. From that perspective, we would expect operating margin to increase through the year, et cetera. And â having a little brain cramp here. In terms of where the people generally â where the investments in people will be, for the most part, Matt, those will be customer-facing folks, so largely in our professional services organization and in our customer organization. Now we do plan to and are actively investing more in research and development this year. So you'll see some heads move into there. Sales and marketing is also another area that will continue to add heads as we've talked about before. It's important for us to keep driving awareness the solutions for which we are not quite as well known. That's important to us because we think we've got a great opportunity there. And as always, we'll be selective about adding team members to our sales organization. We've got a very effective and a very efficient sales organization. But as our customer base grows, [indiscernible] coverage and overall coverage is important to us. So again, back to summarize on those people, principally customer-facing, but sales and marketing and R&D as well. You are welcome. Eddie, with respect to the macro environment, there was a little â very little way in commentary in your prepared remarks on that front. Obviously, based on the strong results and guide, it appears you're encountering very few headwinds. But I was wondering if you could just provide some additional commentary on what you're seeing from a macro perspective? Look, there's definitely chop out there. There's no question about that, Mark. Each of us wake up every morning can see, feel and see the chop. But I mean, when we look at the demand for our solutions, when we look at our pipeline, we believe driven by the investments in innovation that we're making, the critical nature of our solutions to both the resilience and the growth of our target markets, we obviously feel pretty good about where we are. We've got pretty good visibility. And so that is how it feels to us, that forward motion feels pretty good. But it is not without its headwinds, for sure. Not without its headwinds. Okay. Great. And then just shifting gears to your point-of-sale solution. I think it was last year's user conference, you expressed that achieving like 10 to 12 go-lives would be a pretty significant milestone â you felt it would be a pretty significant milestone for the company just because it would make it very easy for the next sale. Just wondering if you can give us a little bit of an update on where you stand on that front? Yes, yes. So we're making good progress. Honestly, you caught me a little colder, I should know all those numbers specifically. We're not quite at that number. But we're less than a handful of way from our initial target. I mean we're not â listen, obviously, the finish line is not 10 or 12 installations, but we've got â the first lap for us is sort of getting there. We're making good progress. We've got a couple of go-lives, I think, coming up here in Q1, early 2Q. And by â certainly by the fall of this year, we will have round it out and met that first milestone. From an overall momentum of point-of-sale and store solutions, again, feels pretty good. We came off of a very enthusiastic National Retail Federation Conference where all the retailers are. We had a pretty big presence from a point-of-sale perspective. Actually, we were fortunate enough to have two components. We had our own booth. We were also the only third-party vendor in the Google Cloud booth as well demonstrating point-of-sale, and we saw a lot of interest coming out of that. Okay. Great. And then on the point-of-sale, again, I think fiscalization was an important new capability that you are building into the product mainly to go after the international customers. Maybe just provide us a little bit of an update there? Yes, sure. Well, actually, so you're spot on. In addition to international customers, oftentimes when you sell point-of-sale even to kind of what is a domestically headquartered company, they have operations overseas. They want a single solution. So fiscalization is important for them as well. And we're knocking them down, frankly. We're knocking down the countries. There is a process there. There's a technical integration. There's a design process, a technical integration process. And then there's a certification process with each and every government agency in those individual countries. And to be honest with you, you can only go at a certain pace because you're dealing with those legislative bodies. But we're making good progress. The principal focus of wave 1 has been on Europe for us. But we're moving to both APAC and to Latin America, just as fast as we can and knocking them off, fortunately as fast as our customers need them. Thanks for taking the question. Nice quarter, guys. Just following on the point-of-sale product lines, I guess I'm just curious if maybe you give us a little more color on the competitive landscape as you're bidding for these new projects. And what are you typically displacing â or what are you seeing in place that you're able to push aside with your solution? Well, not pushed aside. But yes I mean â look, there's a lot of legacy, if you want to call it that, competition out there because this is obviously a point-of-sale in general, is not a new space. There have been solutions available for literally 100 years out there. But our real competitive differentiation is with an omnichannel solution, right. We're not just providing a cash and carry, cash-register-centric solution. Obviously, we've seen over the years, the point-of-sale industry kind of move from being a hardware-centric industry to now a software-based solution with pretty commoditized hardware, whether it be tablet or desktop PCs. So the disposition or the transition is around both hardware and software. And again, in any solution where there is a level of personalization and consumer touch involved, that's where we are really able to shine. Okay. Great. And in terms of the macro environment, just â is the retail â I'm just wondering of your key verticals, is there anyone you would call out to say, hey, this is a little bit squishier than some of the others? No, I don't think so, Blair. Again, we're all reading, frankly, the same articles and watching the same news feeds. There's a little bit of squishiness everywhere. But as a function of that, in order to compete, then you've got to be close to the customer, you got to be able to provide â or our customers have to provide excellent service, maximum utilization of the biggest piece of working capital they have, which is the inventory on hand. And bringing those two things together, customer demand and available inventory. So it's â we're as you know, providing mission-critical systems to our customers. And yes, the â frankly, there's winners and losers across the customer base. But the fortunate thing is we're much more diverse today, frankly, than we were maybe 10 or 12 years ago, and that's helpful to us. We have reached the end of the question-and-answer session. I'd now like to turn the call over to Eddie Capel for closing comments. Very good. Thank you, Robert. Well, again, as always, we appreciate you taking the time to join us this afternoon, particularly since it's our year-end earnings call. We're very pleased with the 2022 results. We appreciate your support throughout the year, and we're excited about as the path ahead. So we look forward to talking to everybody in about 90 days or so. Thanks a lot.
EarningCall_520	Good morning, and welcome to the presentation of Skanska's Fourth Quarter and Year-end Report for 2022. I'm Antonia Junelind, Senior Vice President, Investor Relations. And here in our studio, I have our CEO, Anders Danielsson; and our CFO, Magnus Persson, who will take you through some business, financial, and market updates. [Operator Instructions] Thank you, Antonia. And before I jump into the report, I want you to look at this picture to the right, itâs one of the landmark office building in Stockholm developed by Skanska and also transfer to our new business stream investment properties is Stockholm One. If I look into the fourth quarter, overall, I can say, we have a really strong performance, the construction stream, very good performance across the borders. The residential development had a good start of the year, but the weak Q3 and Q4. So, we'll come back to that. Commercial property development, successful divestment during the year, and we also started two new projects during the quarter. Investment properties, a good start. Completely according to plan. So, we have transferred three office buildings in Stockholm and Malmo during the year, two of them in the last quarter. Operating margin in construction, 5.4% in Q4, very strong, of course. If you look at the full-year, we had 3.7%, well above our target. So that is a really strong performance. Our return on capital employed in the project development, 8.1% below our target, but overall, considering the market situation on a good level. Return on equity, 15.8% and we have maintained the really strong financial position for the company. Proposed dividend from the board is SEK 7.5 per share to be decided by the AGM later on and we managed to reduce the carbon emission with 55%, compared to our baseline year 2015. So, if I go into each stream, starting with construction. The revenue increased in the quarter. If I look at the local currencies, it's increased with 3%. Order booking was really strong, SEK 51.6 billion, and we have a book-to-build of 104% for the full-year of 2022. So, we are in a really good position there. We have historically high order backlog as well, close to 230 billion. And the operating income, 2.3 billion in the quarter, which corresponds to an operating margin of 5.4%. So overall, strong performance and really good profitability. And our strategy that we have had the last few years really pays off now. We have been selective. We have been keeping our discipline. We're going for projects that we see that we have a competitive advantage and also that we have a history of profitable projects. So, I'm really proud of the organization and the achievement here. So, really good. The order backlog, again, historically high and also, which is really encouraging that we do see solid performance across our geographies. And that's also the underlying explanation that we perform on such a good level. Moving on to Residential Development. Revenue is really low in the quarter. 155 homes sold in Q4, and we have started 671 homes during the quarter. So, really slow quarter and operating margin of 0.6% is, of course, on a very low side. If I look at the full-year, as I said, we had a fairly good start of the year in 2022. So, the return on the capital is 7%, but we do see a weak housing market, especially here in Sweden, I think a lot of hesitation amongst the buyers of homes, due to high interest rates, high inflation, which leads to high energy costs and so on. And also that the secondary market is a lot of uncertainties. Buyers and sellers, they haven't met each other yet. So, I think it needs to stabilize before we can see improvement here. But the good thing is that we do see an underlying need and an underlying demand from homes in all our markets, which is good for the longer-term. So, it's a good place to be. We have low volumes. And we also saw during the quarter underperformance in one of the segments in the more affordable segments, which is BoKlok in our in our operations. Minor part of the total, of course, but we have launched a turnaround program that we launched here in the end of Q4. We also changed the management for that unit. Commercial Property Development, operating income, 1.3 billion, which a gain on sale is close to 1.5 billion, which gives us a return on capital employed of 8.6% for the full-year. I think that's on a good level. We've been successful when divesting projects. So both we can see that investors, they are definitely interested and attracted by our offering, and we have high quality, very high environmental standard in our portfolio in the right place, of course. And we do have 34 billion in total investments when we have completed this 36 ongoing projects. And the occupancy rate is today 31%, compared to the 50% completion rate. This is something we follow very carefully because we don't want the gap to be too big. And we started two projects in Q4 that was to multifamily rental projects, started one in Copenhagen and one in the U.S. And we had two large internal transactions in the quarter transferring to our new business stream investment properties. And the leasing remains a priority for us, quite slow, has been slow during the pandemic also during 2022. So, we leased 42,000 square meters in Q4. We can see that the tenants are coming back. They are more interested right now. There are hesitation, of course, because the back-to-office has been quite slow after the pandemic, but we can see it's going in the right direction. We can see it's leading actually in Europe, Central Europe, the Nordics, more people are coming back to the office. Companies want to get their employees back to the office, and we can see a slower pace in the U.S., but it's also in U.S., it's going in the right direction, but they are lagging a bit compared to Europe. But there's also a big priority or polarization in the office market. So, both tenants, potential tenants and investors, they are seeking for high-quality, high environmental standard building in a very good location with public transportation and all of that. So â and that's exactly what we can offer because we are in the right places. So, I'm confident for the future. And Investment Properties. New stream, as you know, from 2022, and we are targeting here high-quality, sustainable office, and ambition is to build up a portfolio of between 12 billion to 18 billion over a few years. It will give us a strong stable cash flow. We can also see a big potential to take part of the value increase as we develop an area, for example, and also value increase over time in the office market. So, I'm very confident that this is the right thing to do and also satisfied with the delivery so far. We are running this according to plan. And I said, two actualization during the fourth quarter, Aqua Building in Malmo, Stockholm One here in Stockholm. So, a strong start in the first year. Going back to construction and looking more in detail on the order booking. Here, you can see over the years, the development of the order bookings. It's a blue bar here where you can see the order backlog. The order bookings is the gray line, and you can see order bookings per quarter, orange line, and also the revenue, the green line here. So, as I said earlier, record high order backlog. We can see that the revenue have trended upwards for the last two years. You can see the green line bottom up in early 2021 and quarter-by-quarter we have seen increased revenue. And if we look into the different geographies here, we have good order intake overall, especially strong in the U.S., as you can see. We have 113% book-to-build and slightly below 100% in the Nordics, but as you can see, we have 14 months of production in the Nordics, 12 in Sweden, 17 overall. So, that's on a very good level. So, we are in a very good position. We can be â continue to be selective. We can continue to keep our discipline and going for a project that we know we have been successful in the future with a fantastic team we have, and I'm confident in that. Thank you. And we move to construction and income statement. You can see that on the slide here. As Anders already said, we grew revenues around 14% in the quarter, 3% in local currency. So, sort of the scope growth of the actual organization is considerably lower than what the values in Swedish kronas imply. And that's sort of quite an important signal to understand how we move the company and how we expand the resources that are available for us. For the full-year, the corresponding numbers then is [18] [ph] and 8% in local currency. So, you can see also that our growth rate is tapering off a bit towards the end of the year, which in a sense is, sort of nothing strange with that. You just looked at a slide and heard explanations about the strong bookings that we have here. So, we go into this year with a very comfortable, sort of booking position here and also quite high burn rate in terms of revenue in the construction business. If you look at gross income, we took in around 4.2 billion in gross profits in the quarter, up from 3.1 billion last year. Corresponding margins to this 9.8%, compared then to 8.5% is quite a big step-up. We have a very well performing portfolio of construction projects in the group at the moment. So, very sort of strong underlying performance. Now, in the isolated quarter, we have also had â we had a couple of effects that sort of positively influenced the quarter. I will come back to them in a bit more detail in the next year. But in Sweden, we have essentially landed an agreement with the client that allows us to, in this quarter, recognize revenue that we have been earning for more than one quarter, so to speak, a number of quarters prior to this. But since we had not agreed with the client on the compensation, we defer until this quarter to recognize it in the books, which is all-in-line, of course, with the strategy we have to work with recognition in a very cautious way. And this also points out importance here to not look specifical at individual quarters. So, when you sort of assess the real performance of the construction business, you need to look at it sort of a rolling 12 months or something like that. We also had a couple of â we have a couple of very large construction projects in the U.S. that are approaching completion as we do so. And as we are successfully manages the risk, we can, of course, increase the profit take out from these projects as we can release reserves that we have held in them. Normally, this doesn't show up very much, but it's a very standard part of how we do. Now, we had this effect on a couple of projects in the same quarter. So, the effect has sort of put on each other and therefore it has somewhat of a big effect in the quarter. But important here, this is not our view to be seen as something, sort of extraordinary. It really comes out of our standard operation even if there's a bit of a lumpiness. So, I would only urge you to look at performance over a slightly longer time stretch here. SG&A is well under control, takes us down to a very strong operating margin then of 5.4% in the quarter, significantly up from 4.2% last year. And as Anders already pointed out, a 3.7% margin for the full-year. Last year, we were at 3.8%. But if you recall, this includes divestment gains from selling a business in the U.K. This year, it's all about underlying strong performance in the real operations. So, essentially marking then of a very successful year in construction. If we look at the different geographies, then Nordics came in with a margin of 5.9%. Sweden isolated 6.7%. And here, you have some of the effects that we â that I just discussed in the last slide. Europe somewhat down from last year, but 3.8% here is still a very strong number. And as we have mentioned on, I think, a couple of earnings calls, prior to this, we are exchanging ERP systems in the European operation, and this actually has an effect on the margin here. So, strong performance in this operation, too. And then in the U.S., 5.5%, up from 3.5%. You heard explanations to this during â on the last slide also. So overall, all geographies are performing really, really well here. Moving to Residential Development, a slightly different story in the quarter. The quarter has been â if you look at the revenue, we essentially decreased them by 80%. And the market has been really weak in the quarter. Probably the weakest market is the Swedish one. And maybe the strongest we have, relatively speaking, is the European residential market then. Now, when you read these numbers, I think you need to understand as a little bit about how we recognize profits in Skanska in our segment reporting, which is what you look at in our quarterly report. We recognize revenue at point of contact. And that means when we sign a sales agreement with the customer, we recognize the revenue from that divestment, from that sales essentially. This means that when you look at our P&L, you have a very, sort of here and now reading of how the market has been performing in isolated quarter. There are no real lagging effects between how the market behaves and when this shows up in our P&L. So, it's a very, sort of accurate reading of where we've had the market during the fourth quarter. Selling and admin obviously 234 million to 30% this seems a bit odd, but this is all due to the very low volume. So essentially, the profits here gets a bit eaten by the S&A charge. So, very low volumes then. Operating margins 0.6%. If we look at the different geographies, both in Nordics and Sweden isolated have done negative profits here. And if you read the quarterly report, way back in it, you will see that we have had negative revenues, not a lot, but still negative in the Swedish part of the RD operation. And the reason to this is one that the market has been weak leading to very few new sales in the quarter. And in addition to this, we have had cancellations from customers in a few select projects in Sweden in the affordable segment where we operate with the BoKlok brand. It's a select few projects that this is happening. And when it happens, due to the profit recognition we have, we have to reverse the revenue out of our books, and this, of course, contributes then to the weak result in the quarter. If we move to the European part, you can see 18.6% operating margin, which is sort of a very good margin, but the volume is low, as you can see, at 52 million and compared to 120 million approximately last year. Homes started and sold, we started almost 700 units, 671 in the quarter, which is then quite a lot lower than same period last year. And obviously, and we have said this in a couple of quarters when the market becomes weak, it is more difficult to find the business cases. It's also more difficult to assess the relevant, sort of price to underwrite in the projects out in the future, which slows down the start substantially. On the sales side, we sold the 155 units come as no surprise given what I just told you about the weak market there. So, quite a lot down then from last year. We remain at the high production pace in this business. 7,900 units are under production, of which we had sold 65% due to slower sales, this comes down somewhat from the 73% that we had at the year-end last year, but still within a very comfortable range here, 65% sold of the total amount that we have under production. And we have 130 units that are completed but not sold. A fairly large part of these are so to speak, show homes that we use in order to have customers come and look at the products that we market before we sell them then. So â and this is also a low number, historically speaking, and we still have a good churn of these apartments. We move to Commercial Development. You can see for the full-year, we had revenue of 13.5 billion approximately, actually quite an active year. We made 19 outgoing transactions, divestments, during the year. So, quite a high amount of activity. Booked gains of approximately 3.6 billion, a bit down since last year when we had 3.9%, but still a very respectable number here for the business. In Q4 isolators, Anders has already pointed out, we made three transactions, two internal to our own investment property stream. I'll come back to that. And one transaction where we disposed of the remaining 5% ownership stake in the project that we have developed in Seattle some time back then. Unrealized and realized gains, we had unrealized gains in the portfolio of about 8.5 billion come end of the quarter down from 9.8 billion the quarter before that. And the difference then is 1.3 billion should come as no surprise then that in Q4, we booked gains of 1.5 billion essentially made a profit takeout from this surplus values that we have in the portfolio then. And the absolute majority of this is, of course, expected surplus values in the ongoing projects. And you can also note that we're successively sort of reducing the amount of properties that are completed but yet unsold, which then brings me to this slide, where you can see the completion profile of the portfolio. And you can notice that approximately 5.4 billion in invested properties are completed but not yet sold. And this is the investment value, not an assessment of the market value then. These were on the average lease to 66%. And then after that, we expect to complete properties for an investment value of around 4.5 billion in Q1 this year, and these properties are currently leased at 44%. So, the leasing profile here looks quite good, even if, of course, given the slowness over the last 1.5 years or 2, we would like to see it being a bit higher than. And in the isolated quarter, the fourth quarter here now, we've also completed one property, sort of ends up in the completed unsold one. Leasing. We leased 140,000 square meters approximately for the full-year and in the isolated quarter than 42,000 square meters. So, as already been said here today, we normally will like these lines, which represent the completion rate and the economic occupancy rate to go quite much hand in hand here. We are comfortable with letting and spread aside. But of course, we have to watch the risk tolerance here, which we do, obviously. So, now as we sell properties, we sell properties that are higher with a higher amount of leasing, obviously, and we start new properties with a lower amount of leasing, and that is why we get this effect. Investment properties, we made two acquisitions then in investment properties in the quarter, both of them from commercial development, obviously. We booked the revenue of SEK 20 million, which is very small, and an operating income of SEK 100 million. And then when you look at this, I think it warrants an explanation, not at least because we've only had this business stream for very few quarters there. So, it says that we have changed the property value here and by that created gains. In reality, there's been no change in property value at all from our side. What happens is the technicality because when we make these transactions, we make a customary adjustments to the purchase price based on the deferred tax that it is â that it carries along with it. And when this property ends up the receivers portfolio, you have to revalue to the right market value, so to speak, and then you get this effect through the way we report here. So, properties on [indiscernible] basis has no change in value in the quarter. Now in total, end of the year, we had 3.8 billion in the portfolio and a very good start to the buildup of the portfolio then. And all of the properties there are, of course, environmentally certified to a very high degree and total leasable space 52,000 square meters. If we add everything together, in the group income statement, we can look at the central line here. You can see the cost, central cost comes down somewhat. I would urge you not to read too much into that because the underlying cost structure is essentially the same, but you always have these different effects quarter to another, a bit with the legacy business sort of. So, it's very much the same. Takes us down to an operating income then of 3.5 billion. Then we have very positive net financials of 200 million. Reason for this, I think, should be no surprise. We have a very strong balance sheet, a lot of cash that we deposit in the most favorable way we can, given the restrictions that we have put in place on ourselves, with rising interest rates, then we get much better net interest, sort of net financial outcome for the different periods here. So, both for the isolated quarter and for the full-year, this is a very good outcome then. Taxes, we taxed 730 million in the isolated quarter, which is a tax rate of approximately 9.5% to be compared then to a tax rate of around 15.5%, which we had last year. Now, the difference here is twofold. First, last year, we were very successful in utilizing, sort of past losses in the group in Europe for tax deductibility reasons, which reduced the tax charge that we had to recognize last year. It's, of course, very positive. This year, given the transactions that were made between commercial development and investment properties, due to the accounting regulations, when we make these transactions, we have to account for a tax of 20% of the gain. And this tax is then in the accounting. We don't have to pay it, and it resides on our balance sheet as a deferred tax liability up until the future. And normally, when commercial development sells externally, we can package the properties and thereby make very tax-efficient, almost tax-exempt transactions. So, we will have this effect when we sell the properties between commercial development into investment properties. If you look at the cash flow, we had a negative cash flow of around 2 billion in the quarter. Main effect here is that we have a very high investment pace at the moment, which comes as no surprise. Last year, we started a tremendous amount of commercial development properties. We also started a lot of residentials that are now up and producing. So, we have a big net investment in the cash flow here. And the other part is also working capital, where we have some effects, and I'll come back to that. If you look at the working capital here, we are still at a very good level, around 90% of revenue. We have, what we call free working capital, which is substantially the, sort of advanced payments, if you will, from the clients that we can utilize, but still, it comes down a little bit in the quarter. You can see this represented by the bars on the chart here, and this is the effect we have then on the cash flow from net working capital in the isolated quarter. Investments and divestments. If you look at the green line on this slide, you can see the net investments of the group. And notice immediately that for quite a long period of time, this has been well above the zero line, basically placing the group in a net divestment territory. We have been able to, sort of harvest the proceeds from the buildup of the property development portfolio for quite a long period of time here. Since we have ramped up investments again, you can see this green line comes down. It creeps down below the zero, and we are now in a net investment territory essentially building up the size of this portfolio again. And on a rolling 12 months basis, we had net investments here of around 5 billion, which is one of the sort of fastest investment phases we have had over the last 10 years. So, we are really stepping on the gas here, which you can also see on the bottom part of this chart, where we show you the capital employed numbers, where we now are up to close to 59 billion comparable to 47 billion then if you back up a full-year. But we have a very stable financial position to deal with this. We had 3.7 billion in external financial loans and bonds at the end of the year here. We have available to us at any given point in time, 16 billion of cash here, of which then we have unutilized credit facilities of 6 billion. We will have two maturities during the year. That totals around 1 billion. And I would also like to point out that during the fall here, we secured a new revolving credit facility, also back up for any needs we have in the group. The intent of this is not to draw on it, but we should always have it to further secure our financial position. It's a 5-year structure involving seven banks, and it is sustainability linked. So this is very good to have this existing revolving facility will run out in 2024, which takes us to the group's financial position. We had an equity position end of the year of 55 billion, tremendously strong, obviously, with an equity-to-asset ratio of 36% and a very solid net cash position of 12 billion at our disposal to handle and make use of opportunities that come our way. Yes. And I will address the market outlook that we have overall here, starting with construction. Overall, we have a stable outlook when it comes to construction. We have a strong market outlook in the U.S., continue to be strong in the civil sector. A lot of federal money coming out in the system. And you can see that the state â on the state level, they're really pushing out projects, so it's a strong market. And we also see that the nonresidential construction market, the building sector is also strong. We are in the right sectors in the U.S. We're building airports, university, hospitals, schools and so on. So, we can see a strong market there, which is really good for us. The Residential Development, low activity in the housing market. So, we expect the market to be slow during the next year. It's a cyclical market, as you know. And I believe it will stabilize over time. We have an underlying need for new homes in our market. Commercial Property Development, we can see that hesitant behavior from the investors, we don't see a lot of transactions now in the market. And we can also see that the leasing market slowly recovering from the pandemic now. And again, as I said earlier, we do see a polarization in the market where investors and lead tenants go for high-quality building. But overall, we have continued to have a slow market outlook for the commercial property development. To summarize before we open up for Q&A. Solid performance for the fourth quarter. Construction really strong across the border. Residential development, a weak market. And commercial property development, successful divestment both in the quarter and over the full-year as well. And we managed to start up the new business stream investment properties in a good way perfectly according to plan. And we do have, as you have heard, really robust financial position and the strategic direction remains for the company. We will keep our discipline. We will prioritize profitability and responsible growth in the construction stream. We're aiming for being the leader residential developer in our markets. And we have an ambition to grow the Commercial Property Development, and of course, continue to build up the investment property portfolio over time. We do have a good plan to do that. Thank you. Yes. So, let's open up for your questions. [Operator Instructions] But we will start with questions from the conference call. Operator, do we have someone calling in? Good morning and thanks for the questions. Just two for me. I wondered if you could help a little bit more quantifying the impact of those contingencies released in the construction division this quarter and maybe your thoughts on what the, sort of underlying profitability run rate is here going forward? And then second question, you touched on, sort of why you're seeing an improvement in the outlook for the U.S. market? But I just wondered if you could add a little color on the U.K. civil side of things, which I see is worsening in your view? Thanks very much. Okay, I can answer that. Regarding the contingencies in the fourth quarter, I would say you should not look into a single quarter, you should look on a more rolling 12-month basis. That's more accurate when you judge the construction margin. And if you look over time, as you have seen, we have 3.7% operating margin. And that represents the underlying performance for the business. We have been able to successfully winning new projects that we have successfully executed, and we have avoided loss makers that we have seen. And we also managed to work out that revenue that we have a few years back. And when it comes to the improvement in the U.S. the market outlook, I think that's really encouraging to see that the federal money coming out in the system the different states are really investing a lot. And we also see encouraging signs that the inflation might go down in the U.S. When it comes to the U.K., we as you saw we turned down the outlook for infrastructure, the civil market. And that's due to the fact that it's a lot of uncertainty where will U.K. the economy go? Will we see a recession? Will it flatten out? So, that's a lot of uncertainty in that market, which gives us a slower market outlook. Good morning. Congratulations to a very strong ending to 2022. On the positive one-offs in the construction stream, in the U.S., you're mentioning that they are related to the reserves, might there be more potential there as we move into 2023? Hi Fredric, this is Magnus. Thank you for your question. You ask if there are more potential here. I mean, I'd say the potential is that we continue to perform in the projects that we have then we will, over time, sort of continue to have a strong profitability. I would think â and we said this also during the presentation that in the Q4 isolated, we have had a couple of these effects put on each other. So, the Q4 isolator is not something that you should take as an isolated quarter, and then shoot for. What you need to look at like rolling 12 months longer time perspectives, but we expect to continue to deliver at a very high performance level in the U.S., yes. And why â typically, when you have write-downs, you quantify the effect since there seems to be a number of positive one-offs here in the quarter. Why are you not giving us for on what those may be improving? I hear you a bit, but I think that you're asking why are we not giving you more guidance on how much we have, sort of how much is one-off effects in the quarter. Did I get that right? Yes. This is because this is our standard business. I mean we have the projects we have. This has not been like a claims release or anything like this in the U.S. This is the valuation of our projects. And we have many times communicated that we go into projects, sort of with a cautious profit recognition. And if we manage to handle the risks, we will successfully take out more and more profit. And this is the effect you see now. And we've also said that you shouldn't look too much when you assess profitability on isolated quarters here. I think that's the most important thing to bring with you when you look at this because this money is not coming from, sort of from non-project business. This is real underlying performance, but it happens to be a bit agglomerated in the quarter. Got it. Moving over to Residential Development. Obviously, it's a challenging market, and you're not selling as many units as prior to the 2022. But on the other hand, we're also witnessing that your SG&A costs are growing year-over-year, are there any plans to look at overall headcount or cost reduction program? Of course, we look at the cost level all the time, and we're doing that continuously. And so, that's definitely something we do all the time. But we also need to look ahead, of course, we do have â we are well-positioned when it comes to Residential Development operation. We have 65% sales rate in the ongoing project, very few unsold completed, and we have a really good land bank. We have worked long term with the land banking strategically for many years right now. So, we are well-positioned that day that the buyers come back and take the decision to buy apartments. So, I'm confident and strongly believe in the market â residential market in the long-term. And then two more questions from my side. Moving over to Commercial Development. Have you made any adjustment in your asset market value of the overall portfolio during the fourth quarter? I think you are referring to the ongoing development projects we have and the market value that we are communicating, but that we have not booked, am I correct? Okay. We continuously assess these, of course. Normally, what we do or what we always do is that when we underwrite the project and started, we are quite cautious in the assessments of that business case because the expectation is that we need to obviously develop the project and build it and then put it on the market. And this whole process means that the excess is always often three years or more out into the future. So, it's very warranted to be very cautious with the exit yield that we assume because there is a big uncertainty when you look that far out into the future. So, we have not made like a structural total portfolio change to that. We look at this on a project-by-project basis, obviously. My final question relates to the dividend, the proposal from the Board. It corresponds to a payout ratio really in the lower end of your range. How did you â what was the rationale behind being on the cautious side? I think it's a balanced proposal from the Board of Directors to the AGM. We are â have a very strong financial position, but we also do need a lot of capital to execute our strategy. We will â we want to increase the investments in commercial development, residential development when the market allows us to do that. We also determine to continue to build up the investment property portfolio for the future. So that requires capital. And we're also very determined to keep our financially strong position. That's a very good place to be when the market worsen, and there is a lot of opportunity that will show up in a market that we can take advantage of. Thank you very much. A few questions from me. Starting off with the Commercial Development one. You've been starting quite a lot of projects in 2021 and 2022, and the occupancy rate, as you state, is now 31% versus a completion rate of [60%] [ph]. At what gap would you become hesitant, should we interpret that you are already a bit more hesitant towards office since you started several projects in other property segments? Hi, Markus. This is Magnus answering your question. We don't have like a specific gap here that that we look at or a specific level of this gap that would make us react because we need to assess project by project. And the viability of this portfolio is essentially consisting of the viability of a number of ongoing and completed projects. So that is the level we have to make that assessment, what we're comfortable with. So, yes, I think that answers your question. Am I right? Yes, you are right. Then on RD construction cost inflation up and co-op prices down, where do you see the best possibility for housing starts in 2023 given over value in the land bank and also dependent on market conditions currently? And do you think that Q4 production start here of [670 units] [ph], is that a good average or bad figure in your view? I think if I start with the Q4, I think it's a reasonable figure considering the market development, we will always look carefully on the sales rate in the ongoing portfolio. Now, we are in a good place between real 65%. So, I'm comfortable to be in that range between 60% and 70% in a normalized market. We can allow ourselves to go a bit lower as well, if we feel that we are in the right places. So, we have the financial strength to start new projects, and we will do that in the right location. Because even though we have a weak market outlook for the coming 12 months, it takes much more longer to complete Residential Development. projects. And I'm confident that the market will come back at some point. And I'm confident that we will position ourselves in a good way here, both when it comes to starting project, but also when it comes to buying land in the right location, but we do have a really good land bank for when the market picks up here. And a follow-up also on the â where you see the best possibility for housing starts in 2023 given different geographies? I can see definitely the Nordic, we are strong. We have a good position in the three largest cities here in Sweden. We also have a good position in Oslo, Helsinki. We are in Prague and Warsaw and Krakow and those cities are really â have been resilient for this. So, we can see that Central Europe has been resilient. There's not too many new projects out in the market. So, the prices on the secondary market is stable. So, I see opportunities in the capital cities in the market we have chosen to be, but more resilient actually in Central Europe right now. Thank you. Last question. Could you give a bit more color on the development for BoKlok? And also, I didn't catch if you [took any] [ph] restructuring costs here during the quarter in that division? Yes. So the development in BoKlok, well, you can say it's â BoKlok has been challenged during the quarter with a weak market. And I say the impact has been toughest on the market in that segment, and that is where we have the BoKlok. And so they are suffering from lower volumes, and of course, an overhang of overhead. And so, we need to get this whole, sort of production and marketing and design and essentially the development machine working under the market conditions that we have now then. And which is why also that we had this turnaround that we referred to in the â turnaround initiative that we refer to in the quarterly report. That is too early to say because we have initiated that now. And we do not have any material turnaround costs in the numbers for 2022. Thank you very much. I have three, if that's okay. Firstly, on Commercial Development, you've done quite well with internal sales to investment properties, but you haven't done many external disposals. I'm assuming there's an effect from higher interest rates in the commercial real estate sector, do you expect to be able to do a few transactions in the coming months? I guess that's my first question. Yes. I can start with that. Thank you for the question. So, during the year, we actually made 19 divestments, sort of outgoing transactions in commercial â from Commercial Development. And of these, three were to investment properties. I would say there has been a good amount of transaction activity there. Obviously, the external transactions we have done has due to various circumstances been smaller than, but I think that answers your question. So, obviously, the transaction market, it is slower. There's no doubt about that. We have â the amount of, sort of reference transactions that we call it on the market are lower today, but we still feel that there's a good amount of interest from investors for properties that are very sustainable, they're cost efficient during the right locations and they're, sort of economically well performing as well. So that's where we are with that. Thank you for that. My second question is on the cash flow generation. I mean, in Q4, you mentioned the increase in investments putting a bit of pressure on your cash flow. Can you give us a comment on the outlook there? Is it fair to say that you'll have more investments in the coming quarters? Yes. I mean when we start, sort of property development project, that's often a multiyear, at least sort of a two-year venture. And throughout that whole project, you will continue to invest, obviously. So, I think we will â without giving any forecast, the pure logic and dynamic of this business implies that when you are investing at the pace we are now, and we have, sort of ceased to increase the net investments, that will probably stay for a while because you need to finish the ongoing projects, so to speak. That's clear. Thank you for that. And lastly, construction order intake, quite strong in the U.S., I guess, a bit more stable in Europe. Would you mind commenting on the competitive environment in construction in Europe? I mean the macro environment is a little bit more uncertain. And I assume there may be a bit fewer projects coming to the market. Can you confirm that? And what do you see in terms of your competitors doing? Are you confident you can still take good orders at good margin? Thank you. Yes. We have seen strong order intake across the Board, I would say. We are slightly below 100% book-to-build in Europe and in Nordic over 100% in the U.S. So that's definitely a strong market. When it comes to the amount of competitors, we have not seen any big changes there. The civil market, for example, has always been really competitive in Europe. We don't see any sign that, that will increase or decrease. That's the way it is. So, all players are chasing the projects right now, but having said that, we do see a stable market in most of the countries in Europe. So, we downturn now in the U.K., but we do have a very strong order backlog there. So, I'm confident that we can be competitive going forward as well. Hi. Good morning. Thanks for taking my questions. I was looking at Slide 19 and you helpfully give, sort of the rental value and obviously, the carrying value that carry investment properties at. And I kind of, okay, very simplistically look at, I think it sort of implies a 5% yield, is that the right way to look at this? Is the 100%, for example, in Stockholm in 2022, is that the lease or the rental income on the 80% leased or if it were 100% is just so we understand what the, sort of implied yield is that you're carrying, please? That would be helpful. Maybe Iâll let you answer that before the next question. Thank you for your question, Gregor. It's quite detailed and your yield number â your calculation ends up somewhat in the wrong place. So, I would suggest that [indiscernible] with our Investor Relations department afterwards. Okay. And then in terms of, sort of the construction margin, I mean, you kind of mentioned it, but just to be clear, you think the, sort of 3.7% you printed for the year as a whole is a reasonable reference point to think about what the business is performing at. There's no reason to believe it's either that number particularly â I mean, obviously, it's above your target of 3.5%. But is that the right interpretation? I appreciate you're not specifically guiding, but sort of directionally. Is that what you're saying? Yes, it's â the underlying performance is on a very high level. And thanks to that we have been successful executing projects, avoiding loss makers, and been selective. We have kept the discipline. So, it is a very good performance. Okay. And then remind me, so this is the first quarter, I think, in a very long time, we've seen sort of a free working capital reduction, at least towards the year-end. So, I guess my question is, do you think there's a trend here or is it too early to call? I mean I'm thinking interest rates are higher, people make money on their cash, so maybe they don't prepay you as generously as you have done in the last few years, or maybe I'm misinterpreting, I just want to understand what you think whether there's a trend here and what you think is a sustainable number, I guess? I know this has come up in the past, but if you could just remind us. Yes, I think it's an excellent question. This working capital position we have is, sort of important for us because the alternative is to go to the funding market and source money from there. So, we watch this very carefully and of course, do a sort of thorough questioning and investigations into this all the time to make sure that we are on top of any development in the market on a structural level that we need to be aware of to plan our capital sourcing, our balance sheet, et cetera, et cetera, right. The effects in this quarter is actually quite â it's very sort of isolated. We have a very good understanding of what it is. And when we look at the overall portfolio and how we manage to negotiate with clients, and the clients, sort of openness to these negotiations, we see no change really. So, I would say this is something that happens when you have a very high net working capital balance then of course, sort of, it's hard to keep it growing like that. You will have some setbacks at some point in time with that. But we are not concerned about the stability of that position. And just to remind everyone also that sort of the â it's hard to say what is normal and not normal here. But currently, we are at approximately 19% of revenue in our, sort of free working capital. But historically speaking, this has been creeping up for many, many, many years due to strong negotiation skills and due to us being able to assert a favorable payment plans also in projects. Okay. And then coming back to Slide 17, which is, sort of the completion profile and okay, yes, there's 66% on the stuff that's done, but from memory, you only try to sell when you're sort of, let's say, north of 80%, correct me if I'm wrong. So, is that still your approach that you prefer to wait? In other words, you'd rather just not sell if lease rates are lower? Because obviously, it begs the question whether you're going to be selling actually realizing anything it's up to you, obviously, whether you decide to sell or not, right? But I just want to understand where you cut off, right, in terms of trying to actually get stuff in front of the market. Yes. Good question. And you will get another one of this maybe slightly boring answers, but this is, of course, an assessment we make on a project-by-project basis because for every investment we have made, we try to, sort of find the most lucrative way of monetizing that investment for shareholders. And that we assess continuously, sort of every quarter for every project that is sort of possible to sell. We have sort of an assessment of this, you can say, right. So, we also talked about the 80%, that's because the market in general historically have responded in such a way that when you cross approximately 80%, you don't end up in discussions around that would, sort of lead to you having to compromise on the price due to lack of leasing, but the market is a moving thing, right? So, this moves all the time. So that's not to say that it will be exactly the same in the future. But this is also why we have implemented the strict transaction guidelines we have when we buy properties into investment properties, where we say, 80% leasing, right? But in commercial development, on a case-by-case basis for every project, we analyze what is the best way to monetize the investment. And we don't stick really to any specific rule in terms of an exact percent on when we can divest it or not. Okay. So thank you very much. That was all the questions that we had time for today. We've now run slightly over time. If there are any remaining questions, then please don't hesitate to reach out to either myself or the IR function, and we will ensure that you will be getting your answers. So, with that, it's time to wrap up this presentation. First of all, thank you Anders and Magnus for your presentation here today. And then, of course, thank you for showing up here at our studio in Stockholm. And lastly, thank you for watching. A recorded version of this broadcast will be available on our web page shortly. And we will be back in the setting to present the first quarter report on May 4. Thank you.
EarningCall_521	Good morning. My name is Devin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Saia, Inc. Fourth Quarter and Annual Meeting Conference Call. [Operator Instructions] After the speakersâ remarks there will be a question-and-answer session. [Operator Instructions] Thank you for your patience. I will now turn the call over to Doug Col, Saiaâs Executive President and Chief Financial Officer. Please go ahead. Thanks, Devin. This is Doug Col, I'm Saiaâs Executive Vice President and Chief Financial Officer. With me for today's call is Fritz Holzgrefe, our President and Chief Executive Officer. Before we begin, you should note that during the call, we may make some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements and all other statements that might be made on this call that are not historical facts are subject to a number of risks and uncertainties, and our actual results may differ materially. We refer you to our press release and our SEC filings for more information on these exact risk factors that could cause actual results to differ. Good morning, and thank you for joining us to discuss Saia's fourth quarter and record full-year results. Before I get into the discussion of fourth quarter results, I want to take a minute and express my thanks to the entire team here at Saia for what we achieved together in 2022. The year brought an additional 11 new terminals into our network and our team grew by more than 500 employees during the year. Most importantly, we kept the customer first and continue to provide leading service to our customers in doing so achieved record sales and earnings for the full-year. Thanks to all of our Saia associates, who had a hand in these record results. Moving on to our recent results. December brought a continuation of the negative volume trends we experienced across the back half of 2022. In the fourth quarter, we averaged approximately 28,400 shipments per day, about 8.2% fewer shipments per day than in the same quarter last year and down from 30,500 shipments per day averaged in the third quarter. Wafer shipment increased modestly, so overall tonnage was down 7.7%. The slowing industrial environment as evidenced by numerous reports influenced these results across all of our business. On a brighter note though, pricing remains stable and our fourth quarter yield excluding fuel surcharge grew by 6.5% and revenue per shipment excluding fuel surcharge increased by 7.1%. Total fourth quarter revenue rose by 6.3% to $655 million. Our continued strong service performance supported the contractual renewal increase of 7.4% in the fourth quarter. The contractual renewals reflected deceleration from the trend of the past several quarters and should be expected given the softer volume environment, but solid number nonetheless. On a full-year basis in 2022, total revenue of $2.8 billion was a record for Saia, it was up 22% from the prior year. Operating income rose 40% for the year to $470.5 million and our operating ratio of 83.1% was 230 basis points improved from 2021. This was the best year in our nearly 100-year operating history. As we move into 2023, we've continued to see announced general rate increases across the market and that are in the mid-single-digit range. And here at Saia, we implemented a general rate increase this past Monday, which averages approximately 6.5% across impacted customers. At the same time, our service indicators remain very strong across the business. We're committed to providing excellent service to our customers and are invested heavily in the business to expand coverage and it's gratifying to see that our customers see the value in our service offering and GRI allows us to partially offset the rising cost of investing in people, equipment, technology and our growing service footprint. Our fourth quarter operating ratio of 85.9% increased by 170 basis points, compared to our operating ratio of 84.2% posted in the fourth quarter of last year. Thanks, Fritz. As mentioned, fourth quarter revenue increased by $38.6 million to $655.7 million. The components of revenue growth in the quarter versus the fourth quarter a year ago were as follows: our yield excluding fuel surcharge improved by 6.5% and yield increased by 14.3%, including the fuel surcharge. Fuel surcharge revenue increased by 46.4% and was 20.1% of total revenue, compared to 14.6% in last year's fourth quarter. Revenue per shipment excluding fuel surcharge was 7.1% to $288.34 and including fuel surcharge, revenue per shipment rose 15% to $364.44. Tonnage decreased 7.7% attributable to an 8.2% shipment decline slightly offset by a 0.5% increase in our average weight per shipment. Our length of haul decreased 3.5% to 892 miles. A further breakdown of activity in the quarter is as follows. In October, our shipments were down 4.4% and tonnage was down 3% with a 1.4% increase in weight per shipment. In November, shipments were down 8.1%, tonnage was down 7.1% and weight per shipment rose 1.1%. December shipments were down 12.3% and tonnage was down 13.2% with weight per shipment turning negative down 1% in December. In January, shipments have been down -- were down 3.9% and tonnage was down 3.7% with weight per shipment up slightly 0.2%. Shifting to the expense side for a few key items to note in the quarter, and how they moved with the acceleration of negative volume trends we experienced. Salaries, wages and benefits increased by 5.3% from a combination of our July wage increase, which averaged about approximately 4.3% across our employee base and also the result of our employee count having grown by approximately 5.7% year-over-year. Purchase transportation expense decreased by 13.8%, compared to last year and was 9.2% of total revenue, compared to 11.3% in the fourth quarter of 2021. Truck and rail purchase transportation miles combined were 12% of our total line haul models in the quarter, compared to 19.5% in the fourth quarter of 2021 and compared sequentially to Q3 miles of 17%. Fuel expense increased by 41.5% in the quarter, while company miles increased 4.3% year-over-year. The increase in fuel expense was primarily the result of national average diesel prices rising more than 38% on a year-over-year basis. Clients and insurance expense decreased by 8% year-over-year in the quarter and was down 2$ or $0.3 million sequentially from the third quarter. Depreciation expense of $39.6 million in the quarter was 10.3% higher year-over-year, primarily related to investments in real estate and equipment. Total operating expenses increased by 8.3% in the quarter and with a year-over-year revenue increase of 6.3%, our operating ratio increased by 170 basis points to 85.9%, compared to 84.2% a year ago. Our fourth quarter tax rate of 24%, compared to 23.9% in the fourth quarter last year and our diluted earnings per share were $2.65, compared to $2.76 in the fourth quarter a year ago. Moving on to financial highlights of our full-year 2022 results. As Fritz mentioned, revenue was a record $2.8 billion and operating income of $470.5 million was also an annual record. Our operating ratio improved 230 basis points in the year to a record 83.1%. For the full-year 2022, our diluted earnings per share were a record $13.40, compared to $9.48 in 2021. Thanks, Doug. While the environment certainly feels a bit more tempered to us than it did entering the past couple of years, I feel pretty optimistic about the road ahead. The December volume decline was a bit more pronounced than what we would have expected from a seasonality standpoint. But we do like -- feel like some of that may have been the result of inclement weather that moved across the country over the last week or so in December. The extreme temperatures have resulted in some customers working limited schedules and we saw that reduce pickups. As we turn the calendar January volumes are catching up a bit better than expected, maybe the result of some catch-up from customers. If history holds, there'll be more weather effects as we move through the next month and get into warmer temperatures in our seasonally busier months of the year. However, as we've learned over the past several years, that the environment is disrupted by weather or other events, the carrier that has the ability to adjust and restore service will continue to be a strategic partner of the customer's supply chain. In terms of expectations, we have plans to open five terminals over the next three to four months. And look forward to the expanded service and presence these terminals will give us. At the same time, we continue to develop the markets around the 18 facilities that we have opened over the last two years. Although we're excited by the early success of these locations, we see considerable runway to continue and penetrate those markets. Beyond that, we continue to work through a pipeline of more than 30 real estate projects, which are under review and consideration as potential openings over the next several years. These terminal openings support our strategy of getting closer to the customer and adding value to the supply chain. Hey, great. Good morning, Fritz. Good morning, Doug. Thanks for taking the question. So Fritz, it sounds like you just covered a little bit of the January trends and it feels like maybe if there's some movement between late December and into January. But I guess, I'm just curious in this environment how you think about managing the staffing levels with kind of the volatility and freight as you think about margin progression either into the first quarter or even on a full-year basis in 2023? What would your expectations be just given kind of where the environment is? Yes. I think the key thing for us, Todd, we describe the impacts that we saw with weather in December and just the last few days of January, you actually saw the weather trends in the center of the country and as you would effect that had -- that influence the results we have. But the key thing that we think about with any of this is that we want to manage our labor cost to match, sort of, what we need to do to deliver leading or exceeding service for our customers. So as we've gone through this last few months as we've seen the trends, we've reset kind of our cost model. You see us in sourcing more and more of our line haul costs versus what we had been doing, looking for opportunities to leverage our city drivers into our line haul network to maximize the utilization of all those important assets. Those are the -- those people are key to driving the success for us as we come out of weather events or slower economic events and be able to match customers' needs and expectations or frankly exceed them. So we feel like that, that we're continue to position ourselves for that. We've looked at the history of what we've seen sort of quarter-to-quarter from Q4 to Q1. We feel like we can keep that kind of in line with historic, sort of, seasonality there to keep the OR flat, maybe it gets better, if things get a little bit better. But I think we continue to manage to maintain service and we optimize and match our labor costs to what the environment affords us. So full-year, it's still -- it will be interesting to see how this develops as to where this ends up, but I that we're in a position that we know that we're providing differentiated service, that's going to allow us and the environment certainly is going to continue to allow us to price for that. And I think that's going to be an important part of how we manage the overall investment in the business. Yes, okay. Thanks, Fritz. And maybe just to that last point, and I'll turn it over after this. But on the pricing side and you talked about the contract renewals coming in I think at 7.4% and that's down from what we've seen over the last couple of quarters, which have been very strong. Can you just speak to where you think you're at with your pricing ability based on your service improvements and the network and maybe your ability to kind of continue close that pricing gap as you've made those investments and improve the service over the last several years? Thanks a lot. Thanks, Todd. I mean, Frankly, I mean, as to emphasize our focus is on keeping that customer front and center. And I think in that kind of environment, you've got -- and that's -- this continues to be an expensive business to operate. So you've got to continue to push making sure that we get paid for all the service that we provide. I think maybe the rates of change that we've seen over the last few years, it slows perhaps. But I think the position that we're in right now around what we're doing for the customer that is differentiated. And if I look across the landscape of what others service is being provided with that pricing looks like. I mean, I think that there's an opportunity for us to continue to grow our business and develop the margin profile that this business deserves. Hey, thanks. Good morning, guys. Few things. Can you just on the January tenants, do you have a sense on the sequential December to January and how that was trending? Yes. Historically, we've seen a little bit of step up call it 1.5% 2% historically as you move into January, that's always influenced by the weather you're exiting and what you're facing. But the step up was closer to 5.5% to 6% this year. But like Fritz said, that last week of December, man, it was tough with that cold front that went across the country and the pickups were really soft. So some of that could have been just catch up like Fritz said from customers. But it felt better given the first two weeks of January, it felt a lot better than the last two weeks of December for sure. Okay, good. And then Doug, any help with how to think -- I know you don't give us intra quarter yield updates, but just directionally how to think about the yield trends gross of fuel and net of fuel, however you want to think about it in Q1 the year, however you're thinking about? Yes, I mean, like Fritz said, I mean, we've seen a lot of GRI announcements and our GRI went out this past Monday. Like I said, on an average of 6.5% and in a softer volume environment, you probably end up making some concessions in some lanes for example or with some really good operating customers. So historically, we say we hold on to about 80% of our GRI in terms of the yield that we capture. So in a softer and volume environment, maybe it's a little less than that. I saw a couple of GRIs, I think on average, the GRIs even though they're solidly mid-single-digits, there's a couple that are lower than what we've seen over the last couple of years. So that's -- I think that's just in line with probably what the shipperâs expectations are. But it's still a positive environment. I mean, the 7.4% contractual yield, I mean, as you know, I mean, it's just kind of a forward-looking indicator to us of what the shippers expecting and it's coming off the heels of several quarters of double-digit rate increases. So we're lapping some of that. So I'd say pricing in January was still positive and I just think the expectation should be that you won't get price at the same rate when volumes are running down like they're running. Right. And then just last thing, obviously, based on sequential margin being flat, so margin is down 0.5% year-over-year. Do you think you have the potential to improve margin over the course of the full-year? You know, we go back and look at some examples. So, I mean, you know, I guess, it just -- from a very high level, it's going to depend on really what where there's economy goes and what volumes look like. But I mean, we've got examples in the past improving margins in the down year. I mean, if we go back to couple of years like 2014 into â15, things were down in â15, kind of, energy rolled over, our shipments and revenue were both down about 4% that year. Fuel expense was down a lot, so fuel surcharge revenue would have been down. But that year we actually improved our margins by 70 bps. And we look at the following year and it was still pretty sluggish environment. Fuel was down again; I think our revenue was flattish o down tonnage and that year the OR went backwards a little bit. So there's a lot of moving pieces out there, but I think if shipments are going to be down like they are kind of in January, if we had to run that through the full-year, we really got to hang on to this rate increases at this GRI level. And then I think we could hold on to margins. I think if volumes are going to run negative all year in this low to mid-single-digit range, I think it would be hard to improve margins. But again, like Fritz mentioned in his opening comments, we've got 18 terminal opened in the past couple of years. I mean, they were certainly -- although we're pleased with how they're doing and as they mature, they do better every quarter, but those were a drag essentially on the overall OR we reported. So again, while you're building out a network like this, which is something we're going to have to manage through. But I think be reasonable, think ORs within 100 basis points plus or minus. So what we just exited would be reasonable. Hey, thanks. Good morning. Maybe picking up on the cost side, so kind of wanted to get a sense of what you think your cost inflation is running, and then maybe a little bit about how you think you're going to manage headcount assuming that we still see a little bit of sluggishness in tons at least for the first part of the year? Well, I think Fritz covered it pretty well. But I mean, I can give you an idea of how we manage it. I mean, if I think of just sequentially Q3 into Q4, our shipments per day were down almost 75 right, and it was accelerating there at the end as I step through the months, but shipments per day down about 7%. So you go to work on the things you can control out in the network and our dock hours per day for example Q3 into Q4 were down 10%. Our city hours Q3 into Q4 as we're managing down costs to adjust to these declining volumes, our city hours per day were down about 5% in Q3 to Q4. So those are the levers we'll keep to work, unlike Fritz said, I think we're in a position given where we exited December that our capacity in terms of labor and all feels pretty good for where we sit today and we brought a lot of it that we could in-house to make sure we keep our drivers as busy as we can and keep that valuable resource, because our outlook is still a little bit cloudy there's people starting to talk themselves in the idea that we're definitely going to have a soft landing now. So we want to be mindful that it's very fluid and we don't want to be scrambling to find these valuable employee resources when our customers need us. So it's a tight road, but we feel pretty good about how we positioned ourselves this quarter. I mean, it's hard to give you just kind of an average number, right? If I think about it on the wage side, you're still going to have some wage inflation there. This past year, our average wage increase was about 4.3%, so I think something in that range still kind of makes sense and unless things really fall apart in the jobâs economy. You moved down the line and depreciation was up 10% in 2022 and it's going to be up again. I mean, we're going to invest in the business again this year. Like Fritz said, we've got terminals to open. We're going to invest in the fleet, work on fleet age, which helps our maintenance cost. So those are a couple of big buckets, but then when you get below that, I mean, it's tough to say, because PT can be down a lot. That's a cost bucket, but it's down, because we're moving some of those costs to other buckets. But I think low to mid-single-digit maybe if I had to think about on average last inflation now. Thank you. Good morning. Doug, you just touched on PT, I want to ask you about that, I mean, it's been running much higher than historical levels up until this fourth quarter and youâve pulled it down pretty meaningfully as a percentage of revenue. How much of that is, I mean, obviously, there's a shipment component to it, but do you view that as kind of structural? It sounds like you are going to run headcount thoughtfully throughout a cycle. So PT seems to be a quicker lever. Is this step-down kind of more consistent of the levels we should think about in this type of volume environment you laid out for â23? I mean, if I think -- I mean, given the expansion efforts, we have underway to grow the network, to be more comparable to the network some of our national peers, we're going to continue to need PT as we come out of whatever slow down, we're in here. We're going to continue to need PT and we use it very effectively. If I think back to pre-2017, before we were in this expansion mode. As a percentage of miles, I mean, we run in that 12%, 14% range pretty regularly. So if we take it below that in this downtime, it's because we want to use our drivers and hang on to them. But I don't think that structurally we've ripped a lot of it out. But when business comes back, we're going to need it. We're going to use it effectively and I don't think this is kind of a run rate from here if the economy bounces back, we'll use it. We'll use more rail, right? I mean, if we can get it, we'll use it over the road. Truck PT, because those rates are probably going to be pretty favorable when things come back, because they're kind of resetting now. So we brought miles down quite a bit, but sometimes when we do it, we're doing it to preserve hours and miles for our drivers, but it's not all that effective in some lanes. If I was running PT into a backhaul market, I'm running those miles on my own drive now and coming back less efficient, because maybe I'm not full. But I'm doing that because I want to keep those drivers keeping busy where I can. So you know, if you follow us for a while, PT is not a negative for us, it's just variable and we like to use it when it's effective for us. Yes, itâs part of our total line haul cost investment. So at any given point in time, we're going to make a decision around what's cost optimal around the options that we have available via rail, truck or internal fleet. So it's -- it will flex and change over time as we meet service obligations. The first step we have in that process is that whatever choice we may make has to be about supporting what the customer requires and then we cost optimization there. That's good to have that flexibility in this volatile time. Fritz big picture one for you quickly, it feels like the consumer narrative is pretty binary right now, but maybe getting a bit more optimistic. The industrial narrative seems a lot more negative. And you carry more industrial freight, so the last couple months of data you provided notwithstanding what are you thinking and what your customers are saying about the industrial outlook for this year? I think we read much the same thing that you do. And I think what you -- I would say generally across the board, it's tempered. I think it's critical for us to remain -- keep that flexibility and keep the -- our network in a position that we can flex as we need to. If the consumer is a bit stronger, certainly we have some elements of our business that would be more consumer tied or others that maybe a more industrial tied. So we want to be able to handle both or be able to deal both and be in a position that we can flex, but most significantly meet those service requirements. That's why we've kind of managed the way we have. We really focused our cost optimization efforts around reducing hours and maintaining flexibility and availability in our workforce. So far that's been successful and I think we've got to continue to focus on matching the service expectations and balancing that against maximizing or you're best utilizing our driver fleet. Thanks, operator. Hi, Fritz. Hi, Doug. Good morning. I just wanted to follow-up on the margin expectation for the first quarter. I guess just given how weak November was or counter seasonal November was and the relative snapback in January, we just think there may be an opportunity to see some counter seasonal OR improvement. I don't know if you vehemently disagree with that or if there's something in the cost structure that evolves that I'm missing, but it just seems like 4Q was just a lot worse, because it doesn't remember fall off and that's counter seasonal and maybe you get some of that back in the first quarter? You know, Amit we could and I could also paint a picture that we could go the other way. I think the challenge you have with forecasting and really considering sort of March -- or sort of March quarter -- first quarter result is that January and February historically and you go back in time for us have been kind of up and down. It could be everything from economic to weather related, all those sorts of things. So it's tough to draw a correlation to say that, hey, would this could bounce back, we know that March is the most important month of the quarter. But what I like the position that we're in right now, because we've worked extensively November, December into the present time and kind of resetting our profile to be able to be in a position that we're little bit more cost optimal, as compared to what we saw as tonnage declined in November and December. We feel a little better than kind of where our footing is now, what our productivity looks like. And most significantly what our service level is and our ability to restore service as we move through even though last week of weather challenges we've had. That's part of the game right now. I think the path to outperforming Q1 is we get a favorable operating environment in terms of everything from weather and such. And I think we can perform well through here. We've kind of given our thoughts around the margin profile. That's kind of where -- we've got -- as we look at history, that feels like kind of where we would be. Certainly, is our path to better? Sure. Okay. Yes, that's helpful. And maybe one more, maybe more important question than like the near-term stuff. So I'm just curious how much of the productive labor force? Did you guys lose through attrition as you guys cut the hours across the board? And really what I'm trying to get a sense of the next, kind of, most important thing is how carriers are able to bounce back efficiently with fluidity as volumes come back in late February and March hopefully. And I just want to know are you properly resourced with respect to dock workers and drivers to kind of meet that opportunity just given kind of the big cut to hours and maybe the attrition that drove? Yes, the attrition has been -- we've seen a bit of it here in the last few weeks, months. And that's been relatively small, we have focused very diligently as we've reduced hours. It's important to us that we balance that across our workforce. As we've seen some attrition, we haven't replaced it, so that allows you to better balance across the remaining headcount. So we feel like we're pretty well positioned that we can flex from here, flex up from here. And some of the things that we have done around workforce as we've had dock -- part time dick staff have elected to move on to other things. We've used our supervisor ranks to work on the dock. And in some cases, we've used some of our city drivers. All those are ways for us to keep that all important connection with those critical employees, so that when time comes and I think it'll come that we can flex out of this. I think we'll be in a good position to restore and continue to grow. Okay, great. Good morning and thanks for taking my question. So I guess, Doug, if we go back to something you mentioned earlier, sort of, we're talking ourselves into this idea of a soft landing. I don't know if that's right or not, but I would just sort of be curious if you and Fritz could maybe comment a bit on what your customers are telling you about maybe how they're expecting their business trends to kind of progress through the year. Just any sort of color or context around that? Well, I mean it's hard for us to pull in an anecdote here or there and try to draw a conclusion. I mean, we've got a very diverse customer mix. We've got 60%, 65% industrial exposure, but not any one customer makes up more than 3%, 3.5% of our revenue. So I'd hate to take one anecdote and try to draw a conclusion from that. I mean, we should look at the same data you all are looking at and I [Indiscernible] it wasn't all that favorable in January. But I'm just thinking about what's going on in the jobs market and with some of the other economic data. It doesn't seem as bearish as it was late last year in terms of the outlook. But for us, I think like Fritz has keyed on, I mean, I think we've gotten a pretty good position from a cost standpoint with the volumes we're currently seeing. We've got the rate increase we've worked on and announced the GRI, and that's key to what we're doing, because I think our service does put us in a position to go get pricing. And whatever goes on from here, I think we've got a pretty good relative value proposition. And if things are going to be down, maybe we'll find share opportunity. Maybe ours will be down a little bit less because we're in some newer markets. We've got good service. If our rate is attractive, even if we're all bumping rates up a little bit, maybe we offset it, and we're down a little bit less. So I don't think we've got a great view into what our general customer outlook is. We look at some of the shipper surveys that come out of you all. So the analyst's ranked. Okay. All right. Well, I appreciate that. I appreciate just the intellectual lot to see about that, and it's all good. So I guess maybe for my second question, I just would be curious, just following up on Amit's question earlier, which is a fair point. How are you guys thinking about line capacity in the network today? If I recall, last time you updated us, it was about 20% or so. I know it's a hard number to really get to, but we've also seen tonnage come down a bit. It definitely feels like you're carrying extra costs for when things begin to recover to be prepared for that. But how are you thinking about where that number stands today, roughly? Yes. Jack, we're at least, so we've got -- I think I'd expand that to 25% capacity, 25% kind of latent capacity. I think one call out that I'd point to, we've mentioned that we've opened 18 facilities in the last two years. And our focus there is, we're thrilled with the early success we've had there, but when you're making a 10-year investment, we move or identify these facilities, we're thinking about them for 10-years. And so those are all opportunities for us. And we've got our sales force geared on that as an opportunity, because those are -- that's capacity we can fill. I think in some of the -- we have a couple of pinch point investments in the network this year where we're adding some great capacity. So we still have some of the challenges we had before in terms of we have a range. We've got facilities that have got tons of capacity and others that we've still got to make some investments. So what I really like about it is that we've -- as we look across our network and footprint, we've got a pretty consistent service offering across the board. So for us to match a customer need and grow is really exciting to us. And I think that flexibility and the ability to repeat the service is going to be key. Yes. I just -- I guess, following on some color around the newer terminals that Doug had mentioned, et cetera, as being a slight drag. I'm just sort of curious, the last 12 or 18 that you opened, when you do open them, is the gap between existing and new narrowed versus prior experience? Or do you get out to profitability in a quicker fashion? Just sort of curious. Thanks. Absolutely. You get back to a quicker to sort of company average OR for sure. When we opened the Northeast, we -- it took a little bit of time. Now we're thrilled with where it is right now. But it took some time to scale those just simply, because we had to build the infrastructure around that. The last 18 are more, I would characterize as, sort of fill in. And these are ones that maybe you're taking a little bit of stem time out. So you've got a cost advantage you're taking advantage of or frankly, you're finding a new customer or better serving the customers. So these, I would expect that we would be able to get to company averages much more quickly. Now I will point out that the challenge with that is that when you experience what we did in the fourth quarter about the volume trends that Doug described, that impacts the facility that's in its infancy. So they become a bit of a drag in that because you experience that across the board, those sorts of trends. Yes, good morning. I wanted to see if you could I think offer some thoughts on pricing. I mean it seems like there was debate over the last year about as LTL pricing get a hold or not. And I think generally, people are of the mindset, it will. I think the results are pretty consistent with that. But are you seeing anything in competitor behavior that causes you to be kind of more or less optimistic? I mean, I guess the idea that you said of getting less price and a weaker tonnage environment totally makes sense. But anything on kind of competitive dynamic and conviction on the favorable pricing dynamic for LTL? Yes, I don't see any changes there. I mean, certainly, the customer and the environment is, Tom, as you just characterize, a bit softer, right? So that there's -- it's not what we saw a few months ago or a year ago. But what I'd tell you, I look at specifically Saia and I look at kind of where we stack up against the competition, and I look at the service that we're providing, which is, in many cases, better. I think there's an opportunity there for us. And the investments that we've made in the facilities and expansion, it deserves that. So I feel pretty good about our position. The rate of growth may not be the same, but the opportunity remains. And I think the environment, underlying everybody still has inflationary costs. So I think that that's a critical part of the industry and kind of what we see. Right. Okay. So it sounds like still a lot of confidence in the competitive dynamic. I guess for the second question, I think you talked a little bit about industrial earlier, maybe parse it a little bit further. Did you see a difference -- have you seen a difference over the last several months in terms of how much weakness is being realized with industrial customers versus retail customers? And I think the idea is just that if you have inventory reduction with retail customers, maybe that plays out through 1Q and they improve, but it's just a little less clear on whether you've already seen weakness with industrial customers or whether that's still to come? I think, Tom, one of the things we're challenged with is that no one customer is greater than 4% of our revenue base. So it automatically is a pretty diverse base. And I would tell you what we've seen, the trends that we've seen, it's been pretty much across the board. So I don't have a really good call out around industrial or retail there. And particularly, in some cases, as you know, in this business, as a customer's mix of business changes or their plans change, they may choose alternate supply chains and things that we may lose or pick up business. So it's tough to really for us to call a trend there. I would say that the trends that we've seen in our business have been really pretty much across the board. So I don't have a really good intel for you on the retail side or component or the industrial component. But it sounds like you -- I guess there's some information value, I think, in saying that you haven't seen a big difference between the two, right? Like it's, you don'tâ¦ That's fair. But I would caution you by saying sometimes some of what we've seen is based on our own action, because we're pretty deliberate around making sure we get the pricing piece right, because our service levels are pretty critical. Hey, great. Good morning and thanks for the time, Fritz and Doug. Going back to the real estate last quarter, Doug, I think you mentioned that you could slow things based on the flows. But given you're opening five terminals, how do you -- is that in line with your target of 10 to 15 this year and kind of your annual growth? Or are you thinking about things slowing based on tonnage? I guess, maybe just how do you think about that given your real estate projects? So Ken, let me just jump in on that one. The five that we're opening, those are in our pipeline, and I'd tell you they're confirmed. In -- as we look out for the balance of the year, we're going to be opportunistic. We may add additional facilities down the road based on what we see in the macro environment. One of the great things about doing an organic expansion is you can accelerate or slow down as you need to. I think right now, with kind of the tempered environment that we're in, we feel pretty good about these next five. There may be a few after that, but I'm not in a position I could speak to those yet. We have -- we know what they will be, but we may not open them this year. We could open them this year. It all depends on what the environment is. I think the opportunity that we have right now is the last 18 that we've opened. Let's continue to optimize those and add share in those markets. And then we'll take advantage of these. We've got a couple of big ones coming up this quarter and next, which I think will be a nice add for us. So Fritz, it's not like you're saying, hey, we're opening five because we're seeing some opportunities. These are already in progress and that will decelerate from here on and maybe comment to the second half unless we see things improve. Is that a better way to look at it? Yes, exactly. You know what? If we feel better about the second half or more confident, I should say, we could add more. We could come back and say, hey, Ken, we're going to add five, six more. We could do that. But right now, we like the next five, and we like the fact that we've got a lot of opportunity in the last 18. So I know you don't give out the fuel expense specifically. And 1 of the things that I think a lot of investors have been worried about was the amount of profits that were coming off of fuel surcharges. And it seems pretty thin this quarter with your fuel surcharge revenues up, call it, $41 million year-over-year. And I know you don't break out the fuel category, but the whole category was up 37%. So I guess, your thoughts on the ability to sustain those revenues or that gap as fuel starts rolling over. I think any thoughts you can give us to calm some of those nerves out there that as fuel came down, you'd lose that profitability gap. Well, I mean the way -- I think the first thing I'd make sure we understand is that fuel and fuel surcharge in particular, an important part of the cost structure of this business. So the fuel surcharge program is tied to kind of our base pricing. So that is kind of ongoing, and we've continued to make pretty big investments in that. One thing I'd call your -- make sure you think about as you study our financials is that, as we switch to change our mix in linehaul from purchase transportation to internal fleet, the fuel cost ends up on our internal fuel line, right? So rather than on the PT line. So that's part of what you see there is we're optimizing our linehaul network. Thanks, everyone. Just a couple of follow-ups from me on the end markets. One is I know you touched upon the volume like a few times, but just kind of at a high level, I think some of your peers on both the LTL and the TL side have spoken about a potential spring inflection in the cycle. Do you underwrite that view? Or are you saying that it's too uncertain to make that call? I think I can understand and where that might -- the thoughts around that. I think certainly, there is some reason for optimism and the jobs number today was really good. So I think there's the potential for optimism there. I think as you -- as we reset our business, we want to be in a position that as the economy gets stronger, we want to be able to take advantage of that. So we're positioned for that. I think there's definitely some possibility we could see some -- second half could be better. But at the same time, if there's other sort of macro shocks that could take it in a different direction. But it seems like increasingly, we're seeing a more kind of a little bit more optimism in the back half of the year. So that would be good. Got it. And just on that note, kind of -- I know you spoke about the industrial end markets earlier, but I think you're a little bit unique in that you have a slightly higher energy market exposure than many of your peers. Given how volatile that has been in â21 and â22, kind of, is that a tougher comp for you this year? Or does that not really matter? It doesn't really matter. I mean -- as you know, followed us closely that, as we've added the Northeast, that sort of energy exposure probably looks more like the rest of the LTL sort of sector, right? So our book of business is looking more and more similar to everybody else. So I don't have a call out there, so it's influence on our results. Hi, good morning. Just keeping on that industrial side, a lot of our coverage in the industrial space is really talking about the sort of recalibration here as we smooth down the backlogs that have extended here with all the supply chain issues. Is that driving any volatility in some of the trends that you're seeing from some of your industrial customers? Or are you expecting that just given some of that lumpiness potentially? Allison, I don't have a great view on that. But we do see -- and I think this is an important part of our operating flexibility is that we do see a continued kind of disruption with some of our customers around this order patterns, supply chains changing. Those are important parts of our ability to be flexible and match customer expectations. So I don't know that there's a particular vertical there, but it's -- we see that and have seen that over the last year or so where you do see some disruption in sort of month-to-month trading and changing in all parts of the business. Got it. And then just going back to the facilities you had opened; you had talked about it being a drag to the OR. Does that flip now as you start to build out and leverage or is it just the volume moderation a little bit heavier this year than maybe you would have expected in terms of that kind of flipping from a drag or it's more of a tailwind for you? I mean, I think the opportunity for us is that there's a potential tailwind there, right? We have -- we're really, I think, have been successful in replicating that fantastic service that we're offering the customer across these new openings. As customers become familiar with us in those markets, we have the opportunity to kind of grow in those facilities. And that's -- it's a -- I think it certainly could be something that would be beneficial to us in the balance of the year. So I wanted to ask Fritz and Doug, maybe you could give your thoughts on the ability to get to a sub-80 OR kind of over the longer term? I know you said kind of expectations for â23 probably within 100 basis points or so of what we saw for â22. But is the sub-80 still kind of the long-term target and kind of what's your confidence level around that? And then should we also have an expectation that Saia can kind of be top quartile among peers in terms of where its OR lands in any given year? I don't have a reason why not. I have to be honest with you, we are marching on to that. This is the environment that we're in right now, it's a little bit more challenging than it has been, but we don't see any reason why our service, our quality can't be. It is, in many cases, becoming best-in-class or approaching that, and that deserves an appropriate return. And I think that operating in the mid-70s is our expectations or perhaps lower. I mean certainly, the bar has been set. So we're going after it. I don't know why we wouldn't. That's great. Certainly very encouraging to hear. And then just in terms of the five terminal expansions that you're looking at, maybe you could give a little color on what geographies those are focused on. Historically, you've spoken about kind of the benefits that you see in terms of increasing density in a particular geography. Maybe you could give us some color on kind of what the expectations are for the benefit that you might get from that. Yes. Listen, 1 we've talked about, and if you followed this closely, we've talked about it's a testament to how challenging real estate is, but we've got a facility that will open in Northeast Atlanta. That will give us three in this market. This is a growing metropolitan area. We have a challenge being able to provide the best-in-class service that we would expect in the Northeast part of Atlanta. We added one in Northwest Atlanta, I guess,1.5 years ago and been thrilled with all that. We've been able to service those customers and approach that market. We expect more of the same going up the 85 corridor. That's an important add for us. I think it's going to be -- not only do we will able to do a great job for the customer there, we'll be able to recruit drivers in that market, will create flexibility and capacity in our legacy facility there, and we're going to say there's going to be some efficiencies built into that. Just the fact of the matter that we get to a customer without having to go through 1.5 hours of Atlanta traffic is a big deal. And I think that we're excited about that opening. It just can't happen fast enough. Hey, good morning team. This is actually Andrew Cox on for Bruce. I just wanted to dive in a little bit -- yes, no problem. I wanted to dive in a little bit on -- I appreciate all the detail you guys have given on cost reductions and the natural attrition you guys have allowed to occur in response to slower volumes. But I kind of wanted to get a sense of your views on the other side of the equation that might be kind of backfilling a little bit of this excess capacity with maybe transactional shipments? You've talked about your shift to enforcing line haul and maybe having additional backhaul opportunities there, and you've now got 25% latent capacity and your costs are better aligned and we've heard from this week that some of your peers may be taking part in this exercise. So I just wanted to know your thoughts on backfilling capacity with maybe some transactional freight. Listen, we're all about finding customers that value are fantastic, what we see is a very strong service proposition. So if there are opportunities for us to go sell and available capacity on it. And in fact, we have several initiatives around that. But we're not in the game of leading price that. Frankly, that's not what is appropriate. What is appropriate is to find a customer that understands that you're going to get a great product from Saia. And they're going to pay accordingly and that's going to fit. Maybe in some markets that there's an opportunity for us. But we don't -- you won't see us participating in simply price -- working on leading with price. That's not our game. We'll find the customers up, but that's certainly an opportunity as we build capacity. Okay, great. Thanks for the follow-up. Doug, I just wanted to circle back real quick to make sure everybody is on the same page on the operating ratio kind of thoughts for the first quarter. If I heard you guys correctly, you're kind of talking about flat operating ratio quarter-to-quarter sort of fourth quarter to first quarter, which would be in line with seasonality. Is that what you guys said? Or did I misunderstand that? Yes, that's right. That's what we've seen historically. And then Fritz gave a lot of color on Amit's question about could it be better than that, potentially, but you hate to get out too far over your skis given the weather challenges have come up in February a year ago. I think it was a pretty tough comp for us. So I think it's mid-teens kind of shipment and tonnage growth last February. So we got to get a clean run through there to think that we try to forecast something better. So yes, flat out of Q4 into Q1 would make a lot of sense to us. Thank you for everyone that's called in. You heard the latest update on this Saia performance. We're excited about the opportunities in front of us this coming year and look forward to providing you an update in the next quarter. Thank you.
EarningCall_522	Good day and thank you for standing by. Welcome to the Cerence Q1 2023 Earnings Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Rich Yerganian, Senior Vice President of Investor Relations. Please go ahead. Thank you, Chris. Welcome to Cerence's first quarter fiscal year 2023 conference call. Before we begin, I would like to remind you that this call may involve certain forward-looking statements. Cerence makes no representations to update those statements after today. These statements are subject to risks and uncertainties as described in our SEC filings including the Form 8-K with the press release preceding today's call, our Form 10-Q we filed today, and then our Form 10-K we filed on November 29, 2022. In addition, the company may refer to certain non-GAAP measures, key performance indicators and pro forma financial information during this call. Please refer to today's press release for further details of the definitions, limitations, and uses of those measures and reconciliations of non-GAAP measures to the closest GAAP equivalent. The press release is available in the IR section of our website. Joining me on today's call is Stefan Ortmanns, CEO of Cerence; and Tom Beaudoin, CFO of Cerence. As a reminder, the only authorized spokespeople for the company are Stefan, Tom and myself. Before handing the call over to Stefan, I would like to announce that we will be presenting at the Virtual Baird's 2023 Vehicle Technology & Mobility Conference on February 15 and in early March at the Morgan Stanley Technology Conference. Thank you, Rich. Welcome everyone and thank you for joining us to discuss our first quarter earnings. I'm pleased to report we had a strong start to the fiscal year driven by our core auto business. Each of the key financial metrics provided in our guidance came in above the high end of the range. Tom will share the details with you shortly. At our Investor day November, we laid out our strategy for long-term sustainable growth for Cerence, what we are calling Destination Next. We described the evolution of our technology and the role it plays in the car of the future, an immersive companion that goes beyond conversational AI, extending to all aspects of the user experience inside the cabin for both driver and passengers and even outside the car. We also provided our long-term target models, which reflect not only the increasing level of adoption of current â of our current technology with programs already awarded, but also the future adoption of a greater suite of technology that Cerence will bring to the market. This was an important event that allows us to share with all of you the excitement we have for the future of Cerence. In the near-term, the first quarter showed continued success across customers and product innovation. Working with our customers, we delivered 47 SOPs start of production in the quarter, including 18 initial program launches. We signed two competitive win-back contracts in the outer space: one in Europe, one in China. These are significant because both represent takeaways from consumer tech and validate our continued competitive edge. Our experience in large language models combined with our deep mobility experience and generative AI expertise is vital to drive innovation and expand our position as a category leader. In addition to various competitive design wins, we added two new logo wins, one in Europe for auto and one in China for two wheelers. The two wheeler win now brings the total of two-wheeler customers to seven, and we expect that number will be even higher by the end of the fiscal year. Two-wheeled vehicles continue to be an important adjacency providing a growth area for Cerence and our Destination Next strategy. While we are seeing slow improvements, the macro environment remains a challenge. Semiconductor shortages are still impacting out production. All through there has been some improvements of the supply. We are hopeful that the slow but improving trend for access to semiconductors continuous. These shortages have led to append up demand for autos, where in many areas inventories remain low. There is a concern about a potential global recession in 2023, but that does not appear to have had any impact on auto production at this point. The latest forecast from IHS aligned to our fiscal year is for 2.5% growth year-over-year. After our strong first quarter, we are slightly raising the lower end of our full year guidance. We remain confident that we can achieve the goals we set for the fiscal year and continue to deliver predictable and medium and long-term sustainable growth. In addition to the business highlights for the quarter, I would like to also share with you some key innovation highlights across our products. With our razor sharp focus on innovation, we have a distinguished competitive advantage. It is evident that our customers rely on us to jointly create unique mobility experiences for their customers. As the automotive industry transitions to electric vehicles, this experience will become an increasingly important aspect of differentiation for our customers. Continued innovation is key to our customers' visions and to our future growths and to strong momentum for our current products and technologies provides a solid foundation as we extend our AI expertise to other areas. As the core of our current product portfolio is Cerence Assistant 2.0, the foundation of our co-pilot offering. This product is perfect example of what we referred to as scalable AI, where we can take a product developed for the auto industry and with minimal engineering apply it to an adjacent transportation market such as two-wheelers. As you may recall, Cerence Co-Pilot runs directly on a vehicle's head unit with advanced AI deeply integrated with car sensors and data to understand complex situations both inside the vehicle and around it. While securely integrating edge technology with cloud services to make driving more intuitive, connected and enjoyable. It's clear that mobility OEMs see the advantages Cerence Co-Pilot brings to their vehicles as Q1 so far automotive design wins from customers in Europe and China. With Cerence Assistant 2.0 as its foundation Cerence Ride our offering specific to the two-wheeler market was awarded three design wins in the quarter, including a key win for a major Japanese manufacturer where we had to compete against both consumer tech and niche competitors. Cerence Ride offers unique features like providing the rider with distraction-free navigation, route planning and riding records, enabling a safer, more enjoyable experience. By using their voice, riders can now navigate, listen to music and other media, adjust settings and even control their smart home devices, all without taking the hands off the handlebars or the eyes off the road. Further expanding the reach of our technology, Cerence Link is a comprehensive solution that bridges the technology gap between connected and not connected cars by providing the availability to capture vehicle diagnostic sensors and telemetry data as well as car geolocation and other useful information that is delivered to the end user through a mobile app with a rich user interface. With Cerence Connected Vehicle Digital Twin at its foundation, Cerence Link is able to apply cloud-based intelligence on this data to enhance driver safety, security, comfort, and convenience. When we first introduced this product last September, we had already secured an important customer win in India, which is already contributing to revenue for the company. In Q1, we won our second customer also in India demonstrating continued adoption for this new solution. These key wins for Cerence Link and Cerence Ride indicate continued adoption in adjacent and expansion markets, proving that we are focused on the right areas that can support continuous long-term growth. And lastly, during the quarter, we had a customer launch a significant expansion of capabilities leveraging our car knowledge product. The innovation is an upgrade to the OEMs' existing solution and makes accessing digital owners' manual information and remote vehicle controls as easy as possible, delivering additional value for the drivers. Customers can chat with the assistant both in the car and via Facebook Messenger from anywhere, asking vehicle-specific questions or remote starting, locking or unlocking their vehicle, the system leverages generative AI to [indiscernible] voice commands and provide more engaging responses. I'm very excited about our current find up of products and our growth in important adjacent markets, but even more so for the products yet to come under the leadership of Chief Technology Officer, Prateek Kathpal; and Chief Product Officer, Nils Schanz. This slide may look familiar to you from our Investor Day, but we feel it's important to revisit, to continue to ground ourselves in all what we have accomplished in the past 12 months and where our focus is moving forward. We have the customers, the innovative product and technology and the strong competitive position to deliver long-term sustainable growth. Now, it is all about execution. As you heard from me in November and as remains true today, our goal is to deliver on what we have promised to our customers and investors. We have had a strong start with the fiscal year and we are focused on keeping the momentum going. Before I hand the call over to Tom to review our Q1 results and Q2 guidance in detail, I want to reinforce the key points of our âDestination Nextâ strategy. âDestination Nextâ applies to all aspects of our business. It shapes our product strategy as we innovate to deliver a truly immersive companion experience in the car. It positions us as a key partner to our customers as they seek to create unique branded experiences. It doubles our served addressable market over the next seven years, providing excellent opportunities for growth once we get past the FY2023 transition year, and it puts the company on a path to deliver strong growth, profitability, and cash generation over the long term. The entire company is behind our âDestination Nextâ strategy. And I'm excited to keep you informed as we continue to make progress towards our long-term goals. Thank you, Stefan. I'll come back to guidance in a moment. But first I want to share more on our Q1 results. One of our goals has been to develop a track record of doing what we say. With our strong Q1 results, we are providing another positive data point in accomplishing this goal. We are committed to continuing to build upon this trend to establish a proven track record of predictable performance. Q1 revenue came in at $83.7 million, well above the high end of our guidance. This is due to a combination of better than expected strength in our core business with higher than anticipated contributions from connected services, professional services and fixed contracts. Consumption of existing fixed contracts in the quarter was lower than originally expected due to a longer, projected consumption time for the Q1 prepaid deal than our model. The higher amount of fixed contracts in the quarter remain within the framework of 40 million fixed contracts for the full year. Because of the higher revenue, we exceeded all of our key profitability metrics we guided for the quarter. Non-GAAP gross margin was 70.4%. Non-GAAP operating margin was 20.5%. Adjusted EBITDA was $19.7 million or 23.5% margin. And non-GAAP earnings per share was $0.36. All these metrics came in above the high end of our guidance. During the quarter, cash flow from operations was approximately negative $2.1 million. While CFFO was negative in the quarter, we expect positive CFFO for the full fiscal year. Here is our breakdown of revenue of the quarter. Variable license revenue was up 22% from the same quarter last year and 38% quarter-over-quarter. The increases were due to reduced consumption of fixed licenses, slowly improving auto production and increasing penetration. New connected services revenue was down 12% from the same quarter last year and up 3% from last quarter. The year-over-year decline was the result of several disclosed factors such as lower production of connected cars over the last two fiscal years due to semiconductor shortages and expiring contracts for older technology, separate from the legacy contract. Finally, our professional services revenue was up 3% year-over-year and down 5% quarter-over-quarter. Professional services are a key indicator of future license and connected services revenue as the pro services team includes the individuals who directly interface with customers to customize and implement Cerence's technology on next generation OEM platforms. We don't see professional services as a revenue growth driver for the company, but instead acts as an enabler for future license and connected revenue. Moving on to the details in our license business. Overall, the license business remains strong and is indicating slow improvement from the issues that have plagued auto production over the last few years. We signed fixed contracts in the quarter worth $19 million, $18 million as prepaid contracts and approximately $1 million as a minimum commitment deal. This was slightly above our estimate going into the quarter of $18 million. We continue to manage fixed contracts to an approximate $40 million level for the full year. While there was a small, minimum commitment deal in the quarter, we do not expect minimum commitment deals moving forward. Consumption of fixed licenses declined 14% during the same period. While difficult to accurately predict, we do believe the consumption of fixed contract licenses should peak in fiscal 2023. The majority of our KPIs continue to indicate strength in the business. Our penetration of global auto production for the trailing 12 months increased to 52% from 51%. This means over half of global auto production includes some level of Cerenceâs technology. Of the total 11.5 million cars with Cerenceâs technologies those that used our connected services increased 4% quarter-over-quarter. We also saw a big increase in monthly active users, 19% year-over-year, indicating increasing popularity among consumers of our technology. Now turning to revenue guidance for Q2 and the fiscal year, one factor that we have an impact on our quarterly revenue is the value of fixed contracts in a quarter. Fixed contracts were $19 million in Q1. We expect fixed contracts of approximately $4 million to $5 million in Q2; approximately $15 million in Q3 and none in Q4. Taking that into consideration, we are guiding to $64 million to $68 million for Q2 with Q1 behind us in greater visibility into our fiscal year. We are also raising the lower end of our full fiscal year guidance from $270 million to $275 million. You can see on this slide the revenue guidance and effect of the associated financial metrics. Overall, the business continues to perform as we outlined at our Investor Day, and remained focused on innovation and execution to achieve our long-term goals. Hi, good morning. Thanks for taking the question. Want to start with a mechanical question this morning and Tom, can you just help us understand the lower-than-expected consumption of fixed contracts this quarter? I know you mentioned it had something to do with prepay is that timing related, mix related? And is it right to think that this doesnât flow through to full-year guidance or not? Thank you. So, as weâve talked about previously, we typically a prepaid gets consumed on average over six quarters. The particular prepaid that we did in Q1, the projected consumption on that particular deal is estimated at about eight quarters. So from our modeling and from the way we had set our plans and guidance that that has a positive effect in the short-term. Understood. Thank you. And then follow-up. I just want to ask a bigger picture question, Stefan. So wondering if thereâs any additional color you can provide on the Co-Pilot win-backs in particular, maybe if we could discuss key system capabilities you think that help to drive those win-backs versus the competing consumer tech. And I donât know if you could comment also on your previous positioning with these customers, if that would make sense? Thank you. Thanks for your question, Luke, here and good morning. Yes, so our Cerence Assistant 2.0, so-called Co-Pilot Ride is actually well received here at the OEM sites. We had various design wins last quarter in Q1. One was against a big tech giant and another one was also again in China also was also tech giant, yes. And then we had also some very competitive design wins against the big tech players here. Yes. And what we see here and the feedback from the market is actually outstanding, right, in all my discussions with OEMs, right, is say, okay, wow, thereâs really a cool solution, right? Itâs extremely fast in the response time behavior. It has a broad coverage, but it goes also into a deep learning. And what we said also generative AI search capabilities here, right? Combined with proactive AI, for example, leveraging sensor data and also leveraging the information around the surrounding of a car, for example, road information and also this kind of weather forecasting here, right? And that was actually well received. Yes. We have a great prototyping solution here and OEMs want to work tight with us together, right? Also seeing Co-Pilot as a foundation, but in most of the cases, they want to have also a kind of their own branding and experience. Oh, great. Thanks for taking my questions. Just first question, guidance is just to confirm, is it based on IHS, and IHS has actually come down for September year end? So is that incorporated and what is offsetting sort of that weakness and production? Yes, so maybe let me start first, and then I will ask also, Tom, for putting his color to it. Right. So in general, right so, IHS been down roughly 3% from 6% year-over-year. Now itâs in the range of 2.5% to 3%. And that goes actually hand in hand with our projection from the beginning of our fiscal year. Yes, we had baked in when we had done our original planning. We had taken a relatively conservative approach. Interestingly enough, IHS has come down more to the numbers that we were projecting. We donât use solely IHS in our forecasting, because we get reporting from all of our customers every quarter on their royalties. So, we use a combination of overall market trends and that what we are seeing from our individual customer royalty reports. And thatâs how we base our guidance. Got it. Okay. That makes sense. And if I look at Slide 9, you look at like new connected services. Yes, I think you highlighted something like a 19% increase in monthly users, but that line hasnât really moved very much. Itâs not really showing growth. So what is sort of keeping the growth back in that new connected segment, and when should that start to inflect back upward? Itâs a combination. I mean, as weâve talked about previously, there are some older platforms that are not up for renewal that are kind of winding down. Weâve also lost kind of two years of revenue, because cars were much low â we took down $20 million a year of production. And that represents connected opportunities that we wouldâve had in the amortization of those revenues coming in the current periods. As we talked about at Investor Day thereâs a number of wins that will start to go into production at the second half of this year and into FY 2024. A lot of those wins include some of our connected services, which will start to help us to drive growth and get us more towards the growth projections that we had in 2024, 2025 and going forward. The usage I think is important. It doesnât directly correlate to revenue because itâs the revenue of the connected services that are shipping on the cars, but it â but what it does do is to show that our technology is being used more, is being accepted that, that some of our new enhancements are being recognized by the drivers and the passengers. Maybe let me also add a bit color to it here. Right? So, I think what I just mentioned at the beginning, right? Co-Pilot, Cerence Link, Cerence Ride? They have all the connected component, right? And they will go live over the next 12 months to 18 months with the specific OEMs. We see also really an uptick here in active subscribers, right? So one OEM reports also a big jump in the adoption of our so-called connected services offering. We are working also with leading premium OEM on so-called additional expansion of the current cloud with new cloud domains, with new proactive AI for older capabilities, right? So that we can bring those services, cloud services to SOP cars being on their own. So we have plenty of opportunities. And as Tom mentioned correctly, right, I think we are still in the transitional year. We are suffering still a bit from the outer production over the last two to three years. But we are seeing more and more opportunities for connected services. Yes, thank you, and congrats on good results and a good transition with this turnaround story. Question on the visibility if I can, I know at the Analyst Day you talked about kind of 95% visibility into fiscal year 2023, and then you talked about, I believe, 75% visibility into fiscal year 2024. If I look at the slides, on Slide 12, youâre kind of increasing your visibility for this year by about a couple points to 97% for the full fiscal year. Iâm wondering how youâre thinking about the visibility into the growth year, fiscal year 2024. Has that changed given some of the design wins youâre talking about given some of the more stabilization in the fixed contracts, and is that also applied to some of the longer term targets and fiscal year 2025, 2026? So Raj, thank you for that. Thank you. We are happy about Q1 and continuing this story. Yes, I mean, clearly we have stronger visibility to FY 2023. As we report bookings semi-annually, so we'll be updating our bookings in Q2 and clearly we had we had good bookings in Q1 that will help with that visibility for FY 2024. But so I hope to have more to say around more specifics around how we're tracking to that FY 2024 growth initiatives that we laid out in Investor Day. But everything that we accomplished in Q1 helps us towards that journey in delivering those results. Great. And if you could maybe update us on the field of use agreement I believe it's ending in two years. If you could just clarify that and once that field of use agreement is over, what other markets can you start to license your IP? So also I think that also a key focus area. Actually, we have three vectors here, right? One is the execution on our core roadmap; what we just explained with automotive, adjacency transportation segments, right, the other important aspect is driving innovation. And the third one is also paving the way for post-FOU opportunities. And we have hired a very strong business development team also with separate with the R&D team underneath, right? And they're working already on some opportunities for this fiscal year. And we hope that we can also report first revenue driven by this team by the second half and the second half of this fiscal year. And we are evaluating also other opportunities for let's say October 2024. So I think that's one of our key focus areas also, and also part of our destination next strategy. Yes. Just to make sure everybody understands, as we laid out in an Investor Day we have the transportation adjacency markets that are starting to take traction that, that Stefan talked about today. And then we have what we call the non-transportation, and as Stefan said we've already seeded a team and just for clarity, there are a couple of technology areas that are not subject to the FOU. And so we're able to seed that group and they're able to drive some solutions and even some revenue prior to the FOU. The opportunity expands and that's why we're trying to get this group seeded and working well so that when the FOU expires in now less than two years, we have a well-developed team and capabilities to then look at expansion of all of that post the expiration. And the other important aspect is also at the Analyst Day we presented three pillars here, right, scalability AI, then the multi-standard experience platform plus tools, and then the companion â immersive companion solution, right? Scalable AI is also key to success and we can easily apply those technology to other markets beyond transportation, more or less at no cost. Great. Thanks. Thanks for taking my questions, guys, and thank you for the increased transparency. I appreciate all the incremental data points over time we're getting here. It's very helpful. A couple â several questions if I could jump through these fairly quickly. I think Tom, you referenced bookings. Just to be clear, did bookings meet the plan for the quarter and net-net I know you don't publish an outlook in terms of what you're thinking internally for the year, but has the annual outlook on bookings changed say versus 90 days ago? And then along the same lines just to just want to make sure I'm clear, the consumption number I think you talked about at the Investor Day was roughly $75 million of consumption expected in 2023. Is that still the number? So just on bookings, I mean, we'll update bookings in Q2. And the reason we do it semi-annual is it can be a bit lumpy. We did have some nice wins in Q1, I think Stefan alluded to that. And then on consumption, consumption will be a little bit lower because of this one particular prepaid where we had modeled spend six quarters and it's probably going to be eight quarters, but that can vary too Jeff, because it's all based on actual shipments from that particular Tier 1. So it could be â it could be even sooner. Okay. That's helpful. And then Stefan as it relates to generative AI and in particular the GPT, large language model is looking very disruptive. I know Bardon [ph] and some others are coming, but the GPT and some of the things it's been able to demonstrate seem to take a pretty significant leap forward in terms of what these large language models can do. Giving you play in those worlds, but within a specific vertical, do you see that as competition, co-opetition, how do you view that? And then as you were just referencing a minute ago, you've got the expiration of the FOU. Does that suggest the future FOU opportunities also end up being a bit more competitive given what these guys are demonstrating? Just love to hear your thoughts there? I think I don't see them as a direct competitor, right? So we have already created a prototype with ChatGPT, but also enhanced with our deep knowledge about the car knowledge, right? About mobility AI experience here. You know that we have also for example applications such as PROSS [ph] what we've just also announced the Cerence car knowledge which went live is a North American market OEM right? And you're bringing those information all together, we have the general knowledge, yes, but also the automotive transportation specific knowledge, right? And this is actually our goal, and we're already in discussion with some of the OEMs, what we can do together here. Hi team, this is Gavin Kennedy on for David Kelley. Thanks for taking my questions. Can you provide us with more details on your progress and transportation adjacencies? It looks Cerence Ride specifically won three more design awards with two wheelers, and your two wheeler customers are now up to seven. So how should we think about this in the context of your prior transportation adjacencies sales target of 1 million in fiscal year 2023, and I believe 6 million in fiscal year 2024? I mean, that the two wheeler market is a very important market to us here, right? Compare it with automotive they're producing roughly 50 million to 60 million two wheelers on a yearly basis, yes. I'm really proud about this big design wins for one of the big brands in Japan where we won an evaluation done in North America against the big tech players and some niche players, right? And the feedback was amazing with respect to our Audio AI stuff, our solutions, right? We won in terms of technology and also with respect to application. So we are doing exactly what a rider is looking for. Thatâs one important aspect. So two-wheelers on the other hand, you mentioned also last quarter, where that we had also some significant design wins in the truck space. Also we can easily adapt our Cerence Co-Pilot to the needs of trucks here. So overall we are doing pretty well. And the other important launch, which I mentioned today was also related to Cerence Link, where we are also connecting now non-connected cars via smartphones via OBD to solutions to give a better driver experience, right? We can also monitor the behavior of the driver geolocation and so on so forth. So, I think we are doing quite a lot also going beyond the typical natural language processing here, right. And combining all pieces together, right. I think thatâs actually, what we want to do, right, driving this immersive experience for the transportation markets. Yes. And just in these markets as Stefan alluded to there is a â so most of these are connected elements to the, and therefore, the revenue growth will build over time as you have to take that portion of the revenue and amortize it over the service life of the particular solution. Got it. That makes sense. And then as a follow-up, just switching gears, I believe at the Investor Day, you mentioned a cost management strategy to improve Cerence, and I believe these Cerence â these savings, excuse me, were included in your playing discussions. Can you provide any more details here on the cost actions youâve been taking? Or, and is there any low hanging fruit that youâve addressed in the near-term? Thank you. So, I think youâre absolutely right. Yes. And weâre working here with a well known consulting company together. So, and also that we have our refocus on innovation R&D and customer deliveries. Therefore, we have noticed two organization, CTO office, and CPO product office [ph] run by new trends from Mercedes, he joined us a couple of months ago. And weâre trying to optimize here the organization for driving more efficiency, productivity. And we are also on a good track. And yes, youâre right. Thatâs part of our plan for this fiscal year. Tom? A lot of our cost initiatives were designed to drive efficiency, and then as Stefan just talked about, to drive alignment as we implemented the new leadership team across the company, weâve done very well on that, and that program is well in place and being implemented, but I do want to say weâre also investing, right? Itâs important that we continue with our innovation strategy. And so weâve baked all of that into our guidance going forward, the cost savings that weâve achieved through the efficiency and productivity initiatives combined with some continuing investment to, and all of our investments are really in the R&D and technology areas to support our innovation agenda. Thanks so much team. Stefan and Thomas, if I could ask, one of the things that youâve provided, which is really helpful, is the pro forma royalty to sort of, to sift through on the licensing sort of the underlying trend. And this quarter you showed 5% year-over-year growth. But weâve roughly seen sort of a flat lining in this number when we look at, on a two-year basis. And so one of other questions that I think investors are trying to look forward is, when will that underlying metrics sort of move up, so that we incorporate some of the large orders that weâve seen that youâve talked about some of the launches in connected, but I think seeing that essentially what is paid usage of your licensing move forward will given sort of some confidence of the, higher secular growth versus sort of the low single-digit outgrowth that youâre doing today. So, Chris as we talk about in the Investor Day, thereâs a number of programs that are coming to SOP. Weâve got shipping cars that have deeper sets of our solution, which drives a higher price per unit also gets some additional volumes from those deals. So, I think, youâll start to see that line hopefully start to tick up over the next few quarters going into where we show some strong growth in FY 2024. Thatâs great. And just maybe as a follow-up, not for this call, but I think maybe, a metric that would be helpful on going forward with sort of a, percentage of units, refreshed or, a launch percentage in 2024 or 2025 versus 2023 or 2022, something that we could start to kind of make our own estimates for. And again, thereâs a lot of moving variables, but order of magnitude, does that start to become, 5% to 10% above production growth? Does it become 10% plus above production growth? Thereâs something in that order of magnitude to give us sort of the end goal of 2024 and 2025, because thereâs, we see the orders, but I think weâre trying to connect the pieces, just to get into 2024, 2025 would be super helpful. Yes, good morning and thank you for taking the questions. First, when you think about some of the new wins and some of the take backs, that you referred to, are those consistent with the trend higher and pricing over time that was something that was articulated at the Analyst Day? So yes, I think overall we have various new win-back opportunities right across the globe, not just in Europe, but also North America primarily and also in China some great opportunities, I think overall in a very competitive environment. But what I said at the beginning, I think we are better than even before in terms of competition, right? With our new products, right? With all the flexibility we are offering to OEMs and we bring also more and more features on the embedded side, but also on the cloud side, right? And that was actually what we also mentioned at the Analyst Day that we see a nice increase in the PPU thatâs already to embedded. And I think we will also show something over the next couple of quarters on the connected side where we see also a nice upside. But overall I think we are doing pretty well here. Okay. Thatâs helpful. Thanks. And then the second was on the connected business. I believe in the past the company has talked about some component of revenue thatâs tied to usage of the products and whether or not, when your technology is on vehicles, are drivers actually engaging with it and using it? Maybe talk a little bit more on what youâre seeing in terms of underlying usage rates broadly and was there any impact from usage rates on revenue in the quarter? Thanks. Today most of our contracts are on the connected side. Not tied to usage. We do have a small amount and we actually saw a slight benefit this quarter from one of those contracts. And then I think going forward as more and more of the OEMs move to over the year updates, that will also help us to implement more of our solutions on cars that are on the road may also help us with additional opportunities to have more usage or activation type revenue. So that was, it was small, but it was a positive thing this quarter on one of our deals. At this time, I am showing no further questions. I would now like to turn the conference back to Rich for closing remarks. Thank you for everyone, to everyone for joining us on our conference call this morning. And we look forward to engaging with you in the future. Have a great day.
EarningCall_523	On Page 4, I will explain the highlights for Q3 fiscal '22. The exchange rates were JPY143.6 to the dollar, JPY144 to the euro and JPY93.8 to the Australian dollar. Compared to the same period of the previous year, the yen depreciated against the U.S. dollar, the euro and the Australian dollar. Consolidated net sales for fiscal '22 Q3 increased by 27.3% year-on-year to JPY920.5 billion, and operating income increased by 54.3% year-on-year, reaching JPY135 billion. The operating income ratio increased by 2.6 percentage points to 14.7%. Consolidated net sales and operating income increased, respectively, due to the positive impact of FX, increased sales volume and improved selling prices. Regarding other income and expenses, expenses increased by JPY23.2 billion, mainly due to an increase in FX losses due to the stronger yen and an increase in interest expenses. Net income increased by 11.2% to JPY69.3 billion. Consolidated net sales and operating income both reached record highs following the second quarter. On Page 5, I'll explain sales and profits by segment. Sales in Construction, Mining & Utility Equipment increased 30.8% year-on-year to JPY863.4 billion and segment profit increased 66.6% year-on-year to JPY122 billion. Both net sales and profits increased due to the positive impact of FX, an increase in sales volume and improved selling prices. Retail Finance sales increased 25.4% year-on-year to JPY22.1 billion, and segment profit increased 17.5% year-on-year to JPY6.4 billion. Sales and profit increased due mainly to the positive impact of FX. Sales of Industrial Machinery & Others declined 14% year-on-year to JPY43.1 billion, and segment profit decreased 28% to JPY4.7 billion. Regarding business with the automobile industry, net sales and profit decreased mainly due to a decline in sales of large presses and machine tools. On the other hand, sales and profits from the semiconductor industry increased, mainly due to strong Excimer laser-related sales. Page 6 shows sales by region for the Construction, Mining & Utility Equipment segment. Sales of Construction, Mining & Utility Equipment increased 30.6% year-on-year to JPY860.7 billion. Sales increased in all regions except CIS and Japan. There were large increases, especially in North America, Latin America and Asia. Traditional markets accounted for 46% and strategic markets 54%. On Page 7, I will explain highlights for fiscal year '22 third quarter on a 9-month basis. The exchange rates were JPY135.6 to the dollar, JPY140 to the euro and JPY93.2 to the Australian dollar. Compared to the same period of the previous year, the yen depreciated against the U.S. dollar, the euro and the Australian dollar. Consolidated net sales increased 26% year-on-year to JPY2,539.2 billion, and operating income increased 54.9% to JPY346.6 billion. The operating income ratio was 13.6%, up 2.5 points. Consolidated net sales and operating income increased due to the positive impact of FX, an increase in sales volume and improved selling prices. Net income increased 49.1% to JPY231.9 billion. Consolidated net sales, operating income and net income all reached record highs in Q3 on a cumulative basis. Page 8 explains net sales and profits of each segment. Sales in Construction, Mining & Utility Equipment increased by 28.4% year-on-year to JPY2,369.6 billion and segment profit increased by 61.3% year-on-year to JPY309.5 billion. Retail Finance net sales increased 16.5% year-on-year to JPY63.6 billion, and segment profit increased 59.9% year-on-year to JPY21.2 billion. Sales of Industrial Machinery & Others declined 3.8% year-on-year to JPY126.9 billion, while segment profit increased 3.8% to JPY15.6 billion. A cost analysis for each segment will be explained later. Page 9 shows the Construction, Mining & Utility Equipment sales by region. Sales increased by 28.4% year-on-year to JPY2,363.2 billion. Sales increased in all regions, except for CIS and China. In particular, sales in North America, Asia and Latin America expanded sharply. Sales in traditional markets accounted for 44% and those in strategic markets were 56% of total sales. Page 10 shows a cause of difference in sales and the segment profit in Construction, Mining & Utility Equipment. As for the segment profit, cost price, which has been previously included in the volume, product mix, et cetera, is shown separately from this time. Sales increased by JPY524.1 billion year-on-year, mainly due to the positive effect of foreign exchange rates, increased volume and improved selling prices. Segment profit increased by JPY117.7 billion year-on-year, mainly due to the positive effects of foreign exchange rates and selling prices. Segment profit ratio was 13.1%, up 2.7 points year-on-year. Page 11 shows Retail Finance. Assets increased JPY84.4 billion year-on-year, mainly affected by foreign exchange rates and an increase of new contracts. New contracts increased by JPY156.2 billion year-on-year, affected by foreign exchange rates and an increase of sales in construction, mining and utility equipment business. Revenues increased by JPY9 billion year-on-year due to an increase in new contract and the positive effects of foreign exchange rate, despite the impact of selling post-lease equipment as used equipment in the corresponding period a year ago. Segment profit increased by JPY8 billion year-on-year mainly due to the decreased allowance for doubtful accounts and the positive effects of foreign exchange rates. Page 12 shows our sales and the segment profit of Industrial Machinery & Others. Sales of Industrial Machinery & Others decreased by 3.8% year-on-year to JPY126.9 billion. Segment profit increased by 3.8% year-on-year to JPY15.6 billion, and the segment profit ratio improved to 0.9 points to 12.3%. Both sales and profit decreased for automobile industry, mainly due to the reduced sales of large presses. But both sales and profit increased for semiconductor industry, supported by brisk sales of the Excimer laser-related business. Let me explain the orders and sales of industrial machinery on Page 33 in the appendix. Page 33 shows a book-to-bill ratio for industry machinery. Chart shows the index of orders received for 6 months divided by the sales for the same 6 months. Commercial industry is engaged in the sales and the services of press and sheet metal machinery. As the orders for large presses have been picking up recently, the index has been over 100%. Komatsu NTC is engaged in design, manufacturing and the sales of machine tools, including transfer machines, machining centers and crankshaft processing machinery. Orders in transfer machine for automobile industry have been solid and the index has been over 100%. On Page 13, I will explain consolidated balance sheet. Total assets increased by JPY436.1 billion year-on-year to JPY4,783.6 billion, mainly due to an increase of inventories and effects of foreign exchange rates. Inventories increased JPY256 billion to JPY1,244 billion due to foreign exchange rates and supply chain disruptions. Shareholders' equity ratio was 50.3%, down 1.1 points and net debt-to-equity ratio was 0.34. Yes. I'm Masatoshi Morishita, General Manager of the Business Coordination Department. I'll now explain the projection for fiscal '22 and main market conditions. Page 15 is an outline of the forecast for fiscal '22. From left to right, our fiscal '21 results, the October projection for fiscal '22 and the April forecast. Year-on-year changes compare the fiscal '22 October forecast against fiscal '21 results. In fiscal '22, Q3, despite the impact of supply chain disruptions and increases in material prices and logistic costs, both net sales and operating income reached record highs due to increased sales of new equipment, parts and services, improved selling prices and the weaker yen. Net sales and operating income are both trending steadily and order backlog has been building up across the world. However, as the yen appreciates more than expected, the outlook for construction equipment demand is becoming increasingly uncertain in Europe and the U.S. Therefore, the company has not made any changes to the full year guidance from the October forecast. The following pages will explain demand trends and projections for the 7 major products. From Page 16, I'll explain the demand trends and outlook for the 7 major products. This chart shows the demand trends for the 7 major products, including mining equipment. Total global demand in fiscal '22 Q3 was apparently down by 6% year-on-year. When excluding China, demand apparently decreased by 5% year-on-year. China's market conditions are sluggish and demand continues to decline. In other regions, other than China, demand increased in North America and Europe but decreased in Japan, Southeast Asia and other regions. For fiscal '22, we expect overall demand to remain flat year-on-year, while demand in regions other than China is expected to be 0% to plus 5%, unchanged from the April forecast. However, the projection for each region has been partially changed in light of current conditions and other factors. The following pages will explain the conditions in major markets. Page 17 shows the conditions in Japan. Demand in fiscal '22 Q3 apparently decreased by 9% year-on-year. Due to ongoing impact from supply chain disruptions, demand was sluggish because supply had not kept pace. The fiscal '22 demand forecast remains unchanged from the April forecast at 0% to plus 5% year-on-year. Delays in supply are improving, and we expect for the full year that demand will be probably flat year-on-year. Monthly average operating hours for contracts in December was minus 4% year-on-year. On Page 18, I'll explain the demand trends in North America. Demand in fiscal '22 Q3 appears to have increased by 1% year-on-year. Demand for infrastructure and rental increased and business with energy customers were firm. However, demand in residential and nonresidential construction declined, resulting in overall demand remaining at the same level as the same period last year. Fiscal '22 demand forecast has been unchanged from April at 0% to plus 5% year-on-year. We expect demand to continue to trend at high levels, but we will continue to monitor future trends closely as residential and nonresidential demand has begun to decline. The monthly average operating hours for contracts was minus 6% in December year-on-year. Hours decreased in residential and nonresidential, et cetera. Page 19 shows the situation in Europe. Demand in fiscal '22 Q3 appears to have increased by 1% year-on-year. Although there was impact from inflation and the surge in energy prices, supply chain disruptions eased, leading to demand reaching about the same level as the previous year. For fiscal year '22, we expect demand to be 0% to minus 5% year-on-year, unchanged from our October forecast. Supply delays due to supply chain disruptions are expected to continue to improve. But due to inflation and the surge in energy prices, retail orders have been dropping in Germany and France, et cetera, and we will continue to monitor this trend closely. The monthly average operating hours for contracts were minus 7% in December year-on-year. On Page 20, I'll explain the demand trends in China. This page shows demand for hydraulic excavators, excluding mini excavators. Total demand, including machines made by Chinese manufacturers are shown here as well for reference. Demand growth rate represents the number of foreign manufacturers. Demand in fiscal '22 Q3 appears to have decreased by 11% year-on-year. In addition, total demand, including Chinese manufacturers, appears to have declined minus 28% year-on-year. Although the degree of decline contracted temporarily due to inventory adjustments by companies in response to emissions regulations due to stagnant economic activity and the impact of the spread of COVID-19, demand declined. In light of these circumstances, we have revised our demand forecast for fiscal '22 from the April forecast to minus 40% to minus 50% year-on-year. And also for total demand, including Chinese manufacturers, our assumptions are minus 30% to minus 40% year-on-year. Monthly average operating hours for contracts were minus 14% in December year-on-year. Operating rates remain low due to the impact from the spread of COVID-19. On Page 21, I'll explain the demand dynamics in Southeast Asia. In the third quarter FY 2022, demand decreased by 7% year-on-year, with demand slowdown in Thailand. Demand in the largest market, Indonesia, was almost sustained flat year-on-year, while demand for mining equipment has been firm for , that for construction equipment declined with weakened customers' investment appetite due to the material and fuel cost surge and interest rate hikes. The full year demand forecast for the entire Southeast Asia in FY 2022 was revised from projection in October to increase between plus 10% and plus 15%. Mining equipment will continue to be robust, but demand growth will slow down in Indonesia for construction equipment and it will decrease in Thailand. As for the contracts in Indonesia, its average operation, hours [indiscernible] was plus 12% year-on-year in December. Operating hours in all segments of construction, agriculture and forestry were sustained at high level. On Page 22, I will explain the demand dynamics of mining equipment. In the third quarter FY 2022, global demand for mining equipment increased by 9% year-on-year. Demand declined in CIS, while it expanded substantially in Asia, including Indonesia and it also increased in North America as coal price has been sustained high. Demand forecast was revised from the projection in October to the increase between plus/minus 0% and plus 10% year-on-year. Demand in CIS is expected to decrease, but the demand mainly in Asia, including Indonesia, will grow. Let me explain the orders and sales of mining equipment on Page 31 and 32 in appendix. Page 31 shows the book-to-bill ratio for mining equipment. Chart shows an index of orders for 6 months divided by sales for the same 6 months. Komatsu American manufacturers and sells ultra-large dump truck. Orders almost remained unchanged. But with the sales progress, latest index was on 90% level. Komatsu Germany manufacturers and sells ultra-large hydraulic excavators. In addition to the low orders in the latest few months, with the progress of sales, latest index was on 100% level. As for Komatsu Limited, orders have been firm for Asia and Middle East and the latest index was on 100% level. Page 32 shows the book-to-bill ratio of KMC mining equipment. Orders of both surface and underground have been firm and the index has been on 100% level. Coming back to Page 23, I will explain the sales of mining equipment. In the third quarter FY 2022, sales increased by 36% year-on-year to JPY372.9 billion. Excluding the foreign exchange impact, sales grew 10%. Sales in CIS decreased, while they increased in Asia and North America. Full year sales for FY 2022 are expected to increase by 26% to JPY1,361.3 billion, kept unchanged from the projection in October. I'll explain the sales of parts on Page 24. In the third quarter FY 2022, sales increased by 33% year-on-year to JPY223.4 billion. Excluding the foreign exchange impact, sales grew 9%. Sales increased, except for a part of regions, including China and CIS. Full year sales for FY 2022 are expected to increase by 30% to JPY846 billion, kept unchanged from the projection in October. On Page 34 and onward, I will explain the major topics. Komatsu has entered into the agreement to acquire GHH Group GmbH, a manufacturer of underground mining equipment. With the completion of all the necessary procedures for closing we'll complete the acquisition by the end of June 2023. And its impact on our consolidated business result is minor. In mining industry, global resources demand is increasing, and the shift from surface to underground mining method for deeper mining is observed. In particular, with the increased awareness for climate change, Komatsu is strengthening its product development for underground hard rock mining as it anticipates growing demand in the mining segment. GHH offers a wide range of underground mining equipment focused on LHD, load haul dump designed for use in narrow veins and articulated dump trucks, and it has extensive dealers' networks for global customers for distribution and services. Production bases in Europe and South Africa and excellent human resources with product development know-hows and expertise. Page 35. In December last year, Komatsu launched the FE25G-2 and FE30G-2 models equipped with large-capacity lithium-ion batteries in the FE Series of 2.5-ton and 3.0-ton class electric forklift to contribute to CO2 emission reduction to achieve carbon neutrality. The quick charging system shortens charging time and allows for additional charging, enabling their continuous operation even at sites that requires long hours operation or high load work where the use of electric forklift has been deemed almost impossible. Through the expansion of FE Series, we expand the operational sites of electric forklift to contribute to reduced environmental impact and realize carbon neutrality. Page 36. Komatsu was selected as a component of the Dow Jones Sustainability World Index, one of the world's leading corporate social responsibility indices, and it has been selected continuously since 2006. And the CDP, a not-for-profit global charity, identified Komatsu as a climate change and water security A-list company again in 2022. This is Sasaki from Mitsubishi UFJ. I have 2 questions. It would be great if you can answer them one by one. The first one is on about the causes of difference in sales and segment profit. I'm always asking this question. Please give us a more detailed breakdown of the difference in volume, product mix, et cetera. Also based off the results, especially regarding unrealized inventory, may I ask how much of an impact that the increase in inventory has? I would also appreciate it if you could tell me about your thoughts on pricing, considering the surge in costs. Yes, this is Horikoshi. I think you're talking about Page 10. We were a little more helpful this time around by separating out the cost price impact. The impact from volume, product mix, et cetera, was JPY57.4 billion. But the pure volume impact was JPY37.3 billion. In terms of the impact from regions and product mix, sales of parts were better in the third quarter, which resulted in an impact of JPY10.1 billion. The rest is JPY10.1 billion, and this mainly is a gain on distribution of indirect costs due to an increase in inventories. Then regarding cost price and selling price, cost price includes the price increase for container ships, which we have been talking about. JPY12 billion is included in the minus JPY95 billion. Looking at the Q3 on a cumulative basis, selling price impact was plus JPY81.3 billion, and the cost price impact was JPY95 billion, resulting in a net negative. Looking back at the first half on a cumulative basis, selling price impact was JPY52.1 billion, and the cost price impact was JPY69.2 billion. So the impact from cost was considerably larger. However, when you look at Q3 on a stand-alone basis, selling price was plus JPY29.2 billion and cost price minus JPY25.9 billion, resulting in a net positive difference of JPY3 billion, with selling prices having a greater impact. As I explained at the time of the interim results at the end of October, I said that from the third quarter onwards, the effect of higher selling prices will probably exceed the cost impact. And that is what exactly happened. That's all from me. My second question is about what you have just talked about, price. Just the other day, I believe you announced additional pricing for your main products in Japan. With inflation likely to linger in the world, can you tell us about your company's pricing strategy? How you plan to go about in each of your major regions? Also, can you break it down into construction and mining equipment? Even with additional price increases announced in January, there's still quite a bit of room for price increases. And I was wondering if you will start reaping the rewards going forward as price increases will rather catch up to inflation. I'd appreciate it if you could share your thoughts about future price hikes and how your company is considering pricing policies. Thank you, this is Horikoshi again. As you're aware, for example, in Japan, we have announced that we will raise the list price by 10% starting from February orders. Regarding pricing, as I explained earlier, the cost price impact was greater as of Q2 on a cumulative basis than the selling price impact. The increase in selling prices was happening in a belated way. So next fiscal year, in 2023, the increase in material prices and container ships may moderate, but we may be affected by wage hikes as well as other factors. Therefore, we plan to continue to raise prices in the next fiscal year as well. We are currently preparing our business plan and we expect full year contribution from pricing that took place this year. And we will also account for further pricing to take place next fiscal year. As for the forecast for this fiscal year, in terms of original equipment and parts, the degree of price increases for original equipment is a little greater than that for parts for this fiscal year. Also in terms of magnitude, the price increase for construction equipment is slightly greater in volume than that for mining. As we have always said about mining, pricing is determined by a formula that is linked to cost increases, especially for mining majors and global contracts. And this formula is likely to gradually kick in. This is Sano from JPMorgan. First, regarding the operating income for Q3, I was hoping that it would exceed JPY130 billion, and the results came in strong. But what is your view on sales and operating income compared to your internal plan? You did not change the full year guidance this time around. And you also mentioned some weakness in construction equipment. Can you give some explanation about this? Are we supposed to expect Q4 profits to decrease significantly from Q3? It will be great if you can provide more flavor on this. Yes. This is Horikoshi. As you know, at the end of October, when we announced our annual forecast, we set the foreign exchange rate assumptions for the second half of the year at JPY140. Looking only at the third quarter, the average exchange rate was JPY140, so the yen was still weak. The consolidated financial results are based on the average exchange rate at the beginning of each month. So for example, at the beginning of December, the yen was still weak. So that is why the exchange rates were like that compared to the October outlook. Looking at Q3 results as well as the expectations we have now, first of all in the third quarter, sales volume was a little lower than expected. However, this is not about demand. It's more about the supply chain, which had an impact, especially in North America, Japan and KMC, although KMC was mainly affected by a delay in the recognition of the period. Volume was lower than expected, especially for original equipment. Therefore, in terms of sales volume, we underperformed. But FX gains helped and part sales overachieved, meaning that there was a product mix gain. And although this is not something that's great, inventory was slightly higher than expected. So there was a gain on the allocation of overhead costs. These are the reasons why both sales and profits in Q3 alone were greater than the October forecast. As for Q4, as I mentioned earlier in the presentation, in terms of sales volume, Japan, for example, has suffered a great deal in Q3 due to production restrictions and the supply chain. But in the fourth quarter, with the issues resolving somewhat, we expect a significant increase in Q4. Moreover, we also expect positive impact from the oceanic regions in South Africa with a recovery from the supply chain issues. However, looking at the overall picture, I said that sales volume was below expectations in Q3. And we are not sure if we will be able to completely recover that. In addition, since the exchange rate is now at around JPY130, there will be a loss from the difference between JPY140 and JPY130. And in Q4, we will start to reduce inventories. So there will also be a loss from overhead costs. Basically, the overachievement in Q3 is expected to be offset by the performance in Q4, ultimately leading to somewhere near the October forecast for the full year. Mr. Horikoshi, the second question I'd like to ask you is about mining equipment, mainly services. You exceeded JPY100 billion in Q3, and of course you need to take the FX into account. But it seems that mining services is growing more than 50%. I would like to know what's behind this strength. I guess going forward, the impact from GHH is still yet to materialize, and we will probably have to wait until June or beyond. But at this phase, although the impact on performance may be small over the short term, can you share your thoughts about strategies and how this is going to affect your services business and sort things out for us? This is Morishita speaking. I explained the status of mining equipment on Page 23. As you rightly said, conditions are not bad regarding the progress we are making, but it is not just services, et cetera, but also parts that are included in these trends. Basically, trends are doing well because operating rates are good. Demand is very strong and prices remain high, especially for coal mining, and customers are continuing to operate their mining equipment at high levels. Simply put, that is the backdrop. As for GHH, it will still be a little while before we start to see any real material impact. However, as I explained earlier, there is a great deal of synergy expected between this company and KMC in terms of complementary products. Also, from a regional perspective, I believe that the scale of our underground business is highly complementary. But regarding its financial impact, please give us a little more time. That is all for me. Incidentally, Mr. Horikoshi mentioned earlier about the composition of parts. Is it correct to think that if services increase, the profit margin will improve in the same way as for original equipment like parts? Yes, you can think of it that way. In the case of mining equipment, especially when it comes to service, a large part of this is based off contracts, which involves long-term contracts with customers to maintain their fleet. This is a long-term contract. So to a certain extent, we do have visibility. In this sense, of course, maintenance parts are used in the process of providing services and labor costs incurred as compensation for these services are also recognized as sales. I am from . I also have 2 questions. The first one is about demand. For construction equipment, it seems to be declining in Southeast Asia as well as in North America and Latin America. It seems that there is rising uncertainty around demand for construction equipment and that there was a slight slowdown in Q3. Is this a temporary factor? Or should we expect a low in the next fiscal year as demand matures? Can you give us your perspective on this? This is Morishita. Yes, in the market outlook part, first for Southeast Asia, we have slightly lowered our expectations on a year-over-year basis. In retrospect, this region has been revised upward in the October announcement, and now it has been lowered back again. We may have been a little too bullish. I am not too worried about mining equipment in Asia as a whole. But in construction equipment, especially in Thailand and Indonesia, the market has been weakening a little. As I explained earlier, the background to this is greater costs, like fuel and rising interest rates, as well as inflation, which we believe have weighed on purchasing power. In Thailand, public investment and construction projects have been slowing down, which is a negative factor for demand. As for North America, to be frank with you we are not very optimistic about the next fiscal year. In North America, we do not expect any material negative factor, but the housing and non-housing demand have been declining. And how they can be offset by energy and other demand, that is what we are examining in making the business plan for FY 2023. We are now in the process of making the plan for 2023. Simply put, we assume that the mining equipment will be solid. But for the construction equipment, we cannot have an optimistic view. Thank you. As for the North America, in the second quarter results meeting, I think the President said that the infrastructure-related demand would underpin the business. Compared with 3 months ago, have you turned more cautious for construction equipment? Or do you think the situation has not changed much? Which is the case? Compared to of 3 months ago, our view has not changed much. At the end of 2021, substantial budget bill for infrastructure development has passed. And I think they are beginning to be executed now. When we hear the customer's voice in the market, they are not in negative conditions. As I might have commented 3 months ago with high volume of construction work at hand, customers started 2023. On the other hand, the supply chain condition in North America and Europe worsened the visibility. We have high level of order backlog, which would be same for other peers as well. And orders will be realized in demand in 2023 and onwards. So our overall perspective remains unchanged. But for example, housing starts is one of the things that we are going to monitor more closely to find out how much negative impact will be conferred by them. One more question. In Russia, I think you continue to offer services now. But in future, given some auto manufacturers are beginning to leave, would you comment on your management decision that you may need to make in this fiscal year, or early next year, which might have financial impact, if any? As for Russia, for this fiscal year, as mentioned in October meeting, we keep our stance unchanged from April. As for Russia and Belarus, our sales are based on the local inventory at the end of March and shipment in April. In the surrounding CIS, changing commercial routes slightly, we sustain business. Currently in Russia, we are paying 100% of salary to employees and continuing the operation. And as for parts, of course, fully complying with the regulation, we are supplying the necessary parts. And with that level of sales, if you ask that local entity incurs major losses, not -- as of today, no, it is not the case. So at present, we have not made a decision to withdraw from Russian operation. In the forecast for this fiscal year, impact of suspended parts exports from other local entities to Russia, or impairment caused by the long-term parts impact were already incorporated. But concerning operation in Russia, we do not see any needs for large impairment as of today. And we do not foresee material losses regarding this. This is Maekawa of Nomura Securities. I have 2 brief questions. First, let me confirm the increase in selling prices. When the construction equipment volume will be challenging in the next fiscal year, I think you tried to offset that either with a change in mix, including parts and services, or with the selling price increase. Considering costs including logistics in the third quarter, selling price benefit more than offset the cost. I think your price hike was slightly over 4%. So are you going to accelerate the price increase? Or can you continue with the price hike of 4% to 5% in the next fiscal year? Would you share with you -- your thoughts on price increase as far as you can? This is my first question. This is Horikoshi. As I said in October, when we refer to our competitor, Caterpillar, their price increase from April to October was 13%, and our price hike in the first half was about 4.4%. It possibly indicates that we have still room for further price increase. But in the case of Caterpillar, North and Latin America combined account for 58% of their total sales, while it is 42% in our case. So Caterpillar has a wider area where price increase is easier. The price increase for the full year, expected for this year, is about 3.6%. And for the next year, we have to increase price by similar margin as this year. Because if the cost increase, for example, 100, and if we increase the selling price by the same margin, profitability will go down. So if the cost increased 7, unless we increase the price by 10, profitability will decrease, and we prioritize profitability. Next year, cost increase will be more moderate than this year. But considering the shortfall of this year, we need to take some price increase. As we are making the plan for the next year, and we are telling the local entities to take substantial price increase. And currently, we are finalizing the plan. Very clear. Second question is about mining. I think mainly coal operation has been very robust. And after winter, will the operation condition change? While recently, the copper price has been peaking, and I think in the last few months, environment for mining began to change slightly. I think basically, the mining operation will continue to be at high level. But if there is any change in your prospect by mineral or by region, please let us know. This is Morishita. Compared with 3 months ago, there is no major change in our perspective. Coal operation is still at very high level, especially summer coal price is now higher than the coking coal, and that still continues. As for the development in the last few months, China's relationship with Australia began to improve. Whether that is reflected in the export/import data is not clearly shown yet. But such move is observed. How that will affect the 2023 result is not known now. But coal, especially in Indonesia, continues to be very robust. We often explain about idle rate. In the idle rate, a 100-ton class dump truck in Indonesia fell further down to 1% plus, showing extremely busy operation now. This indicates a very stable production and solid operation of equipment. Copper price is also very strong. Our demand forecast for mining FY 2022 was relatively strong. This strength is supported not only by the conventional major mining markets, but also by Africa and the Middle East, especially for large equipment, where large projects were launched. This is Ouchi. Firstly, sorry, I was not able to follow you thoroughly. You said that inventory increased and profit increased. I think it is more likely to work adversely due to the impact of unrealized inventory gain. So would you explain more in detail, please? Unrealized gain is about the intermediate stock. For example, when Komatsu Limited, sells to other company, the local company, then profit booked on Komatsu Limited is included in the intermediate stock profit. Then that unrealized gain will lead to reduced profit. On the other hand, when work in progress in Komatsu Limited, where local company increased -- the indirect costs will be allocated to that work-in-progress goods. So when inventory increases, the allocation will increase, and that will reduce cost and that benefit the profit. Second question is about cash flow. At the first half results meeting, you said cash flow would be about JPY130 billion plus. Can you comment quantitatively how will that be for the full year now? Inventory at the end of the fiscal year will be higher by JPY60 billion or JPY70 billion than the projection in October. In October, we said that the free cash flow will be about JPY130 billion. But sorry to say it will be lower by JPY60 billion to JPY70 billion in our present forecast. This is my last question. As for mining equipment, my impression was that there will be no major bad news in the next fiscal year. Do you think that -- we don't have to worry about the production capacity of your company or the group companies as a bottleneck risk for the next fiscal year? This is Morishita. We do not see major bottleneck in production now. Of course, current market condition is very good. But as you know, about 10 years ago, demand was even higher than now by 40% to 50% back then. And of course, we'll not be able to adjust our capacity in line with them. In mining, especially large customers tend to place orders for equipment in line with their mid- to long-term mining plans well in advance. So rather than having the abrupt large orders, we tend to receive a delivery request with their schedule. Therefore, it is relatively easy for us to make production plan. Thank you. With this, we'd like to conclude the Q&A session and close our business results meeting. Thank you very much for joining us today.
EarningCall_524	Good morning, ladies and gentlemen, and welcome to Siemens Healthineers Conference Call. As a reminder, this conference is being recorded. Before we begin, I would like to draw your attention to the safe harbor statement on Page 2 of the Siemens Healthineers presentation. This conference call may include forward-looking statements. These statements are based on the company's current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties. At this time, I would like to turn the call over to your host today, Mr. Marc Koebernick, Head of Investor Relations. Please go ahead, sir. Thank you, operator. Dear analysts and investors, I'm sitting in snowy Erlangen, together with our CEO, Bernd Montag; and our CFO, Jochen Schmitz, who will be taking you through the detail of our first quarter results for fiscal 2023 this morning. After the presentation, there will be a chance to ask questions. The Q1 2023 results were published this morning at 7:00 a.m., and you can find all the relevant documents, as well as a recording of this call on the Investor Relations section of the Siemens Healthineers website. Before we start, let me give you the usual reminder for a two-question rule in the Q&A. Yes, thank you, Marc. Good morning dear analysts and investors. Thanks for dialing in and expressing your continued interest in Siemens Healthineers. Let me start by shedding some light on our financial performance in Q1. Once again, we were able to significantly increase our order backlog with an excellent book-to-bill, equipment book-to-bill rate of 1.36, thanks to double-digit equipment order growth in all segments. Comparable revenue growth ex-antigen was rather soft at 1%, primarily due to lower diagnostics volume in China and with Varian revenues held back by a supplier issue. Including antigen revenues, we saw a 5% decline given the significantly higher antigen revenue in the previous year quarter. The drop in antigen revenues led to a comparable revenue decline of 24% in the diagnostics business. Excluding antigen, diagnostics revenues also saw a decline, primarily due to the aforementioned lower testing volumes in China because of lockdowns followed by high infection rates. Diagnostics margin was slightly negative at minus 2% impacted by costs for the transformation program. And the margin was also burdened by the lower volumes in China. Varian comparable revenue declined by 4%, due to a spillover of supplier issues from Q4 into Q1, impacting our margins as well. Imaging and Advanced Therapies had a solid quarter, both with 5% comparable revenue growth. Imaging showed a strong margin expansion of 100 basis points in Q1, leading to a margin of 20.9%. And Advanced Therapies had a margin of 12% in Q1. Our adjusted earnings per share came in at â¬0.47 in Q1, down year-on-year essentially due to the mentioned tough comparable basis on the antigen side. Beyond this, increased procurement and logistics costs, transformation costs in diagnostics and the mentioned temporary headwinds we faced in China were compensated by positive tax effects. For the remainder of fiscal year 2023, we expect strong growth ex-antigen with meaningful margin improvement, particularly H2 rated. Drivers of these developments are our very strong order book, the success of our pricing measures and our expectation of a normalization of the COVID situation in China. Therefore, we reiterate our outlook for 2023, expecting ex-antigen comparable revenue growth of 6% to 8%. And also our adjusted earnings per share range of â¬2 to â¬2.20. Including antigen, we continue to expect minus 1% to plus 1% comparable revenue growth. As always, Jochen will explain in more depth the Q1 numbers, but first, let me recap briefly what makes Siemens Healthineers so unique, why are we such an attractive partner and what drives our sustained order growth. The capabilities are the foundation of our success: patient twinning, precision therapy, and digital, data, and AI. They are our capabilities that make us truly unique. They fuel our present and future growth and make us the holistic partner of choice for our customers everywhere. They are the source of a constant stream of innovations in pioneering breakthroughs. Let's have a look at two of the most recent examples. At RSNA, we launched the MAGNETOM Cima.X our strongest 3 Tesla MRI ever. With its field strength and strong gradients performance, the scanner will be optimal for detecting the finest structures in the body more clearly. These micro structures can hardly be visualized with classical MR imaging, but with the help of a strong gradient system, these structures can be made more visible and can help to better understand, for example, neurodegenerative diseases such as multiple sclerosis. Thus, treatment could be initiated earlier, improving the outlook for patients. And by introducing AI-based algorithms on this high-end scanner for the first time, we reduced the scanning time in MRI by up to 50% by improving image quality, enhancing patient experience, and enabling better inclusion of high-performance imaging into standard radiology workflow. On the precision therapy side, we are proud of the recently launched breakthrough innovation HyperSight from our Varian business. I'm really thrilled that we have received FDA approval for the HyperSight imaging solution earlier than expected. HyperSight will be an exciting option for new Halcyon and Ethos systems. Beyond this, it is available as an upgrade for existing Halcyon and Ethos systems and will also be available for TrueBeams in the future. HyperSight offers substantially improved image quality at a significantly increased speed. This new cone-beam CT imaging technology can achieve diagnostic imaging quality in just six seconds, a true breakthrough in speed and resolution. HyperSight allows for substantially improved treatment planning capability right in the treatment room. HyperSight is a proof point of our broad offering of comprehensive cancer care solutions that is leading in the industry, and a showcase of imaging and therapy coming together. In all of our products, [are enabled] [ph] are the glue of digital, data and AI like the aforementioned AI-based algorithms to reduce the scanning time in the new MAGNETOM Cima.X ovarian oncology-as-a-service offering. Our breakthrough innovations fuel our future growth and allow us to be the holistic partner of choice for our customers. I will share a strong example for us being the holistic partner of choice on the next slide. We are the partner for the C-suite at a consolidating and transforming customer base. With the depth and breadth of our unique portfolio, we provide offerings for virtually all critical departments. Our service offerings range from the highest-rated product service to [consigning] [ph] to comprehensive value partnerships. This gives us unmatched relevance for our customer base and is well reflected in the fast-growing order backlog for enterprise-wide multi-year deals or as we call them value partnerships, which stands now at â¬4 billion. The recently announced value partnership with Atrium Health is another strong proof point of this. The agreement includes over US$200 million in equipment and associated services with strong solutions across Imaging, Varian, and Advanced Therapies. This is the largest value partnership we have ever signed in North America. We will support Atrium Health to modernize its health care infrastructure and the quality of patient care, and will jointly develop education and workforce solutions. Siemens Healthineers technology will help Atrium Health improve health care in rural and underserved areas by strategically strengthening economic mobility, health equity, and access, and focusing on environmental sustainability. This will ultimately improve outcomes, efficiency, and quality and reduce costs in health care across the infrastructure of Atrium Health, also supported by our cutting-edge AI solutions. This partnership is a strong example of the unique strength we have with the focus and scale and unmatched relevance of our portfolio. Turning to the next chart, you will see that at our Diagnostics business, our unique Atellica portfolio has also allowed us to close a significant multi-year agreement with Unilabs. As we highlighted in our full-year reporting last year in November, we are driving a meaningful transformation process in our Diagnostics business, also as a reaction to the changed macroeconomic environment. It will ultimately lead to a significant portfolio and organizational simplification and enhanced internal efficiency. A key reason why it's the right point in time for this transformation is the launch of Atellica CI1900 at the end of last year, which completed the Atellica portfolio for immunoassay and clinical chemistry testing. Atellica Solution and Atellica CI1900 are based on the same technology menu reagents, software and workflow, addressing low to very large volume labs and customers in all hub-and-spoke settings. With our Atellica solution, we are able to maximize productivity for large-scale customers for high-throughput testing. With our new Atellica CI1900, we address low-and-mid volume labs in developed and emerging markets that need a cost-effective integrated analyzer. Additionally, the CI1900 enables true standardization for an optimized hub-and-spoke setting by combining Atellica solution in the hub and the CI1900 in the spoke setting. Thus, with the launch of the CI1900, we are in a strong position to simplify our overall portfolio in diagnostics as part of our transformation program. The CI1900 is currently in a controlled rollout in Europe, and we aim to initiate a full-fledged market rollout later this year. This unique Atellica portfolio allowed us to, for example, to close a multi-year agreement valued over â¬200 million with Unilabs for immunoassay, clinical chemistry, and other testing solutions like hemostasis. Under this agreement, we will help Unilabs to modernize its testing infrastructure across its network to improve outcomes, throughput, clinical evidence, and quality and ultimately improve patient care across the testing network. These two deals with Atrium Health and Unilabs, as different as they are, are the perfect proof points on how unique and relevant our portfolio is for our global customer base. It shows that we help our customers to drive productivity and overcome cost and step shortage challenges, and ultimately to improve the quality of health care across an entire enterprise network, whether it is with our cutting-edge solutions in Imaging, Varian, Advanced Therapies or Diagnostics. Now this brings me to my next slide, which I have shown before, and I like showing again simply because it is and stays more valid than ever, why Siemens Healthineers is a unique investment case. We operate in structurally growing end markets that benefit from several secular growth trends. With our leading portfolio and consistent rollout of innovative solutions, we are convinced we will continue our path of outperforming our markets. The advanced ways of treating the most threatening diseases in cardio, cancer and neuro, our products and solutions enable next-level medicine and next-level medicines such as pharma and device innovations often drive our procedure growth. One could say the world innovates for us. In challenging times like these where our customers face staff shortages and inflation, our technologies are key to help improve productivity. This may be with our AI and tech-enabled services or with our generations of equipment that are faster and more automated than ever. Furthermore, we generate growth by consistently expanding our markets with new solutions if need be and possible in a value-adding fashion also via M&A. These drivers guarantee strong consistent growth. This growth and additional revenue comes with a high degree of resilience. About 55% of our revenues are recurring. Adding to this, value partnerships are a very fast-growing part of our business and make us even more resilient as they guarantee a reliable recurring flow of revenues for years to come. The just presented agreements with Atrium Health and Unilabs prove that these kinds of partnerships and long-term deals will continue to be an important source of growth. Our geographical diversification has proven to be an important resilience factor over the years. The strong and resilient growth prospects we have are also paired with market-leading profitability levels. We have sector-leading margins in Imaging and at Varian with further room for expansion. At the same time, we have a clear road map to generate significant margin accretion at Diagnostics and Advanced Therapies in the medium-term. All of this combined makes Siemens Healthineers a unique investment case. Thank you, Bernd. Good morning to everyone. Glad that you are joining us again. Let me take you through the financials of our first quarter in fiscal year 2023. I would like to start by giving some color on equipment orders first. As Bernd highlighted earlier, we posted broad-based strong equipment order growth of 16% in Q1, a very healthy dynamic both year-over-year, as well as sequentially since our impressive order growth momentum continues. In particular, we saw excellent equipment order intake in China. These impressive equipment orders resulted in an again, very positive equipment book-to-bill ratio of 1.36. We are very pleased with this continued momentum of equipment orders, which will be an additional support for us to achieve the expected strong revenue growth in fiscal year 2023. Now, over to revenues. Excluding rapid antigen sales, we saw soft revenue growth of 0.7% in Q1 due to lower diagnostics revenue impacted by lower testing volumes in China and varying revenues being held back by the known supplier issue. Including rapid antigen sales, we recorded a 5% decline of comparable revenue. Before we look at the development in the regions, a quick reminder. In October, we announced that we split our Asia Pacific operations into China and Asia Pacific/Japan. China is now its own region with its own management team, as it is the region Asia Pacific and Japan, which will allow both regions to address their full potential even better. And now to the Q1 development. The Americas region recorded solid 3% growth on tough comps. In EMEA, revenues declined as expected due to materially lower contributions from rapid antigen sales. Excluding antigen revenues on a comparable basis were on the prior year level. The new Asia Pacific Japan region achieved significant revenue growth, driven in particular by a sharp rise in revenues from rapid antigen sales in Japan. Excluding antigen, the region achieved solid growth on a comparable basis. The China region declined by 6%, mainly due to lockdowns at the beginning of the quarter and due to a high infection rate at the end of the quarter. All-in-all, considering the situation in China in Q1 and the supplier issue at Varian, revenue held up well this quarter, also thanks to very strong service revenue growth. Now, moving over to profitability and to the right side of the chart. Earnings per share were down year-over-year, essentially due to the lower antigen contribution. Adjusted EBIT margin came in at 12.7% below the prior year quarter, due to lower contributions from rapid antigen sales, which impacted the margin by over 150 basis points negatively year-over-year. Other than that, we also saw increased costs particularly for procurement and logistics year-over-year, one-time costs related to the transformation program at Diagnostics and pandemic-related headwinds in China. These effects totaled to over 200 basis points of headwinds in Q1. Together with the low antigen contribution, this adds up to over 350 basis points of negatives in Q1. I will talk in more detail later in this presentation with regards to what to expect for revenues and margins in the course of the remainder of the fiscal year. Now, let us have a look at all the other line items. The Q1 tax rate came in significantly lower at 14% due to the release of a tax provision. Financial income net was minus â¬25 million, slightly less negative than expected, due to the interest-related part of the aforementioned tax provision release. Free cash flow was minus â¬77 million in Q1, due to inventory buildup for the scheduled acceleration of equipment revenues in the following quarters. In addition, receivables from Q4 antigen sales remained in the balance sheet as of Q1 closing as planned, holding back the usually strong cash collection in Q1 after strong Q4 revenues. For Q2, we expect a significant rebound of cash from operating activities driven by cash in from the Q4 antigen sales receivable and by the reversal of the buildups in operating working capital, particularly at Varian after the resolution of the supplier issue. Although we very rarely do have negative free cash flow in the quarter, we are not concerned since the basics of our cash generation are fully intact. We see the negative cash in Q1 as a merely timing topic, with future cash being, kind of stored in the balance sheet over Q1 closing. As always, you find the EBIT to cash bridge in the appendix of this presentation. Now let us have a look at the segment's performance in detail, starting with Imaging and Diagnostics. Imaging showed solid comparable revenue growth of 5.2% with broad-based growth in the businesses and in particular, very strong growth in MRI even after very strong growth in the prior year quarter. On the adjusted EBIT line, Imaging had strong margin expansion year-over-year of 100 basis points, driven by very healthy conversion. Foreign exchange tailwind of around 100 basis points was more than offset by cost increases, particularly for procurement logistics year-over-year. Going forward, cost increases will flatten out year-over-year in the course of fiscal 2023 and more so, we overcompensated by our pricing measures. So, foreign exchange is not the key to expanding margins at Imaging in fiscal 2023. The two key drivers for Imaging margin expansion in fiscal 2023 are conversion from growth and pricing. I will give additional color on that topic later in the presentation. To summarize it, it was a good start of the year for Imaging. Diagnostics had a less good start of the year in the core business, mainly due to the situation in China. But let me start with the overall business, including the antigen business. Diagnostics saw a sharp revenue decline, due to the expected lower contribution from antigen revenues in Q1, which were â¬63 million versus â¬329 million in Q1 last year. Excluding the antigen contribution core business, revenue declined by 7.3%, impacted mainly by lower testing volumes in China, due to the lockdown at the beginning of the quarter and high infection rates at the end of the quarter. The margin in Diagnostics was down year-over-year largely due to the lower antigen contribution. In addition, Diagnostics had â¬34 million one-time costs related to the transformation program. These costs include initial steps on product portfolio simplification. As Bernd highlighted before, the completion of the Atellica platform with CI1900 is the trigger for portfolio simplification. For the full fiscal year, we continue to estimate one-time costs of â¬100 million to â¬150 million as communicated in November. We expect the lion's share of these costs to be booked in the next quarter. In Q1, the margin contribution for antigen and the one-time costs related to the transformation program more or less balanced one another out. Therefore, the core margin was on the same level as the all-in margin. In the operational business, Diagnostic faced clear headwinds from the pandemic situation in China from foreign exchange and from increased costs, particularly for procurement and logistics. Now, let's look at Varian and Advanced Therapies on the next slide. Varian has further expanded its strong order book with double-digit equipment order intake growth and an impressive equipment book-to-bill of more than 1.6 in Q1. Varian posted a [comp revenue] [ph] decline of 4.5% as a result of the held back revenues due to the supplier issue I mentioned beforehand. This is the same supplier topic that held back performance at Varian in Q4 last fiscal. While the issue was resolved in course of Q1, it did still lead to substantial parts of Q1 revenues being pushed out into the next quarters, especially in the regions, Asia Pacific Japan and China. After seeing a strong month of December, with significant growth, we are confident of strongly accelerating revenue growth in Q2. Q1 adjusted EBIT margin was down from the prior year at 14.5%, burdened by the missing profit contribution from the revenue pushouts due to the aforementioned supplier issue, and cost increases, particularly for procurement and logistics. Adding to this, we saw a margin headwind from foreign exchange. In-light of these substantial headwinds, I would like to emphasize that the margin held up quite well at Varian. Advanced Therapies had a solid quarter with 5% comparable revenue growth driven by a healthy backlog. We are very happy with the continuous top line performance at Advanced Therapies. As you know, our smallest segment can be lumpy in the quarters, but we have seen solid growth numbers in Q3, in Q4, and now in Q1. The margin in Advanced Therapies was down to 11.6%, due to the cost increases, particularly from procurement logistics and also unfavorable mix effects. At the same time, Advanced Therapies saw tailwind from foreign exchange. The investments into endovascular robotics business continued to weigh on margins in Q1. Moving on from the Q1 results, let us now have a closer look at the dynamics we expect to see in the remainder of the fiscal year. Starting with pricing, and with the graph on the left-hand side on the chart, which you already saw in our disclosures from the last two quarters. We continue to expect our successful focus on pricing to lead to stronger margins, notably in the second half. The pricing measures continue to positively impact price levels in the sizable and growing backlog, where these improved price levels are steadily gaining share. As stated previously, there's a time lag of around 3 months to 18 months on average varying from product to product between order entry and revenue. Hence, we expect to see sequential margin improvements in fiscal year 2023, accelerating notably in the second half due to the phasing of cost increases and pricing measures as shown in the schematic graph on the left-hand side. Let us now have a look at the revenue growth dynamic in fiscal year 2023 and at the schematic graph on the right-hand side of the slide. We expect comparable ex-antigen revenue growth to accelerate from Q2 onwards to a substantial higher level than the soft 1% ex-antigen growth we have seen this quarter. Three major drivers affirm this acceleration of growth. Firstly, our sizable and growing backlog substantiates our expected equipment revenue growth. As I alluded to just before, we also see the price levels in the backlog improving. This will be another tailwind for the acceleration of growth. And of course, our recurring service revenues contribute with resilient continued growth. Secondly, after the resolution of the supplier issue at Varian, where it has accumulated pent-up deliveries, which will be shipped from Q2 onwards and accelerated revenue growth up and above the momentum we would have anywhere expected for the year. As said before, we already saw a strong revenue month in December with significant growth. Thirdly, China had weak revenues in Q1, due to the overall COVID situation, initially in Q1, tough lockdowns followed by exploding infection rates. At the same time, we recorded double-digit equipment order intake in China. We believe that China should benefit from the lifting of COVID control policy and from governance stimulus program. Hence, we expect a positive dynamic in China with revenue growth picking up from Q2 onwards. This dynamic will obviously also be a positive for the diagnostic business, which was the most impacted segment from the overall COVID situation in China. To summarize, we see that all indicators like the improved pricing, the scheduled backlog and even the low free cash flow due to significant inventory buildup are actually heading in the right direction and are supporting our expectations on revenue growth and margin expansion for the current fiscal year. And this brings me directly to the final slide for today the outlook. First message, we confirm our outlook for fiscal year 2023. Let me reiterate, on revenue growth, we see the outlook well substantiated by our strong order backlog, including the impact from our pricing measures, Varian pent-up deliveries and the expected positive dynamic in China. On adjusted earnings per share, we see it equally well substantiated by the profit conversions from revenue growth, improving margins from pricing measures and tailwind from foreign exchange. The guidance for our segments remain unchanged. In Q1, the situation in China predominantly impacted diagnostics, hence, we would point only for diagnostics to the lower end of the growth and margin band. Also due to the fact that we do not expect the lower testing volumes in Q1 to come back as pent-up demand. With diagnostic at the lower end of the guidance, the high end of the group outlook will obviously be more challenging to achieve. And with the U.S. dollar weakening versus the euro, foreign exchange will still be a tailwind, but obviously, to a lesser degree than before, as already well captured in the recent estimate updates and in the consensus. All-in-all, we continue to see the outlook for revenue growth and adjusted EPS as a very balanced view on the company's performance in fiscal year 2023, and therefore, comfortably confirm the outlook for this fiscal year. And finally, let me share our current view on the current quarter, second quarter. As mentioned before, we expect strongly accelerating revenue growth in Imaging and Advanced Therapies and especially in Varian with the accumulated pent-up deliveries for Q2, where we expect growth in the higher teens. Due to declining antigen sales, we expect revenue in diagnostics to decline year-over-year. Just to remember, in last year's Q2, we posted the highest antigen sales in a single quarter of around â¬680 million, so there will be a significantly tough comps in Q2. With the expected normalization in China, we expect the growth in the core Diagnostics business to improve. On margins, please bear in mind that we expect to book â¬100 million to â¬150 million of onetime costs related to the diagnostic transformation program in this fiscal year that are not adjustable in our KPIs according to our financial performance systems definition. Let me highlight that this is important for us that we keep our KPIs consistent over time and at that time are transparent about such very specific one-time costs that we currently incur with the transformation program at Diagnostics. In Q1, we booked â¬34 million related to the transformation program, and we expect to book the lion's share of the remaining costs, which are not adjustable in Q2. With regards to the free cash flow, we expect a significant rebound of cash from operating activities in Q2. Also bear in mind that we will see the dividend payout again after our Annual Shareholders' Meeting in February that will impact our cash flow from financing activities in Q2 as it does every year. Of course, this does not affect the operating cash or free cash flow, but it will affect the leverage development in the single quarter. Thanks, Jochen. And before we get into the detail, first, let the operator remind you of the rules to register for the Q&A. Good morning and thank you for taking my questions. I have two, please. Firstly, could you talk about the strength in the order book, how this is constituted by modality and particularly interested in Varian, as well as by region. What was the contribution from the two larger contracts you announced in terms of the order book for the quarter? And secondly, could you talk about the weaker growth in Varian and the extent of supply challenges in fiscal Q1? Have you already started installations in fiscal Q2? And could you talk about your confidence around mid-to-high teens growth that is implied by your guidance for the remainder of the year? Thank you. Hassan, thank you very much for your question. I will start with the order book and try to describe it a bit in more detail. Let me start. When we talk about order book, we primarily focus on equipment orders. That means the Unilabs deal Bernd was referring to is not part of this. The double-digit growth of 16% is without the Unilabs deal. It is and obviously entails the Atrium deal, but only the equipment portion of it, just to clarify. So that means when you look at this, I think this is â it is a significant part of it, but not driving, so to say, the numbers alone, yes. And Bernd gave you also guidance on what is the order backlog of our ES business. Overall, it's 4 billion out of, I would say, a total order book of 30 plus billion. That means we talk about at max 15% of orders coming from ES, and the current quarter was not very different in this regard. So, when we look at the regional distribution, we saw very, very healthy orders coming in across the geographies. We saw double-digit order growth in EMEA, in Asia Pacific Japan, in China, and we saw high single-digit order growth in Americas. So, it was healthy across the board. And when you also look via business areas, we saw double-digit equipment order growth in Imaging, in Advanced Therapies, as well as in Varian. So, it was â you can now say very broad-based across the board regionally, as well as business-wise. Hassan to the second question, I mean, as maybe stated in other [circles already] [ph]. I mean, what is the background of the topic, we have one supplier of key electronics component who has shifted production from China to Mexico and has faced significant yield problems, which led to the fact here that we had to produce [indiscernible] for delivery, but needed to wait for that component. The situation is under control, yes. We have in December already had a very normal delivery schedule and now the team is catching up with the deliveries, the topic is fixed, and that is also why we are very confident about the Varian growth target or guidance for the full-year. Maybe as another comment, I also said this in the press call, this is one of the things where in the long run, Varian in addition benefit from being part of the Siemens Healthineers organization and its larger scale, yes, because typically, components like this we tend to have in-house, so that it's also much easier to manage situations like this, but specified a transient problem. And I'm very, very confident in the Varian team here. Very helpful. Thank you both. And if I can just follow up, Bernd, obviously, a very impressive order number, but are you seeing any caution in the U.S. market incrementally in your customer discussions given what some of your competitors are saying? No, actually not. I mean we have this â I think the U.S. market is very healthy. And when you look at it, the â I mean, what we provide is, on the one hand helping in big problems of our customers, which means the labor cost topic and also the staff shortage topic. It is of utmost importance to also invest into productivity. So, you can look at our type of equipment as an investment to overcome the challenges. And in addition, and that is especially true for Imaging, you know you don't â Imaging is the front door of a hospital. If you are not competitive, they are also a source of profits. So that is not an area where we see artificial ways of holding the breadth or so at the moment, and we don't see that the situation is changing. And I think this discussion about hospital CapEx and so on has been with us for a long while. And you have also seen that for a long while, the order book is proving the opposite, and I see no reason why this shouldn't continue. Thanks Hassan. So, we'll go on to the next caller online, that would be Veronika Dubajova from Citi. Veronika, should be live. Excellent. Good morning and thank you gentlemen for taking my questions. I will keep it to two, please. My first one is on the Imaging margin, and Jochen, your degree of confidence and progression as we move through the remainder of the year, almost 21% is a good starting point, but I was just hoping you can spend a little bit more time quantifying the benefit you expect from price and the benefit you expect from declining procurement logistic costs. And if you can put some numbers around that so we can feel more comfortable with the full-year expectations there? That would be a good starting point. And then my second question is a bit of a follow-up from the topic that Hassan was touching upon. Just curious [indiscernible] about the competitive environment on the order side of things, in particular in Imaging. We've seen some very divergent performance from you and some of your peers. And I'm just curious what you're seeing out there in the market, maybe a comment on China specifically and whether that is a market where you're doing very well relative to peers. Thank you. Veronika thank you for your question. I think as it came across, we were very satisfied with the margin profile of imaging in the first quarter, considering that the growth was very solid, but below our fiscal year guidance with 7 to 9. And when you look at the margin expansion opportunity, we have seen there with 100 basis points, really net-net because as I said, the foreign exchange tailwind was more than offset by still year-over-year higher procurement logistic cost. And we always need to remind ourselves year-over-year means October to December 2021, that was quite a different world we lived in at that point in time, and that's why it's still increasing. So, what we have more or less penciled in, in our full-year margin profile for Imaging is at the end, not a significant contribution from lower procurement costs year-over-year, but more from two things conversion from the top line, as well as â and this goes hand-in-hand, because conversion from top line, better pricing kicking in. And what is really, really good is that we see those pricing topics we have seen in the order book now already starting to find its way into the P&L. And when you look at our equipment businesses, we have in imaging, the modalities, which have â which have shorter lead times between orders and revenue than for example in AT or Varian. Therefore, we have seen here already in Q1, the first good signs of better pricing and revenue, which helped for the conversion, which we have seen. I hope that clarifies it a bit. And Bernd is taking the second question. Thank you, Veronika. I mean looking at the competitive situation, we see, and I'm very proud of the team here, continued market share gains in orders across the globe and in the key geographies, [here] [ph] the U.S., but also in China. Some comments on China since you asked specifically about it, we are here in clearly in the leading position in the â when it comes to the peers. What we also see is, especially in a quarter like the last one, when there is also government programs that there is a bit of a momentum in the local competitors. But that is something which I think has two sides. Here on the one hand, it shows that it's a local topic. The Chinese market remains extremely attractive and super important for us. And it might be that in the long run, the competitive dynamic is a little bit shifting, say, in China, you can choose â here's the world market leader and innovation leader. But then there's also a little bit of a local hero, but it makes it harder, I believe, when you are a global Number 3 or Number 4 to stay a viable alternative. So that is a bit of what I see in China. And overall, for the year, in both orders and revenue, but also when it comes to the margin contribution. I'm very, very optimistic and also very, very happy with what the Chinese team is doing. Thatâs very clear. And can I just ask Bernd was the China order growth much higher than the 16 that you reported or was it similar to the 16 that you were talking about for the order book overall? A bit higher, a bit higher. And I mean, the positive thing is, I think there was a â I mean, Hassan's question in the beginning, about the ES contribution or ES Enterprise Services where your partnerships, which is more in the 15% range or so in the rest of the world. So, in China, it is a pure transactional business, yes. So, this is not a market for value partnerships mostly since it is more hospital by hospital. So very, very good order growth there. Good morning, guys and thanks for taking my questions. Just one on the guidance. I know at the end date, you should have talked about the upper end of the range being a little more difficult to achieve, but just thinking about some of your comments around cost tailwinds, maybe not being in your guidance. Do you feel like things like freight and chips might make things a little bit easier for you in the second half? And is that maybe some sort of upside or fact there? And then could you just talk more generally about supply chain? So, is that now really improving for things like Imaging as well? Thank you very much. Graham, I believe it is a bit too early to pencil in, I would say, more tailwind from potentially lower costs in the second half. But obviously, we are well prepared to participate if that really happens, yes. As I said, our guidance for the business is built-in, I would say, on a solid print with regard to the cost items. And if there is upside to this, we will update you accordingly. But as we said, with the first quarter in Diagnostics, which was a tough quarter also in the core business due to China, I think we are currently, I would say, I do not see us moving all of the guidance range at all to the upper end, just to say this, even if there is a bit better cost position, yes? But as we go through the year and as we see how that stabilizes and becomes sustainable, we might update you on this. Just to say that. Sorry, Graham, on the second part, I'm not sure â what was the additional where actually you had there on the SDN side? Can you please repeat that? Sure, so it's just around supply chain. So obviously, you've seen an easing of the situation in Varian. I'm just wondering if you were comparing maybe imaging now to maybe where you were in the summer of last year, how much better things gotten â and do you still need â are you still striving for some components in some areas? I'm not sure. I think the Varian topic is a very specific topic as Bernd alluded to. I think that is, and you could even argue it has nothing to do, really, not really something to do with the supply chain challenges we were talking about due to the, I would say, the consequences of the pandemic right? It's a â yes, the world is talking about, you're right. And I think, therefore, it is of a different nature. I think the important topic is we have fixed it, we have now the yield we need to work through our pent-up deliveries in Varian and the team is full steam working on it. Good morning guys. Thanks for the questions. So, obviously, one of your competitors canceled some orders with their customers during the quarter. I just wondered if you've seen any benefit of that on your orders in the quarter, and I suppose on a sort of more medium term, do you see a potential for further gains as a result of some of those issues at your competitor? And then just on China, just given the evolving situation, obviously, very rampant COVID situation in China. Just wondered any risks around installations in the second quarter that we should be thinking about? Yes, David, this is not â when it comes to this cancellation topic, this is not something we consider. And we also don't see it as an issue. I mean â and when we give the guidance and the let's say, the perspective for the full-year, including Jochen's chart how margins will recover with the pricing measures kicking in, it takes into consideration that we have some older orders at different price levels. What we don't have is orders at crazy price levels. I think Siemens Healthineers was always disciplined in pricing, also because we have a little bit of a more global approach to it. So, we are a company which values its commitments. And also don't see â and the price for valuing our commitment is not high. And I believe, I mean, to your point, there is a potential upside here that this is not helping customer satisfaction when it comes to what other companies are doing, yes. But I mean, I don't want to quantify this, but I believe when you want to be a trusted partner, you should stay to your commitments. David, you also talked about the potential installation risk in China. And when we look at what happened in the last quarter of the calendar year that, I would say, the highly populated areas in China went through a real pandemic heat wave, so to say. Our assumption is that we have most of it behind us and that we get back to normalization. And therefore, we also expect that we should be in a position to install in a more normal fashion than we have seen over the last quarters in China due to the â more to the lockdown situation than the COVID policy release situation. I don't have a crystal ball, what can happen, but I would say the current signs we have, and also, I would say the messaging from our local teams is clearly, I would say, cautiously optimistic that we are back to normal in China with regard to supply chain and logistic processes with regard to downstream installation processes and things like this. Thatâs great. Thank you. Maybe just a cheeky follow-up, you mentioned that you had very strong service growth. I just wondered, I may have missed it, were you able to quantify the growth in service revenues? David, normally, we said weâd strive for 6% service growth. And in Q1, it was even a bit better than 6%. Hi, thanks for taking my questions. I will have two, please. First of all, given how much in focus, the photo accounting was in RSNA, and now some peers are also talking about doing similar, bringing similar products in the market [indiscernible] talk about. How does the outlook look? And what's the weight of CT content within your order books? Are you seeing any market share gains in CT versus other imaging segments? That's the one question, please. And the second, the tax provision that you saw, was that related to Varian or a different matter that we would know? And do you expect â I mean, if it was reserved, I would assume that you expect it to remain so, but does that have impact, any changes on your tax outlook for 2023 and beyond? Yes, Sezgi. Thank you very much for the question on counting CT. I mean, first of all, it was really very amazing to see the momentum at RSNA. I mean one of my personal highlight was being at a user meeting via the first customers were presenting on what that technology is doing and how it is really changing clinical practice. I mean, something we normally internally don't like. Many people say, well, I can do stuff, which I normally do with MR, but there's also topics of â which were simply unheard of, plus the additional benefit you always have of much lower patient dose or X-ray dose. So, really amazing momentum. And the positive is also that there is violent agreement in the community that this is where the field is going, that it will become the standard like multi-slice CT was in the beginning of the century. And that is also what is, what I want to say like, and it sounds arrogant, but it meant seriously in the statements of our competitors that they don't doubt the technology and say, hey, we will do this too. So that means it is a big confirmation. And the good thing is that we are extremely ahead in terms of where we are, not only in the technology, but also when it comes to having user meetings where people look at how they deal with patients, how they change clinical practice and so on and so on, which is something completely different than having a prototype installed in two years from now. So, to quantify it a little bit, CT is 30% roughly of our imaging volume. And out of that 30%, I mean, the high-end is maybe in the 10%, 20% range, yes, extremely margin accretive. And this is an area where I mean, we are basically a little bit a league on our own already with the dual-source CT. And in a way, this is â in this segment, it is not so much a market share game. It is a market expansion in a make market game. I think coming from â I think you asked very widespread questions. Now, we go to the tax topic, Sezgi, as you rightfully said, it was a provision, yes. Therefore, we â there was a trigger in our Q1, which led us to release the provision. I would say, it is a more normal topic, which can happen. The trigger was set by the process of a tax audit of a country. And therefore, I would say, something in the normal course of business, what can happen. Is it something which drives in a sustainable manner, our tax rate outlook down. I would say, no. And as you know, we had for five years, a tax range guidance of 27 to 29, for our first five years. We lower that by 1 percentage point for this fiscal year to 26 to 28. This release of the provision, obviously, is tailwind to end up more in the lower-end of the band than in the upper-end of the band, yes, just to say this. But I think it's not necessarily a precursor for expectation that we will lower the band quickly again, just to say this. We still have quite a long queue and actually the call according to our invitation is already over. I think we will extended it another five minutes, but we will not make it fully through, and we'll get back to you guys. So, the next one in the queue would be [indiscernible] from Bank of America. So, [indiscernible], please go ahead and ask your questions. Thanks very much. Good morning, everyone. Very quick follow-up for me on Graham and David's questions. So, very strong order intake. And you stressed a very strong revenue from MRI within [liquid] [ph] and Imaging. One of your peers recently mentioned that basically, they couldn't take any new order in MR due to a lead time exceeding year. So, could you â the first question, do you take new orders like in this modality? And then could you maybe share your lead time for MR and also the rest of the business, if it's possible? Thank you. Thank you. I mean, we take orders. And simply because I mean our lead times are completely under control. I mean â and typically, to give you a little bit of a flavor, the lead times in imaging vary a little bit by business because the â let's say there are like basic X-ray systems, ultrasound or so, which are almost â they are â there is no installation required. Typically, so on the CT side, it's more in the 3 months to 6 months, if it's not a long-term multi-modality contract where you have multiple installations over time. In MR, it is typically a little bit longer, and that is more a customer topic, yes, since the MRI also requires typically measures on the sighting side, yes. So, it's room preparation. There is the shielding, which is necessary for the radio frequency and the magnetic field and so on and so on. Yes, so typically, on the MR side, it is more in a 6 months to 9 months range. So, but we have not â we did not have any situation where we had to walk away from an order or from a deal because we could not offer a delivery time for the customer, yes. So, I hope that answers the question. We won some orders because of this. But this is more â I wouldn't make this a big part of the market share gains we have. It's just another let's say, aspect of being the company with a leading portfolio and also the biggest scale and with this also the biggest stability of the business. Thanks [indiscernible]. So, we come to the last one for today's Q&A, and that will be Robert Davies from Morgan Stanley. So, Robert, please ask your, weâll give you two questions. Thank you. My first one was just around the ex-antigen profitability against some of the other global diagnostics peers. There's been a bit of a differential lately in terms of profitability. Just if you could give us a little bit more color of what's going on there and the expectation over the full-year and into next year. Where is the medium-term, kind of run rate on that business? And then the second one was just around your comments you made on Varian. You seem to, sort of obviously have a high conviction that that's coming back mid-teens next quarter. Just in terms of the profitability of that business, are we expecting a, sort of disproportionately large kicker on that volume growth into 2Q and then normalizing into the range? Just if you could, kind of, I guess, walk us through what your expectations are around profitability for Varian specifically? Because obviously, you've had a couple of quarters now where you've been below the range on the supply chain shortages. Are we going to see a, sort of spike and then a kind of normalization back into the range? Thank you. Yes, thanks, Robert, for the question. Let me start with Diagnostics. We have a clear target out there for 2025 on Diagnostics to be ex-transformation costs if there remain any in 2025, around 8% to 12% margin, which is still below the best peer group there, which is clear. Therefore, it is an intermediate step, but I think we felt that it is meaningful to keep that time box in place 2025, and give guidance on the margin there. And we expect us to move with the transformation measures, which lead to 300 million additional cost savings until 2025, gradually into that window of 8 to 12. I hope that clarifies it. And as we said, over the last two years, we were in the low single digits margin territory. When you now look year-over-year, we had, in addition, supply chain, foreign exchange, China headwind in the quarter. If you add this all together, you could â it's about 600 basis points or so negative year-over-year table in the core without the antigen topic. And that is not too far off to where we have been in the past. And we all know this business is â has high contribution margins. And when you are faced with negative growth then you also are faced or impacted by this heavily. On the Varian side, to be honest, in this quarter, we shrank by 4.5% on the revenue line, and we grew significantly on the order line. Our outlook for the fiscal year is 9% to 12% growth. So, you can say double-digit growth. That means, and when you then look at the margin level of 14.5 relative to the full fiscal year margins, and that's also of 16 to 18, that's also â I feel relatively good about Q1, considering the very low revenue line in that quarter. Therefore, I was more â I would say, more positive about the margins, considering the low revenue line. Therefore, I expect us with conversion, better pricing, move up into that margin band relatively quickly based on the high teens margins, revenue growth we guide for in the current quarter, Q2. Thanks, Robert. So that brings us to the end of today's call. Thanks for all the questions. I promise you guys who are still in the queue, we'll make sure that you get prioritized tomorrow morning in our sell-side breakfast. And we look forward to communication in the next two weeks and days on road shows and conferences and at latest here and see you at our Q2 call in May. Bye-bye. That will conclude today's conference call. Thank you for your participation ladies and gentlemen. A recording of this conference call will be available on the Investor Relations section of the Siemens Healthineers website.
EarningCall_525	Hello. Good morning, everyone. I'm Renato Lulia, Group Head of Investor Relations and Market Intelligence at ItaÃº Unibanco. Thank you for participating in our video conference to talk about our earnings for the fourth quarter of 2022, which we're broadcasting directly from our office here in Avenida Faria Lima in SÃ£o Paulo. This event will be divided into two parts. In the first part, Mr. Milton Maluhy Filho will explain our performance and earnings for the fourth quarter of 2022. Next, we'll have a Q&A session where analysts and investors will be able to interact with us directly. Now I'd like to give some instructions to make the most of this meeting today. For those of you who are accessing this via our website, there are three options for audio on the screen â all content in Portuguese, all content in English, or the original audio. In the first two options, we have simultaneous translation. To choose your option, all you have to do is click on the flag on the top left of your screen. Questions can also be forwarded via WhatsApp. To do so, just click on the button on the screen on the website or simply send a message to the number 55-11-94552-0694. The presentation we'll make today is available for download on the hot side screen and also, as usual, on our Investor Relations website. I now give the floor to Mr. Maluhy, who will begin the presentation on the earnings. And then I'll come back with you to moderate the Q&A session. Milton, go ahead. Well, thank you, Renato. Welcome to our fourth quarter of 2022 earnings presentation. I'll also talk about the 2023 guidance. I'll go straight to the figures, so that I can bring you some more information. Firstly, our earnings in the quarter totaled BRL 7.7 billion, a drop of 5.1% from the previous quarter, and BRL 7 billion in Brazil, which also dropped 5.7% from the previous quarter. A very important topic I'd like to raise at the very beginning, so that it can be very clear to you, is the subsequent event â the credit case that was announced after December. In our balance sheet for 2022, there was an increase in provision for loan losses to cover 100% of this exposure. Therefore, there won't be any negative impact in 2023, only positive impact from a possible credit recovery. I wanted to make this clear at the very beginning. I'll comment during the presentation on some adjustments to make it clear how our performance would have been without this credit event. But it's very important to highlight that the exposure in our balance sheet is 100% covered. If it weren't for this effect, our consolidated earnings would have been BRL 8.4 billion and BRL 7.7 billion in Brazil. Speaking of profitability, already considering the provision for loan losses to cover 100% of the credit exposure caused by the subsequent event, we posted a consolidated return on equity of 19.3%, a drop of 1.7 percentage points and of 19.7% in Brazil. If it weren't for the subsequent event, our consolidated ROE for the fourth quarter would have been 21% and 21.7% in Brazil. Another very robust quarter and very significant from the performance standpoint. To continue on the subject of the subsequent event, I'll jump to the cost of credit. At the end of the quarter, our cost of credit was BRL 9.8 billion. And if it weren't for the subsequent event, it would have been BRL 8.5 billion. Therefore, you may note a difference of BRL 1.3 billion, which was recorded in our P&L. And the difference for the total exposure was recorded in our balance sheet. For the subsequent event, it was recorded as additional provision for loan losses. We always carry out regular reviews of the bank's additional provision for loan losses and we used a portion of this balance to complement the provision for the subsequent event. Therefore, the provision for loan losses covers 100% of the exposure. Part of it has already been recorded in the P&L in the amount of BRL 1.3 billion and part of it is recorded in the additional provision for loan losses. And if there is a deterioration of this case, naturally, it would consume the additional provision for loan losses that is associated with the event. In the financial market with clients, there was a growth of 3.6% in the consolidated figure, reaching BRL 24.2 billion and, in Brazil, it totaled BRL 21.2 billion, which represents an increase quarter-over-quarter of 2.6%. Speaking of the NPL for over 90 days, once again, we are very consistent with what we've been telling you for many quarters now. We can see a slight increase of 0.1 percentage points in the consolidated figure and 0.2 percentage points in Brazil. We posted another positive result for the efficiency ratio, reaching 41.2% in the consolidated figure and 39.1% in Brazil, a drop in both ratios from the previous quarter. Now I'll talk a little about the credit portfolio. We've been reducing the pace of growth of the portfolio throughout the second semester of 2022. And you'll see that in the numbers. Our credit portfolio for individuals grew 3.7% in the quarter and 20% in the year. The SME portfolio grew 2.4% in the quarter and 10% in the year. We reached BRL 918 billion in the portfolio in Brazil and BRL 1.1 trillion in the consolidated portfolio, an annual growth of 11% and a 14% if adjusted by the foreign exchange variation. In the next slides, I'll present the results compared to the 2022 guidance disclosed. For the loan portfolio, the growth expectation was between 15.5% and 17.5%, but the result was below the low range of the guidance. We've already been telling you that the bank has been very carefully making adjustments to the risk appetite in view of the current macro scenario. I'm very comfortable with having delivered a figure that is below the guidance because of this. Now deep diving into the portfolios. The collateralized product share in the individual portfolio grew from 47.7% in 2019 to 52.8% in 2022, so that we have a more guaranteed mix. Finance credit card portfolio and overdrafts, two lines that have a significant impact on the margin, dropped in the quarter as the result of an active risk management. On the other hand, this naturally had an impact on the margin of the product mix. The margin with clients posted growth of 3.6% in the quarter, up BRL 800 million, of which BRL 600 million was the core increase and BRL 200 million was related to the working capital impact allocated to the margin with clients. As I previously mentioned, the product mix had a slight negative impact of BRL 100 million. On the other hand, the average volume, the spreads and the effects of the operations in Latin America had positive impacts, raising our margin to BRL 21.5 billion. We reached a consolidated annualized average margin of 8.7% and a risk adjusted annualized average margin of 5.6%, excluding the subsequent event. If we include the subsequent event, it was 5.1%. In Brazil, we were able to maintain the annualized average margin at 9.4% and a risk adjusted annualized average margin at 5.9%, excluding the subsequent event. But if we take the event into account, it reached 5.3%. We expected consolidated financial margin with clients to grow between 25% and 27%. And we delivered it very close to the top range of the guidance, which is good news. Now we'll talk about the financial margin with the market. We should remember that 2022 was a very challenging year for this line, mainly due to the interest rate rises, volatility and the fact that we no longer have the positive effects of the overhead strategy that we had until 2021. But nevertheless, we managed to deliver a positive margin again as margin with the market reached BRL 700 million, slightly outperforming the last two quarters, already considering the capital hedge cost of roughly BRL 500 million per quarter. So we recorded another robust quarter as we performed well in both Latin America and Brazil. We expected a major reduction in margin with the markets as our 2022 guidance for this line was between BRL 1 billion and BRL 3 billion. The good news was that we reached the top of the guidance, although we can clearly see a negative impact compared to 2021 results for all the reasons I've mentioned, notably due to the overhead strategy and to the impact of the capital hedge implemented in 2022, which added approximately BRL 2 billion in costs this year. Capital hedge was the major responsible for the drop of the margin with the market in 2022. Moving to commissions and fees and results for insurance operations. We performed well in credit cards, both in issuing and acquiring activities, and recorded a 4.2% increase. We also performed well in asset management, and we recognized our funds performance fee in the second and fourth quarters. That is accounted for on a cash basis as required by the central bank. We recorded the performance fee in the fourth quarter, and this is why we posted increased earnings quarter-on-quarter. We also posted dramatic increases in insurance operations, both in quarter-on-quarter and year-on-year comparisons. We expected growth between 7% and 9% in 2022 commissions and insurance results guidance and we ended up with 7.8%, which means we were very close to the guidance midpoint. Regarding asset management, our funding balance, whether through our own or third party products through the open platform, was up 8.7% year-on-year. The most important thing is that we can provide better products for our clients because of our complete portfolio. Please bear in mind, focus on client centricity. We have performed really well in our own products due to a greater demand for fixed income products, which are deemed safer and less volatile. For this reason, the open platform output ended up falling in the period. Acquiring transaction volume recorded a significant increase of 17.9% from 2021, with revenues growing more than two times then the volume of transactions, which means we've been performing really well due to the right mix of products and services, delivering real value and growth, with NPS of acquiring activities improving dramatically. I've been emphasizing the growth of the insurance business in the previous quarters and the premiums earned were up 19.9% year-on-year. Really noteworthy is that the core of the insurance operations result has grown nearly 50%. We believe this segment is due to keep on growing. Now let's move to credit quality. First, we noted that delinquency was at an acceptable rate as measured by the ratio of 15 to 90 days overdue NPL. This is a very important piece of information. Last quarter, I mentioned that this rise in the Latin America ratio has been due to a specific corporate case that will be regularized and will not be transferred to NPL 90 days. As you can see, this was rightly done. In Brazil, and in total, we recorded a slight increase of 20 and 10 basis points respectively, as I commented back at the first slide. Focusing on transparency, we recorded the impact of BRL 100 million from the sale of the active portfolio of 0.02 percentage points at the NPL rate. That represents a very small amount, but underlines the way how we value the transparency of any sales of our portfolio to the market. In Brazil, delinquency, as measured by ratio of 15 to 90 days overdue NPL, is extremely acceptable for individuals and was flat compared to the previous quarter. The NPL ratio for SMEs recorded a slight rise. The ratio for the corporate segment is not a good indicator, since it usually concerns events rather than delayed payments. You must remember that, last quarter, I mentioned that I expected NPL to go up in the fourth quarter for the individuals portfolio as we had noted in the third quarter, in line with the normalization process for this indicator, We recorded 30 basis points increase in the third and 20 basis points increase in the fourth quarter. I had also told you that this normalization process would go until the first quarter of 2023. This expectation is reaffirmed which underlines our strength, risk management and ability to manage the cost of credit in more troubled times. Challenges surely lie ahead, but I believe the bank has been successful so far in walking through such tough scenarios. NPL for SMEs in Brazil recorded a slight increase of 10 basis points and it poses no specific concern for us. The cost of credit to portfolio ratio closed the quarter at 3.5%. If it were adjusted by the subsequent event concerning this specific credit, it would be 3%, very close to previous periods and even below pre-pandemic results. Cost of credit increased to BRL 8.5 billion in the fourth quarter from BRL 8 billion in the third quarter. And considering the subsequent event, it reached BRL 9.8 billion. Loan coverage ratio in the wholesale segment reached 1,857%, precisely due to the provision for loan losses done in the fourth quarter to cover 100% of the exposure on the specific corporate case that entered into judicial reorganization. Thus, if the event occurs to the extent of the recognized provision, the coverage ratio will surely suffer. Cost of credit would have closed the year at BRL 31 billion if we excluded that subsequent event. That is at the top of the 2022 guidance. To wrap it up, the amount we exceeded the 2022 guidance of BRL 1.3 billion is related to the specific case of this retailer. That is the subsequent event occurred in January 2023. Moving now to OpEx. The non-interest expenses were up 6.7% year-on-year and 4.5% in the quarter, the latter due to its seasonality. We came close to the top of the guidance Brazil and within the consolidated guidance. The efficiency ratio reached 39.1% in Brazil and 41.2% in the consolidated figures. Year-on-year, the investments we made in platforms and new business to improve the client experience were the main driver of non-interest expenses increase. Our core cost was up 0.7% or BRL 300 million. The inflation in the period was almost certainly above 6% for banks, impacted by the effects of the collective bargaining from previous years at much higher levels. We've been able to make huge investments to build the future of the bank, while growing slightly above IPCA inflation index, but below inflation for banks. Good news for the capital ratio, we made headway in the capital base for one more quarter by reaching 11.9%. If we disregarded the subsequent event, our capital ratio would be at 12%. Our Tier 1 closed at 13.5%. That is 50 basis points above our risk appetite. As a reminder, our risk appetite is 11.5% at CET1 and 1.5% at AT1. So, here we are again accumulating capital in the quarter. We've been successful in increasing earnings, generating enough capital to invest and grow our business and portfolios and also evolving the bank's capital base. So this is good news and one more positive quarter. I've been talking about earnings all the time, but the pillars underlying our earnings, the ones I want to highlight here are, one, how our culture is engaging our employees whom we call ItaÃºbers and, two, how digital transformation is happening and the impact on what is most important for us, the reason for our existence, our client centricity agenda. I'll start talking about culture. First, we reached an employer Net Promoter Score of 88 points. And this is the bank's record high eNPS. And I always say that engaged and happy employees deliver a higher client satisfaction. We reached almost 19,000 people who are already working in a community or tribe model. There are 2,030 squads in the bank's operations. I'd like to share with you very carefully and humbly some awards and recognition we got in 2022. People ask me how we measure cultural transformation and employees engagement. And I think that these recognitions are the answer. We are the first bank to top the Great Place to Work ranking with over 10,000 employees. So this is the first time a bank achieves this position of the best company in Brazil according to the Great Place to Work ranking. We were ranked first in the banks category of the Valor award. This was the first time Valor Magazine introduced the bank's category. We were ranked first in the Valor award career, the best in management. We also ranked first in the top companies of LinkedIn for the third consecutive year. We were elected the most innovative bank in Brazil by Valor Innovation. We were ranked first in the international category of the best workplaces for innovators award and eighth in the global ranking. So I always look at these recognitions and feel delighted. I think we've been making important progress, but also in a humble way because things are still difficult and we need to keep on performing on a very sustainable basis. Focusing on the coming quarters, the second pillar that is very important to our journey is digital transformation. The system modernization and focus on quick problem solving brings higher value creation to our clients and competitiveness in our business. I told you that 2022 was a key milestone for the bank's digital transformation. We managed to reach our goal of 50% of our platforms modernized with state-of-the-art technology and totally decomponentized. As regards the competitiveness of our platforms, we reached the modernization of 70% of what we understand is relevant to the client journey. So rather than looking at the absolute figure of 50%, I prefer to look at this evolution because it's what impacts the UX user experience. Speed is increased and our ability to bring in an agile methodology, renewed digital platforms, a new culture and client centricity to production has allowed us to quickly increase our ability to deliver products, correct mistakes and deliver new features to production. We increased the speed by 756%. Also very important is reducing incidents because incidents become issues for our clients. So when we look back at the period beginning back in 2018, the numbers of incidents in our platforms fell over 70%, especially driven by all the work done and the journey we've undertaken. Moving to client centricity. I'll share some figures we usually don't disclose, but I think it's a good moment for accountability since we are wrapping up 2022 and beginning 2023. Client centricity, as measured by Net Promoter Score, is very important for our day to day activities. The bank's global NPS has increased 20 percentage points since 2018. We significantly cut back the gap we used to have compared to our peers that were operating with higher NPS levels. That was our goal and we are succeeding in delivering. We can see that most of our business is at record high levels, which evidences the engagement, the focus, the client centricity, and the digitalization actually happening. Almost 60% of our business reached what we call an excellence zone, with NPS over 70 points, such as the personality test segment, top business and business, which are two retail corporate segments. ItaÃº BBA Uniclass segment, private segment, credit card business, vehicle financing business. Rather than showcasing the evolution of this business and of the products portfolio, it's better to set the goal of closing 2023 in the excellence zone. That is, reaching an NPS over 70 points. This is our goal for 2023 on a global scale. All our weighted business must reach an NPS of around 70 points by the end of the year. This is the goal and we really believe we'll be able to get there based on everything we discussed today. Let's strive to go after it and reach all these ratios. This is the great evolution for the client agenda. Moving forward to 2023, I'll start with the expectations for the macro scenario. The main highlights are GDP is expected to grow by 0.9%, but I believe we have a positive bias. This forecast will likely be reviewed in the short term with an upward trend. Regarding the Selic rate, the best expectation today is a fall towards 12.5% by the end of 2023. It naturally depends on decisions about the fiscal framework and inflation itself, which will have to be closely monitored. Inflation will be well in line with the rate of 5.8% in 2022. We expect employment rates to slightly rise to 8.5% from 8.2%. Foreign exchange will post a slight devaluation of the Brazilian real to BRL 5.5 to $1. So moving to 2023 guidance, we expect the credit portfolio will increase between 6% and 9%, a more modest growth compared to what we've delivered in previous years. This is fully associated with the challenging scenario we are experiencing. That's why we choose to be more cautious in granting credit, a strategy we've been applying in the last quarters. The financial margin with clients is expected to grow between 13.5% and 16.5%. Margin with the market is expected to range between BRL 2 billion and BRL 4 billion. We believe we'll manage to deliver positive margins for another year despite the challenging scenario. With the capital hedge cost already included in these figures, there is a significant impact of approximately BRL 2 billion depending on the interest rate differential. Cost of credit is expected to range between BRL 36.5 billion and BRL 40.5 billion. Commissions, fees and revenues from insurance operations are expected to increase between 7.5% and 10.5%. Non-interest expenses are expected to rise between 5% and 9%. It's crucial to say that we expect the core cost not to rise over 2%. We must remember that inflation measured by IPCA has been around 5.8%. And I always say that inflation for banks is usually higher due to the collective bargaining that brings in the inflation inertia from previous years. So we've set the goal of not letting the core costs rise over 2%. The whole difference between 5% and 9% lies in the investments in the bank's digital transformation, in modernization, in business and client centricity and in customer experience. And last, but not least, the effective tax rate is expected to range between 28.5% to 31.5%. That's all I wanted to share on 2022 earnings and 2023 guidance. I'll be joining Renato for the Q&A session to address your questions. Thank you very much for joining us, and I'll see you in a while. Take care. Well, hello, everyone. I'm back. Milton is already here with me. So let's start with the Q&A session. [Operator Instructions]. Now, let's start. The first question is from Domingos Falavina from J.P. Morgan. I have two questions. Very quick two questions. In terms of provisions, the first is to understand a bit how that additional provision works. The additional one. Well, it seems the balance is BRL 17 billion. I wanted to understand how much is already destined for the segment for credit cards or specific sector of the economy and how much of that is completely free, let's just say, with the use â looking at the subsequent fines of approximately BRL 2 billion, BRL 1.3 billion, the exposure [indiscernible]. So, I wanted to know how much leeway do you have, let's just say? And the second one, how do you reconcile the guidance for the growth, the 20% growth year-on-year with a portfolio that is growing also in 6% to 9%. So it's growing two times the portfolio when the bank is working with a derisk, you're increasing the risk. And this is a provision that is anticipated with the expected loss. And so, how do you reconcile if it's an increase of risk? Or are you going to be more conservative in the guidance? These are the two points. Let me start with the complementary provisions. The complementary provisions, in fact, we've been looking at these balance for a long time. We do the periodic reviews. I would say monthly reviews on the volume of provisions that we have in the balance sheets, always looking at our portfolio with expected losses. And the bank has the practice of many years of being very careful, very prudent with the level of provisioning that we carry over the balance. So we have the reinforcement of provisions all throughout the previous quarter, specifically during COVID-19. You remember 2020. And those provisions, they're allocated for specific cases where we have some concern that we understand that the level of provisioning has to be higher. Now, we always see the expected loss. We have the effect of the expected loss, which is within the complementary provisions part, is the specific case, it can be a segment, it can be a company, specific business or an adjustment that the bank deems necessary. So, what do we do? Once a month at least, we do a complete review of these provisions. And when you take a look at case by case, what are the expectations for the recovery in the future, if it's improving, if it's not improving. So when we did the 100% provisioning in the specific case, which is a subsequent event, we looked at the balance sheet and we wanted to understand well. Is there any leeway in terms of some change in regards to the complementary provisions case. We decided to do 100% provisioning. That was the decision. We look first if there is an adjustment that has to be done within the complementary provisions. And in the end, we did BRL 1.3 billion going through profits and losses and constituting even more complementary provisions. So, in this specific case, we took a 2H and then, automatically, we did that review. We don't give disclosures for specific cases. But since it was spread in the news and there is the Chapter 11 and our credit is registered there, our exposure total is BRL 2.8 billion for this specific case. So just to facilitate the math, it was BRL 1.3 billion with [indiscernible] and then BRL 1.5 billion [indiscernible] because it's not just the risk of their credit for the operation, we also have an exposure of derivatives, there is a loan and then that complements the total exposure. So, I'm giving you the results. We don't do the specific results. But this is a specific cases. But this is a very publicized case. So it's a lower exposure, BRL 1.5 billion and a complementary BRL 1.3 billion allocated. So when we reviewed, we saw that there was an opportunity for a specific allocation. And in our financial results, if you look at several places, we leave it explicit that it's for a specific case that it's on the news. And when there is a deterioration of the case and we understand that this is â given the case, given the unpredictability that there will be naturally more expenses of [indiscernible] in the specific case and then an immediate use of the provision that has been allocated. So I would just like to reinforce there is no negative effect looking up ahead. 100% captured in the fourth quarter. And looking up ahead, we are going to do movements as we receive more information. Now your second point, which is the guidance. Here, there are two important elements that I would like to address. First, we look at the retail on the individuals portfolio. We see a stabilization of the delays. And this is the best expectation so far. We are growing 0.2 over 90 over the last quarter, so it's stable for the first quarter. The portfolio is growing. It's about a growth of 9%, close to 10%. And the individuals, we didn't subdivide it by segment, but our expectation is that the individuals and companies, they're moving along in the same speed. If we extrapolate the fourth quarter of the year, in retail, for next year, given that we work with the expected losses, so we're always anticipating the new cycle production. This provision naturally will grow 13%, 14% with a portfolio that can grow close to 9% to 10%. So this is not relevant when we look at these numbers. So it's important that we look at a number. That is very important. When we normalize, specifically the retail portfolio for two years, so this is the term that I've been using, we realize that there is a normalization, gradual normalization in this retail, and more challenges given the level of interest rates that we see and economy that we have, more â the leverage of the companies has to be lower since we have a fixed interest rate. And that made us be very careful in estimating the cost of credit that is much higher for 2023. Specifically, in the wholesale that works with a lower â well, the delay is not â I don't like to follow the NPL 90 for the medium and large sized companies, but there you can see that the delay is insignificant, irrelevant, whether there is more relation with the cost of credit capture that we can observe all throughout 2023, given the scenario and also given the perspective, given the size of the portfolio to actually do more provision â an expectation of doing more provisions for 2023. Congratulations on the results. I think that it was very good. Now, I have a question. I have a question, Tier 1 question. The bank went back to 13.5. So there is an ROI of 20%. And then you're working with the numbers aligned with [indiscernible] growth of the portfolio. The bank can pay clearly more dividend payout, in my math 60 and still keep the Tier 1 stable at 13.5. So, that's my question. Are we going back to that scenario that the bank is going to pay all the capital above 13.5? And a quick follow-up on Domingos' question. What changed in the bank in regards to the specific case of Americanas in the legal proceedings? How has the bank evolved with this case of Americanas? Well, let me talk about the capital here. We are going to systematically and consistently grow the level of capital. If you remember that, we started in 2020, with the provisions for COVID and then we start to recover. We implemented the hedge of the capital index policy and the bank is consistently generating value and financing its activities and having an increase of the capitalization of the bank measured by CET1. Now, my expectation, looking up ahead, there was no scenario of the increase of percentage payment. We have 27%. We maximize the JCB, that's why the payout is above the minimum. We still provision looking up ahead for the level of the payout that is much similar. Yes, we're growing the results of the bank and then we're increasing the dividends, the JCB per share. That's our work. Now, even though we recovered capital, which was a great news, we see challenges up ahead. These are typically two. First, there is new [indiscernible] for the credit risk. And in our first reading, they can be positive for the capital. But there is a public consultation, which is the operational capital, there is a measure in the way that we allocate it for now. But there is a review being done. And this measure might impact the level of capital of the bank. It's very early. There is a public consultation. There are several debates happening with the regulator. We're looking at Basel, several countries delaying the implementation. Our best expectation today, the provision is that, in January 2024, maybe there is a chance that we are going to, in fact, follow up in different geographies, a delay to 2025. So the bank is doing a provision for their capital looking up ahead. We are not going to fall in the scenario that we're going to pay for a larger dividend, knowing the prospectively we can have a use because of this event. It's not materially going to place us below the appetite. We'll continue to work, so that doesn't happen. We continue to replenish, but there might be, yes, an impact. There might be an impact. And we're going to follow up over the next quarters. There is no change in the policy of payout, therefore. We continue to follow the policy of dividends that was published and the capital. Our trend is to continue to grow. And we need on the regulators from the central bank that we do not know all the details on how it's going to be post the public consultation. So, the corporate subsequent event, that specific case, about that, of course, yes. Every credit event gives us learnings, whether if it comes from a fraud or if it comes from a worsening of a scenario where we eventually did not predict or did not imagine that would happen. So I would say that that's part. It's an expensive learning without a shadow of a doubt, but we always have a learning however expensive it is. So, we want to do a complete review of the processes. We are going to go over the storyline, understand what we could have done, when, where. Here's an important message. In this period, in the second quarter, well, this is a public case where you don't talk about the specific case. But since it's a public case, we reduced BRL 1 billion for this exposure in this specific case. So there was a discomfort with a series of information. Of course, it's difficult to imagine that there was a fraud happening in a company with all the characteristics that you know of the company, but we were reducing our exposure, and we reduced BRL 1 billion in the period. Just so you know, the magnitude of the effort, given the operations that were due, we didn't produce new operations for several reasons. So, this is a learning. So in our opinion of everything that we've seen, this is an isolated case. It's a fraud. We reviewed the portfolio. We reviewed several companies that are using the risk not only in the bank and in the market, we didn't identify any bad things. This is an isolated thing. It's isolated case, and we are learning and this is everything that we are doing whenever we incur into an event such as this. Congratulations on the results, specifically given the whole scenario. I wanted to change the subject. I want to talk about the guidance, the fee. Well, at least our understanding is that if we understand the run rating at the end of the year, there is maybe a little bit lower than the bank was presenting throughout the year and that there is a guidance of 7% to 9%. Specifically, if we look at â what do we expect for the mix for 2023? Well, an acceleration of TPV. Maybe there is going to be an impact in the credit card â well, there is an asset management pressure, given the challenges in investment banking. So, I wanted to understand. How do we see this end of the year that is more challenging in this line, the growth is weaker, and you are bringing an expectation much higher than the run rate at the end of the year? So, it would be the insurance compensating for all that. If you can go over the composure, how that guidance is built? Well, in my opinion, it's aggressive given the end of the year. Okay, let's take a look. And we always challenge ourselves. Whenever we get into a new year, and I'd like to say that we got into 2023 better than we finished 2022 and better than what we started in 2022. Having said that, looking up ahead, there is always a degree of challenge. And any guidance, many times, you have an objective, you have the best estimation. Not everything has an absolute, well designed and defined action plan. And this is part of our dynamic. We need challenges. This is how we like to deal with performance. This is how we like to deal with the indicators looking up ahead in the future. Now, along those lines, it's no different. We have a challenge. That's it. Now, having said that, we believe that, with the information that we have, nowadays, it is possible to capture that growth all throughout 2023, if nothing else is altered. We can see that in different ways. Not only B2B credit cards, there is also the inter exchange. And when we talk about the credit card, we have to look at the fees, which is very important for the reduction, annual fees. Also, the programs for generating loyalty with our clients under the inter-exchange rate. So these effects are contained here. The acquirings, as you've seen, if you look at the end of the year, when you'll have the buyers, typically, there's a growth. Here it's a better mix â we're searching for a focus in the repricing because of the penetration of financial products, interest rates, a management that is much closer to the bank, that integration has worked much more. And the buyer, acquirer, we don't like to look at them as a P&L of a business, but we like to look at them in a global context for the relation of the bank and the client. That's it. Every year, we have the challenge because regardless of where the market goes, an important part of the result is coming from performance fees. And we have to be capable, we have a very competent team. We have to be capable â we have the multi tables besides the traditional tables of assets for exchange and we have the performance fee challenge and we've managed to deliver this all throughout the year. So we have a challenge for 2023. Obviously, with a risk of the market â with the treasury â it depends on the positions. How do we manage the assets and the risks all throughout the year, but there's always an expectation for the generation of alpha. Now, whether it's a challenge, more uncertainty â well, the performance fee will always bring volatility. But wherever I think that there is a challenge is in the economic â the investment bank. There is a two sides of the same coin. Here, the broker, we can invest more in the individual portfolio, and then we can take products and solutions for our clients that had generated a lot of value. So we had a gap in the portfolio and we're bridging that gap monthly, consistently, and we see a growth. So, part of the result comes from the individuals when we have a portfolio that is much more robust, to service our clients better. On the other hand, the investment bank, traditional, the activities of M&A have to continue. Equity capital markets, it will depend on the window of the market, how the global and local uncertainty scenario, interest rates, so there might be a good opportunity. And we imagine that even though we had important challenges, we will have an activity that will continue with a lot of dynamics all throughout the year. And insurance, I always say â we see an evolution of the operation. This is a retail insurance, and we pile them up. So as we penetrate more, we grow, your pile the seasons for the subsequent years, and we expect an evolution at the bottom line 2023. So, insurance should bring good contributions in 2023. So we expect that this is â we have the execution risk, of course. Whenever we have investment bank, I always see more risk. But we're going to work hard, so we can follow up on the guidance that was placed. If there's any change all throughout the quarters, any change in the scenario, or if there is any difficulty, then we're going to update the guidance if it's necessary. But once again, we believe that it's factual and we're going to continue running after the numbers. I wanted to talk about how the guidance of the growth of the portfolio, how it's made, do we have retail growing more? Well, wholesale growing below. If you are comfortable with individuals mix that is 48 and then a group with a collateralized credit. So if you can tell us more about the growth of portfolio and the breakdown. The second question that is quicker, is there any changes in the spread that your practice in the wholesale, given the subsequent? Do you think that you're going to do anything for the supply chains involved? That would be my question. About the growth of the portfolio, Daniel, we open up in the consolidated, the information, for you, but it's important to separate three main messages. Well, the portfolio is going to grow less than the 21, 22 [ph]. So there is a deacceleration of the growth., even though I think that that balance between insured and non-insured might be â there might be a growth in not-insured more than 23 [ph] than what we observed in vehicles and real estate, which has a great growth. So we're going to continue with a level of insured above 50, but there might be an adjustment in the mix, which is a positive factor for the financial margins as well. So, possibly portfolios with more risk. In the adequate populations with the adequate risk profile, we have a portfolio that is very affluent, and we've managed to gain share in the best risks, which is a good sign, but with a mix that is more favorable for more. So, we have a deacceleration in the vehicles, we see deacceleration because of everything that we've seen in the credit card portfolio. We are possibly going to grow in the core. And those segments that we've had a lot of safety, specifically in new clients with the close relationship with the banks where we have more growth. And real estate, the increase because of the interest rate, our expectation that there is a going to be a deacceleration â deceleration all throughout the year. So this is the â how we see the retail. Well, small and medium companies, SMEs are growing, but two digits low. This is something that we can foresee. And big companies. We also expect a growth that is low two digits, double digits, single digit high maybe, this is how we're going to see the portfolio of the companies that depends on the market dynamics. So, if you look at our numbers for 2022, you're going to see that our capacity to recycle the portfolio is very relevant. And we are the leaders of the capital markets where the market share â we are the leaders with 30%. So we're going to continue to recycle the portfolio, opening the space, and we're going to continue to operate and generating â cross selling our clients. And the portfolio that will impact for negatively in 2023 not because it doesn't grow, but because the â we have the Latin America portfolio that we see flat all throughout the years, adjusted for real because of the exchange rate. So it's because of the currency. This is an overview of the credit portfolio, and this is how we are observing in 2023. In this specific case, the review of the spread, very important. Reviewing the spread, it will always happen whenever we understand the scenario or the perspective, change the risk scenario, change the implicit risk of the company is worsened. So the pricing is something dynamic that we do every single day. There was no repricing because of the specific case in the media. I say, once again, this is a specific fraud case, something that we do not see every so often. It's maybe the biggest fraud of all times. So this is an isolated case of everything that we observed. We don't see any contagion in our portfolio. We looked at all the chain, we always have to be careful. No materiality. This is a company that continues to work. They have challenges. We hope that the company will leave this process in the best way possible. There's people dedicated to that, but there is no repricing of the portfolio due to this event. We continue to price in the same way. We're always taking care of the scenario, but nothing that comes from the specific case. This is very important that we frame this. Congratulations on the result. Milton, I wanted to focus more in the retail. So, the weight of Americana with wholesale. And we have the companies that are subcontracting the financial advisors to restructure their debt. So, clearly, there is a worsening of the scenario in general. So, we need to understand from you if there is any specific thing that will worry you the most. Also, I wanted to understand when we see the guidance for provisions, how much is from wholesales, how much is from retail. So looking at the previous year, we had a high profitability in the wholesale. So, I think that your ROE is close to 30%. So I wanted to understand what is the capacity of the bank and profitability having a high profitability in the sector? Looking at the records, the profitability might be lower. So, wanted to understand better how are the dynamics and how you see specifically case by case? In fact, specifically talking about the cost of credit and the evolution for the year and the sector, the segment of wholesale, wholesale for the bank, it's very broad. In the MD&A version and the way that we talk about this, it's very important that we understand there's several businesses here, not only the business of ItaÃº BBA, which are the big corporations in the middle, there is the whole business of asset management, which is in there. The operation of LatAm is also there, in there. So it's a business that is very complete from the standpoint. So, it's an overview that is a previous one with a wholesale, the retail vision. Well, no. In there, there are several businesses. Some more recently, and some more depending upon credits, some are outside of Brazil, which is the operation of LatAm which had a great evolution in 2022, with perspectives and challenges for 2023. Of course. Now looking at the environment, of course, in a scenario that you're looking at prospectively, a GDP that is relatively low, much below the potential for growth, we're talking about GDP of 1% growth. We are talking about 0.9%. In the premise, I was talking with a bias of high â might be higher, but it's not going to be substantially better. So we are reviewing this scenario and we are going to publish the next phase. First point. Second point, interest rate. Come on, interest rate, 13.75% plus the spread that is charged. It has an important pressure on any company, whether it's a small company or a large corporation. Even though they're very capable of accessing the capital markets, the base rate is much higher. That generates a pressure in the financial experiences. And it makes the company to really take care of their leverage level. The activity in the month of January is much better than what we expected, we've seen, but November/December were weaker months. So maybe there is going to be compensation. Now with interest rates, 13.75%, there is a natural deacceleration of the company. But globally, the scenario improves from what we had two months, one month ago. We see global dropping the â dropping less than what we expected. And this is the whole framework. In our opinion, yes, this is a scenario that is more challenging for the company, specifically from thresholds that were very low. If you looked at the cost of credit, close to zero, in some cases, because there was still a portfolio in the past. There were reversals that happened and companies performed better in several cases from what we expected, et cetera. So, we're going to see an effect of normalization also that it's going to happen in the wholesale. You mentioned a few cases, restructurings. Come on, these are not new, to be very frank. These were open. Once again, the fraud, the specific case, it's not something that the traditional models would capture. The cases that we've heard, they're not new, they were already on the radar, they were monitored and followed up. So there is a re-RJ happening. So you generate 45 days and you come back, the Chapter 11 because of the legal protection, the strategy, and the whole thing. And following up on the process and the case is absolutely duly provisioned. We didn't have any concerns specifically regarding for those that follow up close. So to answer. it's a challenging scenario. Yes. I believe that there will be a normalization. Yes. The interest rate currently, it pressures the bad debt in the segment of the companies. And then, we have to follow up these liabilities up close. So there is no specific sector. What worries us is the leverage companies with high leverage with the cost of debt and they don't have an adequate capital structure. But, remember, then there are many ways they can work with that. There is a capital markets today that there's always an opportunity for opening a window and you can work on the capital of those companies. The shareholders themselves, they can inject the capital whenever there is difficulty. So there's X amount of situations that you can go over the problem. Well, yes, we're expecting a worse scenario in 2023 than 2022. Point, that's within the guidance of the cost of credit. We don't open to break down. Substantially, the effect is retail in terms of materiality of provisions, but relatively speaking percentage, the biggest growth is wholesale. So we have to look at percentage, the cost of credit year-on-year if you removed the effect. For the specific case of December, we have the retail for now from the nominal, the big volumes. And of course, the margin levels are â is very different. Well, it's from retail, and before it was wholesale. Congratulations on the results. I want to talk a bit about growth. When we look at the central bank data, specifically for individuals, measures that you and other banks took make sense. But greater reduction than we would normally see seasonally speaking. So I'd like to understand this deceleration and how this can affect guidance risk this year. Yes, we've seen this portfolio decelerating for the last few quarters, actually. We made adjustments in the third quarter of 2021, and so we're talking about 13, 14 months of consistent, consecutive readjustments. We make adjustments, we see how things are going, make more adjustments. So we're very active in this regard. So this deceleration has happened for a number of reasons, in specific portfolios. Real estate, for example. Interest rates. There's a lower demand. Vehicles, we proactively decided to reduce our exposure. For individuals, I think it's important that we understand where the income is lower in the portfolios. So this is a 10 percentage point in the mix â sorry, this is 10 percentage points, not 10%. So this is a six point NPL, give or take. We're looking at 150, 160 NPL above what we are disclosing. So, this has been proactive. And something we've been doing each month. Yes, fourth quarter there was a deceleration. There is seasonality. Non-financed credit cards is growing. Otherwise, it's falling. And in personal loans, individual loans, two areas were affected. General loans, average balance still is fine. Overdraft and 13th salary are affecting the more expensive lines â recovery in the more expensive lines. Yes, since there's piling up with retail, and we see this over the quarters, when we start to look at the future, we don't see much growth. So, the system across the board has done this to some degree or other. And where we see greater preoccupation, greater risk, we've made the adjustments that are necessary in the portfolios. This includes credit cards, vehicles, and the like. So we've been very prudent. I think we need to be cautious. That's what the outlook calls for us. I think few people look at this with such caution, as much caution as we are. So that's what we're doing. We're looking at a decrease in growth, and managing the portfolios as best as possible. Again, watching how these portfolios are performing over time, and make adjustments to the right, to the left. Again, that's part of what we do. And that's what we do on a day to day basis. I've been following you guys for 15 years. I remember how you started compared to your competition way back then and how you are now. A lot of your peers say this performance gap is cyclical. Customer exposure, et cetera. We think it's more structural. Milton, since day one as CEO, you've been focusing on digital transformation, you've been pushing it. And you can see that this has really affected performance positively. Do you think there's still chance for growth here? Can we believe that this difference, better performance for ItaÃº is structurally better, is based on digital technology because it's better â it's even better now than it was 10, 15 years ago. Okay, disclaimer. My disclaimer. Okay, I'm going to start with that. Okay, our numbers, our indicators, our bank, et cetera, these have been important. Second disclaimer, I'm not really going to go into performance, relative performance vis-Ã -vis others. You have the numbers, you know what's happening, you know how to assess this, in fact, better than I do. And I respect our competition. I highly respect our competition regardless of where we are at different moments in time. It's a marathon. And it's an ongoing marathon. There's no end. It's not something that ends next quarter. It's ongoing, ongoing, we're going to run, we're running, we're running, we'll never reach the finish line. Now going back to performance. Our digital transformation has been very critical for the bank, no doubt about it. The speed of change that we have implemented and the features has been phenomenal, how quickly we've changed our systems, how fast we've simplified things, how we've made them interoperable, the cost of serving our customers and the quality of the new solutions, all of this together has been incredible and translates to a wonderful NPS. It's not just digital transformation. It's cultural transformation, this customer focus, obsessed with the customer, all of this has resulted in customer satisfaction. So it's a number of factors that have led to these positive numbers and these positive results. And yield and NPS go hand in hand. You can't have high sustainability, you can't have a product that's not sustainable and then get an NPS. We work with sustainable products, sustainable solutions that maximize yield and maximize satisfaction of our customers. So they work hand in hand together. So I have no doubt that digital transformation has been absolutely critical in the evolution of the bank and how we work and how we work with our customers. There are lots of communities in our bank. If you don't have the digitalized platforms and all the components in place, you're not going to get the speed you need. So you're going to have people. You have agile people, but they don't have the agile tools, you're not going to be able to deliver on your promises. So the NPS reflects that we have about 20,000 people in our community, over 2,000 squads, that just shows how relevant the agile system is in our company. So why has our performance led to these wonderful results? Very positive, very high. It's because we're a full bank. I insist on this from the beginning, full bank is not just being present in the different sectors and areas. That's not what it means. It means managing these and understanding where you're operating. And because of our dedication and because of our investment and our focus over many years, we've been relevant in a number of businesses. We've been able to perform in a number of areas. We were talking about wholesale. ItaÃº BBA, very important in these results. It's not just commercial. It's investment bank, it's products, it's cross sell. If you look at our positions relative â our relative positions in all of these businesses, we are high up in all of the rankings, the returns are fantastic. 2022, you saw these great returns. So if you add this all up, all of this helps our performance. When we look at retail, traditional retail bank, where we work closer with customers, we've had excellent performance, we're close to the customers, we work with them, we've been able to increase in customer engagement with the bank, each engagement percentage point represents a billion reals. Obviously, there are challenges in cyclical moments. We've got vehicle issues in each area in the vehicle sector. But if you understand the risk and you can anticipate these cycles and if you have a portfolio that balances out these difficult moments, it means that your yields are going to be quite high, your earnings are going to be quite high. We have credit cards in Brazil, and we look at our markets and we look at our portfolio. Yes, we're facing a more challenging moment. But we have a number of other businesses that are maximizing their revenue pools. And their leadership is unquestioned. So, this healthy portfolio has helped us in terms of yield and revenue across the board. Challenges are going to â are always going to â we're always going to face them, we have difficulty with retail, obviously. There may be decreases in terms of yield, in terms of earnings, because of the cost of credit. But because we can manage a number of different businesses, and that's implicit in our guidance, we're able to confront the challenges and deliver excellent numbers. Yes, we've got competition across the board. We've got transformations, changes happening, and we continue understanding that, pursuing it. So I don't see anything today that will make me change my outlook in terms of yield. Obviously, things may change over time. Obviously, the macro is important, zip codes are important, is important in our results. And this obviously affects us directly. So, again, it's going to depend on general macro outlook, so that we can continue to deliver on these numbers. And when we look at global market, and this is also quite important, not just customer wise, but generally, we look at the market risks to serve our customers. We don't look at as simple returns on associated risks. And separately, we've been able to manage risk excellent â they've done an excellent job managing risk in a very challenging situation. And you can see that the results to returns are excellent. Hedging costs are great. BRL 2 million in margin just last year. If it weren't for that policy, we'd even have higher returns on the top line. My question, a little bit more macro, but also kind of how it will impact the bank, right? The rhetoric we're hearing from the government seems to be increasingly negative, questioning central bank independence, high interest rates, renegotiation programs using public sector banks to support growth? I don't know if you've had any conversations with them at all. Just how do you think this environment could potentially impact the bank and the way you run the bank, particularly if some of the public sector banks start to lend below market rates? Just any color, your thoughts on the current macro and political environment and how that could impact the bank? Let me first of all say that, yes, we've been having conversations with the government, with Fernando Haddad and his team. Not only with him. Last week [indiscernible], we had four ministers, they're telling us a little bit more about their plans. Simoni, Esther, [ph], Fernando Haddad, and also [indiscernible] of BNDES. So, our view is that all the discussions we had so far are very positive. Okay? So I think the direction and the concepts are very clear. They've been very open to listen to us and understand our views on this scenario. The noises that we've been hearing recently â in our democracy, the way we've been very polarized, I would say, for the past year or so, it's natural to have some noise as we are seeing right now. The thing is that we have to wait. We don't have all the information. We have the first effort coming from Minister Haddad to reduce the deficit. So this was a positive message to the market, that the deficit is very important for the government and they will pursue to reduce the deficit for 2023 and so. We have a huge discussions about the goals and the inflation target. I think it's an unnecessary noise. So my view is that they have to define as soon as possible the new inflation target and work on that because, otherwise, there is an impact on the prospective inflation, the expectations are going up. So only because of the noise. And this has, of course, an impact in the interest rate curve. And the most relevant information, from my view, and I think the whole market is expecting, is the new fiscal framework that we should understand a little bit more by the end of April. This is what Minister Haddad has been telling the market. So I would say yes, there is noise. Yes, we've been hearing the discussions. But we have to understand that we are in a democracy, it's part of the process to have some noise. The most relevant things is that whenever we have new decisions coming from the government and new efforts coming from the financial team, we will have more information to forecast looking forward. But there is a lot of uncertainty. And this uncertainty, yes, it changes the way we manage the bank. So we have been more conservative, yes. We have a prudential approach, yes. We don't have all the information. So it's difficult to forecast. As much noise you have, as less confident we believe we have to be in running our businesses. So, there is a guidance, there is these inputs that we consider on the macroeconomic scenario, the GDP, we may have something around 1.3, 1.4 for 2023. This is something that may have a positive impact. But again, there is a lot of challenges and a lot of noise. And this, of course, makes price not only in the financial market, in the system, but in our decisions. So we expect that this noise starts to reduce at some point, especially if we take out the most relevant decisions that should be taken to take this noise of the yield curve. So this is our best expectations. And we have to wait and see what will be the message and decisions that will arise in the coming months. But, yes, we are more conservative and more cautious with the current scenario. First, I wanted to thank you for the 2022 results. Excellent. I wanted to know about bank's investments specifically. What do you expect for 2023? What is the outlook? Were you expecting to invest more heavily? And once again, congratulations on the wonderful results. We're quite satisfied with how our business has been developing, specifically investments. We did our homework, we made the right decisions. We made the right investments. So when we look at maturity, this is three months, six months, depending on the investment, depending on where we're located, where we're investing. We've got B2C, over 2,000 employees focusing on this, with great new platform, great tools. If we look at the platform and all the different products, our products are excellent. It's a very open platform with tons of funds, including third party funds. We also have product solutions that are very specific, that are specific to different customers. This allows us to understand and work through the cycles. So if you want something that's really more focused on your own products, you want something that's more focused on lower risk, we've got that too. So we're able to address these risks. We've been able to balance them out based on what our customers want to offer. Supply and demand has been quite positive. I'd like to stress, our business model today is to encourage our investors, is excellent, excellent. Our performance, our portfolio returns are fantastic. Regardless of the products and how it is for â the most important thing is that it best meets our customers' needs. And this is what we're really focused on. And we've seen excellent results because of that. And I really want to stress that. There has been a reduction of volume loss in the last periods, and that's excellent. Our portfolio is much better structured. Our NPS is much higher. Our consultants are focused â again, interest rates also help. And we've been able to gain market share in investments overall. So if you look at individuals, this is probably one of the best ratios we've seen, individuals with these investments. Are we completely satisfied? No. Have we reached our main objectives now? We have challenges ahead of us. We'd like to improve. I'd actually like to talk about some of the products that really â we really advanced a lot â we had a lot of progress in 2022, but we need to make a lot more progress in 2020. There are some gaps that we need to address. And so, we're focusing on that. So when we look back, we found the right model, we've made excellent progress, we established a really solid model. And so, now we're really seeing this. The pipeline for digital products has been excellent. So there's lots of investment in that. But there's still a lot to be done. So we're happy where we are. But we'll be more happy when we get to where we want to get to. But we're very happy with what we've gotten to so far. The next one is from Rafael Frade from Citibank. Congratulations on the results. I want to talk about the financial margin. We've seen a stability and then there is a discussion on how that evolution would be. Can you comment a bit more on the mix of the retail? And then, we have spreads a bit below for 2023, but we see that in wholesale, at least the largest level in the historical records. So, I wanted to understand wholesale. We have the product spread. At the beginning, Milton said that there is not a relevant change in spread. So, what explains this margin of retail? Well, once again, we see an expansion for 2023 that is very subtle. So, we continue to believe that there might be an expansion, but there's going to be in the margins â we've been running at a profitability level that is very good. I'm looking at the consolidated, okay? But we can expect that there's going to be an increase in the line all throughout the time. The guidance is explicit on the growth of the margin. There is a series of effects here. The first effect is that we should have the fourth quarter that has an atypical effect with the payment for the starting salary, the non-financed portfolios have been growing, the loans have been reduced, so that affects the mix of the line. On the other hand, more volumes, we've managed to get some products with regulatory caps. So there is the increase in the funding structure or funding. We have the real estate credit, there is a dynamic of the price of the asset and the liability, the savings, the treasury against the credit. So, we also have the competition. And we see pressure in the spread in a few products, specifically those that have a regulatory cap. Now, on the other hand, since we are a full bank and we have penetration for the â relationship with the clients that is very relevant, we have all the cross sale that also affects the margin, whether if it's several products or transactionality of treasury or cash management products and deposits, and the volume of capture throughout the bank, that generates a lot of returns. In part, also the interest rates that are higher, we also benefit. And I would say on the short term, specifically with better results, not only in our deposit structure saving, but also the working capital that has also benefited. The impact is not immediate. We do the hedging, whether if it's of deposits and capital, and several vertices looking up ahead, but we also see in 2023, given the interest rate levels, a potential positive effect that comes from the deposits in our working capital. Now, in the wholesale, because we are a full bank â and once again, we can capture several treasury products and we have penetration of cash management that is relevant, we have the outstanding balances in the deposits that affects, importantly. But the wholesale is not just ItaÃº BBA. It's asset with a performance fee and the growth and results has also affected that when we look at the wholesale as a whole. And there is the operations for LatAm that has had a better profitability for 2023. We've had substantial growth in all countries of LatAm and with a profitability level that is much better than what we had operated in the previous years. All of that adds to â the challenges, of course, are big. But the interest rates in the short term also has some positive impacts. And I like to say that structurally, we rather work with the interest rates that are lower, so that the bank can expand the business and increase the risk appetite, so that the companies can, in fact, have a quality of credit and capacity for growth that is much more healthy than in a scenario of risk of interest rates that are much higher for a long period of time. So, when the interest rates go back to the lower â then we're going to lose some revenues on the short term. But on the other hand, we're going to recover the capacity for growth and growing much stronger. And part of the math is the cost of credit. I would like to go back to the capital. First, could you quantify the impact of increased operational risk weighted assets whenever it is applied? As you mentioned, earlier could be January of 2024. It could be later. Second, has your risk appetite changed? You mentioned a lot caution, uncertainty. Do you want to operate with a different level of capital? What will be your current capital level at which you are aspiring for your CET1? And finally, related to that, could that affect your investment in XP? And is that something that you're going to keep? Or you might sell at some point also to reduce your risk? First of all, talking about cap, as I was saying at the very beginning, we still believe we have room to increase our capital base. Just to get your second question, then I go back. Yes, we decided to run the bank with a CET1 â core common equity of 11.5%, which is a little bit below of the 12% that we had in the past. Why is that? First of all, because, in the past, the most relevant negative impact that we could have in capital had to do with the FX rate. Okay? And for two reasons. First of all. the overhedge strategy that would generate a lot of tax credit and withholding tax and capital. And second, due to the operations, we have not only in LatAm, but dollar linked or other currencies linked portfolio, this brings a lot of volatility in our capital index. So, having said that, when we took out the overhead due to change in the regulatory environment and also implementing the hedge for the capital index, we took out all this volatility. So that's why we reduce our appetite, so we don't need to run the bank with 12% of common equity, but 11.5%. That was the most relevant explanation for the decision. But more than that, we are very concerned about our ratings. So, we don't go much below that. We could. Because we want to keep a very good standard of ratings, and are doing some local or international, more than that, benchmarks to understand what would be reasonable for us to keep in terms of capital. So, that's why â so we believe that the most relevant impact for volatility is out of the table now. So, the buffer is more relevant today than it was in the past even with this 50 basis point reduction. Talking on the operational side, this is very early to say. We're not releasing a specific figure. But my view is that we may have something that could be around 100 basis points depending on how it is implemented. So, this is reasonable to expect. So as we see an increase in our capital for 2023, more profitability, the risk-weighted assets growing much less than what we used to be in 2022 and other major/minor impact, we still believe that we will be generating capital for the year end of 2023. Now depends if the operational risk will be implemented or not in 2024, but we are, of course, provisioning and planning the capital base of the banking, taking these in consideration. This number, it's very, very â 20,000 seat information, I would say. Just to give you a sense that, even with that, and with the capital plan that we have, we won't be below the level of risk appetite of the bank. So, we'll still be in a very well position in terms of capital base. I had a quick follow-up on the complementary allowances. We thought that the they did increase quarter-over-quarter, but in a much lower magnitude than the exposure to the subsequent event. So is it fair to say that if it hadn't been that â if that hadn't happened, you could have released something like BRL 1.2 billion from these complimentary allowances? And then a quick question on your guidance for expenses, you have a fairly wide range. Is it okay to understand that if â let's say, if conditions are challenging throughout the year, you could delay or hold off on some investments? Talking about the provisions, yes, to be very precise here, if we didn't have this specific event, we could be in a position to consume part of those complementary provisions, those allowances that you just mentioned. So the answer is yes. But looking to the portfolio, looking name by name, we understood that the best thing to do was to provision 100% of the specific case the way we did at the end. So being very sharp, clear as we could. And talking about 2023, we do believe that we have to keep an eye on the cost of credit, we have to keep an eye on the guidance range that we have, understand how these allowances and complementaries will pursue and how we should approach them. And talking about investments, if I understood right your questions, you mean investments in generally speaking of the bank? We have of course â we discuss investment every single day. Okay? And we decide if we should or not expand some business or some credit, some business line or new business model. So, when we look to our expenditure and the cost of the bank for 2023, what we believe is that we have room to improve our efficiency ratio. And we're going to keep doing that. And also, on the other side, we want to keep investing for the franchise, for the future of the bank. So we don't like at all to run the next quarter, making decisions of avoiding investing in things that we really believe, but the cost of equity is different today, the scenario is different. So we're always more cautious when making a decision investment â investment decision due to the scenario, due to the cost of capital, but we take those in consideration. But another relevant thing that I would like to highlight here in terms of costs, running the bank, we want that the core costs of the bank, and I said that before in the guidance, won't be above 2% year-on-year. With the inflation that is not the inflation of the year, but you have, of course, the impact of the inflation of the year before and also the banking industry inflation is higher than the IPCA, so we do believe that we can keep 2% on the core side. It's a very relevant adjustment that we do to open pace and room for more investments in the bank. Now we're going to the last question from our analysts. And last, but not least, obviously, the question come from Juan Recalde from Scotiabank. My question is about the acquirings business. In 2022, the conditions in acquirers, they grew above the transactional value. So what is the expectation for 2023 for the growth of the transactional value? And can we see the revenues? Were the conditions in acquirers growing above the seasonal value for 2023? Look, the acquirings business is more and more a product within the organization. We closed the capital of Redecard and we've been investing more and more to include this acquirer, buyer in the bank. And we can do it much more faster. And we need to look at this with a grain of salt. I'm going to do a few brief comments. Yes, we have been growing revenue larger than TPV for several reasons. First, the repricing capacity that we've had. So separating those clients that need to be repriced, those clients then have a re relationship of acquiring not just a customer, but more product. We're seeking that penetration of the financial products has been very important. And that has brought very relevant results. So that's why we have a substantial growth. We've been operating more and more with the adequate mixes. So we've tried to serve our clients, but always try to grow in the more profitable mixes. And this is the evolution in this work of the network and the bank has had relevant results. It's a product in a business that we add strength with the buyer for the distribution, to be able to grow in a very profitable segment. The year, if you look isolated, the P&L of Redecard, and this is not a great reading, but remember that our business model, every capital of the business, we isolate [indiscernible] corporation. When we look at the results of several other companies in the market, all the working capital is benefited with an interest rate that is higher. Or the cost of funding too, given that it's zero because it's capital â to do the anticipation operations with the effective lower rate, we price at the margin. So we look at the opportunity cost for funding to the pricing of the anticipation at the end. So this is from the managerial model. It's cleaner from these effects and we isolate the working capital and the corporation is not located [ph] at the business per se. So I look at this way. The great business/. We've had a great evolution, NPS that has been advancing, all the advances in the relation with the clients and the proximity with a bank. I am very optimistic for 2023. For 2023, I think that there is a double effect, not only the performance indicators should improve, but also the isolated result of the business should be better because we've done to hedge of the liabilities. Many companies, they didn't work with that â so they didn't do the adequate hedge. So we implemented a hedge policy that has worked very well. And that has brought stability for the results. So I can expect a better result for the buyer, the acquirer results for 2023. It's not the level of results that we operated last year. Structurally, the industry has changed, the margins are thinner, but we've managed. And another point that I would like to state. When we look at the base of clients that are active, there is a reduction. And the reason is because there is dirt [ph] in the base. There were some segments where we didn't â where we invested in the past and then we made the decision of leaving. And so, basically, credit card Bob [ph], which was a specific individual segment that, at that moment â the operation wasn't structured in a way that it should, you have a lot of bases of client in amount where you don't have a resulting profitability. So, VPL [ph] of those harvests are negative. So the cleanup happened at the base over the last few years. And where we are focusing, we are growing the base and where we decided to leave because they're not profitable segments, we have more amount of clients and little profitability, maybe none. So, that's why you see the base of clients that are reduced, but this is healthy, their direction is good. So we're very satisfied with the evolution. And then we have a great 2023/2024 acquirer. Now finishing the question we received, the WhatsApp questions. I know that we have a short term, but I wanted to ask you at least one, so we can finish. So the questions were from several themes. We've covered cost, NPL, portfolio. But there is one that I chose to finish our talk, which is about what we call beyond bank. So the question is from [indiscernible] and he asks, we have a portfolio that has evolved in the bank with products beyond the financial market. Thinking about the increase of that portfolio, what are the other businesses that the bank foresees as potential for next years? Beyond Banking is part of our strategy, actually. And we've got to talk to our customers to find out where there are new opportunities. And that's what we've been doing. ItaÃº Shop is a great example. We're very happy with the progress thus far, it's been growing substantially. All of our iPhone forever, Samsung forever, Apples and all these products, all these partnerships have been wonderful. We've seen excellent results. The results have been great for the bank. And we've been able to offer exclusive products to our customers and solutions to our customers. And we found other profit pools. And these are not the traditional profit pools of the financial system, of the banking system. So this has actually resulted in not just cross sell, but better conversations with our customers, better audience, better interaction with our with our audience and publics. We've got more interaction with our apps, with our super apps. It's been great. So it has been developing wonderfully. We've seen a lot of progress. When we see cash management for wholesale, we've seen a lot of progress as well. This is also considered part of Beyond Banking. There are a number of initiatives. And our role is to be open to this, to be looking out to see where there are opportunities, where there are correlated opportunities, where there are ecosystems that we can tap into. With TOTVS, we saw a great â this is great. We're waiting for one last authorization. We've been able to distribute some of our solutions in other channels. Avenue, for example, we brought this in. These are ways to reach other markets that we weren't operating in. Specifically for affluent customers, those who have resources and funds and international resources, our offers before were limited to personality type. So, we really need to make this access more broad. So we've been able to fill out these ecosystem with new offers, new products. And we've looked to Beyond Banking because we understand there's great synergy for the customer. And this generates value to the customer. I don't have to leave my app. There's associated loans, there's credit, there's the payment in installments, products, there's funding, there's loans, and so obviously this creates loyalty not just with the bank, but with the products that are behind these offers. So, we're really looking closely at these new business opportunities. Okay. So, we're just going to end our question-and-answer period here. Before we close, I'd just like to remind you that all of the material from this earnings call and the recording, the results and all of this will be available on the bank's website. So please take a look when you get a chance. It's wonderful to be here. I'm sure we'll be able to â we'll have many opportunities to see each other or meet up over the next quarter. I look forward to telling you how our first quarter is. The challenges are great, but we're up for it. I'd like to end by saying we're quite satisfied. As I mentioned at the beginning, we're quite satisfied. We started 2023 much better than 2022. And certainly, better off than we ended the year last year, although it was a very long and difficult year. This month as well. We are very dedicated, very focused, we're very excited, very willing. But we're also conservative, we know what we need. We're aware of the challenges that we face, we're aware of what we need to do. And we are working hard to deliver on what we promised to deliver and to give you sustainable performance over the years. We know the challenges are great. We talked about some of them today. And I hope to give you some updates over the course of the year, over the course of the quarter.
EarningCall_526	Greetings and welcome to the Gladstone Investment Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Chief Executive Officer, David Gladstone. Thank you. You may begin. Well, thank you very much and welcome to all of you coming in to this call. This is a good call coming up. So hope you stay tuned through the whole thing. This is the third quarter report for fiscal year 2023 this quarter ended December 31. So we are a little bit for further away from that. Earnings and conference call for shareholders and analysts of Gladstone Investment listed on NASDAQ trading symbol GAIN for the common stock and then we have two registered notes, one under GAINN and GAINZ and thank you all for calling in. We are always happy to provide an update to our shareholders and the analysts who call in provide a new point of entry in terms of information about the company. Two goals for this call, first, help you understand anything thatâs happened in the past through December and give you a current view for the future. Now, we will start out not with our General Counsel this time, but with his right hand man and Eric is going to do the Michael LiCalsiâs call. Go ahead, Eric. Good morning, everyone. Todayâs call may include forward-looking statements under the Securities Act of 1933 and Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties and other factors even though they are based on our current plans, which we believe to be reasonable. Many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors listed on our Forms 10-Q, 10-K and other documents we filed with the SEC from time-to-time. These can all be found on the Investors page of our website www.gladstoneinvestment.com or the SECâs website www.sec.gov. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. Please also note that past performance or market information is not a guarantee of future results. Please take the opportunity to visit our website, www.gladstoneinvestment.com, sign-up for our e-mail notification service. You can also find us on Twitter @GladstoneComps and on Facebook, keyword, The Gladstone Companies. Todayâs call is simply an overview of our results through December 31, 2022. So we ask you to review our press release and 10-Q both issued yesterday for more detailed information. Thanks, Eric and to everyone out there listening in we appreciate you being here. We are pleased to report that GAIN did indeed have another good quarter for this part of the year â23 quarter end 12/31, including in this very challenging period obviously of rising interest rates and inflationary costs. Our portfolio companies are meeting these challenges and we must remain vigilant and cautious not only with our portfolio management of these companies, but also with our new acquisition activity. We ended the fiscal third quarter to 12/31/22 with adjusted NII of $0.30 per share, which is slightly up from $0.29 per share in the prior quarter. And you will hear more about this detail from our CFO, Rachael Easton shortly. But this is good because we are also continuing the progress to our expectations for a strong fiscal year ending 3/31/23 and beyond that with future earnings. Total investments at fair value at 12/31/22 increased to $760 million from $738 million at the 9/30 quarter end. And this was primarily due to successful deal activity in the quarter. We did invest $15.5 million in a dividend recapitalization as we call it of one of our existing portfolio companies. And in connection with this investment we received dividend income of $4.5 million and recognized a realized gain of $13.4 million and increased our debt investment in that company at the same time up to $40.5 million. So it accomplishes a few things, increasing our investment in a really good company, but also able to harvest income and also capital gains and these opportunities may present themselves from time-to-time and we will pursue them, because they do allow us, as I mentioned, increase our investment in a company where we know the management team, we know the business and we have a strong belief in its future. So with a buyout market still pretty frothy, this is a good way if the opportunities present themselves to create value with the portfolio and also at the same time obviously reward our shareholders. During the quarter, we also invested an additional $8.4 million to fund an add-on acquisition to one of our portfolio companies. This actually is also a good opportunity for us with a number of our portfolio companies as we grow them and build them and we will continue to fund add-on acquisitions. We did exit one investment with our debt investment being repaid and we received success fee income of $1.1 million on that particular investment. Previously announced during the quarter we did increase our monthly dividend by 6.7% to $0.08 per share, which is up from $0.075 per share for a new annual run-rate of $0.96 per share. We also paid a supplemental distribution of $0.12 per share in December of 2022. Subsequent to the quarter end, we declared a supplemental distribution of $0.24 per share, which will be paid in March of 2023. We currently anticipate being able to continue funding these supplemental distributions and they come from the recognition of realized capital gains on the equity portion and other future exits to compensate from other recapitalizations. Our Ohio focused strategy continues to successfully generate gold income from all the distributions to shareholders and of capital gains on equity, which allows us to make these supplemental distributions. And this is our game plan. Now, we did experience a very small decline in valuations in the aggregate across our portfolio. This was primarily a result of declining valuation multiples even though there were increases in the actual EBITDA at many of our portfolio companies. Our balance sheet continues to be strong, low leverage, very positive liquidity position with significant availability in our credit facility. And this will allow us to continue providing support to our portfolio companies for add-on acquisitions and interim financing if the need arises, while actively seeking new buyout opportunities and allowing us to grow our assets. So looking forward, even though there does seem to be some decline in the multiples being used to determine the values of buyouts, the market is still very competitive, being strong, and a significant liquidity in the buy-out funds who we compete with. But we will remain selective while aggressively seeking new acquisitions and we will be patient in our diligence and our review process. So briefly in summing up the quarter and looking forward, we believe the state of our portfolio is very good from a credit perspective. We have a strong liquid balance sheet. We have an active level of buyout activity and continued prospect of good earnings and distributions over the next year. So with that, I am going to turn it over to our CFO, Rachael Easton to go into some more detail. Rachael? Thanks, Dave. I will start with a summary of the fundâs operating performance for the quarter ended December 31, 2022. In the fiscal third quarter of FY â23, we generated adjusted net investment income of $10 million or $0.30 per share, up from $9.7 million or $0.29 per share in the prior quarter. We continue to believe that adjusted net investment income, which is investment income, exclusive of any capital gains based incentive fees is a useful and representative indicator of our ongoing operations. In the fiscal third quarter of FY â23, we generated total investment income of $21.6 million, an increase compared to $20.8 million in the prior quarter. The $0.8 million increase in total investment income during the quarter was primarily due to an increase in overall yields on our debt investments driven by an increase in LIBOR as well as interest income on additional debt investments made during the current quarter. The increase in total investment income was offset by an increase in net expenses to $13 million from $9.4 million in the prior quarter primarily due to a $3.1 million increase in accrued capital gains based incentive fees due to the net impact of realized and unrealized gains and losses as required under U.S. GAAP. As a result, net investment income for the quarter ended December 31, 2022 declined to $8.6 million or $0.26 per share from $11.4 million or $0.34 per share in the prior quarter. During the quarter, one portfolio company was moved to non-accrual status and we believe it will be back to paying interest in the next couple of quarters. We now have three portfolio companies that are on non-accrual status and we will continue working with these companies to get them back to non-accrual status when possible. We believe that maintaining liquidity and flexibility to support and grow our portfolio are key elements of our success. We have long-term capital in place and at December 31, 2022 had over $150 million available on our $180 million credit facility. Additionally, we raised approximately $3 million in net proceeds under our common stock ATM program. Overall, our leverage is low with an asset coverage ratio at 12/31/2022 of 250.5%. Our NAV per share increased during the quarter to $13.43 per share at 12/31/2022. This is compared to $13.31 per share at 9/30/2022. The increase here was primarily driven by $8.6 million of net investment income, $3.8 million of net realized gains on investments, $3.4 million of net unrealized depreciation on investments, and $3 million of proceeds under our ATM program. These amounts were then partially offset by $12 million of distributions that we paid to common shareholders. Consistent with prior quarters, distributable book earnings to shareholders remained strong. During the quarter, we increased our monthly distribution to $0.08 per share for a new annual run-rate of $0.96 per share and we paid a $0.12 per share supplemental distribution in December 2022. In January, we declared a $0.24 per share supplemental distribution to be paid next month in March 2023. Using the monthly distribution run-rate of $0.96 per share per year and $0.48 per share in supplemental distributions that have been paid or declared for the fiscal year, our aggregate fiscal year distributions would total $1.44 per common share or yield about 10.5% using yesterdayâs closing price of $13.70. Thank you very much. Itâs very nice, Rachael and nice that Dave and Eric both provided more information to our shareholders. This call plus the 10-Q filed at the SEC yesterday, you can also find it on our website surely brings everybody up to date. The team again has reported solid results for the quarter believe the team that is in a great position to continue success through the remainder of our fiscal year, which ends in March 31, 2023. Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions and supplemental distributions from capital gains. The team hopes to continue to show strong returns for the investment of the fund. Folks, you are now getting $0.96 per year, thatâs a 7%, nice 7% yield and then if they can pay supplementals brought it up to 10.5% for this year. So great performance back up the truck, buy a lot of shares, because I think weâre strong. You have been paying dividends for how long Dave? About 200â¦ 227, 227, thatâs just fantastic. And I think all of you know the team here is presented to you our plan for going forward and paying dividends to shareholders. So now letâs have some questions from our analysts and shareholders. And operator, if you will come on and give them the signal on how to do that? Thank you. [Operator Instructions] Our first question has come from the line of Mickey Schleien with Ladenburg. Please proceed with your questions. Yes, good morning, everyone. Dave, I understand that you said in the prepared remarks that the market for buyouts remains frothy, but are you seeing any improvement in opportunities available to you given all the risks that and headwinds that we are seeing in the market currently? Hey, Mickey. Good morning. So the short answer is we are seeing opportunities. There are still good companies out there Iâd say that we have seen even though I say frothy, frothy being defined really as from a competitive perspective still a lot of money out there to be put to work, so as a result of that the companies that are coming to market represented by good quality investment bankers, we are still seeing fairly aggressive I would call it multiples from a valuation standpoint. I would also say though that to some degree that the volume actually overall has come down slightly. There seems to be a little bit of a holding pattern right now. So some companies that perhaps might be coming to market, they are kind of holding, just to be sure, as you just sort of reflected on seeing how the earnings are going to look for the rest of the year so to speak. So instead of getting into a conversation about a reduced valuation is maybe better to hold and just wait and see how the year evolves. So all of that said, there still are good companies, we are in the process right now with a number of what we call indications of interest on some pretty decent sized businesses for us as well as actually moving into a couple of letter of intents, which means the process starts for the intense due diligence obviously that we do. So if I hope and we expect that we will do a couple of pretty decent deals this year, I think thatâs highly likely. And but again, as you well know, we are going to be very careful with our valuation metrics, because we do the debt and the equity. And we have got to be careful about that. Yes, I agree and I appreciate that. Dave, I have a few questions about portfolio credit quality given the difficult outlook for the economy so bear with me here. When did you place Edge on non-accrual? And did you reverse any previously accrued interest income on it? Yes, we placed Edge on non-accrual at the beginning of the quarter so as of October 1 and we reversed 1 month. You reversed a month, okay. And Dave, I mean, broadly speaking, what are the issues that Edge is confronting? Clearly, the previous valuation was already stressed and now itâs on non-accrual, but you mentioned that you are hoping for a positive outcome in a couple of quarters, can you â what insight can you give us into that company? Well, interestingly enough, Mickey, some cases we have and this is one of those where actually the company is generating â has cash generating cash. We might have another lender in there and there is some constraints as a result of the fixed charge coverage metrics that say the lender would be looking at. So while the company indeed might be in a position to pay our interest. So from time to time, we may have to do that. Fundamentally, I would say that the company actually is performing quite well going into the beginning of this year. And as Rachael pointed out, I would hope and expect that we indeed somewhere in the next few quarters would be able to bring that back on accrual status. Understand. And I see that you recapitalized Mountain, which has been on non-accrual for a while, but itâs still on non-accrual? Can you give us any insight into the outlook for that company? Yes, I donât think that we will come back on accrual frankly for a while. What we did was we essentially, as you well know, that has been effectively from a valuation perspective been written down for quite a while. So what we did was essentially restructure the debt at a slightly different valuation and if allowed us to therefore âwrite-off for all purposes, including tax purposes some of the debt.â So thatâs how we manage that one, but I would not honestly anticipate that coming back on accrual for some time. And does that â I mean their end user is consumers? Is it just weakness in the consumer at the Mountain and is that something we are seeing elsewhere in the portfolio? On their particular products, we have seen a little bit of softness in the December timeframe interestingly enough January, which is generally a slow month by the way for them as well. So thatâs not necessarily unusual. Looking forward, we are seeing a slight, we think a slight uptick in February, but certainly, the customer base that they have are generally these specialty stores, also places like the zoos, the institutions like Smithsonian and what have you. And there clearly has been some drop-off in activity at those levels. So, the company is kind of holding its own honestly. We have had â I think I have reflected on this over the years. We have had probably more issues around management with that particular company than we have had with some others. And thatâs as much frankly a part of it, but we are very intensively working on it and doing the things that we need to do to get the best outcome as possible. I appreciate that. Dave, you mentioned in your prepared remarks that on a net basis the decline in â or the unrealized depreciation in the portfolio outside of Old World and the Mountain was driven mostly by multiples. Is that the case at Horizon Facilities which was driven down â which was marked down relatively meaningfully or there are company performance issues there as well? But just one last thing on Horizon though, that company is very solid, very strong. And even though we have a slight decline in EBITDA and multiple you get us kind of a double whammy, but that company is, thatâs doing very â thatâs a really good company, very well managed and one that we feel very, very good about, just to be clear. Hey, good morning, guys. Thanks for taking my question. Just on the credit side of things, can you give us a sense for how your companies have been able to adjust to the higher rate environment and higher debt servicing costs and kind of how thatâs impacted the overall leverage of your portfolio? Well, Kyle, I think other than the ones who we sort of specifically talked about, as Mickey was asking, we are not seeing any stress, obviously, the some of the companies, as you well know, most of our debt has a floor, not most, in fact, all of our debt has a floor. So where we have been at LIBOR plus, the way we structure our deals, LIBOR really has to start moving up pretty dramatically before you start getting above the floors of the â on the actual loans that we have to our portfolio companies. And we have seen that obviously, a bit in a few. And as Rachael mentioned, we have seen some of the increase in net investment income as a function of having slightly higher interest coming in. But overall, we have not seen stress on the leverage of the individual portfolio companies, that is necessarily putting any of them in any real concerns at this point, so. Got it. Helpful. And then just one quick follow-up on the Old World Christmas, recap just, give us a sense for the timing, the rationale and how that impacts the overall capital structure of that company? Okay. So, this is the second time we have recapped Old World Christmas, actually. And the timing of that, we did it right near the end of the year, in December. And thatâs extremely strong company with its EBITDA, its leverage was very low. And so it was an opportunity. And itâs a great company, the management is very good. So, it was an opportunity, frankly to be able to, for us to put some more money to work, take some as I mentioned. We get some fees, obviously, from that and also it happened to lend itself to a capital gain perspective. So, the good news about that company as well, to some extent, you have a pretty good idea where the year is going to look early in the calendar year, in part because of the nature of its business. So again, I donât know what else Kyle, I can tell you on that other than, it was a great opportunity for us to be able to do another dividend recap. It allowed some of the management who have ownership position in it as well to get a bit of a reward. And then in turn, likewise, we can make a distribution to shareholders also. Thanks. Good morning everyone. Maybe wanted to just start with kind of a simple question around the portfolio yield. I am just curious, when â maybe when the floating rate loans reset from a base rate perspective. Did they reset after the end of the year, in early January? And do you expect kind of continued yield expansion out of that floating rate debt portfolio? Yes. Bryce, I will try to give an answer and then Rachael can add to that. Itâs sort of automatically, I will say happens. I donât â rate rates are starting to now it looks like maybe if not just go down, certainly stabilize. So, I am not sure we are going to see a lot more expansion in that regard above kind of where we are now with those that have gone above our floor. Rachael, do you have something you want to add to that? Yes. So, we went over the floor late last year. So, most of our â as Dave mentioned portfolio has a floor set in place, most around generally 2%. So, really in this quarter, we did see that increase in LIBOR lift our overall yield. No, I was just going to say, the weighted average yield, at least the way we are counting through the quarter and went up right about 1.3%. Thatâs obviously somewhat reflected as a result of that. But again, as I would say, I donât know that we are going to start seeing much more necessarily increase in that just because of somewhat stabilization, I think in LIBOR. Sorry, I didnât meanâ¦ Got it. Maybe I didnât â you are correct, Dave. Maybe I didnât ask it the right way. But just kind of trying to understand whether the move that we have seen in rates, is it fully reflected in that 13.4% weighted average yield, or will you get some kind of carry-through here in the March quarter? Okay. Thatâs helpful. Letâs see, from a â and maybe to follow-up on some of Mickeyâs questions around portfolio valuation. Dave, you mentioned, an overall net decline in portfolio valuation outside of Old World Christmas. But there were some notable increases from an appreciation perspective. So, can you talk about kind of whatâs going on within several of those companies, is it higher EBITDA, higher multiples, just kind of curious how you are getting to some of those higher valuations? Yes. So, I think if you look at â if I was to go through each one of these, I wonât honestly do that. But just to give you a general sense, companies such as, I donât recall them all out necessarily, but like a Brunswick Bowling, Mason West, Dema, which is one of our more recent investments, Nth Degree, which we still now have a interesting investment in, Schilling, which is consumer, somewhat related, PSI Molded Plastics. All of those had increases fundamentally as a result of EBITDA appreciation, while there was a slight decline on multiples, which of course, we donât create those thatâs given to us. So, net-net, in those companies, as an example, we saw an ability as a result of the EBITDA increases to offset any sort of multiple decline, so to speak. And then when you look at some of the others, Horizon, we mentioned that had a bit of a slight EBITDA decline and a multiple decline as well. Some of the others, Educators Resource, which is a very good company had a similar dynamic, B&T acquisition, similar dynamic. So, overall, I would say, the obvious question is, we have 25 companies in our portfolio, excuse me, which is down from 26 companies, because of the â we have exited one company, as I mentioned that we have had in the portfolio for some time. So, overall, I think the balance in the portfolio is very solid with the nature of the companies we have in the various industries that we are in. And as I look forward, obviously, hopefully, we will start seeing â I suspect we will see generally EBITDA for arguments sake just kind of continuing on a trailing 12 basis, which is obviously how we do our valuations. We will probably stay relatively stable. I would expect we might see a few increases, but nothing on a negative side necessarily, and then multiples, who knows what thatâs going to look like as we go through the end of this quarter. I would anticipate multiples would be probably, again, relatively stable, maybe slightly down. Okay. Thatâs helpful. Last one for me, around the dividend and the supplemental, it sounds like you have an intention of continuing the supplemental dividends as appropriate. Just curious kind of maybe where the estimated UTI balance is at this point? And how do you feel about that $0.48 annualized levels from a supplemental perspective, I guess how much visibility do you have into that? Yes. Well, I think Bryce, we may have talked about this. And I certainly mentioned this I think on all â most of these calls as we know. The model that we drive here at Gladstone Investment as a âbuyout fundâ, right, being a little bit unique in the in the BDC space, where we have a large percentage, relatively speaking of our investments in the equities of the companies, right. So, we are not just getting â as you well know, we are not just getting a sort of equity kicker, we actually are the dominant equity source. And thatâs our strategy and our plan. So, having said that, we are also at the same time though, want to be sure that we are very cognizant of the need to continue paying very stable monthly distributions to shareholders. And we have been able to, as David Gladstone mentioned, done that for a long, long time. We will continue doing that. And we will continue to increase those as we did roughly, I think 6.7% this period, because we are earning it on a monthly basis. And thatâs our focus. Therefore, the supplementals if you will, a little bit about, I donât want to say good news, bad news. The good news is our strategy. And our plan is to be able to continue as we harvest companies by exit, whether in the case of a supplemental coming from, say the Old World, which again is not going to happen all that frequently, these dividend recaps, frankly. But when we exit a business, we will probably have a couple of exits this year, thatâs our plan. We want to be able to do that, so we can provide the supplementals. But having said that, we are not really in a position to tell you or tell anyone that we have a plan that we are going to be able to make a distribution from supplementals in June as an example. Thatâs just not the nature of the beast. It is going to be as we can manage the portfolio, manage to exits and therefore have the ability to make supplemental, that clearly is our plan. But is going to be a little bit less certain in that regard, than certainly what we expect on our monthly distributions. And Bryce, just so you know, sometimes you see analysts out there writing information about the number of deals we have that are on non-accrual. And thatâs a comparison with all of these BDCs that are just income oriented. They donât have any capital gains or any upside. So, when you compare us to the regular BDCs, you are getting a 7% yield plus the opportunity for these increases in capital gains that go through as an extra dividend. But it shouldnât be compared. We shouldnât be compared in this company with a world of BDCs, simply because they are just lending money. We are doing both. And I think that should be taken into account. Do we have any more questions? We do not. There are no further questions. I would like to hand the call back over to you Mr. Gladstone. Alright. Thank you very much. It was very nice to have such a wonderful quarter to report. Dave and Rachael did a great job of cleaning up the place and putting money out. Itâs really nice. If there any other questions, your last chance is now, hit the button. Alright, then we will see you again next quarter. Thatâs the end of this call. Thank you. That does conclude todayâs teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
EarningCall_527	Good day, everyone. Welcome to the Natural Grocers' First Quarter Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today's call is being recorded. At this time, I'd like to turn the conference over to Ms. Jessica Thiessen, Vice President, Treasurer for Natural Grocers. Ms. Thiessen, you may begin. Good afternoon and thank you for joining us for the Natural Grocers by Vitamin Cottage first quarter fiscal year 2023 earnings conference call. On the call with me today are Kemper Isely, Co-President; and Todd Dissinger, Chief Financial Officer. As a reminder, certain information provided during this conference call are forward-looking statements based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in forward-looking statements due to a variety of factors, including the risks and uncertainties detailed in the company's most recently filed Forms 10-Q and 10-K. The company undertakes no obligation to update forward-looking statements. Today's press release is available on the company's website and a recording of this call will be available on the website at investors.naturalgrocers.com. Thank you, Jessica and good afternoon everyone. We are pleased with our start to fiscal 2023. Our first quarter daily average comparable store sales growth was 0.5% as we cycled the lift from strong pandemic trends in the prior year. Comps improved sequentially each month of the first quarter. Our three-year comp was 17.6%, representing a sequential increase in the three-year comp for each of the previous three quarters. Our differentiated offering of the highest quality natural and organic products, coupled with our marketing emphasis on value and always affordable pricing, continues to drive demand as health-conscious consumers balance economic concerns. Always affordable pricing is one of our five founding principles and is particularly relevant in the current inflationary and uncertain economic environment. We believe everyone should be able to afford to empower their nutritional health with high quality products. One facet of our affordability is everyday affordable pricing across our assortment of products. We work hard to source our products at the lowest possible cost and we regularly conduct pricing studies on our core items versus our primary competitors to ensure we meet our always affordable commitment. A second facet of our affordability is special sale pricing on hundreds of items that we offer to our {N}power loyalty members, including promotions to highlight budget-friendly options for family meals. Our {N}power loyalty program grew 18% to more than 1.8 million members by the end of the first quarter. The {N}power net sales penetration was 76%, up from 73% a year ago. The growth of our {N}power loyalty program reflects our customers' awareness of the benefits offered by the program and our deep engagement with these valuable customers. Our Natural Grocers-branded products delivered premium quality at compelling prices and represent a third facet of our affordability. In the first quarter, our Natural Grocers-branded products accounted for 7.9% of total sales, up from 7.5% a year ago, reflecting heightened customer interest in the quality and value of our entire offering as well as continued expansion of our Natural Grocers-branded assortment. During the first quarter, we launched eight new Natural Grocers-branded products. Creating access to high-quality and affordable products and nutrition education has been a part of our legacy and is fundamental to our growth. Our business model is flexible and has consistently proven successful in urban, suburban and rural communities. Reflecting this market diversity, our two newest stores include our eighth store in Denver, Colorado, which opened during the first quarter and our fifth store in Idaho in the Mountain Town of McCall. That opened in January. We are excited about serving both of these markets. We are on track to open four to six new stores and relocate one to two stores in fiscal 2023. Over the next several years, we expect to return to opening between six and eight new stores per year as we anticipate improving construction and supply chain conditions. In closing, I want to thank every member of our good4u crew for their continued hard work and commitment to delivering the highest quality natural and organic products at affordable prices and excellent customer service. Thank you, Kemper and good afternoon. The first quarter results were in line with our expectations as we anticipated the challenges of cycling the strong pandemic trends in the first quarter of last year and the impact of higher labor rates this year. Net sales increased 1.1% from the prior year period to $280.5 million. Our daily average comparable store sales increase of 0.5% was comprised of a transaction size increase of 1.7%, partially offset by a transaction count decrease of 1.2%. The 1.2% decrease in transaction count reflects the moderation of pandemic trends year-over-year, more normalized levels of travel and food away-from-home consumption and fewer SNAP EBT customer transactions. The 1.7% increase in transaction size was primarily driven by retail price inflation, partially offset by a fractional reduction in the item count per basket. We estimate that product cost inflation was approximately 8% on an annualized basis for the first quarter, lower than industry trends. Historically, our inflation rate has been more stable than conventional grocers due to our specialized supply chain. In the first quarter, we passed along the impact of product cost inflation through pricing and expect to continue to do so for the foreseeable future. The first quarter item count per basket was down by less than one item compared to the prior year and consistent with the previous four quarters. In the first quarter, our strongest performing departments were dairy, meat and grocery. The supplement comp was down low single digits compared to the prior year as we cycled strong supplement demand driven by the pandemic. However, supplement comp was up mid-single digits on a two-year basis. Gross margin decreased 30 basis points to 28.1%, primarily driven by lower product margin attributed to higher shrink, freight and distribution expenses. Store expenses as a percentage of sales in the first quarter increased 130 basis points, primarily driven by higher labor expense as a result of increased wage rates. Administrative expenses as a percentage of sales increased 30 basis points, primarily driven by higher salaries and benefits, technology amortization, and legal expenses. Net income was $4.4 million with diluted earnings per share of $0.19 in the first quarter. This compares to net income of $8.9 million or $0.39 of diluted earnings per share in the first quarter of last year. Adjusted EBITDA was $13.8 million in the first quarter. Turning to the balance sheet and cash flow, we ended the first quarter in a strong financial position with $16.9 million of cash and cash equivalents. We had no outstanding borrowings under our $50 million revolving credit facility and $13.7 million outstanding on our term loan. During the first quarter, we generated cash from operations of $21.2 million and invested $11.3 million in net capital expenditures, primarily for new and relocated stores, resulting in free cash flow of $9.9 million. Today, we announced that our Board of Directors has declared a quarterly cash dividend of $0.10 per share. The dividend will be paid on March 15th, 2023, to all stockholders of record at the close of business on February 27th, 2023. The dividend reflects our strong operating performance and financial position, confidence in our business model and commitment to returning value to our stockholders. We are reaffirming our guidance for fiscal 2023, which we first established in mid-November. Our outlook reflects first quarter results that were in line with our expectations, current operating trends, consumer trends and the uncertainty of the economic environment, including inflationary factors. Our guidance includes the following; open four to six new stores, relocate or remodel one to two stores, achieve daily average comparable store sales growth between negative 2% and positive 1%, achieve diluted earnings per share between $0.70 and $0.90, and direct $28 million to $35 million towards capital expenditures to support our growth initiatives. In closing, we are pleased with the first quarter results that were consistent with our expectations and in line with our full year guidance. We attribute our performance to our customers' appreciation for our differentiated business model, including the value proposition of high quality products at always affordable prices. We continue to be encouraged by our recent operating trends, and we are confident in our ability to drive growth and enhance value for all stakeholders. Good afternoon. Thank you for taking the question. Can you talk a little bit about the comp momentum that you're seeing in the first quarter to-date? And then in terms of the decline in units per basket that you talked about, is there any specific category that you're seeing customers pull back in terms of that metric? Okay, that's helpful. And then in terms of the units per transaction, are there any categories where you're seeing customers pull back? You mentioned that it was down less than one unit, but what are you seeing there in terms of where customers are pulling back? Okay. And then in terms of inflation, you called out the 800 basis point sort of tailwind from that in the quarter. Do you think we're at peak inflation today? What are you hearing from your suppliers in terms of their price increases that they're trying to take and how that's informing your inflation expectations for the full year? I think that we'll probably see similar inflation this quarter. The rest of the year, it's really hard to get a clear picture. Hey guys. Hope you have a good start to the year. Labor expenses, I think you guys flagged them in your press release. Clearly, it's a challenge throughout the economy. I think probably in Colorado area, it's still really tough to get people. So, how do we think about that going forward? I mean, is it a concern? Has it gotten a little bit easier? Like how are you doing that way? And is the 7% increase what we should anticipate? I think that we hopefully have cycled the annual dollar bump to everybody and won't have to do that this year. I mean, our starting wage in Colorado is now $17 plus $1 an hour [indiscernible]. The only place where you have -- where we're going to see a lot of inflation still in wages is the states and cities that have minimum wages tied to inflation. We have that up in Oregon, Denver, and Washington. Otherwise, I think that this year will be a more normal year for wage inflation. We're seeing that it's easier to staff stores already this year versus at the end of last year. Okay. So, it's interesting to hear your guys' comments just last questions about -- and in the prepared remarks that things are kind of Steady Eddie with you guys because I'm not sure that's the case in the industry. I think the industry from what we're hearing is slowing down, but you guys actually have obviously a much different model. So, maybe just kind of remind us how the business performs as the rest of not the macro necessarily, but just the rest of the grocery industry maybe has a little bit more trouble. How -- do you feel like you're not as volatile because of the attributes of your business? Or just remind us how we should be thinking about it? Well, our businesses have -- the base customers are incredibly loyal. So, that our standards -- so we -- I mean they talk about ESG nowadays. And we were kind of ESG before ESG became a popular phrase. We didn't call it as ESG, of course, but having high standards and having affordable pricing, having nutrition education, caring about the environment and caring about the people who work for us has created an environment at our stores where customers become really loyal. And so -- and then it also built because of the word of mouth. And so that makes it so that we don't have as much shifting of customers to other competitors because of that. And also we communicate to our customers through our {N}power loyalty program like three times -- at least three times a week, informing them of all of our standards, affordable prices and other attributes of our company and it really works. And Kemper, remind -- I don't know if you were public back then, but in the Great Recession, how did the company do? We did actually pretty well. We had positive comps during the Great Recession that retailers did not. So, we weren't public at the time, but we did have positive comps at the time. You did not. You did not. Okay. This is great. I think that does it for me. And it's an interesting discussion of this business actually, but just maybe a little bit more stable as things get rocky anyway. Thanks guys. And ladies and gentlemen, at this time, we've reached the end of today's question-and-answer session. I'd like to turn the floor back over to management for any closing remarks. Thank you very much for joining us to discuss our first quarter results. We are proud of our performance and our history of providing the highest quality natural and organic products at always affordable prices to the communities we serve. We look forward to speaking with you on our next call to review our second quarter 2023 results. Thank you, and have a great day. Good bye. And ladies and gentlemen, that will conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.
EarningCall_528	Ladies and gentlemen, thank you for standing by. Welcome to the Weatherford International's Fourth Quarter and Full Year 2022 Earnings Call. [Operator Instructions]. As a reminder, this event is being recorded. I would now like to turn the conference over to Mohammed Topiwala, Director Investor Relations and M&A. Sir, you may begin. Welcome, everyone, to the Weatherford International's Fourth Quarter and Full Year 2022 Conference Call. I'm joined today by Girish Saligram, President and CEO, Arun Mitra, our Executive Vice President and Chief Financial Officer; and Desmond Mills, our Chief Accounting Officer. We will start today with our prepared remarks and then open it up for questions. You may download a copy of the presentation slides corresponding to today's call from our website's Investor Relations section. I want to remind everyone that some of today's comments include forward-looking statements. These statements are subject to many risks and uncertainties that could cause our actual results to differ materially from any expectation expressed herein. Please refer to our latest Securities and Exchange Commission filings for risk factors and cautions regarding forward-looking statements. Our comments today also include non-GAAP financial measures. The underlying details and a reconciliation of GAAP to non-GAAP financial measures are included in our fourth quarter earnings press release, which can be found on our website. As a reminder, today's call is being webcast, and a recorded version will be available on our website section following the conclusion of this call. Weatherford delivered outstanding results in the fourth quarter and all of 2022, and I'm incredibly gratified, proud and humbled. Gratified that our strategy and actions have come together to deliver strong performance; proud of what we have achieved; and humbled by being given the privilege to represent the 17,700 members of the One Weatherford team and share our results with all of you. The spirit, resilience and talent of our team is the driving force behind the commercial wins, revenue growth, margin expansion and free cash flow we delivered. My immense pride and deep gratitude goes out to all of our Weatherford team. Thank you for what you do every day for our customers and the company. There are many significant milestones in our full year 2022 results. It was the first time we generated positive free cash flow for 3 consecutive years in over 3 decades. We achieved a leverage ratio of 1.4x, the lowest in over 15 years. Revenue grew year-over-year by 19%, the highest growth rate in over 10 years and perhaps most notably, we generated positive net income of $26 million, another first in over 10 years. These results clearly demonstrate the effectiveness of our refreshed operating paradigm and reaffirm the strength of our strategy to enable margin expansion and generate free cash flow. With this marking the tenth successive quarter of results that demonstrate performance, credibility, transparency and stability, we can now confidently say the turnaround at Weatherford is complete. We are the new Weatherford, a Weatherford that continues to deliver differentiation in technology and people, but now with the culture, leadership and operating paradigm around consistency and credibility of performance. As we confidently move into the next phase of our journey, we have a broader horizon and a longer range vision to deliver value. Desmond and Arun will cover more details, but I wanted to share a few of the more significant highlights of our results. Our fourth quarter 2022 revenue of $1.2 billion was up 8% sequentially and 25% year-over-year. Our focus on directed growth and pricing allowed us to grow the top line and was aided by general market activity increase. I'm especially pleased with our performance on margins and free cash flow. We delivered 22% adjusted EBITDA margins, expanding margins by 290 basis points sequentially driven by solid execution across the board. In fact, the Q4 2022 EBITDA margin is the highest that the company has achieved in any quarter in more than 12 years. The improvements we have made in our net working capital efficiencies, alongside higher adjusted EBITDA were reflected in our $171 million of free cash flow performance. This is $38 million higher than the third quarter despite $65 million in additional interest payments. We delivered $72 million of net income in Q4, leading to a full year profitability as measured by net income of $26 million. Few would have bet on Weatherford being net income positive in 2022, and we are excited to turn the page and add to shareholder equity on our balance sheet. While we clearly acknowledge the benefit of the tailwinds of a strong market, our performance improvements are equally driven by the execution intensity on our 2022 focus areas. In fulfillment, we continued our multiyear initiative and have begun to fundamentally change the company's manufacturing, sourcing and repair platform. Over the course of the year, we identified our new flagship centers, put in place a new logistics management system, and continue to make progress on facility optimization, as we have now exited over 12% of our operating facilities since 2021. I have been emphatic about not chasing revenue growth without margins and directed growth was a focus area for us to ensure that incremental revenues also provide margin lift. We complemented this with a company-wide initiative on driving price consistently and systematically as we offset the inflationary pressures from our suppliers and wage increases. Excellence in execution. Our focus area aimed at improving our enterprise effectiveness continued to progress over the course of the year. We saw improved inventory efficiency evidenced by an 11-day reduction in DSI year-over-year, in a year where revenue increased by 19%. Overall, net working capital days improved by 13 days to 91 days, an impressive achievement in a growth environment. Simplification. Our focus area to increase operational efficiency was led by several global and localized initiatives aimed at delayering and driving more accountability across the organization, resulting in overhead costs as a percentage of revenue to decline over 280 basis points on a full year basis. These initiatives are crucial in delivering our year-over-year increases of 320 basis points in EBITDA margins and $21 million of free cash flow. Over the past 3 years, Weatherford has generated $655 million of free cash flow, which exceeds the past 2 decades combined. In the fourth quarter of 2022, we also had many commercial wins, demonstrating our position as both a broad spectrum and specialty services provider, providing a solid foundation for 2023 and beyond. Kuwait Oil Company or KOC awarded us a 5-year contract to provide directional drilling and logging while drilling services, which provide fit-for-purpose solutions to overcome complex challenges. A major IOC in the Middle East awarded us a 5-year contract to provide fishing equipment and services. We attribute this win to our consistent service quality and safety performance. We won 3 awards worth more than $600 million with a Latin American customer to deliver integrated drilling and completion services in onshore and offshore operations, enabled by our technological and operational leadership. In Brazil, we secured a 2-year sole provider award with Petrobras for the provision of our newly enhanced chemical injection system, addressing the reliability and conveyance requirements of the pre-salt play. As previously announced, we received a 3-year lump sum turnkey or LSTK contract with Aramco to deliver drilling and intervention services with the possibility of extending it for 2 years and a 5-year contract exceeding $500 million from Petroleum Development Oman to deliver integrated drilling services in the Marmul and Grater Saqar fields, which is already underway. Shifting to our technology and partnership highlights for the quarter. Our Firma Plug and Abandonment team in Europe won an OWI award for significant contribution to the industry. This recognition showcases our Firma Solutions' rigorous approach to well decommissioning, resulting in reduced carbon emissions and enhance safety in every operation. We announced a partnership with Ardyne, a leader in specialized well decommissioning technology that will enable Weatherford and Ardyne to deliver significant value to customers globally by offering the industry's most comprehensive portfolio of Plug and Abandonment and Slot Recovery solutions. This partnership demonstrates our continuing commitment to innovation and value creation in the well decommissioning space and further enhancing our industry-leading Firma offering. We signed a multiyear agreement with DataRobot, a leader in artificial intelligence, to deliver advanced AI solutions in our digital platforms, including ForeSite production optimization and central well construction platforms. Now turning to our view on the markets. In North America, the last several quarters have seen a high rate of growth for drilling and completions activity, and we expect the trajectory to start flattening. We still expect North America to grow in 2023, but at a lower rate. On the supply side, we are now beginning to see signs of recovery, as logistical constraints are slowly correcting and raw materials are becoming available. On the offshore side, we are seeing signs of market activity picking up and are well positioned to capture it across our portfolio, especially with our MPD and TRS offerings. The momentum of our international markets continues to gain traction and support the multiyear up-cycle view across all segments and markets. Middle East and Latin America activity continue to be robust, and there will be incremental opportunities as activity further ramps up. In summary, the overall macro environment for the sector continues to be supported by solid fundamentals despite continued inflationary and geopolitical headwinds. Our ability to carry our momentum forward is evident in the commercial wins in 2022, including over $6.5 billion of wins with IOCs and NOCs across our broad customer footprint. In the coming quarters, we will begin to see the impact of our new contracts, technology advancements and partnerships, as we continue to focus on margins, cash flow and positioning the company for success over the long term. Our confidence in the growing revenue pipeline and intense focus on driving lean business operations enable us to envision low to mid-20% EBITDA margins over the next few years. We also added a new member to our leadership team. In January, Arun Mitra joined Weatherford as Executive Vice President and Chief Financial Officer. Arun's decision to join Weatherford speaks volumes to the caliber of talent we attract as a best-in-class organization. Arun, we are thrilled to have you on our team. Before I hand things over to Arun, I'd like to thank Desmond Mills for his service as our interim Chief Financial Officer and his continued leadership in guiding our finance team. With that, I'd now like to hand it over to Desmond to talk more specifically about our financial performance this quarter, followed by Arun to walk us through the guidance for the first quarter and full year of 2023. Thank you, Girish. Good morning. and thank you, everyone, for joining us on the call. I'll begin with our consolidated results and then move into our segment results, liquidity and cash flows. As Girish outlined, we had a stellar fourth quarter to close out the full year with great momentum. Full year 2022 revenue of $4.33 billion grew 19% as all segments experienced growth with adjusted EBITDA of $817 million or 18.9%, adjusted EBITDA margin, a 320 basis point improvement. Revenue for the fourth quarter of 2022 was $1.21 billion, an increase of 8% sequentially and 25% year-over-year. Operating income was $169 million in the fourth quarter of 2022 compared to $121 million in the third quarter of 2022 and $33 million in the fourth quarter of 2021. Net income was $72 million compared to $28 million in the third quarter of 2022 and a net loss of $161 million in the fourth quarter of 2021. Adjusted EBITDA of $266 million in the fourth quarter increased 24% sequentially and 73% year-over-year with adjusted EBITDA margin of 22%, a sequential improvement of 290 basis points. These results were primarily driven by increased activity, share improvement and pricing across all of our segments, coupled with successful execution across the focus areas we laid out for ourselves in 2022. Now moving into segment results. Drilling and Evaluation or DRE revenues of $371 million increased by $23 million or 7% sequentially, mainly driven by higher volumes and price increases for drilling services and higher wireline and managed pressure drilling activity in Latin America and Middle East, North Africa, Asia regions. Segment adjusted EBITDA of $111 million increased by $26 million or 31% sequentially, leading all segments with Q4 adjusted EBITDA of nearly 30%, 550 basis points higher than Q3. This increase is largely attributable to price increases to certain drilling services contracts, which were retroactive back to Q3. Additionally, we achieved higher fall-throughs from increased activity in drilling services. Well construction and completion or WCC revenues of $403 million increased by $12 million or 3% sequentially, primarily driven by higher cementation and liner hanger products in the Middle East, North Africa, Asia and Latin America regions. Segment adjusted EBITDA of $87 million increased by $9 million or 12% sequentially, largely due to higher fall-through and execution efficiencies for cementation and liner hanger products in the Middle East, North Africa, Asia and Latin America regions. Production and Intervention or PRI revenues of $407 million increased by $50 million or 14% sequentially, primarily driven by higher international pressure pumping activity along with higher artificial lift activity in North America. Segment adjusted EBITDA of $88 million increased by $22 million or 33% sequentially, mainly due to higher margin fall-through for pressure pumping overall. Turning to liquidity and cash flows. For the full year 2022, operating cash flow was $349 million and free cash flow was $299 million. In the fourth quarter, net cash provided by operating activities was $193 million, an increase of $33 million and free cash flow was $171 million, an increase of $38 million sequentially. These improvements were primarily driven by higher EBITDA margins as well as improved working capital efficiencies, especially around inventory utilization. We drove outstanding performance with DSI metrics improving by 7 days to end the quarter at 51 days on improved sales and operational plan execution. We made a lot of progress improving operational efficiencies as seen from our cost of products and services, which as a percentage of revenue was 70% in 2022 compared to 74.5% in 2021, an improvement of 450 basis points. This is reflective of the high utilization on a more efficient operating cost structure, coupled with price improvements, which offset some of the impacts from supply chain disruptions and inflationary headwinds. We are beginning to see the working capital benefits of our ongoing fulfillment and inventory optimization initiatives. The improvements are evidenced by our year-end inventory levels, which were up less than 3% compared to 2021, despite a 19% increase in revenue. We ended the fourth quarter of 2022 with total cash of approximately $1.1 billion as of December 31, 2022, down $31 million sequentially, reflecting payments made to pay down some of our debt. During the fourth quarter, we completed the debt paydown of previously announced redemption of the $125 million principal amount of our 11% senior notes due in 2024. In addition, we are also opportunistic in buying back some of our debt on the open market as we optimize the economics of our debt paydown by open market purchases, all below par. We bought $8 million of our 6.5% secured notes during the fourth quarter and an additional $11 million in January 2023. Finally, we also redeemed a further $20 million of our 11% senior notes in January 2023 by calling it in December 2022. In total, since the beginning of 2022, we have now paid down a total of $214 million of debt as we continue to improve our debt profile and reduce annual interest expense by approximately $23 million. Our overall debt stack at this point comprises $1.6 billion of senior notes due in 2030 at 8.625%, $481 million of secured notes due in 2028 at 6.5% and the original exit note stub of $105 million due in 2024 at 11%. Finally, during the fourth quarter of 2022, Standard & Poor upgraded our credit rating to B and we also increased the aggregate amount available under our credit facility to $400 million. Thanks all for your time today. I will now pass the call to Arun for his comments on the outlook for the first quarter and full year 2023. Thank you, Girish, for the introduction and Desmond for supporting me with the 2022 commentary, and good morning, everyone. I just wrapped up my first full month here, and it's been a busy one. I'm truly excited to be part of an organization that has achieved so much in such a short span. I look forward to contributing to the company's strategic direction and driving further financial performance as we pivot to position the company to generate sustainable returns over the longer term. In the first quarter of 2023, we expect consolidated revenues to grow on a year-over-year basis by mid- to high teens. However, there will be the usual Q4 to Q1 sequential decline by mid- to high single digits, mainly driven by seasonality and some FX impacts. Across the segments, DRE revenue is expected to decline in the high single digits. WCC is expected to increase low to mid-single digits and PRI is expected to decline by mid- to high teens, mainly driven by seasonality. Adjusted EBITDA margins for the first quarter of 2023 are expected to decline by 150 to 200 basis points, compared to the record fourth quarter we experienced in 2022, which was augmented by catch-up pricing adjustments. So normalized for Q4, the decline is around 50 to 100 basis points. Although the margins will witness a seasonal decline in Q1, they are still expected to be over 20%. CapEx is expected to range between $40 million to $60 million and free cash flow will be in the range of negative $15 million to negative $35 million due to seasonal working capital payments during the quarter. Our full year 2023 consolidated revenues are expected to grow by low double digits to mid-teens compared to 2022, driven by mid-single-digits growth in North America, mid-teens growth internationally, excluding Russia, with our Russia business expected to be a drag on overall company growth. Across the segments, DRE is forecasted to deliver mid- to high single-digits growth, WCC to deliver in the mid- to high teens growth, and PRI to deliver mid- to high single digits growth. There continue to be multiple headwinds highlighted by labor inflation, geopolitical uncertainty and supply chain disruptions. 2023 will also be a year where we invest in the company for the longer term and also have some start-up costs on the new contracts we have announced. Regardless, we are confident in our ability to deliver margin expansion and cash flow generation. We also have visibility to some significant opportunities and we fully expect to offset the aforementioned risk and have a slight bias to the upside. As a result, full year consolidated adjusted EBITDA margins are expected to expand by at least 100 basis points over 2022. We expect 2023 free cash flow to be in line with 2022 with a slight bias to growth in spite of higher CapEx and net working capital. CapEx for the full year is expected to be in the range of $200 million to $230 million. As in our prior years, our CapEx will be a metered spend with rigor around delivering returns and within the 3% to 5% range we've previously discussed. Thanks, Arun. As we take a final lap on 2022 and take time to communicate and celebrate these results, we are also very clear that now is not the time to rest. Rather, we are marching forward with a renewed, refreshed and rejuvenated sense of purpose. As we are moving on to the next phase of our journey, I will share our strategic imperatives. However, this time around, our priorities are broader and will be a multiyear journey. The first and foremost priority remains financial performance. We successfully demonstrated in 2022 that we could achieve growth along with margin expansion and positive cash flow. For 2023 and beyond, we are driving to ensure cash flow generation is cycle agnostic. While taking advantage of the up cycle, we will drive cost efficiencies and technology differentiation to provide greater leverage now and enhanced support in a different cycle. The second priority is organizational vitality. Our goal is to upskill and develop our team to meet industry challenges and continue to lead. We will drive greater focus and investment in training and development across all levels of the company. But like all other investments, this will also have a rigorous payback lens. We want to attract great talent, but more importantly, develop, engage and retain our team to grow their careers in the manner they aspire to. Next, we have customer experience. Customers will continue to be the focal point of everything we do. As we build our opportunity pipeline, we want to ensure that we employ robust processes, solutions, technologies and data that help us achieve both customer success and satisfaction. As we forge ahead, we want to look at building a sticky customer base through our approach of delivering services. Despite the continuing logistical challenges faced by the industry, we will endeavor to maintain our uptime for our customers and minimize our total incident rate. The fourth priority is lean operations. Efficiency and waste elimination will be the motives that guide all our internal processes. Our ultimate goal is to provide value to the customer, and this will be achieved on the back of nimble and agile operations. This will be achieved through a combination of various factors such as maximizing the value per dollar spent on support costs, increasing asset utilization efficiency and tightening the working capital cycle. This is a very significant change for our company as we bring together disparate systems, processes and workflows built on [indiscernible] acquisitions and become a more integrated company. Our final priority is creating the future. Innovation is the key tenet to achieving this objective. Our focus will be to enable our people to understand the needs of our customers and to introduce new products and services that create a unique value proposition for our customers and differentiate us in the market. We will continue to actively engage in further building our core products and services, energy transition and digital portfolios, thereby positioning ourselves for the next decade. As a responsible organization that is committed to its sustainability journey, Weatherford will continue to advance our ESG strategies and collaborate with stakeholders to achieve our net zero commitments. We have come a long way, and our progress energizes and reassures me that we are on the right path. I've seen what this organization is capable of, and I'm excited about the journey ahead. Congrats on a great quarter. And welcome to the team, Arun. And I know, Chuck, you've been there a little longer but welcome as well. I was curious I guess, maybe for you, first question for me. You laid out the 5 priorities going forward, all important priorities and really shows a company that's much matured from where Weatherford was just several years ago. If you had to pick kind of 1 or 2 of those priorities as kind of keys to success, what would those 2 be? I understand that all 5 are important, but what were the key 1 or 2 messages that we should take away? Yes. So a great question, James. Look, I think at the end of the day, financial performance, frankly, is an output of everything that we do. So the way I look at it, for us, we have to -- you're 100% right. We have to do all of it. But this whole notion of lean operations and customer experience, I think that external focus on delivering to customers and how we deliver it internally really brings everything together and ultimately drives our ability to be more efficient and more effective. Okay. Okay. Fair enough. And then just looking at your strengths in MPD and TRS and really just these nice inflection and acceleration that we're seeing offshore and in particular in deep water. Could you maybe talk for a minute about how well positioned you guys are there? And if there are any kind of geographical or product holes you need to fill? Yes. So look, we are excited as we referenced a little bit in our prepared remarks on the offshore inflection. Look, the industry is starting to adopt MPD a little bit more. So that's, I think, a big positive for us given our leading-edge technology in that space. And as we have said multiple types for both MPD and TRS have a bit more of an exaggerated value proposition on the offshore piece. So look, we don't think we've got any gaps per se, but we continue to drive new product development to position us at multiple different application levels and different price points. So we're excited about a couple of things that we've got coming through the pipeline that we'll be talking about over the course of the year. Girish, congrats on a pretty remarkable turnaround here. I wanted to see, you gave us the outlook and briefly touched on the geo markets. I was wondering if you could expand on the geo markets and the outlook for each of these in '23? Sure. Look, I'll start with North America. Again, we expect North America to grow. But as you look at last year, we grew over 20% in North America. So certainly not anything close to that kind of a rate. I think probably instead of the mid- to high single digits is where we see the North America business going. Again, this offshore inflection will help a little bit, especially on the Gulf of Mexico side. Look, Latin America was probably -- if you look at just on a numbers basis, it was our most robust region, grew 30% last year. We are still continuing to be excited about Latin America, but that will again taper down a little bit. We got the bulk of our growth. And so this year, we will be building on that and driving margin expansion. Middle East is probably the area we're the most excited about, as I've referenced multiple times on the call. We think the Middle East growth will be head and shoulders above all of the other regions, and will really spearhead the overall company growth and should be high teens to 20-plus percent just on a stand-alone basis. And then you've got Europe and Russia, and especially Russia, as we mentioned, will be a little bit of a drag. Look Russia continues to be a complex environment. There's a lot of volatility on currency. So it's a little bit hard to predict exactly where that will go. We think Europe will grow outside of that, but probably not to the level of any of these other regions. So hopefully, that gives you a little bit more of a perspective. Yes, absolutely. And then on the margin side, you talked about your goal to get to the low to mid-20% EBITDA range over the next few years. Of course, you get the low 20% range on a quarterly basis in 4Q. Can you talk a little bit about what it takes and maybe bridge the gap to get to the mid-20% margin level? Yes. So I think, look, a couple of things, Luke, that are important, as Arun pointed out and Desmond referenced, right? In our Q4 numbers, we had a little bit of a pricing catch up. The total year numbers, everything sort of still fits within that envelope. But there was a little bit of a catch-up that really should be attributed to Q3. So net-net, it's probably about 50 to 100 basis points. If you look at it from that perspective, I think we will continue to see very strong and solid margin expansion this year on an operational basis, and we'll continue to drive that. Having said that, we have this year a couple of things going on. The first piece is we have a few investments that we have talked about all over the course of last year in systems, in our processes, that we are going to be very, very diligent about, very conscious and we'll do it in a metered fashion, but we have to get this company ready for the next decade or 2. So that's going to come in a little bit over the course of the year. And the second is our new contracts have some start-up costs, especially in the second and maybe a little bit in the third quarter. So we've got a little bit of that. But I think once we are sort of passed that as we get our fulfillment network and our overall platform around repair and maintenance fully established, and it should be in a much better state by the end of this year, as we are able to bring out more new technology, I think we will be able to then look at '24 as really the year where we transition into that sort of a realm on a consistent basis. You talked about a lot of improvements in working capital in 2022. Are you now in a position to talk about normalized free cash flow conversion from EBITDA just yet? And if not, what else do you need to see happen before you get there? Ati, look, I think a couple of things, right? Normalized is a very broad word for -- and it's all relative to a certain extent. I think we have made some tremendous progress on working capital efficiencies but I don't believe we are fully done yet. Look, the other thing for us is you have to recognize as you think about EBITDA to free cash flow conversion is we still have a sizable chunk of debt, right? So our debt and our interest payments, while they're very manageable now, our blended cost of debt is approximately 8%, which in today's market is very competitive. We think we can certainly manage that, but it does create a little bit of a bump, if you will, on that conversion ratio. So I think we've got to take a little bit more time. And hopefully, by the second half of this year, we'll be able to talk a little bit more about from your perspective, what that normalized sense means. But we still think we've got opportunities to improve our overall working capital side, especially on our payable side. Got it. And then, Arun, maybe one for you. Firstly, congratulations on the role, and we look forward to working with you. I'd like to get your view on what your key areas of focus are for the firm as you think about the role? And how do you think about the capital allocation priorities for the firm in terms of just the milestones you would like to achieve? Thank you, Ati. Yes, I'm very excited to be in the role, a lot of work to be done, but a tremendous amount of progress has already been made and the excitement is palpable. So I'm very excited to be here. But I think to -- as Girish mentioned earlier, there is still work to be done on the working capital optimization. So I'd like to get to, on an unlevered basis, 40% to 50% conversion. In terms of capital allocation priorities, as Girish has mentioned several times in the past, our priority is to recalibrate our debt structure, work on our debt, keep paying down debt, so that we have the flexibility and the resilience on our balance sheet when the down cycle hits. So resilience of the balance sheet is a clear priority at this stage. Congrats on great results, the others have said. My first question is, I've been listening to all week BP, Shell and Total and others. They claim that they're saying mid -- low single-digit inflation on all of their CapEx. And of course, we've heard that story before from those guys and then it all goes in a different direction. But I'm just wondering, can you help me reconcile that with the obvious margin expansion we're seeing in the U.S. oilfield service sector yourselves included? I'm just wondering, do you not do much work for the majors? Is that the answer? And then secondly, more philosophically, traditionally very cyclical sector and 20%, 25% EBITDA margins maybe to look forward to in the next few years. But then inevitably, at some point, we worry about an activity decline. And in the past, the sector has behaved by getting rid of lots of people. And it sounds like your -- over the last few analyst calls, you're trying to take a different approach with the new Weatherford. And I'm wondering how would you envisage riding through the next downturn, whenever it may be, hopefully, many years from now, but when it comes, will it just be another slash 50% of the workforce? Or do you see a different path for Weatherford ahead? Yes, James, both great questions. Thank you. Look, on the first one, I am never going to tell you that we do enough for any kind of a customer anywhere, we'd love to do more for all of them. But look, we do have a very wide mix. And again, as you look at our company, right, we have talked multiple times about our revenue mix, it is much more internationally geared, right? So 75% of our revenues are outside of North America. So as a result, we do have a greater proportion of preponderance of NOCs versus the IOCs. So -- and look, we do work with all of the companies that you mentioned. They're all very important and strategic customers for us, along with a lot of the different NOCs. Look, when it comes to margin expansion, as we have talked to you, pricing is certainly a factor in that. But in addition to pricing, you have 2 other effects, right? The first is us working on our cost structure and improving the efficiencies on that. And second is just a very simple sort of mathematical view of fall-throughs as they come in with -- on the same cost base because we don't add cost at that same level on a total company basis. So I think that's what gives us that margin expansion, and we continue to have optimism about being able to expand it into the future. So having said that, look, your second question, I think, is really important and you're right. Look, we've tried to look at it very differently for the last couple of years. One of the tenets that I've spoken about multiple times is that we are willing to give up a little bit of that upside in this up cycle to make sure that we are fixing the company and we are protecting it on the downside when inevitably the cycle will turn. Look, like everyone else, we hope and we believe, at this point, it's not going to be any time in the immediate future. But we are trying to build a company that is more cycle-agnostic, that is a little bit more cycle proof, if you will. And that mentality of as soon as you have a down cycle, you slash and burn your employee base, just doesn't work, that's no way to run an organization. So we are really working on scalable infrastructure. Look, as you look at our revenue growth, we exited 2020 with a run rate of approximately $3 billion. If you look at what we are guiding to, our exit run rate this year is going to be 60% higher than that. But our employee base has not even gone up 10%, right? So it's a dramatic change in the way we are leveraging our resource base, how we are utilizing third-party labor and just getting more efficiency, but also driving automation into our services, into how we deliver to our customers. And again, that's also a big part of the margin expansion that we see. Girish, I wanted to approach the margin outlook a little differently. Last year, Weatherford Group EBITDA margin's more than 300 basis points. Guidance for this year calls for at least 100 basis points of margin improvement and full disclosure, I'm trying to gauge the potential upside to that, but what assumptions around pricing benefits from the fulfillment initiatives are really needed just to reach that 100 basis point of margin expansion? Yes. Doug, look, I will start off with saying our mentality and our approach of really being credible in terms of the guidance that we give and making sure that we have a pathway and a line of sight and having full transparency on how we get there and what changes, has not changed at all. If you recollect, even last year, look, we started at, at least 50 basis points, and we worked our way up as we saw more, and we saw activity in [indiscernible]. Look, as we have planned out this year, we have built in some assumptions on cost increases in terms of inflation. We have built in assumptions on wage increases. This is a high inflationary environment for all of our team members, so we are going to be doing a merit increase. That's something that's very important. And we have, as Arun mentioned, some start-up costs on these new contracts, nothing untoward, nothing that is concerning, but it's just a timing factor. These are long-range contracts, 3 years for the one in Saudi and 5 years for the one in Oman. So we will have a little bit of an impact this year. But look, we do believe that pricing is going to continue to be a factor that is a positive contributor, but probably not to the extent that it was last year. We were able to get some very significant benefits, especially in the fourth quarter as we worked with customers and were able to explain our value proposition as well as our cost base. So we think all of these -- look, we haven't broken it down in a quantitative fashion to give you the exact walk, but all of that feeds into, say, 100 basis points at least of margin expansion. And as we come back each quarter like we have done in the past, we will provide you with a granular update of where we see things and how much progress we have made on the initiatives to drive that. That all sounds very reasonable. Europe, SSA and Russia revenue grew 22% sequentially. Just can you highlight which countries were the primary drivers of this growth? So again, Doug, we don't break it out by country. But look, we had multiple growth areas. And you have to also look at it on a quarterly sequential basis but also on a total year basis. If you look at it on a total year basis, it was only a 4% growth year-over-year. So we also highlight some of the challenges that we see as opposed to the other regions. Fair. And then Arun, you touched base on this a little bit, but I just want to get a little more color on what attracted you to Weatherford and maybe get your initial assessment of the internal systems and maybe down the road, would you anticipate providing segment guidance, not just total company revenue guidance? Yes. Thanks for the question. This is a question which has been asked pretty frequently in the recent past. And my common answer has been, I don't know what I was thinking, I should have been here a year ago. So this has been -- the excitement in the team is palpable. This does not look anywhere close to being a company, which had an existential crisis 3 years ago. This is a company which is on a platform to drive growth and continued margin expansion. So -- and although there was -- there is still a little bit of negative imperative out there in terms of when you Google Weatherford, if you dig deeper and understand what this management team has been able to accomplish over the last 2.5 years, it's extraordinary. And of course, Girish has been able to put together a super management team, communication vertically, horizontally is very transparent. And some of the grassroot levels based on what I've seen in the last 30 days, there is alignment in the strategic direction of the company. So I'm very excited. We don't do segment EBITDA margin disclosures. So as Girish highlighted earlier, the 100 -- the at least 100 basis points expansion compared to 2022, we do see an upside bias to it, but we'll be able to give you guys more color as the quarters progress in 2023. Yes. And Doug, look, if I could just add to that. We are very committed to transparency, but we also need to make sure that we give you things that are constructive and helpful versus giving you more information that will just lead to more questions. Our job is to manage all of this together. And we always give you the full details on our retroactive base of exactly what happened in each segment, so to get a bit of a better sense around the company. Look, given our size and scale, we still have a situation where individual product lines in a single country do have an effect, and we've got to manage that at a holistic level. Congrats on a great quarter. I don't say that very often either. Just -- you mentioned the capital allocation priorities. You're focused on recalibrating the debt structure. Can you just give us a little bit more color how you're thinking about that? And what is the right debt number today? Yes. So Gregg, I'll take that. Arun and I have just started to have a lot of discussions as he's coming up to speed on that. Look, we have not explicitly laid out a leverage target or a specific debt number. But look, our priority has been to, first and foremost, take out the high cost of debt stuff or the stuff that we still have left. We took out another $20 million of that. We paid it down in January, we called it in December. So we're left at $105 million. The call premium on that goes away in December. So we'll continue to look at the economics on that. But I think suffice to say, look, that won't be an issue on the longer term. We will get that taken care of. And look, what we started doing on an opportunistic basis in the fourth quarter, as we saw our bonds dipped below par a little bit just given the market volatility, we went in and got some of -- we were able to buy back some of those bonds. So look, we want to continue to pare down that cost of debt. Like I mentioned earlier, blended sort of 8%, we think, is very competitive, but we'd still like to bring that quantum down a little bit more. I think, look, once we are able to get our retrenching down the credit facilities, we get a few more quarters under our belt, we'll be able to come back and have a bit more of a specific conversation about that. So I would just ask for a tad bit more patience on that. But just look, it continues to be the biggest priority for us. Right. And just last quarter, you put in place a new revolver. One of the -- I think one of the benefits of that facility was the ability to release some of the cash that's collateralized for LCs. Have you made any progress with being able to release cash? Is that something -- is there a way to think about how that may play out over the year? Yes, Gregg, I'll take that. Based on what I've seen, I think we are on target to release about $15 million in Q1 and another $20 million in Q2. So we should be able to free up restricted cash to the extent of $70 million through the first half of the year. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to management for any final remarks. Great. Thank you all for joining and taking the time today. We look forward to coming back towards the end of April and sharing our Q1 results. Thank you all.
EarningCall_529	Good morning, everyone, and welcome to United States Steel Corporation's Fourth Quarter and Full Year 2022 Earnings Conference Call and Webcast. As a reminder, today's call is being recorded. Good morning, and thank you for joining our fourth quarter and full year 2022 earnings call. Joining me on today's call is U.S. Steel President and CEO, Dave Burritt; Senior Vice President and CFO, Jessica Graziano; and Senior Vice President and Chief Strategy and Sustainability Officer, Rich Fruehauf. This morning, we posted slides to accompany today's prepared remarks. These can be found on the U.S. Steel Investors page under the Events and Presentations section. Before we start, let me remind you that some information provided during this call may include forward-looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties as described in our SEC filings, and actual future results may vary materially. Forward-looking statements in the press release that we issued yesterday, along with our remarks today, are made as of today, and we undertake no duty to update them as actual events unfold. I would now like to turn the conference call over to U.S. Steel President and CEO, Dave Burritt, who will begin on Slide 4. Thank you, Kevin, and good morning to everyone joining us today. We appreciate your continued support of U.S. Steel. We safely delivered another profitable quarter as we end a strong year of operational, financial and strategic performance and advanced our Best for All strategy. We are pleased but not satisfied, and we are focused on moving faster towards our future. 2023 will be our most transformational year yet as we continue to unlock the stockholder value of our Best for All strategy. In summary, we are bullish, we are confident, we are transitioning to greater stockholder value, we are focused on our competitive advantages and we are delivering on our strategy. I will start my remarks with a recap of the past year. In 2022, we delivered some all-time record performances, best safety and environmental performance in our history, best execution on strategic projects, delivering greater returns that far exceeded the weighted average cost of capital. Best cash and liquidity positions of $3.5 billion and $5.9 billion, respectively, best year-end balance sheet ever with 0.2 times net adjusted debt to EBITDA, best strategic market volumes, second best adjusted EBITDA of $4.2 billion and second best free cash flow of $1.8 billion. We also delivered on a breakthrough collective bargaining agreement with United Steelworkers. Instead of falling in line with other union agreements, we broke pattern from a competitor and took the time to negotiate a fair agreement where our employees continue to do well when the company does well. The agreement truly is best for all, and includes over four years $3 billion lower capital commitments versus a competitor, $200 million cost advantage versus a competitor and $300 million of cash benefits. The wins of the past year were experienced throughout the enterprise and across our businesses and our ability to perform at our best level so far translated to stockholder value. While steel prices retreated throughout the year, our stock increased in value and performed better versus prior cycles on a relative basis than most of our peer group. That's only the start. And that resiliency is a proof point that our strategy is working. And we remain committed to delivering even better returns for our investors and we focus -- as we focus on the continued execution of our strategy. We're just getting started. Focused execution starts with safety, and I'm pleased that we achieved another record year of safety performance. Our days away from work, safety performance is industry-leading by a long shot, 18 times better than the most recent Bureau of Labor Statistics' iron and steel data. Record safety has become a drumbeat at U.S. Steel. 2022 better than 2021. 2021 better than 2020. 2020 better than 2019. As the best in the industry, we expect that drumbeat to carry forward into 2023. Safety results are table stakes for operational excellence. Great safety translates to great operations. Our drumbeat of improvement also continues across other key priorities, including strategic project execution. In spite of inflationary pressures and supply chain delays, I am pleased to report we remain on time and on budget. While others in the industry have not been able to overcome these challenges, we remain confident in our ability to execute our best for all future safely. You know all of this, but it's worth repeating. We are bullish on U.S. Steel's future. Our future is less cost-intensive, less capital-intensive, less carbon-intensive and enables us to become the best steel competitor as measured by EBITDA multiple improvement in the near term and best customer and stockholder value longer term. To become the best, we are transforming our business model by expanding our competitive advantages in low-cost iron ore, Mini Mill steelmaking and best-in-class finishing. We are also generating value through a balanced capital allocation framework, maintaining our strong balance sheet, investing in capabilities that grow our competitive advantages and generate returns in excess of our cost of capital and returning capital to stockholders. And with the added support of continued strong trade enforcement, our path forward to our Best for All strategy is becoming a reality. So, this morning, I want to spend some time talking about that reality, a reality that we are achieving with each quarter of strong performance and strategic execution. And while I know it's easy for many to focus on just the short term, I want to create the drumbeat for our future, a future that is delivering for our customers, our employees, our planet and most importantly, you, our stockholders. Let's get into today's discussion on Slide 5. Our Best for All strategy is focused on value creation, ESG transformation and disruptive innovation. The strategy we are executing is delivering our low-cost iron ore and a differentiated metallic strategy; our transition to Mini Mill steelmaking, which serves as a catalyst to generate increased and resilient free cash flow and our best-in-class finishing capabilities are crucial to sustainable steel solutions. Finishing assets in Gary Works and Protech are unmatched today. These solutions align with our customers' priorities and support our bold 2030 and 2050 sustainability goals. Innovation is the name of the game and disruption in the steel industry is inevitable. We intend to innovate to disrupt. Steelmaking innovations expected from Big River II should extend our leadership role in producing advanced grades with up to 80% fewer greenhouse gas emissions. We recently brought in innovative expertise to accelerate our strategy execution. Christian Gianni joined the company in the fourth quarter as Senior Vice President and Chief Technology Officer. Christian's extensive background in product development will be key to driving further innovation with and for our customers. John Gordon also recently joined U.S. Steel as Senior Vice President, Raw Materials and Sustainable Resources. John is unlocking greater stockholder value from our unique low-cost iron ore competitive advantage. His extensive and diversified mining background make him uniquely suited for leading this core, sustainable competitive strength. Let's start with our low-cost iron ore advantage and metallic strategy. U.S. Steel has been and continues to be the low-cost producer of iron ore in Northern Minnesota. Low-cost iron ore has historically been a competitive advantage as a key component of the supply chain for our integrated blast furnace operations. That value remains today. This advantage will grow our value creation potential as we continue to execute our differentiated metallic strategy in our transforming footprint with state-of-the-art Mini Mill steelmaking. If the geopolitical events of the past couple of years have taught us anything, it is a strong supply chain secured access to raw materials and production capabilities matter. That is why U.S. Steel is creating value for stockholders by investing in internally sourced pig iron at Gary Works and expanding our capabilities to produce higher grades of pellets at our Keetac operations. Our investment in up to 500,000 tons of pig iron production at our Gary Works facility was completed ahead of schedule and on budget, with the first barge of pig iron received at Big River Steel on January 6. My thanks to the construction team at Gary Works for the excellent work and your focus on safety, we had zero recordable injuries in over 185,000 hours worked. Safety First was a term invented by U.S. Steel and remains our top priority. Our team runs operations with high quality safely. As the metallics headwinds of the back-half of 2022 ease for our Mini Mill operations, our investment in pig iron will only help to amplify the positive momentum we are experiencing as we enter 2023. The pace of change at U.S. Steel is accelerating, and we have no intention of slowing down. Our ability to invest in capabilities that generate value and buy back our stock is enabled by more resilient levels of free cash flow. We've moved quickly to create a business model that increasingly supports growth and direct returns to stockholders. Next on Mini Mill steelmaking. As we continue to shift our domestic steelmaking volumes from integrated to electric arc furnace production, we are not only transforming the way we make steel, which is greener and with best capabilities, but we are also transforming the earnings power of steelmaking for our company, delivering higher margins and higher and more resilient free cash flow that's powerful value creation. And I'll go as far as say U.S. Steel provides the best opportunity to create improved stockholder value in the sector today. We believe EBITDA multiple expansion is within sight. In just a few short years, we've created a Mini Mill road map that we expect will deliver 6 million tons of Mini Mill capabilities and annual through-cycle EBITDA of $1.3 billion and annual through-cycle free cash flow generation of $1 billion or more. Note that I said through cycle, and those numbers I provided represent earnings power and free cash flow generation that our company has never had before. It bears repeating that is powerful stockholder value creation. Now it's up to all of us at U.S. Steel to continue to execute. Our focus is winning today because when we win, all our stockholders win -- stakeholders win, and that includes our customers who are pleased to serve by producing sustainable steel solutions with best-in-class finishing capabilities. This year, we expect to complete another important milestone in our Best for All strategy that will expand our offering of sustainable lower greenhouse gas emission steel at Big River. We are on track to bring to market thinner and wider non-grain-oriented electrical steels in the third quarter. These steels will add to our differentiated portfolio of strategic market capabilities by directly supporting the growth in the electrical vehicle market. Our investment in electrical steel finishing capabilities is expected to add an additional $140 million of through-cycle earnings power to our business, expand our Big River margins by about 400 basis points and adds another layer of free cash flow from the Mini Mill segment. At U.S. Steel, our customers are already partnering with us on advanced high-strength steel and Vertex steel. And soon, we will add electrical steel to the portfolio. Our customers are reimagining their own sourcing strategies, including our automotive customers. And we are pleased and eager to continue to serve our long-term relationships with them as their needs change. We truly value our customers' partnership. We captured share for 2023 from those that don't share our customer-first mindset and welcome additional opportunities to best serve customers this year and in the future. So that's our drumbeat for the future. Best iron ore to create a differentiated metallic strategy, best Mini Mill performance to fuel a free cash flow engine and best-in-class finishing capabilities to deliver our customers the sustainable steel solutions they crave. These investments will deliver long-term value, incremental free cash flow and returns in excess of our cost of capital. Before I pass it to Jess, let me provide a brief market update on Slide 6. Our [indiscernible] and Mini Mill segments have positive momentum where we saw economic and industry trends improved through the end of the fourth quarter and the start of the year. Prices are increasingly supported by rising scrap costs, increasing global metallics and iron ore prices and extending lead times. We were successful in our annual contract negotiations for the beginning of the year. We continue capturing market share. We continue securing additional automotive volumes at Big River. This success is a product of close customer alignment and our preparedness to support our OEMs' transition to Mini Mills and our product development, collaboration and research capabilities. In Europe, significant challenges remain. Steel prices are increasing from a very low base and are beginning to offset high energy and increasing raw material costs that continue to pressure segment performance. In Tubular, today's energy market remained stable with consistent demand supported by strong trade enforcement. Thanks, Dave, and good morning, everyone. I'll pick up on Slide 7. As Dave described, we've moved quickly to create a business model that creates value for stockholders today and tomorrow and increasingly supports growth and direct returns. Since December 2021, we have consistently included share repurchases as part of those direct returns and through year-end, have returned $1 billion to shareholders with buybacks. In addition to our regular dividends, that includes $150 million in repurchases completed in the fourth quarter. When you consider repurchases to date, we've reduced our diluted share count by approximately 15%. We know that free cash flow is the most important source of enduring value creation, and we know the trust you show in our balanced capital allocation framework to put that cash to work on our strategic goals. To that end, we are on track to deliver incremental annual run rate EBITDA of $880 million by 2026 from strategic projects that are underway. As we consider cash needs to continue our in-flight strategic initiatives in 2023, our balance sheet is the strongest it's ever been. Those projects are fully funded. And when coupled with our extended maturity profile, allow us to continue to execute our strategy with conviction this year. The balance sheet also provides an opportunity to continue repurchases on our current authorization. We completed an additional $50 million of share buybacks in January and we'll look to complete the remaining $250 million left on our current program in 2023. So, let's look at the fourth quarter's results on Slide 8. Fourth quarter adjusted EBITDA came in at $431 million. This is an improvement over the December 15 guidance we provided of approximately $375 million, a stronger-than-expected December in both [indiscernible] and the Mini Mill segment as well as in Tubular contributed to that beat. And we're pleased to see the strong finish at year-end from our great team. Importantly, that momentum has carried into Q1 for those businesses. That strong December also contributed to better-than-expected adjusted EPS, which came in at $0.87 per diluted share. It translates into $131 million of free cash flow for the quarter, contributing to our best-ever cash and liquidity positions at year-end. Slide 9 recaps 2022 financial results, our second best in the company's 122-year history. For the full year, our business generated adjusted EBITDA of $4.2 billion, adjusted EPS of $9.95 a share -- per diluted share and free cash flow of nearly $1.8 billion. We believe there is no better value than U.S. Steel in the sector today. Over the past two years, we've generated a record $5 billion of free cash flow. And in this time, we've been able to deliver our balance sheet and debt maturity profile that continues to be strong as steel. We've advanced best for all high-return strategic investments that are transforming our business model and redefining what cash flow generation will look like for U.S. Steel. And all the while, we've rewarded stockholders with over $1 billion of direct returns. We are tremendously well positioned for 2023 and beyond to continue to execute our strategy and generate value for all our stakeholders. Let's take a closer look at the fourth quarter by each of our business segments. Our North American Flat-Rolled segment delivered nearly $300 million of EBITDA at double-digit margins, overcoming the pressure of declining steel prices and customer destocking. Firm price contracts in our Flat-Rolled segment helped to mitigate the negative impact from lower market prices in the quarter. As a reminder, firm and cost-based contracts represent approximately 30% of our Flat-Rolled segment order book. Shipment volumes in the quarter declined 13% compared to the third quarter, and that was impacted in part by our decision to temporarily idle blast furnace number three at the Mon Valley and blast furnace number eight at Gary Works. Next, on our Mini Mill segment. Big River has more exposure to the spot market than NAFR. And the Mini Mill segment saw a 28% reduction in average selling price for the quarter. Similar to our competitors, Big River's performance in Q4 was also weighed down by the impact of our continuing to absorb high-priced pig iron procured at the onset of the Ukraine war. We calculated the metallics headwind in the quarter to be about $40 million or about 7 percentage points of margin in the quarter. Absent these cost pressures, Big River would have reported positive adjusted EBITDA for the quarter. And even with these increased raw material costs, Big River delivered positive EBITDA in December and is building on that momentum to start Q1. By mid-February, we expect to put these raw material challenges behind us, in part due to the in-sourcing of pig iron from Gary works. Turning to Europe, which remains challenged in the fourth quarter. Our European segment was impacted by reduced end customer demand in the region that extended the typical year-end destocking cycle. This led through to selling prices, which was amplified by the segment's exposure to the spot market. Challenges continue to impact the region from the effects of the Ukrainian conflict. Higher energy costs and an extended more expensive supply chain created additional margin pressure in the quarter. On a brighter note, our Tubular segment delivered impressive results in Q4. Strong selling prices and a reconfigured tubular business model, with internally sourced substrate, resulted in record level EBITDA margins for the segment. Let's now look ahead to the first quarter, which is expected to mark a trough for 2023 based on prevailing steel price forecast. Encouragingly, lead times are extending, customer inquiries from key end markets are growing and seasonal tailwinds are all expected to improve performance moving forward into 2023. I'll share a few Q1 comments on each segment. In our Flat-Rolled segment, shipping volumes should increase versus the fourth quarter. In response to increased demand and an improved order book, we recently restarted blast furnace number three at the Mon Valley, and we're watching the book closely. And for now, we'll keep blast furnace number eight at Gary temporarily idled. Higher volumes in NAFR should also help to partially offset the negative impact of lower steel prices and the typical seasonal headwinds we see early in the year from our iron ore mining operations. So, for those of you that have followed us for years, you know that mining headwinds are unique to the first quarter, and we expect them to be about $75 million. As you know, our ability to ship iron ore pellets, either to our own operations or externally, are limited as the locks on the Great Lakes close for much of the first quarter. At our Mini Mill segment, I mentioned the momentum coming into Q1, which we expect will return the segment to positive EBITDA for the first quarter. Our metallics margin will improve with the start of pig iron shipments from Gary and a return to a more normal level of metallics costs in the back half of the quarter. Coupled with improving customer demand, the segment will see increasing EBITDA margins even as average selling prices are expected to decline in Q1. In our European segment, increased volumes have supported our restarting blast furnaces number one and number two earlier this year. However, these higher volumes will not outpace the impact of lower average selling prices in Q1 and the impact of an extended supply base and high energy prices. As a result, we expect EBITDA for this segment will remain negative in Q1. And in tubular, higher selling prices and consistent demand are expected to result in higher quarter-over-quarter adjusted EBITDA. And when you add it all up, first quarter adjusted EBITDA for the company is expected to land in the range of $250 million to $300 million. Looking beyond Q1, I'll mention we have also shared aspects of our full year outlook in last night's presentation to be helpful in your modeling. This includes full year shipment guidance, 2023 CapEx, DD&A, annual pension figures and cash interest expense. Thank you, Jess. Before we open the lines for your questions, let me recap our prepared remarks on Slide 10. We are building momentum in 2023 and setting up for another year focused on stockholder value creation, ESG transformation and disruptive innovation. ESG and our strategy execution are uniquely linked. 2022 marked our best year for progress against our environmental goals, and we are advancing strategic projects that will further greenify our footprint as we transition to more Mini Mill steelmaking. We'll generate a lot more cash, too. We are continuing to create value for our stockholders. Today, as we continue to deliver on our strategic commitments and with continued share buybacks in the future with an incremental $880 million of run rate EBITDA contribution from our strategic projects. We are pleased with the successful start-up of the Gary pig iron operation and are advancing our NGO Galvalume, DR-grade pellet investment and Big River 2 in-flight strategic projects on time and on budget. We are bullish on U.S. Steel. Okay. Thank you, Dave. Our first question comes from, Say Technologies. We received several questions on the economy and the potential impacts to domestic steel demand. Dave, can you get us started on your views and outlook on the economy? Yes. Thank you, Kevin, and thanks for that really broad question, but I think it will be informative in terms of how we're thinking about this. It does feel like there's a lot of optimism coming back as the economy progresses in this year. Change in sentiment is turning positive, and it looks like a really good start with this positive news. There are several other factors on the horizon that could provide some additional upside. We've all seen the calming and lower trending inflation, the easing Fed rate hikes 25 basis point was the latest increase. Supply chain improvements continue. We got the fiscal stimulus, the chips act, the infrastructure bill, the climate change, our Inflation Reduction Act. Infrastructure bill, likely second half 2023 or 2024 tailwind. So that's only just beginning. So, we would expect that to accelerate. And then there, of course, there's the bipartisan support for national security in the 232. Reassuring and surety of supply are developing trends. United States and U.S. Steel is uniquely positioned with mine melted and made in the U.S.A. Steel prices, you've seen them trending up, supported by higher scrap and iron ore costs, accelerating industry demand, longer lead times. The tailwinds seem to be growing. We are keeping an eye on any potential hurdles, including, of course, we've all seen the yield curve inversion, declining PMI, declining M2 money supply, declining housing permits. There's lots of geopolitical risks. So, there's a lot of things around the corner, no doubt about it, that are unknown. But we'd say if there's no system shocked -- shocks to the economy, we expect this to be dialed in about right and we'd expect a soft landing, Perhaps some mild recession in the back half of 2023 and a strong recovery in 2024. If there's a recession, we believe it'd be consumer-led, but I like the phrase that somebody uses called Goldilocks [indiscernible]. I think it's not too hot, not too cold. It feels like it could be just right with a bunch of geopolitical risks, of course, along the way. But you all know this. We are focused on what we control. We're going to get our strategic projects completed on time, on budget, and we're going to improve our free cash flow generation of the business through cycle and enhance our EBITDA multiple. Kevin? [Operator Instructions] And we'll get to our first question on the line from the line of Alex Hacking with Citi. Please go ahead. Hello, good morning Dave and Jess. So, Dave, I think you mentioned in your comments that you're gaining market share -- or potentially gaining market share on the automotive side. But when I look at the mix of your contract versus spot in the slides, particularly on the Mini Mill side, it looks like the firm pricing is significantly lower than it was last year. And when I look at the flat-rolled side, it's still -- the firm business is still sort of, I'd say, significantly below where it was three or four years ago. So, I guess how should we square that away? And then I guess adding to that question, one of your competitors has been pretty vocal about where the auto contracts ended up. Did you achieve similar results? Thank you very much. Yes, that's a really good question. Let me start this out, and then I'll ask my teammates to weigh in as well. We've been doing very well on the automotive agreements. We've got good balance across all of the OEMs and better pull rates to start here in 2023. There's no doubt that we are winning in the auto space, and we're very pleased with the contracts that we've had, which also give us the greater market share. One of the areas that we see significant interest in is our verdeX steel, particularly at Big River Steel, where we have the automotive sector, very interested in that much lower carbon. And of course, for us, that's very low on the cost curve. And Big River Steel, of course, with the new products that we're putting on, folks are lining up for the NGL line, which will be electrical vehicle and the motors there, which will be, without question, the best in the United States. But as far as the contracts, it's true that Big River Steel does mostly have the spot business. But as we move up the food chain, we'd expect to have more of the fixed contracts that mirror closer to what we have across the enterprise. But that will take a little bit longer. Yes. And then, Alex, the only thing I would add is you referenced to the pie charts in our materials, right, those being year-end 2022 figures. We'd expect to see that market share capture change in customers' desires for more in-depth contracts a year ago and maybe more spot exposure this year to flow through into 2023 contract next. So, given the volume gains we believe we've made across auto and other end markets, you'll see that flow through increasingly to our product mix this year and, in our contract, structures this year. We'll get to our next question on the line. It is from Tristan Gresser with PNB Paribas Exane. Please go ahead. Hi, thank you for taking my question. Can you discuss a little bit what you're seeing for the tubular division near term, but also for the full year? That's maybe one -- the only division when the guidance for volumes fell a bit short of market expectations. So, can you talk a little bit about the commercial strategy there? The evolution of the contract mix as well, we've seen on the slide there, is it fair to assume, given your commentary and what we're seeing on the ground that we could see some margin resilience in the first half? Thank you. Yes. Thanks, Tristan, for the question. This is Kevin. So tubular certainly is a very large bright spot in the portfolio. Your point around the contract structure and the commercial strategy is a great call out. We've been very purposeful within the business to expand our program customers, which means that we look at customers that participate in more resilient basins like the Eagle Ford, like the Permian, like the Haynesville strategic basins, and have increased our exposure to that business. So that allows us to have a much more resilient tubular order book and certainly in a strong environment like today, is resulting in record margins. On the demand side, I think what's important to remember is that the shipment levels that we saw particularly in the second half of the year are really full utilization given some of the capacity constraints that we have at our Fairfield Works facility. So, volumes should remain at pretty stable levels given the high utilization rates that we ran in 2022. So, with all that being said, I think tubular is obviously in a great position for 2023. We certainly expect prices to be higher in Q1 versus Q4. And as I think both Dave and Jess mentioned in their remarks, we should see another really, really strong quarter of performance for tubular in the first half -- first quarter of the year and resiliency certainly throughout the year. Good morning, Dave, Jess and Kevin. Thanks for taking my question. My first is a follow-up around sort of the pricing expectations for the Mini Mill business, particularly as you think about the NGO line coming into service in the third quarter of this year. How long do you anticipate that qualification process to take? And should we expect this product to be sold at fixed price contracts? And how should we start to see that impact pricing throughout the course of the year? Yes. This is Kevin. It's a great question. I would say that the second half of 2023 for our non-grain-oriented electrical steel line will be heavily focused on commissioning and qualification with customers. We will start to see some of those volumes come in throughout the back half of the year, but 2024 will certainly be the year where you start to see the heaviest ramp-up in benefit from our non-grain oriented electrical facility. So that's a 200,000 ton a year line. I wouldn't take kind of half of that and assume that's what we're going to ship in the back half of 2023, but we should get much closer to that number on a run rate basis moving forward. Electrical Steel has traded a significant premium to spot prices and to higher oil prices. So, we're having those types of conversations now with our customers as they look to secure line time at that facility and ultimately added to their portfolio of business with our company. So, we're seeing lots of activity, lots of interests and our commercial teams are deeply engaged in those discussions. And when that line ultimately comes up, you're going to see it really enhance the product mix at Big River. We -- Dave mentioned in his remarks, about 400 basis points of margin expansion based on that richer mix and those volumes being pulled through the Campus Therapy River. Maybe a follow-up is just around the flat-rolled business' cost structure there. It looks like your utilization rates have fallen about 15% there from 2Q to 4Q levels last year, but cost per ton have been pretty flat, but still elevated relative to prior year levels. Maybe can you talk a little bit about what's been happening at the flat-rolled business that has kept those costs per ton numbers flat? But what is the potential for cost out as we look forward to 2023? I'll leave it at that. Thank you. Yes. Thanks, Emily. It's a great question. I think it really speaks to the level of cost control, operating efficiencies that we were able to drive within the North American Flat-Rolled segment with a reduced footprint. If you adjust for the two furnaces, both Gary and the Mon Valley, which are temporarily idled, and you look at the applied utilization rate of those furnaces to remain, we are in excess of 80% levels of utilization. So that's a very healthy level of utilization to run blast furnaces, and our team did an excellent job not only running them safely, but doing it in a very prudent way from a cost perspective. So as utilization rates then increase, at the Mon Valley, as that furnace ramps up, we should see probably some additional cost improvements as well. And we're certainly focused on driving continued efficiencies and yield improvement, labor productivity, et cetera. So, I think there's some continued opportunity to lower cost in 2023. We'll now proceed to our next question on the line is from the line of Phil Gibbs with KeyBanc Capital Markets. Please go ahead. Thanks for taking my question. So, the labor contracts that you talked about, Dave, earlier in your script, can you just discuss a little bit about how you design those with the long-term strategy in mind? Sure. Thanks for that question, Phil. And the collective bargaining agreement, I would say all things considered went very smoothly. We took the time. We were very purposeful. We had in mind what would the expectations were and we worked very well with -- during the USW negotiations, and we felt great that we are able to break away from the pattern, but mostly that was because of the stellar pension that we have, particularly with the Veeva, which was 200% overfunded. Because of the way that operates, you can actually -- and I'll ask Jess to weigh in on this, we can actually make sure that we use those -- the cash from the pension that is overfunded to be able to pay for active medical, and then that active medical is reduced. So that would enable us to provide increases in pay. And so, when we think about the collective bargaining agreements, what we want to do is we want to strive for more variable pay with the philosophy of pay for performance, meaning when we do well, our employees do well. So, we have a bias for profit sharing. In fact, uncapped profit sharing like we've had here in the last few years where people can make substantial amounts of money. That's the model that we have at Big River. And we believe that when you have a variable pay structure, you end up with a much better result for your employees, for your company, and certainly, you can then invest more in innovation to support your customers. So, we're very pleased with the flexibility working with the USW to get an agreement that works very well for us, very different than the competitor that was first brought to us that plan, but we feel really good about this. And maybe just a little bit more, Jess, on how the Viva works because we do take a long-term view of this relationship with our employees, as with our customers, as with our stockholders. Jess? Yes. Thanks, Dave. And Phil, thanks for the question. I'll mention Aviva in a moment, but there actually were a few really significant financial considerations within the CBA that our negotiating team did a fantastic job in making sure that are thinking of our employees and thinking of the company, right, and the approach that we took to get the CBA negotiated. So, the Veeva is one of them. So as Dave mentioned, our OPEB plan, our OPEB funding was significantly overfunded to the tune of 200%. And so, what we have been able to do is to tap into that overfunded status. It's still significantly overfunded, right? It's in excess of 135%, but we were able to carved out some of that overfunded amount and utilized that as a direct cash offset to active medical expenses incurred by our represented employees in the year. So, what that's going to translate to is, over the four-year agreement, about $300 million of direct cash offset. Think about it as $75 million a year against the active medical costs that we would otherwise have paid for with corporate cash. So that opportunity to offset some of the cash flow for the company ensures that, again, the represented employee is -- the medical is still in place, but we have this offset in terms of the economic burden, right, by directly accessing that excess Veeva funding for the -- across the four-year period. So that's the first thing. I think the other thing worth noting is we were able to leveraged what was -- what continues to be a very strong cash position in being able to reward our represented employees with a onetime cash bonus at ratification. And so that $64 million onetime bonus was paid in the fourth quarter, and again, puts money in the pockets of our represented employees real-time, in addition to what we've negotiated as what we believe to be a fair salary increase over the four-year period as well. We also believe that negotiating what will be $1 billion of capital investment commitments over that four-year period will continue to supply supportive CapEx to maintain our integrated assets with really exceptional operating quality and reliability performance, but is at a significant advantage to some of the commitments that were negotiated by our competitor. So, we feel really good from a financial perspective about the overall considerations in the CBA and obviously are happy to get to work within the integrated mills. I'd say the collective bargaining teams on both sides, U.S. Steel and USW, they were very creative to work together. I have to say I was very impressed with the outcome that they were able to come together to make sure that we -- what we like to say, best for all, because this was clearly a great agreement for our employees. It was also grade for our stockholders, too, because of the cash saved and the costs that we have improved versus a competitor. So, weâre, very pleased with the relationship with USW and of course, really delighted that we're able to give our employees such a great contract. If I could sneak in a follow-up here. Just can you update us on Granite City and that plan, I believe, for your relationship with SunCoke to potentially do some pig iron modules over time? Anything that you could provide there as an update would be helpful. Thank you so much. Yes. Sure. I'll turn it over to Rich here just to second. He's providing some leadership there. I would say that the discussions are ongoing. We're working really hard to save some 500 jobs there. And we think this pig facility would be a good solution. But there's -- we got to make sure we do this cost effectively, and we got to make sure, again, we get it best for all. We want the employees to do well, and we need our stockholders to do well, too. Well, thanks, Dave. Yes, as Dave said, we continue the conversations with SunCoke. And congratulations to them. I think they had a great year last year. I saw their earnings release. So no, we're in regular contact with SunCoke. The conversations continue. And as Dave said, we're trying to figure out how we can make this work for both sides. So it's a win for everybody. [Operator Instructions] We'll get to our next question on the line from Lawson Winder with Bank of America. Please go ahead. Hi. Thank you, operator. Good morning, Dave, Jess and Kevin. Thanks for todayâs update. I wanted to ask about your decision to restart Mon Valley. My understanding is that Mon Valley mainly serves the appliance market. Have you seen any strong indications from those customers that demand is, in fact, strengthening? And why I'm asking is just -- I mean, there remains this view that the appliance demand could be weak if there's any sort of macro headwinds like with residential market or interest rates? Love your thoughts on that. Thank you. What I'd say is that I'd say more last year, we felt more of the headwinds. We obviously match supply and demand. So the fact that we're turning on a blast furnace is an indication that things are better. Obviously, with the economy and the headwinds confronting the residential space, there is some pressure on the appliance, but I would say it is better. I would say, probably third quarter issue was a lot more challenging, but we're encouraged where we are, and we'll have to see how it plays out. Yes, Lawson, 'the only thing I would add to Dave's remarks is the Mon Valley also serves some of our construction converter and service center business. And we were just looking overall at the order book. We saw order entry rates significantly outpacing our melt production plans, and that was a very clear trigger point for us to make the decision to return that furnace to service at the Mon Valley in support of our customers and to ensure we have the right delivery performance that we need to earn their business going forward. So good pockets of demand throughout the Mont Valley benefited from that with the restart. Okay. Fantastic. And maybe if I could just follow up on some earlier comments and a question on the Tubular segment, just to be a little bit more clear. So I mean your guidance of 450 to 550, at least at the midpoint, suggests that it could be a little bit down in 2023. Could you maybe just comment specifically on those numbers versus the 523,000 tons in 2022? Sure, happy to. I mean we provide a range, obviously, given it's a full year look. But I would say at this point in time, there's nothing that we're seeing in the Tubular segment that would have us cautious as we're not able to meet the upper end of that range. So I would expect, at this point in time, at least similar levels of shipment volumes in '23 as '22. Hey, guys. Thanks for taking the question. Congratulations on the strong cash flow. A lot of the questions I had have been answered. But I just wanted to get your thoughts on kind of a broader question. Just given -- just looking at the U.S. economy and given consumer spending are the engine of the U.S. economy is starting to sputter, you have retail purchases down in three of the past four months, you have spending on services flat in December, which is the worst in a year, home sales last year fell to the lowest level since 2014, auto sales the worst since 2022 last year. It just seems like some -- in some of the forces that help keep spinning higher kind of unwinding. Just wanted to get your thoughts on -- given those dynamics, what do you guys think about pricing in the first and second quarter and the second half? And then one follow-up. Well, thanks. I think we are seeing prices come back. Obviously, we talked about that a bit earlier. So through the first quarter, things related price and demand are stronger. It's always hard to forecast in this industry what's going to happen. I indicated I believe it's going to be a soft landing in the back half. But the reality is nobody really knows for sure, but I think the key piece here is if you look at the labor markets, they continue to be very strong. People continue to have jobs, they continue to spend and they continue to move the economy forward. But if there's going to be a deep recession or a recession, it's probably going to be consumer-led, as I said earlier. But for -- right now, it does seem good for the first quarter in terms of pricing. We have indications that longer term, it should be really good because we've got these bills that will start to kick in. The infrastructure bill really hasn't hit yet. And then with the IRA and of course, the CHIPS Act moving forward, those are all very positive things. And I think with the Fed easing rates, we should probably see this thing continue. We said some time ago, we don't see -- even though we model towards the average price CRU index when we do our business case studies, we believe it should settle higher than that over the cycle because we have had industry consolidation. We have had changes in the dynamic. We have better trade enforcement. So -- again, it gets back to really bullish longer term. We're in this transitional period with a lot of uncertainty. And frankly, I think a lot of people think the Fed is doing a lot better job on the soft landing than what was expected. But the reality is nobody knows. And the good news for us is we've got a really healthy balance sheet, lots of liquidity, lots of cash, so we're going to be able to manage whatever comes our way. But I'm bullish on the U.S.A. I'm bullish on the U.S. steel industry, and I'm bullish on U.S. Steel. And I believe, longer term, the prices will be sustainable and higher. And just a quick follow-up. You guys have built a strong cash position. Any plans that maybe you didn't mention on what you plan to do with that strong cash position? Thanks for the question. And congrats on results. Well, thanks for those comments, Gordon. We appreciate them. As we keep doing the beating of the drum, we've got the strategic investments we have to get through because we're going to generate $1 billion of cash through these and we'll be done with those at the end of this next year. So we feel really good about getting those strategic investments in place. And so I do think that as we say and we're going to have the growth and direct returns to stockholders. We want to make sure that we're building that into our business model that our stockholders can always appreciate and expect for us to be able to give direct returns and stock buyback. If I can add, Dave, just a quick comment to that. Gordon, what I would is if you come back to our -- the framework of our capital allocation strategy, that's really a guide towards the way we're thinking about how we'll spend that cash, how we'll put that cash to work, how we'll look to grow the business and provide direct returns. In going down the list, the check box of making sure we maintain a strong balance sheet, making sure that we are prioritizing the investment in the strategy and in the initiatives that are going to generate even more cash flow, right, that virtuous cycle of investing in a business to drive more cash to reinvest and drive more cash. And then ultimately, the opportunity that we have today and tomorrow, to have that cash be returned to the stockholders in direct returns. We're really excited about the opportunity that we have and what we've built so far and how the continued focus of capital allocation in those strategies is just going to give us more power to grow in the future. I think we need to all be clear on this. We got the capital allocation strategy. It's a healthy balance sheet, making sure we get the strategic projects done. If there's a 15% or better return that we can get quickly we're in. And then, of course, we got the dividends and the stock buyback. But look at that schedule in there, that's what we're following. And as long as we're generating that cash, we believe we're going to be in absolutely fantastic shape. And that was our final question. I will now turn the call back over to U.S. Steel's CEO, Dave Burritt, for closing comments. Well, thanks again for your interest in our company and our strategy. We're looking forward to building on our successes from 2022 and delivering value to all of our stakeholders in 2023. None of this is possible without the commitment and dedication of our teams. Thank you for safely working for our customers and delivering quality sustainable steel solutions. We can't stand still, and we have a lot more success together. And to our customers, thank you for your continued partnership, your support motivates us every day to make U.S. Steel, the best steel company and to provide you our customer with profitable steel solutions for people and planet. We appreciate you, and thank you so very much for the increase in market share. Thank you also to our investors. If you currently own U.S. Steel stock or considering to purchase, know that we remain committed to delivering on our strategy, determined to execute those plans as promised and focused on generating the best stockholder value improvements from our transition to best for all. Now let's get back to work safely. Thank you very much. And that does conclude the conference call for today. We thank you for your participation as you disconnect your lines. Have a good day, everyone.
EarningCall_530	Good morning. My name is Emily, and I will be your conference operator today. At this time, I would like to welcome everyone to Avantor's Fourth Quarter and Full Year 2022 Earnings Results Conference Call. [Operator Instructions] I would now like to turn the call over to Christina Jones, Vice President of Investor Relations. Mrs. Jones, you may begin the conference. Good morning. Thank you for joining us. Our speakers today are Michael Stubblefield, President and Chief Executive Officer; and Tom Szlosek, Executive Vice President and Chief Financial Officer. The press release and a presentation accompanying this call are available on our Investor Relations website at ir.avantorsciences.com. A replay of this webcast will also be made available on our website after the call. Following our prepared remarks, we will open the line for questions. During this call, we will be making some forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. Actual results might differ materially from any forward-looking statement that we make today. These forward-looking statements speak only as of the date that they are made. We do not assume any obligation to update these forward-looking statements as a result of new information, future events or other developments. This call will include a discussion of non-GAAP measures. A reconciliation of these non-GAAP measures can be found in the supplemental disclosures package on our IR website. Thank you, CJ, and good morning, everyone. I appreciate you joining us today. I'm starting on Slide 3. Fourth quarter results were in line with the guidance provided during our Q3 call. Our business grew 2.7% on a core organic basis, and we expanded adjusted EBITDA margin by over 60 basis points as customer demand and supply chains continue to normalize, as we transition from the COVID-19 pandemic, the temporary headwinds we have faced largely played out as expected. For the full year, we delivered core organic revenue growth of 6% at the high end of our long-term target of 4% to 6%, with growth across all geographies and product groups. We expanded adjusted EBITDA margin by 110 basis points, above our long-term target of 50 to 100 basis points and delivered $1.41 of adjusted EPS, outpacing our updated guidance of $1.38 to $1.40. We continue to execute on our long-term strategy and growth drivers, including advancing a robust innovation pipeline, expanding our manufacturing and distribution capacity, enhancing our digital capabilities and leveraging the Avantor business system to drive operational rigor. More than 70% of our revenue is in Life Sciences. And over the course of the year, we introduced a number of new products to support our customers in growing biologics platforms, including monoclonal antibodies, cell and gene therapy and mRNA. We enhanced our proprietary consumable offering with the extension of our precision plastics portfolio under our J.T. Baker brand. We also introduced innovative kits and flow cells from Oxford Nanopore, which helped generate next-generation sequencing data at the highest consensus accuracy. During the fourth quarter, we further augmented our global footprint and strengthened our ability to provide essential products and services to local biopharma customers as we opened our new CGMP distribution center in Dublin, Ireland, and produced our first commercial batches in our new CGMP manufacturing hub in Singapore. In addition, we continue to improve supply for bioproduction customers and reduce lead times for a broad range of products across our portfolio. We also completed a number of contract renewals with our largest customers, including our recently announced multiyear agreement with Catalent that significantly expands our relationship, making Avantor as their primary supplier across a broad range of lab supplies and services. Continuous improvement is in our DNA. And in 2022, we completed more than 450 kaizen events focused on improving critical business processes, a 50% year-over-year increase. We also introduced enhancements to our organizational structure to strengthen commercial leadership, and we made significant progress in building out our strategy and corporate development team. We remain focused on execution, and our 14,500 associates are aligned with our enterprise priority of driving growth. We made significant progress in 2022 with our Science for Goodness platform, improving our ESG metrics from four major rating agencies. We are on pace to exceed our 2025 greenhouse gas emissions reduction targets and are accelerating our climate-related commitments in alignment with the latest science and look forward to sharing updates on our progress in this area in the coming months. Looking ahead, our long-term algorithm remains fully intact and highlights the strength and resilience of our business. Our guidance for 2023, which Tom will cover shortly, reflects our confidence in the fundamental growth drivers for life sciences as well as the headwinds we face in the current operating environment. Thank you, Michael, and good morning, everyone. I'm starting on Slide 4. Starting from the top of the page, reported revenue was $1.795 billion for the quarter at the midpoint of guidance provided on our Q3 results call. Our core organic growth for the quarter was 2.7%, reflecting ongoing strength in our core business, partially offset by inventory destocking in liquid handling and single-use tubing that we flagged in our third quarter call, a weaker-than-expected year-end budget flush and approximately 170 basis points of headwind as a result of fewer selling days in the fourth quarter of 2022. For the full year, reported revenue was approximately $7.5 billion, and core organic growth was 6%, driven by over 20% core organic growth in bioproduction and double-digit growth in Advanced Technologies and Applied Materials, offset by approximately 70 basis points of headwind as a result of fewer selling days in 2022. Adjusted gross profit for the quarter was 34.3% and 34.8% for the full year, an expansion of almost 90 basis points compared to 2021. This expansion was driven by the favorable impact of our 2021 acquisitions, double digit growth in sales of proprietary products and ongoing commercial excellence, partially offset by increased cost of materials and freight. Adjusted EBITDA was approximately $360 million in the quarter and $1.571 billion for the year, representing approximately 60 basis points and 110 basis points of margin expansion, respectively. The expansion was driven by our gross margin performance and our ongoing focus on productivity, while we continue to invest in growth. Adjusted earnings per share came in at $0.32 for the quarter and $1.41 for the year, driven by adjusted EBITDA performance, partially offset by higher interest expense and FX translation headwinds. Adjusted net income grew double digits for the year on a constant currency basis. This double-digit earnings growth on 6% core organic growth demonstrates the powerful earnings conversion attributes of our business model. We generated free cash flow of $172 million in Q4 and $710 million for the full year, below our expectations of $800 million. In the fourth quarter, we made investments to support customer contract renewals and extensions, which lowered our free cash flow, but which will support our growth profile in the years to come. We also proactively built inventory levels as a countermeasure against global supply chain constraints and experienced higher accounts receivable balances throughout 2022. We have identified several opportunities to improve our working capital performance in 2023. Our adjusted net leverage ended the year at 3.7 times adjusted EBITDA, down from 4.2 times at the start of the year, putting us within our stated target leverage of 2 to 4 times adjusted EBITDA. Overall, we delevered the balance sheet by 0.5 times in 2022 and remain focused on incremental deleveraging over the course of 2023. Slide 5 outlines the components of our revenue growth in the quarter and the year. Our Q4 core organic revenue growth of 2.7% was in line with our guidance of 2% to 4%. Customer destocking in select product categories like liquid handling consumables and single-use tubing played out as expected, and Europe performed better than we anticipated. COVID-related revenues represented a 4.8% headwind for the quarter versus our expectation of 4% as vaccine-related sales slowed further in the fourth quarter, resulting in a 2.1% organic revenue decline. We had a modest M&A inorganic contribution of 0.7% in the fourth quarter associated with October sales for Masterflex, which laps its 1-year anniversary on November 1. Foreign exchange translation represented a 4.5% headwind driven primarily by the strength of the U.S. dollar versus the euro, resulting in a fourth quarter reported revenue decline of 5.9%. For the full year, the 6% core organic growth ended at the high end of our long-term growth algorithm, a testament of the health and resilience of our core business. COVID headwinds finished the year at 3.6%. We achieved $190 million of COVID-related sales in 2022. M&A contributed 3.6% and FX represented a 4.3% headwind, resulting in 1.7% reported growth for 2022. On to Slide 6. From a regional perspective, Americas, which represents approximately 60% of annual global sales was flat on a core organic basis in the fourth quarter, with strong growth in serum, process ingredients and excipients for bioprocessing and custom formulations for the semiconductor space, offset by destocking headwinds in liquid handling consumables and single-use tubing. On a full year basis, Americas grew 6.1% on a core organic basis, driven by double-digit growth in bioprocessing, and Advanced Technologies and Applied Materials and strong contributions from Biomaterials. Europe, which represents approximately 35% of annual global sales achieved 6.3% core organic revenue growth in the fourth quarter and 5.5% for the year, above our expectations for the region, driven by strength in bioproduction and biomaterials. Bioproduction grew double digits in the fourth quarter on a core organic basis, driven by robust demand for our process ingredients, excipients and single-use solutions. Although industrial demand in Europe continues to be moderate as expected, our performance in this region reflects the value of our end market exposure and diversified application and customer mix and highlights the overall resilience of our business. EMEA, which represents approximately 5% of annual global sales grew 5.7% on a core organic basis in the fourth quarter and 7% for the full year, driven by sales of proprietary materials to advanced technologies and applied materials customers and bioproduction strength in process ingredients and excipients. Slide 7 shows our core organic revenue growth for the quarter by end market and product group. Biopharma representing almost 55% of our annual revenue, grew low single digits in the quarter, including high single-digit growth in bioproduction. Liquid handling and single-use inventory headwinds impacted fourth quarter growth, primarily in the Americas region. For the full year, biopharma grew high single digits, led by over 20% growth in bioproduction. Health care, which represents approximately 10% of our annual revenue, declined mid-single digits on a core organic basis in the fourth quarter and grew low single digits for the full year, driven by strength in biomaterials, offset by inventory destocking in liquid handling consumables, which was particularly pronounced in the fourth quarter. Education and government, representing approximately 10% of our annual revenue, experienced a low single-digit core organic revenue decline in the fourth quarter and full year. Advanced technologies and applied materials, representing approximately 25% of our annual revenue, achieved high single-digit core organic revenue growth in the fourth quarter and double-digit growth for the full year, driven by growth in proprietary materials for semiconductor and electronic device applications, partially offset by a moderation in industrial demand in Europe. By product group proprietary materials and consumables offerings grew high single digits in the quarter and double digits for the full year, driven by strong demand across our bioproduction, biomaterials and advanced technologies and applied materials platforms. Sales of third-party materials and consumables declined mid-single digits in the quarter and grew low single digits for the full year, impacted by a moderation in lab consumables demand relating to destocking. Services and Specialty procurement declined low single digits in Q4 and grew mid-single digits for the year, driven by strength in lab and production services. Equipment & Instrumentation sales grew low single digits in the quarter and the full year with growth across all three regions. Moving to Slide 8, I'd like to provide an update on the contributions from our recent acquisitions. As a reminder, this slide reflects the 12 months revenue and margin for Masterflex, Ritter and RIM Bio in 2022. Full year results included $393 million of revenue and $136 million of adjusted EBITDA, resulting in a 35% adjusted EBITDA margin. Masterflex revenues were modestly below our estimates due to ongoing top line pressures relating to customer destocking in our tubing category and ongoing component shortages for peristaltic pumps. Despite the transitory headwinds, we are highly encouraged by the Masterflex leading market position, pipeline of exciting new product launches and robust demand from our bioproduction customers for our end-to-end fluid management solution. Ritter revenue came in slightly above our revised expectations for the year, driven by a stabilization of the research and diagnostics platform as the COVID roll-off concluded in the second quarter. Europe industrial demand was slowed, albeit at a more moderate pace than anticipated. The team is working to convert our pipeline of commercial opportunities and introduce new products in our technology road map, including four significant product launches planned for the first half of this year. RIM Bio generated $10 million of revenue for the year, a supplier constraint pushed another $10 million of revenue from the fourth quarter to the first quarter of 2023. We are excited with the traction and momentum we have built with this business, including the successful transfer of 2D and 3D bag technology from RIM Bio to our global customers. Looking at 2023, we expect Masterflex tubing headwinds to subside by midyear with a return to double-digit core organic growth in the back half of 2023. Ritter performance has stabilized, and we expect sequential improvement in Ritter revenue throughout 2023, as the effects of our commercial synergy program and NPI investments take hold. On the right hand of this page, we've provided an update on balance sheet leverage. We exited 2022 at 3.7 times leverage within our target range of 2 to 4 times leverage. We were able to mitigate the impact of rising rates on our 2022 interest expense through proactive interest rate management and debt pay down. Given the interest rate environment, we will continue to focus on deleveraging as we move into 2023, while also actively building our pipeline of M&A opportunities. Turning to Slide 9. I'd like to walk you through our 2023 guidance. Beginning with revenue, we start with our long-term algorithm of 4% to 6% core organic growth, which is based on our differentiated position serving attractive end markets. We continue to see strong demand in Life Sciences and expect another year of double-digit core organic revenue growth in bioproduction. We are initiating 2023 core organic revenue growth guidance at 2.5% to 4.5%. We expect continued strength in bioproduction and a healthy overall pricing environment, moderated by the near-term inventory destocking in lab and single-use consumables, which we've discussed, as well as reduced demand from industrial applications globally, notably in our semiconductor end market. Moving forward, we will not be categorizing revenue as COVID related, as it is expected to be immaterial. Consequently, the COVID headwind for 2023 is predetermined at about 2.5%. This results in organic revenue growth of 0% [ph] to 2%. We expect FX to be neutral for the full year at our current planning rates, leading to a reported growth of 0% [ph] to 2%. On adjusted EBITDA, we expect margin to range from 25 basis points of contraction to 25 basis points of expansion with commercial excellence, growth in our proprietary offerings and productivity tempered by the macro inventory headwinds, the dilutive impact of the COVID revenue roll-off and ongoing inflationary pressures. We have a track record of delivering strong margin expansion, and we are working diligently to find opportunities to offset margin headwinds, including leveraging our Avantor business system to execute on a robust funnel of productivity initiatives. For earnings, we are initiating our 2023 guidance at $1.35 to $1.45 adjusted earnings per share, which reflects the range of our revenue and margin expectations, as well as interest expense of $270 million to $295 million and a 21.5% tax rate. Our interest expense estimate reflects the impact of current forward [ph] yield curves on the roughly 30% of our unhedged variable rate debt. The rate increases are expected to have an unfavorable year-over-year impact on interest expense of about $65 million that will be largely offset by the impact of deleveraging. We expect to generate approximately $700 million to $800 million of free cash flow, which includes a modest improvement in working capital as our supply chain continues to normalize. Regarding pacing, the more pronounced 2023 first half COVID headwinds and inventory destocking result in more tempered expectations for the first half of 2023 compared with the second half. We expect first quarter core organic revenue declines of 1.5% to 3.5% and COVID headwinds of 4.5%, leading to organic revenue declines of 6% to 8%. This reflects more difficult comparables in the first quarter as well as our assumptions around industrial demand globally, including semiconductors. We also expect a roughly 2.5% headwind from FX, leading to reported revenue of 17.50 to 17.85 [ph] Thanks, Tom. As we conclude, I want to emphasize our conviction in our long-term financial algorithm. We view the current headwinds and supply chain normalization as short-term dynamics that will subside in the second half of the year, as supported by internal analysis, ongoing customer interactions and industry trends. We are confident in our plan for 2023 and are well positioned to execute on our growth strategy. I am encouraged by the strong fundamentals in our end markets, the deep relationships we have with customers and the positive returns we are generating from our investments in innovation and capacity expansions. Our strong free cash flow enables rapid deleveraging and capital allocation flexibility as we continue to actively build our M&A pipeline. Thank you for your interest in Avantor and for your continued support. I will now turn it over to the operator to begin the question-and-answer portion of our call. Thank you. [Operator Instructions] Our first question today comes from Patrick Donnelly with Citi. Please go ahead, Patrick. Your line is open. Hey, guys. Good morning. Thanks for taking the questions. Michael, maybe just on a couple of those variables as we enter '23 here. It seems like European - industrial demand, you guys were pretty cautious last quarter going out some risks in the macro. It seems like you're feeling a little bit better about that. And then the second one, obviously, some of that excess inventory in the system on the lab business, particularly in the liquid handling. Can you maybe just talk about those two? What they look like in terms of variability in the guidance? And then the visibility, particularly on that excess inventory, what you're hearing from customers visibility into that normalizing? And when we should expect that to kind of get back to kind of growth and a little bit more normal? Thank you. Thanks for the question, Patrick. And good morning, everyone. Yeah, I think that's a great place to start. When you point out the dynamics that we saw in the fourth quarter on Europe certainly played out a bit better than we expected, and we're certainly pleased with more than 6% core organic revenue growth there in the quarter. It really continues a strong year that we had there in the region. Entering the quarter, I think we were trying to reflect just some of the uncertainty associated with the energy situation in Europe. Certainly, the conflict in Ukraine, as well as just overall recessionary concerns and it certainly played out a bit better than we had anticipated. And as we look ahead into the year, I think we're encouraged by the trends that we see there, although we remain a little bit cautious. From a destocking perspective, I think the quarter played out as we had anticipated, both in liquid handling consumables, as well as in the single-use consumables within our bioprocessing offering and transitioning into 2023, I think the picture for us remains largely unchanged. As we engage with our customers, as we triangulate a number of reports and analytics that we have, I think our view here is that it's probably something that will be with us throughout the first half of the year, which will lead to a dynamic here that Tom referenced with the second half of the year being stronger than the first half. So we'll expect ongoing destocking here in the first quarter should start to improve a bit as we move through the second quarter, and we would expect that to hopefully be behind us as we get into the second half of the year. Great. Thanks, guys. So my question is just around margins. You guys exited 4Q at roughly 19.5% EBITDA margin. You're guiding to down 25 - to 25 basis points for the year. So can you just talk about some of the puts and takes, very similar to Patrick's question, given some of these headwinds in the start of the year, how should we think about that EBITDA margin expansion or contraction on a quarterly basis? And then is that mainly driven by price or volume? Or kind of how should we see that rolling through the P&L? Thank you. Thanks for the question, Rachel. I think I'd start by just reiterating our confidence in our ability to continue to expand margins. And I would point to the fourth quarter as a good proof point of that. The environment we saw in the fourth quarter is probably pretty similar to what we're anticipating as we move into the new year here, and we're coming off a quarter here where we did expand 60 basis points. So certainly, a strong track record of being able to do that. When you look at our margin expansion algorithm, there's probably two or three variables that we really focus on, certainly starting with managing price versus COGS. A big part of that process plays out in the fourth quarter and early days of the first quarter. We're pretty well through that. And I think we're pretty confident that although pricing is going to be above our long-term algorithm and similar to what we delivered last year, we do think it's going to be sufficient to contribute at a level that we would historically see. You then get into things like mix, and we've talked openly about the roll-off of the COVID headwinds that are pretty margin rich. We're working against us, as we move through the year. That's going to be more pronounced in the first and second quarter than it would be in the second half of the year. And then the last variable I mentioned is just around the productivity aspects of our program here. We've got a pretty full [ph] pipeline of opportunities that we're driving to help mitigate the impacts of inflation. So I would say largely the algorithm is intact. We'll - we tried to reflect some of the headwinds associated with the mix, as well as just the volume impact and as destocking and COVID come down and the impact that, that has on absorption. But I think we're cautiously optimistic here out of the gates as we look ahead to margins and look to build on our strong track record. Great. Good morning, everyone. So two for me. So just quickly on Masterflex came in a little light versus your guide for the year. Any kind of commentary there, what you guys are seeing in the fourth quarter? And any signs that this is troughed and starting to get better from a destocking perspective and the various headwinds there? And then secondly, can you talk about - I mean, you guys have talked about the investments you made in the customers. And you just came out with the master service agreement with - or the service agreement with Catalent. Can you give us any other color that you're around the future or current deals that you guys are working on that kind of underlie the improving outlook here? Good morning, Luke. Thanks for the questions. Starting with Masterflex. As Tom mentioned in his remarks, we continue to be incredibly optimistic about that business, not only from a growth standpoint, but also margin standpoint. It's one of the leading franchises in the single-use space and gives us one of the only end-to-end aseptic fluid management solutions in the industry. Really great traction, strong brand recognition, and we're thrilled to have it as part of the portfolio. The inventory destocking that we talked about related to particularly the tubing offering associated with that, continues to play out as expected. It might have been a little bit stronger in Q4 than maybe what we had anticipated, but not far off of that. We expect to see that to be through the first half of the year, as I mentioned. I imagine as we work through the first quarter and sort of transition to the second quarter, we would anticipate things to start to incrementally improve and would anticipate having that behind us, as we move into the second half of the year. The other headwind that we faced in Masterflex is just the ongoing chip and component shortages for - peristaltic [ph] pumping technology. We've got a great order book there and a backlog that continues to build. So I think we certainly draw confidence from the strong demand and positioning of that technology. And the supply chain continues to improve. We do still have certain components that we're struggling to get on time, but we're starting to see incremental improvements there. And as Tom mentioned, I think as we get to the second half of the year, we're expecting double-digit core organic growth for that business. Really appreciate your second question as well. We continue to have really great traction and momentum with our customers. This is an important part of our business model, the unparalleled customer access that we do enjoy. And when I look at 2022, the team did just a remarkable job in renewing and extending relationships with new customers, as well as acquiring new business. We referenced in the fourth quarter a pretty significant agreement that we were fortunate to put in place with Catalent, where we became their primary supplier of a broad range of laboratory supplies and clinical and production materials and end services that will significantly expand our current relationship with them. We also extended the duration of our lab supplies and lab services relationship with Janssen Pharmaceutical Companies of Johnson & Johnson and that came with a pretty significant upfront investment. But we're really excited by the positioning we have with that business and the duration that we were able to achieve with that extension. So just another good example of the traction we have and momentum we have in the business. Tom mentioned in his comments around free cash flow that some of these relationships do require a bit of an upfront investment that we were able to reflect in our cash flows in Q4, which will give us significant returns as we enjoy the revenues of those relationships as we move forward. Thanks for the question. Hey, guys. Thanks for taking my question and I had a two-part, Michael, maybe I'll start with you. The guidance here, when I look at the midpoint core organic, 3.5 for the year, that's 150 basis points below your LRP. And when I look at Q1, I think that number is 750 basis points. So one, is all of this inventory destocking you know, macro industrial slowdown? Is that happening in Q1? Is that the bridge between your 5 to 3.5 for the annual, and I thought, for some reason, Q4, those headwinds were around 300 basis points. So why is it accelerating here in Q1? And one for Tom on - on margins here, Tom, I thought you said pricing was positive. Can you clarify what the pricing assumption is for fiscal '23 and why shouldn't pricing aid your margins here in '23? Yes. Good morning, Vijay. Thanks for the questions. I'll take the first one. The midpoint of our 2023 core organic guide of 3.5% contemplates roughly 250 basis points of macro impact, and that would include certainly the impact of destocking. It would include our view on kind of just the general macro environment and the impacts on our applied markets, perhaps most notably in the semiconductor market, as we mentioned in the prepared remarks. And so that gets on that basis to the high end of our long-term guide of roughly 6%. So very much in line with what we've been doing over the last several years. As you think about then the phasing within 2023, I think the headwinds that we've talked about are certainly most pronounced in Q1. We'll have a - destocking effects in Q1 are certainly most pronounced there, as well as just our view of the macro impacts on some of our applied markets. I'd also note in Q1, kind of relative to where we're at in Q4. Q1 is one of our most difficult comps of the year. I think we're running into a comp that's probably 300 basis points plus in Q1 compared to where we were at in Q4. So it's certainly going to be a situation here where the second half will be stronger than the first half, as we work through some of these destocking events. And Vijay, on the second question. Thanks for the question on the margins and in particular, on pricing. Just to reiterate what's behind our guidance. I think it's helpful to remind ourselves, since the IPO, we've been tracking to the high end of our margin expansion long range plan of 50 to 100 basis points, nearly at 100 basis points or so when you each of those years. So the drivers are not much different than they've been in the past. And we like to think of it, as Michael said earlier, it has three components. The first being, the pricing and overall, what we call commercial excellence and in other words, balancing pricing against inflationary pressures on COGS inputs and other inputs. I think the - this has really proven to be a core capability of Avantor. We've got fairly sophisticated approach, a lot of data, really strong talent and systems and software to drive us a little long in the process for 2023. It's a big annual exercise starts in early November and really culminates right around now and working with suppliers and customers. So we're well along. We have a high degree of confidence in our ability to drive the price to offset inflationary pressures and be accretive to margins, as Michael had said. So that's definitely a positive factor for us. When you're considering the range that we've given I certainly think the COVID headwinds need to be taken into account when you see roughly $200 million of revenue coming out of the plan from '22 actuals to '23. That's pretty margin-rich content. And since it's mostly in biopharma production, vaccines and other kinds of content that go into -- bio production vaccines. We're reflecting that in the guide as well. And then I think overall, the third aspect in addition to mix is just productivity for margins. And we have plans in place, as we always do, that address material productivity, that address performance of our factories, performance of our distribution centers. And we'll continue to be pretty vigilant on costs and know that will contribute to some potential movement to the higher end of the guide. So I wouldn't look at our guide as reflecting anything materially different than what we talked about in Q3 and Q4 in our various meetings. I think we're setting up in a way that I think as we look ahead, we feel that it's pretty prudent start for the year in terms of expansion margin. Great. Thanks for taking the question, guys. I got a couple of parts, but it's just one question. And I kind of wanted to touch on debt levels, interest expense and M&A. So could you just walk us through again the interest expense coming in higher year-over-year if the deleveraging remains a top priority. We thought it would kind of come down a little bit despite where rates ended at the end of the year? And then on 3Q, along those lines, previously on 3Q, you said we're concentrating near-term M&A efforts on improving performance of recent acquisitions - and yes, using available free cash to reduce debt. Today, I think you had a comment about actively building a pipeline of M&A opportunities. So definitely noticing a tone change there. Could you talk us through what's going on? And is that something you're referring towards the end of the year? Is there a certain leverage target you want to hit before you're back to being in a hunt for more M&A? Just clarify the difference there. Yes. Thanks, Mike. And I'll answer the first question, and I'll let Michael answer the second. In terms of our leverage and debt levels, things are playing out as we kind of articulated in our planning. We started out the year north of 4 times leverage in 2022. We ended at 3.7 times. And when you look at the impacts on interest expense and so forth, they're also playing out as we expected. So we expect to continue on that delevering path. We'll probably be - when we execute our plan in '23, we expect to be in the low 3s, if not at 3, and we're encouraged by momentum. When you look at the key drivers of the delevering for us, it certainly is free cash flow. And while 2022 didn't exactly hit the mark on free cash, we were pretty pleased with how the interest itself was managed. We had articulated at the beginning of the year roughly $260 million of interest expense. We came in roughly 266. And that's with over 400 basis points of increases in various reference rates that impact our weighted average borrowing cost. So when you look at how we manage that, we did a few things to basically convert variable rate debt to fixed. We also, right before all the interest rate increases had taken place, we had a good portion of basically refinancing our entire portfolio. So over the course of 2021, we had significantly lowered our overall weighted average cost of borrowing. And the combination of those two things, that is the repricing, as well as some of the things we did in '22 on swapping variable to - sorry, fixed to variable and the euro swap that we did. We ended up improving the mix of our variable versus fixed rate where about 30% of our debt is variable rate, most of that is exposed to the euro. And as we look to 2023 interest expense, you've got two components there. Certainly, that 30% of the debt that's variable. We do have some impacts, as I talked about and quantified in the past, certainly close to $50 million or $60 million of pressure on interest expense from that. But the delevering impact largely offsets most of that. And so if we deliver at the midpoint of our guidance range at 700 to 800 in free cash flow, I think we'll be in pretty good shape. So we're - we've called that interest expense roughly 270 to 290 million in the guide. So it's relative to 266 in '22 and considering the interest rate environment, pretty pleased with how that looks to come in. And the more cash we can generate, the better we'll do on interest expense. Michael, I'll pick up the second part of your question there around M&A. Maybe just a couple of comments. Firstly, I would just reiterate that M&A has been and will continue to be an important part of our playbook, and we've been actively investing and enhancing our capabilities. You'll recall, we announced a new Head of Strategy and Corporate Development, Kitty Sahin, who joined the team late last summer. And she's been busy in building out her team to put us in a better position going forward. When I think about the environment for M&A in 2022 and where we're at here in the first half of the year, certainly, we're cognizant of our own leverage, as well as the status of the debt markets. And consequently, have been and will continue to prioritize deleveraging in this environment. I think there's still some disconnect between buyer and seller expectations and I think there's a reasonable amount of just market uncertainty associated with transactions. So it makes sense for us to focus on delivering the commercial synergies of the deals that we closed in '21 and continue to give ourselves more flexibility by deleveraging. But I think it's prudent to continue to be active in building a pipeline, which we have been doing throughout '22. And we'll certainly remain focused on that as we move here into 2023. Just to ensure that we're positioned as opportunities open up in market - markets start to normalize, perhaps later this year as we move into 2024. So I don't think our position has really changed here in terms of our view of the priority of M&A or just - the status of the current market conditions, but we'll continue to invest in this area and make sure that we are prepared if and when things open up again. Great. Thank you. Thanks for the question, guys. Maybe just one on bioproduction, so 4Q, I think you said it grew high single digits. Just give us a little color kind of maybe unpack that number a bit. It was a bit slower than the trend, but obviously, there's a lot going on within that. So I would love to get color on kind of how you executed the year on bioproduction. And then I know you talked about the '23 strong growth. Maybe a little color on what you're assuming for '23 in terms of the growth rate and included in that, how does some of the new capacity that you're bringing online impact your growth outlook across that business? Thanks. Yes. Thanks for the question, Dan. I think at a high level, probably important to reflect on just the strength of the overall bioproduction space. 2022 was a great year for novel drug approvals. I think there are 18 large molecules that were approved, including some pretty big ones in the area of Alzheimer's, for example. I'm sure you all saw the news earlier this week around biosimilar approval in the HUMIRA space. So there continues to be, I would say, a very favorable backdrop in the core monoclonal antibody space. There are 6 CAR-T therapies that are available in the U.S. and Europe, and there's a big year ahead here in '23 of candidates that are up for approval. So backdrop for the space, I would say, is incredibly strong, and we remain quite bullish about not only the space, but certainly our position and long-standing track record of outgrowing the broader market by 200 to 300 basis points. We concluded 2022 with more than 20% bioproduction core organic revenue growth, so another really, really terrific year. Q4 was certainly the lightest quarter of the year for us in that space, really reflecting the impacts of destocking, particularly in the single-use consumables area. We obviously have a very broad portfolio that touches nearly every step of that process from upstream, downstream to fill and finish. And I think we had pretty good performance across the space with the exception of these liquid handling consumables. And we saw it both in Masterflex as well as in our legacy business. I think the quarter played [ph] out largely as we had anticipated. I think Tom referenced, we did have a pretty meaningful order in our RIM Bio business of nearly $10 that slipped from our plan in December into the early part of this year due to a supplier constraint. So absent that, I think it was another double-digit quarter and a really strong finish to the year. As we think about 2023, again, we'll deal with these destocking events through the first half of the year. And overall, we expect another year of double-digit organic revenue growth in bioproduction. Our next question comes from Tejas Sevant with Morgan Stanley. Please go ahead. Tejas, your line is open. Please proceed with your question. Hey, guys. Sorry about that. I was on mute. Just a few follow-ups there, Michael. Starting with bioproduction, can you give us just what your open order growth was in terms of the order book at year-end '22 versus year-end '21? And second, in terms of the guide itself, would you be willing to break out what you're assuming for Masterflex, Ritter and RIM versus the $393 million that you did in '22? And then finally, Tom, on your comments on free cash flow. Could you elaborate a little bit on some of those working capital improvements that you referenced that you expect to provide an offset to the growth investments here in '23? Thank you. Thanks, Tejas, for the questions. Appreciate you joining us today. On bioproduction, I think the setup for that space, as I just mentioned, is quite strong heading into the year. We have a really terrific order book that reflects I think the strong underlying market fundamentals as well as, I think, the investments that we've made in capacity to improve service levels and bring down lead times. We were fortunate even in the fourth quarter to reduce the lead times on several hundred GMP materials, which will support our customers' growth, as we move into the year. So a great backdrop from an order book standpoint to start the year. Relative to our acquisitions in terms of how we think about those shaping up in 2023, we expect Masterflex tubing headwinds side by midyear and would return to double-digit core organic growth in the back half of '23. Ritter business has certainly stabilized. I think if you look at the outperformance relative to plan in the second half of the year, finishing above the high end of our guide, certainly gives us a little bit of momentum heading into the year. And the way I would think about Ritter is a sequential improvement, as we move quarter-to-quarter here as the effects of all the work that we're doing around end customer conversion through our channel, as well as, and importantly, the impacts of all of the NPIs that will be launched as part of our technology road map. We had some pretty meaningful launches in the fourth quarter and another four or so launches planned for the first half of the year that will put us in position to continue to improve the trajectory of that business. And I would say, in aggregate, we do expect on a full year basis growth for our - for these acquisitions. Yes, Tejas. And just to answer the question on working capital. I mean I think the important backdrop here is that business continues to generate a strong amount of cash and has since the IPO. We're a low CapEx model and our conversion relative to our net income is generally pretty strong relative to our peers. 2022 was a unique year in many ways, and I think our supply chain was probably the most impacted by the events that we've seen unfold over the course of the last couple of years. We've made a fair amount of investment in our inventory to cushion and manage the availability of inventory and also to protect our customers, their supply chains. So no secret when you look at our statement of cash flows that inventory has been an area of build for us in both '21 and '22. Michael referenced lead times when he's talking about open orders, that certainly has an impact on inventory levels as well. And we are starting to see significant improvements as a result of the actions that our supply chain teams have taken on reducing lead times, both from our suppliers as well as within our own four walls of our distribution manufacturing. So we're encouraged by that. We think we can take a few days out of inventory over the course of 2023. The other aspect is that '22 was unique for the pricing environment that we're in as well. They were probably an unprecedented level of number of pricing changes. And that makes it challenging to stay synchronized with your customers on individual invoices and at times, there can be confusion. We've worked through most of that. I think on the receivables side, we're pretty confident that we'll be able to take a couple of days out of that as well over the course of the year. So things [ph] are looking up. And I think the working capital investments we've made have paid off, but I think we do see some opportunity there, and that's reflected in our free cash flow guidance. Thank you. Thank you. Tom, you mentioned that customer contract renewals pressured free cash flow in the quarter. Could you circle back to that? What types of investments are associated with a contract renewal? And was there anything abnormal in the fourth quarter? Or was this just normal course of business? Yes. The business model with most of our customers is to drive volumes and to drive growth. And you typically enter into long-term agreements with the customers, could be anywhere from 3 to 7 years, and they're often extended. And so it's a natural part of the business that either you have a contract coming up that you extend or in the case of some of the ones that Michael has mentioned, we actually can expand the services in those. But embedded in the business model are incentives to drive volume growth for the customers. And it's pretty formula in terms of the milestones that they achieve on growth - cumulative growth relative in particular product categories and whatnot. And so when you enter into new agreements or extended agreements, there typically is an upfront type of pre-date [ph] as well that gets factored into the equation. And we deal with those all the time. It's just the size and magnitude of the customers we've talked about in the fourth quarter, took more out of our free cash flow than is normal. But we're quite excited by the investments we think they're going to drive - continue to drive really strong growth for us, as we go forward in those customers, so that's the mark. Thanks, good morning. Mike just on the Service and Specialty segment was down low single digits in the fourth quarter. Can you unpack that a bit? And Tom, are there any selling day variances to be aware of that you'd like to call out for this year looking forward? Yes. Thanks for the question, Brandon. Overall, the Services and Specialty procurement part of our offering is an important aspect of kind of the customer intimacy model that we do have and gives us a pretty privileged position with our customers. I would say a couple of factors that drove kind of the underperformance in that part of the offering in the fourth quarter. Certainly, the specialty procurement nature of that reflects, I would say, just the overall macro environment and the level of activity in our customers labs, as well as probably a muted year-end budget flush. Part of the offering there is to support procurement of materials that aren't necessarily a core part of our portfolio. And we saw a somewhat muted finish to the year, particularly in the Americas. So I don't think anything that particularly caught our attention there other than just a reflection of the environment activity levels. Here in the early days of the first quarter have been strong, and we're certainly encouraged by the trajectory that we've got here out of the gates, but really just related to, I would say, the overall macro environment and destocking and a more muted year-end budget flush. Thanks, Brandon. On the selling days, I assume you mean going forward. And for 2023, overall for the full year, the number of selling days is the same as 2022, roughly. You'll have a little bit of favorability in the first quarter, and we end up giving that back in the third quarter. I think the second and fourth quarters selling days are roughly equal year-over-year. Thank you. Good morning. Thanks for taking my questions. A two-parter for you. First, would be helpful to hear your thoughts on just how prudent you view the flat to up to organic guide to be. When you consider moving pieces like inventory destocking price, and I guess, underlying demand do you think the 2% assumes a base case scenario for these variables? Do you think the first quarter guide, for example, captures the base case? Yes. Thanks for the question, Josh. What I would say about our guidance is that it certainly does reflect the number of variables that we see and certainly is underpinned by our view of really strong end market fundamentals, particularly in the life sciences space. The 250 basis points of kind of macro headwinds that we've categorized certainly reflects our view today of destocking, as well as I would say, a step down in our applied growth rates from '22 into '23. We ran well ahead of our long-term algorithm in '22 in that part of the market. Most quarters were high single digit, low double digits, in an end market that more classically for us grows mid-single digits. So within that 250 basis points also reflects a normalization of growth in that part of the business and a pretty meaningful step down in the semiconductor end market, for example. On the other side, we do see continued strong contribution from price in the year ahead, maybe not quite as strong as in '22, but certainly above our long-term algorithm. So we're closely monitoring the dynamics that are at play here. We're certainly working hard to identify opportunities to offset some of the headwinds in other parts of our portfolio like in bio materials. We recognize there's a sequential ramp in growth rates throughout the year to achieve the guidance that we've put out there. But we have certainly confidence in the shape of the plan, given the demand signals that we see today, as well as a moderation in comparables in the back half of the year. So when we put all that together, I think we're confident in the plan. I think it's a prudent place to start. Those are all the questions we have time for today. So I'll now turn the call back to Michael for the conclusion remarks. Yes. Thank you, and thank you all for participating in our call today. Certainly appreciate your support and look forward to updating you when we meet next. And until then, take care and be well, everyone. Thank you.
EarningCall_531	Thank you for taking time out of your very busy schedule to join us for the FY â22 Q3 Earnings Announcement by Takeda. My name is OâReilly, Head of IR. Iâll be the master of ceremony today. [Operator Instructions] Before starting, Iâd like to remind everyone that we will be using forward-looking statements in the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today. The factors that could cause the actual results to differ materially are discussed in the most recent Form 20-F and our other SEC filings. Please also refer to the important notice on Page 2 of the presentation regarding forward-looking statements and our non-IFRS financial measures, which will also be discussed during this call. Definitions of our non-IFRS measures and reconciliations with the comparable IFRS financial measures are included in the appendix of the presentation. Now, we would like to move to the presentation and the presenters are Christophe Weber, President and CEO; Andy Plump, President of R&D; Costa Saroukos, Chief Financial Officer. And after the presentation, we will have time for Q&A. Let us start. Thank you, Chris. Thank you everyone for joining us today. Itâs a real pleasure to be with you. I am pleased to report that Takeda has delivered another strong quarter and we are reinforcing our long-term growth through pipeline advancements and two targeted acquisitions. These developments are well aligned with our vision to discover and deliver life-transforming treatments guided by our commitment to patients, our people and the planet. This purpose-led approach is at the core of our strategy for global growth and long-term value creation for our stakeholders. In order to do that, we aim to create a diverse, equitable and inclusive working environment for Takeda colleagues. Our focus on creating an exceptional people experience has been critical in allowing us to maintain and develop talent, especially during the recent challenges of the pandemic. I am very proud that these efforts continue to be recognized. Last month, for the sixth consecutive year, we were 1 of only 15 companies to achieve global top employer certification for 2023. In addition to this global certification, Takeda was recognized as a top employer across 22 countries. If now we move on the next slide, we have again delivered strong revenue and profit growth as we continue to execute on our strategy. Let me take you through some of our recent highlights. In Q3 year-to-date, core revenue was almost JPY3.1 trillion, with growth of 4.5% at a constant exchange rate. Our top line continued to be driven by great momentum from our growth and launch products, which now represents 39% of total revenue and grew at 20% year-to-date at a constant exchange rate. Core operating profit was JPY954.7 billion, enabling us to maintain a competitive core operating profit margin of 31.1% and core earnings per share was JPY456 with growth of 17.1% at a constant exchange rate. This result very clearly keep us on track to deliver our management guidance of low single-digit core revenue growth and high single-digit core operating profit and core EPS growth on a constant exchange rate basis. And in fact, we are tracking toward the high-end of some of these metrics. Moving now to the right hand side of the slide, we are progressing on our journey to build one of the most exciting and diverse pipeline in the industry. In December, we achieved a significant milestone as our dengue vaccine, QDENGA, was approved for use in the European Union against any serotype in individuals 4 years of age and older. This followed a positive CHMP opinion in October recommending approval in the EU and in dengue-endemic countries participating in the parallel EU medicine for all procedure. We reached a further crucial milestone late last year when the U.S. FDA accepted our dengue vaccines candidate for priority review. We also had three positive late-stage trial readouts since our last quarterly update. In January, we announced favorable safety and efficacy results for TAK-755 from the first and only Phase 3 trial in CTTP, an ultra-rare disease with limited treatment options. Based on this data, we plan to submit TAK-755 for marketing authorization. In addition, the result from our Phase 3 AURORA trial for LIVTENCITY, maribavir, were encouraging, demonstrating evidence of durable antiviral efficacy and confirming the favorable safety profile despite not meeting the primary endpoints of non-inferiority at 8 weeks. Full data results will be submitted to a peer-reviewed journal and are being shared with regulatory agencies. Andy will share additional information on these two studies later in the presentation. In January, together with our partner, Arrowhead, we announced positive Phase 2 data for fazirsiran in alpha-1 antitrypsin deficiency associated liver disease. Takeda is responsible for taking this program into a Phase 3 study, which we expect to begin very soon. Moving to the mid-stage pipeline, TAK-861, our oral Orexin agonist for narcolepsy has met our pre-specified criteria to advance the program into two Phase 2b studies in narcolepsy type 1 and type 2. We have been proactively planning these studies and we will be able to move very quickly. Both Phase 2b trials are currently enrolling patients. To supplement this positive development in our pipeline, we are making strategic investments in long-term growth in line with our capital allocation policy. In December, we announced a major agreement with Nimbus Therapeutics to acquire our potential best-in-class TYK2 inhibitors to be known as TAK-279 after closing. This acquisition is fully aligned with our strategy and adds another important life stage therapy to our pipeline. This therapy has possible indication across a broad range of disease, including psoriasis, psoriatic arthritis, inflammatory bowel disease and lupus. It represents clearly a very significant potential opportunity in this market. We could potentially find this program within the fiscal year â25 to â27 timeframe, which means it could be generating significant revenue by the time [indiscernible] biosimilar, reinforcing our growth profile into the next decade. We were able to take advantage of this exceptionally rare opportunity because of our financial discipline and our success in deleveraging, which is driving our strong free cash flow. We will maintain that strong financial discipline as we continue to look for opportunities to enhance our pipeline with mid to late-stage assets. In January, we announced an exclusive licensing agreement with HUTCHMED for fruquintinib, a highly selective VEGFR1/2/3 oral tyrosine kinase inhibitor. Fruquintinib offers a potential new treatment option for patients with refractory metastatic colorectal cancer regardless of biomarker status. The agreement will give us exclusive rights to further develop and commercialize fruquintinib worldwide, excluding China, Hong Kong and Macau. We plan to complete regulatory submissions in the U.S., Europe and Japan in 2023. Including this quarter has reinforced our growth outlook. We continue to deliver on our financial commitment to progress our pipeline and to create long-term value for our stakeholders while we fulfill our purpose of bringing better health for people and a brighter future for the world. Thank you, Christophe and hello to everyone on the call today. If we go to the next slide, please. Our pipeline continues to advance with very strong momentum this quarter and fiscal year. I am excited to share several important pipeline updates that have been achieved just this quarter. As Christophe mentioned, Takedaâs dengue vaccine, QDENGA, was approved in the EU and received a positive CHMP opinion for endemic countries participating in the EU medicines for all program. In addition, the U.S. filing is complete and QDENGA received priority review. As a result of these efforts, Takeda is on track to provide broad access to this critical vaccine with many additional approvals and launches in the near future. QDENGA is a transformative vaccine that fills a substantial unmet need for individuals in and travelers to warm weather climates. QDENGA has the potential to prevent morbidity and mortality from dengue in endemic regions across the globe, where about half the worldâs population lives. Important clinical updates include TAK-755, which at an interim analysis of the Phase 3 study, demonstrated robust efficacy and a strong safety profile compared to the standard of care in congenital thrombotic thrombocytopenic purpura or CTTP. We will file for approval of TAK-755 as the first recombinant ADAMTS13 replacement therapy for cTTP. I will discuss these data in more detail later in this presentation. LIVTENCITY is up next. In the Phase 3 AURORA study, LIVTENCITY provided clear evidence of durable antiviral efficacy in hematopoietic stem cell transplant patients with first-line CMV infections. In addition, we confirmed its favorable safety profile versus the standard of care. We are excited to engage regulatory agencies about our filing strategy in the very near future. Next, ICLUSIG, our third-generation tyrosine kinase inhibitor designed to block BCR-ABL. ICLUSIG met the primary endpoint in the Phase 3 PhALLCON study, demonstrating higher rates of minimal residual disease or MRD negative complete response when compared head-to-head with imatinib in frontline Philadelphia chromosome positive ALL. MRD negativity is associated with improvement in long-term outcomes for patients as reported in the scientific literature. We are discussing these potentially practice-changing data with regulatory agencies and will be the featured abstract in Februaryâs ASCO Plenary Series. In early January, Takeda, with our partner, Arrowhead, announced positive results for fazirsiran from the blinded Phase 2 SEQUOIA trial. Fazirsiran is a potential first-in-class RNA interference therapy designed to reduce the production of mutant alpha-1 antitrypsin protein or Z AAT as a potential treatment for the rare genetic liver disease associated with alpha-1 antitrypsin deficiency. Fazirsiran demonstrated a dramatic decrease in circulating mutant Z AAT as well as liver Z AAT globules. In addition, the percent improvement in portal inflammation and change in fibrosis were consistent with the prior open-labeled Phase 2 results. We have opened the Phase 3 study with the primary endpoint of decrease from baseline of at least one stage of histologic fibrosis measured at week 106. We believe that patients who received fazirsiran for 2 years should demonstrate continued therapeutic benefit with improvements in liver fibrosis. Also in January, as Christophe mentioned, we announced the advancement of TAK-861 into two Phase 2b dose-ranging studies for patients with narcolepsy type 1 and narcolepsy type 2. We remain very excited about our Orexin franchise. We believe our oral Orexin agonist, TAK-861, has the potential to transform treatment for patients suffering from narcolepsy. I will describe the directional criteria used to make this decision shortly. The last clinical update we would like to share is a new Phase 2 start for TAK-341, an antibody therapy targeting alpha-synuclein for multiple system atrophy or MSA. MSA is a rare, progressive and fatal neurodegenerative disorder. Our Phase 1 study showed strong target engagement and a significant reduction of CSF alpha-synuclein. We believe there is a strong biologic rationale that preventing the accumulation of alpha-synuclein could be a disease-modifying approach for MSA patients, for which there are currently no approved therapies. And finally, again, as Christophe mentioned earlier, we recently signed two late-stage pipeline-enhancing deals that are pending antitrust reviews. We announced our intent to acquire a late-stage potential best-in-class oral allosteric TYK2 inhibitor from Nimbus Therapeutics. Data from a Phase 2b study of this molecule in patients with psoriasis are targeted for presentation in March just next month. With its unique allosteric mechanism of action, this asset is a potent and highly selective TYK2 inhibitor with exceptional clinical activity, a strong tolerability profile and wide therapeutic margins. We believe it has best-in-class potential across a wide range of immune-mediated conditions. The second deal is a licensing agreement with HUTCHMED that gives Takeda worldwide rights outside of China to fruquintinib, a highly selective oral VEGF receptor tyrosine kinase inhibitor thatâs already demonstrated a significant overall survival benefit in refractory metastatic colorectal cancer. Our partner, HUTCHMED has started a rolling submissions process with the U.S. FDA. Regulatory submissions are expected to be completed in the U.S., EU and Japan in fiscal year 2023. Next slide, please. Shown here are our 10 late-stage development programs, which continue to advance. Additional progress this quarter includes the LIVTENCITY filing for relapsed refractory CMV in China and a submission of QDENGA in the U.S., which received priority review. As evidenced by the two late-stage deal announcements, Nimbus and HUTCHMED, we continue to look for transformative programs within our therapeutic areas that can add to our late-stage development program and contribute to our marketed portfolio this decade. Next slide, please. We are energized by recent developments in our mid-stage pipeline that continues to mature and advance. As mentioned earlier, this quarter, we advanced TAK-861 into two Phase 2b dose-ranging studies for patients with narcolepsies type 1 and 2. This decision was made based on the careful review of preclinical toxicology data, data from the single and multiple ascending dose healthy volunteer cohorts, data from studies of healthy volunteers subject to sleep deprivation, and finally, efficacy and safety data for patients with narcolepsy type 1. The pre-specified Phase 1b efficacy criteria are equivalent to those used to evaluate our other Orexin agonists. The safety review included liver safety assessments for up to 4 weeks of treatment. Our decision to progress was based upon the data for TAK-861 and our extensive datasets from prior Orexin agonist development. In addition, we highlight in green a recent submission to an upcoming conference, promising early data for TAK-925 in healthy volunteers recovering from anesthesia. We hope to share these data with you early in fiscal year 2023. At our year end call, we plan to share progress across the mid-stage programs shown here. These programs are the first of many new molecular entities that could emerge from our rich and transformative early to mid-stage pipeline, adding to our growing late-stage portfolio. Next slide, please. Shown here are select expansion opportunities we have for our major brands. Subcutaneous ENTYVIO was filed in Japan for Crohnâs disease earlier than our initial plan. We continue to expect an ENTYVIO subcutaneous U.S. filing in early 2023. The EU filing for the approval of TAKHZYRO to treat pediatric patients is complete, as is the U.S. submission for TAK-880, an IVIG therapy for patients with the sensitivity to immunoglobulin A. Next slide, please. As you can see illustrated here, Q3 had many regulatory and Phase 3 highlights that added to our pipeline momentum. Positive regulatory updates include QDENGA approval in the EU and UK. LIVTENCITY achieved EU approval this quarter and EXKIVITY was approved in China earlier than our initial target of fiscal year 2023. Lastly, the HyHub device, which is designed to improve the patient experience by reducing the number of steps required to complete an infusion of HYQVIA will now have a regulatory decision in the first half of fiscal year 2023. We have received some end-of-review requests from the FDA that we believe can be satisfied through additional analytical testing. Now letâs look at TAK-755 and LIVTENCITY data. Next slide, please. TAK-755 is our recombinant ADAMTS13 replacement therapy designed to address the underlying cause of congenital TTP. The interim analysis of the first and only Phase 3 pivotal trial in cTTP patients showed a 60% reduction in the incidence of thrombocytopenic events versus the standard of care, which is plasma derived from fresh frozen plasma or FFP. TAK-755 also showed that a substantially lower proportion of subjects experienced adverse events. These and many other clinically relevant benefits from this head-to-head trial will be presented at a medical meeting later this year. As you can see on the right, we have ADAMTS13 activity plotted versus time at varying doses. The 40 units per kilogram dose was the one used in the Phase 3 trial and is plotted in green. The gray and shaded area between the 5 and 20-unit curves is representative of the activity we would expect from the plasma standard of care, which typically provides about 10 units per kilogram of activity. These positive results are perhaps not surprising given the higher level and longer duration of ADAMTS13 activity projected. Our recombinant therapy can provide consistent and higher ADAMTS13 replacement with less risk of allergic reactions and no concerns for volume overload. TAK-755 is also being developed in immune TTP, a much more prevalent form of this disease. Next slide, please. The AURORA trial was the largest head-to-head comparison of LIVTENCITY versus the standard of care, valganciclovir, in patients undergoing hematopoietic stem cell transplant who develop CMV infections. Despite just missing achievement of non-inferiority at the primary endpoint, we believe the durable efficacy and favorable safety profile is clinically meaningful and potentially label enhancing. I would like to highlight the sustained numerically higher rate of long-term CMV clearance at weeks 12, 16 and 20, showing evidence of durable antiviral efficacy as well as the compelling favorable safety profile, which includes a significantly lower rate of treatment-emergent neutropenia. We will be engaging regulatory agencies shortly about a path forward. Thank you, Andy and hello everyone. This is Costa Saroukos speaking. Today, Iâll walk you through the financial highlights of our fiscal 2022 third quarter results. And Iâm pleased to say that it has been another strong quarter of growth. Core revenue for the 9-month period was JPY3.07 trillion or approximately $23.3 billion. Despite the entry of VELCADE Generics in May 2022, we continue to deliver solid top line growth, up 4.5% versus prior year at constant exchange rate, driven by our Growth and Launch products. These products now represent 39% of total revenue and grew 20% at constant exchange rate. Reported revenue growth was 13.9%, with business momentum and foreign exchange upside more than offsetting the impact of a JPY133 billion gain from the sale of the Japan Diabetes business that was booked in Q1 of prior year. Core operating profit grew 9.7% at constant exchange rate to JPY954.7 billion, and our core operating profit margin was 31.1%, an increase of 1.5 percentage points on a year-over-year basis. This year-on-year margin improvement is an indicator of our financial resilience and our ability to control costs. In fact, at a constant exchange rate, our SG&A spend continues to be lower than last year. Reported operating profit declined 13.1% year-to-date impacted by the sale of our diabetes portfolio last year, but this impact is diminishing as each quarter goes by, and we still expect to end the full year with growth. Free cash flow was very strong at JPY585.2 billion, and net debt to adjusted EBITDA came down to 2.5x from 2.8x at the start of the fiscal year, even after paying the full year dividend. With regard to the full year outlook, we remain on track to our management guidance for constant exchange rate growth, although we are actually tracking towards the higher end of this guidance on some measures. Our reported and core forecast remain unchanged. Slide 16 shows our first half results in more detail. On the left-hand side are our reported results. As highlighted in previous quarters, the sale of the Japan Diabetes portfolio in Q1 of last year is impacting our reported operating profit growth, but reported EPS is actually up 19.6%, benefiting from a favorable reported tax rate. Focusing on the core numbers on the right. Iâm very pleased with the year-to-date growth we are delivering on a constant exchange rate basis with revenue up 4.5%, core operating profit up 9.7% and core EPS growth of 17.1%. On top of that, FX has been a significant tailwind for us this year, resulting in actual core revenue growth of close to 20% and core EPS growth of 37%. Let me go into more details on the Q3 year-to-date revenue performance versus prior year on Slide 17. On the left is a waterfall chart for reported revenue, which grew at 13.9% year-on-year with business momentum and FX favorability more than offsetting the impact of the JPY133 billion one-off we booked in Q1 of last year from the sale of the Japan Diabetes portfolio. Core revenue on the right-hand side excludes the impact of the Diabetes portfolio sale in the prior year. You can see our business momentum was driving 4.5% growth at constant exchange rate, with the additional FX tailwind raising total core revenue growth to 19.8%. On Slide 18, you can see that the key driver of top line growth is our portfolio of Growth and Launch products, which generated approximately JPY1.2 trillion or 39% of total revenue quarter three year-to-date with 20% growth at constant exchange rates. Incrementally, these products added JPY350 billion or $2.7 billion of revenue compared to last year. This is the portfolio driving total company growth this year despite the VELCADE loss of exclusivity, and we expect that the continued momentum of these products will allow us to offset VELCADE Generics in fiscal 2023. With our five key business areas; GI, our largest area by revenue, grew at 11% year-to-date on a constant exchange rate basis. This was spearheaded by ENTYVIO, which grew 17% driven by a continued increase in bio-naive patient share. In Rare Diseases, which grew 5%, we see continued demand and geographic expansion for TAKHZYRO, which delivered growth of 25%. We also see early indicators of success with the LIVTENCITY launch, with 87% of transplant centers in the U.S. having now initiated therapy with at least one patient. PDT Immunology continues to be very strong with 18% growth, including 19% growth of immunoglobulin and 20% growth of albumin, reflecting strong demand. We have continued to expand our plasma donation center network, adding 21 centers in the fiscal year to date, bringing our global footprint now to 225 centers. Next is Oncology, which is declining year-on-year as expected, given the VELCADE Generics entered the U.S. market from May this year. Excluding VELCADE, the rest of the portfolio grew 7% driven by ALUNBRIG, EXKIVITY, ADCETRIS and ICLUSIG. Finally, Neuroscience continues to perform very well with growth of 10% driven by VYVANSE and TRINTELLIX, while the other segment is declining due to some regional loss of exclusivities in Japan. The other segment also includes our COVID-19 vaccines in Japan. We are seeing low market demand for NUVAXOVID than expected given the current situation of vaccination in Japan and prevalence of Omicron. On Slide 19, we show the drivers of reported and core operating profit for the quarter. Reported operating profit was JPY401.9 billion, a decline of 13.1% versus prior year. Again, the decline is predominantly coming from the gain on the sale of the Japan Diabetes portfolio, which contributed JPY131.4 billion to reported operating profit last year. We also had some one-off items impacting the other column here, such as impairments of intangible assets, which includes NATPARA and higher pre-launch inventory in preparation for future launches. On the right side of the slide, you can see the core operating profit was JPY954.7 billion, with our business momentum driving 9.7% growth at constant exchange rate. Foreign exchange was an additional benefit, resulting in actual core operating profit growth of 26%. Moving to cash flow on Slide 20. This slide shows our year-to-date free cash flow of JPY585.2 billion, comfortably covering the full year dividend and also the net interest payment. We also continue to make progress in reducing our debt with a total amount of JPY281.6 billion paid year-to-date, including prepayments of higher interest debt maturing in November 2023. We closed December with ample cash of JPY685 billion, and total liquidity of JPY1.3 trillion or roughly $9.5 billion. This gives us the comfort to pay for the TAK-279 acquisition from Nimbus, primarily utilizing cash on hand, pending deal completion, which we hope will occur within this fiscal year. Slide 21. The net debt balance compared to the end of March demonstrates the continuation of our steady deleveraging progress from 2.8x down to 2.5x. Although we continue to make progress with debt repayment, the amount of debt on our balance sheet in Japanese yen terms increased over the period due to the depreciation of the yen versus the dollar and euro, and this movement is captured within the other bar in the chart. However, as a reminder, the depreciation of yen also benefited EBITDA, which means the impact of FX on our leverage ratio is minimal. Also, we have structured the currency denomination of our debt to mirror our cash flow, which ensures that over time, we will be able to pay down debt with minimal impact from FX movements. On Slide 22, you can see our debt maturity ladder as of December. As demonstrated on the cash flow slide, we have already paid off significant amount of debt this fiscal year, including a total of $1.2 billion of higher interest USD-denominated bonds and â¬750 million of floating rate bonds. As a result, our debt is now 100% fixed rate, and our weighted average remains around 2%. We remain very comfortable with the debt maturity profile over the coming years. Next, moving to Slide 23 and our outlook for full year 2022. Iâm pleased to say that we are on track to meet our full year management guidance for growth at constant exchange rate, with core revenue growing at low single digit and core operating profit and core EPS growing high single digit. And in fact, we are trending towards the high end of the range for some of these metrics. For our reported and core forecast, we are keeping our numbers unchanged from the update we gave at Q2. On a reported basis, we still anticipate revenue to be JPY3.93 trillion, operating profit JPY530 billion and EPS of JPY198. On a core basis, revenue is expected to be JPY3.93 trillion, with core operating profit expected to reach JPY1.18 trillion and core EPS to reach JPY525. With regards to free cash flow, we are keeping our forecast unchanged at JPY650 billion to JPY750 billion, although please note that it does not include the impact of the TAK-279 acquisition from Nimbus, which may impact this number if the deal closes within this fiscal year. To close out the presentation on Slide 24, Iâd like to reemphasize the key elements of our strategy to deliver sustainable growth and value to our shareholders. We continue to see strong momentum from our commercial portfolio, which enabled us to deliver 4.5% core revenue growth at constant exchange rate Q3 year-to-date. This is driven predominantly by our Growth and Launch products, growing at 20% on a constant exchange rate basis, more than offsetting the impact of generic visions of VELCADE that launched in May 2022. Our margins are strong at 31.1%, and we delivered year-to-date core operating profit growth of 9.7% at constant exchange rate, well on track towards full year guidance of high single-digit growth. And our success is built on a solid financial foundation with robust cash flow that we will continue to allocate towards growth opportunities such as the recent new deals with Nimbus and HUTCHMED while continuing to focus on competitive shareholder returns. We have abundant liquidity and a well-structured debt profile of 100% fixed rates at an average cost of 2%, which positions us well in the current macro environment. Finally, before we open up to Q&A, Iâd like to bring to your attention an upcoming investor call we have scheduled for mid-March focusing on our launch plans and commercial strategy for QDENGA. We look forward to your participation in this event. Now, weâd like to take questions from the participants. And here in the Q&A session, Ramona Sequeira, President, Global Portfolio division is joining together with Christophe, Andy and Costa. [Operator Instructions] The first question is Yamaguchi-san, Citigroup, please. Thank you. Thank you very much. So this is Yamaguchi. Two quick. I think itâs better to make two questions at the same time. The first question is at margin questions. COGS and margin itself, just looking at the quarter by quarter on a sequential basis, itâs trending down especially in the Q1 to Q2 to Q2 to Q3. Can you give us a reason why or is it coming from the business mix, maybe it may have an impact on that one? But is this in line with your expectation or itâs little bit slower lower than your expectation? Thatâs the first question, cost of goods sold on the margin question. The second question, regarding [indiscernible] therapeutics, I understand the quarter doesnât â quarter itâs not necessarily important, but this quarter pretty strong especially in IgG and also albumin. Can you give me the price conditions or marketing conditions or margin conditions regarding PDT especially in the U.S.? Thank you. Thank you, Yamaguchi-san. For the first question on gross profit margins on a quarter-to-quarter basis, I will ask Costa to answer that question. And then regarding the PDT business, market dynamics, pricing dynamics, I would like to ask Christophe to answer that one. Thank you, Yamaguchi-san for your question. Let me just refer to your question. More on a year-to-date basis, we typically, given the way the business operates, the seasonality impact and quarter-by-quarter, we prefer to look at the year-to-date. So, if you look at year-to-date, the gross profit margin year-to-date â Q3 year-to-date versus Q3 year-to-date â21, in fact, our gross profit is improving on an actual basis by 0.5% and on a constant exchange basis, itâs grown by 0.1%. And the main reason for this, gross profit improvement on a year-to-date basis is because of the strength of our Growth and Launch portfolio. At the same time, if you look at our core operating profit margin, itâs improved year-to-date by 1.5% for both actual and constant exchange rate. And again, the main reason is driven by the Growth and Launch products, coupled by our laser-focused efforts on managing costs, in particular, SG&A, where you see our SG&A, itâs actually favorable. So, weâre at â itâs 1.6% favorable versus prior year year-to-date. So, please consider the year-to-date numbers and the year-to-date numbers are really looking favorable overall. Thank you. Thank you, Yamaguchi-san. Itâs Christophe. Our PDT growth is really driven by volume and demand. Itâs not price-driven growth. Our portfolio is growing well. Our SCIG, CUVITRU and IQVIA are growing also well. And they are significant growth driver. We have, in the quarter, by the way, we continued to increase our donation center. We added five new donation centers. So, we are on track to expand our network as planned by about 25 centers in fiscal year 2022. We â in terms of the donor cost â donor compensation, as we announced previously, we have been able to reduce slightly the donor compensation and to maintain that level in this Q3. So, really, a growth driven by the business fundamental. Thank you. It seems that I am in the Japanese channel. TAK-755, I have a question about TAK-755. If my understanding is correct, this is basically caplacizumab or cTTP, recurrence is suppressed, similar to that drug. And there is no plasma exchange and the bleeding event is fewer with the 755. Thatâs my understanding. So, is that correct? Thatâs my first question. And the second question is, I understand that you are going to be filing for this product. It was not part of the press release. But is this only for on-demand, or does it also include a prophylactic use? So, please explain that. Thatâs my first question. Yes. My second question is about TAK-341, alpha-synuclein antibody is my understanding. So, in Parkinsonâs disease, you are doing Phase 1. And Mr. Plump mentioned that this short target engagement, and this is of course, for MSA, MSA actually involved alpha-synuclein. So, diagnostic criteria for MSA is just symptoms as far as I understand. So, can we really include true MSA patients in the clinical trials? How accurate can you be with that enrollment? And starting from this study, the sponsor started to be Takeda, not AstraZeneca. So, can you please explain why the sponsor has changed to Takeda? Thatâs my second question. So, I think these are both for Andy. So, the first question on TAK-755. So, understanding similar efficacy is for [indiscernible], but without the need for plasma exchange, is it correct, there is no bleeding events? And then for the filing, would it be on demand or is there also a prophylaxis indication possibly? And then the next question on TAK-341, was in Phase 1 for Parkinsonâs now moving into a Phase 2 for MSA. But we â certainly, we can enroll the right patients given that a lot of the diagnosis is based on symptoms. So, are we sure we can correctly enroll these MSA patients? And why is Takeda be taking over leading this trial from AstraZeneca? So, I will hand over to Andy, please. Terrific. Thank you very much, Koutani -san. This is Andy. So firstly, on TAK-755, the data that we have accumulated in our Phase 3 study is both in prophylactic and in acute settings. cTTP, whether itâs congenital or immune mediated is related to either a complete deficiency or a functional deficiency and ADAMTS13 activity. So, TAK-755 is quite distinct from any existing therapy. Itâs a recombinant form of ADAMTS13. And so, we are essentially providing an enzyme replacement therapy. We are placing either the genetic or the acquired deficiency in this enzyme. And the activity that we have seen in the Phase 3 study in cTTP is quite remarkable. TTP is a very complex disease. You have both clotting and bleeding. And so, the endpoints are related to both clotting organ damage that you see when you move blood flow to an organ and also bleeding. And we saw benefits across all endpoints in our Phase 3 study. And we will be presenting those shortly, and you will have a chance to see them. With respect to TAK-341, you are correct. MSA is a clinical diagnosis and has many overlaps with Parkinsonâs disease. There are some distinguishing features. The rapidity of progression is one. And then there are some neuropsychiatric manifestations in MSA, which are different. But it is a diagnosis â clinical diagnosis. And so, itâs possible that some of the patients that we would include in our MSA study may not actually have MSA. I donât think that, thatâs necessarily important because our expectation is that not only will TAK-341 be effective in MSA, but we have a strong hypothesis to think that TAK-341 could be effective in Parkinsonâs disease. We are starting with MSA, because itâs a more streamlined Phase 2 and Phase 3 study. We think that we can see efficacy more rapidly in MSA. But we are also considering very seriously moving into Parkinsonâs disease as well. And then finally, this program is a partnership with AstraZeneca. The terms of the partnership were that AstraZeneca would manage the Phase 1 program, and starting in Phase 2 and Phase 3, Takeda would take over the market authorization application. Thank you. Wakao speaking, JPMorgan. Thank you very much. I have two questions. First is TYK2 EBITDA. In March, Phase 2b result will be announced. And looking at this Phase 2b results compared to deucravacitinib of Bristol, can we tell that this is superior? Phase 2 endpoint is, I think PASI 75 and compared to deucravacitinib, can we consider that it is expected that this Nimbus molecule is superior? Thatâs first question. Second question is about 861. You proceeded to Phase 2. And in TAK-994, there are some safety setbacks, but can you now believe that itâs totally eliminated, or still there is potentially a possibility of the similar risk in Phase 2 and you will monitor it? And I think it is for long-acting molecule. However, in terms of the concept, is it the similar sort of molecules? Thank you. I think both of these for Andy as well. So, the first question on the TYK2 inhibitor. So, we will see Phase 2b data in March. And will that data allow us to see superiority versus the Bristol product in the PASI 75 scores? And then the second question on TAK-861. Does this mean that we have fully overcome the TAK-994 safety issues, or does that possibility remain in Phase 2? And previously, we talked about this â about having a longer half-life, a longer duration. And is that still the case with TAK-861? Over to you, Andy? So, the TYK2 Phase 2b psoriasis â I am sorry, the TYK2 Phase 2b psoriasis data will â Nimbus has already disclosed if they intend to present that in March. The hope is that we will be closing the deal this fiscal year, and we will be presenting those data or representing those data at a medical meeting. Itâs important to note the study did not include deucra. This was a study that was increasing doses of what we will call TAK-279 against placebo. So, you have to make cross-study comparisons. And when we looked at the data during our diligence, we felt that the study data suggested a high likelihood of a best-in-class profile. The best way to understand the potential of this molecule is to go back and look at some of the deucra Phase 2b data, right. And look at what you see in terms of clinical efficacy with increasing doses with deucra and then look at the dose that was chosen for Phase 3. So, we believe that deucra left efficacy on the table with their Phase 3 dose, perhaps to optimize the safety profile. But you will have an opportunity to see all of those data next month. With respect to TAK-861, TAK-861 is a distinct molecule to TAK-994. Itâs more potent. It has a longer half-life. Itâs a very different set of biophysical properties, and itâs dosed at a much lower level than TAK-994 to see equivalent efficacy. We havenât seen any indication of liver toxicity in our clinical studies. Now, itâs important to note that we have only dosed patients for up to four weeks, but we havenât seen any signals, which is quite encouraging. So, we are very excited to move forward with the Phase 2b study, which we will be testing a number of different doses and dose combinations. Thank you. My first question, in this third quarter, if you look at the expenses, R&D and SG&A, on a quarter-by-quarter basis, they both increased quite a lot. And based on this situation, for the full year, JPY1.18 trillion of our core profit for the full year, do we have to worry about achieving this? Thatâs my first question. And the second question is with regard to shareholder return. In the market, there is a heightened expectation for increased dividend by Takeda, and not just once, but continuous increase in dividend. So, in FY â23, â24 and â25, is your plan to continue this every year over the long-term? What is your general thinking or policy about this? Those are the two questions. Thank you. So, first question is looking at the quarter-on-quarter costs. So, R&D, SG&A tend to be higher in the third quarter. And is there any risk to the full year forecast of JPY1.18 trillion core operating profit? And then the second question on shareholder returns. What should we think about expectations of a dividend increase? Would it be something continual? And can we have the thoughts on that? So, I think both of these will direct to Costa. Great. Thank you very much, Muraoka-san. So, let me just start again just really drawing your attention to the year-to-date numbers, Q3 versus Q3 2021. So, again, quarter-by-quarter, this fluctuation seasonality on a year-to-date, we are comparing the right apples-to-apples baseline. So, on the SG&A numbers, you can see that our SG&A on a constant exchange rate is actually declining versus last year. So, itâs favorable 1.6%. And again, main driver for that is significant improvement in back office, more the G&A line with leveraging data digital technology, the Takeda business solutions and transactional effectiveness there. The R&D line, itâs up on a constant exchange basis of 5.3%, slightly above the growth of revenue, which is revenues growing at 4.5%. But a lot of that is driven by some timing of program completion. Overall, to your question on the core operating profit of JPY1.18 trillion, I can say that we are tracking well towards that on a run rate. You can see our run rate deliverable year-to-date, we are tracking well. And in fact, we are highlighting that the management guidance is at the high-single digit and perhaps in the higher range of that high-single digit number. So, very pleased with Q3 results, not only on the top line growth, but also on the OpEx and core operating profit overall. Regarding dividend increase of share buybacks or â we havenât changed, we are not changing our capital allocation policy. Again, we are very much focused on investing for growth and growth drivers. We are pleased with the trend of our net debt to adjusted EBITDA coming down even from 2.8 to 2.5, even after the full year dividend has been made. And we are tracking very well towards getting to our net debt to adjusted EBITDA targets by fiscal year â23. So, we are very much focused on that and shareholder returns. So, we are very much focused on maintaining our discipline there. If we were to give an update on the capital allocation policy, we will consider, for sure, looking at something that wouldnât be a one-timer. It will be something that will be consistent moving forward. But right now, itâs too early to communicate that. Thank you very much. Thank you. And now, the time has come to close. So, I would like to finish the Q&A session. Thank you very much for your participation, taking your precious time out of your busy schedule. If you have any individual follow-up questions, please contact IR. I would like to ask for your continued support.
EarningCall_532	Greetings, and welcome to NAPCO Security Technologies, Inc. Fiscal Second Quarter 2023 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Patrick McKillop, Vice President of Investor Relations. Thank you. You may begin. Thank you. Good morning. My name is Patrick McKillop, Vice President of Investor Relations for NAPCO Security. Thank you all for joining us for today's conference call to discuss our financial results for our fiscal second quarter 2023. By now, all of you should have had the opportunity to review the press release discussing the results. If you have not, a copy of the release is available in the Investor Relations section of our website, www.napcosecurity.com. On the call today is Richard Soloway, President and CEO of NAPCO Security Technologies; and Kevin Buchel, Executive Vice President and CFO. Before we begin, let me take a moment to read the forward-looking statement. This presentation contains forward-looking statements that are based on current expectations, estimates, forecasts and projections of future performance based on management's judgment, beliefs, current trends and anticipated product performance. These forward-looking statements include, without limitation, statements relating to growth drivers of the company's business, such as school security products and recurring revenue services, potential market opportunities, the benefits of recurring revenue products to customers and dealers, our ability to control expenses and costs and expected annual run rate for SaaS recurring monthly revenue. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. These factors include, but are not limited to, such risk factors described in our SEC filings, including our annual report on Form 10-K. Other unknown or unpredictable factors or underlying assumptions, subsequently proving to be incorrect, could cause actual results to differ materially from those in the forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. All information provided in today's press release and this conference call is as of today's date, unless otherwise stated and we undertake no duty to update such information, except as required under applicable law. I will turn the call over to Dick in a moment, but before I do, I just wanted to mention that we are actively planning our Investor Relations calendar for more NDRs and conferences in the near future as investor outreach is crucial, especially for a small-cap companies such as NAPCO and I would like to thank all of those folks that assist us in these conferences and marketing trips. Also, we invite you to come to visit our booth at the upcoming ISC West Trade Show, March 20 through the 31 in Las Vegas, Nevada. ISC West is the industry's largest trade show, with over 30,000 attendees. With that out of the way, let me turn the call over to Richard Soloway, President and CEO of NAPCO Security Technologies. Dick, the floor is yours. Thank you, Patrick. Good morning, everyone, and welcome to our conference call. Thank you for joining us today to discuss our results. We are very pleased to report our fiscal Q2 2023 record sales of $42.3 million. This is our ninth consecutive quarter of sales growth. Recurring revenue continued to grow at a very strong rate and the annual run rate is now approximately $59 million based on January 2023 recurring revenues. Our balance sheet remains strong, with our cash balances at $47.1 million, and we have no debt. We continue to focus on capitalizing on key industry trends, which include wireless, fire and intrusion alarms, school security solutions, plus enterprise access control systems and architectural locking products. The management team here at NAPCO continues to focus on the key metrics of growth, profits and returns on equity and controlling costs. These metrics are important for us as well as our shareholders. We continue to execute our business strategy and our interests are aligned with our shareholders as senior management at NAPCO owns approximately 16.5% of the equity. Before I go into greater detail, I'll now turn the call over to our CFO, Kevin Buchel, who will provide an overview of our fiscal first quarter results and then I'll be back with more on our strategies and outlook. Kevin? Thank you, Dick, and good morning, everybody. Net sales for the second quarter increased 27% to a quarterly record of $42.3 million, as compared to $33.4 million for the same period one year ago. Net sales for the six months ended December 31, 2022, increased 27% to $81.8 million, as compared to $65 million for the same period one year ago. Our equipment sales in Q2 increased 23% to $27.4 million, as compared to $22.4million for the same year ago period and equipment sales for the six month period also increased 23% to $53.1 million as compared to $43.2 million for the same period a year ago. Recurring monthly revenue continued its strong growth, increasing 35% in Q2 to $14.9 million, compared to $11 million for the same period last year and for the six months increased 35% to $28.7 million versus $21.3million in the same period a year ago. Our recurring service revenues now have a prospective annual runrate of approximately $59 million based on January 2023 recurring service revenues. The increase in equipment sales for the quarter were primarily due to increases in both our Alarm Lock and Marks store locking products, as well as increased sales in our Continental Access Control products. The increase in equipment sales for the six months was primarily due to increased sales of NAPCOâs intrusion products, Alarm Lock and Marks door locking products and Continental Access Control products. The strong growth of our recurring revenue for both the three and six months ended December 31, 2022 was primarily attributable to the continued strength of our StarLink cellular radio products driven by increases in the commercial intrusion and fire alarm business. Gross profit for the three months ended December 31, 2022, increased 70% to $19.4 million with a gross margin of 46%, as compared to $11.4 million with a gross margin of 34% for the same period a year ago. Gross profit for the six months ended December 31, 2022 increased 51% to $37.6 million with a gross margin of 46% and as compared to $24.9 million with a gross margin of 39% for the same period a year ago. Gross profit for equipment sales for the three months ended December 31, 2022 increased 245% to $6.2 million with a gross margin of 23%, as compared to $1.8 million with a gross margin of 8% for the same period a year ago. Gross profit for equipment sales for the six months ended December 31, 2022, increased 88% to $12.3 million with a gross margin of 23%, as compared to $6.5 million with a gross margin of 15% for the same period a year ago. Gross profit for recurring revenues for the three months ended December 31, 2022, increased 37% to $13.2 million with a gross margin of 89%, as compared to $9.6 million gross margin of 87% for the same period a year ago and gross profit on recurring revenues for the six months ended December 31, 2022, increased 38% to $25.4 million with a gross margin of 88%, as compared to $18.4 million with a gross margin of 87% for the same period a year ago. The significant increase in gross profit dollars, as well as gross margin for equipment sales for both the three and the six months ended December 31, 2022 was primarily the result of the aforementioned increases in equipment revenues, as well as increased availability and lower cost of certain components and transportation cost, as compared to the same period last year. This was as a result of improvements within the company's supply chain. The increase in revenues also resulted in improved overhead absorption rates from our Dominican Republic manufacturing facility. The increase in gross profit dollars for recurring service revenues for both the three and six months ended December 31, 2022 was due to the continued strong sales of the company's StarLink Radios. The continued increase in gross margin of recurring revenue for both the three and the six months was primarily due to increased service revenues relating to the company's fire radios, which have higher monthly selling prices than the company's intrusion radios. Research and development expenses for the three months ended December 31, 2022, increased 12% to $2.2 million, 5% of net sales, as compared to $2 million or 6% of net sales for the same period a year ago. Research and development expenses for the six months ended December 31, 2022, increased 19% to $4.7 million or 6% of net sales, as compared to $3.9 million or 6% of net sales for the same period a year ago. The increase in dollars for the three and six month periods was due primarily to salary increases and some additional staffs. Selling, general and administrative expenses for the three months ended December 31, 2022, decreased by 5% to $7.8 million or 18% of net sales, as compared to $8.2 million or 25% of net sales for the same period a year ago. The decrease in dollars resulted primarily from higher stock option expense and legal expenses incurred in the three months ended December 31, 2021. The decrease as a percentage of net sales was due primarily to the increase in net sales as well as the aforementioned decrease in expense dollars. Selling, general and administrative expenses for the six months ended December 31, 2022 increased by 5% to $6.3 million or 20% of net sales from $15.5 million or 24% of net sales for the same period a year ago. The increase in dollars resulted primarily from increases in credit card processing fees, insurance expense and commission expenses. The decrease as a percentage of net sales was due primarily to the increase in net sales as partially offset by the aforementioned increase in expense dollars. Operating income for the quarter increased 643% to $9.4 million, as compared to $1.3 million for the same period last year and operating income for the six months ended December 31, 2022, was $16.7 million as compared to $5.4 million for the same period last year, which is a 206% increase. The company's provision for income taxes for the three months ended December 31, 2022, increased by $886,000 to $1.2 million, an effective tax rate of 12%, as compared to $291,000 with an effective tax rate of 22% for the same period a year ago. The increase in the provision for income taxes for the three months was primarily due to higher taxable income. The company's provision for income taxes for the six months ended December 31, 2022, increased by $1.3 million to $1.9 million with an effective rate of 11% and as compared to $639,000 with an effective tax rate of 7% for the same period a year ago. The increase in the provision for income taxes for the six months was also primarily due to higher taxable income. The effective tax rate for the six months ended December 31, 2021 was reduced due to other income of $3 million - $3.9 million being non-taxable. Net income for the three months ended December 31, 2022 was a quarterly record $8.4 million or $0.23 per diluted share, as compared to $1 million or $0.03 per diluted share for the same period a year ago, 714% increase. Net income for the six months ended December 31, 2022 increased 69% to $14.8 million [Indiscernible] per diluted share as compared to $8.8 million or $0.24 per diluted share for the same period a year ago. Net income and earnings per share in last year's Q1 benefited from $3.9 million of other income from the forgiveness of debt. Without such benefit, net income and diluted earnings per share for the six months ended December 31, 2021 would have been $4.9 million and $0.13, respectively. Adjusted EBITDA for the quarter was a quarterly record $10.3 million or $0.28 per diluted share, as compared to $3.1 million or $0.08 per diluted share for the same period last year, a 232% increase. Adjusted EBITDA for the six months was $18.6 million or $0.50 per diluted share, as compared to $7.8 million or $0.21per diluted share for the same period last year, a 138% increase. The EBITDA margin for the three months ended December 31, 2022, was 24% as compared to 9% in the prior year period and for the six months ended December 31, 2022 the EBITDA margin was 23% as compared to 12% in the prior year period. Moving on to the balance sheet, at December 31, 2022, the company had $47.1 million in cash, cash equivalents, investments in marketable securities, as compared to $46.8 million as of June 30, 2022. Working capital, defined as current assets less current liabilities was $101.6 million at December 31, 2022, as compared with working capital of $93.1 million at June 30, 2022. The current ratio, defined as current assets divided by current liabilities, was 6.6 to 1 at December 31, 2022 and 4.5 to 1 at June 30, 2022. Cash provided by operating activities for the six months was $1 million, as compared to $7.8 million for the same period last year. This decrease was primarily due to inventories increasing by $14.8 million, resulting primarily from the company's decision to purchase hard-to-get parts used in products that generate recurring service revenues for the company. The challenges from the supply chain crisis are beginning to subside and the company believes its inventory levels will begin to decrease in the latter part of fiscal 2023 and continuing in fiscal 2024. CapEx for the quarter was $444,000 versus $249,000 in the year ago period and for the six months ended December 31, 2022, was $816,000, compared to $771,000 in the prior year period and we have no debt. Kevin, thank you. Our second quarter was a sales record breaker our sales, continuing our sales growth streak, which is now our ninth consecutive quarter of year-over-year sales growth. Prior to the COVID pandemic, we had 23 consecutive quarters of growth and we look forward to surpassing that streak in the future. We are pleased that we were able to beat published Street consensus estimates for revenue, EPS, net income and adjusted EBITDA metrics. This outstanding performance is the result of the continued strong demand for each of our product lines, including NAPCO, fire and intrusion, Alarm Lock and Marks door locking products, as well as our Continental Access Control systems. One key area of our success continues to come from the commercial fire and intrusion alarm business. The ongoing concerns about a potential recession in the U.S. and rising interest rates remain as top headlines and I'd like to remind you that our company is highly recession-resistant as 80% of our business is commercial and one of our primary growth drivers. The commercial fire alarm business is a mandatory non-discretionary item. Commercial buildings must have and maintain a fire alarm system in order to receive the certificate of occupancy. Given the high profitability and essential nature of this business, we focus on this as a key area of our resources. Our equipment and recurring revenue both generated exceptional growth in this quarter, increasing 23% and 35%, respectively. The annual run rate for recurring revenue is now approximately $59 million as of January 2023. Our StarLink radios continue to have strong sales and we are optimistic that we can reach our previously mentioned goals of $150 million in recurring revenue and $150 million of equipment revenue by the end of fiscal 2026 or possibly sooner. Achievement of those goals as well as our gross margin goals of 80% for recurring revenue and 50% for equipment revenue could generate EBITDA margins in excess of 45%. We estimate that there are millions of commercial buildings of all types such as offices, hospitals, schools, coffee shops, fast food restaurants and others that still require upgrades from old-fashioned copper phone wires. Our StarLink radios have the widest coverage with both AT&T and Verizon service and rich feature sets, which our dealers love. The 3G sunset was completed just a few weeks ago and management believes that a portion of the active NAPCO's StarLink radios that lost communications due to the Verizon 3G sunset have not yet been replaced because a long deal is expected the sunset to be delayed as was the case with the AT&T 3G sunset in 2021. Ultimately, the company anticipates that many or all these NAPCO 3G radios will be replaced with NAPCO's newer-generation radios, because alarm dealers must have new functioning and revenue-producing radios to monitor alarm conditions, resulting in both additional hardware revenue and increasing recurring revenue for the company. We are pleased that the equipment margins improved by 1,500 basis points to 23% in this quarter versus 8% in the same period a year ago. Margins for recurring revenues also improved by 200 basis points to 89% for this quarter versus 87% in the same period a year ago. The constraints of the supply chain have largely abated for us, and we believe that in the next three months, the new supplier sources we have developed will begin to invigorate our equipment margins and bring them to even higher levels than what we generated prior to the supply chain crisis. The backlog for the company remains at a higher-than-normal level. Although it continues to come down considerably and we remain confident in sustainable demand for our products going forward, we remain encouraged by the continued strength of the sell-through statistics we are seeing from several of our largest distributors. We believe that we are taking market share from our competition based on new customers continuing to tell us that they can't get products from the competition. School administrators are focused on the need for security solutions as more incidences continue to happen. Our fully integrated solutions with school security generate healthy margins for our business and now more than ever, we are laser-focused on further penetration of the school security market, which is comprised of approximately 130,000 K-12s and 5,000 colleges and universities across the country. Our fully integrated technologies for the school security market continues to remain a top priority for NAPCO. The availability of grants to schools to fund these security projects has never been better. We are excited to report that we recently received another school security project for a large school district in the state of Massachusetts and the school will be using our Continental Access Control products in its 125 schools. Offering seamless security solutions, which allow for our dealers and us to generate recurring revenue streams is central to our strategy. Historically, recurring revenues have been from our NAPCO Intrusion and Alarms division, but the recently launched Air Access product, we are now â with the recently lost air access product, we are now able to generate recurring revenue from all divisions of the company. Air Access should generate recurring revenue from locking and access control which has never been done before. Air Access is the industry's first cellular-based access control system, which we believe is a billion dollar opportunity. The benefits of Air Access include no need for upfront investment of expensive hardware, no need to interfere with corporate IT networks, which can be a major problem for installers, and no on-site database backups or software updates. Our R&D team remains hard at work, developing even more products to the future, which will help grow our recurring revenue business. We have experienced tremendous success over the last five years growing our recurring revenue business and believe the best is yet to come. Lastly, I am pleased to announce that David Patterson, the Governor of New York for March 2008 until January 2011 has joined our Board of Directors. David has vast experience in crime and in security issues and is an outspoken advocate of safety by combating crime traditionally and with new messaging systems. He will bring his unique perspectives to NAPCO and we plan for the future growth and success of the company. We will begin our Q&A session portion of this call in a moment. Our fiscal second quarter 2023 was a record-breaking successful one. We have a strong balance sheet, no debt and continue to generate healthy profits. We believe we can continue this renewed growth streak well beyond the ninth consecutive quarter streak we are on now. NAPCO's senior management owns approximately 16.5% of our equity and I would like to thank everyone for their support and for joining us in the exciting future we have. Our formal remarks are now concluded. We would now like to open the call for a Q&A session. Operator, please proceed. [Operator Instructions] Our first question comes from the line of Jim Ricchiuti with Needham & Company. Please proceed with your question. Thank you. Good morning. I just wanted to follow up on the comment that you made regarding the Verizon 3G sunset. Are you hearing from your channel partners yet of the acceleration in demand that they might be anticipating as a result of this? Sure. So Jim, we know that the dealers who failed to take action sunset hit. A lot of these dealers didn't think it was really going to happen, because when the AT&T sunset came about, they didn't â they kept delaying it and delaying it. The dealers thought it was going to get delayed this time. Remember this with the dealers. If they don't have an active radio, then they suffer. They are losing recurring revenue. Remember, they charge the end user recurring revenue, just like we charge the dealer. So the last thing they want is to lose their livelihood, that recurring. So, we're starting to see a lot of scrambling around as these radios that went dark at the end of January 3rd are being replaced. We're pretty confident that they are all going to be replaced, and we're pretty confident they'll be replaced with our radios. They'll go from a NAPCO 3G radio to a NAPCO StarLink 5G radio. There is also the possibility that some of the radios that go dark from other [Indiscernible] could come over to the NAPCO side because we believe we have a better offering than the competition. So, there is a lot of scurrying about. Let's watch what happens, but we think in the end, it's going to mean more radio sales and more recurring revenue for us. Follow-up question and this may be for you, Kevin or Dick. If you could talk a little bit to some of the redesign activities when you start â when are you anticipating that, that could produce more meaningful improvement in equivalent gross margins? Yes, I could take that one. So several months ago, probably about seven months ago, we said that we were going to embark on the journey of getting another source to replace the traditional source, which is Texas Instruments, for our radio business because we can't keep living with having to buy these hard-to-get parts from brokers. So it takes time to do this. It's not like you just find the other source and you pop it into the board and you're off to the races. There is redesigning of the board. There is software updates. There is approvals from the ULs of the world, takes time. Well, we're happy to say that we're almost done. We're about seven months into this journey and probably by the end of this quarter, we're in the March quarter now. We're going to start utilizing these other â these new sources. These new sources will be the same cost that we were used to before we had to start buying these parts from brokers. Now we are going to still use TI. It's not like we're going to give up on them. But they can't keep up with us. They can't keep up with anyone actually. They're having trouble with everybody. But we'll use them, if they can deliver. We'll use the new source when they can when we can get from them. We don't anticipate any trouble from the new source and that should return margins to more normalized levels that we were used to before the COVID and the supply chain hit. Now we do have a lot of inventory at the higher price, higher priced inventory, the inventory that we've been buying from these brokers. We've got to work our way through it and then eventually we'll be exclusive with lower cost parts for our radios. I think we'll start to feel a difference a little bit in Q3, more in Q4 and certainly in fiscal 2024, I think we'll really start to feel it and as we work through that inventory, it will also help reduce the inventory overall, which we're carrying a lot of extra inventory because we don't want to be short at all with radios. Radios leads to recurring, which leads to going on forever. All right. And then just 1 quick final question, if I may. Just remind us about ISC West and the impact that has on SG&A in this current quarter? ISC, I'll do the first one. ISC West is the biggest Trade Show in the industry and we'll get to see lots of dealers, which are great buyers and we'll be able to pick up a lot of market share. We show a lot of new products at that show. We have a very large out, right in the main section. It's very important to show our products. We'll have our sales teams out there. We'd like to have any customers and also financial people come out and see it. You'll get a feeling for the power of NAPCO in the industry and you can hear the dealers talking to us. As far as what the costs are, Kevin, maybe you can explain that. Yes, so, it will hit â the show is March 28 through the 31st. So it's a Q3 for us fiscal Q3 expense and expense well worth it. But it's [Indiscernible] dollars plus hit to SG&A. So, for those of you that are modeling SG&A, remember that SG&A, in Q3 will have that expense in it and should be somewhere in the neighborhood of $500,000 to $600,000 higher than what you saw in this quarter that we just finished. Yes. Thank you very much. First of all, the gross margin question, it looks like gross margins are going to continue on the equipment side expanding what you just talked about, do you expect steady services gross margin is 89% sustainable? Well, I modeled this back then when we did our 150, 150 goal at 80% and I was thrilled at that time to be utilizing an 80% gross margin and it just keeps growing and growing and growing and growing. I thought the top was 85% or up to 89%. It keeps growing mainly because we are selling more and more fire radios. And that's â we get more money for those. So the margins expand. I think, if I was modeling this, I use mid-80s, maybe we'll keep it in the high 80s. It's not going to go below mid-80s, maybe we'll even hit 90%, it's possible. But mid-80s is certainly great enough. Okay. And then, in terms of equipment revenue growth, you beat me by a couple of million on the top line in revenue in the period. Is that - $27 million, $28 million, is that a sustainable number for the third quarter what you had in the second quarter? Well, the comps get a little harder each quarter. Third is a little harder than the second and the fourth. It's $30million last year. So, when I model this, I modeled 10% hardware growth with the expectation that we could possibly do better than that and continue. We've been in the 20s the last several quarters. We hope we can keep it up. There is no guarantees. There is nothing we're seeing that says we can't do it. But when I model, I'm more conservative, so I am more in the 10% range, especially when we get to Q4, which is $30 million, and that would mean 10% would be $33 million. But our guys are charged with - I want 20% out of all of them and that's what we're pushing for. Okay. Very good. Then just moving on with cash. You talked a little bit about inventories, maybe coming down over the next couple of quarters. So that should produce, unless I am missing something, you can walk me through, cash should increase sequentially from second to third quarter and third to fourth quarter. Is that correct? That is 100% correct. So two things are happening. So as the recurring revenue grows, the cash grows with that too. We haven't really felt it because we've been using a lot of that growth that the recurring brings us for inventory. So as recurring keep growing, cash grows and if inventory goes the other way, it will â you'll feel the growth in cash two ways, so to speak. And so, yes, we expect cash to grow in the third quarter and the fourth quarter and beyond. Okay. So receipt pools and other things and payables aren't going to â other working capital isn't going to change dramatically. It's all about the inventory of the cash, right? Okay. And then, in terms of price increases, I believe you â on the product side, you had a price increase in April, 1 in July. Have you had any other price increases in the last 90 days or do you plan any in the next 90? We haven't had one since that second one and we're discussing it. We haven't made the decision yet. But typically, we take a price increase every year. So, at the very least, we'd probably do 1 in July. We always do it. The question is, would we do 1 beforehand that we're talking. Okay. And then, last question in terms of backlog. You mentioned backlog coming down. Are they still near record levels? I'm just worried about our â I have a question less worried about your visibility with backlogs coming down slightly. Backlogs was never a big thing here. Backlogs became a big thing when supply chain and COVID hit, and it was up to $10 million and then we got it down to $6 million and now it's down to $3.5 million. These are still historically high levels. We don't like backlog. We want to be able to ship dealers right when they order it. So we're working hard. As fast as we kill the backlog, we get new orders. When the demand is strong, that's a good thing. But even with strong demand, we are working to reduce that backlog to less than $1 million. We are not there yet, but working hard towards it. Yeah, absolutely. My question is on the Continental locking axis, due to â were those increases in those equipments indicative of the school security projects? Yes. The product line utilizing our cellular technology that we invented for the fire intrusion is helping out a lot because of school security where you don't have to wire the school, but you can get the lockdown functionality out of it and it goes through the cloud and people with cell phones can access what's going on in the building and there has to be a lockdown electronically. It could be done. So it's a great product and it has great growth potential. And one thing I'd like to point out, in the $150 million in equipment by 2026, $150million in equipment by 2026 and recurring revenue of $150 million by 2026 or before. We don't have air access with this application included because it's a new product with us. It takes typically a year, in this case, 1.5 years for it to become more mainstream with dealers because it is very different. But it gives the dealer the benefit of recurring revenue. We never have recurring revenue on a product. It's kind of what the fire and fire and burglar alarm dealers get now for locking and access dealers. So, it's a very, very new and exciting product, and it's reteaching the industry on how to sell it. I understand that Air Access is still a minimal part of our non-existing part of the service contracts. Of the equipment â on the equipment side any estimate of what the school security contributes to the equipment currently? It's hard to say, Raj, because we get a lot of orders that go directly through distribution and we don't see it or a lot that we see. And what I look at, is to really get an indication. I like to see what's our locking sales as a percentage of our overall hardware and so I see that our locking sales is about 59% of our overall hardware sales. That's a lot. That's a very healthy thing and I know it's because of schools. It's not only schools, it's hospitals, it's airports, it's a lot of things. But when schools are doing well, the security end is doing well, that number does better. So I know it. And there are lots of wins we don't talk about. We mentioned one on this call in a Massachusetts school district. For some reason the schools don't let us really talk about it a lot. They like to keep things quiet. We have mentioned a couple of really big wins on largest school districts in the country, which we got over the last six months, two top 10, so two of the 10 largest school districts in the country. So we were proud to get that. It's early stages. I know we sound like a broken record. Despite all the shootings that have gone on, we're still in the early stages of this as most schools still haven't done enough. And now there is all kind of money available from both the federal and the state governments to help them and of course, if it's a university, they have big endowments and can do it. We're in the early innings, second and third inning, if you ask me, on school security. Big area. I wish we could be more specific, but we can't. Got it. Got it. And then, on the inventory increase, the higher-priced inventory, I just wanted to understand, on one hand, the margins â our gross margins on equipment are going to be helped because of the higher volumes and the cost absorption. On the other hand, you are going to have higher priced inventory flow through the income statement. I know you just talked about that. Could you help me understand if that is happening? What the cadence of that is happening in the next two quarters or largely the impact of higher-priced inventory on gross margins negative impact? Does that happen in fiscal 2024 or... That's going to happen probably in the next two quarters. It's going to keep our margins in the similar range to where they've been in this fiscal year. The fourth quarter is probably going to benefit from a much higher sales level and more overhead absorption. So, last year, as an example, when we had a $30 million hardware quarter, the margins for equipment jumped to 27%. 27% may not sound like a lot, because in the old days, it wasn't a lot compared to what the rest of last year looked like, that was a significant jump. So we're going to see a jump probably in the fourth quarter because of that volume overhead absorption from the DR facility, but we won't feel the back to the good old days yet until we work through this inventory. We'll start to feel more of it because we are not buying as much from the brokers. So that helps. We got to work through that inventory that we did buy from the brokers and that will affect Q3, and to some degree for by next year, fiscal 2024, I think we get a lot of this behind us. Got it. And then just lastly, could you give us some more color on the sell-through at the dealers? Are you still seeing, in the top five dealers robust year-on-year increases? Yeah, the sell-through is still very good. It's changed. The old sell-through, we wanted the distributors to carry three months supply of everything. And once COVID hit, supply chain crisis, then the distributors became just-in-time distributors. They wanted to carry the bare minimum. We don't love that. There is a good side to it. Our business â our orders come in very steady throughout the quarters. They come in weekly one after the other. We don't have to wait till the end. I was telling somebody earlier today, I used to sit here in December on New Year's Eve, because everybody is out celebrating, and I'm waiting for orders to come rolling in. They come in last minute as distributors waited to place their big orders to try to get the best deal they could. Those days, in large part, they're over. The orders come in very steady throughout the quarters. You don't have to go crazy with overtime and flying things as much and you can forecast better. The only negative is, you've got to watch their inventory levels that they don't run too low and that they have product across the board. We don't want them to run out. If a dealer comes into a distributor and they don't have the product, they go elsewhere and we better hope that the elsewhere is a place that carries our product. So we monitor it closely, make sure they have everything on the shelf. The days of the three months might be over, but there are benefits from it. Raj, I want to mention something to you. And realize that most of our production goes to distributors and the distributors are our customers that, when Kevin is talking about the stats, he is talking about these large distributors that have the products and he is watching over what's checking and what's selling to those dealers. The dealers go to distributors and get the product. Our business was founded on small midsized dealers in every town and city, but now what's happening is, we are getting big, big ones, the ADTs of the world are coming to us. The Siemens, the Johnson Controls, they are coming to us directly. So it's a very, very good thing that they are. The products that we have outperform everything in the industry functionality, range and a lot of other feature sets that we talked about. So the big companies, which have lots of installations want to use these type of products. So those come direct those large companies, and everybody else goes through distribution. Kevin is watching the vast number of dealers we have. We have more than 12,000 dealers that go to distributors and get the products. So everything seems to be checking well. Got it. Thank you. Iâll do it on the questions. Thank you for answering them. Iâll check it on. Thank you. I wanted to ask today, if you could share any other metrics on the re-occurring business. For example, could you share roughly how much is coming from the fire radios? Could you discuss at all annual pricing and how that might change? And then, lastly, could you share any color on products that you see aiding your re-occurring revenue growth in the medium term out two or three years? We don't break out the radio sales, Chris, not yet anyway. I know, we've been asked about it. And we can start doing that. We just haven't done it yet. What we have said is that fire radios is the largest piece of the various StarLink radios. And in around three or four years, it's the newcomer of radios, but yet it's taken over as the number 1 seller within the group. So we'll look at that. Maybe eventually, we're going to break it out. There's no harm doing that. So, but we haven't done it yet. As far as looking three years out, Dick, maybe you want to talk about the Air Access and the potential for that? All right. So, our concept in our company is integrated solutions and we have an integrated engineering department to develop all these products in-house. We don't go offshore. It's all done in-house. We have our own factory. We don't use subcontractors. We have our own factory in the Dominican Republic and we have been getting recurring revenue in two of our segments, which is the fire alarm and burglar alarm But we want an integrated recurring revenue solution for all of our segments, which means the locking and access and the introduction of Air Access gets us recurring revenue for every segment and it is a great thing for lock smiths and access control dealers, because they now can start getting recurring revenue like a fire and burglar alarm dealer can do. And there is a very big if they sell any of these accounts, like, for instance, a fire burglar alarm dealer sells an account to an ADT or another company, there is a 35 to 40 time monthly multiple that the dealer can get by selling one account to one of the large alarm providers. So, we think that the locksmiths and the access control dealers who don't get that recurring revenue stream from their products, because those products don't really offer it, but Air Access does. And we think that from our focus groups and the initial training that we've done that we think that this is a billion dollar industry, Air Access with recurring revenue and locking and we're excited about it. But it's going to take another six months to a year before it becomes more mainstream, because it is a big change for locksmiths and access dealers that they really got recurring revenue. All they got was a service contract to replace the lock or to come in lubricated it or to upgrade the software and access system on site. Now all of this is done by Air Access and they can now give additional services to their clients, which are very valuable to their end-user clients. So, we're very excited about the future of Air Access. Great. Thanks for all that. And then anything on your re-occurring revenue pricing per year that you could share with us? How that tends to evolve or how you're planning on managing that? Thank you. Yeah, we have a price list. We have a price list for each of the different types of radios we manufacture, including our â we talk about it as radios, but NAPCO does more than radios. NAPCO also makes the control panels for new work. We make it both fire and burglary control panels and each of those control panels has a radio built into it. In the past, they all use copper, but as we know, copper is dead and the dealers are switching their new jobs over to radio and now we have radios built into our control panels, which is a very, very popular product line with us. We're very busy building these control panels with radios inside. So, we do the rip and replace radios for all the lines that are going dead fire and burglary, where you keep the control panel and the system that you have, you want to rip it out, you put our radio there, and our radio is what we call the universal radio, different than anything else on the market because the one radio does any type of control panel, whenever it was made, whichever brand it is, it works on everybody. It doesn't just work in the NAPCO ecosystem. And then, we have our control panel with the radio built in. So, we have this menu. It's a published menu, but we make the most on the fire radios, because the fire radios require more handshakes from the central station. In other words, more signals going back and forth. So there is more traffic and we charge more for those. But we are keeping our pricing the same and we think priced right and you can see where the margins are. Thank you, everyone for participating in today's conference call. As always, if you have any further questions, please feel free to call Patrick, Kevin, or myself for further information. We thank you for your interest and support and we look forward to speaking to you all again in a few months to discuss NAPCO's fiscal Q3 2023 results. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
EarningCall_533	Good afternoon, and welcome to the Farmer Bros. Fiscal Second Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Joining me today are Deverl Maserang, President and Chief Executive Officer; and Scott Drake, Chief Financial Officer. Earlier today, the company issued its inaugural quarterly shareholder letter, which is available on the Investor Relations section of Farmer Bros.' website at www.farmerbros.com. The shareholder letter is also included as an exhibit to the company's Form 8-K and is available on the company's website and on the Securities and Exchange Commission's website at www.sec.gov. A replay of this audio-only webcast will be available approximately two hours after the conclusion of this call. The link to the audio replay will also be available on the company's website. Before we begin the call, please note that all of the financial information presented is unaudited and that various remarks made by management during this call about the company's future expectations, plans and prospects may constitute forward-looking statements for purposes of the Safe Harbor provisions under the federal securities laws and regulation. These forward-looking statements represent the company's views only as of today and should not be relied upon as representing the company's views as of any subsequent date. Results could differ materially from those forward-looking statements. Additional information on factors that could cause actual results and other events to differ materially from those forward-looking statements is available in the company's shareholder letter and public filings. On today's call, management will also reference certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin in assessing the company's operating performance. Reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures is also included in the company's shareholder letter. Good afternoon, and thank you for joining us. As you saw today, we have now moved our quarterly reporting to a shareholder letter format. This approach better enables us to provide our investors with context around our performance, strategy and progress. If you haven't had a chance to view it, it can be found on our IR website. So with that, on the call today, I will provide some highlights from the quarter, and Scott will go into a bit more detail on the financials, and then we will field some questions. Looking at our results for the fiscal second quarter, we reported sales growth of 12%, paired with a slight sequential increase in our gross margin. We are finally beginning to see the benefit of contracted price increases and overall customer demand across our national account and DSD businesses. We have more work to do here, but have already seen additional progress early in calendar 2023. Additionally, we improved adjusted EBITDA as we held operating costs in check despite inflationary pressures. We also believe that fiscal Q2 will prove to be the high watermark for our coffee input cost. While we're encouraged with the early progress, we recognize that our results need to improve from here to achieve the performance, our turnaround work has laid the groundwork for. We think the right factors are in place to see that improvement. The short-term pricing headwinds we have faced more recently are expected to alleviate. Our turnaround has improved our underlying operating cost structure and our strategic growth initiatives, while in the very early stage, are progressing nicely. This gives us confidence in a more pronounced recovery in sales and margins in the second half of our fiscal year, helped by a much more favorable cost environment. We remain vigilant as we manage through the near term and our vision of a path for long-term profitable growth remains steadfast. Thanks, Deverl. Let's dive right in. Net sales in the second quarter of fiscal 2023 were $132.7 million, up 12% year-over-year. Growth in sales primarily reflects traction with new customers and higher per pound pricing in both our DSD and direct ship sales. This was partially offset by lower volume, which was primarily due to the loss of a large customer at one of our major national accounts in our direct ship sales channel. Gross margin was 22.9% in Q2, which was an incremental improvement on a quarter-over-quarter basis. Margins in the quarter reflect what we believe were peak coffee costs, combined with the previously noted lag that accompanies our contractual cost plus pricing agreements in the direct ship sales channel. Adjusted EBITDA loss was $3.1 million in the quarter, an improvement over the last quarter from a loss of $4.9 million. The adjusted EBITDA margin also improved quarter-over-quarter by 170 basis points. Our unrestricted cash balance increased by $7.8 million to $17.6 million as of the end of the calendar year. The increase in unrestricted cash was due to a decrease in working capital, net proceeds from the sale of branch assets and net borrowings under our credit facilities. Turning to direct ship and DSD, we saw a low double-digit percentage sales growth in our direct ship business on a year-over-year basis as we began to see pricing realization after a lag period that depressed the first quarter of fiscal 2023 performance. On the volume front, 1 of our large national accounts experienced the loss of a major customer, which led to a decrease in our pound volume compared to the prior year period. Looking ahead, we expect that the direct ship business continues to improve. We saw positive momentum in our DSD business as revenue was up in the low double-digit percentage range, driven by our pricing increases. Although volume decreased in the quarter compared to last year, there was strong unit and pricing momentum in December that carried over to January, and we expect continued progress on pricing actions in the coming quarters. Looking ahead, our focus in the coming quarters remains on completing the final elements of our turnaround, driving process improvements that will result in sustainable higher levels of performance and executing on our exciting growth initiatives, including SHOT and Revive that bring more services and products to customers and leverage our national distribution footprint. In recent weeks, we have started seeing the benefit of our ongoing pricing efforts as these take effect across our direct ship and DSD customers. This development, paired with our falling coffee prices, leave us optimistic that gross margins will recover towards prior year levels exiting our 2023 fiscal year in June. At the same time, current economic headwinds are placing pressure on talent acquisition and wages as well as transportation and other operations. We continue to move aggressively to contain and manage these pressures and we fundamentally believe our cost structure is better positioned than it has been in years to drive better performance as macro conditions abate. Our near-term objectives are to bring Farmer Bros. back to profitability, improve our competitive position for sustainable long-term growth and enhance our ability to manage macroeconomic challenges and challenges within our industry. Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Gerry Sweeney with ROTH MKM. Please go ahead. I wanted to talk about prices â pricing. I know you talked a little bit about it there in the prepared remarks. But I think one of the things we discussed in the past was, especially on the DSD side was not just instituting price increases but making sure that they were appropriately or fully pushed through at the street level and maintained at the street level. And I think it's really two questions. One, how is that going? And two, I believe some of your IT initiatives were being put in place to help also facilitate that I wanted to see if we could get an update on that front. Yes. Yes, you bet, Gerry. When we think of pricing, obviously the direct ship is the more straightforward one and you didn't ask, but we'll get that out of the way. It's that pricing agreement we have with all those customers. So it's kind of a cost-plus pass-through. So there's that lag in that direct ship side of the business that we've talked about. Specific to DSD, and maybe it's a little bit on us that we haven't impacted this a little more fully. But you're right. We continue to see inflationary costs in the business that we have to pass through. So we're doing so. But even in our DSD business, a lot of our larger national DSD customers are under a pricing agreement as well. And so we have several of these that have windows of execution for changes to the contract, including pricing. And for example, we've been doing those changes that some of those contractual changes for those larger customers, they've been happening in November, December, there's some still in January, February as well. So that's one we'll continue to see momentum on that front in regards to the pricing. But the good news is that we think we've seen the peak pricing or peak cost for coffee as well as other costs are starting to plateau as well. So we think we're going to get both momentum on the pricing side and start to see some relief on the cost of goods side and the two of those will combine for the stronger margins that we expect to see in the coming quarters. Regarding the long-term solve, which is I think what you're getting at with the IT solution, you're exactly right. And the IT solution may take a little longer as we work through it, but we're currently underway with a â basically a reengineering of our pricing function for DSD. Taking out some of the complexity, taking out, quite honestly, some of those variables that we have less control over that we've talked about. And we're going to be testing and rolling out this new pricing engine for DSD here over the next two quarters. So by the end of the fiscal year, we think we'll have substantially improved pricing for DSD and better insights, better controls, all those things. So we think that's another reason for our bullishness on margins and sales for the coming quarters. Got you. Would you be able to quantify or qualify where you are on your pricing versus where you would like to be or should be or however you would phrase that in aggregate, I guess? Right. Right. Yes, I think you're right. I think in aggregate, I would call it middle innings, moving towards the latter stages of the game, but still in the middle innings, unfortunately. One of the things we really want to address with these new engines and our new logic is wherever we can move more swiftly, we want to be able to do so. So that's one of the things we're really targeting with some of these improvements. Got it. And then you did touch upon it for a second. This was down on my list of questions, I guess, it impacted both direct ship â I think DSD, but some of the hedging contractual structure and delays. I think last quarter, you talked about Q2, which we just had some improvement, but more substantial improvement in Q3 and Q4. How does that work out? Or is that still sort of on the table per se? Yes, exactly. The â I think that when you look at the program we have, really, we hedge so that we can have more certainty around our costs. And when theoretically, when prices are rising like they were in the last couple of years, that's when you saw us get much more coverage, and we went much longer on our contractual coverage of those costs. And then when we had the thesis the prices were going to be falling, we've obviously shortened up our coverage quite a bit so that we could get to those lower prices as quick as possible. But we are still working through some of those inventories. It has to be brought in, manufactured, distributed, sold, et cetera, to get the way all the way to the P&L. So we're starting to see that now, but that is another thing that that lag, along with some of the pricing lags we've talked about, are both â we're seeing progress, but we're just going to need some more time, a few more months here to continue to work through them. But the good news on both fronts is that they're accelerating. So through Q3, Q4 and even Q1, we think we'll continue to have these tailwinds and really see nice progress. On that front, how long does it take for sort of inventory to roll through? So obviously, pricing is down as well over well above $2 a pound, now it's below on average. How long does it take to sort of see that benefit? Yes. It's interesting. If you look at our â like any other business, if you look at our top SKUs, those turned quite a bit. It's pretty regular. But I'll use an example from DSD and our spices and teas. Some of those products, they kind of have a growing season and ordering season and you really only place your orders once or twice a year for some of those items. So you've got longer inventory and it just takes a little longer for those to turn. But I think on average, when you look at it, it's â people can do the kind of quick inventory turns, but we're usually at a couple of months, two to three months I would say, on average. But then again, you've got with DSD you have that sale and that turn and then you've got your collection, your AR period there that would tack on to the end of that. And with DSD, you've kind of got the customer notification. So even if you're going to change prices or move some of these things, there's usually a 30-day or so notification period. And that tends to make it just feel longer and really because it is longer than the 60 to 90 days we talk about so much. Got it. And then unrestricted cash was up and just looking at the balance sheet, inventories were down. I actually â I mean; I didn't scrub the balance sheet or go through it. But I would imagine as cost of coffee reduces, working capital, just like an inventory should decline as well. Is that a fair assumption? And is that what drove 2Q or are we just seeing with some of the initiatives you put in place, just better inventory management, et cetera? Yes. You're exactly right that our inventory should get some natural benefit of lower cost as we move forward. But in Q2, what you really saw was the benefit of some of the actions we've talked about through the summer months of 2022 and then into the fall where we were focused on restructuring our debt, which we did successfully. And then we had mentioned how we were going to really turn our focus to getting more efficient with working capital. And Q2 was really the result of that. The inventory and some of the other efficiencies you see were really the result of us getting in and getting more efficient with our inventory, with our processes, safety stops, all those different components that go into that got a little better for us. And quite honestly, it's also been helpful and it was the right time to do so, because more of the supply chain returning is normal. At the time where we can have more reliance on vendors and products and timing, so we're able to do a lot of this progress. But we're not done yet. We'll continue with the efficiency and have the benefit of lower cost with coffee certain. I'm going to ask one more. I'm not sure if there's anyone in queue. But labor, historically, it's been challenging to get labor in the last couple of years and trouble â led to some challenges around rolling out additional routes or reinstating routes, et cetera. Any issues there? Or what's that looking like? And obviously, you also had the Revive business, but curious to on that front. So Gerry, labor is â we've invested in HR. We've pulled some new resources in use, we pulled in a new CHR just over a year ago. She's put her fingerprints on the organization, new head of recruiting, working on different programs with various technical schools and training program, and what that has resulted, and I'll speak to Revive first. We've been able to recruit against our turnover in Revive on techs and have net adds per week, which is what's contributing to being able to get more techs on the street. And now we're just working those folks getting fully trained and productive on their specific tech routes in Revive. And then on the DSD side, we've had I'd say, a little less success from where we were with Revive, but solid performance on maintaining our RSR headcount and being able to get people back on routes and continue to add routes as the volume justifies those routes. We're still very much focused on optimization of those RSRs as we add them back. Would it be for turnover or specifically coverage on PTO or for adding additional RSRs to be able to change route structures when the route starts to get to a point where it has too much volume on the route, and we need to add a route, so we can pick up additional volume for customers that may be underserved? So that's an ongoing optimization. We have a group that continues to lead that with our DSD team, and that's been very successful. And the HR side we've been able to turn the tide. I'd say from a macroeconomic perspective over the past quarter, we've seen â while the labor rates have continued to â unemployment rates still quite low. We've been able to react to that and be able to get more applicants through and hired than on the street. So I'm sensing right now given the new programs we've been putting in place through our HR team and through our DSD frontline team that we've been able to hold our own and not deteriorate on the negative side and lose more than we can add. So that's been very positive. Yes. And Gerry, just quickly on external view just because I happen to have seen it last week. Unfortunately, I don't recall where, but there was an article I saw that noted the restaurant industry in the United States is still â they estimate about 1 million workers short from where they would like to be. So we still see that with our customers, and we're hopeful for improvement there as well. Thank you. Overall, while we've had the foundation in place, market dynamics have been difficult. We are very focused on sharpening execution as we manage through this period. And we're encouraged by our progress this quarter and are optimistic that the expected favorable pricing environment that Scott spoke of in the prepared remarks and in the coming quarters will support meaningful improvement in our results. The strategy is in place, and we are determined to show the benefits of the hard work the team has completed as we move through fiscal 2023 and into the next fiscal year. Thank you for attending today.
EarningCall_534	Hello, everyone and welcome to the CTS Q4 2022 Earnings Call. My name is Bruno and I will be operating your call today. [Operator Instructions] I will now hand over to your host, Mr. Kieran OâSullivan, President, CEO. Mr. Kieran, please go ahead. Thanks, Bruno. Good morning and welcome everyone to our fourth quarter and full year 2022 earnings call. We delivered solid financial results in the face of economic uncertainties that remain elevated driven in part by the current geopolitical environment in Europe, demand softness as well as rising interest rates and inflation. Although supply constraints are easing as we experience shortened lead times, we expect inflation and some supply pressures to remain a challenge, especially in the first quarter of 2023. As discussed in October, we were impacted in the fourth quarter by supply issues from a semiconductor supplier for our smart actuator product line. Our focus on profitable growth, diversification through our advanced materials capability and electrification in mobility markets remain our highest priorities. We are energized and focused on achieving our long-term growth goals and improving our operational performance. For the fourth quarter 2022, sales were $142 million, an increase of 7.4% from the same period last year, including the negative impact of the anticipated short-term semiconductor supply pressures we noted in our last earnings call. Adjusted gross margin was 36.3%, down 38 basis points from the same period last year. Adjusted EBITDA margin was 22.9%, up 200 basis points versus the fourth quarter of 2021. Adjusted diluted earnings per share increased 14% to $0.56 on a year-over-year basis. Operating cash flow was $25.5 million compared to $26 million in the fourth quarter of 2021. New business awards were $71 million. We added 4 electric vehicle platform wins in the quarter and 10 new customers in non-transportation markets. Turning to full year 2022 results, sales rose 14.4% to $587 million from $513 million in 2021. Adjusted gross margin was 36.5%, up 50 basis points from 2021. Adjusted EBITDA margin increased 180 basis points to 22.8% from last year. Adjusted diluted earnings per share increased 27% from $1.93 to $2.46. Operating cash flow was $121 million, up $35 million from 2021. New business awards were $523 million, below the elevated levels we achieved in 2021 as transportation customers delayed sourcing awards while they manage critical supply constraints. Going forward, we are reintroducing total book-to-business for transportation only and also introducing book-to-bill ratios for the company to provide more visibility into long and short-term trends. We continue to make progress on our diversification strategy as non-transportation sales increased to approximately 48% of our overall revenue, up from 45% last year. I would like to remind our listeners that this conference call contains forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Additional information regarding these risks and uncertainties is contained in the press release issued today and more information can be found in the companyâs SEC filings. To the extent that todayâs discussion refers to any non-GAAP measures under Regulation G, the required explanations and reconciliations are available in the Investors section of the CTS website. Overall, we achieved strong results in 2022, finishing the year delivering sales growth of 7.4% in the fourth quarter and 14.4% for the full year. Organic sales, which excludes sales from our two acquisitions in 2022, were essentially flat in the fourth quarter, due in part to the impact of the temporary semiconductor shortage. Full year sales grew nearly 10% organically. We continue to advance our diversification strategy throughout the year with non-transportation revenues increasing 24% and up 13% organically. Transportation sales were up 7% from last year. Customer demand was somewhat tempered towards the end of the year. We did see some supply chain stabilization in the fourth quarter, thanks in part to the agility of our teams to keep us on track to manage through the temporary semiconductor shortage that impacted sales. We expect to see continued easing of the semiconductor supply constraints with supply expected to normalize by the end of the first quarter of 2023. We continue to benefit from our diverse and high-quality customer base across our end markets. The integration of the acquisitions we completed in 2022, TEWA Sensors and Ferroperm, remain on track and are performing well. These acquisitions have further strengthened our ability to add new applications and improved our distribution offerings, which have helped us to continue to gain traction with our customers. Gross margin for the fourth quarter decreased 38 basis points to 36.3% and full year gross margin rose 50 basis points to 36.5% versus 2021. We continue to gain momentum from our diversification strategy despite margin pressures from supply side cost increases. While we expect cost pressures to persist in 2023, we remain confident in our ability to partner with our customers to share these cost increases and to execute successfully together in the year ahead. Our customer retention rate speaks to the deep relationships and value we provide our customers. In addition, to offset these pressures and support long-term margin improvement, we remain focused on implementing operational improvement projects. Fourth quarter adjusted diluted earnings per share of $0.56 was up 14% from $0.49 in the same period last year. Full year adjusted diluted earnings per share of $2.46 increased 27% from 2021. Later, Ashish will add further color on our financial performance. We added 10 new customers in the quarter, including 1 EV customer for a temperature sensing application. In Industrial, we added 5 new customers with broad applications, including test and measurement, home appliances, small cell stations and temperature applications in both water heating and refrigeration. In Medical, we added 4 new customers, 3 for ultrasound imaging and another for an ultrasonic dental cleaning application. New business awards for the full year totaled $523 million, down from 2021âs elevated levels as certain transportation awards were delayed from the fourth quarter to 2023. We expect a stronger performance in the year ahead as automotive supply challenges ease for our customer sourcing teams. Our book-to-bill ratio was 0.9 in the fourth quarter and 1.0 for the full year. The recent reduction in the bookings reflects normalization from several quarters of elevated book-to-bill rates in 2021 and the early parts of 2022. We will continue to include the book-to-bill ratio in our future communications for added transparency. As we have previously mentioned, consolidation of the sites in Denmark resulting from the acquisition of Ferroperm is underway and is expected to be completed in the third quarter of 2023. More recently, we began the process of consolidating our Juarez location into the Matamoros site in Mexico. This consolidation is driven by multiple factors, including the stability of the workforce in Matamoros as well as the need to strategically align our operations in Mexico to achieve better efficiencies. The consolidation is expected to be completed within the next 18 months. In the non-transportation end markets, we have achieved strong double-digit growth in the last couple of years. Our material formulations have continued to drive our performance throughout key high-growth end markets. Customers view our leading-edge technologies, deep industry experience and vertical integration as key differentiators helping us deliver long-term value. Our in-house know-how and proprietary processes coupled with our competencies across three leading piezoceramic technologies are a proven key competitive advantage, enabling us to develop new piezo material formulations such as textured and lead-free. Our global foundry footprint positions us to support and drive growth for our customers. In the industrial market, demand for microactuators used in industrial printing applications has softened, primarily driven by demand in China. Across temperature sensing, we see more stable demand, although at a reduced level, which has been helped by the addition of new customers in refrigeration and cooler display applications. We are working with a customer on a hydrogen fuel cell temperature application and added new wins in industrial food preparation. For our EMC product line, we signed a contract with a European OEM and expect shipments to begin this year. We also secured RF wins for precision off-road vehicle tracking. With our portfolio of sensor and control products, we are at various stages of qualification for home appliance, automation and marine applications. In the fourth quarter, we added temperature sensor products to our distribution portfolio across Europe and U.S. markets and are assessing the viability of moving piezoceramic products through this channel. In medical markets, we see good momentum in the year ahead. Our targeted business development efforts continued to progress as we add new customers and new applications. We added 4 new customers, 3 for medical ultrasound and one for an ultrasonic dental cleaning application. Across our portfolio of ultrasound applications, we received prototype orders for 3 new programs and a preproduction order for a new program with an existing customer. Our temperature portfolio continues to support growth in medical applications. We secured our first single crystal technology award for an application in pacemakers with an existing Ferroperm customer and a new contract with an existing customer. In therapeutics, we received the next generation award with an existing customer. Sales to the medical end market were a little softer in the fourth quarter as our customers focused on managing their inventory levels. However, we expect demand to be solid in 2023. We remain confident in the long-term prospects for the aerospace and defense end market, given our enhanced capabilities, new material formulations and the geopolitical landscape. We received multiple orders across several defense Tier 1s for sonar, hydrophone and sonobuoy applications. We also had wins for munition detonation and countermeasure applications. A new application is in development for depth detection, where we expect first orders in the first half of 2023. With temperature sensing products, we received orders in aerospace, defense and space applications. We continue to make progress in unmanned underwater vehicle applications, where we are deploying our single crystal technology and obtained additional advanced development awards. Finally, we were awarded new contracts for RF filter products and precision frequency applications. Looking ahead at 2023 for non-transportation end markets, growth remains mixed in certain industrial applications. Distribution continues to adjust the inventory levels, while defense and medical end markets remain more resilient and in some cases, we are improving our market share. As I mentioned, we remain focused on advancing our long-term growth strategy, which centers on diversifying our end market profile through expansion of our technologies, products, customers and geographic reach. This strategy enhances the value creation opportunity for our stakeholders as well as the quality of our earnings. We have made good progress on diversification efforts over the past year, notably increasing non-transportation sales to approximately 48% of total 2022 sales. Full year 2022 non-transportation-related revenue increased 24% compared to 2021, while transportation-related revenue increased 7%. Looking ahead, we will continue to focus on further diversification to grow non-transportation revenues at a faster pace, leveraging our balance sheet to pursue M&A opportunities while continuing to strategically grow our transportation business and strengthen our product portfolio. As a result, we continue to target long-term revenue growth of 10% with a goal of greater than 50% of total revenues coming from non-transportation markets in the years ahead. Transportation sales in the fourth quarter were negatively impacted by the short-term IC shortage we discussed in our last earnings call, resulting in sales declining approximately 9% sequentially. We expect this temporary shortage to be resolved by the end of the first quarter. For the full year, our transportation sales grew by 7% despite supply challenges and unfavorable currency impact. We anticipate automotive demand to be flat to up low single-digits in 2023. IHS is forecasting 4% growth globally, attributed to a stronger rebound in Europe and North America. Transportation total booked business was $1.48 billion at the end of the year. Since the last time we published total booked business, we have made a few changes. First, to simplify, we have removed the contracts for our non-transportation customers as these contracts are shorter in duration and we will track them in our book-to-bill ratio. Second, as you know, the auto market has faced supply chain issues that have meaningfully impacted volumes globally in the last few years and the recovery is expected to take longer. We have adjusted our transportation total booked business numbers to reflect changes in industry production volumes from 2020 onwards. In 2022, we saw significant delays in sourcing decisions as our customers focused on supply challenges to maintain current production. In the fourth quarter, we had wins in the accelerator module product line with an Asian OEM across two platforms for chassis ride height sensing, we had wins with a North American OEM. On the Mechatronics front, we were awarded extensions related to existing products in commercial vehicle applications. More importantly, we are driving to achieve our goal of having 25% of our light vehicle revenue come from electrified platforms by 2025. Progress on securing electric vehicle wins continued as we added 4 electric vehicle platform wins, including an application in a European shuttle vehicle. In two-wheeler applications, we had an award with an Asian OEM. We are also excited by the progress made in 2022 as we gain traction towards achieving our goal from new products. In the fourth quarter, we launched products on the Toyota Yaris, General Motors Buick, GL8 in China, Honda MDX and Renault Duster in South America as well as passive safety sensors with a Tier 1 customer. The move towards hybrid â electric and hybrid vehicles as well as increased sensor content with passive safety and future e-break applications present tremendous opportunities for us. Smart actuators aside, the majority of our portfolio is agnostic to the propulsion system, creating flexibility for us to meet the needs of our customers. In 2022, the global share of electrified automobiles grew to approximately 10% to 12% of the global vehicle share, and we expect this to accelerate to 15% or more by 2025 and above 30% by the end of the decade, with the Chinese market delivering the largest share gains followed by Europe. Demand for two-wheel applications such as throttle sensing modules and travel position sensors is rebounding from recent softness in Asian markets. We continue to invest in the companyâs future growth and are strengthening our electrification portfolio through M&A. We are pleased to announce the completion of our acquisition of maglab AG on February 6. Maglab has deep expertise in magnetic system design and current measurement solutions for use in e-mobility, industrial automation and renewable energy applications. The companyâs domain expertise, coupled with CTSâ commercial, technical and operational capabilities position us to advance our status as a recognized innovator in electric motor sensing and controls markets. Weâd like to welcome the maglab team to CTS. We look forward to working together to achieve our goal of greater than 25% of light vehicle sales from electrified platforms and expanding into other end markets. Our balance sheet, bolstered by strong cash flow generation, continues to provide us with a solid foundation to further our diversification strategy. Our capital deployment priorities remain focused on supporting organic growth investments, leveraging our financial strength to advance M&A in alignment with our long-term growth strategy; and finally, returning cash to shareholders. We remain committed to effective capital management, while maintaining a disciplined approach to acquisitions as we have done in the past. The investments weâve made in the front-end processes, including commercial resources and IT capabilities, along with implementing SAP across the organization have strengthened our foundation, operational performance and position us to execute on our strategy. We are pleased with the progress made in 2022 with the integration of TEWA Sensors and Ferroperm and our financial performance. We continue to build a solid M&A pipeline and are committed to leveraging value-creating acquisitions in order to accelerate our growth and diversification. As mentioned, we will remain disciplined in our approach, focusing on acquisitions that meet our criteria, including enhancing our technology portfolio, strengthening customer relationships as well as expanding products, applications, end markets and geography. We are continuing to target acquisitions in the range of up to $50 million a year in sales. However, we remain open to larger opportunities that will advance our long-term strategy. In-line with our capital allocation strategy, we continue to return cash to shareholders. This past quarter, we repurchased approximately $8 million of stock as part of the previously announced buyback program. We have returned a total of $142 million to shareholders since 2013. At CTS, our purpose is to enable an intelligent and seamless world. Through deep customer relationships, we play an instrumental role in helping our customers shape the future by designing components and solutions with effective and efficient technologies that make their products smarter. Iâve previously highlighted our strides in supporting sustainable products like electric vehicles, and how we play a pivotal role in promoting health and safety by supplying components used in noninvasive medical devices such as medical ultrasound. We are driving our growth on battery electric vehicles and hybrid light vehicle platforms, and our goal is to achieve greater than 25% by 2025. We understand we have a responsibility to help shape not only a smarter future, but one that will be sustainable for future generations. This begins with making sustainable business choices across our organization, creating long-term value for our company, our stakeholders and the communities in which we do business. We work to bring these values to light through the CTS CARES platform through which our employees across the globe participated in community activities and contributed more than 4,400 hours to community projects in 2022. Additionally, to report on our progress in driving sustainability throughout our operations, we plan to issue our first sustainability report in the second quarter of 2023. Summarizing our outlook for the year ahead, increased safety, automation and efficiency needs will continue to drive demand for CTS solutions. Our non-transportation end markets are growing, and we continue to use our core technology and domain expertise to expand our presence with new products and new customers while also finding deeper penetration with current end market applications. We expect the transportation market to be flat to up low single digits. Looking at the U.S. light vehicle transportation market, the SAAR was closer to 14 million for 2022, and we expect the 14 million to 15-million-unit range for 2023. European production is forecasted in the 16 million to 17-million-unit range. China volumes are expected in the 26-million-unit range, marginally up compared to 2022. The commercial vehicle market remains solid, and we expect it to be robust throughout the first half of 2023. The near-term semiconductor supply challenge, which I mentioned earlier, will impact our sales in the coming months. However, we expect it to be resolved by the end of the first quarter. For non-transportation markets, in-line with our diversification strategy, we continue to expand the customer base and range of applications in the industrial, medical and defense end markets. In some cases, inventory levels are correcting to more normal quantities, especially in certain industrial applications and in distribution impacting volume in 2023. Demand in defense and medical markets remains more resilient. As I mentioned earlier, we expect a softer first quarter at levels similar to the fourth quarter of 2022 and an improving trend for the rest of the year. Overall, we remain energized and focused on our long-term goals to drive profitable growth in the face of near-term challenges and improving our operational performance. In terms of guidance for full year 2023, we are forecasting sales in the range of $580 million to $640 million and adjusted diluted earnings per share in the range of $2.40 to $2.70. Thank you, Kieran. Fourth quarter sales were up â were at $142 million, up 7% compared to the fourth quarter of 2021 and down 6% sequentially from the third quarter of 2022. Foreign currency exchange rates impacted revenue unfavorably by approximately $4.3 million, mainly due to the changes in Euro and Chinese renminbi exchange rates. Sales to non-transportation end markets increased 22% year-over-year, supported by another quarter of double-digit growth in the industrial and medical end markets. Our two acquisitions added $9 million in sales during the quarter. Sales to transportation customers were down 4% compared to the fourth quarter of 2021 and decreased 9% sequentially. The primary driver for the softness in transportation revenue was a supply issue that impacted sales of our actuator product line. Our adjusted gross margin was 36.3% in the fourth quarter, down 38 basis points compared to the fourth quarter of 2021 and down 24 basis points compared to the third quarter of 2022. We continue to partner with our customers to partially offset the impact of cost increases we have experienced. Foreign exchange rates impacted gross margin unfavorably by $1.7 million in the quarter. While some parts of our 2020 restructuring program will be completed in 2023, we have realized $0.25 of EPS in savings to date. Earnings per diluted share were $0.47 in the fourth quarter. Adjusted earnings for the fourth quarter were $0.56 per diluted share compared to $0.49 per diluted share in the same time last year and $0.62 per diluted share in the prior quarter. For the full year, we achieved $587 million in revenue, an increase of 14% compared to 2021. Sales to the transportation end market grew 7%, and sales to other end markets grew 24% in 2022. We achieved strong double-digit growth in the industrial and medical end markets and made solid progress in sales to the aerospace and defense end market. Our two acquisitions performed well and added approximately $23 million in revenue during the year. Foreign exchange rates impacted sales unfavorably by almost $11 million in 2022. Overall, as we continue to focus on diversifying our business, non-transportation sales were over 48% of our total sales in 2022, up from 44.6% in 2021. Our gross margin was at 36.5% in 2022, up 50 basis points compared to 2021. Our global teams executed efficiently in the face of significant supply challenges to offset the impact of cost increases and delivered solid results. Supply challenges and inflation are expected to continue impacting us in 2023. However, we continue to work closely with our customers to share the cost increases, and we are confident in our ability to execute successfully. Foreign exchange rates impacted gross margin unfavorably by approximately $3.6 million. For the full year of 2022, our earnings were $1.85 per diluted share. Adjusted earnings for the full year of 2022 were $2.46 per diluted share compared to $1.93 per diluted share for 2021, an increase of 27%. We achieved. We achieved 22.8% EBITDA in 2022, an improvement of 100 basis points compared to 2021. Moving on to cash flow generation and the balance sheet. We generated $25.5 million in operating cash flow for the fourth quarter of 2022 and $121 million for the full year, up from $86 million in 2021. Our 2022 operating cash flow number includes $27 million in surplus cash received from the termination of our U.S. pension plan. Our balance sheet remains strong with a cash balance of $157 million as of December 31, 2022, up from $141 million on December 31, 2021. Our long-term debt balance was at $84 million, up from $50 million as of December 31, 2021, due to the partial funding of our Ferroperm acquisition. Our debt to capital ratio was at 14.2% at the end of the fourth quarter compared to 9.7% at the end of 2021. We remain focused on strong cash generation and are committed to maintaining a healthy balance sheet to continue to support organic growth and strategic acquisitions. During the quarter, we repurchased approximately 199,000 shares of CTS stock totaling approximately $8 million. In total, in 2022, we returned over $27 million to shareholders through dividends and buybacks. [Operator Instructions] Our first question is from Brady Lierz from Stephens. Mr. Brady, your line is now open. Please go ahead. Yes. Good morning, everyone. This is Brady on for Justin. And thank you for taking my questions. So you mentioned expectations for a softer first quarter in the release. Could you kind of talk about the drivers to that comment and maybe kind of quantify the order of magnitude of that softness against your expectations for the remainder of 2023? And then Iâve got a follow-up. Yes, Brady, just the real drivers for the first quarter softness, first of all, is the continued IC shortage we talked about in our last earnings call, which will be something that will be resolved at the end of the quarter. So itâs still a temporary thing weâre working through. And then we are seeing softness in industrial and distribution primarily. Thatâs where weâve got some things that weâre working through. You heard me say softness in micro actuators for industrial printing and some other applications and the inventory levels in distribution. On the flip side, the medical side, defense side remain robust and resilient, and we feel good about that for the rest of the year as well as well as flat to single-digit growth in transportation. Okay, thanks so much. And then maybe just a quick follow-up, so your 2023 revenue and EPS guide kind of implies margins remain relatively flat on a year-over-year basis. Could you kind of talk about a few of the things that might be offsetting the potential for some margin expansion in 2023? Yes. Brady, thatâs a good question. If you look at the range that we provided, we are dealing with some volume uncertainty in different end markets. And we are also looking at exchange rate as well as continued cost pressures on the raw material side that we have already talked about in the past. So those are some of the things that we are watching for carefully. And the other thing that we want to stay ahead of is as the economy evolves during the year, we could potentially see price pressures from our customers, and weâll be working the supply chain very hard to make sure that we can offset any pressures on the price side with cost savings from our material suppliers. Thank you, Mr. Brady. Our next question is from Joshua Buchalter from Cowen. Mr. Joshua, your line is now open. Please go ahead. Hey, team. Good morning. Thanks for taking my question and congrats on all the progress in 2022. I wanted to ask again about the component shortage impacting your transport market. Is that sort of a single point of failure and you just canât get enough of the single â of the component for the actuator? And I guess what gives you the confidence that youâll be able to get that cleared up in 2023? And within the guide, are there any embedded â I know in the past, you talked about your customers not being able to get semis also. I was wondering if thatâs still impacting the Transportation segment as well. Thank you. Joshua, thanks for the question. Itâs not a customer thing. Itâs a supply thing for us. Itâs one part. Itâs a very well designed in part and take the design and substitution to replace it would take quite some time to qualify. Obviously, weâre preparing for that for the future. But it will be solved in the â by the end of the first quarter. Weâre already seeing an improved trend, and we have the commitments and the capacity thatâs lined up to make that happen. So we feel good about resolving it. And as you said, it is impacting our sales in the first quarter, just like it did in the fourth quarter as well. You had also asked about the embedded risk from our customer volumes in the â in our guide. The â there is some level of built-in. You will see that we have guided to a slightly wider range that we normally do. And embedded in that is some level of uncertainty primarily on the demand side of the equation. We see a continuing improving trend on the supply side, but we are watching carefully how the demand scenario looks in the interim. What I would also add is that we are very well positioned, in our opinion, on the mid to long-term growth of the business with all the development activity thatâs underway and the traction that we are getting in winning in different end markets, in industrial, medical and aerospace and defense. Okay. Thank you for all that color. And for my follow-up, if we sort of account for TEWA and Ferroperm, and I think another acquisition you did, I am letting at around $10 million to $20 million of organic growth implied in the guide. One, I guess can you confirm if I am in the ballpark. And then secondly, can you walk us through directionally which end markets and products you expect to contribute most? It sounds like aerospace and defense and medical in particular, would be helpful to hear your directional color there. Thank you. So, Joshua, I think the first part of your question was asking about the expected contribution from acquisitions to this yearâs revenue. Is that right? Well, it was more â yes, it was more about like what are the underlying drivers of the organic growth if we sort of back out the â half a year of Ferroperm inâ¦ Okay. So, like Kieran mentioned, we are expecting transportation to be flat to up low-single digits, and thatâs going to be mostly driven by the demand environment. Industrial, we are seeing some softness at the moment, including in the distribution space. Our expectation is that, that could last Q1 and Q2 with potential for more stable to some recovery in the second half of the year. Medical and aerospace and defense look pretty stable to us at the moment. So, thatâs kind of how we are looking at 2023 in terms of expectations by the different end markets. Kieran, would you want to add something? Yes. Just since Joshua, you asked about acquisitions, you heard in our prepared comments, Josh, that we acquired maglab. Itâs a company based in Switzerland. Itâs got an expertise in magnetic system design, primarily focused on custom current sensing and position sensing solutions. So, itâs a great addition for us. It doesnât come with revenues or anything. We are really bringing in a technical capability to advance our electrification strength and position going forward. Just to go back on your thoughts on revenues for the year. I guess when I first started, I thought that the â your non-transportation revenues would be up for the year. But now I am wondering with maybe distribution shortfall, maybe lessening into the second quarter. Are you looking at a potentially down year in non-transportation? No, John. We would see it just across those non-transportation markets. We would see growth in medical and in aero and defense. What we are seeing is the mixed results in industrial and inventory corrections in distribution, which is impacting volumes. Okay. And also in your prepared remarks, you mentioned something about potential pricing from your customers. Could you talk a little bit of what you meant by that? John, we havenât seen anything yet, but we are keeping our eyes and ears open on whatâs happening on that front. If there is softening of demand, then there is a potential that we could see some pressure. And as I mentioned earlier, we would want to stay ahead on the supply chain side to be able to offset that with any material cost favorability that we might be able to get. John, I would tell you, we are very focused on the alignment with our supply side costing, making sure thatâs in line as we go forward to protect our margins. In the current environment holding prices as well as pushing some smaller price increases through â in certain parts of our business. Okay. So, you were able to push through pricing during the recovery and you are worried about pushback, I guess mostly in the transportation market, should there be a weakening. Is that a fair assessment? Yes. I would say in transportation, but I would go a little bit broader in the industrial distribution space as well. And John, one other comment is just to make sure we are all calibrated is cost pressures have not gone away yet. They are still there. They are still real for companies. Got it. And then I will go back to an earlier question about how the Q1 lines up versus Q4. I normally would think that seasonally, it would be stronger. I just want to make sure that, thatâs still the case on a normalized basis, or is the aforementioned revenue problems result in something thatâs more flattish or even down versus Q4? So, John, our comments were that you can expect Q1 sales to be roughly in line with where we finished Q4 because of the semiconductor shortage and some adjustments in inventory as it comes to distribution or industrial markets. But again, we said very clearly an improving trend for the rest of the year. We feel very good about our medical and aerospace and defense markets. And transportation is a little bit of â is it flat, is it up a few single digits, thatâs what we are trying to gauge. And to Ashishâs point, we will have a better â we get a wide guide, but we will have a much better sense as we get through the first quarter with how the macroeconomic situation is evolving. Hey. Good morning guys and thanks for taking my questions. Maybe a question on the supply constraints, but from the angle of commercial vehicles, which I believe you noted in the PowerPoint would likely have an impact on the first quarter. So, can you talk specifically a bit more about visibility to your commercial vehicle exposure? And do you also expect those constraints to ease with kind of broader transport exposure as we work through Q1? So, Dave, good morning. The softness we are seeing in Q1 is pretty much similar to the softness we had in Q4 due to the semiconductor shortage. And again, I want to emphasize thatâs going to get fixed by the end of the first quarter. We are on it. We feel like we are on a good track with that. And then to your visibility on the commercial vehicles side, we feel good about the first six months of the year. I would tell you, even some of our customers out there feel good about the rest of the year. We are just waiting to see the first six months evolve and take it from there. Okay. Got it. Thank you. And just you noted the strengthening EV platform wins. If we take a step back, we are seeing some OEMs cut EV pricing in the U.S. The U.S. EV incentives were just adjusted that now includes more models. So, can you talk broadly about the bidding opportunity in electrification, if you are seeing a meaningful uptick there in the recent months from customers, and you have got the target out there to increase revenues, but maybe talk about the cadence over the next couple of years, how you are expecting momentum to unfold in electrification? Yes, David, I think as we all know, on the transportation side, pricing pressures in the competitive side of it is always high. We havenât seen any meaningful change. And I imagine on the electric vehicles, when your big dollar items like displays and other things that go in there, you are going to experience a lot of pressure. Our products tend to be smaller dollar value, highly engineered and customized to the customersâ requirements where, as you know, the dependability, quality and innovation is important. So, we feel pretty good. Our focus more so is strengthening the portfolio. With the small acquisition we have done in Switzerland, we see that as a good step forward. But we are also very excited about eBrake applications and other things we have been developing around moderate current sensing that we think are going to build nice momentum for us in transportation markets. And also we are looking at how do we do move that into other mobility applications as well. [Operator Instructions] Our next question is from Hendi Susanto from Gabelli Funds. Hendi, your line is now open. Please go ahead. Kieran, my first question is, is the softness in chip shortage unique to CTS since you have like a custom design products, meaning that I think in general, for the market, the chip shortage is better. Therefore, we shouldnât expect like any negative surprise outside of that particular chip shortage? Yes. Hendi, probably the best way to address that is, we have gone through 2 plus years without actually impacting our customers with any shortages. We have obviously had tight situations and qualified and managed substitutions. And we feel bad about this one because itâs in a design thatâs going to move into the next-generation design. And the lead time to substitute another part wasnât exactly the easiest thing to do. So, itâs just the one part that goes into this one commercial vehicle application. And again, we will have it fixed by the end of the quarter, and itâs improving. But thatâs the one shortage we are working through. Itâs not impacting any other part of the portfolio. Got it. Yes. And then Kieran, some electronic contract manufacturing and semiconductor companies are expecting positive demand and a continued positive growth in automotive. Having said that, I think those companies are in different places of the transportation supply chain. May I inquire like what is the case of CTS Automotive sales to be flat in 2023 under, letâs say, like the low-end scenario? Yes. So, what is the case of, letâs say, like CTS Automotive sales to be flat in 2023? Like what kind of scenario may contribute to CTS automotive sales to be flat, whether itâs, letâs say, like the SAAR numbers will be significantly worse than what you have stated or like what are some external market situation for your lower end of the automotive sales at the flat year-over-year growth in 2023? Yes, Hendi, the way we are looking at it a little bit is if you look at the SAAR, itâs one thing we could expect softness in China where the market has been softening for a period of time now. Some people would say a second half pickup in China. We have seen mixed results in Europe. We think North America may be up a little bit to flat. But you are seeing different companies give different views out there in your traditional automotive suppliers. Some are up high-single digits, some are flat, some are slightly down. I donât have too many down more flat is the situation. And the way we look at it is, obviously, we are impacted a little bit in the first quarter from the shortage, which is a temporary thing. And then as we look at the rest of the year, will China rebound as strong as it should rebound. Thatâs one thing thatâs on our mind. And whatâs going to evolve in the commercial vehicle space, we see it has been robust in the first half of the year, but I am not sure thatâs going to hold up for the full year. They would be some of the things that would take us towards a more flat view. Thatâs very helpful, Kieran. Thank you. And then Kieran, in electronic vehicles, I think people usually talk about the increase in dollar content, which would be â like how should we think about CTS benefiting from increasing dollar content per vehicle? And then would you be able to share the timing of new product introductions. Hendi, we havenât disclosed content per vehicle. Itâs something we are tracking internally because itâs a key part of how we manage our growth trajectory. We have launched accelerator modules into both electric vehicles and hybrid electric. We have got current sensing that will be launched with the European OEM this year for electrification application. We are very excited about the eBrake. I think we said in our last earnings call, we are in predevelopment activity with a customer. And we are really focused on getting that portfolio as solid as it can be to make sure we are growing with the market as we go forward. Got it. And then, Ashish, I think the EPS guidance is above my projection. So, can you share more color on gross margin and OpEx for the high end of the EPS guidance. So, Hendi, the high end and the low end of the EPS guidance will be fairly consistently mirroring our volume. So, if you look at it from the range of revenue, if we are on the high end, then we would see some leverage on OpEx as well as gross margin. And if we are on the lower end, then we will be focusing on managing costs a lot more carefully as we navigate through a tougher environment. So, thatâs what I would point to. We are continuing to focus on pricing. We are continuing to focus on managing the cost side of it. As Kieran mentioned earlier, material cost is still an issue. We are seeing some increases in labor costs. But so far, in terms of managing that equation, we have been able to do that fairly well. And I expect that we will do the same in 2023. The other area that we will be watching carefully is how the currency movements are happening. That impacted us pretty significantly negatively in 2022. So, we will keep an eye on that as well. Okay. And then Ashish any insight on CapEx, I think CapEx is â CapEx was like below your business model in 2022. And I am wondering what 2023 may look like? Yes. So, CapEx was slightly lower. I am expecting 2023 to be more in line with our longer term expectations. But obviously, as you know, Hendi, we will be looking at all CapEx requirements carefully and making the appropriate capital allocation decisions based on the amount of return we can generate. So, we always watch that equation carefully. And then just, may I verify, I think your long-term model has CapEx at around 4%. So, when you mentioned closer to your business model, does that imply closer to 4% of the revenue? We currently have no further questions. I will now hand back to our speaker and CEO, Mr. Kieran OâSullivan. Mr. Kieran, please go ahead. Thanks Bruno and thank you ladies and gentlemen. In conclusion, despite experiencing a challenging macroeconomic environment towards the end of the year, we achieved solid financial results in 2022. CTS is well positioned for future growth driven by demand for increased automation, connectivity and energy efficiency. We are supported by global teams whose deep expertise and custom-engineered solutions fuel growth across our customer base, driving sustained long-term value for our global stakeholders. Thank you for joining us today. This concludes our call.
EarningCall_535	Hello, everyone. This is Terada from IR. I'm the GM. Thank you for your valuable time today, despite your busy schedules. As it's time now, we will like to start Mitsubishi Corporation's Fiscal 2022 Q3 Results Briefing. First, let me introduce who is here with us from our side. We have Representative Director, EVP and CFO, Yuzo Nouchi; also the GM of Corporate Accounting, Yoshihiro Shimazu; and myself, the GM of IR, Tatsuhiko Terada. We have three of us here. This is Nouchi, the CFO. Thank you very much for taking time out of your busy schedule today to participate in our fiscal year 2022 Q3 results call. First, I will explain the progress of the mid-term corporate strategy 2024, including the highlights of the financial results for fiscal 2022 Q3. My part will be followed by Mr. Shimazu, GM of Corporate Accounting, who will explain the details. Please refer to the page on the material entitled results for the first nine months of fiscal year 2022, presentation materials. From this quarter, we have enhanced and improved the content of our results materials and also integrated supplementary information materials with the results materials, which used to be separately posted on our website. The contents corresponding to the conventional supplementary information materials are under supplementary information for consolidated financial statements and supplementary information by segment, but I will not be explaining them at this time. Now please turn to Page 3, which is numbered at the bottom right. First, I'll explain the summary of this quarter's financial results. Consolidated net income for fiscal 2022 Q3 increased by Â¥311 billion from Â¥644.8 billion in the same period last year to Â¥955.8 billion. We were able to exceed last fiscal year's full-year record high profit of Â¥937.5 billion as of Q3. Additional commentary by segment will be provided later by Mr. Shimazu. In addition to the steady progress leading up to Q3, we have also felt good response in Q4. Therefore, we have revised our full-year forecast upward from Â¥1,030 billion announced in November to Â¥1,150 billion, a Â¥120 billion increase from the previous forecast. Despite headwinds such as inflationary cost increases, we recognize that profitability is steadily improving. Regarding shareholder return, we have raised our dividend forecast by Â¥25 to Â¥180 per share from the November forecast, and we will implement an additional share buyback of up to Â¥100 billion. Next, on Page 4, which is numbered at the bottom right, I'll provide a supplementary explanation of the progress toward the profit targets in the Midterm Corporate Strategy 2024. Please refer to the dark blue portion of the bar graph on the bottom half of the slide under Midterm Corporate Strategy 2024 for this fiscal year's target of profit excluding price factors. We have revised the target to Â¥730 billion, an increase of Â¥80 billion from Â¥650 billion, which was the outlook at the beginning of the year. We expect profit growth in automotive and mobility, industrial materials and other segments, and we have reversed our risk buffer of Â¥40 billion by Â¥30 billion taking into account, the reduced uncertainty and the remaining period of the fiscal year. Toward achieving our goal of Â¥800 billion in fiscal year 2024, the final year of the medium-term management plan, we will continue to maintain and expand our earnings base and we will also accelerate investment in EX, DX-related and growth areas. Please refer to Page 5 on the bottom right. Now, I would like to explain our progress as of fiscal 2022 Q3 toward the cash flow allocation plan set forth in a Midterm Corporate Strategy 2024. Cash inflow for the period was Â¥1.5 trillion, consisting of Â¥1 trillion in cash flow from underlying operating cash flows and Â¥0.5 trillion in cash flow from divestments. On the other hand, cash outflows included investments of Â¥0.6 trillion resulting in an adjusted free cash flow of Â¥0.9 trillion. Shareholder return that has been announced up until today a free cash flow of Â¥0.9 trillion will be appropriately allocated to investments in growth to enhance corporate value and additional shareholder returns while maintaining financial discipline. Page 6, please. We plan to invest approximately for the medium-term under Midterm Corporate Strategy 2024. We plan to invest approximately Â¥3 trillion over the next three-year period of which approximately Â¥0.6 trillion has been already executed. Major investments include in the area of maintenance and expansion of earnings base, approximately Â¥0.4 trillion invested in Australia metallurgical coal and Lawson-related businesses, and in the EX-related area, approximately Â¥0.2 trillion invested in the Quellaveco copper mine and in the Eneco-related power generation business. Page 7, please. I will explain progress on the growth strategy defined as part of the Midterm Corporate Strategy 2024. In the past nine months, in addition to the maintenance and expansion of the earnings base, we had progress in the areas of EX-related, DX-related and the Regional Community Revitalization. A major progress was an acquisition of a new offshore wind power generation business in Northwestern Netherlands through Eneco during Q3. Lastly, I will explain about shareholder returns on Page 8. In line with the targeted total payout ratio of 30% to 40% defined under the Midterm Corporate Strategy 2024, we set the total return to shareholders at approximately Â¥430 billion, taking into account financial soundness and market expectations for shareholder returns. We are increasing annual dividend to Â¥180 per share, reflecting the steady growth of earnings. In addition, we have also decided to buyback shares worth up to Â¥100 billion, which explains the difference between the dividend and the Â¥70 billion share buyback announced in November. Progress on quantitative target is summarized on next page, Page 9. Please refer to it later. This concludes my brief explanation. Next, the business conditions are still unclear because of the slowdown in the world economy. We would like to accelerate our initiatives and increase the efficiency of the asset and increase the corporate value of the mid- to long-term. Hello. This is Shimazu, GM of the Corporate Accounting Department. I'd like to make a few supplementary comments on the detailed result for the first nine months of fiscal 2022. First, I'll explain Q3 results by segment. Please refer to Page 11 shown at the bottom right of the document. In Q3 of this fiscal year, seven out of 10 segments reported year-on-year increases in operating income or net income. I will now explain the segments with the largest increase in profit. First, Natural Gas. The first item from the top on the left side of the slide showed an increase of Â¥30.5 billion from the same period of the previous year, mainly due to a decrease in dividend income in the LNG-related business and an increase in equity and earnings of LNG-related businesses, despite the impact of losses on transactions in the marketing business. Mineral Resources, net income increased Â¥137.1 billion year-on-year, mainly due to higher market prices in the Australian coking coal business. Now moving on to the right half of the document. Automotive and Mobility recorded an increase of Â¥33 billion from the same period of the previous year, mainly due to increased equity in earnings of the ASEAN automobile business and Mitsubishi Motors Corporation. Finally, urban development, which recorded gains on a sale of a real estate management company in the first quarter, reported an increase of Â¥86 billion from the same period of the previous year. Next, I'd like to explain the outlook by segment. Please refer to Page 12 on the lower right. Please move on to Page 12. We have revised our full-year forecast upward by Â¥120 trillion from Â¥1.03 trillion announced in November to Â¥1.15 trillion. By segment, out of 10 segments, eight segments had upward revisions. Let me now explain about three with larger revisions. First, on the left hand side of the material, the first item is Natural Gas. That revised up Â¥38 billion to Â¥170 billion due to increased earnings and dividend income from the LNG-related business. Next is Integrated Materials, due to increased earnings from the North American plastic building materials as well as in the steel business, the business revised up Â¥10 billion to Â¥62 billion. Next is Mineral Resources. Due to higher earnings from the Australian metallurgical coal business, the business revised up by Â¥43 billion to Â¥442 billion. Finally, please see Page 13. This is a reference material or market assumptions. From this time on, in addition to actual prices of metallurgical coal, we are listing actual and forecast prices of iron ore and impact vis-Ã -vis the full-year earnings forecast. Please refer to the details later. This concludes the presentation from the company side. We will now move on to the Q&A session. As usual, we would like to receive one question at a time and a maximum of two questions per person. [Operator Instructions] So at this point in time, you are ready to speak and please identify yourself by the name and affiliation. Please refrain from asking questions on specific items of the financial statements. Our IR team would like to answer those questions offline. This meeting is until 6:15 pm Japan time. If you have any questions, please raise your hand. First person, SMBC Nikko, Morimoto, over to you. If you don't mind, please turn your camera on and please go ahead with your question. Thank you for your explanation today and also regarding disclosure and your efforts to enhance and improve it. Thank you very much. I'd like to extend my gratitude. So â because you're taking one question at a time, here's my first question. So regarding dividends, you increased it to Â¥180 a share, but can you talk about the reasons why and the backdrop leading to this? For example, excluding market factors, you were able to see an Â¥80 billion increase when you referred to the materials for profits, but what about its sustainability? Are you confident about â what sustainability and therefore you set it at Â¥180? So that's my first question. Why is it Â¥180? Yes, I would like to take that question then. Thank you very much for your question. In the middle of the fiscal year, we raised our dividend by Â¥5 to Â¥155 and at that point in time, regarding further earnings growth, we wanted to make sure where it was headed. And basically, we are following the concept of 30% to 40% of the payout ratio raised in the Midterm Corporate Strategy. And during this midterm plan period, we wanted to continue on with our progressive dividend policy. So that is the reason why. So to answer your question Morimoto, as you rightly pointed out, in a sustainable way, we thought that our earnings can grow by a certain degree. So profit independent of market factors. Rather than looking at that, it's more about resource prices and FX, it's profit after making some adjustments, which we look at one piece of reference. Of course, it's not just about resource prices. There are other types of market factors that we are susceptible to, but the market volatility is the greatest impact we receive. So we made some adjustments and we look at how much of a magnitude it is. Of course, there are one-off factors, market factors that we are impacted by, but the degree of the dividend increase is one where we have confidence in; two, continue on with our progressive dividend policy. So it was a comprehensive decision made in making decisions on a dividend hike. So we believe this level is one where we can continue on with our progressive dividend policy. So that's what we looked at. For total return, the range is 30% to 40% that we've committed to. And like we said at the interim period, what we commit to is something we would need to protect. Based off that, whether upon deciding on the total shareholder return, the rest has been allocated to share buybacks. I hope that answers your question. Yes, it does. Thank you. Here's my second question. For this fiscal year and the way you look at your performance in Q4, when you do the math up until Q3, after the upward revision and the progress made by segment, it seems that if you just do the math, it's going to be a sudden drop off or in other areas in segments you have already achieved your full-year plan. There's many of them. You were saying you had reversed a buffer, you reversed 30, which was 40 and you still have 10 left. So when you think about that, in what way are we going to see the fourth quarter unfold? What are your assumptions and what is the probability? And if you were to exceed and beat your expectations, is the total return ratio of 38% going to be the base off, which, we should apply in trying to determine your policies? You were saying the buyback is going to be until April 30, so it really makes us feel that there's going to be some more coming, but what are your thoughts? Well, for the fourth quarter towards Â¥1,150 billion for the year, we have made 83% progress as of Q3. So three quarters is 75%, but we've already exceeded that level progress rate wise. And the three-month outlook is going to be about Â¥195 billion. And you were saying that that maybe conservative. As a risk buffer, we still have about Â¥10 billion in place, but of course, the remaining period is less than three months now. So uncertainty, you never know what's going to happen until the end of the year. So that buffer will be able to handle what may happen. And also in Q4, we would like to ensure that we will take care of any uncertainties if there is a need. So when you think about all of these aspects, it's not as if we are super conservative in guiding Q4, and we're also not expecting profits to drop off substantially either in the revised outlook of Â¥1,150 billion. That is something that we would like to achieve, but of course, you never know what's going to happen in the balance of the year, but we would like to make efforts so that we can achieve the guidance. And of course, depending on the circumstances, we might be able to beat our expectations. For return, are you committing to 38%? Was pretty much what you were trying to get at in your question. But our basic way of thinking is like explained progressive dividend policy, total return ratio, and we look at the range of 30% to 40% that we raise in the Midterm Corporate Strategy, and it should be in that range. So we're not committing to that single number of 38%. And of course, going forward for dividend hikes, returns and what we're going to do in Q4. At this point in time, we are not going to rule out any options, but we will like to think about the future. Thank you. The next question is from Nomura Asset Management [indiscernible], please. If you don't mind, please turn on your camera and ask the question. Thank you very much. From Nomura Asset, my name is [indiscernible]. I'm sorry, my video is not functioning, so I can't turn it on. The first question, this maybe minor detail, but Eneco until Q2 there was a huge loss, but from Q3, it turned out to â the profit. This year â this fiscal year, it seems that the Eneco as a company is going through tremendous volatility for Q2, Â¥3 million, 16.2 in Q3, it's positive Â¥14.9 billion. So why is the volatility, and do you accept such kind of volatility? Or are you thinking about anything to do in order to stabilize the profitability towards next year? Thank you very much for your question. Regarding Eneco. It's true. In the Q2 and Q3, there was a significant volatility. Especially, for this fiscal year, the energy prices during the fiscal year compared with normal years, the volatility is much higher. That is one reason. And in the case of Eneco, renewable energy power generation is a large part of their business. So the wind conditions also was another factor. That's why we had a negative profit number for Q2. On the other hand, for Q3, and also going forward coming Q4, well normally â relatively Q1 and Q2 are low and the Q3, Q4 profit will be higher. That is the normal seasonality pattern. And that itself has not changed so significantly. But as you pointed out the volatility maybe high. Last year there was a Russian/Ukraine issue and also energy prices in Europe compared with normal years, the volatility is higher. So this is one factor that is impacting the performances of energy companies in Europe. Not only Eneco and Eneco is also affected by those situations. In total, Enecoâs profitability, earnings power has been improving steadily. That is the perception that we have. Therefore, as the core company, core business in EX, we would like to position Eneco continuously. Thank you. My second question is about food industry and consumer industry? For these businesses, there are lots of downstream businesses and what is the inflation impact? The electricity prices are going up, especially from the next year. So from next year, how do you anticipate the increase in cost? Or is it from next year or when you make the plans? Is it something that you are paying attention to? When you are budgeting for these businesses? Regarding food and consumer businesses. For both of them, as you pointed out, the cost increase impact from inflation is relatively negative compared with other areas. That is true. In fact, for the third quarter â up until the third quarter, this fiscal year, if you look at the performance in the food and industry group, until Q3 we had a Â¥68.5 billion. In other segments, up to Q3, they have seen increases in profits. But to a certain extent there was a decline year-over-year, exactly Â¥2.8 billion except for Cermaq and others, which is still performing well or performing strongly than â more strongly than other eight years. The grain cost price is affecting the feed business, especially Nosan Co in Japan and IPC. Nosan Co is a livestock business in Japan. Well, the question I think is related to whether the situation continues until next year and whether the electricity prices are going up. I think when it comes to electricity prices, well, on the other hand, retail power price going up is happening from now. However, for business-to-business, enterprise electricity prices has gone up to a certain extent already. Of course, electricity prices and other cost, which are staying at a high level, should continue going forward. But weather that is affecting our business significantly or not, I don't think so. We don't think that way. So in these areas, how we can pass on the cost increase to â on the pricing is one question or another question is how much we can drive down the cost. So on a day-to-day basis, these are the things that we are working on in an operation, therefore, so that we can absorb some of the increasing costs. So we believe that we can observe those cost increases to a certain extent towards next year. Thank you very much. The next person is from Daiwa Securities, Nagano. Please turn your camera on, if you don't mind before you ask your question. Thank you. This is Nagano from Daiwa. Thank you for taking my question. Yes, we can see you very well. Thank you. I also have two questions. Well, both of them are regarding segments. The first one, in Queensland and the impact of the coal because of the heavy rains seems that there is some impact on volume as well as at the ports as well as at the mines. But in your operations for ports as well as the mines, what is the impact like? And towards next fiscal year, what is the image of production volume? That's my first question. I'd like to take that question. Exactly, as you rightly pointed out, the heavy rain impact has been impacting MDP as well because of the torrential rains in Queensland. Of course, it really is specific to certain areas as well as a certain ports, but as we speak, coking coal prices are still going up. So â because supply overall is currently limited, prices are going up. So for volume it has been impacted by a certain degree. But on the other hand, fortunately, regarding ports facilities, there are some ports that are affected greatly, but relative to that, the ports that we are using, although they are being impacted, the impact is not that great, which was fortunate. So the outlook for next fiscal year at this point in time is, it's a matter of â we're not really able to foresee what's going to impact us next year. But regarding productivity gains and improvements, this is something that is being conducted on a daily basis, but when it comes to the weather, this is something we can't really control. So if something were to happen like that, of course, we've liked to ensure that we could absorb the impact by a certain degree and that's what we are working on every day. And from the field or at the mines at the job sites, we are hearing that they are working on it. So even if there is a weather factor, hopefully the impact can be minimized through our efforts. Thank you. Regarding production volume, of course, for weather, this is something we can't control, and I understand it's difficult to foresee. But the reasons why production volume was weak this year, is this pretty much attributed fully to weather? Yes, yes. Basically yes. There's no other special factor. For example, strikes. There were some concerns at one point, but more than we thought the impact was limited and we were able to go beyond it. So the production volume decline is pretty much due to weather conditions. Okay, got it. And also for the ports for Dalrymple Bay, it seems that it's not that impacted, but for Hay Point that BMA utilizes it's close by, but the impact was small. Is that the case? Relatively speaking, but it has been impacted by a certain degree, but we have been hearing that one of the four facilities have been impacted heavily. And BMP is close by to the ports that were mentioned. But I'd like to keep my comments there. Okay. So moving on to the second question for nat gas. This time around, you have revised up the full-year forecast substantially, so I think the trend is favorable. So regarding the factors, why, as well as its sustainability, when you think about next fiscal year, how much earnings power do you think that the Nat Gas Group has? For natural gas, the reason why we did the upward revision was natural gas, but in reality, whether it be the third quarter, spot prices were trending high. Basically, we conclude long-term contracts for the majority of contracts. But production volume, we were able to make more, which we were able to sell more of. So compared to our assumptions, we have been able to generate better profits. And in Q2, in our trading business, there were some missed opportunities, but this also already has been taken care of, and we have been able to respond to what has happened. So our fundamental earnings power has been improving for this business. For next fiscal year apart from our outlook, I would like to say that for natural gas, its earnings power is steadily improving. That is the feel we have. But including long-term contracts, when it comes to price volatility, this is something that happens, which is hard to control. And what's most important is, and production of the project to ensure that production is steady. So that is part of the business that we would like to address, which will allow us to capture the upside when prices go up. So I think that's where we are. That's it for me. Thank you. So you're headed towards that position, meaning for Q1 and Q2, for this fiscal year. For transactions with Europe and spot volume there were some areas where production was weak. Was that the case? Because you were saying you were making more and you're seeing an improvement in production volume and for the transaction in Europe and the issues you faced, it's pretty resolved, which means that is the starting point going to be higher for this business next fiscal year? For trading losses, this already has been taken care of, and we're not expecting something similar to happen next year â next fiscal year. So yes, that wasn't the upside we were able to capture. For production volume, project-by-project, we have been optimizing and for Q3, additional production has been realized. So for next fiscal year onwards, we believe we are at a point where we could meet expectations. And personally, I have good expectations towards this business as well. Thank you, Mr. Nagano. Some supplementary comment. In Europe, rainfall has been increasing overall. So irrespective of specific industry, there are some impact in different industries. So next question is from Narita from Nomura Securities. If you don't mind, please turn on your camera? I'm sorry about that. There are two points. The first one is about the metal resources, the breakdown in Q2, Q3. MDP they had higher profit despite the lower pricing and the [indiscernible], the losses are increasing. So there was a significant change in Q3 from Q2. So what were the factors behind it? Could you explain about the factors? Yes. This is Shimazu from Corporate Accounting. For MDP from Q2 to Q3, I like to explain about the changes. The actual for Q2, Â¥42 billion, and in Q3 we had Â¥59.8 billion. The changes from Q2 to Q3 was about Â¥18 billion, positive movement by factor. The pricing and the loyalty was minus Â¥7 billion; and volume and cost was positive Â¥17 billion; foreign exchange rates positive Â¥3 billion; and others positive Â¥5 billion. So as you pointed out from Q2 to Q3, if you only look at the index, Q2 was 250 and Q3, it was $278. So if you only look at the dollars and then index, it looks like it's going up, but the actual selling price is not necessarily linked to index. Therefore, in terms of the pricing royalty from Q2 to Q3, was negative Â¥7 billion. Regarding vehicle, I would like to answer your question. Already in production. From July last year, we had already commenced the production. And in September from the authorities, the license was issued, and we started the commercial operation, and we started shipping in October last year. It's not the full capacity production yet. There is a time lag of three months continuously. So that's part of the reason. So up to Q3, we incurred cost, but not the sales yet. So for Q4, there are certain profits that we are already expecting at a reasonable level. So that's why in the revised plan, we have fully taken that into consideration. In terms of the full capacity production, it will happen in the second half of FY2023. So this is something that can benefit the next year's performance. So we have a very positive expectation from that, and we can expect considerable contribution from that. Thank you very much. My second question, well, this time you have announced the share buyback and dividend increase in line with the market expectation. I saw that phrase in the statement. And in your outlook for the performance, the profits independent of the market factors, you said that it was Â¥730 billion. How can I interpret that? You said that the next year there are still uncertainties, but when it comes to FX and the resource prices, all of these upside factors will not be gone next year, therefore, Â¥730 billion, is this the normal normalized level for the company already? So if the market factors, some of them are still remaining, maybe you can achieve Â¥800 billion or so, or is Â¥730 billion just the bottom up numbers of different factors. So how did the each segment decide their forecast? It's difficult to see from outside. So if you could give us supplementary comment on Â¥730 billion that would be great. Yes. The bottom up number of Â¥730 billion, it's not a complete bottom up number. So when we talk about the company's capability or normalized level, it is misleading. So when we look at the resource prices and the FX rates, so it's the profit after the adjustments of the resource prices and the FX rates. So during the mid-term period â midterm plan that we have this time. So what is the normalized level? That's not always the normalized level. There are some price or market factors as well as one-time factors included. Some of them are included. But the biggest factor of volatility is the resource price fluctuation. So at a certain resource price levels and FX levels, we have made some assumptions as benchmark. And then that is reflected and towards the end of the final year of the MTP, we are trying to reach that level, so that we can make an overall improvement in profitability or earnings power. By doing so, the current progressive dividend scheme, while is continuing with that, we would like to increase the level of increase year-by-year under the progressive scheme. So you are asking about the reasons for the increase. It's not that we are intentionally increasing that. So one of the reasons for the increase is that, well also there was a risk buffer that we secured in the beginning because we only have several months to go for this fiscal year, so we put back some of it. And also the resource prices are increasing, however, the volume wise, they are working towards the other way around between price and volume. But we took that into account and there were some negative factors included. But other than those for the auto and also industrial materials for those areas compared with the original expectations as we tried to make upward revision of Â¥120 billion and as we looked into the content and break up, then we realized that the profit or profitability earnings power of these sector is increasing. So based on that with the certain assumptions we announced the changes. These are not absolute level, but it can be one reference level where we think about whether the earning power is getting higher or not. This is one of the indicators that we can look at when we think about that. So that's how we have conducted analysis internally this time. Thank you. Well, I'm curious, you increased the dividend this time, but it's not that you are increasing the dividend unless there is no increase in profit. Well, how important is it? Well, it depends on the reasons, breakdown of the profit. In the beginning as Mr. Morimoto asked and as we answered, well, this time we decided to increase the dividend because the basic progressive dividend scheme as we tried to maintain that scheme. And then while maintaining that, how much dividend increase we can make, that's the question that is always in our mind. And as we thought about it, we decided to raise the dividend at a certain level and because we were confident that with that level we can maintain the progressive dividend scheme. So as we thought about it, the profit independent of the market factors, that is something we always look at. Thank you. So next question is from UBS Securities, Goroh. If you don't mind, please turn on the camera and go ahead with your question. This is Goroh from UBS Securities. Thank you for taking my question. Thank you. Well, related to what's been discussed is my first question. So profits independent of market factors by 2024, you would like â you're aiming for Â¥800 billion and the lead up to that. Earnings contribution was large from some businesses this quarter. When you look at the quarterly trends, automotive and mobility is a good example, but it seems that from the first half going into second half, we were seeing some decelerating trends maybe due to economic deterioration. Is that your view? Or is it just simply seasonal factors for each segment? So for fiscal 2023, as we head towards next fiscal year in order to increase profit independent of market factors, which segments are going to contribute? Can you comment on that together with the momentum you've been observing for the segments for this quarter? Thank you very much for your question, Goroh. As you rightly said, there are some one-off profits as well, so that needs to be taken into account, but for a normalized underlying profit for some of the segments. When you think about the economy or this fiscal year, from the beginning of the year, rate hikes started in Europe and the U.S. and inflationary trends have taken off leading to people talking about the deceleration in the economy. It hasn't materialized as much. That's how we feel, but the slowdown in the economy has been a factor that maybe materializing in some areas. But going forward, we need to continue to closely watch the trends to see how things unfold. There are some segments that are more susceptible on a relative basis to the economy. However, in the medium-term value plan, we would like to engage in value added cyclical growth, such as replacing our assets. So for those projects that don't exceed our hurdle rate or have been slowing down, we would like to consider divestments. And also we would like to concurrently ensure that we recognize capital gains to harvest in our past investments. So if the economic sentiment were to worsen, and if there were some businesses where earnings power is declining, we would like to ensure that we are able to offset those trends with other parts of the business. But of course, timing is important as well. So on a fiscal year basis, I'm not sure if we can continue to see this grow in a linear way. But going back to Narita question, but profit, excluding independent of market factors may fluctuate as well. But over the longer term, we would like to ensure that it continues to grow. And during the mid-term period, we would like to manage to reach Â¥800 billion. In order to achieve that, we will be implementing various initiatives. Thank you. My second question is a question as well as a request at the same time. Regarding the breakdown of investments for EX, you have included Â¥60 billion for Eneco, but you were talking about the volatility of Eneco earlier, but in your EX strategy for core companies that you invest into, I think there's various elements of investments. For example, offshore wind power generation in the Netherlands, that was covered in the press as well as the President and media has been talking about green hydrogen opportunities, and I think that is also included in investment plans as well. So instead of saying profitability maybe fluctuating every year, how are you going to go up the steps? It's kind of hard to get a better picture. So can you talk about â give more flavor on the investments that you are going to make or making, and towards 2030 in your long-term vision as growth drivers, how is your allocation like, and which part or how much of investments are going to be in the nature of sowing the seeds for the future? So it was a question as well as a request at the same time, allocation to increase your profit as well as sowing the seeds for the future. So the answer is, regarding EX, over the course of the mid-term plan, we are planning to invest Â¥1.2 trillion. And as we have in the materials, it's not just for Eneco and apart from what's noted here in North America, our power generation business opportunities, our employees and also LNG-related investments are included in this budget as well. Apart from that, regarding future investment plans, including our commitments, we have accounted for that in this plan. So in order to respond to your request about raising visibility, I think that's what you're trying to get at. We will consider your request. Thank you. Thank you very much. For EX-related, as the CFO just explained for copper, HKW and offshore wind power, we are working on those. So when the time comes, we'd like to give you more details going forward. We still have some time left, so if you have any questions, please raise your hand. Thank you very much. I see hand from Tokai Tokyo Research Center, Kuribara. The floor is yours. Please turn on your video if you don't mind, please. Yes. You may have already mentioned this, but for the fourth quarter, the end of the year, last year there was Â¥80 billion year one-time loss. You had accounting process and this year, I'm sure that you will be looking at the asset. But in terms of the amount, I don't think that there will be another one-time loss to be recorded this fiscal year? Well, at the moment, we wouldn't have three-digit [indiscernible] level or two-digit billion level asset impairment or such significant impairment this fiscal year. We are not planning that. Last year, well for any asset with any concerns, we thought that we should take care of them as early as possible. That was the stance last year. And for this fiscal year, for the assets with any concern we have already taken care of those pretty much. But if there is any left, we would like to do so. But even if we do so, the amount would not be as large as last year. Of course, if there is anything that comes up and then we wouldn't hesitate to record such accounting item. Okay. Going to the second question about the auto and the mobility. The business is going well, as I understand, and there is a shortage of semiconductors and that led to the shortage in products. That means, your profits are stable because of that. Is this trend is still going on? And how do you see the trend going in the future? For the auto and mobility business? Yes, the business is doing very well for this fiscal year and in Thailand, in Indonesia, the business so far has been strong. We have hit the record high in history as Kuribara as you suggested. In terms of the volume â sales volume, there isn't such a tremendous growth. However, we are seeing a very positive growth in the profitability of each car sold. It is because of the demand supply situation partly, and also it is because of the cost reduction efforts that we are making during the COVID-19 pandemic and that is turning out to be very effective. So we believe that this initiative is going to have a positive effect continuously. On the other hand, in terms of the demand supply situation, as the gap is being addressed in terms of the profitability. For this fiscal year compared with the past, we had high level profitability. So in the future there maybe some negative repercussion. But we would like to cover up for that by increasing the efficiency in our sales. Thank you very much. It's time. So we would like to wrap up the Q&A. Just one point I want to add, Morimoto at the very beginning asked about the duration of the share buyback at the Â¥70 billion announced in November. For that in the middle of this month 15, we are going to finish that program earlier than planned. And other than that the new share buyback plan of Â¥100 billion at the maximum will be started. And by the end of April, we would like to finish that program. Thank you. Thank you very much for taking time out of your busy schedules today to attend our Financial Results Briefing for Q3 FY2022. This concludes the briefing. Thank you very much. Thank you for your participation.
EarningCall_536	Good morning, my name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Methanex Corporation 2022 Fourth Quarter 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]. I would now like to turn the conference over to the Director of Investor Relations at Methanex, Ms. Sarah Herriott. Please go ahead. Thank you. Good morning, everyone. Welcome to our fourth quarter 2022 results conference call. Our 2022 fourth quarter news release, management's discussion and analysis and financial statements can be accessed from the reports tab of the Investor Relations page on our website at methanex.com. I would like to remind our listeners that our comments and answers to your questions today may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome. Certain material factors or assumptions were applied in drawing the conclusions or making the forecast or projections, which are included in the forward-looking information. Please refer to our fourth quarter of 2022 MD&A and our 2021 annual report for more information. I would also like to caution our listeners that any projections provided today regarding Methanex's future financial performance are effective as of today's date. It is our policy not to comment on or update this guidance between quarters. For clarification, any references to revenue, average realized price, EBITDA, adjusted EBITDA, cash flow, adjusted income, or adjusted earnings per share made in today's remarks reflects our 63.1% economic interest in the Atlas facility, our 50% economic interest in the Egypt facility, and our 60% interest in Waterfront Shipping. In addition, we report adjusted EBITDA and adjusted net income to exclude the mark-to-market impact on share-based compensation and the impact of certain items associated with specific identified events. These items are non-GAAP measures and ratios that do not have any standardized meaning prescribed by GAAP and therefore, unlikely to be comparable to similar measures presented by other companies. We report these non-GAAP measures in this way because we believe they are a better measure of underlying operating performance and we encourage analysts covering the company to report their estimates in this matter. I would now like to turn the call over to Methanex's President and CEO, Mr. Rich Sumner for his comments and a question-and-answer period. Thank you, Sarah and welcome to all of you. We appreciate you joining us today as we discuss our fourth quarter and full-year 2022 results. I'm excited to be leading the Company and to be having my first earnings call since becoming CEO of Methanex on January 1. In December, we announced changes to the executive leadership team or ELT with a few longstanding ELT members retiring. I want to thank them for their significant contributions to the Company. The new members of the ELT, all have extensive industry experience and as a team, we all share a passion for safety and value creation. Now let's turn to a review of our fourth quarter and full-year 2022 financial results. For the fourth quarter, our average realized price of $373 per ton, generated adjusted EBITDA of $160 million and adjusted net income of $0.73 per share. Adjusted EBITDA was lower in the fourth quarter, primarily due to lower proceeds from the redirection and sale of natural gas in Egypt, partially offset by the benefit of a decline in gas and logistics costs. In 2022, we recorded annual adjusted EBITDA of $932 million and robust adjusted net income of $343 million or $4.79 per share. Combined 2021 and 2022 are the highest adjusted EBITDA and operating cash flows in the Company's history. I'm proud of the team for delivering another year of strong financial results and I'm very excited for the Geismar 3 plant coming online this year, as it will further enhance our cash generation capability. We estimate that global methanol demand increased slightly in 2022 to 88 million tons. Methanol demand in the fourth quarter was down approximately 5% compared to the third quarter of 2022, primarily driven by lower MTO operating rates. MTO affordability was under pressure from low olefins prices leading to lower operating rates and some plant outages. Demand from traditional chemical applications was also slightly lower due to lower consumer spending, year-end destocking in Europe and Asia and continued lackluster demand in China due to COVID-19 restrictions. Demand from energy-related applications was relatively stable in the fourth quarter. Industry operating rates in the fourth quarter were similar to the third quarter with lower operating rates in China and Iran due to the seasonal diversion of natural gas to meet power demand offset by stronger operating rates from the Atlantic region. High coal pricing in China continues to provide support to the methanol cost curve. We estimate the industry cost curve based on the marginal coal producer costs in China to be approximately $330 to $350 per ton, with coal pricing continuing to remain well above RMB1,000 per ton levels. Based on these industry supply and demand fundamentals, we're seeing relatively balanced markets in the Atlantic and tight markets across Asia and China, underpinned by high energy pricing globally. Our February posted prices remained stable in North America and increased in Asia and China. Less volatile spot prices in the fourth quarter, primarily in China led to a lower discount rate of 20.5% compared to 21.5% in the third quarter. In 2022, we had an average discount rate of 21% and in 2023, we had a similar discount rate. We continue to monitor the macroeconomic and energy price environment, we see potential demand upside from the reopening in China, following the Lunar New Year given the significant methanol demand in China, as well as in Asian countries with strong economic ties to China. We continue to see a high global energy price environment, which enhances methanol's cost competitiveness against alternative fuels, supporting demand growth. Interest from the green industry and orders for dual fuel vessels able to run on methanol continue to grow. Based on existing dual fuel ships and orders to date, demand potential grows from approximately 300,000 tons today to 3 million tons over the next few years. On the supply side, we do not anticipate any capacity additions outside of China in 2023, besides our Geismar 3 project, which is expected to start production in the fourth quarter. Turning to operations, our production levels were higher in the fourth quarter compared to the third quarter as the Egypt plant restarted after an extended turnaround. We had higher gas availability in Chile and New Zealand and no plan turnarounds. We did experience unplanned outages in Geismar, Chile and Trinidad that impacted the fourth quarter production. In 2023, we have three planned turnarounds, which will be undertaken sequentially and complete by September. Our forecasted production for 2023 is approximately 6.5 million equity tons, excluding production from G3. Although actual production may vary by quarter based on timing of these turnarounds, gas availability, unplanned outages and unanticipated events. We ended the fourth quarter in a strong financial position with approximately $806 million of cash, excluding non-controlling interests and including our share of cash in the Atlas joint venture and with $600 million of undrawn backup liquidity. Construction on our Advantage G3 project is progressing safely on time and on budget with production expected in the fourth quarter of this year. The expected G3 capital spend remains unchanged at $1.25 billion to $1.3 billion and we spent approximately $910 million before capitalized interest to the end of the fourth quarter. The remaining $415 million to $465 million of capital expenditures and including approximately $75 million in accounts payable is fully funded with cash on hand. We are looking forward to adding G3 to our asset portfolio as it will enhance our cash flow generation capability and lowered the CO2 intensity of our portfolio. Looking ahead to the first quarter of 2023, we continue to see a strong methanol pricing environment and we expect slightly higher production in the first quarter compared to the fourth quarter. I'd also mention that our sales of produced product were meaningfully lower than our production for the fourth quarter. As a result, we're expecting much higher sales of produced product and higher adjusted EBITDA in the first quarter of 2023 compared with the fourth quarter of 2022. In the medium term, the methanol market outlook is positive and we have growing cash flow generation capability with G3 production expected in the fourth quarter of this year. At $375 per ton realized methanol price and $4 per MMBtu gas, we expect G3 to generate approximately $250 million of EBITDA per year. With our G3 projects being fully funded with cash on hand and our ability to generate meaningful cash flows across a wide range of methanol prices, we are well positioned during this period of economic uncertainty to maintain a strong balance sheet, pursue economic value-added growth opportunities and continue returning excess cash to shareholders. We would now be happy to answer questions. If I look at what's going on in the market. Pricing is about similar in Q1 as Q4, gas prices are lower, you have a lot more sales. Would you not say that Q1 earnings should be significantly higher than Q4? Is there anything you can do to kind of quantify a bit more? I think you probably can put it together, I think the much higher on produced sales do that, if you kind of look at production and then think about our inventory balance, you can probably project what that means in terms of produce sales. And you're right Joel, in this environment where margins are strong and so we're expecting much higher earnings along with that. And then New Zealand production is starting to come back, but it seems like a slide here, and maybe some of the Chile production in '23 looks a bit, like not growth there. I'm wondering if there is one of the turnaround is happening in Chile this year, and then more generally like I know we're in '23, but can you maybe talk about as you get into '24, how might Chile and New Zealand volumes look better, like what's on the table, considering all the things going on those countries and Argentina? Sure. Yes, maybe I'll start with New Zealand. So in New Zealand, as you know we've got gas contracts that go out to the end of the decade. We're a big gas consumer there, so we work closely with our gas suppliers, on their drilling campaigns to support our contracts and our 2023 forecast is based on what we see relatively tight market in 2023. We continue to be optimistic with their drilling campaigns, as well as their well maintenance activities that are going to happen this year on the outlook for more an incremental gas to the two plants for at Motunui. Long-term or medium to longer term, we think it's favorable dynamics in New Zealand. The Taranaki Basin is a well-developed basin that reserves are there, its economic gas and in the high energy price, there is associated gas that comes with that. We also think we're a big consumer in the region and the other consumption isn't power and increasingly, I think New Zealand's recognizing the importance of gas for power generation. So we're cautiously optimistic there and we're going to continue to work really closely with the gas suppliers. So that's kind of New Zealand. When we talk about Chile, we've got gas coming -- into Chile coming from suppliers in Chile. But that gas happening all year round, and then we have gas coming from Argentina which happens outside of the winter months there. We are forecasting similar gas supply as 2022 and 2023. We continue to work with in particular with suppliers in both Chile and Argentina. Argentina, there's a quite positive things happening within Argentina that we think can be significantly change the balance there. One is that, there is a lot of development happening in the Neuquen Basin and the Vaca Muerta Field and there's pipeline connections being made which likely would supply domestic markets there and reduced need for imports of LNG. And it also depends on gas in the South, where our plants are and there's investments happening in the South. There is an investment by Total and Wintershall $700 million project, where they're developing gas. It's meant to come online in the next year and a half or so. So we're continuing discussions there and remain again optimistic of future gas, but things have to happen in Argentina for that to come unfold. And just finally, if I could be greedy here. Can you tell me at G3, did commissioning start in January, as part of that question. How many months did it take from first commissioning to first production at both G1 and G2 and would a similar timeline makes sense for G3? Well, I guess it depends on your definition of commissioning. When we're commissioning a plant, we -- what we're doing is, as the different systems and the plant are complete. We're handing it over to the commissioning team. So as of right now, the power supply system is being commissioned and handover to the team, that will continue to handover different parts of the plant as they become available. So that -- all that is built into our timelines when we say production in the fourth quarter and that we think once, we actually get tempting to start up the plant, it's a matter of weeks not months, because of all that pre-work done by the commissioning team. Thank you very much and good morning everyone. Rich, I just want trying to figure out 2023 in terms of demand. There is a big story about China starting to reopen this year and the U.S. and the EU perhaps going into recession. And you mentioned that we had about 88 million tons of demand in '22. Can you talk about where incremental demand comes from in '23 is it going higher, is it going lower? And what about incremental production? So you said that outside of China, G3 is the only asset coming online, but what's happening in China, how much new production or change in production do you expect to see? Sure. So the demand -- thanks Ben, the demand question is kind of maybe a large one. I'll try to tackle that one first. So we break down demand, we break it into both, I guess, segments as well as regions. Traditional chemical applications at 50% of demand. The MTO is 15% to %20 and then other energy applications is 30% to 35%. A significant portion of that demand overall is in China, so 60% of overall demand is in China, and another 10% to 15% is in other Asian countries. So with a strong linkage to China. So when we look at it -- we're looking at it both regionally and also by derivative, where demand we see growing, all applications in China and Asia could be help and supported with the reopening of China. We're looking at forecast day that are predicting 4% to 5% or above growth rates in China on reopening. We're going to have to wait and see. We didn't see that demand ahead of the Chinese Lunar New Year and we're -- but we are seeing a lot of activity in that country coming out. So we're going to be cautiously optimistic there on really all applications. For MTO when we -- what we saw towards the end of last year is 15% decline in MTO demand. It was really on the back of two large scale plants. One of which has already restarted and we know one plant is down that consumes over 2 million tons. We think the reason for that continuing to be down as they actually had refinery expansion and they're commissioning naphtha cracker ahead of the derivative downstream being commissioned and we believe that MTO, they have plans to restart MTO, once it's all commission. So we think that actually is likely to happen and we also think new Iranian supply after winter would be a logical place for a lot of that to supply into. So we look at the olefins market and say, yes, it's been under pressure. But we think MTO has been competitive to naphtha and there is a likelihood we see more. We have to wait and see. So hopefully that answers some of the questions on demand and we can revisit that. Maybe I'll switch over to China capacity and when we look forward, we're seeing maybe about 1.5 million tons to 2 million tons of new capacity in China this year. We also will net that off of -- most of that's coming from cooking gas. When that off and also the fact that there is a continued shutdown of smaller inefficient plants in China, so call it 1.5 million tons, which is not that meaningful, when you look at overall demand and overall demand growth. So maybe I'll stop there and see if you have any follow-up questions. Yes. No, that's perfect. And then just a quick one on the cost curve. I was very surprised that through China's lockdown last year, we didn't really see that thermal coal price drop a lot and so the methanol -- the marginal cost of methanol held in really well. And now in 2023, we're going to see China is starting to reopen. What is the downside to that core price if any? I mean, it seems like the cost curve has a lot of support either where it is or potentially higher. Do you know -- do you have an idea what could derail the cost curve in '23? It's hard to see in a high energy price environment. China is importing a lot of energy, LNG and oil and coal production, they had a real difficult time increasing coal supply through the last year. We understand that that's partially on the back of labor and COVID restrictions, getting people to mine. So the -- some of that could free up, but we also understand a lot of these mines are quite. I've already been mine quite deep and going any further causes safety concerns and other factors. And it's not easy to invest in a large scale mine, it takes time to bring production on. So we kind of forecast though and I think there's likely type coal markets. It does seem like China might be trying to open up more imports, talk about lifting the ban on Australian coal imports, but imports into China represents between 5% and 10% of overall thermal coal demand. So it's hard to see that being a major swing in the coal pricing. So hopefully that helps. Yes, good morning guys. Appreciate the time. Just a quick clarification question on the discount rate. Rich, I think you referenced the '23 rate as being similar to what we saw in the fourth quarter. I just wanted to clarify some of your opening remarks. Perfect. Thank you. Appreciate that. And then just a follow-up on Joel's question earlier around some of the production basins. I just wanted to clarify a bit more in New Zealand. I think the guidance relatively flattish on the year, but just curious, because you didn't have a couple of large turnarounds, are there was a turnaround in the period last year? And so, is there just -- is it a conservative guidance that we can get an uplift this year or is it just the gas supply, just trying to reconcile the two? Okay. Fair enough. And then just lastly around capital allocation. You've got a good cash position here to finish off G3, when should we start to think about sort of like the next stage of capital allocation in terms of comfortability on accelerating the buyback or pursuing the buy back more aggressively as the cash flow opportunities are set to [indiscernible]? Yes, so we're really happy with where we are today. Our balance sheet is in really good position with about $800 million on the balance sheet with $465 million left to spend on G3 and we're maintaining our minimum cash balances at $300 million. So we don't see a lot of excess today. We will be generating at today's methanol prices with our assets operating -- generating strong cash flow. We're obviously going to be cautiously watching things and still moving through a period of economic uncertainty here. But we have options for excess cash. So like you said, we can accelerate the current bid, it's still around over $100 million at today's share price. That number is getting bigger every day. And then if we can upsize the bid as well, which would mean going to 10% of the public float would be another around $100 million. And then we've said that we want to repay rather than refinance our $300 million bond coming due in 2024 and we think we can do that in stages rather than all at once. So we have options, we're going to be looking at our options and obviously first priority is to keep a strong balance sheet and through this period and ensure G3 is completed Yes, I wanted to go back to that discussion on China and your thoughts on the low MTO affordability that we're dealing with right now. One, does that improve, because I thought part of the discussion, there was just the overcapacity situation wins for the Chinese olefins market given the ramp and new capacity there? Yes, so the olefins market has been under pressure for well over a year. That's on the back of both like you said the new capacity that's been coming into the market, as well as the economic demand for olefins. So kind of a double whammy there. That's impacted the affordability for both Asian naphtha producers as well as MTO. We think MTO, it's been competitive to naphtha through that period. But it's been tough for all producers in that sector. When it gets back into balance. It's sort of hard to predict. We think that that -- on the demand side, certainly the opening up of China could help support on the demand, but there is new capacity and required rationalization of operating rates. We don't really think, olefins pricing is so low right now, it's low-low. It's hard to see it going further down from here, but we'll see how -- see what happens. So, we think there is some positive signs with demand that could help balance things out, but still need that rationalization in that industry. Okay. And then my second question just on the Trinidad gas contract. Maybe just talk through where you are in the negotiations are for Titan. And this contract for Atlas, will you be doing this at the same time? And then what are the structures of the gas contracts being considered? Yes. So, for Trinidad, certainly want to be talking to the National Gas Company of Trinidad for both Titan and Atlas. The NGC is really in a number of different discussions right now. One is with the upstream and so they are in discussions with the major players in the upstream there. They are also have been working towards getting a standard ownership interest across all the LNG trains. And then obviously start the discussions with the downstream. So positive progress on all fronts. We understand, they've done one contract -- upstream contract with BP. We also understand that they reached agreement on the unitization of the LNG and that set to be done in the first quarter and complete. I think that both those things are creating a better environment for now us getting into commercial discussions with -- on the petrochemical side. So we will be having those discussions this year. Some other positive news is recently is the Biden Administration just granted a license to Trinidad to develop a field, the Dragon field in Venezuela, which is a fourth Tcf field. That's positive, because there is also -- an even larger fields that borders -- it's more than double the size of the borders Trinidad and Venezuela. So it opens up the possibility for that to happen as well. So this progress happening there. We'll have more to report throughout this year as progress takes place there. Good morning. Could you give some detail on how you're seeing the evolution of the Marine methanol demand and your line of sight to demand growth over the next couple of years? And what you're seeing in China for both DME and industrial boiler demand? Sure, I'll start with the Marine Fuel. This is a really exciting area for us. We're seeing a lot of interest right now. We -- as of today, there is both ships that are on the water as well as orders that are on the books today. It's over 100 vessels that, if run on methanol, 100% of the time would be 3 million tons of demand. But we also know that all major shipping companies are looking at methanol, either committed to methanol or looking at methanol in the container space. So that's Costco, HMM, Maersk, CMA, CGM and others. So really exciting there, but we're also seeing interest in all other sectors. Cruise lines, Disney just committed to their first cruise -- large cruise vessel. Ferry has done a -- first converted ferry vessel. And then we know tug barge, dry bulk, et cetera. So we were really interested. We're supporting that area, we expect to see it grow, continue to grow. We're supporting in a number of different ways, trying to really help with shipping companies understand the technology of methanol, the logistics, the availability of methanol. We just did some demonstrations in the Port of Gothenburg with Stena during the first ship to ship bunkering in Sweden, as well as for our Ferry. So we're supporting this in a lot of different ways and we're also trying to understand their interest in low-carbon methanol and how that fits with potentially our investments in our sites as well as future projects. So really interesting space. I'm sure we'll have a lot more to report on more vessels and more demand potential as that goes forward. Your other question is about coal boilers and kilns. You asked about DME. DME, we don't see demand growing there, that's sort of what I'll say is sort of a mature application not seeing investments in that space, but it's sort of steady demand, above 4 million tons of demand per year with a lot of growth rates on that. Coal boilers and kilns, we see that that conversions continue to happen, mainly in the smaller commercial applications for commercial heating and commercial residential heating. So continuing to track that. We put a number on it, it's probably in a 4% to 5%, it's not -- we're not seeing huge growth rates there. The other area that we're watching is demand for vehicle fuels. Kee Lee [ph] is promoting a number of different applications, M100 vehicles, heavy duty trucks, as well as hybrid sedans. And so they have some quite optimistic marketing plans for especially heavy duty trucks. So yes, so those are the applications we're watching and continuing to track. Okay, thank you. And can you also just speak to kind of your philosophy or your view on what Methanex's strategy should be on green methanol? And also what you see is the current kind of state of the market? I think as far as to keep track, I think there's about 1.5 million tons of projects already announced, but I'm not sure if we're catching everything. So just curious about what you see in terms of -- what's in the pipeline and how you want to participate in that? Yes. I think if you break those projects down, you'd see those are a lot of announcements that haven't reached full commercial or project approval. So I think the pace of those projects is something that we're watching. As it relates to Methanex, we're looking at a number of different areas and when it relates to low carbon. First -- the first and the easiest thing for us to do is renewable natural gas. So, we're certified in North America in our Geismar plants and we're active in the renewable natural gas market where we buy renewable gas at a premium and create green methanol and supportive of downstream customers. When it comes to investments, we're looking at the feasibility of carbon capture in the U.S. And that's on the back of benefits and tax incentives under the Inflation Reduction Act, as well as sequestration availability in Louisiana. So we're looking at the feasibility of that and we're also looking at the feasibility of e-methanol, a small e-methanol investment in our -- at our New Zealand site and we think that that is something we could apply to multiple sites. These are very early, really in the feasibility stage understanding technology, understanding capital and these things will take government support as well as customer demand and willingness to pay. So I think our strategy is to try to make sure we're positioning the company the right way as those things advance and there's -- and the conditions for investment improve. Thanks. And just to clarify on the biogas route. Are you making the same profit per gallon using the biogas as you are on regular gas? So I guess the answer is, yes. And I guess the answer would also be it, it would depend on each agreement we would get in. And as of right now, we're still in discussions on that. Yes, good morning. I just have another question on the MTO market in China. You mentioned that, there was another a new naphtha cracker coming up. I just wondered if the competitive dynamics might change with a kind of shiny new naphtha cracker, will it become more cost competitive in some way that could in any way affect the demand for methanol in that market? And secondly, there is a considerable amount of new capacity coming up. I think BASF is putting up a huge plant there. I'm not sure if they would have any offtake on -- I mean, any supply of methanol that might change the competitive dynamics of methanol in that market? Yes, so let me clarify what I was talking about with MTO units. So the MTO side, I'm talking about is, it's all -- the MTO units on the same site as the refinery expansion. Today the MTO units is feeding into derivative downstream. They've started -- they've now built out a new refinery project on the same site, right, next door with both the naphtha cracker as well as new derivative downstream. So once all the site is fully commissioned, they actually need both in terms of feed. When we look at economics, MTO today looks more competitive than naphtha and if you also include the fact that MTO is buying a considerable amount of product from Iran at discounted prices to international prices, that makes it even more attractive. So we would expect to see that, that plant starts up. So it's really a very site-specific issue, but it obviously has big demand impact given this MTO unit consumes over 2 million tons per year. All right, thanks. And anything on the BASF plant and other big chemical expansions there, whether they might in some ways produce byproduct of methanol in anyway that would affect the competitive market for methanol in China? Not familiar with that, but certainly -- I mean what we're seeing is not the expansions. We consider that in the mix of all the capacity that's being added, I'm sure, but nothing specific to mention around that. Hey guys, this is James Cannon on for Josh. Just looking at kind of where gas costs have come down to at this point in 2023. You're starting to hear some comments on potential reopening and not reopening, but improvement in Europe as things become more affordable and potentially seeing some rebuild in feedstock inventories of the downstream production. Can you comment on what you're seeing in that market versus what we're seeing through destocking in 4Q? So yes, so I guess when we talked about our fourth quarter, our fourth quarter we saw traditional chemical applications declined about by about 3% and a lot of that was driven by both Europe and Asia. Right now certainly, we think that the decrease in natural gas prices has supported producers and manufacturing base in Europe. As of right now, we would say that, it's likely got a little upside from where we were towards the end of the year, but we got to wait and see. I think our customer base is a little more optimistic than what they were three months ago. So, but still got to wait and see and see how operating rates are impacted, but I'd say modest improvement in outlook there. Okay. Thank you. And then just as a follow-up to that, with gas now below 250 in the U.S. Do you have any update to your kind of views on your hedging strategy with 2023 at 85% and how we should think about looking out to 2024 and beyond? Sure. So, when we think -- you quoted, we have 85% hedged. When we look at our North America natural gas exposure, we consider both Medicine Hat and Geismar in our North -- in mix of North American gas. We have a team that looks at how we want to manage that on an active basis. Our target is to have around 70% per year hedged for us there. We view that in two ways. One is through longer-term fixed price physical contracts with suppliers. And then the second is through commodity hedging in the financial markets. We're hedged 85% for 2023 and then we're close to our 70% levels for both 2024 and 2025 after considering G3 at full production rates. So we feel really good where we are in the kind of medium-term. We're going to continue to be active in the market. Obviously, today's spot price is supporting our unhedged exposure and that's quite a benefit from where we were last year when we saw that pricing up in the $8-$9 in MMBtu. So we think that's a positive for our cost structure in 2023. Thank you for your questions and interest in our company. Looking forward, we're well positioned with our current asset portfolio and a strong balance sheet. Our G3 project is fully funded, progressing safely on time and on budget and we expect to be in production in the fourth quarter of this year. We hope you will join us in April when we update you on our first quarter results. Thank you.
EarningCall_537	Thank you, Serge. Good morning and good afternoon to everyone. We would like to welcome you to the webcast and conference call for CNH Industrial's Fourth Quarter and Full-Year Results for the period ending December 31, 2022. This call is being broadcast live on our Web site, and is copyrighted by CNH Industrial. Any other use, recording or transmission of any portion of this broadcast without the expressed written consent of CNH Industrial is strictly prohibited. Hosting today's call are CNH Industrial's CEO, Scott Wine; and CFO, Oddone Incisa. They will use the material available for download from the CNH Industrial Web site. Please note that any forward-looking statements that we might be making during today's call are subject to the risks and uncertainties mentioned in the Safe Harbor statement included in the presentation material. Additional information pertaining to the factors that could cause actual results to differ materially is contained in the company's most recent report 20-F and EU annual report, as well as other periodic reports and filings with the U.S. Securities and Exchange Commission, and the equivalent authorities in the Netherlands and Italy. The company presentation includes certain non-GAAP financial measures. Additional information, including reconciliations to the most directly comparable U.S. GAAP financial measures, is included in the presentation material. Thank you, Jason. And thanks, everyone, for joining our call. We finished 2022 with solid results as fourth quarter revenues were up over 27%, driving full-year consolidated revenues up 21%. Deliveries and product mix improved in both Agriculture and Construction. Our strength was broad-based, with double-digit year-over-year price realization coming from all regions. We expanded profit margins in both Agriculture and Construction despite significant input cost increases. The industry faced many other headwinds during the year, including a choppy supply chain, elevated freight costs, and ongoing inflation. Late in the year, these issues began to modestly improve. And we anticipate that will continue into 2023. The CNH team's creativity, hard work, and strong execution resulted in company records for both adjusted net income, up $2 billion for the year, and adjusted earnings per share, at $1.46, up 14% over 2021. We also generated $2 billion in free cash flow from industrial activities in the fourth quarter and $1.6 billion for the full-year as we over-delivered on our plans to complete and ship our accumulation of partially built units. This benefited our dealers and put us in a net cash position well ahead of our plan. Last year, we launched two potent margin improvement initiatives, the Strategic Sourcing Program, and the CNHI Business System, which we refer to as CBS. Continuous improvement is hard, especially in pursuit of breakthrough results. But our team has embraced this lean mindset, and is poised to deliver value across the business. Looking ahead, we remain focused on executing our strategy, including significant investments in out tech stack and product development. Derek Neilson and his team continue to drive exceptional performance, delivering a strong fourth quarter, with full-year net sales for the AG business up 22%. This growth was largely propelled by robust industry demand and significant year-over-year price realization, especially in North and South America. We saw improved product mix, including Precision AG revenues up 32%, which benefited from both an increased take rate for factor-fit precision options and incremental rate in sales. AG profitability remained healthy, with Q4 gross margins up 280 basis points, and adjusted EBIT margin up 310 points admittedly against an easy comp. Margins were down sequentially versus our record third quarter performance impacted by regional mix and the non-standard work required to finished units. Overall, I'm extremely pleased with the AG team's performance and results. For 2022, AG adjusted EBIT was nearly $2.5 billion, marking our highest profit in more than a decade. We are executing on our customer-centric strategy and customers have responded with continued demand for our high-end products at prices offsetting increased escalated production cost. They have also recognized us with improved net promoter scores, 5% higher than in 2021. Derek and his team are ensuring that customer is at the center of all we do, driving the right behaviors and results. Stefano Pampalone and his Construction team executed quite well in the fourth quarter with strong momentum from Sampierana integration, manufacturing improvements, and enhanced customer focus; we expect even better progress in 2023, and beyond. 2022 net sales were up 16% for both the full-year and the fourth quarter, with noteworthy growth in Europe and South America. Organic growth accounted for about two-thirds of the increase in the remainder, with the remainder attributed to Sampierana. Their excavator portfolio and technology innovations have enhanced our ability to meet customer needs, and their Eurocomach platforms provide an outstanding foundation for electrification. Construction adjusted EBIT for the quarter was $34 million at a 3.5% margin. Full-year adjusted EBIT was up 38%, to $124 million. And we are encouraged by the ongoing progress in Construction. The team is well-positioned to deliver on their strategic initiatives, support their dealers and customers, and gain market share. This past December, we held an engaging Tech Day to showcase our extensive suite of precision AG technology. Attendees met our deep team of experts in automation, autonomy, and connected platforms to better understand the cutting edge products we are developing. Through a series of live demo stations, the team exhibited the real world applications of our groundbreaking [Smart Iron] [Ph]. The products and technology that we demonstrated at Tech Day that you see here on this page and those we will be releasing over the next few years, prove our commitment to being a leader in precision agriculture. We reiterate our expectation to deliver over $1 billion of Precision AG sales in 2023. I also want to highlight two recent investments made through our CNH Industrial Ventures arm. Stout Industrial Technology is a U.S.-based startup focused on AI-powered smart agriculture implements. EarthOptics has proprietary sensor technology that precisely measures soil health and structure. By taking minority stakes in these and similar companies through our Ventures portfolio, CNH is staying on the cutting edge of emerging technology to develop solutions to provide real advantages for customers. CHN remains committed to adding value and creating profitable growth for its customers and shareholders through sustainability. We have a strong history of sustainability performance as evidenced by our recognitions and our innovative products, including the New Holland methane tractor and electric mini excavator pictured here. In 2022, we pledged to set science-based targets that will enhance our operation's Scope 1 and 2 emissions goals, and establish a first-time decarbonization goals related to our products, which we'll announce later this year. Yes, thank you, Scott, and good morning, good afternoon to everyone on the call. So, fourth quarter net sales from Industrial Activities, of nearly $6.4 billion, were up over 27% net of adverse FX impacts. Full-year net sales of Industrial Activities, of $21.5 billion, were up 21% or over 24% at constant currency. Continued price adjustments were significant drivers for the top line growth in the quarter, and volume and mix also accounted for around 15% sales increase from Q4, 2021. Our Industrial segment's fourth quarter gross margin was 21.7%, and 22.2% for the full-year. The year-over-year margin improvement, of 1.5 points, is mainly due to strong and profitable growth in South America, and disciplined price realization globally, which more than offset rising productions cost. Q4 adjusted EBIT came in at $680 million, up $302 million from 2021, with a corresponding EBIT margin of 10.7%, a 310 business points improvement versus prior year. Full-year adjusted EBIT of Industrial Activities was $2.4 billion with a margin of 11.3%, up 140 basis points from 2021. Free cash flow from Industrial Activities was $1.6 billion in 2022, which turned our initial Industrial Activities net debt into a net cash position of $362 million at the end of the year, as Scott discussed in his introductory slide. Adjusted net income for the quarter was $486 million, up $61 million compared to prior year. This resulted in adjusted earnings per share of $0.36, up $0.05 year-over-year, and full-year adjusted EPS was $1.46. Adjusted net income for the quarter was affected by a higher tax rate due to discreet items booked in Q4. The full-year adjusted effective tax rate was about 28% mainly due to the jurisdictional mix of pre-tax profit with higher rates coming from South America. And we will likely see the tax rate a point or two lower in 2023. Available liquidity, as of December 31, was $10.6 billion. And at the Annual General Meeting, the Board of CNH Industrial is planning to recommend an annual cash dividend of $0.36 per common share, totaling a little over $500 million in distribution to shareholders. In the fourth quarter, strong volumes and double-digit price realization continued to shield us from the steep increase in production costs. R&D and our SG&A expenses were higher by technology investments, inflation, and newly acquired businesses. Energy costs increased year-over-year but still accounted for about half-a-percent of our total costs worldwide. Agriculture adjusted EBIT increased by $287 million, to reach $701 million with a margin of 13.1%, up more than 300 basis points from the same quarter in 2021. The higher profits were driven by higher volumes and favorable pricing, which offset higher products cost, SG&A, and R&D expenses. Gross profit was up $394 million compared to Q4 2021, exceeding $1.2 billion with a margin of 13.1%. For the full-year, gross profit was up $989 million or up 140 basis points from 2021 largely driven by strong price realization coming from all regions and better product mix, including margin-rich technology-related sales growing by about 32%. Construction Equipment adjusted EBIT for Q4 increased by $14 million compared to Q4 2021, reaching $34 million with a margin of 3.5%. These results were driven by favorable volume and positive price realization. But product cost, including site-related costs, were an outsized headwind for the business. Gross profit across the year was up $82 million compared to the full-year 2021, mainly due to higher volumes and stronger pricing. For our financial service business, net income in the fourth quarter was $75 million, down $50 million compared to 2021. Factors include high risk cost, provisions linked to the termination of the construction business in China, increased labor cost, and compressed margin in North America slightly mitigated by robust volumes across the region as well high recovery on those agreements. Retail originations were $2.9 billion in the quarter reaching $10 billion for the year, up to $100 million from 2021. The managed portfolio at the end of 2022 was $23.8 billion, up $4 billion on a constant currency basis. Delinquencies remained at a low level, up 10 basis points year-over-year to 1.3%. Increase from December 2021 is explained by the in-sourcing of the resolving credit account portfolio that was purchased in October 2022. CNH Industrial Capital America acquired receivables previously held by CD on a private label program that will now be run and booked by our company. Free cash flow from industrial activities in the quarter was over $2 billion on the back of $1.5 billion change in working capital driven in large part by the reduction in manufacturing inventory as we mentioned before. At the end of the year, the total gross debt for industrial activity was $5 billion with a net cash position of $362 million. So, within the first year of the spin-off, we were able to improve our net financial position by $1.5 billion on the back of the cash generated by the operations. This takes to our capital allocation priorities. And we have target spending $4.4 billion in combing R&D and CapEx over the 2022 - 2024 plan period, almost doubling what we were spending in the previous three years. In 2022, we spent the first $1.3 billion of that. And we remain committed to invest in our business to fuel profitable growth. We are confident the product and service we would bring to the market with the spending will ensure higher financial performance in the near future, and more importantly, higher efficiencies to our customers. Strong cash generation helps us maintaining our investment grade rating which has been re-affirmed or improved by all the rating agencies after the spin-off. We returned nearly $600 million to shareholders in 2022 through dividend and share repurchases. And as mentioned earlier, we proposed -- the proposed 2023 dividend itself will total above $500 million. And we plan continuing our share buyback program. We have the liquidity to funding organic growth and you are seeing use the ventures on for minority investments when opportunity arises. We remain committed to our capital allocation strategy and focus on maximizing value for our shareholders. Thank you, Oddone. Overall, demand continues to outstrip the industry's ability to supply at least in the near term, which despite record sales has actually dampened the industry levels. Spot commodity prices are trending down. But they are still generally above pre-2022 levels. And fortunately for farmers, fertilizers and other input cost are dropping as well. In North America, elevated farm incomes are sustaining demand for high horsepower tractors and combines. While small tractor demands has slowed from a lofty level seen over the past two years. We see the European Ag industry flattening as the macro-environment starts to impact equipment demand there. South America and Brazil in particular is a very good market for us. The business conditions in Brazil are inflexed following a presidential election. But we believe that the fundamentals are still positive for agriculture in the region. We also see good long-term opportunities in APAC. But this year will likely be slightly down. In construction, global demand is trending is lower. And we expect residential and commercial markets in North America and Europe to decline in 2023 due to rising interest rates. However, public construction spending at least partially fills in those gaps in United States. In Europe and South America, construction markets will be down in reaction to the overall macro-environment. We expect net sales of industrial activities to increase 6% to 10%. With confidence in the stickiness of our 2022 price increases, we expect to build on our margin gains by taking more cost out of our system. We are committed to growing market share. And we have the products, brands, and dealer network to do just that. Returning to full production in our North American plants will also help. Our SG&A as a percentage of sales remains one of the lowest in the industry. And despite inflationary pressures, we will severely limit SG&A growth. Free cash flow will be between $1.3 billion and $1.5 billion. A little lower than last year as we have earmarked $1.6 billion for R&D and CapEx, up about $300 million from 2022. Even accounting for the increased R&D cost, our EBIT is projected to grow slightly faster than our top line. We are becoming a simpler, leaner company every day. And expect to modestly improve our industrial margins throughout the year. Earlier today, we announced that our Board of Directors has determined that our shareholders would be best served by a single listing in United States. The majority of our trading in CNH Industrial stock has been shifting to the New York Stock Exchange since the snip-off of Iveco Group. Revealing that CNH's new business profile and investor base better fit with the single New York Stock Exchange listing. Concentrating trading in one market will allow for increased liquidity of our stock, improve investor focus, further simplify the company's profile, enable broader index inclusion, and attract more passive investors. The current Italian regulations only permit the delisting of stocks when they are or will be listed on another EU exchange. By definition, the stock exchange does not qualify. CNH Industrial has an open dialog with Borsa Italiana on Euronext. And we told them about of our intention to leave the European listing. The harmonization and modernization of the Italian financial system, which is underway, is expected to include the New York Stock Exchange as an acceptable exchange. This is our preferred path for smooth delisting from Euronext Milan. But not the only option if this becomes untimely. We are targeting sole trading on NYSE by the end of 2023. But that could shift into 2024 depending on the timing of the regulation change. Rest assured, we will delist it soon as it is legally possible. At this point, we do not intend to change our incorporation in the Netherlands or our tax domicile in U.K. as part of the single listing. Therefore, we do not expect any material tax or trading consequences for our shareholders. Our Board of Directors and management team are grateful to Euronext Milan for being our listing venue for the past 10 years, and excited about the company's full return to the NYSE. I want to stress that this does not change the company's longstanding commitment to Italy and the Italian market. CNH employees over 5000 people in Italy made a significant investment with Sampierana acquisition in late 2021, opened its fifth plant in the country in 2022. We also have three R&D centers in Italy developing products that are sold around the world. While the delisting is another step in corporate simplification, real value creation comes from the business. We are now taking orders into Q4 in some markets. And overall demand remained strong. But the uncertain macro-environment, especially toward the end of 2023 requires vigilance as we strive to support our customers, dealers, suppliers, and employees. We expect to escalate combine CapEx and R&D investment as we launch exciting new products and build out the tech stack. We have already introduced some Raven-enabled products, and we will unveil more in 2023. But the real payoff for these higher margin precision solution kicks in 2024. We are happy to have finally secured a contract with UAW North America. The agreement we reached is fair for our employees and sustainable for the company. Employees returned to work this week. And we expect the two affected plants to ramp up to full production in the coming months. While the pace of inflation is slowing, it is still inflation. And we expect it to have an impact on our manufacturing, energy, SG&A, and R&D cost in 2023. On a more positive note, we are seeing modest supply chain improvements. Our primary margin improvement initiative, strategic sourcing, and CBS will start to yield results in 2023. I want to close by emphasizing again how proud I am of the team for what they have accomplished. And ensure you that we are ready to do even more in 2023. That concludes our prepared remarks. Hi, good morning. Thank you for the question. Scott, you talked about some of the industry demand outlook for 2023, I was wondering if you could comment more on some of the order book trends that were outlined in the press release? If I recall, last quarter, you talked about some of the year-over-year declines being driven more by your intentional decision to keep order books relatively short. How far are you open now, and maybe just say more about how you view demand versus order levels for 2023? Yes. As we talked about, the macro environment is -- it's choppy a little bit, and you see that in everything you read. But our order books really are not open. We haven't opened up Q4 in any markets yet, and we still are allocating. So, a lot of what's happening in the order book is our choice to allocate markets. I mean it's -- I'm not proud of the fact, but we have not delivered on a timely manner in much of 2022. The one market where we've been very clear is down is low horsepower tractors. So, we are seeing softness there. And I mentioned, I referred to the political situation in Brazil, it's really provide a -- just taking farmers, I think, are just taking a pause. We think the fundamentals in that market are incredibly strong; the world needs that agriculture production and they need equipment in order to do that. But we're just watching that very closely. But overall, Europe is a little bit slightly down, but we feel good about our ability to execute and keep that market relatively flat to the way it was in 2022. So, overall, I think the demand environment is better than I would have expected to be at this point. And we're really, I mean, running our factories as fast as we can and as much as we can through the year, and just being careful as we look at the fourth quarter. The fourth quarter is where we are being cautious at this point. We don't have orders for that yet, but where we have talked about it, I think we could open that up and probably book it very quickly. Okay, that's helpful. And then just as a follow-up to that question, just how you're thinking about dealer inventory levels existing 2023, do you expect to produce in line with dealer inventories, builds, just any comments you have there? We are still -- again with the exception of the low horsepower tractors, we are still below historical levels, and really, quite frankly, still below where most of our dealers would like us to be with our inventory. So, we're going to work to catch that up. We do not plan to get back to historical levels. We'd like to keep inventory relatively lean. It's careful balancing there, because you're running as fast as you can to provide shipments, and the market is going to slow down at some point. But no, we are not looking to push a lot more dealer inventory into the channel. We've got some dealers build that we've got to do just to give them acceptable levels of inventory. But our goal and part of what we're watching for is to make sure we protect dealer inventories going into 2024. So, thanks. Good morning. Just on the Q4 order book point, just curious, Scott, why haven't you opened up the order books yet? And what will you need to see to fully open them up for Q4? Steven, it really refers to, and again I'm not proud of the fact, just our inability to deliver in a timely manner. I mean, we've got the backlog, especially in our high horsepower tractors, that is quite long. And I think we're just trying to get more confidence in our ability to deliver. We -- again, inflation is -- it's not rising anymore, but it's still out there. So, we also are making sure we manage our cost. You know, Derek and Stefano are really doing a nice job of managing cost inputs in their business, but it's really that making sure we balance the cost-price equation, and you've seen from our history, we're really good at doing that. But also, ensure that we can deliver when we say we're going to deliver if we open up the books. Okay, that's fair. And then, I guess, in terms of the AG margins for 2023, can you maybe just give us any color on the puts and takes there? I imagine there were a number of inefficiencies in production, in 2022, due to the strike and the supply chain, and then you have Precision AG mix should be helpful, I would think, for 2023. So, can you talk about some of those puts and takes, and then what you're expecting for price versus cost in 2023? Let me take this, Steve. Yes, you predicted -- you pretty got it. I mean we expect 2023 to be a play of cost more than a play of pricing. We expect steel to be positive price over cost, as we have been throughout 2022. But the big game will be in getting cost out of the production system and reducing cost on to the production systems. And that's a combination of having a smoother supply chain, and a more organized cadence, and possibly getting some improvement in -- from our strategic sourcing program. That probably will kick in more at the end of the year rather than in the beginning of the year. But that's what we're looking at. And we have some carryover pricing for 2022 still coming in. And then you mentioned as well growing sales in tech, and which have generally higher margin than the pure equipment. Hi, thank you. I'm just trying to square up the implied volumes. When you look at the price -- sorry, the revenue guide, of the 8%, I mean, currency shouldn't be that much of a drag at these levels. So, and it looks like it's mostly just price in the revenue guide. Is that the right way to interpret it, that basically volumes are flat? And if that is the case, if you can give us a little flavor where volumes up versus down just so we kind of square up any chance of overhead absorption? Volumes are up slightly, modestly -- I don't know, slightly modestly defined there, but it's low single digits. North America is really where we see the greatest strength, and where we see the biggest backlog and where we've got the most work to do. So, I think that'll be the volume play there, to a great extent. And the rest of -- there's still lots of work to do to deliver in other areas of the world, but that really will be where most of the volume comes from. And Oddone, the comment about steel -- more about steel than price, and so I understood what you were implying there, do we still think our steel costs are up year-over-year more than price? And it's all wrapped in a thought around do we think gross margins can expand in '23? I just want to make sure I understand that [indiscernible] margin comment. And I'm sorry if I wasn't clear. I was talking cost, so price over cost, in general. And cost includes raw material, but in general, cost, so all of our production cost. So, if volume is up a little bit and price costs should be net positive to margin. I assume we can infer from that gross margins are expected to expand? Hi, good morning. Nice quarter. I guess just two questions. Scott, given the performance that you've put up -- the positive financial performance you've put up, can you talk about how you're thinking about the AG cycle, and the implications for your 2024 financial target, whether you think there's upside there? And then, I guess, my second question, just an update on Raven and where we are relative to your synergy targets? Thank you. Okay. Well, first of all, if you go back a year, to Capital Markets Day, we're obviously much -- 2022 played out significantly better than we expected. And unfortunately some of that driven by soft commodity prices impacted by the war in Ukraine, which we couldn't have anticipated. But overall, '22, and then as we look at '23, are both better than we had anticipated from that. But that's really market related, not our -- our performance is actually doing quite well. As we look at our 2024 targets, we obviously feel like we're on a path to do better in some areas, but we've got work to do in some areas. So, we feel like, generally speaking, we set ambitious targets, and we're on path to hit those. But we are -- I don't want to be a pessimist, but I just think '24 could be a -- we talked about, it could be a more difficult year. The AG cycle though, as I talked about in my prepared remarks, soft commodity prices are still at relatively good levels. And it looks like that could hold. And farmer income is still at elevated levels. And their -- their reluctance to pay taxes, and therefore their desire to by equipment still makes a good setup for the AG cycle. It won't stay positive forever, but we feel like, right now, we're not about to call that starting to turn negative in '23. As far as Raven concern, I'm honestly not sure I could be more positive on how well that integration has gone. We committed to a reverse integration because we like the team and we like the culture. And our team has embraced that. We are learning from their agile customer-focused system, and we're building on that, giving them the tools and resources. We've done a tremendous amount of hiring. And really, it's -- we talked about new Patriot sprayer that we brought out with full Raven capability. We'll embed their tools in everything that we can, going forward. But really, integrating them into our tech stack is where the real value unlock is. Huge aftermarket opportunities there, retrofit opportunities in Raven. But overall, I'm just really pleased with how the team -- both the Raven team and our team have done to bring value and overdrive on our synergy targets. Great. Good morning, guys. Thanks for the question. Just wanted to ask on some of the more producing credit margin improvement opportunities you mentioned. You called out the sourcing program and CBS starting to ramp in the quarter. I know Oddone mentioned it would still be a bit more back-half-weighted. But could you just maybe earmark kind of how much more of an opportunity that could be on more of a dollar basis or a margin basis, so just trying to get a sense of kind of quantifying what the tail end could be next year? Yes. Well, remember, we actually are not -- our CBS and lean initiatives are not are not starting from nothing. And we've got a great history with WCM and pulling lean tools throughout the plant network. What we're looking to do is how do we deploy that in other areas of the business, and accelerate it in the plants. And I think that's what you'll see taking shape this year. And obviously, the -- that's -- the opportunity is quite significant, but what the teams are working on now is how do we just push back the cost input using various lean tools to get back to where costs were pre-pandemic. And that's a lot of heavy lifting. But Oddone referred to it, 2022 was the year of price, and 2023 is going to be a year of cost focus. And our lean tool will be a significant way that we get after that. But more importantly, it's a way we get after delivering value for customers. It's not about just taking cost out, we're going to use those tools to make quality better, to make delivery better, and overall, help us expand margins. The -- that's, I wouldn't say, short-term, but we can do those, that we did that -- some of that work in '22. We're accelerating the work in 2023, so a great opportunity, across the business, to use those tools to create value and expand margins. Strategic sourcing is a longer-in-the-tooth program. It's probably -- it got kicked off last summer and fall. We've got a strong team working through it. But that will show some results later this year, but really start to drive notable margin expansion in '24, and beyond. But both of those, I would say, near-term opportunities with our CBS initiatives, more significant long-term opportunities with strategic sourcing. Okay, that's helpful color. Thanks, Scott. And then just with my follow-up on the Precision AG revenue target, I think, Oddone, you mentioned that you exited the year up 32%, you were originally guiding, at the Tech Day, it's up 11% in 2023. I know it's still a fairly recent target, but just given that exit rate, would you consider any upside to that $1 billion target for '23 at this point? Hi, good morning. Thank you so much. So, just to get some color on the volume expectation of low single-digit, is that higher for AG, call it mid single-digit, but negative for Construction, so that nets out to a low single-digit growth for the overall company. Is that how we should be thinking about it? No, it's actually -- the Construction business and backlog is quite good. Despite a difficult overall environment, we had so many limitations last year in our ability to produce, that that business is actually reasonably good. So, both businesses will have positive volume in 2023. Got it, that's super-helpful. And then second question, what kind of incremental margin should we expect in AG and Construction segment this year? I will go to the -- I mean, in line with what the kind of incremental margins that we have had over time, and no big difference from that. Probably a little bit more on Construction because we have -- Construction was more affected by some of the cost headwinds this year, but for AG, I will use -- it would be pretty much in line what we have had in the past. Good morning. And following up on Construction here, I'm wondering if you can give us maybe a little more context around the order book here and the declines that we've seen in both heavy and light equipment. Are you limiting the order book in Construction similarly to what you've done with AG? And I'm also curious, and in your own outlook for 2023, for the industry, are you seeing, arguably, a little more pessimistic than some of your peers when framing 2023? So, again, color on that would be helpful as well. Well, I -- I don't -- obviously, was busy this week, but I didn't really digest the [CAT] [Ph] numbers overall. But I don't remember them being overly positive on 2023. So, I think we're somewhat in line with what that was on the Construction side. Where we're really under-serving our dealer network with heavy excavators, and we're working diligently to improve that. So, that's a significant opportunity for us. But that's where some of the backlog reduction has been just because we cannot deliver in that area. On the light side, we've got just really good progress with Sampierana, and it will start to bring -- expand the markets where we can serve with that. But South America was very strong for Construction last year; we don't expect that to repeat. So, that market will be a little bit -- from a Construction side, be a little bit lighter than it was last year. But overall, again, it's going to be a positive year. Stefano and his team are doing a nice job with that business, and we like where it's going. And it's got a long-range upside for sure in that business. Okay. And then if I can try the price-cost question as well. Looking on a consolidated basis, it looks like you've had positive price cost of about $180 million the past couple of quarters. And as you contemplate 2023, I'm wondering if this figure holds or if we should expect any significant variance from that? No, directionally, we expect to be positive price-cost in 2023 as well. So, I wouldn't take much different view of what we are seeing. And in absolute terms those are going to be different, but I wouldn't take a much different view of what we have seen throughout 2022. Hi, good afternoon. Thank you for taking my question. And if you don't mind, please, it would be helpful to hear your thoughts on the pricing environment [indiscernible] so, specifically, given the industry, in the past, some of your competitors would hand out a steel discount where the raw had to start to normalize a little bit. But to my understanding, this haven't been the case in 2022. At this price, they're already positive [indiscernible]. I was just wondering whether you see anything at all that would suggest that this would change in 2023 or with the risk of some of your competitors giving -- or starting handing out steel discounts with the dealer, and how would you react to that? And then I had one more, please. So, we are still expecting inflation to impact our business, and therefore our supply chain in 2023 to a lesser extent than it did in 2022, so a declining rate of inflation, but still seeing inflation. So, we've seen a decrease in some areas, but overall the cost that we're paying is not coming down. So, we don't intend and in fact, we're still going to have to price, going into 2023, again, at lower levels because of the lower increases. But we don't see a decrease in pricing. And that, again, that the quality and innovation that we're putting in our products would suggest that we don't need to go start competing on price. And I think the industry, overall, is likely going to take that approach. Perfect. Thank you. And then I was just wondering with all the big tech cutting the workforce, were you able to benefit from the opportunity to cut into the tech talent pool for your Precision AG, kind of hiring from the pool, please? That's actually something I have been pushing the team on for quite some time. I mean, we've -- we have done a significant hiring with our technical team, Precision and Autonomy. But many of the layoffs are not actually the programmers and engineers. So, we don't really see that as an opportunity. And we did most of our hiring in '22. We'll probably slow down a little bit. But to the extent that we can bring on great talent at more reasonable prices because of what others are doing. But certainly our commitment to accelerating value that our customers get from Precision and Autonomy is there. And we'll -- we are continuing to hire in '23. So, but no, there's not a significant opportunity for us there just because of where we're hiring and where those -- most of those employees are located. Can we just start by talking a little bit about what you're seeing with respect to used equipment values, any signs of moderation at all from such high levels, in '22, within AG or Construction? Used values are still hanging in there, just again because availability. And I'm not talking about low horsepower tractors because that's a different scenario, and we've seen that market stabilize at a lower. But at the high horsepower side and large AG, we're still not seeing large fleets anywhere in the OEM side or in the used side. So, prices are staying reasonably high. Okay, got it, thank you. And just thinking about the quarterly cadence of earnings throughout '23 versus normal seasonality, I would kind of suspect that you would see a return to normal seasonality. But if there is anything you guys want to comment on to think about throughout the year, that would be helpful? Thanks. No, I would say we will go back to the normal seasonality, which sort of we have seen in 2022 as well between production and retail sales. So, I would say, yes, going back to the normal. Yes, thank you. Yes, first, Scott, it's interesting these -- I think these order board comment in the releases is kind of taking a life of their own. But I'm just curios, how does Derek and team interpret that? There's so much -- seems to be so much noise just in terms of how the world has unfolded over the last year or so, and how you and others have shifted to an allocation mode. Just really getting at the underlying significance of these order boards in light of just all the issues around timing of deliveries, meaning, you know, how significant are they, I guess that's the nature of that question? Yes, I would -- if I could call Derek up and getting on the call, I think you would hear a much more positive tone from him than how I think you are reading it. Obviously we are coming off an unprecedented demand, and I think we are seeing regional changes in that, but overall, the net portfolios are still reasonably good. The collection what used to have is, as you would open up the book and see it for an hour and we still see that in some markets, but generally speaking, it's slowing a little bit in Europe, in low horsepower tractors in almost all markets. But overall, I mean I think a lot of what we are seeing -- we didn't expect it, but the Lula election in Brazil really caused a lot of pause for farmers in a region, and that has been so good for us, and we expect it to be, but it's taken, I would call it a ,"Pause," in orders there. But overall, that market having just been there recently is very, very strong. So, I think it's a matter of timing, and we are trying to manage that properly. But I think Derek's managing the business extremely well, as you have seen by the execution, and that includes on the sales side to make sure that orders and retail orders come through, and he is not at all sounding an alarm, he is just putting the right measures in place to make sure that we deliver on a solid year in '23. Got it, got it. And back to your earlier comments about this dealer, and again, I think the low horsepower market weakness, and I guess it gets pretty well telegraphed and known at this point, but just again, sticking to large ag, obviously far more significant from a bottom line perspective for CNH, the notion that dealer -- any sort of dealer stocking or restocking is likely not happening in '23. So, presumably that could pose some tailwind as we -- you know, '24 is long ways off, but that's still in front of the company as a whole. Is that a fair takeaway? I think some markets will get back to reasonable levels of inventory, but I don't like -- I mean we want to be -- our goal, our intent is to make sure as we manage and protect our own cash flow that we do the same for our dealers, and so that takes discipline to do, and that's the discipline that we are going to have as we go through this. The end of the year was a little bit tricky for us, because it was so much very good work done to complete this in the significant fleet inventories we had literally all over the world, where we just were missing components and we needed to finish those get them build and tested out to dealers. And the team there has done a nice job with that, but it happens so much at the very end of the quarter, we ended up with more inventory in some places that has retail orders, the customers are going to pick it up right away, we just didn't get it there in time for that to happen. So, I think the end of the year inventories aren't really telling great stories, especially in North American market, where that was significant, but overall, we feel like there is just a tremendous opportunity for us to keep our factories running and produce for retails customers at this point, and possibly at the end of the year, start to get dealer inventories back, when I say, "Back up," it means it's up to acceptable levels, not up to historical levels. Hey, Scott. Thanks for taking my questions. I believe you phrased that 2022 was the year priced, 2023 is the year cost, just wanted to understand this a little bit more. If you look at 2022, can you quantify some of the costs embedding the model attributed to premium freight transportation, just buckets that like cyclically won't -- that cost won't be elevated in 2023? Well, you hit a big one, we have already seen it started to come down, being transportation cost, you know, just cargo boxes, all of that stuff. We've seen that start to give way. And way our contracts are we don't always see it right away. But nevertheless, that is - that's one. And overall, we are just not seeing the spike in prices. Again, inflation is there. We are dealing with it. I think team's proven our ability to manage that. Semiconductors have also come down. So, that's it. That are much reasonable or I guess acceptable level for us. But overall, prices are going to be higher for us in 2023. But when I talk about it, we are looking at the entire business portfolio. And saying what costs have be incurred through the pandemic. And then in response to pandemic where we had to ramp up so quickly to do our customer orders. And how do we get back to running the business very efficiently. And that's the work. When I talk -- we talk about cost, it's getting after that efficiency in all aspects of the business that we might have lost a little bit of during last couple of years. Understood. And we just went through the order book comment, but you did also made a comment earlier I think to Jamie Cook about 2024 could be a more difficult year. Many economists actually in 2024 could -- they could be seeing the global economy expanding. So, I just wanted to narrow in on that a little bit. Why do you think 2024 can just become a more challenging year as you said? Remember, we are significantly more exposed to the ag cycle than we are to the global GDP. So, we call it an ag cycle for a reason which means that it is not a flat line. And it doesn't go in one direction forever. And we have had a very high market, and I am not actually not at all talking about a peak year, but I am just saying we had a very strong market here. And I am acknowledging with other global inputs that may at some point impact ag demand. '24 may be a year that isn't as strong as others. I mean that's not a negative. It's not a negative comment. It's just a fact actually. Alright, understood. Just to squeeze one last in like you did see this inflection in your industrial net debt, ahead of times, some of the cash generation from the business in '22. Just -- I know you are aggressively investing in a business. How can we think about the fact that you inflected on your industrial net debt ahead of time? And how should we think about that in terms of potentially share repurchases to kind of close maybe your valuation discount to peers? How you kind of look at that? I know you are aggressively investing in R&D and CapEx. But just lever to pull, how are you thinking of that? So, let me take this one. We set very clearly our capital allocation priorities. We say that we are investing more in R&D, as you pointed out. We stepped up our dividend. In 2022, we went back in doing share repurchase at levels that probably we hadn't done in the past. We want to continue doing share repurchases in 2023. So, that's part of the mix that we have in there. And then, we also want to have some availability for some sort of M&A in particularly in the tech space if that helps profitable growth there. Hi, thanks very much for taking my last question. I guess I just wanted to touch on cash. Your guidance for '23 sort of sees weaker cash conversion. So, I was wondering maybe you could just comment a bit more on what you are seeing there? And sort of what the moving parts are? Thank you. Yes. Again, I'll use the opportunity to answer your question just to thank the team for delivering such strong cash flow in the fourth quarter, which gave us a reasonable for the year. We are expecting another billion dollar-plus I think to $1.3 billion to $1.5 billion range of cash flow in 2023. But we are spending several hundred million dollars more in CapEx. Again, part of our strategy is bringing new products to market that do allow us to have higher gross margins and gain market share. So, those things don't come free. So, we are going to spend more money to get that, and that's really the key driving factor of it. We will still be discipline with inventories and managing that, but that will be the differentiator between year-over-year cash flow generations.
EarningCall_538	Ladies and gentlemen, thank you for standing by. Welcome to BrightSphere Investment Group Earnings Conference Call and Webcast for the Fourth Quarter 2022. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] Note, this call is being recorded today, Thursday, February 2, 2023, at 11 a.m. Eastern Time. I would now like to turn the call over to Elie Sugarman, Head of Strategy and Corporate Development. Please go ahead. Good morning, and welcome to BrightSphere's conference call to discuss our results for the fourth quarter ended December 31, 2022. Before we get started, please note that we may make forward-looking statements about our business and financial performance. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected. Additional information regarding these risks and uncertainties appears in our SEC filings, including the Form 8-K filed today containing the earnings release, our 2021 Form 10-K and our Form 10-Q for each of the first, second and third quarters of 2022. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update them as a result of new information or future events. We may also reference certain non-GAAP financial measures. Information about any non-GAAP measures reflected, including a reconciliation of those measures to GAAP measures, can be found on our website along with the slides that we will use as part of today's discussion. Finally, nothing herein shall be deemed to be an offer or solicitation to buy any investment products. Suren Rana, our President and Chief Executive Officer, will lead the call. Thanks, Elie. Good morning, everyone. Thank you for joining us today. As usual, I'll start off with the financial highlights on Slide 5 of the deck. For Q4 '22, we reported our highest ever quarterly ENI per share of $0.67, 26.4% higher than $0.53 that we reported for Q4 of 2021. Our sizable share buyback in Q4 of '21 and Q1 of '22, more than offset the drop in our earnings from the significant equity market decline in 2022 and the resulting impact on our AUM. We are pleased that throughout this volatile market environment, our investment performance has continued to be strong. As of December 31, '22, 88%, 87%, 87% and 90% of our strategies by revenue, beat their benchmarks over the prior one, three, five and 10-year periods, respectively. We also reported second straight quarter of positive net client cash flow with $1.3 billion of net inflows as we saw robust sales across a few different strategies. Our sales pipeline remains healthy with ongoing searches across a range of strategies. Turning to capital management. We had a cash balance of $108 million as of December 31, '22, after funding $15 million of seed capital for Acadian's Equity Alternatives platform and fully paying off Acadian's seasonal credit facility. Acadian generally draws on this facility in the first quarter for 1Q seasonal need, and they fully paid off over the course of the year. As our business continues to generate strong free cash flow, we expect to continue deploying capital to support our organic growth and to buy back shares whenever opportunities come up. Turning to some highlights for Acadian on Slide 7. Acadian generated $50.9 million of adjusted EBITDA in the fourth quarter of '22 compared to $87.6 million in the fourth quarter of '21. The drop in EBITDA compared to 4Q of '21 was mainly driven by the approximately 20% decline in AUM over the last 12 months due to equity market decline globally and lower performance fees than last year. Turning to Slide 11 for a minute. As a reminder overview of what Acadian's capabilities are. The top two rows, equity and managed volatility had historically been Acadian's core capabilities, and that's where most of our AUM resides currently. The bottom four rows represent the growth initiatives underway. These are all large and growing markets where Acadian systematic approach is particularly suited to serve this demand. As a quick update on these initiatives. We continue to build out Acadian's efforts in systematic credit with the core investment team now mostly in place, and we continue to add to the investment model and data and technology infrastructure. We expect to start investing in this strategy in the second half of '23 with seed capitals. We kickstarted Acadian's Equity Alternatives platform in Q4 with $15 million of seed capital and have now started to build a track record here. We continue to make further progress on systematic macro with ongoing traction with clients and additional buy ratings from consultants. And we continue to see more investment mandates focused on responsible investing. All these initiatives tap into secular growth markets. And over time, we expect them to help generate sustained organic growth for Acadian. To conclude with our long-term strategy on Slide 15. We will continue to invest in our core capabilities and leverage our unique quant platform to expand into new areas. We will continue using our free cash flow to support organic growth and for share repurchases whenever opportunities are available, and we remain focused on maximizing shareholder value. Hi. Thanks very much. So I'm very curious on some of the new build-outs. You talked about the team mostly being paid since systematic credit. So one is, is that the case for Equity Alternatives as well? And then at the highest level, I'm curious of what you see the differences between systematic equity and systematic credit from a process standpoint? And why would Acadian just be getting around to it now? It does seem like a big opportunity. It's just -- it's not as big in the marketplace. So curious if you could talk to those two things. Thanks. Yeah. Hi, Glenn. Thanks. Yeah. You're right. The team -- the core team at least in both these areas is mostly in place. They're about eight to 10 people in both strategies. There will be more people added as we go in select areas in data, et cetera, but the core team is mostly in place. And what's happening now is we continue to add more infrastructure, more trading infrastructure, more data infrastructure, particularly in credit. The Equity Alternatives is a little bit ahead, as I mentioned earlier, we've already seeded it, and the seed capital is being invested, and we're building a track record here. Credit, you're right. It is a big opportunity, at least as large as equity is, and it is a market -- that is -- it is quant driven. And so our unique quant capabilities would have an advantage here. What's come along over the past few years, clearly, this market was a voice market, over the phone market, not as much electronic trading. That's changed a lot. So there's more and more electrification of trading here. And that is also, in turn, like more data being available. So that made this market, I would say, more for the taking now for Acadian. And secondly, it's also as our data has built up, we can leverage a lot of that for credit, it is similar kind of analysis, as you know. So we can leverage a lot of that data. But there was also -- we have been on the lookout for a good team for a while and that's critical. That's the right fit. People who are -- who have the same systematic quant mindset but also have credit experience. So we were fortunate to really find as we announced a few quarters ago and Scott Richardson, really one of the pioneers in quant credit, who brought on more people with deep experience in the area. So it's really just a lot of things coming together at the right time, which is a bit of a coup. Hi. Good morning. Thanks for taking my question. It doesn't sound like you repurchased any shares in the quarter. So wondering, if you could just comment on any discussions you may have had around potential value enhancing transactions. Thanks. Hi, Ken. That is correct that we haven't purchased any shares in the quarter. We, of course, don't specifically comment on any conversations. But, yes, from time to time, we are in blackout windows, either, as Elie mentioned, during earnings blackout windows that also if we have any non-public material conversations. Got you. And one follow-up, if I may. Wonder if you could talk a little bit more about the key drivers for the performance fees you saw in the quarter. I think in the past, you mentioned that some products were above their high watermarks and then it could have been a favorable setup. Just wondering if that was a factor as well as from any other drivers there? Thanks. Yeah, I can. Yeah. Last year was definitely, as you alluded, it was a bit of a loaded base. And so that was unusual that things were set up correctly. And this year, also, the performance in many of the accounts was good and we ended up at, I think, at a decent place. What we got last year is that was clearly very high in record. Hopefully, we can get that again at some point, but it is up there. This year, we had good performance, and we got performance fee from the -- from some of the accounts that were eligible. But clearly, the set of last year was favorable than this year. And we're happy with what we got this year. Great. Thanks. Good morning. I was hoping you might be able to elaborate a bit more on the sales pipeline. How does that look today versus a year ago? And if you could maybe comment on some of the strategies you're seeing strength as well as the customer channels as well, where you're seeing more strength and maybe even from a geographic standpoint too? Thank you. Yeah. Thanks, Michael. We are seeing -- generally, it's a very healthy pipeline in terms of comparing historically -- compared to historical levels, it's at a healthy level. We're seeing searches across a range of strategies, including our flagship strategies like global equity, emerging markets, even managed volatility, which we talked about maybe a year ago, who was out of favor. We're seeing searches there and in our newer strategies like the multi-asset class, all country, non-U.S. as well. So that's -- it's a pretty good broad -- broadly diversified pipeline. And we're seeing maybe about a fourth of the strategy have some kind of sustainability angle to them as well. So we're seeing more and more ESG type of searches as well. So that's all encouraging to see. Geographically, is not much as far as you know, a lot of our -- even currently is within the U.S. and non-U.S. clients represent a growth area for us, and we are trying to do more of that, but it is in line with our -- the current search pipeline is in line with historical levels. Does that cover your question, Mike? Yes. Thank you. Maybe just a follow-up, if I could, just on expenses. Hoping you could maybe elaborate a bit around your expectations for expense growth next year, So you put out the guidance on the variable comp and the affiliate distributions and the operating expense guidance. So maybe you could just elaborate a bit on kind of what went into those ranges, how you thought about that? Kind of what's sort of underpinning it around market performance expectations? Are you baking in a strong start to the year that's already been playing out in equity markets or would that be sort of upside? Yeah. In our guidance, I guess, no, we put this together relatively recently. So it does factor in all that, that we know currently. And it reflects essentially where the market is today, what our -- we are going to invest more in these new initiatives that we touched on earlier on people as well as data and infrastructure on credit, equity alternatives, multi-asset class, ESG, all of these areas. So it reflects the investment in addition to P&L there reflects some inflation as well. So assuming, of course, the ratios can change depending on if the markets were to change significantly. But in the normal range, we should be -- we should end up within our guidance.
EarningCall_539	Good day, ladies and gentlemen. Thank you for standing by. Welcome to todayâs Conference Call to discuss LifeVantageâs Second Quarter Fiscal 2023 Results. [Operator Instructions] Hosting todayâs conference will be Reed Anderson with ICR. As a reminder, todayâs conference is being recorded. And now, I would like to turn the conference over to Mr. Anderson. Please go ahead, sir. Thank you. Good afternoon and welcome to LifeVantage Corporationâs conference call to discuss results for the second quarter of fiscal 2023. On the call today from LifeVantage with prepared remarks are Steve Fife, President and Chief Executive Officer and Carl Aure, Chief Financial Officer. By now, everyone should have access to the earnings release, which went out this afternoon at approximately 4:05 p.m. Eastern Time. If you have not received the release, it is available on the Investor Relations portion of LifeVantageâs website at www.lifevantage.com. This call is being webcast and a replay will be available on the companyâs website as well. Before we begin, we would like to remind everyone that our prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. These statements are based on current expectations of the companyâs management and involve inherent risks and uncertainties, including those identified in the Risk Factors section of LifeVantageâs most recently filed Forms 10-K and 10-Q. Please note that during todayâs call, we will discuss non-GAAP financial measures, including results on an adjusted basis. Management believes these financial measures can facilitate a more complete analysis and greater transparency into LifeVantageâs ongoing results of operations, particularly when comparing underlying operating results from period-to-period. We have included a reconciliation of these non-GAAP measures with todayâs release. This call also contains time-sensitive information that is accurate only as of the date of this live broadcast, February 2, 2023. LifeVantage assumes no obligation to update any forward-looking projections that maybe made in todayâs release or call. Thanks, Reed and good afternoon, everyone. Thank you for joining us today. Itâs an incredibly exciting time at LifeVantage. Our Rock the Rhythm event held earlier this month on January 18 and simultaneously broadcast to our U.S., Japan, Australia, New Zealand markets served as the public announcement for major transformation initiatives designed to forge a new, more modern chapter in our company. Over a year ago, myself, along with the executive team, took a hard look at where we were as an organization and what was needed to propel sustainable growth. LifeVantage has always had a reputation for having superior products, which delivered years of stability, but it was time to get back to being the company to watch. Our team dug deep into consumer trends. We met with top industry advisors. We evaluated the options we had to support growth opportunities and multiple paths to earn for our consultants, previously known as our distributors. The strategic plan that emerged from this comprehensive analysis was called LV360, because to really deliver the outcomes we were looking for, we needed to take a holistic approach with innovations happening across all the major touch points of our consultant and customer experience. One of the biggest components of LV360 is Evolve, our new industry-leading modern compensation plan. Evolve focuses on driving key consultant behaviors, including product sales with commissions possible through new three-tier pricing structure and graduated bonus incentives. Evolve outlines three progressive stages of the consulting paths: share, build and grow, and lead. And this clearly defines the earning opportunities at each stage. Evolve meets consultants where they are on their respective journeys, rewarding them for working in the way that works for their personalities and lifestyles. It is a simple path that is attractive to both direct sales professionals and those who simply want to earn by sharing products they love. A new customer loyalty program called Rewards Circle is another key element of LV360. Like our updated compensation plan, Rewards Circle is structured in a simple and efficient manner, which enhances its value proposition. With each subscription order, LifeVantage customers earn towards reward credits, which once earned can be applied as a discount on future orders. Insider status is unlocked once a certain subscription spend threshold is met. Once insider status is earned, reward credits double in value. Other program benefits include a free full-size product on a customerâs second consecutive qualifying subscription order as well as a product gift on their anniversary. Existing customers on subscription as of March 1 will automatically have insider status in the loyalty program. Both Evolve and Rewards Circle are scheduled to launch in the U.S., Australia, New Zealand and Japan on March 1. These initiatives are planned to rollout to our other markets where LifeVantage products are sold and distributed over the next 12 months. Another important element of LV360, our product innovation initiative kicked off last calendar year with strong activation positionings across the portfolio. The product initiative includes last yearâs launch of liquid collagen. And in October, at Global Convention, we launched our activation paths: optimize health, achieve more, look radiant and evolve possibilities, to make it easier for consultants to guide customers through their wellness journey. At Rock the Rhythm, three new products were launched in the U.S., Japan, Australia, and New Zealand markets. The Rise AM & Reset PM system is a multi-nutrient blend of vitamins, minerals and adaptogens intelligently designed with time-wise nutrient delivery, a system that aligns with the natural circadian rhythms of your body to deliver the right nutrients in the right amounts at the right time. The formula supports cell signaling and gene activation to help maximize the effectiveness of the Protandim line. To demonstrate the important role of micronutrients in cellular communication and activation, we performed a clinical study targeting key genetic markers such as catalase, glutathione and sirtuins. The combination of Rise AM & Reset PM with Protandim Nrf2 Synergizer increased gene expression in glutathione peroxidase by 67% over Protandim Nrf2 Synergizer alone. The combination of Rise AM & Reset PM with Tri-Synergizer increased the total sirtuins activity by 68% over Tri-Synergizer alone. These and other results from the study combined with data from Mintel showing that 76% of Americans rely on dietary supplementation to fill nutritional gaps, positions this product well with our current Protandim users as well as opens the door to new market share as we reach new customers currently purchasing a multivitamin elsewhere. Also added to the product line, LifeVantage D3+ does more than simply supplement you with Vitamin D. It is also an excellent source of vitamin K2, magnesium and calcium to support strong bones, immune and cardiovascular health, muscle and nerve health as well as improves mood. LV360 includes major enhancements to our digital experience as well. Starting on March 1 and continuing over the next couple of months, we will be introducing a revamped e-commerce experience as well as major enhancements to account and subscription management, which will continue to elevate our overall user experience and drive engagement. We are thrilled to unveil LV360 and the initiatives designed to drive growth for our company. Several new promotions and incentives have already kicked off in advance of the March 1 launch to help consultants prepare for the exciting new opportunities that lie ahead. We are executing on a well-thought-out training plan, which includes over 50 road shows and virtual training sessions worldwide. These trainings hosted by a corporate team and partnered with our top leaders are aimed at developing confident consultants excited to share their best-in-class opportunity with others. Current LV360 trainings will culminate at regional Evolve events, which will be held in March in the U.S., Australia and Japan to continue field support and kick off the next phase of field training and development as well as a new recognition program. It was important for us to work towards the public announcement of LV360 while laying a strong foundation for the initiatives to build on. Second quarter revenue of $53.7 million was up 2.8%, our first year-over-year increase in 10 quarters. And on a constant currency basis, revenue was up 7.4%. The U.S. was the key driver with second quarter revenue up 15.4%. Internationally, our Philippines launch continues to show progress, and we are encouraged by recent trends in several other key markets. Liquid collagen remains the top performer and contributor to the U.S. revenue gains. Supply chain challenges surrounding the products were able to be resolved in Q2. Recall that we first launched this product in June and in the first full quarter of sales, which would have been our fiscal year ending in September, orders sharply exceeded forecast, resulting in a significant backlog. The breadth of the demand for our unique collagen product bodes well for future quarters as well as our overall product strategy. Customer penetration was 24.1% in Q2, up from 18.2% in Q1. And consultant penetration reached 27.2%, compared to 25.3% in Q1. On a blended basis, penetration was 24.8% in Q2, compared to 20.3% in Q1. Customer acquisition similarly benefited from our liquid collagen product, which accounted for approximately $9.1 million or approximately 17% of Q2 revenues. We will be launching liquid collagen in Japan, Australia, New Zealand in March in a fashion similar to the U.S. launch in June. We look forward to sharing results from those launches with you in future quarters. The launch of Protandim NAD in Japan, Australia and Mexico enabled us to introduce the Protandim Tri-Synergizer stack in these markets. Consisting of Protandim Nrf2, Protandim Nrf1 and Protandim NAD, the Tri-Synergizer stack has been a top performer in the U.S. and initial results in these markets show similar potential. Our blended penetration rate in Japan was 13.4%. In Australia, it was 4.8%. And in Mexico, it was 12.5%, showing strong early adoption. Energy levels in the field remain high as we continue to elevate and sharpen our brand messaging. Trends have remained very favorable across our social media channels, with Novemberâs total user engagement with brand content up 178% and December up 226% compared to those months in 2021. The MVP Builder incentive and collagen cash have continued to drive key behaviors for consultants as well as set them up for success with our new evolved compensation plan. In Q2, we also introduced the sharing bonus for NAD and Axio that is structured similar to collagen cash for new products in Australia, New Zealand and Japan. Our newest incentive, Run to Pro 4, is also designed to help consultants earn with Evolve. Finally, the upward advancement of consultants provides further proof of our strong momentum and as eight individuals recently qualified for their first Elite Retreat. In summary, the evolution of our business model and culture solidifies our leadership as the activation company and positions us for growth and improved profitability. Weâve invested over $2 million during calendar 2022, which further demonstrates our commitment to the LV360 initiatives and strategic plan. We are very pleased with our latest results, including a return to top line growth in the second quarter, but recognize it is still early in our transformation journey. Organizationally, the alignment between corporate and the field is more unified than ever, giving us a high degree of confidence in our future trajectory. Top leaders within this field are driving implementation within their teams as well, which is creating so much energy and excitement. There has never been a better time to be part of this company. Now let me turn the call over to Carl Aure, our Chief Financial Officer, to review our second quarter financial results. Thank you, Steve and good afternoon everyone. Let me walk you through our second quarter financial results. Please note that I will be discussing our non-GAAP adjusted results. You can refer to the GAAP to non-GAAP reconciliations in todayâs press release for additional details. Second quarter revenue was $53.7 million, up 2.8% on a year-over-year basis and up 3.6% sequentially from the first quarter. Foreign currency fluctuations negatively impacted revenue by $2.4 million in the second quarter. Excluding the negative impact of foreign currency fluctuations, second quarter revenue was up $3.9 million or approximately 7.4% compared to the prior year period. Revenue in the Americas region increased 14.4%, including a 15.4% increase in the United States, compared to the prior year period to $39.7 million, driven primarily by the launch of our TrueScience Liquid Collagen product and partially offset by a 7.1% decline in total active accounts in the region. Revenue in our Asia-Pacific and Europe region decreased 20.2% to $14 million, driven by a 12% decrease in total active accounts and negative impacts from foreign currency exchange rate fluctuations. Excluding the negative impact from foreign currency fluctuations, second quarter revenue in our Asia Pacific and Europe region was down 7%. The foreign currency impact was primarily related to currency fluctuations in Japan, which drove lower revenue in the country. Despite the foreign currency headwinds, we continue to be encouraged by the results we are seeing from our launch of the Philippines due to continued distributor leadership, development and advancement. Gross margin was 78.1% for the second quarter, compared to 81.5% in the prior year period. The decrease in gross margin was primarily due to elevated shipping expenses, the negative impacts of foreign currency fluctuations as well as shifts in geographic and product sales mix. We are actively pursuing cost savings initiatives across our entire supply chain to help offset the recent cost increases that have negatively impacted our gross margins. Commissions and incentive expense in the second quarter decreased $1.9 million year-over-year. As a percentage of revenue, commissions and incentive expense decreased 490 basis points to 43.9% versus 1 year ago levels, which was primarily driven by the timing and magnitude of various promotional and incentive programs. Non-GAAP adjusted SG&A expense was $19.4 million versus $16.7 million in the prior year quarter and was up 400 basis points as a percentage of revenue to 36.1%. This increase was primarily a result of higher event-related costs, increased travel expenses, higher employee compensation-related expenses and outside professional service fees related to the upcoming initiatives launching in the second half of fiscal 2023, all as compared to the prior year period. Adjusted operating loss was $0.9 million, compared with adjusted operating income of $0.3 million in the prior year period. Adjusted net loss was $0.8 million, or $0.07 per fully diluted share, in the second quarter, compared to adjusted net income of $0.6 million, or $0.05 per fully diluted share, in the comparable period last year. We recorded a tax benefit of $17,000 in the second quarter, compared to a tax benefit of $0.6 million a year earlier. The decrease in tax benefit was primarily due to the favorable impact of discrete tax adjustments relating to taxes on foreign income recorded in the comparable period last year. For fiscal year 2023, we expect our effective tax rate will be approximately 31%. Adjusted EBITDA for the second quarter was $0.8 million, or 1.5% of revenues, compared to $1.9 million and 3.6% in the same period a year ago. Please note that all of the adjustments from GAAP to non-GAAP I discussed today are reconciled in our earnings press release issued this afternoon. We ended the second quarter in a strong financial position with $17.4 million of cash and no debt. We also continue to maintain $5 million of availability under our revolving line of credit. Capital expenditures totaled $0.8 million in the second quarter. We anticipate total capital expenditures for fiscal 2023 to be approximately $3 million. Now turning to our fiscal 2023 outlook, we anticipate our fiscal 2023 revenue will be in the range of $202 million to $212 million, and adjusted non-GAAP EBITDA in the range of $11 million to $13 million with adjusted non-GAAP earnings per share in the range of $0.22 to $0.28 per share. Yes. I just was interested to hear how â with the new comp plan, how you feel that this is going to be better than the old one? Yes. Thanks. We feel like this is going to address some of the gaps that we have had in our plan and especially become much more appealing for people that want to sell products. We are proud of our history of products that we have and the innovation that comes with those. But frankly, our new plan does a much better job of incentivizing and paying people that are interested in selling products along with those that want to also build the business. It appears that there are no further questions at this time. I would now like to turn the floor back over to Steve Fife for closing comments. Alright. Well, thank you for joining us today. In closing, I want to take the opportunity to thank all of our employees for their hard work and dedication as well as our outstanding team of independent consultants and loyal customers. We are very excited about this modernization of our company and remain focused on the opportunities that lie ahead. We hope you all stay safe and healthy and look forward to updating you on our next call. Have a great day.
EarningCall_540	Hello, and welcome to the Second Quarter FY2023 Cardinal Health Earnings Conference Call. Please note, this call is being recorded. And for the duration of the call, your lines will be on listen-only. However, you will have the opportunity to ask question at the end of the call. [Operator Instructions] I will now hand over to your host, Mr. Kevin Moran, VP of Investor Relations, to begin today's conference. Thank you. Good morning and welcome. Today, we will discuss Cardinal Health's second quarter fiscal 2023 results, along with updates to our full year outlook. You can find today's press release and earnings presentation on the IR section of our website at ir.cardinalhealth.com. Joining me today are Jason Hollar, our Chief Executive Officer; Trish English, our Interim Chief Financial Officer; and Aaron Alt, who will take over as our Chief Financial Officer beginning February 10. During the call, we'll be making forward-looking statements. The matters addressed in the statements are subject to the risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our SEC filings and the forward-looking statement slide at the beginning of our presentation for a description of these risks and uncertainties. Please note that during our discussion today, our comments will be on a non-GAAP basis unless they are specifically called out as GAAP. GAAP to non-GAAP reconciliations for all relevant periods can be found in the schedules attached to our press release. During the Q&A portion of today's call, we please ask that you limit yourself to one question so that we can try and give everyone in the queue an opportunity. Thanks, Kevin, and good morning, everyone. Before we dive in, I'd like to take a moment to welcome Aaron Alt to Cardinal Health as our incoming Chief Financial Officer. We're excited to have Aaron on board. He brings a breadth of financial and operational experience to our organization, including a background in distribution and he's already hit the ground running in his first few weeks. I'm confident he will be a valuable addition as the leader of our finance organization, contributor to our executive committee and a seamless fit with our company culture. Thank you, Jason. Good morning. I am excited to be part of the team here at Cardinal, particularly at such an important time not only for our company but for the entire health care industry. What attracted me to Cardinal Health was the broad portfolio, the overall culture and the leadership team that is motivated to win. While still early days for me, I can already tell that while there's work to do, Jason and the team have a plan and there are significant opportunities for value creation in front of us. I look forward to interacting with all of you further in the weeks and months to come as I continue to ramp up. Thanks, Aaron. Now let's begin with some high-level perspectives on the second quarter. Overall, our Q2 results demonstrated continued momentum against our plans. In Pharma, we've seen ongoing stability in the macro trends and underlying fundamentals of the business. In the quarter, we saw particular strength in overall pharmaceutical demand and strong performance from our Generics program. We've seen an increase in contributions from Specialty products, which is a key strategic area of focus. And we continue to effectively manage through the inflationary headwinds affecting industry supply chains. In short, Q2 was another data point that Pharma is a resilient and growing business. In Medical, we remain highly focused on our medical improvement plan initiatives. Overall, despite some puts and takes, Medical's Q2 results were consistent with our prior commentary, and we were pleased to see a return to profitability in the quarter. We continue to take actions to drive more predictable financial performance, in line with this business' underlying potential. At an enterprise level, we continue to see benefits below the operating line from our capital deployment actions and favorable capital structure. With the first half of fiscal 2023 behind us, we are pleased to raise our full year EPS guidance and outlook for the Pharmaceutical segment. Our team remains focused on executing our three key strategic priorities of executing on the medical improvement plan, building on the growth and resiliency of the Pharmaceutical segment and maintaining a relentless focus on maximizing shareholder value. I will update you on these priorities in a few moments. Before I turn it over to Trish to review our results from the quarter and revised outlook, I'd like to thank her for stepping in as interim CFO over the past six months. Trish has brought leadership and continuity to the organization and will be instrumental in ensuring a seamless transition with Aaron. Thanks Trish. Thank you, Jason, and good morning, everyone. I'll begin today with our consolidated second quarter results. Total company revenue increased 13% and gross margin increased 3%, both driven by the Pharma segment. Consolidated SG&A increased 4%, primarily reflecting inflationary supply chain costs. Benefits from our enterprise-wide cost savings initiatives offset some of this increase. Operating earnings of $467 million were in line with the second quarter of last year, this reflects growth in Pharma segment profit offset by the decline in Medical segment profit, which was anticipated. Moving below the line, interest and others decreased nearly 30% to $18 million driven primarily by increased interest income from cash and equivalents. As a reminder, our debt is largely fixed rate, resulting in a net benefit from rising interest rates. Our second quarter effective tax rate finished at 23%, approximately 3.5 percentage points higher than prior year, primarily due to net positive discrete items in the prior year period. Diluted weighted average shares were $263 million, 6% lower than a year ago due to share repurchases. In the second quarter, we completed our $1 billion accelerated share repurchase program and initiated a new $250 million program, resulting in a total of $1.25 billion deployed year-to-date. We continue to expect $1.5 billion to $2 billion in share repurchases in fiscal 2023, which reflects our continued focus on maximizing shareholder value. The net result for the quarter was earnings per share growth of 4% to $1.32. Now turning to the balance sheet. We generated second quarter adjusted free cash flow of $439 million, bringing year-to-date adjusted free cash flow to $781 million. We ended the period with a cash position of $3.7 billion with no outstanding borrowings on our credit facility. As a reminder, we continue to expect to pay down the $550 million of March 2023 notes at maturity with cash on hand. Now I will cover our segment performance, beginning with Pharma on Slide 5. Second quarter revenue increased 15% to $48 billion, driven by brand and Specialty Pharmaceutical sales growth from existing and net new customers. Pharma segment profit increased 9% to $464 million. This was driven by a higher contribution from Branded Specialty Products and Generics program performance, partially offset by inflationary supply chain costs. During the quarter, we saw strong overall pharmaceutical demand, including from our largest customers, reflecting their strength in the market. To a lesser extent, we also saw year-over-year contributions from the net new customers that we've previously mentioned and a more robust seasonality with cough, cold and flu products as others have noted. Regarding our Generics program, we are pleased with the solid execution and consistent market dynamics we continue to see. This includes strong performance from Red Oak Sourcing, not only controlling costs, but also in maximizing service delivery for our customers. Within our supply chain, we continue to effectively manage through the industry-wide inflationary costs being in the areas of transportation and labor. In the second quarter, these inflationary impacts were generally consistent with our expectations. Similar to last quarter, this headwind was offset by year-over-year tailwinds from our complete ERP technology enhancements and lower opioid-related legal costs. Okay. Turning to Medical on Slide 6. Second quarter revenue decreased 7% to $3.8 billion, driven by lower products and distribution sales, including PPE pricing and volumes. Continued strong growth in our At-Home Solutions business partially offset this decline. Medical segment profit finished in line with our prior commentary, decreasing 66% to $17 million. This was primarily due to lower products and distribution volumes and net inflationary impact, partially offset by an improvement in PPE margin. During the quarter, the net impact from inflation was in line with our expectations, and we achieved inflation mitigation of over 30%. This sequential improvement from the first quarter was driven by the continued acceleration of our mitigation efforts, including the implementation of additional product pricing actions in the quarter. On our last two earnings calls, we have discussed overall volume softness in our Products and Distribution business. In the second quarter, we saw generally consistent overall volumes on a sequential basis, including our Cardinal Health brand products. With respect to PPE, we did see some slight improvement in volumes on a sequential basis. Additionally, we made significant progress in selling through our higher cost inventory on our balance sheet leading to normalized PPE margins in the quarter. Now for our updated fiscal 2023 outlook beginning on Slide 8. We are raising our EPS guidance by $0.15 at the lower end and $0.10 at the higher end to a new range of $5.20 to $5.50, which represents 6% year-over-year growth at the midpoint. This update reflects improved outlooks for the Pharmaceutical segment and for interest in other. We now expect interest in other in the range of $115 million to $130 million with the improvement primarily driven by the increased interest income on cash and equivalents. Our expectations for the remaining items listed on Slide 8 remain unchanged. Turning to Slide 9 in the Pharmaceutical segment. We are raising our outlook for revenue to a new range of 13% to 15% growth and for segment profit to a new range of 4% to 6.5% growth, both of which primarily reflect our strong first half performance. As we look to the second half in pharma, we anticipate the year-over-year profit growth to be fairly balanced between the third and fourth quarters. Turning to medical. We continue to expect a revenue decline of 3% to 6% and segment profit ranging from flat to a decline of 20%. With respect to inflation and our mitigation actions, we continue to expect a net impact of approximately $300 million in fiscal 2023 or a minimal year-over-year impact. On the cost side, while still at elevated levels, weâve seen a general stabilization across most areas along with improvement in international freight. As a reminder, these product costs are capitalized into inventory and in the current environment of elongated supply chain reflected in our P&L results on an approximate two quarter delay. Importantly, we continue to expect to exit the year with a run rate of at least 50% inflation mitigation. And finally, no changes to the expected cadence of Medical segment profit. We continue to expect segment profit to improve sequentially and be particularly weighted toward the fourth quarter. This sequencing primarily reflects our assumptions around the net impact of inflation, and to a lesser extent, a gradual improvement in overall volumes and the continued implementation of our cost savings measures. For the enterprise, a key factor continues to be the overall utilization and demand environment. In pharma, we expect continued strength in overall pharmaceutical demand in the second half, albeit, at a more moderate rate than weâve seen to date. In medical, we expect a gradual improvement in overall volume, including with Cardinal Health Brand. Therefore, if the trends from the first half of the year continue, we would anticipate segment profit more towards the upper end of our range in the Pharma segment and more towards the lower end of our range in the Medical segment. Thanks, Trish. Let me now provide a few updates on our three key strategic priorities for fiscal 2023. First, executing our medical improvement plan initiatives. Importantly, we remain on track with our mitigation actions for inflation and global supply chain constraints, the number one key to returning the business to a more normalized level of profitability. I am pleased with the incremental progress achieved in the second quarter as we mitigated over 30% of the growth impact to our business in Q2. Taking a step back, over the past nine months, we have made a series of widespread temporary price increases across nearly all of our Cardinal Health brand product categories. Weâve also executed supplier distribution fee increases to offset higher transportation, labor and fuel costs, and continue to explore other opportunities for further offsets with urgency. Weâll continue to monitor cost trends and work with our industry partners to make pricing adjustments that are reflective of current market conditions. As we have taken a transparent approach working collaboratively with our partners, we continue to make progress on this front by successfully adjusting product contracts as they renew. We are also including language that allows for greater flexibility to respond to future macroeconomic dynamics. We continue to expect to exit the year with a run rate of at least 50% inflation mitigation and to fully mitigate inflation by the end of fiscal 2024. Outside our mitigation actions, we are focused on optimizing and growing our Cardinal Health brand portfolio. As Trish indicated, the market demand environment in medical has been relatively stagnant over the last couple quarters. Additionally, some of our higher margin Cardinal Health brand categories remain underpenetrated, which we are addressing through target investments to increase product availability, new product innovation and a continual focus on commercial excellence. For example, we recently expanded our sustainable technologies manufacturing facility in Riverview, Florida, doubling the size to roughly 100,000 square feet. This facility will enable us to better meet increasing demand for single use device collections, reprocessing and recycling services, supporting future growth, while also delivering supply resiliency, sustainable solutions and cost savings for customers. Weâre also investing to accelerate our growth businesses primarily at-home solutions where weâve seen strong growth fueled by the secular trend of care shifting into the home. Our new Central Ohio distribution center equipped with robotics and automation technology will be fully operational soon as we continue to expand our footprint to match the sustained growth of home healthcare we are seeing in the industry and our business. And in our higher margin Medical Services business, OptiFreight Logistics recently expanded its offerings with total view tracking, a new capability offering healthcare providers real-time shipment tracking to enhance supply chain visibility and resiliency. Second, moving to the Pharma segment where weâre building upon the growth and the resiliency of the business. Weâre focused on executing in the core and accelerating our growth areas, primarily specialty. In the first couple months, weâve already seen efficiency and effectiveness gains from our recently combined pharmaceutical and specialty distribution organization. Weâve seen strong growth across specialty distribution, including within acute health systems and alternate care. Additionally, our recent acquisition of the Bendcare GPO and investment in their managed services organization has been positively received by customers. Part of the recent segment organizational changes, we also created a new sourcing and manufacturer services organization, enabling a more holistic approach to enhance our strong pharmaceutical manufacturer partnerships. This includes strategic sourcing along with the high demand area of manufacturer services. In Q2, we saw double digit growth from manufacturer services where we continued to invest to build upon our capabilities such as our leading specialty 3PL and Sonexus, our access and patient support portal. And in the area of cell and gene therapy, we are excited about the work we are doing in this emerging space across all of our service offerings, expanding our capabilities and the opportunities we see in the future. We are investing in automation and enhancing technology across our supply chain today in order to drive operational productivity for the future. Weâre striving to deliver a flawless end-to-end customer experience supporting our strong and diverse customer base. For example, a recently announced collaboration with Palantir will offer customers a solution that connects diagnostic and clinical data with real-time purchasing and consumption data. By leveraging AI and machine learning, our customers will be empowered to make better purchasing and inventory management decisions for their businesses and patients. We are privileged to serve and partner with leaders across the various classes of trade, such as retail pharmacy chains, mail order and grocery, as well as retail independence, long-term care and health systems, all of whom provide essential healthcare access for their respective communities. And lastly, a brief update regarding our relentless focus on shareholder value creation. In addition to the shareholder value creation initiatives weâve already announced such as our governance enhancements and simplification actions, we continue to place a strong emphasis on responsible capital deployment, including the return of capital to shareholders through share repurchases. Our Business Review Committee continues to work through the comprehensive review of our companyâs strategy, portfolio, capital allocation framework and operations. We plan to hold an Investor Day in June 8th in New York City, where among other topics weâll provide an update on our companyâs long-term financial outlook, detail our growth strategies, and share any relevant conclusions from the ongoing review. Before I wrap up, I want to touch on our new ESG report, which was released just last week. This expanded report outlines the steps weâre taking to operate in a more sustainable and equitable world through our established ESG and diversity, equity and inclusion initiatives. We continue to make progress against our long-term targets and are committed to regularly updating our stakeholders. We believe that we can simultaneously drive ESG improvements in support of our ongoing business transformation. In closing, while there remains work to do, Iâm encouraged by our teamâs progress to date and excited about the opportunities ahead. I want to thank our dedicated Cardinal Health employees for driving the execution of these critical priorities and who keep our customers and their patients at the center of everything they do. Thanks very much and thanks for all the details, Jason. Just on the medical side, one of the things that stuck out to me is you talked about the improvement and you talked about needing improvement in volumes. So as we think about that, can you maybe talk about your expectations around surgical procedures as we move into calendar 2023, the back half of the year? And secondly, has part of the issue on the hospital side been staffing issues? And as they start to resolve that, will things get better for Cardinal as well? Yes. Hi, Lisa. I think youâre connecting all the right points there. Thatâs what we hear from our customers and broadly from our peers in the industry, is that there continues to be some constraints as to getting to the free level of demand there. And we do think thatâs a component of whatâs impacting the lack of growth that weâre seeing within medical. Itâs impossible to tell definitively, but thatâs the anecdotal feedback that we are hearing. To help provide a little bit of color around the impact and thatâs why we â Trish had made some comments within her commentary there highlighting that we do anticipate a gradual improvement over the course, so not significant, but getting back to closer to more normalized level of growth. As a reminder, when we provided our medical improvement plan, we highlighted a 3% CAGR total volume growth over the three year period and we anticipated that about half that would be market growth, about half that would be our own innovation and capacity expansion plans for our products. So youâre talking about a couple percent type of growth that would be more normalized and thatâs kind of differentiator between our more of a midpoint of our guidance to what would be more in the lower end, and thatâs why Trish provided that type of clarity. So is the right way to think about that kind of half of it, Jason, you feel like you have some level of control because itâs new products that youâre bringing to the market, and the other half is youâre going to have to wait to see if those volumes come back? Or do you feel like you really truly have visibility around the whole 3% that youâre talking about? Yes. No, I think you have it generally right. Now remember that a lot of the part that we have control over is new product innovation and fast expansion. So thatâs always an element of the three year plan I would expect to be weighted a little bit more towards the later end because it takes time to school up those investments and getting those products into the market. So we didnât ever indicate it was a linear type of plan. And volumes, we have to be careful too that weâve had a period here last two to three years thatâs been incredibly choppy in terms of the volumes. Obviously down during the beginning of the pandemic and has come back for the most part. The last couple of quarters have been very predictable, very consistent types of volumes, but thatâs â even thatâs a bit of an anomaly from what weâve had over the last few years. So presuming that that maintains then thatâs the range that we should be thinking about. But if we get back to an increased level of volatility, which at this time we donât foresee but thatâs certainly a possibility as well. Hi, guys. Thanks so much for the question. I was wondering if you could talk about a little bit more about the pharma improvement in the back half of the year, specifically like as youâve had time to sort of think through the pharma reorganization and sort of continued cost cutting benefit is thatâs whatâs improving the operating profit growth. Are you starting to get pricing in certain places where you hadnât before? You can help us kind of understand that mix. And then secondly on the interest expense guide, it looks like the back half guide has a big sort of step up versus what you did in the first quarter â the first two quarters of the year in terms of interest expense. So is that just sort of changes in cash balance in terms of the net interest contribution or is there â are there other factors going on there? Thank you. Yes. Iâll start with your second question there because you nailed it. Itâs really about cash balances. We donât anticipate there being significant differences in the interest size. Let me just kind of step back. We have a very fixed interest expense for our debts. So our interest expense side is quite predictable and known. Itâs really the interest income is the part that weâve seen favorability in year-to-date and our cash balances were higher than anticipated over the first half of the year. We do have the $550 million note coming due here in March that we anticipate to pay down and thereâs just a seasonal aspect of our cash flow as well. So we would not anticipate the same lower levels or Iâll say improved interest income that reduces our interest expense in the second half, like what we saw in the first half. So you should take away that we continue to have a very advantaged balance sheet, especially as it relates to the fixed variables mix of our debt. As it relates to pharma, itâs really more about volume than anything else. Weâre not seeing a lot of other key variables underlying the dynamics within the generic business continues to be very consistent. We continue to see very broad-based volume strength. Q2 was certainly very strong quarter as it relates to volume and we saw that broad base, I referenced in my comments between Trish and I, brand, specialty as well as generics. It is a lot of volume drivers within that. And as we think about the growth in the second half of the year, itâs very consistent with what we had indicated at the beginning of the year. So our second half expectations remain consistent with what we had indicated before. A little bit less growth than what weâve seen in the first half. And thatâs just a reflection of, again, Trishâs comments that we anticipated being closer to more normalized level of growth in the second half. But if we maintain the same level of strength that weâve seen in the last couple of quarters then thereâs some opportunity behind of that. And then just other â one other comment there about the Q2, why it was so strong. If youâre thinking about it from a year-over-year perspective, we also just have the added points that we did introduce a new customer in the third quarter of last year. And that has been a nice tailwind for us the last four quarters. But this will be the last quarter until we start to lap that. So thatâs part of the driver from a year-over-year perspective. And then, not significant, but there is an element of cough, cold and flu. Thatâs a nice little tailwind for the quarter. But at this point we donât anticipate that being a driver for the full year. In fact, this could be a little bit of a headwind as it relates to Q3 specifically because it looks like the season is ending earlier than normal. So those are all the key moving pieces. Good morning and thanks for taking the question. So just to parse through your numbers a little bit, I just wanted to get a sense. Youâve had strong outperformance here to date based on typical timing, annualization and what youâre calling for relative to growth rates. It seems like thereâs more opportunity for upside on your EPS. I know you talked about medical base list that you see now coming at the low end of the range. But can you give us some of the other potential concerns or headwinds that are built into this number? Just mathematically, you could argue that your EPS baseline should be higher and annualizing it, youâd get there too. So I want to make sure I understand all of the â I guess, takes against the positive puts that you updated in your guidance. Yes. Thanks, Michael. First of all, overall I think itâs a balanced outlook that we have. I think a couple of the key drivers in the first half, second half I just went through on Elizabethâs question. Interest expense is going to be higher. We expect to be higher in the second half. So thatâs one of the components youâre thinking about from an EPS driver. And then pharma is a key driver as well, still solid growth in the middle of that range that we had at the beginning of the year. Not at the same pace of growth that we had in the first half, but still growth. And also just to kind of step back a little bit, and we had a similar level of growth, about 5% growth in the prior fiscal year. So now weâre on 18 to 24 months, a pretty consistent, stable, much more predictable type of growth that weâve seen in that business as weâve step farther and farther away from the pandemic. And we think overall thatâs balanced. Of course, in the second half of the year thereâs a meaningful step up in the Medical segment performance, and thatâs of course being driven more than anything by the pricing on inflation and the first instance we would expect of cost stepping down as it relates to the international freight. But all the other drivers I think are fairly consistent with what we outlined. Question, please. Thanks. So you havenât really participated much in COVID treatment or vaccines, obviously with the contracts that are out there. But as those open up to the private market, could that provide an opportunity for you as weâre looking into next year? And maybe thinking about some of those other anomalies kind of into next year, what are some things that youâre thinking about in terms of opportunity across that core Pharma segment as well in terms of drivers? Or is it a continuation of the same in terms of specialty drivers in other ways? Thanks. Sure. Thanks, Erin. Overall, first of all, as I think about fiscal 2023, itâs a fairly normalized level performance that we have in our current outlook. Again, growth for the reasons I highlighted is a little bit stronger in the first half than what is in our longer-term targets. And weâve seen that very broad strength that I would not expect to continue long-term at that pace, especially when we consider that incremental new customer. The longer-term, I think what this year reinforces is that weâre on track for those long-term growth targets. Specifically to your question around COVID therapies and vaccines, you have it â your inclination is correct. Weâve participated very little on any of that. Over the pandemic, frankly, weâve had more of a headwind than a tailwind because the volume impacts on our underlying utilization. Of course, weâre all the way through that at this point in time and have been so for about a year. So weâre at a very normalized level at this stage. As it relates to commercialization, I think all data points point to that beginning in the summertime, of course, after our fiscal year, so certainly no impacts for 2023. There would be some opportunities for 2024 and beyond. However, Iâd highlight the types of products and vaccines weâre talking about historically outside of the pandemic have not been significant drivers of profitability. So itâs something that should be a tailwind, but I would not jump to the conclusion that it will be as significant as what weâve seen in the marketplace for others, given how the government had isolated that and procured for that. So something weâll keep an eye on and clearly something weâll be providing some context for further as we understand it better and as we get closer to the â that point in time. And the one final point on that is even though the commercialization is scheduled for the summer, thereâs certainly a lot of dialogue and uncertainty as to exactly how much a stockpile within the government and how long will it take for that to work through. So while it may go commercial, it could take us some time to actually see a pull in terms of non-governmental sources. Next question, please. Yes. Good morning, guys. And I appreciate you taking the question. And I guess, Jason, my questionâs probably a derivative of Mikeâs question, which is kind of given the guidance for the year and the expectation to the back half, it would seem that the Street is probably too high. So I guess maybe could you talk about the big moving pieces just as it relates to the back half of the year? And should we think about the current guidance as probably a little bit on the conservative side? Or are there real areas of weakness, particularly in medical that we should be worried about in the back half of the year as it relates to where the company claims to deliver results, kind of versus where the Street is? Sure. Iâll try George, but Iâm afraid itâs going to sound very similar to what I said to Michael. Again, I feel good about the balance that we have here. I feel very good about the progress to date. We have growth â implied growth in the middle of the range for farming the second half of the year. So if volumes continue at a more recent pace, then weâd have some opportunity. On medical, a lot has to occur still for us to execute upon our plan. Itâs very consistent with the plan. We have good step up expected to continue sequential improvements. This guidance provides us sequential improvement for each and every quarter throughout the year. We would anticipate the next quarter â next two quarters to have sequential improvements as it relates to the ongoing pricing for inflation, the ongoing cost reductions, a gradual improvement in volumes. But importantly the big step up will be in the fourth quarter as we see international freight, which is a very high confidence element now, given that weâre now less than six months by the end of the year. These lower costs are almost certainly going to flow â start to flow through our P&L here in the fourth quarter, still at levels well below the pricing weâre getting. But nonetheless, thatâs a pretty well-known part of that equation. So a lot of action still in front of us, but the plan remains entirely intact. And so when you talk about the first half â second half, youâre implying thereâs some difference somewhere. And I think the primary difference is related to the growth within Pharma, still growing. And maybe one other point that remember, Q4 of last year for Pharma was a very strong quarter â we had very strong growth. It was a good quarter, and that's one that we still anticipate there being growth on top of that this year as well and that low to mid single-digit range. So we feel good about where we're at. There's opportunity in Pharma. There's some things we got to watch out on Medical, and we continue to execute all the below line items very consistent to our expectations. Next question, please. Thank you so much, Trish and Jason. Appreciate you taking the question. So just on the Med/Surg side, again, you've discussed the different tranches of price increases on the Med/Surg side that you're going to be taking with customers. I guess we just sort of love to get a qualitative update on GPO and customer receptivity in general. And should we expect, as we think about the cadence for the second half that, that would â those were more fully manifest in the numbers in 4Q? And again, sort of just as a corollary to that, you've highlighted some investments around private label. With the current constraints in the purchasing environment for hospitals, have you observed changes in just the general appetite here for private label? Thanks so much for the question. Terrific. Happy to do so. So on pricing, I would think about pricing as being a fairly stairstep process beginning back with our first temporary price increase in March 2022 so what we have â and when we first shared was the 20% mitigation of inflation soon after in the fourth quarter of last year, then that went to 25% in the first quarter of this year. And then now we're saying it's over 30%. So you can see that, that's a fairly consistent stairstep. And that's how I think about the pricing side, less on the temporary price increases going forward and more on the rotation to more renewals as they come up, and that's just a national function of where we're at in this process as we get farther away from the initiation of those temporary price adjustments. So a continuation of more of the same. How you get to a widening of that 30% to 50% by the end of the fiscal year is the costs starting to come down. So â and again, that's largely focused on the international freight. So pricing, I would expect to just continue blocking and tackling all the way through to the end of fiscal 2024 is where most of the prices will adjust. And that's why we indicate that we won't get to full mitigation until about that point in time. As it relates to private label, I think it's an interesting related question to pricing. Because yes, we want to work with our customers. All of our customers are dealing with challenges beyond the inflation in this category. They have actually much bigger challenges in other categories. And the desire on our part is to work with them if there's a possible win-win to find value in other ways, whether that is into more private label. It's â of course, we're doing everything we can to offset the increase â of the increases to start with to mitigate the inflation through other nonpricing means. And of course, part of this is also working with the supply base. And we indicated that we're working on the distribution fees as well so that the supply base does their part. We do our part and our customers are going to have to absorb this as well. So if the whole industry has to address this, and that's the collaborative approach that we're taking with it. Yes, thanks for taking the question, guys. Just two real quick ones maybe on the model. First, Trish, I think you talked about Pharma distribution. We should think about the â it sounds like you're kind of saying the contribution should be kind of even through the back half of the fiscal year here. It's a little different than I think when you look back at normal seasonality, anything specific that you'd call out to why that might be this year? Yes, let me take that. So that comment was the growth rates were going to be even year-over-year. So you're exactly right, Charles, that there will continue to be the expectation of a normal seasonality. That largely comes from the brand inflation, albeit much lower than what it has been historically. We're still talking less than 5% contribution, but that is all in the third quarter. So sequentially, we would still expect the third quarter to have that element associated with it. Trish's comments were specifically related to the year-over-year growth rates being relatively equal between the two quarters. I see. Okay. I might have misheard. And then maybe if I can just follow up on â you keep talking about the at home â I'm sorry, you keep talking about at-home solutions and how that's a good growth driver. In the past, you've kind of given a little bit of a breakout of the size of the business. Is there any kind of additional color you can give us here in terms of sizing of this business? How much it's grown relative to the rest of the segment? Sure. Yes. You can also go to our segments. But note, this is one of the two businesses we, every quarter, provide incremental revenue information on. And that business, I think, last year was $2.4 billion of revenue. And I believe, for both the first and second quarter, we grew it by around 9%. But again, you can look at the segment footnote to get the precise numbers each and every quarter. Great. Thanks. Good morning, everyone. So on Page 5 in the slide deck, you talked about âjust generics programâ as one of the positive key variables. So I just wanted to get a little bit of color just to confirm kind of what you're referring to as the biggest component within that. When thinking about â are you just referring to just better generic volume and generate compliance rates with customers? Or is it just better buying through Red Oak. And also it's been really a much stronger new first-time generic launch calendar as well. But just curious, what's the biggest piece within your comment about just the generics program, thanks. Sure. Yes, overall, the biggest component for this particular quarter and most quarters that we've seen more recently has been volume. I continue to use the statement consistent market dynamics that's referencing essentially the margin per unit. Yes, there's ongoing deflation, but the buy-side sell side continues to be relatively in balance. And so when we see a year-over-year driver, it's driven often by volume and/or mix. And we continue to see very broad strength across all the products, whether it be generics, brands, specialty â and so this particular quarter, we saw that as well. Again, not the biggest driver. But when I talk about cough, cold and flu, a lot of those products have gone generic. They're more mature products, so they do tend to carry with it a little bit lower margin price points, things of that nature. But that would be a component as well. But again, I'm only highlighting that, given how many questions we get on the topic, not that as a significant driver. But overall, the short answer is volume and mix. Thank you. Question on nuclear theranostics, can you remind us where your investments are targeted in 2023 and where and when do we see ROI on those investments? And then given the development around Alzheimer's treatments, what are you looking for relative to approval or policy change on testing that could lead to more significant step up in demand in that business? Sure. So the theranostics business launched sometime last six, nine months, and we are starting to see now more of that contribution over the last couple of quarters. So it's in the ramp up phase. So we are seeing positive returns already on those investments. This is a business, a business case. And the thing about the nuclear business that is both wonderful and also at times a little bit frustrating is that the business is a long-term business. It means that we have good visibility long-term, but also it means that we have to wait until we can get that benefit. Theranostics has been something we've been working on since, well before I arrived here in the organization three years ago, and it's one that we're now seeing the fruits of all those investments and efforts from that team. As it relates to the second part of your question, Eric, I get lots of questions around trying to link our business, our nuclear business to specific approval, specific other drugs and therapies and how we can attach that. I would say that the beauty of this business and the success of this business is that it's not directly linked to a very specific particular outcome. We have broad expertise capabilities, we are not dependent on any one particular area, and is that diversification and of which we're seeing with the theranostics expansion being even more accentuated because we get to work with so many more manufacturers and partners that it just creates a broad opportunity for us to grow across the spectrum. So our business case for continued growth, our goal of achieving â doubling as a profit in this business from fiscal 2021 to 2026 is predicated on a lot of singles and doubles, not triples and home runs by, by attaching to a blockbuster type of drug. So beyond that, we don't talk about individual drugs, individual manufacturers or products. And so like I said, I just don't think that's the real draw for this business is the breadth that we have and the broad capabilities. Thank you. Itâs Taji on for Brian. So you mentioned expecting stabilization of supply chain headwinds, particularly in freight transportation. Can you just discuss any sense you might have around the cadence of that proven moving forward? I wish I had more clarity. I would say that it's a lot more stable than it has been over the last few years, and we have to break apart freight into the components. So within international freight that I believe was an anomaly that is unlikely to occur anytime soon, if ever again we need to be prepared for it. We have diversified our supply chain further as a result of the living through that. But where those costs are, they're still elevated in certain areas, right. The main China to North America channels are much, much lower, but there is now a lot of sourcing through other parts of Asia that are higher than historical levels, but nowhere near the peaks. So we're clearly seeing at least an 80% reduction of what those were at the peak. And certainly much closer to pre-pandemic levels. So as it relates to international freight, it's not my big worry at this point, and it's one that we have to continue to keep an eye on and manage. The more elevated remains the domestic transportation it's still â it's also down from its peak, especially as it relates to anything related to diesel fuel. So that's also off its peak, and we're seeing certain pockets of improvement, but it's still very elevated compared to pre-pandemic. And there, I have less confidence that it's going to materially reduce from here. There's a lot of inputs that go into transportation other than just diesel fuel. You have the equipment and the drivers all which are higher costs and they're not expected to come down any time soon. So I expect domestic transportation to be higher, longer, perhaps forever. And it's why we need to have permanent pricing is because that component. But on the international freight side, that is why we are not pushing for faster price increases right now is because we believe that will be coming down on our P&L this next quarter. And as we get through fiscal 2024, those two lines, the price line and the cost line will finally intersect and we can see that that will be fully mitigated. Question, please. Yes, thanks a lot. I know growing specialty has been a priority for the company and this management team to set out. And you've mentioned that again today that you're having progress there. I guess, can you just maybe tell us where you're seeing success in the specialty area and is the plan progressing about as expected as it was talked about over the last year or so? Or is that an area not performance for you, or how would you describe that? Sure. Yes, it's absolutely meeting our expectations. It was a call out in terms of the broad volume that we had this last quarter. So we had strength across a number of many different categories and customers. We also called out double-digit growth within our sourcing and manufacturer services group which is a key component of the upstream elements of specialty. So the business is strong, it's large, it's growing nicely. We have â I think like the rest of the industry, biosimilars is a nice tail one that we're seeing, not large enough to call out as an individual driver. Our 3PL business, especially with the regulatory approvals being a little bit more normalized is well positioned. And we're continuing to invest in areas that will be growth opportunities in the future, whether thatâd be cell and gene or just where value-based care is going. We have our Navista TS platform, so we're investing organically. And of course, within our inorganic, we've had a nice success with our Bendcare GPO and the investment in the MSO that I think has given us some additional opportunities to think about in the future as well. So not any 1 item to highlight, but there is strong breadth across many different pillars of the specialty business that we feel good is a very strong foundation and platform for future growth. I believe that was our last question. Yes. Thank you. And I'll... Yes. Thanks. I appreciate that. Just to summarize real quick. I'm pleased with the continued stability in Pharma, as we just discussed here today. As well as the progress that we're making in the medical business. We are committed to executing on our key priorities, including maintaining a relentless focus on shareholder value creation. So with that, thank you and have a great day.
EarningCall_541	Hello and welcome to Ceridianâs Fourth Quarter 2022 Earnings Conference Call. I'm Matt Wells, Head of Investor Relations. And on the call today, we have our Co-CEOs, David Ossip and Leagh Turner and our CFO, Noemie Heuland. As a reminder, all participants are in listen-only mode and a question-and-answer session will follow the opening remarks. Before I hand the call over to David, I want to remind everyone that our commentary may include forward-looking statements. These statements are subject to risks and uncertainties that could cause Ceridian's results to differ materially from historical experience or present expectations. A description of some of these risks and uncertainties can be found in the reports we filed with the Securities and Exchange Commission, such as the cautionary statements in our filings. Additionally, over the course of this call, we will reference non-GAAP measures to describe our performance. Please review our earnings press release and filings with the SEC for our rationale behind the use of non-GAAP measures and for a full reconciliation of these GAAP to non-GAAP metrics. Both our earnings press release and SEC filings are available on the Ceridian Investor Relations website. As a final note, a replay of this call will also be available on our Investor Relations website. Thank you, Matt and thank you all for joining us today for our Q4 earnings call. Today I'll discuss our exceptional results for the quarter and fiscal year and talk to our continued strength in technology that positions us for 2023 and beyond. Leigh will give more information on our successful customer implementations and recent organizational changes that will help drive efficiency and continue to grow. Noemie will then provide insights on our Q4 performance, 2023 full year guidance and reaffirm our medium-term goal becoming a $2 billion revenue company with industry-leading cloud recurring gross margins of 80% and adjusted EBITDA, up 30% by 2025. I'll begin with our financial results. I'm happy to report that we closed Q4 and fiscal year 2022 with strong momentum in financial performance. For Q4, we exceeded our guidance across all metrics. On a constant currency basis, Dayforce recurring revenue grew 35% and 24% excluding float. Our adjusted EBITDA was $67.7 million or 20.1% of revenue with cloud recurring gross margins expanding by 250 basis points on an adjusted basis to 76.2%. Cash flow from operating activities were $41.8 million, a significant improvement from a year ago. Our annual Dayforce gross retention rate remains best-in-class at 97.1% and our cloud annual recurring revenue surpassed $1 billion, growing 34% year-over-year. In 2022, Ceridian demonstrated efficiency in its operations while achieving impressive revenue growth and enhancing profitability. We also saw healthy sales growth in 2022 from both new customers and add-on sales to the base. This provides an excellent setup for 2023 as evidenced by our strong 2023 fiscal year guidance of Dayforce recurring revenue ex float growth at constant currency of 25% to 27% and adjusted EBITDA of 24% to 25%. I'm very proud of what our team has achieved and the value that we have all created for our customers. On this noteI would like to thank our employees and partners for their commitment and contributions to another successful quarter and fiscal year. It is our team, our differentiated tech and just the sheer size of the addressable global HCM market that drives my optimism, my confidence and my motivation to seize the growth opportunity ahead of us. Our brand promise of make work life better has never been more relevant. This has been evidenced in the hundreds of customer conversations that I have had throughout the year. It is evident that every company is striving to boost efficiency and productivity by adapting to the new reality of work and our emphasis on providing tangible value through actual verifiable investment returns has resulted in numerous customer success stories and increased demand for Dayforce. Next I will discuss our product innovation that continues to set us apart in the market. First, the size of our target market continues to expand as we add new modules to the Dayforce platform and by expanding our global payroll capabilities. Today, we offer the most comprehensive HCM suite in the market that is also unique in its payroll capabilities for 57 countries. This allows us to deliver a differentiated solution to enterprise and global customers. Another significant area of differentiation is that Dayforce is a single solution with a single database and single continuous calculation engine. This means that Dayforce offers greater efficiencies and compliance than any other solution in the market. It is our continuous calculation engine that enabled us to launch Dayforce Wallet, which lets employees get paid when they want improving their financial wellness and reducing employee turnover and cost for our customers. Over 1,450 customers, an increase of 500 year-over-year have signed up for Dayforce Wallet and 889, an increase of 462 year-over-year are live. The average registration rate is trending above 45% of eligible users and the typical Wallet user interact [indiscernible] about 25 times a month. Dayforce Wallet remains a key competitive differentiator with high attachment rates to new sales and frequent usage among employees. We expect Dayforce Wallet revenues of approximately $140 million in 2023 which is growing over 100% year-over-year. On the data side, intelligence is central to Dayforce and we continue to integrate AI seamlessly into the platform. Our newly released intelligent search allows managers and employees to get answers to their questions easily and quickly. Also our Dayforce People analytics features provides customers with metrics and analytics across the entire employee life cycle covering DEI, performance compensation, flyers benefits and more. We have also added intelligent automation today for recruiting making the talent acquisition process more efficient and accurate. And we have improved our best-in-class user experience to meet changing work needs including a focus on mobile experiences. With the [indiscernible] mobile benefits enrollment, employees can fully manage the benefits on their mobile devices. And the Experience Hub, which we released last year allows our customers to easily put their branding on the application and personalized content and communications for specific groups. And we continue to offer differentiated features at the very core of Dayforce that extend across the suite to meet the demands of the modern workplace. For example, our Dayforce skills engine, the backbone of Dayforce talent intelligence creates an open standard-based approach to skills. It is a skilled engine that allows us to match candidates to open jobs and we are using this tech to build the ideal talent marketplace. We shared this upcoming solution at Insights. It will help customers increase the flexibility of their staffing models and adapt to the future world of work. And finally, Ceridian Tax Services has always stood out due to its competitiveness. In 2022, we modernized the architecture of our North American tax systems, and now customers can access the tax submission through the same technology as the Dayforce cloud platform. This will enhance our differentiation and drive more growth. Once more we are very proud of the progress we are making with our distinctive product line, which once again has been recognized as a leader in the 2022 Gartner Magic Quadrant for Cloud HCM Suites for 1000-plus employee enterprises, with us being the only pure-play HCM vendor named as such. In conclusion, our product innovation, broad reach and impressive performance this past year, gives us great assurance in our ability to achieve sustained profitable growth. Thank you, David. Like you, I am so pleased that Ceridian continues to perform beyond expectations and even in this complex operating environment. Last year, we adjusted our business to a more balanced growth and profitability plan. We shifted our operating model to leverage our APJ resources, and this allowed us to continue investing in and growing the business and in 2022 Ceridian operated above the rule of 40, with total revenue growing by 24% in constant currency and adjusted EBITDA being 20.1%. And as David mentioned, our guide for 2023 continues to improve on the Rule of 40. On the investment side, we continue to hire meaningfully, and especially so in sales marketing and engineering, which has allowed us to drive the innovation that David spoke to, and the sales results that I am going to speak to. And we did all of this while at the same time meaningfully globalizing our business, and the way in which we support and service our customers driving customer NPS scores up across both our support and services businesses, while also decreasing the number of support tickets logged in year by 13% and maintaining our world-class retention rates of 97.1%. We grew our partner ecosystem significantly in 2022 now with more than 170 partners globally. Today, more than 40% of our global bookings are supported by partners and 14% of our kickoffs in year were also completed by partners and that's a trend that will continue to increase significantly in 2022 and beyond. We are seeing the effect of our partners in our pipeline as well. Our pipeline coverage is strong and the maturity of our pipeline and level of qualification is high. In 2022, we saw triple-digit growth in our global markets, and our average overall deal size increased by 22% in 2022, signaling our growth upmarket while maintaining our leadership, in small- and medium-sized companies. Companies of all sizes, segments and parts of the globe are reaching for digital transformation, efficiency and globalization of their employee base to drive the efficiencies required to support growth. And these tailwinds are not going anywhere. In fact IDC says, that technology budgets are growing in 2023 with SaaS spend increasing by approximately 15%, year-on-year. Our growth levers will continue to prove to be the right ones at the right time. We entered the year with a seasoned and efficient sales organization. We have reps with time and territory and strong pipelines, particularly as we continue to make demonstrable strides in the large enterprise market. Over 25% of our sales, were back to the base in fiscal year 2022, and 39% of our customers have bought our Dayforce suite. Coupled with retention rates in excess of 97%, this positions us well for durable growth over the medium term. These are proof points, that our platform strategy works. Continued innovation, and happy satisfied customers are the combination that drives profitable long-term growth. Now, let me get into some of the specifics of our Q4 customer wins and go-lives. From a customer wins perspective, a global auto parts manufacturer with 40,000 employees in North America, chose to further unify its workforce on a single HCM platform, with Dayforce. This deal was brought to us by a partner, and the business process transformation that will follow, will be done by both the partner and Ceridian, a multinational hotel and restaurant company based in the UK selected Dayforce to fuel its growth and transformation by leveraging a modern, intuitive and engaging experience for its 38,000 employees. A US consumer goods manufacturer, with 35,000 employees globally, chose Dayforce for its Latin America and Asia Pacific operations, standardizing on a single global solution for payroll and workforce management, and driving a more efficient and lean organization. A major global airline based in Canada, with 22,000 employees focused on driving efficiency in their global payroll and WFM processes, selected Ceridian and one of our key global partners, to transform this part of the business. This deal was brought to us by that same partner. We also took live, some notable companies in the last quarter. A global professional services firm recently went live with Dayforce, streamlining payroll and taxes for 55,000 employees in the US and Canada. This customer went from signing to live, in less than nine months. They had very sophisticated requirements and excellent teaming between both Ceridian and the customer made this possible. They also happen to be one of our partners. One of the world's largest express transportation and shipping companies migrated to Dayforce, for a modern payroll experience for 12,000 employees. A leading global retailer, successfully migrated to Dayforce for HR payroll and workforce management for 10,000 employees in the United Kingdom; and a major American cargo and passenger airline launched Dayforce for payroll time and attendance and managed benefits for 7,400 employees. For those of you following us for some time, you will have noted that virtually all of the customers mentioned have employees in excess of 10,000. A few years ago this would have been an anomaly and now it's the norm. We've been relentlessly focused on scaling this business and this is one of the results. Speaking of scale, as we look ahead to fiscal year 2023, I'm very pleased to share the promotion of Steve Holdridge to President, Global Customer and Revenue Operations. In this new role, Steve will lead our entire global field operations. We have always known that this was the structure we intended to move toward and this is the right time to bring our sales, revenue and customer functions together to drive toward our growth goals and to continue delivering the quantifiable value that we promised through every single touch point of the customer experience. To support this new structure, we've also allocated additional resources to marketing in support of our brand and go-to-market efforts. We are providers of real business transformation. And at a time when every single customer everywhere is searching for a partner to help them convert efficiency into growth, Steve is absolutely the right leader to bring these teams together and to help us meet this moment of opportunity. His track record is exemplary, both since he joined Ceridian and in his years prior to joining us. A true global transformation leader, well known in the industry and well loved inside our four walls. I would like to personally take this opportunity to congratulate Steve on behalf of all of us at Ceridian for this latest endorsement of his leadership. Before I turn it over to Noemie, I would like to thank Rocky Subramanian, who will leave our business on March 3. Rocky was instrumental in leading our revenue organization to truly sell the value of transformation, working side-by-side with Steve to ensure that the quantifiable value we commit to in the sales process is realized when our customer goes live and again when they renew. He set us up for this next stage in our evolution and we are grateful for his numerous contributions and we wish him well. In closing, the demand environment remains healthy. Our pipeline is strong. The market opportunity is growing. Our ecosystem is expanding and succeeding and our renewal rates remain best-in-class. When customers reach for transformation and sustained efficiency, we are the answer that powers their growth, accelerates their productivity and reduces their cost. Above all else, we have the right team, further aligned to deliver, who I would be completely remiss if I didn't stop to think, along with our customers and our shareholders for their steadfast commitment to our brand promise and purpose, to make work life better. And with that, I will turn it over to Noemie to walk you more deeply through the quarter and the year and to review our guidance. Noemie? Thanks, Leagh. I'd like to provide additional color on our fourth quarter performance and full year 2023 guidance, both of which are detailed in the press release published on our Investor Relations website. As David highlighted, our fourth quarter results exceeded guidance across all revenue and profitability metrics despite persistent FX headwinds. Notably, at constant currency, Dayforce recurring revenue grew 35% and total revenue grew 23%. Our adjusted EBITDA margin of 20.1% exceeded the high end of our guidance range and operating cash flows was $41.9 million above Q4 last year, driven in part by revenue upside and operating margin improvements. I am very pleased to report that on an adjusted basis, the cloud recurring gross margin was 76.2%, an increase of 250 basis points year-over-year. In the month of December, we also benefited from a $3 million change in estimate of sales commission amortization period. We will now amortize our deferred commissions over a 10-year period, a change of estimate from a five-year period, reflecting higher customer retention rates and length of our customer relationship. This revised estimate is also embedded in our fiscal year '23 guidance. Turning to fiscal year '23 guidance. I want to note that we expect about 85 basis points of FX headwinds to Dayforce recurring revenue ex float for the full year, with the primary impact being felt in the first half of the year, then moderating in the second half. The same trend will persist across total revenue, where we expect about 110 basis points of total FX headwinds. For the full year, Dayforce recurring revenue excluding float is expected to be in the range of $936 million to $946 million, growing 26% at the midpoint at constant currency. As noted in our press release, we have modernized our tax infrastructure and now provide our North America tech solutions under the Dayforce platform. As such, this modernization effort in our tech business is expected to contribute approximately 460 basis points of Dayforce recurring ex float revenue growth in fiscal year '23. In addition, I would like to note that our largest enterprise deals, take over 12 months to achieve full run rate total revenue. And our float revenue guidance reflects a more normalized interest environment. As the pace of rate increases moderates, we expect less upward variability as compared to fiscal year 2022. Adjusted EBITDA is expected to be in the range of $360 million to $375 million or margins of 25% at the midpoint. Our guidance assumes a degree of float reinvestment back into the business, as well as continued scale, primarily driven by cloud recurring gross margin expansion. As it relates to operating cash flows, we expect an adjusted EBITDA conversion ratio in the mid-50s for the full year 2023. Commensurate with progress made in '22 and as implied by our 2023 guidance, we remain committed to our medium-term goals. In closing, I'd like to echo both David and Leagh in saying that we're very proud of the progress we made in 2022 and are eager to continue executing on our shared vision in 2023. Hey, good afternoon and congratulations. When I was at Insights you have a number of large enterprise clients that I talked to that were very complementary. And a lot of them were global in nature. And then I noticed with the sales highlights, you're mentioning all of the various global deals that you've signed. Can you talk a little bit about what you're seeing in the global marketplace as an opportunity relative to single country opportunities. It sounds like your competitive advantages really shine with regards to the multinational deals. And obviously that would speak to bigger deals as well. What are the key drivers in terms of the growth there? Is it just the native payroll and everything being able to translate smoothly? Is it the single database? Is it the continuous calculation engine? And to what extent is Dayforce Wallet attractive internationally? Thanks Mark, and great to speak with you. What I would say about this is that most organizations are now looking at how they can transform their companies to take advantage and be relevant in today's world. On that line one of the initiatives that most organizations are looking at is how they can move to shared services on a global operating model basis. And so we're finding that all organizations beyond a certain sites are looking at using the Dayforce technology, because it provides them with a global operating model for their people. It allows them to have payroll process in a single system. It allows them to do the analytics altogether in constant currency, and it allows them to work on areas like standardization and shared services to achieve there more strategic initiatives. And so we're finding that's resonating very nicely inside the market. Leagh, what would you add to that? First of all, Mark, it's nice to hear from you. Thank you. And I would echo what David said, and I would just refer you to our press release where we talk about global customers that are sort of beginning one country at a time. I think that that's something we're seeing as well. You're right to say, David that companies are globalizing in order to achieve efficiency, but what we're seeing in our pipeline is that many very, very large global multinationals, we refer to a global auto parts manufacturer with 40,000 employees in North America. They actually have 350,000 employees globally. We refer to a global professional services firm with 55,000 employees in the US and Canada that we brought live. They have 276,000 employees globally. So this land and expand strategy is a huge part of our go-to-market and you should expect to see more of that over time. That's great. And can you just mention to what extent the Dayforce Wallet capabilities are helping listen to a large European staffing company Randstad just put in place early wage access for their European clients. So I'm wondering to what extent we're starting to see some traction outside of the US as it relates to early wage access? Mark if you look on LinkedIn or social media, you'll see that we did the big launch of the Dayforce Wallet for the UK populations and it was a tremendously well-attended event with tremendous excitement in market. In the UK and inside Europe, typically the payroll periods are monthly as opposed to biweekly or weekly as they are in North America. So, there is a big demand for it inside the market. We obviously, are doing it in a pragmatic way because of the partnerships we have to have, along the movement of money. And so, we are very encouraged what we're seeing currently with the UK kind of adoption of the system. And as we bring Germany live, we'll probably look towards that geo 28.18 and adding it. We also obviously, are looking towards the ANZ market where there is a requirement as well, for early wage access as well within the APJ market. Yes. Thank you very much. And congratulations, on the very strong guidance. First of all, it's great to see the $40 billion expected wallet revenue next year. I was curious, if that is assuming this continued registration rate of around 45% of the eligible users, or do you see potential perhaps to convert some of the holdouts and maybe what would be the -- what are the hurdles to get that to happen? And then, I have a quick follow-up. So Mark, it's still early days for the actual wallet. I'm not sure, if we got the number correct, it's 1-4 not 40 in the 2023 time frame. It's growing well beyond 100% year-over-year. If I look at the actual volumes of loads, we've crossed over $1 billion, a few months ago. And if I look at the daily loads or the number of times the application is used now, we're probably around 30,000 to 40,000 loads per day. So, it's growing very quickly. But from a revenue percentage contribution, it comes in now, I don't know what is it about less -- about 1% I guess of the overall size of the company. Okay. Understood. David, thank you for clarifying. I didn't hear it phonetically on the call properly. Thank you for clarifying that. As a follow-up, how did you interpret the recent monthly non-farm payrolls data. It was a stunning number. Unemployment rate was the lowest since I think the late 1960s. And I believe leisure and hospitality, were the strongest there where you do have relatively high exposure. Is that something you view, as kind of noisy or anomalous, or do you think it's instructive on the overall employment backdrop that you're seeing today? They didn't really talk about the seasonality of those particular segments. And you remember that in December, you typically have the highest level of employment in hospitality and retail. Typically, you'll see a drop-off of that, as you go through Q1 and then begins to build up again starting with Q2. So, I didn't see -- I wasn't surprised by the numbers. And remember, we have pretty live data when it comes to employment numbers by segment, by geo as well. So it's what we had expected. Hi, all good afternoon. Thank you. I guess, I want to start with demand. Just are you seeing any KPIs that would suggest recessionary behavior or eminent slowdown? Anything, like that? Can you comment on maybe new business momentum through January please? It's kind of a strange time. Usually on the sales cycle, sales activities after Thanksgiving, you typically see a bit of a slowdown that continues through December and into January. Last year, we didn't see that. The Solution Advisory team was exceptionally busy, throughout the month of December, towards the very, very end. And then came right back very, very high active, sales activities in the beginning of January. So there seems to be still a very robust market for our type of system, what I will say though is I think the inspection that is going into every single deal, the amount of diligence that each and every customer is doing is definitely up several at times and the focus on quantifiable value in other words delivering a very hard IRR to the company has become very important in order to get the approvals for the projects. But on the macro side, I can't speak to anything specifically that talks to the slowdown in the economy. Okay. That's helpful. And then pivoting to margin here. So the cloud recurring ex-float gross margin solid close here, where do you expect that to land in 2023? And then just on the change in commission expense amortization. Can you just give us a sense of what the 2023 impact is from that? Yeah. So I'll start with the latter. If you look at the month of December, Noemie I think it was about a $3 millionâ¦ â¦benefit inside that. I assume we could just extrapolate for the year. In terms of the gross margin on recurring, as you mentioned we ended the year on an adjusted basis at 76.2%, which was up about 250 basis points. If we look towards Q1, we would expect that it would go up probably between 1% to 2% relative to Q1 of last year. And for the entire year, I would expect us to probably make progress towards the rule -- to the 80% target that we're hitting by 2025. And so you'll probably see it go up by about another percentage or so over the course of the year. Yeah. Bryan, I think the best way to look at it if you look at our cloud recurring gross margin progression, we've always said that we're aiming to be close to 80% by 2026 and we're going to make progress every year and that's going to be pretty linear until then. And when it comes to flow, you may remember that when we come out of 2022, we had a pretty significant increase in our cloud recurring gross margin with the work we did in automation, as well as using our shared services centers in APJ. So we continue to see the benefits of that throughout 2023, but you'll see less of an impact and progression in 2023. It's going to be more linear going forward until we reach 80%. Just one thing that I would do on the long-term range plan is that I do believe the 30% adjusted EBITDA target with the sales commission changes moves to -- by the end of 2025 as opposed to 2026. So it moves the -- it brings it in by about a year. Great. Thanks for taking my question, and congrats on a strong quarter. Just following up on some of the exact changes that you made just on the promotion of Steve, can you just maybe elaborate a little bit more on why you think it's best to consolidate the role of CRO under him versus maybe replacing Rocky? And then how are you thinking about or handicapping maybe the potential for any disruption if at all? Yeah, I'll take that. First of all, nice to talk to you Bhavin. Thank you very much. I'll say a few things that we noted during the call. We -- David and I talked about this, I don't know David what four years ago about moving toward this structure eventually. In order to be able to do it, we needed stability and scale in each of the customer facing functions. And we knew that we had to go on a journey to be able to do that. But it's a structure and a target model that we always wanted to move to because of the fact that we allow -- it allows us to have like complete full visibility and alignment throughout the entire customer life cycle. We care a lot about delivering quantifiable value to our customers. So this allows us to set the measure for quantifiable value in the sales process, to bring it to life through the renewal -- or excuse me through the go-live process and then to measure it consistently throughout the renewal process. And we believe that that will make us market differentiated. And it will allow us to be the transformation partner, not sales partner, services partner, support partner, but actual life cycle transformation partner that we believe that we can be and that we can focus deeply on value. I will say I think that there will be zero disruptions. Steve is here with us, as is Greg George who leads North American sales. And as you would know that's the lion's share of our business today and they have been well aligned, all the way out through this entire last couple of years and through this change. I would also say Rocky did an awesome job. He was with us for a couple of years. He did exactly what we asked him to do, which was to upgrade and globalize our team to increase our value-based selling and transformation-based selling. And he and Steve have been partners for the last couple of years really working on that quantifiable value throughout the entire customer life cycle. And I think he's built a great culture, great leaders. And I think that there will be little-to-no disruption at all. And so what we've been able to do as a result of this change is to take some of the savings and efficiency and drive it back into our business investing in brands and telling our story. So I think frankly we're going to see forward momentum. As a result the team is super happy and we're just like onwards and upwards. Appreciate the valuable response, Leagh. Just maybe one question on float to follow-up. Can you just maybe help us understand maybe the delta between the 1Q guidance of $45 million versus the full year of $150 million which roughly implies $100 million for the following three quarters. I would have thought if anything that should be stable as we go into 2Q and beyond. Anything that we should keep in mind as it relates to this going forward? So on Q1, you got to -- there's a bit of seasonality going on higher volumes in Q1 with the end of the year processing and the tax volume as well. And then we've reflected the most recent interest rate environment. But as we -- as I said on my prepared remarks, I think the upward variability for 2023 is going to be a little bit of less magnitude than it was in 2022 simply because the interest rate environment starts to normalize and we factored that into our guidance for 2023. Hey. Thanks for taking my questions. I was wondering what countries of [indiscernible] will have you to add native payroll to that you might in the relative near term? Well, the focus at the moment is to get Germany online. We're starting to do the implementation of the charter accounts this year. And as we go through, it will go through a limited release to GA by the end of the year. We've already as you know got quite a backlog for customers in Germany. At the same time, we are extending our footprint across APJ with the countries that we already have acquired. So we launched Singapore last year and there are a few GAs around that are very similar in nature to Singapore that we probably will add. And we're continuing to invest in our global payroll interface, which allows us to if you like bring the engines as you know we've already acquired into the Dayforce platform. Got it. That makes sense. And then can you talk about the competitive landscape? Have you seen any changes in the last three to six months that you'd call out, or is it pretty much business as usual? You know that we play in a variety of different segments, right? So I would say, it's not changed demonstrably. But we're playing â in the emerging â we had great growth in the emerging market, very traditional competitors there. In the mid-market, which is very clouded space. I would say, we continue to see relatively the same competitive landscape. But when we get up into the top end now, I would say, typically we see the three large ERPs, who we are now in the Gartner Magic Quadrant, leadership quadrant alone with. And many of our wins that were noted in the press release, the global auto parts manufacturer as an example was a win against UKG Workday SAP and ADP. When you look at the deal that we did in Australia and New Zealand, it was actually a multimillion dollar deal, done with a global multinational that does provisions of explosives and oil and gas â for the oil and gas and mining markets. That was a deal that was done in 17 days competitive against ADP partner-led. But I would say the one thing that you're seeing more demonstrably than perhaps in the past is that because we're working with partners so much, our deals are really pre-qualified and we're not competing to the same degree that we might have in the past. And our sales cycles are accelerating. As a result, we're able to maintain our value not only to our customer but to Ceridian. Great. Thanks for taking my question and congratulations. Great quarter. David, when you look at enterprise momentum, it's very impressive. And I remember we started investing pre-COVID. For the last few quarters we are seeing this large deal size momentum. So how is the pipeline right now heading into 2023. This enterprise deals versus 2022 last year. And remind us like what's the deal sales cycle time for these large deals? So thanks very much for that. So look the metric that I would point to which Leagh spoke to is that the average deal size went up by 22% last year. There are a few things that are running kind of in parallel would be here. First of all, we have a kind of in-seat large enterprise and enterprise sales team. And so the pipeline that has been generated by that team and the business development organization over the last year means that we go into 2023 with an enterprise pipeline that is several times larger than the one that we went into at the beginning of 2022. The second is we've made tremendous progress with the system integrators and we're seeing more large deals being sourced by the system integrators. Leagh spoke about a few of those, the large global automotive manufacturer that was sourced by one of the large SIâs. The Canadian airline organization. That was also sourced by another very large SI. The chemical organization based out of Australia that was also sourced by another SI. And so we're seeing now the pipeline being positively influenced by the SI channels which as you know we've been investing in for probably the last three or four years. So when you take all of those together, we go into year with a much healthier and much more robust sales pipeline. In terms of the average deal size it really varies. If I look at the chemical company that was a lightning quick, it probably was somewhere like 12 to 16 weeks from identification to actually contracting. If I look at the airline company, which also is about 20,000 employees I think that was probably about six months at most in terms of the time to move through the pipeline. But I think those are outliers. As you would expect in the large enterprise space it would be typically 12 to 24 months to mature those types of opportunities. One other point I would make on the large enterprise side, has to do with the implementation. And we've gotten very good at taking very large populations live very quickly. The large consulting company that, Leagh spoke about which is upwards of about 50,000 or so employees. The project kicked off in April and they went live in December. And that's not an anomaly at all. So I'm very encouraged with what we're seeing in the large enterprise basis. That's great color. And as a follow-up to that, you talked about SIs getting involved in the deals. Is that the reason why the professional services, revenue Dayforce professional services revenue was up 3% year-over-year, or is there anything else? And how should we think about professional services revenue for 2023? Yes, that is correct. I don't think it's -- I think 3% you're talking about is inside the actual quarter. But if you look at it for a fiscal basis, it was actually up by 14% year-over-year. But yes, we are trying to move more-and-more of the implementations to the system integrators. And the number of projects that the system integrators are now primarily, I think is 15% of the overall amount. Hey thanks for the taking my question. I wanted to ask a few on the ideal talent marketplace. So how are you thinking about this opportunity in terms of its size? When would you expect this to start contributing to revenue meaningfully? And then, how do you go about sourcing labor for this product in a tight labor environment? Thanks. So thanks for the question on that. We're still building out the actual products. It will be some time before we see a revenue benefit from it. In terms of where we are, we expect to be able to take the charter accounts live in the Q3, Q4 time line. In terms of the sourcing of the actual labor there are already two classifications of people. We call the first known employees which would be the active employees of the company as well as the alumni of that company. And then the second categorization will be something we call trusted employees which are people that we have done the background screen for we've done the use the able skills engine to validate their particular skills so we can do the actual job matching. In terms of the identification of the charter accounts, we've been quite active in speaking to our clients and getting them to a stage, where we should be in a position to start contracting with the first few customers in the next few months. Hey, great. Thanks for taking the question. Appreciate it. Employee growth on the platform is still strong this year at 17%. You mentioned the environment you're seeing still looks healthy. Can you walk through some of the assumptions you're making on the employment environment in the fiscal 2023 guide? And then secondarily, there's a tax migration impact mentioned in the press release as part of the Dayforce revenue guide. Noemie maybe you can just give us some details on what's driving that? Is that something you're expecting as the user base matures, or maybe what's driving that now? Thank you. Sure. So in terms of employment assumptions David referred to it earlier, we're expecting the employment trends to normalize. Remember in last year Q1, we still had little bit of pickup from the employment level recovery from the COVID period. So that's completely normalized now. We're expecting a slight decline in Q1 in employment levels seasonal trends and then picking back up again. So that's for the â that's what's embedded in our PEPM guidance for 2023. And on the tax migration, we've talked about the effect and we â David can talk about this too, but we've modernized our existing infrastructure. This is no different than what we've done in the past for our Bureau customers, where we migrate them from an on-premise types of delivery into cloud and that really enabled us to generate a lot more profitable margin with the tax customers as well. And we classify the revenue as cloud and Dayforce recurring. That contributes to about 460 basis points of growth in 2023. And we have an aggressive marketing plan as well as branding activities to really grow that market and that business because there's really big demand for it. That's a competitive differentiator for us and customers actually appreciate the services offering. David, do you want to add something on that? Yeah. I think you did it well. It's no different than what we did with all of the legacy payroll business. So over the last number of years, we've actually been rewriting the tax component into the Dayforce platform, such that, it becomes a true cloud system, but also that it allows us to get a foothold in the actual customer's that gives us future growth, and hence the branding exercises and the marketing exercise that Noemie is talking about. A few things though on the gross profit, we were able as we did the actual movement into the Dayforce kind of tech stack to improve the gross profit the gross margins on the recurring tax business up quite significantly as well. And so the gross margins on the tax recurring are now within a few basis points of what we see on the entire Dayforce platform. We also did make some changes to some of the services. For example things like printing. We no longer do that directly. So kind of the low-margin types of services, we worked out other ways to deliver that to customers outside of Ceridian. Great. Thanks for taking our questions, guys. The first one is on the deal size increase that's up I think 22% a year-over-year. I'm curious, whether you can parse how much of that was attributable to the customers being larger like customers having more employees versus maybe holding employees steady but actually uptake of more product. Look, we've got five growth vectors for the business. The first one is that we acquire new customers. The second is that we increase the actual platform. We go back to the base and we upsell them. As Leagh pointed out 25% I think of the sales that we did with inside fiscal 2022 were back to the base. And then the third growth vector is that we go into the enterprise and the large enterprise space. And as you can see from the list of customers and such, we've obviously done that very effectively. So it's really kind of looking at the growth as a rectangle. And we're looking at effectively growing the area all the time by selling more modules and at the same time sell into large organizations. Okay. All right. And then just a quick follow-up on the wallet. Any expected impact or quantifiable impact on margins that you can talk about for the wallet either in 2022 or on the expectation for that $140 million in revenue in 2023. Yes. In terms of the margins, the margins obviously go up as the scale of the business actually goes up as well. I think if we look at it as an overall probability, itâs kind of in line with the rest of the Dayforce application. But I would expect the profitability of that business to obviously improve. But again, it's a small business today, growing well over 100% year-over-year. And I think that growth trend will continue for some time. Likewise. So, excluding the $200 million in the Dayforce Wallet -- no, I'm just kidding. I guess, on -- if you think about the guide for Dayforce recurring revenue, if you do actually exclude the $14 million wallet and the 450 basis points of tax migration, it does appear a little bit more conservative than your historical guidance methodology for Dayforce recurring revenue. Is that just deliver it, taking account of the more volatile macro, is it something else? And just David also help us understand, is this a one for one what we were charging for the tax piece on-prem now moving it into the cloud? Are you getting a cloud migration dollar boost from that as well for that service? And how much is left in that Bureau business to migrate or convert over to Dayforce? Yes. First of all Alex, remember as a tech company we make investments in engineering and we do that in order to get the Dayforce recurring revenue in both the case of Dayforce Wallet and in the tax. We put significant resources into the kind of the development if you like of the Dayforce components for that. It's no different and us going off and building a different module and trying to get recurring revenue against it. So, I don't think what you're saying hold, because obviously we invested in the P&T line, product and technology in order to get the growth on the Dayforce recurring from those two specific modules as I would frame that. In terms of the pricing, yes, you're correct, we were able to increase the prices that we have been getting for tax over the last year. And that's when I mentioned that the margins had improved to be in line with those of Dayforce. Obviously, there's a cost savings on the infrastructure side, but there's also a revenue look that we get from that too. And then in terms of just the latent opportunity that still exists in that Bureau base to convert over to Dayforce or over the course of the next few years either in tax for Bureau? No, we did it in a way that we're able to do it kind of all-in. So, if you actually look at the growth for Q1, it's about 550 basis points lift from that particular migration. And so if I look towards the Bureau kind of run for the year, the makeup effectively is the remaining North American payroll and fiscal 2023 is like $1.5 million to $2 million. Tax all moves across over to Dayforce this year. We've got that small business Freedom product that still holds probably around the $9 million level. We have no more HRO business inside that. There's still a little bit of allocation of float that goes towards the Bureau business in the neighborhood of $1 million to $2 million. And then we have the APJ products that we will be migrating over the next number of years. And that if I look at it for the year in total it's probably about $84-or-so million. That's super helpful. Maybe just sneaking one last one in David. How the thought process around inorganic contribution as you look at -- the market seems to be getting a little bit better for private valuations as you think about just generally for -- by adding incremental functionality into the business. We're not looking at doing any significant scale M&A within 2023. We're focused quite honestly on hitting the $2 billion of revenue the 80% gross margin on recurring and a 30% adjusted EBITDA organically. Okay, perfect. Yes. Same here. Can you talk a little bit the enterprise wins are really, really impressive like where -- what are you seeing there? Are there any patterns in terms of where these customers are coming from in terms of like having tried it out other cloud vendors where the offering is not very strong, some of the old legacy stuff is getting dated and people are moving. Are there any things that you can see that kind of create a trend here? It's right across the Board. We're replacing some of the cloud branders that you obviously know of. We're obviously replacing some of the legacy payroll bureau companies that you would expect that we've always had. We're also replacing some of the ERPs in the market, but I don't think that's changed. Look when I look at it I think we are differentiated in that we're the only pure-play HCM vendor in that Gartner leadership quadrant. And specifically we are number one for compliance. We're number one for payroll. We're number one for customer set. But also we completely differentiated on our global capabilities whether it be global HR, global workforce management, global payroll. So, I do think we're quite unique inside the market when it comes to the large enterprise companies. And as I spoke about at the very beginning the move of all companies of scale to shared services and globalization of the operations is just the reality of a post-COVID world. Leagh what would you add to that? I think the only thing I would add is that the driver is consolidation and efficiency. So in many of our wins over the course of the last quarter, we're replacing like multiple systems. I'll give you an example. The win in Australia that both David and I referred to as a replacement of 34 different systems. This is a really common trend as companies look to drive efficiency in order to be able to fuel growth. And so I would say that that's a really key driver. Yes. Okay. Perfect. And then one quick follow-up more for the future around like your revenue recognition usually started when you get the customer live. Other vendors are starting actually from almost day one because the client is using system integrators and in the client say, how are you thinking about that as you evolve and as more system integrators coming on stream? Have you changed it? Are you thinking about changing that? Any help there as well. Thank you, and congrats from me as well. Yes. I mean I'll ask Noemie add a little bit of color, but I'll simply say that's a business model that you can imagine we're moving towards. As we partner with system integrators we come in with a joint value proposition. We sell the software. They sell the implementation. Together we do the transformation services. And you should expect that over the course of the next few years that we will continue to mature that model. Noemie what would you add? Yes, no, youâve covered it Leagh. We've actually started doing that a couple of years ago and some opportunities and customers have kept that starts right upon signing the contract. We're moving in that direction. Obviously, when you sell the full suite and you have a SaaS offering that includes more ACM and additional modules other than payroll. It's obviously a bit easier to do but the -- we're also making big strides in that model with a payroll and time and attendance customers as well
EarningCall_542	Ladies and gentlemen, thank you for standing by. And welcome to the Lilly Q4 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session, and instructions will be given at that time. [Operator Instructions] And as a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Joe Fletcher, Senior Vice President of Investor Relations. Please go ahead. Thank you, Lois. Good morning, and thank you all for joining us for Eli Lilly and Company's Q4 2022 Earnings Call. I'm Joe Fletcher. And joining me on today's call are Dave Ricks, Lilly's Chair and CEO; Anat Ashkenazi, Chief Financial Officer; Dr. Dan Skovronsky, Chief Scientific and Medical Officer; Anne White, President of Lilly Neuroscience; Ilya Yuffa, President of Lilly International; Jake Van Naarden, CEO of Loxo at Lilly; Mike Mason, President of Lilly Diabetes; and Patrik Jonsson, President of Lilly Immunology and Lilly USA. We're also joined by Mike Sprengnether, Kento Ueha and Lauren Zierke from the Investor Relations team. During this conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to several factors, including those listed on slide 3. Additional information concerning factors that could cause actual results to differ materially is contained in our latest Form 10-K and subsequent Forms 10-Q and 8-K filed with the Securities and Exchange Commission. The information we provide about our products and pipeline is for the benefit of the investment community. It's not intended to be promotional and is not sufficient for prescribing decisions. As we transition to our prepared remarks, please note that our commentary will focus on non-GAAP financial measures. Okay. Thanks, Joe. 2022 as a year of strong pipeline and commercial performance for Lilly. We delivered top and bottom line growth in 2022 despite the impact of the Alimta LOE in the US and significant FX headwinds and delivered another remarkable year of pipeline progress. We began 2023 with multiple updates to our late-stage pipeline. In our Q2 2022 earnings call last August, we announced the filing of submissions for two assets with the FDA under an accelerated approval pathway, pirtobrutinib in mantle cell lymphoma and donanemab in early symptomatic Alzheimer's disease. Last month, we received response from the FDA on both these assets. On January 19, we announced that the FDA issued a complete response letter for accelerated approval of donanemab due to the limited number of patients with at least 12 months of drug exposure. There were no other deficiencies cited. We will continue to work with the FDA to evaluate the best pathway to make this potential treatment option available to patients and look forward to results next quarter for the TRAILBLAZER-ALZ 2 Phase III confirmatory trial, which will form the basis of donanemab's application for traditional approval. We have consistently stated that, we would expect very limited uptake before CMS supports coverage. At the time we submitted for accelerated approval, we had hoped that there would be more movement from CMS to provide access to these medicines for people with Alzheimer's disease. Unfortunately, this has not yet materialized. We maintain conviction that given the impact of this devastating disease and significant unmet need, positive confirmatory data and FDA traditional approval should be sufficient to support global reimbursement and patient access necessary for broad use of donanemab over time. Also in the month of January, we received FDA approval for Jaypirca, the first and only non-covalent BTK inhibitor, for adults with relapsed or refractory mantle cell lymphoma after at least two lines of systemic therapy, including a BTK inhibitor. Jaypirca is a highly selective kinase inhibitor, is novel reversible binding mechanism and pharmacology may allow for extended targeting of the BTK pathway, following treatment with a covalent BTK inhibitor. We are pleased with the recent approval of Jaypirca and we remain confident in the long-term opportunity for donanemab. We also look forward to the potential launch of two of our immunology assets later this year with mirikizumab and lebrikizumab and of tirzepatide for obesity. This current wave of new launches along with the ongoing focus and progress in our next wave of R&D innovation underpins our long-term outlook to drive top-tier revenue growth and expand our margins over time. On slide 4 you can see the progress we've made on our strategic deliverables. Excluding revenue from COVID-19 antibodies, revenue on a constant currency basis grew 10% in Q4 and 5% for the full year. Volume in our core business, again, excluding COVID-19 antibodies, grew 13% in Q4 and 12% for the year. This volume-driven performance was attributed to our key growth products, which grew 21% last quarter. For pipeline milestones, in addition to the recent FDA approval of Jaypirca, we have shared several important updates since our Q3 earnings call. Positive Phase 3 readout and FDA and EMA acceptance of the regulatory submission for Jardiance for adults with chronic kidney disease, the initiation of a rolling submission in the US for tirzepatide in obesity, and FDA granting a Fast Track designation for tirzepatide in obstructive sleep apnea. We also continue to put our cash flow to work to create long-term value. In late January, we announced plans to invest an additional $450 million for expansion of our Research Triangle Park manufacturing site in North Carolina, to further augment our manufacturing capacity for the years ahead. On the business development front, we closed the acquisition of Akouos to expand our gene therapy capability and we entered into a strategic research collaborations with a focus on new modalities and technologies. Finally, we continue to return capital to investors. In Q4 we distributed nearly $900 million to shareholders via the dividend and we announced a 15% increase to the dividend for the fifth consecutive year. Moving to slide 5, you'll see a list of the key events since our Q3 earnings call, including several important regulatory, clinical, business development and ESG updates we are discussing today or that were discussed during our guidance call on December 13. One item I'd like to highlight is the collaboration we announced in December with EVA Pharma to deliver a sustainable supply of affordable high-quality insulin to at least one million people living with diabetes in low to middle-income countries, most of which are in Africa. This is an important collaboration with a local company to produce low quality -- or low-cost high-quality medicines. Strengthening capacity and building self-reliance for insulin manufacturing within the African region will provide a more sustainable supply in the long term. With this agreement, Lilly will sell insulin API to EVA Pharma at a significantly reduced price and provide pro-bono technology transfer to enable EVA to formulate fill and finish insulin vials and cartridges. We're proud to be a part of this novel arrangement, which aligns with our 30x30 goal of improving access to quality healthcare for 30 million people, living in limited resource settings annually by 2030. Thanks Dave. Slide 6 and 7 summarize financial performance in the fourth quarter and full year 2022. I'll focus my comments on non-GAAP performance. As Dave mentioned, we're pleased to report 10% growth for our core business in Q4 on a constant currency basis, driven by strong volume growth. A couple of notable items affected year-over-year comparisons. The first is COVID-19 antibody revenue in Q4 2022, which compared to the prior year declined 96% from approximately $1.1 billion in Q4 2021 to $38 million in Q4 2022. Biptimozumab is currently not authorized for emergency use in any US region and we continue to expect no COVID-19 antibody revenue for 2023. Second is the continued foreign exchange headwinds compared to 2021, which resulted in a 45-basis point dampening of revenue growth in Q4. Key growth products grew by 21% and accounted for 70% of our revenue this quarter. For the full year 2022, revenue excluding revenue from COVID-19 antibodies grew 2% or 5% on a constant currency basis. Our non-GAAP gross margin was 80.5% in Q4, an increase of approximately 440 basis points, primarily driven by lower sales of COVID-19 antibodies, partially offset by lower realized price and increased expenses due to inflation and logistics costs. Total operating expenses declined 1% in Q4, lower acquired IPR&D and development milestone charges were largely offset by higher marketing, selling, and administrative expenses and higher R&D expenses. Marketing, selling, and administrative expenses increased 3% in Q4, primarily driven by costs supporting the launch of new products and indications, partially offset by the favorable impact of foreign exchange rates. R&D expense for the quarter increased 5%, driven by higher development expenses for late-stage assets, partially offset by favorable impact of foreign exchange rates. Operating income declined 7% compared to Q4 2021, driven by lower revenue, partially offset by lower operating expenses. Operating margin for Q4 was 27.4%, which includes a negative impact of approximately 330 basis points attributed to acquired IPR&D and development milestone charges. Full year operating margin was 27.8% an increase from 26.8% in 2021. Our Q4 effective tax rate was 7.3%, bringing our full year 2022 effective tax rate to 10.3%. As we shared during our guidance call in December, we had assumed that the 2017 Tax Act provision for requiring capitalization, amortization of research, and development expenses for tax purposes would be deferred or repealed by Congress in late 2022. However, no legislative action was taken related to this provision, which resulted in a lower effective tax rate for 2022 versus the guidance range previously shared. In addition this provision did increase our tax payments in 2022 by approximately $1.2 billion. At the bottom-line earnings per share declined 4% in Q4 and increased 7% for the full year. On slide eight, we quantify the effect of price rate and volume on revenue growth across key geographies. This quarter US revenue declined 10%. Excluding revenue from COVID-19 antibodies, revenue grew 11% in the US. The swap volume-driven growth was led by Verzenio, Mounjaro, and Jardiance. Net price was flat in the US this quarter. For the full year, the net price decrease of 3% in the US was in line with our expectation. Moving to Europe. Revenue in Q4, increased 8% in constant currency driven primarily by volume growth for Jardiance Trulicity and Verzenio. We remain encouraged with the momentum of our business in Europe. In Japan, revenue in Q4 decreased 6% in constant currency. Revenue growth in Japan continues to be negatively impacted, albeit less so than in prior quarters by decreased demand for several products that have lost patent exclusivity including, the Alimta and Cymbalta. We expect to return to growth this year, as we scale key products and launch Mounjaro. In China, revenue grew 2% in constant currency, as continued volume growth was mostly offset by lower realized prices for Humalog, as a result of the volume-based procurement process and for products listed on the NRDL as well as by COVID-19 disruption. Revenue in the Rest of the World increased 11% in constant currency this quarter, driven by approximately $130 million of onetime revenue associated with the sales of the company's right to Alimta in Korea and Taiwan. As shown on Slide 9, our key growth products continue to drive robust worldwide volume growth, contributing 15% points of volume growth this quarter. As mentioned previously, the decline in COVID-19 antibody volume, was substantial in Q4 2022 and was largely offset -- and largely offset volume growth from key products. While we will face similar prior period headwinds from COVID-19 antibody revenue through the first three quarters of 2023, our long-term growth prospects are underpinned by our innovative pipeline and key growth products including Mounjaro. Slide 10, further highlights the contributions of our key growth products. This quarter these brands grew 21% or 27% in constant currency generated $5.1 billion in sales and made up 70% of our total revenue. While Lilly's incretins portfolio understandably generates high interest, we continue to see tremendous growth both in percentage and absolute terms, for other key products including Verzenio and Jardiance. Verzenio sales in the quarter grew 100%, driven mainly by the edge of an indication. Jardiance sales grew 42% and the product retains the leadership position, in a competitive market globally. Demand for our incretins portfolio remains strong both for Trulicity globally and Mounjaro in the US, and we remain focused on bringing additional capacity online to meet this robust demand in upcoming launches. In terms of supply, as mentioned in our guidance call in December, given strong demand for incretins products. There have been intermittent delays at wholesalers and pharmacies and receiving certain doses levels of Mounjaro and Trulicity in the US. We continue to update the FDA on the situation, and the FDA has been posting to his website details regarding affected doses and expected timing. To meet this rapidly growing demand across our incretins business, we have announced plans to add additional, substantial capacity in the years ahead. The most proximal of these efforts, is our RTP side North Carolina where progress continues as planned and we look forward to the start of production later this year. Moving to Slide 11. Mounjaro's strong launch uptake continues, underpinned by differentiated efficacy profile, and positive customer experiences. For Q4, approximately 75% of Mounjaro's new therapy starts, are patients new to the type 2 diabetes injectable incretins class and further 10% of switches from Trulicity. As we mentioned in our Q3 earnings call in early November, we took actions in Q4 to reinforce the intended use of the Mounjaro savings program, by type 2 diabetes patients. We indicated at that time that these actions could negatively impact new prescription volumes, but were not expected to impact net revenue. As anticipated, we believe the new prescription volumes beginning in late November were impacted by these actions with some week-by-week volatility driven by end of year seasonality. We continue to build payer access for Mounjaro for type 2 diabetes. As of January 1st AXIS [ph] stands just over 50% for patients with type 2 diabetes across commercial and Part D. Regarding the percentage of paid scripts. For Q4 we estimate the percentage of paid script from Mounjaro to be approximately 40% with paid script defined as those prescription outside the 25 non-covered co-pay cards, but inclusive of the 25 covered co-pay card. As we expand payer access, the proportion of paid scripts should continue to increase. On slide 12, we provide an update on capital allocation. In 2022, we invested $9.6 billion to drive future growth through a combination of R&D expenditures, business development outlays and capital investment. In addition, we returned approximately $3.5 billion to shareholders in dividends and repurchased $1.5 billion in stock. Our capital allocation priorities remain unchanged and are oriented towards achieving our strategic deliverables of top-tier revenue growth and speeding life changing medicines to patients. We do this through investments in our current portfolio to drive new launches, investment in our manufacturing capacity in our future innovation through R&D and business development. And we returned capital to shareholders through dividend payments and share repurchases. Slide 13 provides an updated 2023 financial guidance. The only change we've made from the guidance we provided in December is to update our effective tax rate, which result in an updated EPS range. During December guidance call, we shared that the effective tax rate for 2023 would be approximately 16% based on the assumed deferral or repeal of the tax provision requiring capitalization of R&D. Since this provision was not deferred or repealed in 2022 and given the uncertainty around if and when such action will take place in 2023, we have updated our tax rate from 16% to approximately 13%. This update to our effective tax rate results in new EPS range of $7.90 to $8.10 on a GAAP basis and $8.35 to $8.55 on a non-GAAP basis. Regarding FX rates there has been a general weakening of the dollar since we set our initial 2023 financial guidance last year. However, we're not adjusting guidance for FX changes at this time as we're only one month into the year and FX markets can be quite volatile. As I shared in December, the most significant headwind in revenue growth in 2023 versus 2022 will be the impact of COVID-19 antibody sales. This year-over-year comparisons will be most pronounced in Q1 2023 given that we had $1.5 billion of COVID-19 antibody sales in Q1 2022. To a lesser extent the loss of exclusivity of Alimta in the US in Q2 2022 will also impact year-over-year growth in the first half of 2023. Still the midpoint of our 2023 revenue guidance range represents roughly 7% of growth or 50% growth for our core business excluding COVID-19 antibodies. This year holds tremendous promise for us to help patients as we execute on the current wave of potential launches while maintaining our commitment to invest in and progress future innovation. We expect this ongoing focus on disciplined execution and investment will help drive top two revenue growth through 2030. Thanks Anat. 2022 was a really productive year for Lilly R&Ds. We advanced our late-stage assets of tirzepatide, donanemab, pirtobrutinib, mirikizumab and lebrikizumab to key regulatory submissions and we obtained the approval for Mounjaro. We launched Mounjaro for type 2 diabetes in mid-2022. As Dave shared, we received an approval last week for pirtobrutinib now known as Jaypirca. By the end of this year, we also have the potential to launch two new immunology assets with mirikizumab and lebrikizumab. And for ganitumab, we're looking forward to our Phase III readout mid-year, which if positive will form the basis of our submission for traditional approval. In 2022, we also gained clarity on the next wave of assets that have entered or will soon enter Phase III registrational trials. Those are our SERD in breast cancer, our weekly insulin for diabetes, remternetug in Alzheimer's disease and as shared in our December guidance call, we now have Orforglipron and Retatrutide in diabetes and obesity. Given the updates we provided in mid-December, today I'll just briefly highlight progress since our last earnings call. Slide 14 shows select pipeline opportunities as of January 30th and slides 15 and 16, show a recap of 2022 key events and potential key events for 2023. Starting with diabetes and cardiometabolic disease, in November, we shared results from the EMPA-KIDNEY Phase III trial, in collaboration with Boehringer Ingelheim, as the largest and broadest SGLT2 inhibitor trial in CKD to-date. The results showed a significant benefit of Jardiance, in reducing the relative risk of kidney disease progression or cardiovascular death by 28% compared with placebo in people with chronic kidney disease. The overall safety data were consistent with previous findings confirming the well-established safety profile of Jardiance. CKD is a leading cause of death worldwide, affecting over 850 million people globally and 37 million in the U.S. We've submitted to the FDA and EMA for approval and expect to make submissions to other regulatory agencies in the coming months. In January we started QWINT-1, a Phase III study comparing fixed dose escalation of Lilly's weekly insulin to Insulin Glargine, in insulin-naive type 2 diabetes patients. With this initiation all five studies in the QWINT Phase III program are now underway. Moving to earlier stage assets in our Diabetes and CV pipeline, in Q4 we advanced two assets into Phase II, that aim to lower Lp(a), a well-known risk factor for atherosclerotic cardiovascular disease. The first is an oral inhibitor, a small molecule that disrupts the interaction between the apoA protein and the lipoprotein particle and the second uses siRNA to disrupt the production of apoA in the liver. We shared proof-of-concept data on the siRNA asset during our December 2021 R&D Investor Meeting. This is our second siRNA asset to advance to Phase II, following our ANGPTL3 siRNA, which entered Phase II earlier in 2022. We also recently moved an siRNA asset targeting ApoC-III in cardiovascular disease into Phase I. Our genetic medicines portfolio is advancing and we remain optimistic about the prospect of improving cardiovascular outcomes with these molecules. Lastly, we discontinued our Phase I KHK inhibitor. In oncology, we're of course pleased with the recent approval of Jaypirca and we look forward to continuing the substantial ongoing development program for the molecule in the years ahead. Jaypirca is the second product approved from our 2019 Loxo Oncology acquisition, which reshaped our oncology efforts at Lilly. Loxo at Lilly's growing NME portfolio now includes a number of emerging assets shown in our pipeline, including our FGFR3 program which recently dosed its first patient. Also, in Q4, we dosed the first patient in EMBER-4, our second Phase III trial for imlunestrant, our oral SERD. EMBER-4 will study imlunestrant in the adjuvant setting. As a sequential monotherapy in patients who previously received two to five years of adjuvant endocrine therapy for ER-positive HER2-negative early breast cancer with increased risk of recurrence. Lastly turning to Verzenio. As noted in our guidance call at the San Antonio Breast Cancer Symposium in December, we shared the latest interim analysis for monarchE, our adjuvant high-risk early breast cancer study of abemaciclib in combination with endocrine therapy for the treatment of adult patients with HR-positive HER2-negative node positive early breast cancer at high risk of recurrence. We've now submitted an sNDA to the US FDA to potentially expand our adjuvant indication beyond the currently indicated Cohort 1 KI-67 greater than 20% population. In immunology, we're looking forward to potential FDA approvals later this year for mirikizumab in ulcerative colitis, which we expect in the first half of the year and lebrikizumab in atopic dermatitis, which we expect in the second half of the year. Looking earlier in our immunology pipeline, as mentioned in our guidance call, we presented exciting proof-of-concept results for our PD-1 agonist antibody peresolimab in rheumatoid arthritis at the ACR conference in November and we have now initiated a global dose-ranging Phase IIb study. Moving to neuroscience. We've advanced into Phase II our P2X7 inhibitor for chronic pain. Lilly acquired rights to this asset from Asahi Kasei Pharma in early 2021. With regards to donanemab. As Dave mentioned, the sole efficiency cited by the FDA to our submission for accelerated approval was a number of patients with at least 12 months of drug exposure. The Phase II TRAILBLAZER-ALZ trial on which the accelerated approval application was based, allowed patients to complete their course of treatment with donanemab when they reached a predefined level of amyloid plaque clearance. Due to the speed of plaque reduction that we saw, many patients were able to stop dosing as early as six months into treatment, resulting in fewer patients receiving 12 months or more of donanemab dosing. We remain confident in the potential donanemab as a new treatment for people with early symptomatic Alzheimer's disease and look forward to sharing results from the Phase III TRABLASER-ALZ-2 study in Q2 of this year. In summary, while 2022 was an outstanding year of pipeline progress, we're fully focused on the work we need to do in 2023 to make our next set of potential medicines a reality for patients. We look forward to providing additional updates throughout the year. Thanks Dan. Before we move to Q&A, let me summarize the progress we made during 2022. We delivered strong revenue growth in our core business, propelled by our key growth products. We launched Mounjaro for patients with type two diabetes, while advancing and expanding our development program for tirzepatide, including the start of the SURMOUNT-MMO outcome study and the initiation of a rolling submission for chronic weight management. In 2022, we submitted regulatory applications for important pipeline products like mirikizumab, pirtobrutinib and lebrikizumab. And in 2023, we've already received approval for Jaypirca and are poised to advance donanemab in the regulatory process assuming positive data from the TRAILBLAZER-ALZ-2 Phase III study. Finally, we returned $5 billion to shareholders via the dividend and share repurchases. And for the fifth consecutive year, announced a 15% dividend increase for 2023. With continued growth in Mounjaro and our key products, including Verzenio, Jardiance and Taltz, we expect our core business revenue to grow by mid-teens in 2023. We are energized by the launch opportunities before us this year and no strong launch execution is key to our long-term success. Taken together, we believe that we are well positioned to deliver top-tier revenue growth through at least 2030 and to deliver on Lilly's mission to make life better for people around the world. Thanks, Dave. We'd like to take questions from as many callers as possible and conclude our call in a timely manner. [Operator Instructions] Lois, please go ahead and provide the instructions for the Q&A session, and we're ready for the first caller. Hey good morning and thanks for taking the questions. Just first on Mounjaro. So, it looks like the net price dropped to gain in 3Q to 4Q. Can you just walk us through what specifically drove this, and just update us on how you expect this to trend over the course of the year? And then just maybe looking sort of out to the future of your obesity portfolio, beyond 4G [ph], do you have any interest in mechanisms that target the sort of the mitochondrion coupling side of the equation, that would be helpful. Thank you Thanks, Colin. We'll go to Mike for the first question on gross to net and price for Mounjaro and then hand over to Dan for kind of broader obesity mechanistic commentary. Mike? Yes. Thanks for the question. I think the best way to answer that is to take a look at what we saw as kind of our Mounjaro paid scripts in Q4 and then how we think that will progress over '23. In the fourth quarter, we classify about 40% of Mounjaro scripts as paid, which we defined as patients that aren't supported by our $25 non-coverage savings program. In our savings program, as we discussed at launch was designed to bridge people living with type 2 diabetes to access. As we discussed in the Q3 earnings call, we have adjusted a program to better ensure, it's being used for people living only with type 2 diabetes. These adjustments included removing our $25 non-covered benefit from our savings card for new patients. We didn't make any adjustments for existing patients who are seeing these cards are set to expire on June of this year, June 30. As expected, these changes have reduced new patient start volume, while increasing the percent of new patients with a history of diabetes treatments and the percent with formulary coverage. I think the way I would look at our savings program right now for new patients is that, we have graduated from the bridging program and now are kind of the type of savings program, really focused on covered patients that you would do in kind of a normalized cycle of a product. So thus we expect that Mounjaro's percent of paid scripts and a net revenue per script to increase through 2023, as we continue to increase access and grow new starts. We remain disciplined in our access discussions so we can maximize long-term value. From the start, our value our approach was to make sure that we capture value in the long-term versus the short term and we've remained very disciplined on that. We have just over 50% access for lives in Part D and commercial segments for people living with type 2 diabetes We're very pleased where we're at on the access front and where the way our contracting has turned out at this point. So hopefully that helps provide some color to our gross to net in Q4. Thanks. Thanks, Colin for your question on future mechanisms for treating obesity. I can assure you we're not done innovating on behalf of people with obesity. There's a lot we can still do. I think keep your eyes open for more to come from Lilly labs on incretins and related types of mechanisms, but also broadly interested in a variety of new non-incretins-based mechanisms. You specifically asked about one mitochondrial uncoupling but there are several others, I think that also have promise for patients. I just sort of put a note of caution though treating obesity we need to have a very high bar for the types of medicines we develop, remembering that this is a chronic often lifetime disease and highly prevalent population. We need medicines that first and foremost are extremely safe and really highly well tolerated for patients. So that's what we're looking for in future mechanisms. Great. Thanks very much. One follow-up on the last set of questions. Is it still reasonable to think about a net Mounjaro price that could be above that of Trulicity as we look out to 2024 or whenever you achieve kind of comparable payer access. And then my question was on donanemab. I know there wasn't a huge revenue opportunity tied to the accelerated approval. But I think you had talked about using that gap between accelerated approval and full approval to really ramp physician education and infrastructure, et cetera. How do you kind of manage through that now I guess where we're going to have maybe a full approval that could be occurring closer into a CMS decisions? So just maybe elaborate a bit on what that means for donanemab over time. Thank you. Thanks, Chris. All right. We'll go to Mike for the question about Mounjaro price kind of over time and how it might compare to Trulicity. And then to Anne on your donanemab question about activity that would occur to ramp up HCP education. Mike? Yes, thanks for the question. I can't get into roles about our net price for obvious reasons but maybe I'll address the question this way. I mean if you look at â when we have - when we reach â we think we'll reach broad access for Mounjaro and reach ultimately similar access levels that we have for Trulicity. There's nothing differently about how we'll promote or how to support patients on Mounjaro versus Trulicity. So at the end of the day it will come down to our net price negotiations with payers. We believe that Mounjaro has a better profile. We invest a lot of innovation in there. And we do believe that it should have a better net price than Trulicity. Yes. Thanks, Chris for the question on physician education and readiness. So as you said, the accelerate approval is not going to provide access for the vast majority of patients. So it doesn't impact us in that way. And obviously, accelerate approval would have made it maybe a little bit easier to do some of the things that we wanted to do, but there's still a great deal that we can do actually have been doing to make sure that the healthcare system is ready for these medicines. So we begin working on that, things such as developing the diagnostic ecosystem are incredibly important, making sure that there's better integrated Alzheimer's disease pathways to make sure that physicians can properly identify refer infuse these patients. So that's the area of focus right now. Certainly diagnostics are a key area of focus for Lilly. We've continued to expand our PET network to make sure that we're ready for patient diagnosis. And then as well we continue to be committed to PTAL blood tests and intend to launch that this year. So many things going on that I think can make us very ready for traditional approval and making sure that people can access these medicines. Great. Thanks for the question. So Dan, I wanted to ask you if you could talk a little bit about where you see the oral GLP-1 space developing and how your product is likely to be positioned. A little bit of this I think is also what you think the unmet need is outside of where the, sort of, very robust weight loss that we see from Mounjaro is. And then just an add-on to that how do you see the oral market developing in terms of other potential agonists? Is that something that Lilly is pursuing and hoping to further develop combinations there as well? Thanks. Thanks, Seamus. I'll get started. Maybe Mike wants to add on some of the marketplace questions. But clearly obesity is a huge problem in the US and around the world. I think 100 million Americans potentially with obesity and reaching one billion people around the world pretty soon. That's probably not a market that even all of the interested companies could address solely with injectables. So just given the scope of the problem around the world we're going to need orals. Ultimately it's our goal to have orals that can match the safety tolerability and efficacy of injectables. I think our oral GLP-1 is our first attempt in this space and has really good prospects for meeting that initial goal. But then noting of course that the injectables are going to get better over time and the orals will catch up as well. The second part of your question was how do the orals catch up. And I think you're sort of alluding to an obvious issue, which is right now our oral GLP-1 and other orals in the space are single mechanism, single incretin agonists. I think, we've seen with great drugs like Trulicity and competitive products what single agonist against GLP-1 can achieve. It's not as good, I think, as what can be achieved with dual agonism for tirzepatide or hopefully even triple agonism with GGG. And so you can bet, we're working on oral solutions that can bring additional incretin activity to patients in a pill. Nothing ready to disclose today but we're working hard. Good morning, guys. Thanks for the question. I have two related ones on tirzepatide. Dan I know you have SURMOUNT-4 coming up which is the maintenance study but how has your thinking evolved if at all on the potential duration of tirzepatide use either based on longer exposure from clinical studies or in the real world? And do you think that could inform payer discussions. And then Mike on Mounjaro a moving target, but how does the prescriber base as of today compare with Trulicity. I'm trying to get a sense for maybe the endocrinology versus primary care mix and utilization in obesity? Thank you. Great. Thank you, Geoff. So we'll go to Dan for the question on SURMOUNT-4 and duration of tirzepatide and then to Mike on the question of how the prescriber base from Mounjaro compares to Trulicity. Yes. Sure. As I was just saying I mean obesity is clearly a chronic often lifetime disease. And for such diseases patients often need to take therapy for chronically -- potentially life of the disease here. A lot of times in medicine that doesn't happen of course, people come off of therapies, because either the therapy is working, and they think they don't need anymore or there's a benefit they can't see. I'm not sure either of those are the case for a drug like tirzepatide. People clearly can observe the benefits that the drug is having on their health. And perhaps unfortunately, but not different really than any other drug that we have for any other disease. When you stop taking the drug, it's likely that it can no longer work, and patients may see that as well. So I think those factors will combine to have a pretty long duration of therapy. We have to wait and see in the marketplace maybe Mike has some early signals from patients, but still pretty early on. Anything there, Mike? Yes, no hard data yet on that. But qualitatively what we hear is what patients who've used Mounjaro, what they like and what they realize once they start using it is that it really does reduce the appetite, and they enjoy the benefits of reducing appetite. It helps them lose their -- lose weight and stop being as consumed as much during today about 80%. And we do know that when -- what we heard from our investigators and our studies is that when people stop taking Mounjaro that their appetite goes back to the level, it was before. So that's something very noticeable something that a patient values from taking the therapy and then when they stop the therapy, they then see this reversed. And so we do believe that people are going to stop, and see if they can lose weight if they can great. But I do think that they're going to see a very powerful signal very quickly to reinforce going back on the product. So I do think that will help reinforce the chronic use of tirzepatide for type two diabetes, and eventually for obesity if we get approved. The question on Trulicity. Mounjaro if you look at Mounjaro's use right now and compare it to how many customers are using that versus Trulicity at this time, it's a lot broader population than we saw with Trulicity is because the market is a lot bigger a lot more people are riding the treatment. If you compare Mounjaro to the number of Trulicity riders today there are more people riding Trulicity just, because it's been on the market longer. They've gone through the adoption curve and Trulicity has better access, access and especially in Medicaid that drives additional prescribers to use that. So overall I'd say the Mounjaro is within the universe of the doctors who write Trulicity at this point. Thank you. I have a question on donanemab. I'm wondering if Lilly would agree that there is highly likely going to be higher area E and area H rates with your drug versus lecanemab when TRAILBLAZER-ALZ 2 reports out. The prior data would certainly suggest that. If so, relative to lecanemab, doesn't that create a potential risk benefit conundrum for FDA assuming efficacy comes in around the same levels. I guess the bottom line here is there a regulatory concern to contemplate maybe this is why FDA issued the CRL they want to see the full results from your second study. You don't just want to capture a few more patients to bring that total to 100, or am I being too bearish here? Thank you. Yeah. Maybe I'll answer the second part of the question first, which is around, why did the FDA issue the CRL. I think that the FDA regulations actually suggest that FDA should list all deficiencies in the CRL. We were pretty explicit copying some of the FDA's own words here to investors about what was in the CRL. It didn't discuss issues like ARIA it was focused on the 12-month exposure. So nothing further to speculate there. I think your question on rates of ARIA-E and ARIA-H comparing across drugs is a complicated one. We did this head-to-head study against aducanumab. I think it's important to use studies like that to compare rates of ARIA, because we've learned that grades of ARIA are highly dependent on the type of patients who enroll the stage of disease and underlying pathology, baseline characteristics of their brain scans, which are different across lecanemab trials and genetimib trials, as well as exactly how you do the MRIs and read them. So I'm personally not going to get worked up about rates of asymptomatic radiographic-only ARIA in any drug. I don't think anyone really understands what that means. What we should be focused on though is rates of symptomatic ARIA. So patients who have ARIA that turns into something they experience, not just a radiographic binding and particularly rates of serious adverse events resulting ARIA. We know that in some patients ARIA can be dangerous even fatal as we've seen from lecanemab experiences. So that's what we'll be looking out for. I think we still have all the caveats about cross-trial comparisons here, but it's a bit easier to compare those symptomatic or serious events. I think in TRAILBLAZER-1 our numbers were very similar to other members of the class. In TRAILBLAZER-4, the numbers look very, very good for that. And we'll wait and see what we have in TRAILBLAZER-2. The level of concern over that is not high. Hi. Thanks so much for taking the question. Maybe a two part one for me. I guess first on Mounjaro manufacturing. I was just wondering if you can tell us if the FDA has completed the inspection of your new North Carolina facility yet. And then the other question relates to tirzepatide for obesity. I was wondering if you've had any initial payer conversations yet, and if you're planning to use a priority review voucher for that filing? Thank you. Thanks, Terence. I think I'll hand over to Anat for commentary on your manufacturing question and then to Mike on the question about whether there's been any payer conversations on obesity. Terence, to your question on the RTP side North Carolina, it's progressing on schedule as we had planned. We can't comment on specifics on the FDA interactions, but we're expecting that site to start producing this year and it's progressing towards that goal. I will mention important to think about -- when we talk about RTP, I think because of the proximal nature of when this site is going to come online. Obviously, this is the next large node that's going to come online in terms of capacity for incretins portfolio. But we are making substantial investments beyond RTP. So, we've announced a second site in North Carolina, very large site in Concord, when we've announced the expansion of the RTP site additional sites in India â or north of Indianapolis and a site in Ireland. And as we look at our capital investments in manufacturing sites this year alone, it's probably the largest we've ever had doubling what we had in 2022. We're looking at about $3.3 billion of investment just this year. So we're looking at substantial expansion of capacity really across the globe to support not just Mounjaro obviously, but the rest of the portfolio and we have visibility into what's coming as well as the fact that, as we've talked about before we have several products that are part of the same manufacturing network, and the same auto-injector platform. So that helps us kind of build that capacity across the Lilly portfolio. Yeah. I think a good thing to focus on is access and obesity. I mean you look at the massive size of the obesity market 110 million people in the US, 650 million people globally but you really see that the historically that the obesity market has really been slow to develop. And it's really because the treatments haven't been adequate. So, the kind of â the question we had going into this market, was if a safe and efficacious treatment was developed would consumers and health care professionals and payers be interested in using it? Well, based on what we've seen in the marketplace over the past year and on a market research it's clear that consumers and health care professionals will adopt an efficacious safe anti-obesity medication if patients can have access to it. So it does come down to payer access, and we're highly focused on doing that. Noble recently stated in their call that 40 million Americans have access to obesity and the way, they talked about it what's payer access and employers opting into that. So if that's where we're at today that would be a great starting point for access. We're deep into conversations with payers to understand the market and all that. Access discussions haven't started yet, but will shortly. But our focus long term is to improve access for diabetes medications. We are investing significantly to demonstrate the potential health outcome benefits, where people using tirzepatide, who live with obesity. We're also investing in Phase III programs for people, who live with obesity and sleep apnea, or heart failure and they should unlock large segments access for people who live with obesity in commercial and we hope Part D. In addition, in my career, I've seen the power of consumer interest in helping to improve access for medication. And what we've seen over the last year is that, people who live with obesity are highly engaged and willing to do much access effective treatments. They will have an important walls with employers and the congressional representative advocate for access. So, while I think it will take time to establish our ultimate actions goal, I'm more encouraged than ever are potential unlock the obesity market and help a lot of people. So I'm encouraged, but obviously a lot of work still to be done. Thank you. A question for Anat. I'm not going to get the legislative particulars correct. But just to be clear, doesn't Lilly typically guide on tax rate assuming an adverse US situation and doesn't typically adjust that until late in the year. And this year it is assuming no adverse situation but much earlier in the year? If so, can you clarify why you were doing something different this year since it is a profound impact on earnings? And if I could just add on LPA, Dave, Lilly is way behind, how can you catch up? Thank you. Thanks Steve. I'll go to Anat for the question on the tax rate assumptions, and then I'll go to Dan for your LP little a question. Thanks Steve. So here is how we look at this and I wouldn't read too much into it. Last year we had assumed based on very broad support for change in this 2017 tax provision, that this will in fact be enacted by Congress. We assumed late in the year, but it hasn't happened. So at this point, the only thing we're doing is reflecting reality of the situation we're in. If it does get repealed or deferred, obviously, we'll update accordingly. I don't think the likelihood of that is zero. So it still could happen this year, but it does take Congress -- Congress will need to add to get this going. So we're simply reflecting the current situation. Okay. I'll start with the LP little a question. We have two LP little a programs, so maybe the easiest one to comment on first is the oral program. This is a first-in-class I think, probably the only one in clinic here. An oral medication against this target is really a huge feat of molecular engineering. I'm super excited to see the data from this molecule developed and obviously, the market opportunity for an oral drug for such a widespread condition is very important. In terms of the siRNA, you're right to note that a competitor is ahead of us and really just starting the CVOT study. It's a long road to get these drugs to market with outcome studies are needed here to show the benefit. I probably don't get into our differentiation strategy. But, of course, we have some ideas here and we'll move as quickly as possible. I don't see this as a winner take all space. Maybe just to add -- Steve add on the LP little a comment. I think we feel good about where we are with that. But just on the tax thing, there is a difference here where you described it as adverse or beneficial, right? From a GAAP and non-GAAP accounting, of course, it's a benefit on EPS growth. But actually from a cash perspective, it goes the other way. So we just wanted to be clear upfront, because it's not a one-way benefit we're taking early in the year. There's an adverse cash impact throughout the year and a positive effect on the P&L. It's a little bit different from maybe past assumptions we've made. Hi. Thanks for taking my question. So I wanted to ask you, what do you think is the minimum amount of relative risk reduction you'd have to see in an outcome study for obesity for payers to be convinced that there's something here? Thank you. Thanks Louise. Mike, do you want to chime in on that around the minimum amount of relative risk reduction we'd expect in an outcome study for obesity? Yes. That's a good question. I mean first of all, I don't think it's a binary point where all payers are looking for that outcome in order to provide access. I think you're going to see a lot of payers you already see a lot of payers who can provide access for that. And we have an extensive Phase 3 program only in CV outcomes but also the sleep apnea and heart failure to begin to really talk about heart outcomes for many patients who live with obesity. With the CV outcomes that we have today, I mean we're quite confident in our program and based on what we see with surrogate risk reduction and blood pressure and lipids, we're fairly confident in our CV profile as well as what we saw with the SURPASS data and our meta-analysis in the SURPASS program. So I won't give you the exact number, but I think we're pleased with where we're at. And I think we'll be able to demonstrate outcomes that payers will be excited about. Thank you. If I can ask a question on Mounjaro and the interplay with Trulicity. You've commented in the past that in terms of patients on Mounjaro, it has been about less than 10%. That seems to be a little bit higher now. Can you share any thoughts and observations about how you see this progressing on the forward through this year? Thanks Chris for the question. Mike, we'll go to you for that question on the, I guess cannibalization from Trulicity figure and how that will progress. Okay. Yeah, I mean on that nothing has changed over what we had talked about earlier that less than 10% of our scripts we get four Mounjaro comfort Trulicity. That hasn't changed over time. It's still a little bit less than 10%. Hi guys. Thanks for taking my question. There's been a heightened investor focus I feel along the Phase III primary endpoint for donanemab now. And I wonder if there's been any incremental interactions and/or agreement with FDA on the primary endpoint for Phase III. The question I get a lot from investors. And also how are you thinking about this upcoming Phase III? If there were to be a scenario where the MMRM on CDR doesn't agree with ADAS on a patient analysis? Thank you. Yeah. Thanks. Clearly I think there's a lot we can learn from competitor readouts here. And so looking at lecanemab data in our eyes, I think it actually further validates an endpoint like ADAS. If you just look at the forest bot for example there's a lot more homogeneity in effect on an endpoint like ADAS versus CDR Sum of Boxes. So we feel more confident I would say than ever before that endpoint like that is the right way to go. On the other hand I think the -- you could take the position that since lecanemab hit CDR Sum of Boxes people might say, well then it's achievable and you guys should do it too. So there's some pushes and some takes there. But on the whole still feeling good about ADAS as a primary outcome. When you ask though what happens if you hit one outcome and not the other. That's surely a difficult situation to be in. We want to understand why that happened. If that were to happen where the irregularities in CDR Sum of Boxes that could explain it what did the rest of the secondaries look like. Always best to hit all of your outcomes in a clinical trial. Feeling that you want to hit your primary in as many secondaries as possible. So let's wait and see. Great. Thank you very much for taking my question. Maybe a question regarding your next-generation Alzheimer's drug. I cannot pronounce the name remternetug I'll learn it. But how does it differ or similar versus donanemab? Asking -- because I mean you're running a Phase III trial with subcu here. So what would be the read through for this particular asset based on the outcome of donanemab Phase III trial? Yes. I think ,you've got it basically, right. Remternetug is a new medicine, a new molecule, but it's an antibody against the same type of epitope that donanemab has which is this N3pG form of a beta. So a very equivalent mechanism of action. Maybe a little better potency and certainly better drug properties including, no ADAs and formulation things. So the rationale here is to give improved dosing options to patients. Could we get even faster plaque clearance, could it be with fewer doses, could it be subcutaneous. Those are the types of things, that we're currently exploring. The Phase III is designed with a bit of a run-in, were in that portion right now to finalize our dosing strategy and then expand it. Obviously, if donanemab is disappointing there would be read-through remternetug. On the other hand, if donanemab exceeds expectations, I would expect that to read through as well. Hi, guys. Thank you so much for taking the questions. While much of the discussion on Medicare coverage in Alzheimer's, we know that Medicare really doesn't pay for obesity drugs. Can you just talk about your efforts to help Medicare patients get coverage for obesity drugs including, potentially Mounjaro if approved. Maybe add some parameters around, what that additional population could look like from a revenue opportunity perspective. Thank you. Thanks, Evan for the question. I'll hand over to Mike. Mike, do you want to talk about the potential for Medicare to cover obesity? Okay. Sure. Yes, good question. I mean, it's going to take less late action in order to allow diabetes medications to be covered on Medicare Part D. So there is the Treat and Reduce Obesity Act. The acronym for that is TROA. And there's a large growing bipartisan support for TROA, a little over 100 congressmen, senators, people senators are behind the program. And it's growing more and more support across Washington. We're eager to see an advanced list process. It would be great for the company country. America needs to take action and drastic reduce the number of people in the DC and this oscillation would be an important step for this goal. We'll support the translation and continue to work, to advocate for it. Thanks for squeezing me in. Iâm Trung Huynh from CrÃ©dit Suisse. Last month the American Academy of Pediatrics released their guidelines to treat childhood obesity. In those guidelines, they recommended a lifestyle intervention obviously, is the core component. But also they said, they would consider treatment with anti-obesity medications. So I thought, what's your thoughts on anti-obesity medications in children? Is this a scenario that you are moving into or considering moving into? Do you have any trials with children or adolescents? Thank you. Yes. Thanks. I mean this is a significant unmet need. Back to the question that we asked earlier about the Treat Reduce Obesity Act. We need to prove the health of America. We have too many people who live with obesity in the US and that includes unfortunately adolescents and feeds. So, I think they took the right action in order to really identify this as an issue that healthcare professionals do need to pay close attention to. We obviously always advocate for diet and exercise is the first approach of this. But if that's not successful then you really only option at that point is medication treatment. We do think it's important and responsible for us to test the appetite in feed and adolescents and we have activity ongoing to do that. Great. Thank you for taking the question. I guess one for Anat. Back in December, you highlighted austerity measures in Europe as a potential risk. At that time that was a bit of a unique position. We hadn't heard that from many companies since that time. We've heard kind of similar messaging from some but not all. And apologies if I missed it I don't think I heard anything today on this front. So, I know it's only been sort of 45 days or so since you made those comments, but any advances in sort of how you're thinking about this? And any specific products or countries we should think about that impact? Thank you. Thanks Carter for the question. I'm actually going to hand this over to Ilya Yuffa, who's our President of Lilly International to comment on the European austerity measures. Yes, I appreciate the question. There have been a number of markets in Europe that have taken some austerity measures, partially due to Ukraine crisis and energy crisis and inflation in Europe. We have seen Germany, France, obviously, the UK, voluntary system we think is broken and so we exited that. And so we -- there are some austerity measures in there. We've contemplated that into our guidance for 2023. And the overall impact is modest relative to historical declines in price in prior years. We expect that to continue to be in that mid-single-digit decline in price in Europe. Thank you. A question on US commercial access for GLP-1 agonist. First, could you share with us how you're thinking about modeling the impact of the IRA in terms of GLP-1 uptake increasing as a result of the co-pay cap? And additionally benefiting from the reduction in free drug program. How significant is it given the patients still got to find $2,000 per annum? And then second, in relation to the oral DPP-4 market which is still a very, very substantial $14 billion market. You have a category of drugs extensively which may offer considerable advantages in efficacy for glycemia and white. But I'm reminded of the stickiness of the [indiscernible] in the prior period. To what extent do you think managed market is going to preclude your ability to penetrate that segment with oral GLP-1s just on the basis of generic DPP-4s? thank you. Thanks, Andrew for the wide-ranging question on diabetes. I'll hand over to Mike first to talk about your question regarding potential impact of the IRA on access for GLP-1. And then the second question around how oral GLP might fit in given the stickiness of some of the older diabetes medications. Mike? Yes. Good questions. On the IRA side of it, it will benefit patients who live with diabetes who use GLPs and are Medicare Part D the outpace cost will go down. We have I would say a small or moderate impact on GLP sales or just probably lower rates of abandonment than what we'd see at higher out-of-pocket costs. As it comes to the oral DPP4 the perceptions of oral DPP-4 have really declined over the last five years and really being replaced by ST2s and GLP lose. So I don't see much of an impact of DPP-4s going off path in the US or other markets. Thanks, Mike. And Lois, I think we have one final question in the queue. So let's go to the last question. Great. Thanks for taking my question. I was just thinking more about some of the launches that are coming up but I know the maybe a little bit out. But for Mirikizumab and I always get this wrong, sorry. But for UC, can you just talk a little bit about given how much promotion there's been for [indiscernible] as you move into also Crohn's with data reading out soon. Like how do you see like competing in that market? Can you start launching? Do you have to be DTC heavy because it seems like they're very prominent. Like what about the launch dynamics. And then second for lebrikizumab the same question here. Atopic dermatitis is getting pretty crowded. What kind of pushes and pulls might you need to use to get quicker uptake in atopic derm? Thanks. Thanks, Robyn for the questions. I will go to Patrick Johnson for both of these first on mirikizumab and competition in the UC market and then on lebrikizumab. Patrick? Thank you very much. Well, overall we feel very good with the data we have seen on mirikizumab. If we look at the 52 weeks, we have more than 50% clinical remission and we see statistical and clinically meaningful improvements across both clinical, symptomatic, endoscopic and histologic endpoints. What I think is important that if you look at the patient populations with ulcerative colitis, we saw the same results across the bionaive and the bio failure patients. So I think we're extremely well positioned for the launch here. We also demonstrated on a factor but it's extremely important for patients or agency. More than 40% of patients were either completely or almost our urgency at week 52. So therefore, we believe we have a first-in-class asset here that probably initially will be used mainly second line for those that haven't responded appropriately to TNFs and similar. But we believe that long-term, we are positioned for a first-line placement in treatment of ulcerative colitis. And yes, so the outlook for mirikizumab. It's exciting from a competitive landscape perspective, we don't have bad to have data. But if we compare the data we have seen so far, we believe that mirikizumab compares very favorable both versus what's currently in the marketplace as well as what's in the pipeline with other companies across JAK inhibitors S1Ps and other IL-23s as well. So exciting to launch mirikizumab the first half of this year. When it comes to lebri, I think actually, we are uniquely positioned to really upgrade the expected outcomes of patients with atopic dermatitis. We have here an asset that is actually targeting the most relevant cytokine when it comes to treating atopic dermatitis, IL-13 and it does that with a high binding affinity, high potency and a slow off rate. And I think that probably explains the data that we have seen so far. We're extremely pleased with the Phase III data, and we sold more than 80% of patients achieving skin clearance at Week 16, maintaining that at Week 52, but also very importantly, statistical and clinically meaningful improvements across both each, which is probably the most disturbing factor for patients with atopic dermatitis, sleep and quality of life. And we saw similar results across both the Q2W and Q4W formulation. We actually believe that lebrikizumab has the potential to become a first-line biologic. It's important to have in mind that we announced the submission at the Q3 earnings call, and we expect that traditional regulatory pathway. Yes, we will not launch until most likely Q4 of 2023. But a lot of excitement from both health care providers and tier community as well on the payers to get leverage to the market. Great. I think that's the last question. I appreciate the questions across the portfolio. And we appreciate your participation in today's earnings call and your interest in our company. 2022 was another productive year for the company, and we generated strong financial results and delivered important pipeline progress in each of our core therapeutic areas on behalf of the patients we serve. We aim to continue our momentum in 2023 and execute on the meaningful launch and pipeline opportunities that we have ahead of us. So thanks for dialing in, and please follow up with IR, if you have questions that we didn't get to you today. Have a great day. Thank you. And ladies and gentlemen, this does conclude our conference for today. And this conference will be made available for replay beginning at 1:00 today, running through February 9 at midnight, and you may access the AT&T replay system at any time by dialing 866-207-1041 and entering the access code 4283950. International dialers can call 402-970-0847. Again those numbers are 1866-207-1041 and 402-970-0847 with the access code 4283950. And that does conclude our conference for today. Thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.
EarningCall_543	Good morning everyone and thank you for joining todayâs conference call to discuss Daseke's Financial Results for the Fourth Quarter and Full Year Ended December 31, 2022. With us today are Jonathan Shepko, CEO and Board member; Aaron Coley, EVP and CFO; Adrianne Griffin, VP of Investor Relations and Treasurer; and Traci Graham, VP of FP&A and Business Analytics. After their prepared remarks, the management team will take your questions. As a reminder, you may now download the PDF of the presentation slides that will accompany the remarks made on today's conference call as indicated in the press release issued earlier today. You may access these slides in the Investor Relations section of Dasekeâs website. I would like to turn the call over to Adrianne Griffin, who will read the Company's Safe Harbor Statement that provides important cautions regarding forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Adrianne, please go ahead. Thank you Michelle and good morning everyone. Please turn to Slide 2 for a review of our Safe Harbor and non-GAAP statements. Today's presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Projected financial information, including our guidance outlook, are forward-looking statements. Forward-looking statements, including those with respect to revenues, earnings, performance, strategies, prospects and other aspects of Daseke's business are based on management's current estimates, projections, and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. I would also like to highlight our decision to update our reporting segment results. Previously the company had disclosed a corporate segment which is not an operating segment and included acquisition transaction expenses, corporate salaries, interest expense, and other corporate administrative expenses and intersegment eliminations. Beginning with the fourth quarter of 2022 we began eliminating intersegment revenue and expenses at the segment level and allocating corporate costs to our two reportable segments based upon respective segment revenue. All financial information discussed and included in our materials aligns with the new allocations and eliminations. I encourage you to read our filings with the Securities and Exchange Commission for a discussion of the risks that can affect our business and not to place any undue reliance on any forward-looking statements. We undertake no obligation to revise our forward-looking statements to reflect events or circumstances occurring after today, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. During the call, there will also be a discussion of some items that do not conform to the U.S. generally accepted accounting principles or GAAP, including and not limited to adjusted EBITDA, adjusted operating ratio, adjusted operating income, adjusted net income or loss, free cash flow and net debt. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the appendix of the investor presentation and press release issued this morning, both of which are available in the Investors tab of the Daseke website, www.daseke.com. In terms of the structure of our call today, I will start by turning the call over to Jonathan, who will review our business operations and the progress we are making as we execute against our strategic priorities and then Aaron who will provide a financial review of the fourth quarter and full year 2022. And Jonathan will then speak about our 2023 outlook and wrap up our remarks with a few closing comments before we open the line for your questions. With that, I'll turn the call over. Jonathan. Thank you. Good morning, everyone. I'd like to start the call today by welcoming Adrianne to the team. She joins us as the Vice President of Investor Relations and Treasurer. And we are pleased to have her focus on further elevating our IR and Treasury functions. I would also like to thank each of the Daseke team members and especially acknowledge the disciplined commitment of our professional driver community. It's due to the collective effort of Team Daseke that we will today report our company's third consecutive year of record adjusted EBITDA. I'd like to spend just a moment on this Slide 3, whether you are a long time holder of Daseke or new to our story, given the amount of change we have successfully affected over the last years, we thought it made sense to provide a snapshot slide to help everyone appreciate who we are today. As mentioned, 2022 was yet another record year for our company, both in total revenue and adjusted EBITDA. This performance is a noteworthy [indiscernible] our progress and highlights the continued earnings potential of our business as demonstrated by comparing this past year's record adjusted EBITDA of 234.9 million, which was generated during the peak rate environment of the current cycle to the last cycle of peak rates since 2018, where an EBITDA was approximately $60 million less at 174.3 million. This is a peak to peak improvement of nearly 35% and was generated by a 2022 fleet that was 16% leaner than our 2018 fleet before we began to work on an issue to prove our asset utilization. With that as your backdrop, I'd like to move this slide forward where I will share some of our 2022 accomplishments that set the stage for our 2023 outlook. In 2022 we delivered solid revenue growth and posted our third consecutive year of record adjusted EBITDA. We executed a meaningful, transformational share repurchase from our founder, which was accretive and removed -- the perceived overhang on our stock given the percentage of the company the founders ownership represented. We affirmed our ongoing commitment to enhance the strength of our balance sheet through accelerated deleveraging. We have been vocal about the resiliency of our operating model one that is unquestionably different from any other publicly traded transportation and logistics peer. A blend of asset light asset based capabilities exclusively serving the industrial economy with strong diversification by end market and sub vertical. And through a combination of transformation initiatives and strengthening macro environment, we believe we are well positioned to outperform when the cycle doesn't flex. If you will turn with me to Slide 5, I'd like to discuss our fourth quarter 2022 share repurchases. On September 30th, we announced the $40 million share repurchase plan, alternately purchasing over 803,000 shares under this plan at a weighted average price of $6.05. Before starting this plan with the announcement of a founder share repurchase on November 14th. We subsequently closed on the founder share repurchase repurchasing all shares then held by Dasekeâs founder through negotiated terms very favorable to our company and common shareholders. In total we purchased nearly 30% of our then issued and outstanding common shares funded with 45 million of cash on hand and the issuance of Series B perpetual redeemable preferred stock. I'll note that the Series B preferred already is our sole option in whole or in part for 67.6 million plus any accrued and unpaid dividend. If Series B preferred are not convertible and have no affirmative or native comments. As is outlined in this slide, these transactions were immediately and significantly accretive based upon adjusted Pro Forma EPS of $1.52 for full year 2022. Simply put, this repurchase will provide one of the most profound uplifts for our shareholders in the coming years, providing exponential growth opportunity as our consistent performance and strategic execution gives rise to a more aptly valued share price. And while the allocation of capital and support of this buyback fits squarely within our shareholder value creation framework, with our focus now on delevering, the company has no intention to repurchase any additional stock in the foreseeable future. With that, I will now hand the call over to Aaron who will provide a more detailed walkthrough of our fourth quarter and full year. Aaron. Thank you, Jonathan and good morning everyone. I would like to start with Slide 6, which represents a high level review of our consolidated results for the quarter. Once again, our resilient business model facilitated growth as we delivered quarterly revenue of 408.2 million, up 3.5% or 13.9 million compared to revenue of 394.3 million in the fourth quarter of 2021. This included demand strength on high security cargo and the agriculture end markets, which were partially offset by declines primarily in the steel end market and renewable energy vertical, plus contributions from a tuck-in acquisition completed early in 2022. Compared to the fourth quarter of 2021, our adjusted operating ratio declined as inflation increased our total expenses faster than revenue. The cost increases came primarily from salaries, wages and benefits and operations and maintenance expense. And while we achieved year-over-year improvement in our rate per mile, we also realized a reduction in miles per tractor. That said, we're very focused on consistently improving operating ratio by driving operational excellence and strategic execution. In the quarter, we delivered adjusted EBITDA of 49.6 million equal to the fourth quarter of 2021. Now turning to Slide 7. Specialized solutions revenues were 242.9 million, up 10.9% versus the prior year as our team performed very well in shifting asset capacity to end markets with strength including high security cargo, agriculture, and aerospace, which was more than offset by moderating demand in construction end markets and the renewable energy vertical. Furthermore, segment rate per mile was strong at $3.50, an improvement over the prior year as our teams capitalized on demand growth with our asset-light fleet mix delivering a 2% increase in company miles. Specialized functions adjusted operating ratio improved 110 basis points to 91.8%. All adjusted EBITDA improved 19.1% to 32.4 million. Productivity in the quarter was impacted by shorter length of haul loads in high security cargo and a soft decline in total miles per tractor per day that was magnified by the recent receipt of new tractors near the end of the year. We expect a rebound in our miles per tractor per day productivity as seasonality and new equipment deliveries normalize. On Slide 8, we outlined Flatbed Solutions segment results. Despite the first year-over-year decrease in flatbed market rates since the pandemic, Daseke was still able to garner a premium rate compared to the market. As shown in the top right chart on the slide, declining rates and cooling demand entered the steel end market, partially offset demand growth in manufacturing, construction, and the agriculture end markets resulted in a revenue decline of 5.7% to 165.3 million. The use of our asset right model in this segment enabled us to focus on company asset utilization which traded lower loading, higher margin freight on the company assets from brokerage revenues which decreased. Lower revenue and cost inflation, primarily in operations and maintenance resulted in this segments adjusted operating ratio increasing to 95.9% from 91.8% in the prior year and adjusted EBITDA of 17.2 million which was 23.2% lower than the prior year period. Now moving to Slide 9, in 2022 we achieved a consolidated record revenue of 1.8 billion representing a 13.9% improvement over the prior year, driven particularly by strength in our high security cargo end market which grew at nearly 50% over 2021. As well as growth in agriculture, manufacturing, construction, and aerospace, partially offset by declines in the renewable energy vertical and the steel end market. We also achieved increases of 10.5% in the rate per mile and 5.4% in revenue per tractor over 2021. In 2022, we reported income from operations of 98.4 million compared with 112.8 million in 2022. However, in 2022 we had incremental insurance and claims expense of 15.4 million, a 9.4 million non-cash impairment expense resulting from integration and elimination of trade names, 3.8 million in acquisition related expenses, and 2.1 million restructuring expenses as compared to fiscal year 2021. Adjusting for all of these expenses, income from operations would have exceeded 2021. The adjusted operating ratio was 91.6% in 2022, an increase from the 90.9% in 2021. Though we continue to experience inflationary pressures that built across the year primarily in salaries, wages and benefits, as well as operations and maintenance, we're able to offset some of these headwinds on our operating ratio by shifting rate to higher margin company assets and redirecting assets to the most profitable lines. The Daseke team delivered commercial execution in our flexible asset light strategy to deliver value to our shareholders and we set an adjusted EBITDA record of 234.9 million suppressing the previous record of 223.1 million set last year. We're very proud of the entire Daseke team for achieving this record as it shows the agility and resiliency of our team and our operating model. Let's look now at the segments on a full year basis starting with specialized solutions on Slide 10. Segment revenue grew 15.9% to just $1 billion and accounted for nearly 65% of the company's total revenue growth. This success was based on strong demand in high security cargo, agriculture, manufacturing, and construction end markets. Robust commercial execution using all aspects of our asset light strategy to deliver profitable growth and contributions from tuck in acquisition modestly offset by demanding degradation in the renewable energy vertical. We're pleased to report 12.1% increase in the rate per mile and an 8.4% increase in revenue per tractor versus full year 2021, essentially flat company miles compared to 2021. Furthermore, adjusted operating ratio improved by 30 basis points to 90.8 versus full year 2022 and adjusted EBITDA increased 11.5% to 141.2 million versus the prior year due to strong revenue growth. Wrapping up the segment discussion on a full year basis, we look at Slide 11 for Flatbed Solutions for full year 2022. Flatbed Solutions year was predicated on their ability to capture attractive rate in strong end markets and from softer end markets and pivoting from softer end markets to company owned assets which when circumstances necessitated. Segment revenue was up 11.4% year-over-year to 769 million as gains primarily in construction, manufacturing, and agriculture end markets outpaced the decline in the steel end market. Compared to 2021 second rate per mile increased 7.5% though total miles declined to 8.5% and overall revenue per tractor grew 1.2%. Adjusted OR of 92.7% worsened from 90.8% in 2021, primarily due to cost inflation pressures such as market rate driver compensation, operations and maintenance, and insurance claims more than offsetting revenue growth. Adjusted EBITDA of 93.7 million and adjusted EBITDA margins of 12.2% both declined modestly from 2021 for full year results. Despite cost inflation and sequential decline in market rates over the second half of 2022. In terms of cash flow on Slide 12, you will see our ability to generate significant free cash flow as well as our robust liquidity position. In 2022 free cash flow was 135.8 million with cash purchases and proceeds from the sale of equipment, property and equipment nearly offsetting for the second year in a row. We continue to maintain robust liquidity over 264 million with our cash balance created from strong cash flow from operations, plus our revolving credit facility where we had over 110 million of undrawn availability at year end. I'll note our cash balances give effect to the $45 million of cash repurchases in the fourth quarter that Jonathan discussed and the 19.1 million to fund a tuck in acquisition. Without these two uses of cash, our year end liquidity could have been in excess of 325 million. On Slide 13, we provide a strategic update on our balance sheet. With another yet record year of our results we have established a trend of improved performance. The change our business has taken undertaking over the last few years is real, it's lasting, and we remain confident in our ability to generate significant positive free cash flow regardless of the prevailing macroeconomic environment. Given this confidence, we're committed to directing free cash flow to reduce our leverage and are establishing a long term gross leverage target range of one and a half to two times for normalized ongoing operations. We do note that given the seasonality of the business and the front end loaded capital expenditure plan, our leverage will increase slightly in Q1 before declining to the upper end of the range of the target range in the fourth quarter of 2023. We're proactively evaluating options to expedite our progress towards this goal. We believe this commitment to fortifying our balance sheet provides another example of our focus to de-risk the business and deliver value to our shareholders. I'll now turn the call back to Jonathan for an update on our 2023 outlook. Jonathan. Thank you, Aaron. Before we turn the call over and take questions, I'd like to provide some perspective on the market environment in 2023 and our outlook for the business in that context on Slide 14. As 2023 unfolds we expect an improvement in operational productivity, improvements in driver availability which should allow for the seeding of additional higher margin company tractors, and ultimately improvements in demand for freight haul services by mid-year when our business is seasonally on trend. We believe in the cross cycle strength of more than a dozen industrial facing end markets we serve, some of which are set for continued growth given their limited correlation to consumer spending or the prevailing macro backdrop. We expect that all of this will translate into flat to low single digit revenue and net revenue growth compared with 2022. Though in the near term, we do readily acknowledge the ongoing rate environment challenges that began in the second half of 2022 and inflationary cost pressures that continue to work through -- work their way through the markets. However, as stated on our last quarterly call, we continue to feel conviction in the ability of our ongoing transformation initiatives to largely offset these collective headwinds and to provide additional upside to our earnings profile during the expansionary leg of the next impending cycle. Given our view of the current macro environment, our specific end market exposure, and the levers we have available in each of our variable operating model and transformation initiatives, we see full year 2023 adjusted EBITDA approximately in line with our record 2022 to print. In sizing our 2023 net capital expenditures outlook, we view our reinvestment in the fleet as a strategic opportunity, one that positions Daseke to maintain the age of our fleet, drive margin improvement, continue to attract and retain drivers, and preserve our favored standing with our valued OEM partners. Our expectation is for 145 million to 155 million in net CAPEX expenditures for 2023, with most of the capital spend expected to occur in the first half of 2023. We are very pleased with this 2023 outlook, especially building upon record results in 2021 and 2022. Now we will turn the call back to the operator and take your questions. Thank you. [Operator Instructions]. And our first question comes from the line of Bert Subin with Stifel. Your line is open. Please go ahead. Can you maybe give us a little more of an update on how you're thinking about guidance, seems like you have if I think about last year's 235 million in EBITDA and then we go forward this year, can you talk about how much of keeping it flat is related to the cost program versus I guess, your expectation that specialized will stay strong in 2023? Yeah, sure I can address that and let Aaron or Adrianne chime in accordingly. So we -- look, we've said this in the last few calls, we do still believe that through our transformation initiatives, we're going to see exit run rate -- exit run rate uplift in 2023 of about 20 million to 25 million in kind of incremental value. That's going to start to really taper in through the year. You're going to start to see more of that by midyear. So we do -- look, we do think probably on a 2023 basis you're taking a snapshot of those transformational activities. I'd probably say likely kind of on average plus or minus 15, 15 to 17 of that in 2023. The other kind of components of our thesis this year in 2023, as you mentioned, outperformance -- continued outperformance in specialized, we do think that Flatbed although a little bit softer than Q1 comps will have the Q2 -- kind of typical Q2, Q3 seasonality where we think that by mid-year the rate environment will be healthy again. I'm not sure it touches 2022 peaks, but certainly healthy again. So we do feel generally pretty confident that we're going to have overall a good year from a rate standpoint. We also have a couple of other things going for us. So we talked a little bit about the diversification of our end markets. You acknowledged our specialized end markets which continue to outperform. We also will probably have another 100 to 150 trucks on the road this year. So we are kind of net-net be growing our fleet about 100 trucks. I don't think you'll see the benefit of that probably until Q2. We got a lot of new equipment at the end of the year, so we're bringing the older equipment back. We're preparing the new equipment, we're reseeding those trucks. So I think we'll start to see the full effect of that really in our on peak season in Q2 and Q3 and then certainly in Q4. We also expect, as Aaron mentioned in his discussion, we do expect increased productivity. We had some end markets on the specialized side. We also had some headwinds on the flatbed side that kept our miles per truck per day this year around kind of 380. We're forecasting something in the low 400. So kind of an 8% to 10% improvement in productivity on miles per truck. And I think that look, we've gone back really, really on the Flatbed side of the business and stressed improvements in productivity. So making sure that we're getting trucks turned faster. We're not laying over trucks. We're making sure that we're not being too particular about the loads that we take, really looking for that unicorn long haul, high rate per mile. But understanding and appreciating trucking is about velocity. So getting those trucks out, keeping them out longer. So being willing, a little bit more willing to take a more moderated rate per mile load if it has kind of length of haul with it. So we're really thinking about a lot of those things and collectively we think that's going to allow us to hold the line. We also have a few million dollars net of some incremental reserves we took this year. A few million dollars of headwinds in insurance that we, knock on wood, that we hope we don't see. So that also provides a little bit of a downside support in keeping EBITDA flat this year. So maybe just a follow-up on that. We don't have great data for the last downturn. If we're having this conversation in 12 months and EBITDA was, let's say, sub $200 million, which part of that do you think would have been most -- would have been the driver of that and the only reason I ask is doing 235 again or something in that range would clearly be a good outcome. But I am sure there is some assessment of whatâs the potential downside. It sounds like the cost program is pretty solid and that should be savings from what you're seeing today. Specialized is resilient and there's some strength in particular end markets. And so then it comes down to what happens in the rate side and what happens to productivity. If we're looking at this in 12 months and you didn't hit those marks and it was a little worse, what are the things that are maybe a little more exposed or just, what's your assessment of the risk? Yeah, I mean I think you hit it, it comes down to rate. I mean, I think that's at the end of the day, for all of us in this industry, I mean rate is the biggest thing out of our control that will kind of make or break things. Again, we have a lot of these we mentioned self-help business improvement initiatives that we're going to be working on that'll offset that. We also had, we talked about it as really a headwind the last two quarters of 2022, which we think will be a tailwind going into 2023. And that's really the shift away from owner operator drivers, LP drivers, to more company drivers. The last few weeks of 2022 and certainly strong into 2023. So far we've seen a marked shift in our ability to seek company trucks which have a much better margin profile. And I think that if the rates continue to stay moderated this year, that trend will only continue. I think a 200 or something certainly below 200 is a pretty draconian assumption or target to suggest we might hit to. I think that the Daseke business model today is much stronger than it was in the last downturn, the last trough. And so I think that we are fundamentally -- we fundamentally have just a different range of earning profile, operating profile in our business today. I think that if you look at, if you look at where we're at in the cycle, and I know everybody's kind of talked about this, but we have -- these are typically 36 to 48 month cycles and we had 18 months or so, 18 to 20 months of expansion, really 2021 and into 2022. And then for the better part of 2022 at least, the spot rate since January has been slowly falling away, we started to see some shakiness in our contract rates in July or August of this year and kind of a more pronounced leg down in our contract rates. Again, we're 80% to 85% contract rates, but in October we took a leg down on contract rates. And as we look at spot rates today, those are certainly starting to firm up and our contract rates are starting to firm up as well. So I think that we can debate about whether or not we're at the bottom. But I think when you look at the margins that are more commodity end markets are generating, when you look at the demand, sorry, the supply destruction, the capacity destruction that's going on today in the industry, I mean, I've read something that said net relocations of carrier authorities are 6000 to 8000 carriers per week right now. When you look at a lot of those different things, when you look at the loss of LP drivers, owner operator drivers, and the shift to company drivers, when you start pulling a lot of those things together, I just think the rate environment is at the bottom. We've never had a Q2 or Q3 where we haven't benefited with some kind of uplift in seasonality. Even if you look at the Great Recession, we still had good seasonality in the business. And I don't know that people appreciate this, but really, if you take the trough that we had in the Great Recession, we were back to 80%, 90% of peak rates, prerecession peak rates within 12 months. So I think that people underestimate, I can't speak for Flatbed, but I think people underestimate that the resiliency of the industry, particularly the diversification of our model, and that its exclusively industrial facing. So I think, is 2023 going to be from a rate standpoint, a blowout year? No, it's not. It's not going to match what we had in 2022, but we haven't assumed that. There's a lot of other things that we have going for us this year, as I mentioned. But I do think that 2024 we are expecting 2024 will be at 2022 peak rates. And really, if you look at cycles and assume that you get some repetition in cycles to predict kind of future performance, by 2025 we'll have another massive peak. So again, we're pretty bullish on things and we think that 2023 will be the low point if you had to call it. Sorry Bert, I would just add to that, look, we can on a forward-looking statements we can kind of talk about that. But just to reiterate, we feel very comfortable with our outlook and achieving flat year-over-year results. We have a great net CAPEX that delivers quite a bit of free cash flow for value to the shareholders. So we're fully committed to this and when we talk about 200, it's a nice theory, but we believe the peak trough frame put in our current budget that we're putting forth is a reasonable assumption that we can deliver. Got it. That's super helpful. Maybe just my last question and clarification, how should we think about brokerage, Jonathan, I know you made some comments saying you just shift from some of the overflow to using your own assets and that's a higher margin opportunity. But if we think about it from a modeling standpoint, can you expect Flatbed I guess, that brokerage there sees double-digit declines, and I guess logistics is maybe a little more healthy? And then just my clarification question, in terms of share count that's been all over the place and now you have the repurchase, should we assume like 53 million as the year starts out? Thanks again for the question. Yeah, so brokerage we have going down 6% or 7% this year. And you acknowledged it and we saw it at the very end of Q4. And we see it so far into January, we're shifting those loads that would have otherwise been taken by third party carriers onto our company trucks, which is, again, the model that we've talked about. It's a model that a number of our peers employ. So it's really that kind of control valve, if you will. I would say, though, that what we've seen at the end of the year and going into 2023 so far is that while brokerage is down, the margin on our brokerage is up. So it's actually performing reasonably well. The share count, let me get you the exact share count that we're working off of now, it's 47 million Bert. Thank you. And one moment for our next question, please. And our next question comes from the line of Jason Seidl with Cowen. Your line is open. Please go ahead. Hanging in. It's still earning season for us, but I wanted to ask a couple on you guys here. Can you put a little more clarity on the productivity decline in 1Q because that was a big step down, I know you sort of mentioned it, was that a mixed shift towards some high security cargo stuff that was much shorter than hauls? Oh yeah, okay. That's right. I mean, look, a little bit of it was on the high security cargo side, those were shorter length of hauls on the specialized side, that weighed on some of the kind of average productivity metrics. On the Flatbed side, we lost some productivity. And again, if you remember, we really shifted more to asset life, LP owner operator moving into 2022. And so we saw some of that fall away. Either owner operators parking their trucks, going, I've done well for this year and I'm taking myself out of the market right now. Or you had LP drivers that weren't making the same amount of money because the rate environment changed and they're reevaluating whether or not they exit the industry or ultimately shift over to being a company driver. So there's some movement around there which we'll figure out where those drivers land probably in Q1 of this year. Look, you also had just the time of the year, you had two holidays in Q4, and you're having to route a lot of those drivers back home. So just by virtue of that, you lose productivity. So hopefully that answers your question. Jason, we also took a lot of late deliveries of trucks, which are harder to see when you get them late in the fourth quarter like that. And so, that's part of what drove it as well. So we would expect that to start to rebound in Q1. We've been pretty successful with our recruiting classes in January. And I would imagine you've already probably seen some improvement in that just by some of the seasonality that you mentioned? Okay, next question. Jonathan, I think you talked about an expected rebound and to sort of be at peak rates back to peak 2022 rates in 2024. And I think you said you expect like another big year for trucking if you will in 2025, what sort of behind those numbers for you guys when you make those forecasts out? Yeah, I think we have looked at a number of the past cycles. And as I mentioned to Bert, I mean, we look at these and look at them as really three to four year cycles. And, if we look at -- if we try to overlay the cycle that we're currently in and a lot of different things floating around. But, we think it generally is going to track what you saw in 2015, kind of the industrial recession, right. You had about 18 months, it's kind of uplift 18 to 24 months of uplift, leaning at peak in kind of summer of 2015 again, and that was on the heels of the trough where you had back in 2011, you had everybody worried about the debt ceiling, you had to downgrade U.S. debt, you had the kind of the sovereign debt issues around the world, quantitative easing all that and people got nervous and things tanked and they quickly came back, and it ultimately peaked in 2015. And you had to kind of fall down into that winter of about 10% or so. And then you had your normal seasonality, so you got some of that back. And then the next winter, so going into 2016, you kind of filled out some more into that 2015, that summer 2015 peak to the trough. In winter of 2016, you were down about 15%. And again, if you look at these cycles, they typically average peak to trough about 10% to 15%. The only cycle that we've seen that exceeded that was the Great Recession, where it was closer to 20% to 22%. But again, 80% to 90% of those rates you got back within 12 months. So we look at that and go, okay, we think that the kind of characteristics and the drivers of the cycle are different, but we look at where we're at today and go, we kind of feel like we're on that same type of cycle where you have a slow 18 month fall down, you do still have seasonality, you kind of peak in winter, which for us will probably be winter of 2023, and then you'll have kind of a firming up to where by, by early to mid-2024, you will be at 2022 peaks again, and you'll have a runway, you'll have going to have a continued runway from there on out back up to a new peak in 2025. And again, who really knows, but we've done a lot of work again on looking at cycles and that's our thesis, that could obviously change depending on what the Fed does. I think there's a lot of noise in data when you look through data. Cautiously optimistic that they don't overtighten. A little bit concerned about some of the takeaways with this last jobs report and how the Fed Reserve interprets those. And again, you had 21 million jobs lost as part of the kind of COVID effects of 15% of our workforce is taken out. And if you look at employment trends, adjusted for population growth, we're still 3 million to 4 million jobs short, where we would have otherwise been had that employment trends continued. So I think that when the Fed looks at this and said it's a hot jobs market, everything else, I think we're still way behind. And so I think if they continue to over tighten, that could cause some issues. But I think you go back to, okay, we've got the self-help initiatives, we've got the diversified end market exposure, we've got some other things going for us, seeding more company drivers shifting away from LP, lower margin LP owner operator drivers. So we're pretty bullish on things to come. I appreciate the color on that. I wanted to try to dive deeper into your comments on the contract market. I think you said you started seeing some softness in November, but it seems like it's trending up now. Can you give us some numbers behind them? Yeah, I don't have numbers right now to kind of provide but I think that part of this really goes back to Jason, the customers -- look our shippers are just frankly becoming a lot more sophisticated. And, when they're seeing the spot market fall since January of 2022 and they're looking at their contracted rates, you can't ignore that. And, so what we had is October, November, there were some softening, as I mentioned in July. And, I think what you've seen with a lot of these shippers is they've really recalibrated their RFQ process and their RFQ approach. And so a lot of these guys now are going, you know what we're going to go to our ship, we're going to go to our carriers, on the -- I'm speaking on the Flatbed side. We're going to go to them before they're softer, kind of low points in the year when they're really focused on getting freight, really focused on visibility going into Q4 then in Q1 and we're going to ask him to submit rates and submit pricing for that. They're going to be hungrier because they want that visibility going into softer part of the year. And then they've also added an RFQ cycle in April. So right in front of our peak season, right. So they've kind of hit you and said, look we want you to really be hungry for capacity going into your down point. And then before you have a good sense of really how good Q2 or Q3 is going to be for you, we also want you to put to kind of bid the freight. So I think that's part of what you saw. So it said really in keeping with October, November laid down where a lot of those guys have come out before our kind of seasonally soft time of year and said, hey, bid this freight, really playing on everybody's concerns, expectations, that it could get a little tougher. And so I think that push if that's what you saw manifest and a little bit of a leg down for us in October on contracted rates. Appreciate all that and last one, and then I'll turn it over to somebody else here. Obviously, you mentioned that debt repurchase is sort of top of the list here. Can you talk about what are you targeting first, is it the Series B preferred? And then I guess if you can give any comments on the acquisition market and how it looks now and maybe what you guys would be looking forward, if you were to pull the trigger on something? Yeah. So from a debt standpoint, I think we're looking at debt pretty holistically. We had -- there was a kind of a stark difference in opinion between the two ratings agencies on whether or not that new preferred should be treated as equity or debt. One said it should be treated as debt and one said it should be treated as equity. We're focused on really how our investors, our shareholders evaluate that new security. But we're looking at that holistically and it's going to be probably a meaningful pay down when we ultimately make it. We really want to -- again, we really want to start to approach in a quick way, structure approach that one and half to two terms of gross leverage target that we have now, it's a long term target. But we think that there's line of sight in doing that within the next 24 months, given the cash flow we're going to generate this year, and hopefully next year as well. So there's a path there, plus the cash on hand, plus you've got some rolling stock dispositions that we can clean up, we've got some real estate assets and duplicative terminals, yards, things like that we looked at cleaning up really to expedite the pay down of our debt. But on the preferred side, we think it's very investor friendly. It's very company friendly paper, but you can't ignore the fact that the 20 million of that 67 million has a 13% coupon. Now, what I would tell you is that currently the pricing on our term loan is about 8.5%, right. So 2022 is 4.75 but with all the rate hikes, we're at about 8.5%. So the Series A, I'm sorry, the Series B tranche one that carry 7%, good, very friendly paper, good coupon, good dividend relative to our current interest payment on our term loan debt. So that'll like to stay in. But, 13% is a bit onerous, and we're looking for ways to de lever the company and improve the free cash flow profile of the company. So that will likely come out as part of our overall balance sheet enhancement through some kind of large pay down here in the near term. Yeah, the acquisition market is still interesting. It's been a little bit slower because of this bid ask spread that heavily pops up when rates move too quickly up or down. We do have one acquisition under non-binding LOI. And we're cautiously optimistic that we'll have that probably closed, late February, early March. It's going to look a lot like the last acquisition we did, a little bit bigger but from kind of a value standpoint, still immediately accretive, still a great trend, still a great multiple that we're paying and immediately accretive. We also have another few acquisitions that were close to getting under LOI. So we're cautiously optimistic more so on the specialized side, that we can find good acquisitions that we can transact on that will be immediately accretive. But I think that again, we made the comment in our presentation. We do want to live within this target leverage profile. We might intermittently take leverage up a little bit to transact on an acquisition if there's line of sight to getting that leverage profile back down. But what we have on the table today, even some of these potential acquisitions that we're looking at, we think that we can fund it with incremental debt, and cash on hand, even net have a meaningful pay down using cash on hand. We think that the remaining cash on hand will allow us to fund some of these acquisitions that we have in the pipeline. So we're feeling pretty good about it. And I think that we've sized our acquisition appetite and our expectations right, based on where we're at in the cycle, and where we're at with our transformations. Thank you. [Operator Instructions]. Our next question comes from the line of Greg Gibas with Northland Capital Markets. Your line is open. Please go ahead. Hi, good morning, Jonathan and Aaron, thanks for taking the questions. [Multiple Speakers]. Just wondering maybe kind of high level how it's changed relative to maybe your sentiments on kind of the Q3 earnings call and maybe what factor has changed the most? Yeah look, I mean, I think it's a ray, we saw a little bit more softening in specifically Flatbed than we did before. I think we said we'd be, modestly up from an EBITDA standpoint, now we're saying flat to modestly up. So I think that within a -- if you had to quantify within a couple of percent probably of where we may have âguidedâ, on the last call. So it's not meaningfully different but, Flatbed has changed, I think we've highlighted some of the mitigates to that. I'm still optimistic, we're going to have a good year. But I think that would be the delta, where we kind of stepped back just a little bit on what we talked about this last quarter. Sure. And then I guess, with regard to your comments on commitment to accelerated deleveraging in 2023, is that kind of reflective of change in strategic priorities as a result of those rates changing or maybe M&A expectations changing at all or was that kind of the plan all along? No, I mean, I think we've been pretty vocal about bolstering the strength of our balance sheet for the last couple of years now. I think that the market created certain opportunities, namely the buyout of Mr. Daseke, which we thought was very opportunistic, and very attractive. And so we kind of staged that as priority one that when an opportunity came about, we had previously announced the $40 million share repurchase. So, directionally we feel like we ended up in a good spot there, but that's always been one of our stated priorities. I think that when you look through -- when you look through things now, you've absolutely -- you absolutely can't ignore the incremental cash cost of our debt. I mean, it's going to be an incremental 16 million or so this year of cash expense. So we can't ignore that but I think that again, we continue to look around at our peers, look around at our valuation and go what do we need to do to get our shareholders more comfortable that Daseke is going to be able to weather storms, and to take certain things off the table. Certain, I think, adverse things off the table that disadvantaged us from kind of a valuation standpoint relative to our peers. And leverage continues to be a consistent theme. And so we're, in light of some of that feedback we did a massive share repurchase, so doing an open market share repurchase now doesn't make sense, and it wouldn't move the needle. And, so now our priority is really repaying debt. And as we talked to Jason about, we feel like even net have a pretty meaningful pay down in debt. We can fund 2023 -- the 2023 M&A pipeline that we have in front of us with incremental debt. Again, think about incremental debt as, look incremental debt, but still not funding acquisitions with more than that, one and a half to two terms of leverage and with the rest in cash or cash and equity. Let me say cash, I don't want to say equity. I want you to think we're going to issue equity for those but half cash half debt. We think we have plenty of runway with the acquisition pipeline we have in front of us today to do that and still have cash left over and still allow for a meaningful pay down in leverage. So we're looking for things to slowly take off the table to give potential investors, current investors excuses that we should trade at a discount we are to our peers. We've demonstrated continued strategic execution, we've delivered consistently on our financial performance. We've affected a massive share repurchase. And now we look at this and go, look its leverage and margins. We think we're going to continue through transformational initiatives, re-shifting drivers from LP to company, that will improve margins. Certainly on the next cycle, you're going to really see more of the benefit of that. And now it's really focusing on leverage. So that's the plan. Great, very helpful. Wondering if you could just discuss kind of the outlook on the supply side of the market and maybe update on the timing of your new equipment purchases? Sure, so, look -- are you referring to our -- specifically with respect to our supply or just industry supply, plus on industry supply? [Multiple Speakers] part of the first question and then just the update on the timing, maybe this year of new equipment purchases? Yeah, so I'll hit the first, the ladder first. So new equipment purchases for us our front end loaded. We're looking to make sure that we have that new equipment so we can mobilize it, utilize it, during our kind of peak season, which is Q2 and Q3. So a lot of the CAPEX spend is disproportionately slanted to Q1 and Q2 versus the drive in guys who are focused on having that equipment in front of Q4, their busy season. So it's a little bit different for us. I mean, typically, we see 75% or so of our CAPEX going out the door in Q1 and Q2. We're trying to smooth that a little bit this year, so it might be 60 to 65 in Q1 and Q2. That said, we also if you noticed on the slide, we also had about 22 million in rollover CAPEX. So our Q4 2022 CAPEX number was projected to be 55 million, which is a massive spin in Q4 2022 because of supply chain issues and delivery delays, by the OEMs. We didn't get all that out the door. So that's spilling over into mostly Q1 and a part of Q2. So we have an extra $22 million going out the door in Q1 and Q2 on top of our normal cycle, normal replacement cycle CAPEX that is baked into the 145 to 155 of total 2023 CAPEX though. And then supply, look, I mean, I mentioned it to Bert, we're seeing massive net relocations of carrier authorities based on FMCSA data, 6000 to 8000 carriers per week. If you look at some of the data that [indiscernible] orders for January, they're sequentially down 40%, which is a little higher than normal year-over-year. So January to January, they're down 12%. Doesn't quite jive with the increase in 2023 CAPEX guides that a lot of our peers are giving. So I think people are just being cautiously optimistic. They're making sure they have the allocations from the OEMs. But they're not signing up to anything until there's a little bit more visibility into what Q1 is going to look like. But again, I think we're already seeing already seeing demand destruction -- I am sorry, I keep saying demand destruction, supply destruction, capacity destruction. We're seeing LP drivers, owner operator drivers leave the market. We do think that that rates are at the bottom or closer to the bottom. And there's more upside than the downside at this point. I think, a few people have acknowledged this that look on an inflation adjusted basis we're probably flat if you look at kind of peak 2019 rates to peak 2022 rates, where you look at trough kind of offseason peak, I'll say that say definitely, offseason peak 2019 rates to offseason peak 2022 rates, both of those are up about 35%. If you look at that and say so it's about a 10% CAGR, so 10% CAGR over those three years in rate and rate increases. Historically, we've seen those rate increases tracked to CPI so about 2.5% a year. Year in and year out saying okay, well you guys are -- you guys are massively up. I think that the counterpoint to that, the credible counterpoint to that is, is if your inflation adjusts. If inflation adjust, a lot of those rates were probably flat to maybe even down. If you look at diesel prices having nearly doubled, if you look at driver wages increasing 30 plus percent. If you look at things like maintenance costs or tires increasing 50% to 60%, lubricants, things like that, and you truly adjust -- you adjust rates based on an inflation adjusted basis, you get to kind of a real rate growth. I think we're flat to down. So I think that you've got a bunch of embedded costs, that you're simply not going to walk back. And if you do, you're going to blow up the supply side of the equation for your shippers. So, we think that things are starting to stabilize, and we're cautiously optimistic again that 2023 is going to be good with a really strong rebound in 2024. Thank you and one moment for our next question, please. Our next question comes from the line of Ryan Sigdahl with Craig-Hallum. Your line is open. Please go ahead. Good morning, guys. Just one for me at this point. What do you guys think is the maintenance, right maintenance CAPEX level because if I look at kind of DNA over the past couple of years 90ish million CAPEX, including all finance costs was about 145 million last year, and then a little bit more than that this year in 2023. So curious 10 as we think about fully baked free cash flow, what the right maintenance capex number is? And then secondly, how confident are you in generating free cash flow? Again, inclusive of all equipment purchases, that 150 million to CAPEX? Yeah, thanks, Ryan. So we'll talk a little bit about your first question, which is on the maintenance CAPEX. And so our guide for this year is 145 to 155, which includes debt net of proceeds. And so the right way to think about our CAPEX is this year we've got about 8 million to 10 million of transformational CAPEX. We're lightening up trailers, for a one-time event, and then we've got about 5 million that we're buying some specialized trailers for one of our verticals, to pull forward, so we can be in a good position for our renewable energy vertical. And so this year is a little bit of a down CAPEX for us. We're pretty happy with where our trucks are at. We think one of the ways to measure those is on miles. And so we're two and a half, or two to two and a half times, two and a half years on a mileage bases. So we're pretty happy with where our overall fleet is. And outlook number on replacement, given our current profile and truck count is probably 130 million to 140 million for an outlet outlook perspective. That's kind of how we think about that piece of it. [Multiple Speakers] free cash flow. So if you think about call it 140 million of recurring maintenance CAPEX and you back out the interest expense, it's going to be higher tax expense, preferred dividends, etc. Guess how confident are you after kind of fully baked and everything free cash flow generation this year? Yeah, I mean, we feel very confident with that. We're doing a good job on our balance sheet management. I think we've got opportunities there on our cash conversion cycle, but overall, we feel very comfortable with where we're at and the cash flow numbers that you mentioned. Yeah, right. And we're still -- philosophically, we're still looking at kind of a 30% 70% split, so 70% financed equipment 30% cash pay on that equipment. You know, obviously, the equipment loans, and the cost of the equipment debt hasn't gone up as much as the spread on our term loan debt. So we still think it's a prudent way to FUND CAPEX, and we'd rather kind of preserve our cash at least in the near term for optionality. We think that there's probably better things we can do with that cash that'll create more outsized growth and return versus the cost of that equipment debt. So that's our philosophy at least now as it stands today. Thank you, Michelle. I'd like to close today's call on Slide 15, with some final thoughts on our 2022 performance and the Daseke opportunity for 2023 and beyond. As the market leading servicer to complex industrial end markets, we delivered solid revenue growth and third consecutive year of record adjusted EBITDA. Our resilient business model includes a diverse portfolio of more than a dozen industrial end markets to expand multiple industry verticals, with unique non correlated drivers that support our resilience and growth. Large and diversified fleet with expansive geographic breadth that serves the unique needs of over 4000 plus customers and a commitment to the financial strength that will continue to provide us with strategic optionality to support growth across cycles. We funneled our strong cash flow generation into a vector changing opportunity to effect an immediately accretive share repurchase, providing increased ownership to our shareholders and expanding earnings profile of our business. And even in the midst of a challenging backdrop, our current expectations are flat to low single digit growth over record 2022 levels, with intense focus on continuing to build a strong foundation for outperformance when the economic cycle inflects. We remain committed to our fortress balance sheet, the goal to which we initially committed to in 2021, relying on continuous improvement in our business and strategic execution to generate free cash flow that will enable us to accelerate our deleveraging goals. With confidence in our company, our team members, and our perspective results. We believe we are well positioned as an attractive option for outsized performance within the transportation and logistics industry. Thank you for your time today. This concludes our Q4 and full year 2022 earnings call.
EarningCall_544	Good morning, ladies and gentlemen. Thank you for standing by. Iâm Francine, your chorus call operator. Welcome and thank you for joining the conference call on the Full Year and Fourth Quarter 2022 results. Throughout todayâs recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions]. Itâs my pleasure and I would now like to turn the conference over to Alexander Everke, CEO; Ingo Bank, CFO; and Moritz Gmeiner, Head of IR. Please go ahead, gentlemen. Good morning, ladies and gentlemen. This is Moritz Gmeiner. I'd like to welcome you to this morning's conference call on our fourth quarter and full year 2022 results. With me are Alex Everke, CEO; and Ingo Bank, CFO, who will give you an overview of our business and financial development for the fourth quarter and full year 2022. Yes. Thank you, Moritz. Good morning, ladies and gentlemen. I'm happy to welcome you to our fourth quarter and full year 2022 conference call this morning. In this webcast, I will comment on our business before Ingo will guide you through the financials. Starting off with the key figures, our fourth quarter revenues were â¬1.18 billion and the adjusted EBIT margin was 7.3%, both fully in line with our guidance. For full year 2022, we achieved revenues of â¬4.82 billion. This is a slight 2% increase year-on-year on a like-for-like portfolio basis, which means comparing the business portfolio we had at the end of 2022. Adjusted EBIT margin was 8.4%. I will begin with an update on the disposals and integration of OSRAM. We can report that the planned disposals indeed near completion at this point. We have now signed all planned disposals with the last one announced in December for entertainment lighting. One disposable was closed in Q4, as expected, and we now have only two closings remaining for full completion of the disposal program. These closings we expect over the course of H1. We remain fully in line with our expectation of total proceeds from the planned disposals of over â¬550 million, despite a clearly more difficult market environment last year also in this area. The accretion of synergies and savings has continued in line with our plan through last year, and we are focused on realizing further progress as we move through 2023. We were also very successful in advancing various integration programs across our combined business last year. This included significant IT systems and ERP harmonization, aligning the fiscal year for the group, streamlining corporate structures and aligning policies and processes. Here I am glad to confirm that we achieved a full set of milestones in integration, which we had set ourselves for 2022. Let's move to the development of our business. 2022 has been a demanding year for the global semiconductor sector and negative macroeconomic trends continue to shape the situation in our end markets as we enter 2023. Our full year and fourth quarter results shown over as solid performance of our business against the backdrop of the impact from last year scale political and macroeconomic developments, which translated into, among other effects, substantial inflationary pressures. Looking at our segments now, our semiconductor segment was the key part of our business last year and last quarter, providing 66% of full year revenues. Our semiconductor automotive business recorded solid results last year, particularly in light of the demanding market situation we faced. The market environment and a global auto sector was clearly a challenge last year as it was characterized by impacts to vehicle production volumes year-on-year and continued supply chain volatility, plus meaningful inventory adjustments in automotive supply chains in the second half of the year. Looking at the fourth quarter, our semiconductor automotive business performed well in line with our expectations. As mentioned, inventory adjustments continue through the quarter. By managing through this situation, we confirmed our position as global leader in automotive LED lighting and expanded our design pipeline for this future. We are able to drive strong customer penetration in all key regions based on high performance solutions for full range of exterior and interior applications. To give an example, the revenue pipeline for our next generation highly pixelated LED front lighting grew nicely last year and we are successful at several OEMs. We offer a fully integrated light source and driver solution with outstanding performance with around 25,000 addressable light points enable a new level of performance and safety functions. For semiconductor consumer business, we recorded full year results that were in line with our evolved expectations which reflected the less favorable market development during the year. Major segments of the smartphone and consumer market held up well through the largest part of the year, and we benefitted from our broad offering for top smartphone vendors. However, the China Android market did not see a demand recovery from late first half through the second half of the year, which meaningfully impacted our consumer business last year. In the fourth quarter, our consumer business tracked muted expectations given that COVID-19 related manufacturing reductions in China created additional negative volume impact in the smartphone market. We confirmed our position as a market leader in optical solutions, such as display management and camera enhancement sensing, to the leading smartphone OEMs and also good market and design traction for future devices last year. Here I can also confirm that we expect to see a further improved increase of our market share in the consumer market in 2024 for sensing application. Let me now provide additional information related to our development and industrialization program for our leading small structure size microLED technology. Based on latest available information and assessment, we can add that we currently expect to start recording relevant revenues from our microLED technology in 2025. I can also confirm and emphasize that the customer engagement in this area is very deep, significant and active. The market feedback we received clearly confirms that we hold a strategic leadership position in small structure size microLED technology, and that we are the front runner for high volume industrialization of this next generation technology. We continue to spend significant amount of R&D expenses on this program to drive the ongoing process of industrialization, further downwards completion over time, and together with the partners in the ecosystem. It will continue to be a major engineering focus for us to address the technical challenges that still exist. So please keep in mind what we said all along regarding the complexity of the technology itself and manufacturing it in high volume. This includes both, our production of manufacturing and the other steps in the manufacturing chain that need to be in place for the industrialization of this technology. Moving on to our semiconductor industrial and medical business, this area recorded an overall good performance last year. Our industrial markets offered attractive demand support for large part of the year across our differentiated portfolio. This included our industrial LED solutions, outdoor lighting and horticulture, as well as a healthy contribution from our industrial imaging lines. Our medical business performed well last year, mainly driven by medical imaging solutions for CT and digital X-ray. In the fourth quarter, however, an increasingly negative demand momentum impacted the semi industrial business in several areas, which include horticulture solutions and LED industrial and outdoor lighting. These negative impacts were largely driven by the deterioration in macroeconomic environment and the negative regional dynamics in China. Moving to the Lamps & Systems segment, this segment provided 34% of full year 2022 revenues and showed a solid performance. Our Lamps & Systems automotive business, which includes legacy traditional lighting, achieved overall positive results last year, particularly in light of the sector environment. It also performed well in the fourth quarter, with good support from seasonal effects in the aftermarket. The other areas of the L&S segment in industrial, building and medical showed solid results for the year given better demand year-on-year for most of 2022. In the fourth quarter, these parts of the L&S segment also started to see negative influences from global macroeconomic trends. Offering an update on our industry first 8-inch LED fab at our existing location Malaysia. Construction of the fab building forecast fully in line with plans last year and is nearing completion. We are glad to say that we are able to build the shell [ph] as planned despite a more demanding situation for large-scale building projects in 2022. And we will continue further significant expansions in line with our strategic plans this year, as construction of the 8-inch LED fab is progressing towards production availability during 2024. Let me now come to the outlook of our business. For the first quarter 2023, ams-OSRAM is experiencing a weakened demand environment in important markets as negative macroeconomic trends continue to create visible market correction effects. The overall demand situation in our automotive markets remains muted, while inventory adjustments are showing certain signs of stabilization. At the same time, our consumer and industrial business were impacted by prevailing lower levels of demand driven by weak smartphone volumes, negative macroeconomic influences and COVID-19 related impacts in China, in addition to negative consumer seasonality quarter-on-quarter. These dynamics are expected to drive sequentially lower expected production and shipment volumes for the first quarter, with additional negative quarter-on-quarter effects from the adverse exchange rate developments and the revenue loss of around 15 million due to a fire-related capacity loss at a supplier. We, therefore, expect first quarter group revenues of â¬900 million to â¬1 billion, excluding year-on-year disposal-related deconsolidation, as well as an adjusted operating margin of 4% to 7%. These expectations are based on currently available information and exchange rates and reflect a revenue deconsolidation effect for the first quarter from closing the disposal of the Traxon lighting business. This effect reduces first quarter revenues by around â¬10 million on a comparable portfolio basis quarter-on-quarter. The expectations also include year-on-year disposal-related deconsolidation with the first quarter revenue effect of around â¬80 million. Looking further out and assuming an expected recovery of demands exiting the first half, particularly in China and Europe as well as current exchange rates, we currently expect an improved business environment in the second half of 2023 compared to the first half, similar to what we hear from other industry participants. In addition, we expect to achieve our midterm financial targets for 2024 within the lower half of target ranges for revenues and adjusted EBIT margin. These expectations are based on the currently expected business mix for the target period. Here we expect that this year's macroeconomic trends, regional dynamics and inflation pressures will further underline the previously mentioned negative impacts to midterm volumes. Before I hand over to Ingo, let me add some personal remarks. This is my last earnings call for ams-OSRAM, as I will be stepping down from the CEO position on March 31. Over the last seven years, I have been leading an excellent team in a highly attractive company, as we continue to realize our strategy to clear leadership in the optical space, first as ams and then as ams-OSRAM. I would like to take this opportunity to thank my colleagues and the management board and management team, as well as our employees around the globe for their dedication and commitment. It has been an exciting journey and I'm convinced that a compelling technology portfolio of ams-OSRAM offers excellent opportunities for attractive long-term growth and profitability. Thank you very much. Thank you, Alex, and a very good morning to all of you. Before I start going through our financials, a few comments upfront. When we refer to adjusted financial metrics, we refer to adjustments for M&A-related transformation and share-based compensation costs, as well as results from investments in associates and sale of a business. You will find the reconciliation to the IFRS basis of presentation available on our IR Web site. Let us first have a look at some of the key financials. I'm now on Page 23 of the Q4 2022 earnings release presentation. With revenues of â¬1,177 million and an adjusted EBIT margin of 7.3% in the quarter, we came in within our guidance for both metrics, while the full year revenue was â¬4.8 billion with an adjusted EBIT margin of 8.4%. Adjusted gross margin was 28.5% in the quarter similar to the prior quarter. Adjusted net result was at â¬29 million in the quarter. Operational cash flow continued to be strong in the quarter at â¬201 million. Net debt was â¬1.7 billion at the end of the fiscal year 2022, lower when compared to the same quarter a year ago and slightly up when compared to the prior quarter. Overall, this net debt position translated into solid leverage factor of 2x. Moving to group revenues on Page 24 of the presentation. For the full year 2022, group revenues were â¬4.8 billion, nominally lower by 4.4%, largely reflecting deconsolidation effects from the portfolio realignment. By comparing the equivalent portfolio 2022 to 2021 for a like-for-like comparison, we actually saw sequential growth like-for-like of 2%. If you look at the revenue distribution on Page 25, you can see that in 2022, 66% of the gross revenue were driven by its semiconductor segment with the balance coming from Lamps & Systems. From a net market perspective, automotive was the strongest contributor with 41% followed by industrial and medical with 35% and consumer was 24%. Moving now on to group profitability, I'm on Page 26 of the presentation now. Sequentially, adjusted gross margin was stable at 28.5% amongst others, reflecting lower factory utilization levels in a weaker demand environment in combination with planned inventory reductions in our operations. The group's adjusted EBIT margin of 7.3% for Q4 2022 was very similar to the prior quarter. For the full year, the group's adjusted EBIT margin was 8.4%, 160 basis points lower than in 2021, reflecting a far more challenging macro environment in 2022, particularly in the second half and a less favorable mix when compared to 2021. Turning now to the operating expenses on Slide 27, we see that the adjusted R&D spend for the year was stable across the quarters at around the top percent of revenue mark. The overall targeted range for the group remains to be between 11% and 14%. Adjusted SG&A expenses for the group came down in the second half of the year as integration-related synergy effects and resulting cost advantages contributed to an overall lower spent for the group. For the full year, adjusted SG&A as a percentage of revenue was 10.8%, a very clear improvement by 110 basis points when compared to fiscal year 2021. Our targeted range for SG&A spend for the group remains to be between 7% to 9% over time. Turning now to the net result on Page 28, the adjusted net result for the ams-OSRAM group in the fourth quarter was â¬29 million, including a net financial result of negative â¬43 million. Adjusted basic earnings per share in the fourth quarter were â¬0.11 and CHF0.11. Revenues for the semiconductor segment were â¬767 million in the quarter. Full year 2022 revenue in our semiconductor segment amounted to â¬3.17 billion which is lower compared to year ago as it reflects the very demanding market situation particularly in the second half of 2022. As Alex already pointed out, the automotive market environment in 2022 was characterized by continued supply chain volatility as well as notable inventory adjustments in its end-to-end supply chains. In the consumer market, a lack of demand recovery in the China and Android markets meaningfully impacted our consumer business. Adjusted EBIT came in at 6% for the quarter, reflecting lower demand as well as lower utilization of our industrial base, which we took on to actively manage inventories in a weaker demand environment. For the full year 2022, this segment delivered operating profitability of 10%. In the course of the fourth quarter we saw ongoing inventory corrections in end markets and increasingly unfavorable demand effects driven by the macroeconomic environment and regional dynamics in China, impacting the segment's industrial business in certain areas, including LED industrial and outdoor lighting and horticulture solutions. Moving now on to the Lamps & Systems segment, revenues here were â¬412 million in the fourth quarter, up sequentially. Quarter-over-quarter growth was driven by the seasonally stronger traditional automotive lighting aftermarket business. This seasonality helped to more than offset the disposal-related deconsolidation effects of around â¬10 million from the prior quarter. For the full year 2022, revenue was around â¬1.65 billion in this segment, reflecting our strong market position in automotive and various industrial lighting end markets. On a like-for-like portfolio basis, in other words reflecting the deconsolidation effects throughout 2022, we actually saw meaningful growth year-on-year. Adjusted EBIT for the quarter was 10% and 6% for the full year. This is a strong improvement compared to 2021, reflecting positive effects from the portfolio disposals as well as efficiency measures. In the course of the fourth quarter, we saw the successful closing of the Traxon transaction, our business for dynamic lighting solutions, as well as the signing of the sale of Clay Paky, the entertainment lighting fixture business. Let me now complete the review of the company's financials with a look at the cash flow and debt position of the ams-OSRAM group on pages 31 and 32 of the presentation. The group generated â¬201 million of operating cash flow in the last quarter of 2022. For the full year 2022, the group's operating cash flow continued to be very strong at â¬599 million or a very solid 12.4% of revenue. 2022 CapEx spent in the group was â¬537 million translating into spending level of approximately 11% of revenues. Overall, spending increased as expected in the second half of '22 but we stay below our previous expectation of â¬600 million in the end. The CapEx spending also reflects the progress made on the building of the new 8-inch LED fab in Malaysia, which had a meaningful share in the group's CapEx spent in 2022. We expect this upward and elevated trend for CapEx spending coming out of Q4 2022 to continue into 2023, in line with our previous communication. This is firstly due to the building completion of the new 8-inch facility and subsequently to equipment being installed over time. Overall, we are still targeting to keep the overall CapEx spend below â¬1 billion for 2023 also in line with our previous communication. Turning to Page 32 now, the group's cash and cash equivalents amounted to â¬1.09 million at the end of the year. We actually repaid well over â¬400 million of debt in 2022, most importantly the matured USD convertible bond as well as some other liabilities. The group's net debt stood at â¬1.72 billion as per the end of 2022, slightly up when compared to the September quarter, but importantly on a lower level when compared to the end of 2021. Overall, this translated into financial leverage of the group of approximately 2x net debt to adjusted EBITDA which we regard as a solid situation in the industry environment, and are fully committed to 800 million revolving credit facility in euros remained undrawn. On Page 33, you find the overview of our outlook for Q1 '23 that Alex already outlined earlier with expectations based on current exchange rates and available information. We expect group revenues in the range of â¬900 million to â¬1 billion for the first quarter, using the currently prevailing euro-dollar exchange rates. The adjusted EBIT margin we expect to be between 4% and 7% for the first quarter of the new fiscal year. As this is my last earnings call with ams-OSRAM, I would like to take the opportunity to thank my colleagues and the board and the management team for their strong support over the past years. Also a special thank you goes out to my amazing finance team. And finally, I would also like to thank our employees who have done a stellar job in 2022 in what was one of the most volatile market and macroeconomic environments we've seen for quite a while. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions]. We have the first question from Janardan Menon from Jefferies, your question please. Hi. Good morning, and thanks for taking my question. I just wanted to narrow in a little bit on the microLED, your statement that you will get revenues in 2025. There was -- previously, I think you even alluded to on your Capital Markets Day presentation that there will be a ramp in 2024. So is this -- I just want to clarify whether this is a delay in the expectation for that microLED revenue? And if that is at all the case and since you're saying that the fab will be in place in 2024, will there be a margin impact because the fab will be actually delivering revenue only one year later? And then I have a brief follow up. Okay. What we've always said in the past is that we are building a new 8-inch facility and readying for ramp-up in 2024. That's what we said. And that goal has not changed. We said that we expect to be in a position to have that ready, but we've never communicated a timing expectation for a ramp of microLED technology. As to your second question, as I said, we still are working on being able to be ready for a ramp in 2024. As it is usual, if you ramp facilities in a year, you have some costs, some idling costs in a normal ramp-up environment, and that estimate has not changed really. Understood. And on the second half recovery, are you seeing any clear signs, such as you started the automotive inventory correction quite early. Are you seeing any signs of that bottoming out by the first half of this year, or anything else which gives you confidence that your end markets will start improving into the second half, and then take you to the low end of your guidance range in 2024? Yes, this is Alex. So first of all, we see that the inventory in the chain is addressed by industry players. As you correctly said, we started relatively early because we announced weakness in automotive market as one of the first companies. So we see that from the supply chain point of view that inventories get addressed. We also see that the chip shortage in the automotive space is getting easier, and we see that from the demand point of view kind of stabilizing in the automotive space. And for that reason, we can assume in the automotive area, a recovery in the second half from the [indiscernible]. We see that in the consumers business, assuming that China gets resolve the COVID-19 situation within the first half, that also there should be a recovery in the consumer space. How strong, it's hard to say. But if you look at the facts and the inputs we're getting from customers and industry players, we can assume a recovery in the second half of this year. But I think it's important that demand recovery is starting to materialize when we exit the first half. That's clearly important. Right now, as we said before, the demand situation is rather challenging, which I think you also see reflected in our first quarter guidance. So clearly, if you look at the second half, that means that we do expect the recovery out of key markets, particularly China and Europe as well. Hi. Thanks for letting me on. My question is regarding the continuing improvement of your business. So given the challenging environment that you face in 2023, do you see -- the improvements you've seen, for instance, in autos year-on-year to continue or whether that will reverse? And then, of course, in the consumer side or rather the semiconductor side of your business, how do you see that full year behavior, given the weak first quarter that you are seeing? Well, look, as we just said, we've seen very early on last year first corrections in the automotive distribution chain in terms of inventories that, as Alex has said, seems to be stabilizing right now. We are very early in the value chain. So we think early when they are adjusted either up or down. So from that perspective, we see that there's an opportunity in the second half, of course, driven by sort of end demand at the end of the day. For consumer, I think we said that also if you look at the fourth quarter, there were certainly impacts also coming out of the COVID situation in China, and still a rather muted Android market. At this point in time, if you look at the sort of first quarter, we don't necessarily see that recovering. There's obviously an expectation that overall China throughout the year will start recovering, including consumer end demand. So that should help also for the second half. For the last one, for industrial, we also flagged in the fourth quarter already that there are certain developments, particularly from rising energy costs for certain applications that we sell, as well as for outdoor lighting where construction plays a little bit of a role. So there, we also see some adjustment process still ongoing and also as we go into the first quarter, that adjustment process will still take a bit. And then we should also see some of that coming back into probably the second half. But again, that's the current assumption, and it's really very much dependent on particularly Europe and China demand recovering when we have exited the first half. And just a quick follow up on your gross, Ingo. You'd announce the synergies as well as cost-cutting plans. Where are we on that front at this point in terms of is there going to be further positive impact to the margin from there, or we are running out of steam on that front? Yes. On the synergy side, we are progressing in line with plans. We updated you in the third quarter where we were at around I think the 248 million or so mark of synergy run rate that is still progressing in line with plans. And as you know, the target is to be at around 350 million by the first quarter of '24, so that's all on track. That's particularly still ongoing on the SG&A side, as well as some operational costs. We also told you that we would start the footprint -- industrial footprint process in the fourth quarter, which we started, which we did, where we basically reduced one location we have in Asia Pacific. And that should also help, let's say, reduce operating expenses also going into particularly 2023. And then when we spoke about the 100 million cost savings program, that's also in full implementation. Because obviously, if you're working in such an environment macro wise, you focus very clearly on the things you can control and that's cost and cash, and that's what we're doing. We've done it always in the past. And so that's all on track. Hi. Good morning and good luck to Alex and Ingo on your future endeavors. My first question would just be on microLED. There was a report from the SEC, which is an industry analyst saying that microLED for Apple watches would be 5x more expensive than OLED and that it would only feature in a premium device, a sort of $800 device. What is your kind of current thought process on the adoption rate within the watch lineup and within -- and in terms of moving to [indiscernible], because it does seem like the main OEM in this area seems to be pushing out their adoption rate? And I was just wondering, what are the key kind of drivers of that adoption and getting the cost down? Is it going to be mainly pick and place or is it somewhat to do with what you guys are producing? Yes, Rob. Alex here. Thanks for the question. So as you know, we can't give comments on specific end products. But if you look back when the transition happened between LCD and OLED, we had actually exactly the same question. And obviously, every new technology when you introduce it to the market and at a higher cost level than the -- to the replace technology, but it shows and that's also the plan, the more you go in high-volume production, which is on our side but also it applies for the whole supply chain, the costs will come down to a level that a broad adoption is absolutely possible. And when you look from the past when OLEDs took over the share of LCD screens, it started -- which is normal on the high end side first, but then got deployed to midrange and now basically, most of the mobile devices have an OLED screen. We see the same or very similar transition for the new microLED technology entering, obviously, in a higher end first, but then got migrated into the other segments over time. And the main driver for cost reduction is obviously yield improvements, high-volume production, which will happen then naturally. Great. And just a quick follow up, just on the 28% gross margin. Could you say what that gross margin would be without under-loading? Because it feels like that -- you're still relatively under-loaded and you haven't quite completed the kind of manufacturing location optimization programs. So is there going to be a big step up in the future when you pull out some fixed costs, you close sites, et cetera? And when is that going to come through? Thanks. Yes. So Rob, I think if you look at the differences in, let's say, adjusted EBIT margin for the semiconductor segment year-over-year, for instance, in the fourth quarter -- to some extent also in the third quarter, you can assign an unsubstantial part of that difference to a difference in the underlying gross margin, which indeed also has to do with utilization. So indeed, part of the plan is from an industrial footprint conservation part where we start now to take more of the cost out. There's more also to come also in 2023. But of course, another part also is, of course, driven also by how the volume overall will then develop when we move into second half of '23 and into 2024. But clearly, over year-over-year, you can assign a big -- not insubstantial part due to underutilization. Please also bear in mind that in the fourth quarter, we've reduced our inventory position with more than â¬100 million. And obviously, that's next to, let's say, a somewhat weaker demand environment, another impact that we took on consciously to make sure that we run our balance sheet with the proper inventory levels in such a macro environment, and that had an additional effect, of course. So I think that's kind of the effect you have to take into account. Good morning. Thank you for taking my questions. A follow up on the microLED you mentioned in your prepared remarks that due to technical challenges, the product is delayed. Where are those challenges and what does that mean for you? And second question on the sensor socket win for '24 that you basically have confirmed with your market share gains in consumer. How is that progressing, and is that also at risk for delay? Thank you. So I don't think we said that there are technical challenges or that there is a delay. The only thing we did today is that we added information available to us and based on an assessment we did that we expect now relevant revenues to be -- for microLED in 2025. We still expect our 8-inch LED manufacturing facility to be ready for ramp in 2024. Also if you go back, we said all along that when -- coming back to microLED, it's, of course, a highly differentiating technology, which will have technological challenges and process challenges. That's what we always said. And we also said that we're working here in an ecosystem where it's not just us, but also others that need to make sure that it can be industrialized, et cetera, et cetera. So that's I think what we've also said. And sorry, your second question was or maybe Alex -- The second was on the sensing improvement in the consumer market share. So as you know, sensing devices and design wins in this area are projects which are designed to plan platforms. So we don't expect changes there. And this is based on IP and manufacturing capability, which is running for the company since quite a while. Hello, everyone, and thanks for taking my questions. It seems that some other microLED players and notably one called PlayNitride is considering ramping up an 8-inch microLED fab as well. How do we see the competition building up on microLED? And attached to that, when do you expect to see the first prepayment from your LED strategic partner, microLED strategic partner? Thank you. Yes. Alex here. Thanks for the question. So if you look at the facts and what we hear from industry player, we are clearly far ahead of competition in IP technology and obviously in the investment in the first 8-inch LED manufacturing capability. I think it's good news that more and more companies are getting interested in this technology. It shows that the market sees the market potential and the wide range of market application, which is good news. But getting the feedback from various customers, suppliers, industry players, I clearly can state that we are clearly upfront with our positioning as a company in microLED technology. So there's no update on the prepayment. You didn't see it in the Q4 financials and I cannot give you an update when it's -- we just announced that we received it in terms of an agreement and how and when we will make use of it, we will see. Okay. And one last question, if I may. On the modeling side, how should we model the OpEx moving into Q1? And also, do you have any indication on the modeling for the full year, given all the cost-cutting action ongoing, the disposals have been already completed, what needs to be done with the two remaining disposals? What should we model the OpEx for Q1 and this year? Thank you. Well, you've seen that we did quite some steps on the SG&A side in the second half of 2022. We've now more or less completed the ERP rollout that we had in mind. There's still some sort of aftercare we are doing right now, but that has been very successful. That should give us further improvement possibilities in the -- sort of also starting in the first half somewhat. I just mentioned started readjustments on the footprint that should move -- that takes a little bit longer typically before you see that in the financials. And on the synergies, I don't expect, let's say, a kind of different rhythm into the numbers than we've seen in '22. So that's all I would say at this point. Good morning, guys. Two questions, please. So firstly just on the microLEDs, you had talked about process challenges, et cetera, to expect as you ramp these things as usual with any technology. So I just wondered if you could talk a bit about how we should think about profitability in the microLED landscape, whenever it is that you ramp? And are you able to give us some color on what sort of yields you're seeing, at least in your R&D processes, when you're trying to replicate these steps so that we have some idea of how this numbers might trend, as you industrialize this technology? And secondly, I just wondered if, Ingo, you could give us some idea of the underutilization charges you had in 2022 to give us a sense of how much uplift there might be on the gross margin side as utilization levels increase? And if you could also give us some sense of where you expect this to go in 2023, if you're able to, that would be helpful? And all the best in your future endeavors to both Alex and Ingo. Thank you. Yes. Thank you. So look, I think we need to remember a few things. First of all, the 8-inch LED facility we are putting in place in 2024 is meant to cater for very differentiated LEDs and microLED, and it's built for a very long period of time for the next 10 to 20 years to shape our LED business also based on the growth opportunities we clearly see in the longer horizon. Also acknowledging that we knew that at some point in time, in the not too distant future, we would otherwise run out of existing capacity overall. So I think that's -- that we should not forget when we talk about microLED. With any kind of technology when you ramp in the first year, one should not expect that that will generate a profitable contribution to your bottom line. That's normal. You have the typical learnings that you have. You don't have the most fantastic yields initially, and that's not going to be different here than itâs been also with other technologies. And then what we've seen, however, in the past also when we look back in our Singapore engagement back then, we've seen very quickly the team being able to improve yields and get the learning effects in there. And then you can see, certainly in the -- so year one is always kind of a ramp year. And then in year two, you see very meaningful improvements, obviously. And part of it is then also a bit dependent on the underlying volume. So here, I would not see any kind of difference. On your gross margin question on the utilization, I would just reiterate what I said to Rob basically. I think if you look at the difference in profitability in the semiconductor area, which is the biggest part where we talk about, let's say, underutilization given the asset structure there, you can certainly sort of take a -- not insubstantial part of the difference in adjusted EBIT we have there as part of a gross margin difference, and that is largely driven by underutilization which we started, especially to see in the second half of the year. So third quarter, we already flagged that. Fourth quarter, we clearly saw it now also in the numbers. So I think that's the best indicator of what it is. Obviously, that's also in the semiconductor area what I said earlier in my prepared remarks, there was a mix impact there and the mix in this business was a little bit unfavorable when compared to a year or two ago, has also to do a little bit with our consumer business. So it's not just all underutilization, but certainly that plays a very big part now. Moving into 2023, clearly in the first quarter, that's not going away, the demand environment out there is difficult, as we said. And then when you look at what we said about our expectation that there should be some kind of recovery in the second half, of course, pending demand recovering in China and Europe, what we said, then you also quickly see as that happens, how the underutilization sort of turns around completely and the elevator goes up again and not down. So from that perspective, that's just the nature of our industry and that's how we should see it evolve. So certainly, some impact still in the first half and then second half should be different. Great. Thanks for taking the questions. Maybe first one, Ingo, on maybe following on from last question on the second half improvement, I understand you are hopeful of a second half recovery. But do you see anything in your orders or visibility of customers to support that? And can you remind us of your lead times across the business? That's my first question. Iâve got a follow up. So look, as I said, it's very early on in the year. So I think nobody has a real clear view. But like any other -- like a number of other industry participants and also based on customer engagements, there is an understanding or an assumption that the demand will recover in China and in Europe when we exit H1 and then we move into H2. That's clearly what the underlying assumption here is. And of course, in that direction, the orders have to be built. But we're still early on in the year, so January just ended. So that's the situation we're in right now. Okay, fair enough. Maybe a question on the FY '24 target model. It seems like you've lowered that around â¬300 million. Could you split that out for us across the kind of big buckets [ph] of industrial and new growth drivers, just to get a sense of kind of where the shortfall is coming from? Yes. Look, the reason why we've qualified our guidance for 2024 -- midterm guidance for 2024 today is simply because we've seen a bit of a worsening of the macro environment since the fall of last year. And therefore, we expect some kind of trailing effects of that evolution in '23, possibly also into '24. If you look at China right now, if you look at sort of the ongoing inflation pressures, it has certainly on some consumer demand, for instance. And if you then translate into our assumed business mix for 2024, we expect that that will have some trailing effect into '24. That's why we qualified it today and said it's more in the lower half of the targeted range. Okay, got it. And one last clarification from my side. Just to clarify on the microLED that there has been no change in the timeline of microLED ramp up versus the CMD last year. Is that correct? No. What we said at the CMD is that we would expect our 8-inch LED facility being ready for ramp and that's still the goal, and we're working towards that. Alex pointed out too that we're making the good progress on, let's say, the build of the facility and the infrastructure in that, and that's still ongoing. So what we said in the CMD is still valid. The only thing we did today is we provided some additional information based on recent information and our assessment of that, as to when we expect out of that facility coming relevant microLED revenue, and that we now said is in 2025. Thank you very much. One quick clarification, if I may. So if we look at your EBIT margin at the group level, it was 8% in Q3, 7% in Q4. I know you are guiding EBIT lower at the midpoint. And you mentioned, Ingo, you did some work, of course, on the synergies, also deconsolidation, which in theory should be better margins. You also mentioned some offset in terms of business mix. So we still don't see the improvement with all your work you have done, and of course you have the underutilization charges and the mix that you mentioned, but I was just trying to understand when do you think we will be able to see this work -- fruits basically, and should we treat the Q1 as maybe the low base for this year if we expect a recovery, and also the synergies and the consolidation impact coming through? Yes. So I think actually we saw some of that in the numbers clearly last year. If you look at, for instance, SG&A expenses that came down, was 110 basis points, which obviously is related to, let's say, the cost reduction and synergy efforts we've been taking. Secondly, we've also said that the synergies are gross pre-tax numbers and some of that obviously gets reinvested. We talked a lot about the readiness for the facility. Obviously, that also requires underlying R&D spend for the products that we want to launch into that facility, that's important. And you clearly saw it in the Lamps & Systems margins, where you see the improvement year-over-year being quite substantial actually from a profitability perspective. So I think we have actually already seen -- of course, against that, we've seen the macro environment, right, which when we started the entire acquisition was, of course, not in the cards. We've seen inflation, which was clearly a headwind for everybody last year, especially on the procurement side of the house, and these are all effects that go against some of the things we're doing. And going into 2023, I already I believe answered the question as to how -- what I see on the synergies. It's progressing as planned. We talked about 100 million of cost savings that we have been implementing and that should see some improvements also going through in 2023. And then we took the first step into, let's say, the footprint consolidation in Q4 that we announced also earlier on when we gave guidance for Q4 and Q3, and that should also see some impact. But again, this is against the macro backdrop now that kind of dilutes a little bit, obviously, what we're doing on the cost front, but we're moving on and of course doing, as I said, all the things we should be doing given that's the things we can control. And if I look at Q1 with the macro impact, the recovery that you see through the year and the mix potentially turning more positive, should we treat Q1 as a low point of the year, an improvement from there or it's still quite uncertain at this stage? I would be -- we're very early in the year and the environment is still very dynamic. So I think for now, as I said, we're working on the things we can control. We have sort of formed a view on the second half, also supported by some of the things we see from other industry participants and customers as well. But look, 2022 has been very dynamic, and very early on, itâs only January. So I think it's too early to form a very clear view yet. Okay. Thank you. And maybe one last clarification for 2024. You mentioned in the past a new sensor design win in the smartphones is still on track. There is no impact from this program to your 2024 downgrade, right? If I summarize correctly, it's just macro driven, nothing with this design win for 2024? So the -- win for 2024, obviously, also compensates negative effects we mentioned. But it shows at the same time that we are really on track in our customer engagement, in our portfolio positioning and that we are regaining market share in the consumer space as we have planned. And that's a very strong confirmation in the right direction. Yes. Thank you. Most questions have been answered. Just wondered if you could, Ingo, give a bit of color on the interest payments in Q4? It was a bit above what I expected. And also if you -- maybe a question for the entire management team. I know you sort of said it's early days, but would you say that you would expect fiscal year '23 to be a revenue decline of substance, or is there anything you can help us sort of quantify the revenue for 2023? Yes. So on the interest payments, we typically pay not every quarter the same. That's different to how we accrue, of course, for the interest expense. So that's why -- but the interest payment we had in Q4 was fully in line with what we actually planned for. So you can't assume every quarter the same interest payment. But overall, it was completely in line with what we had and we have right now gross and interest. If you look at the total portfolio, we have of around -- between 3.8% and 3.9%, I believe, at this point in time. Obviously, for 2023, the only thing I can say about full year, as we're just starting the year, is that there will be some impact, of course, from the deconsolidation of some of the activities we still had in the year 2022 similar to what we had in '22 when comparing to 2021. And that will depend a little bit on when we expect the closing of this. So it's also for me right now a bit too early to say. That's the only thing I can say at this point in time. Yes. Good morning. One follow up on the prepayment. To understand it correctly, I guess the prepayment is related to some kind of milestones. Probably you could elaborate a bit on this? And the amount, what you then might receive a certain milestone would be achieved? Is it related to future sales, or what would it be related to please? Thank you. Look, I appreciate the interest in that topic. But as we said already in Q2 when we first announced it, I'm not at liberty to disclose right now what the specifics of it is. I would just like to highlight that we didn't utilize it in Q4. So it's not in the financial statements. Thank you very much, ladies and gentlemen. This concludes our question-and-answer session of the call this morning, and we would like to thank you for joining us this morning and look forward to speaking to you again with the next set of results. Thank you very much, and have a good day.
EarningCall_545	Good day, ladies and gentlemen, and welcome to the Airtel Africa Nine Months Results Call. All participants are currently in a listen-only mode and there will be an opportunity to ask questions later during the conference. [Operator Instructions] Also note that this event is being recorded. Thank you. Thank you for joining us on today's call. I'm joined on the line by our CFO, Jaideep; Deputy CFO; and Head of Investor Relations, Pier. We'll be shortly answering your questions. But first, I'd like to provide you with a very brief overview about some of the performance in the last nine months. Over this full year, we have reported a strong set of results despite the global macroeconomic backdrop. Revenues went up to $3.9 billion, with a 17.3% growth in constant currency terms. Adjusting this outbound voice call barring, the organic revenue was $0.2060 for the year. In Q3, the quarter ended December, our constant currency revenue growth was 18%. Despite the inflationary challenges, we are delivered on our mission to maintain steady margins as our EBITDA margin slightly increased to 49%, giving us an EBITDA for the period of $1.9 billion, an increase at constant currency terms of about 17%. It is important to all that while EBIT did have some FX headwinds over the period, we continue to report double-digit growth of book revenues and EBITDA in reported currency. Before discussing our performance across our two new reporting segments, I'd like to highlight our performance on a regional basis or per regionals, including both mobile services and mobile money. In Nigeria, we continue to see strong trends in constant currency performance, 21% in the period and 3.4% in Q3. In East Africa, we reported a 16% revenue in constant currency with the France region growing 12.7% in constant currency as well. Let me begin by focusing the performance of the mobile services segment. With strong demand for services across our certain countries, combined with a very attractive consumer-focused acquisition and distribution infrastructure drove a 10% increase in the customer base, with quarterly net additions at the highest level in over eight quarters. ARPU growth of 5.9%, and across our user base increased for mobile services revenue grew 15.9%. We remain confident that the very low unique customer attrition levels across our footprint, combined with very low usage revenues mean there remains a long runway for both voice and data revenues to grow across all the three regions. In Nigeria, mobile service revenue grew 21% over the period, while in East Africa and France-speaking market saw almost 30% growth in constant currency. Let me further break down the performance of the Mobile Services segment between voice and data. For voice services, revenue grew up 4.7%, was supported by growth in customer number alongside the further increase in voice ARPU as a result of increasing usage by customer, supporting our view that usage level across African countries remain very low compared to our global peers. For data services, the expansion of service remained very well across the 40 markets as well. This, combined with also same focus on network coverage and capacity, has contributed to 13.6% growth in data customers. Together, these are customers with ARPU growth compared to constant currency growth of above 22%. Only 17% of our voice customers and 46% of our data customers are using 4G, highlighting the opportunity for sustained growth in data services going forward. As a result of a very strong revenue performance and despite international pressures, particularly voice calls in Nigeria, mobile services has seen a very encouraging growth of almost 15% in constant currency with continued margin resilience at 49%. The mobile money business continued to see a very strong performance with almost 30% constant currency revenue growth in the period. It is the fastest growing mobile money business across the continent. We continue to see expansion of our customer base, which increased by 22% as a basic driver of growth. Outside of Nigeria, which is very early in the mobile money journey, the beneficial of the customer base increased almost 85%. With increasing cases and continued customer engagement, transaction value per customer increased at 10% regarding Q3 annualized transaction value of almost $100 billion. Following these careful launches in Algeria, we continue to focus on building new brands, and we invest in technology and platform to develop growth and confidence in our customer propositions. We will have a view that we invest in the tech platform and systems ahead of revenues is the best strategy for long-term value creation. Mobile service growth, we continue to see path to resilience despite the very challenging official environment in many of our markets. We have continued to focus on cost reduction and on raising efficiencies to limit the impact of inflationary pressures on our cost fees, resulting in a 20 basis point margin increase over the year in reported currency. Over the year, foreign assumed changes about an advancing part on our reported financials. The biggest drivers of CapEx weakness related to the dilution impact in Nigeria, our largest market; Central Africa, and France, Malawi, Kenya and Uganda. It is partly offset by the acquisition in Zambia Kwacha. Adjusted for these losses within our finance cost line, our key are exceptional items increased 21.6% over the year, reflecting our strong operational execution across the 14 countries in the group. Briefly, in terms of the balance sheet and cash flow. At the end of December, our leverage ratio was 1.5x EBITDA with net debt of $3.6 billion. The leverage ratio has increased slightly from 1.3x at the end of September 2022, reflecting the recent acquisition of spectrum, particularly 5G spectrum in Nigeria. Our capital allocation policy remains unchanged. Our priority is to continue to invest in this business to ensure we future-proof our operations for sustained growth, and we therefore reiterate our previous stated guidance of between $700 million and $750 million by the current financial year. We also remain committed about strengthening our balance sheet by reducing further currency debt, while continuing to push that down to data revenue. Earlier this year, we redeemed $450 million of OpCo debt in advance and we will continue to focus on reducing the debt further as we continue to upstream cost from our various OpCos. Over the last nine months, we are further investing in our network to enhance coverage and network quality. Almost 90% of our CapEx is targeted towards growth initiatives. In addition, we have also announced our spectrum footprint across a number of key markets. In particular, in January, we announced the acquisition of 3.5 and 2.6 gig spectrum in Algeria, which will be used for 5 gigawatts and increased 4G capacity. This spectrum and other acquisitions in Kenya and Zambia, we provide significant capacity first accommodate continuous strong data growth by supporting good 5G rollout and 4G expansion. Before we open to Q&A, I thought I'd highlight that what I see, what we see to be the five regions where the opportunity of Airtel Africa is so attractive. Number one is a very stronger outlook. Our markets across Africa continue to show significant opportunity for growth, which is reflected in the rapid uptick of both voice and data services. This, while leveraging significant mobile money opportunities, including the rollout of PSB in Algeria, which saw significant confidence on the social media of growth in the coming years. Secondly, our relentless focus on efficient returns will ensure that the flow-through of revenues will continue to drive profitable growth. Despite the macro environment, we continue to deliver EBITDA margin resilient across the book in the short term. Thirdly, our confidence in growth which has focused our attention on future, putting the network, and our recent investment spectrum will ensure network reliability for enhanced customer experience and enhance our brand, which is the key to monetizing this growth opportunity. Number four, our risk mitigation framework. Our corporate governance strategy is in mitigating risk which we're exposed to. Our track record speak for itself how we maintain this vigorous approach to drive continuing shareholder value. And finally, our sustainability agenda, which is based on a very strong belief that profitability and sustainability are not mutually exclusive. And with that, I would now like to open the line for questions for which I will be joined by Jaideep and Pier. First question is on the Nigerian Mobile Money rollout. I know you gave some color in the release around a focus on Lagos for the moment and some discussion around security protocols, et cetera. Just wanted to get the sense on how far we are away from launching a product that looks like your product across Africa and starts to generate revenue growth there. And then question number two, can you provide us with some insights on the pace of 5G rollout? It seems as though your major competitors are talking more to their 5G aspirations, particularly in Nigeria. So just wanted to get a sense of potential investment in 5G. And then finally, just any heads up that you can give us on further spectrum acquisition? I know it's been a busy year, but I just wanted to know if there was anything obvious that is coming through in the next year. Sorry, last question. Is it about spectrum? Acquisition. Okay. Let me take the PLD question first. We have spent the 14 months of building a very strong distribution foundation. We've also focused on IT infrastructure and the drive business systems and products to ensure that we can rely on the business model to build us confidence in the brand. We're almost at the end of this process. So the next couple of quarters would not be devoted towards consumer acquisition. We wanted to be very confident that the systems -- escalated systems are the force to prevent fraud and to deliver the customer propositions we want to put out there. I'm slightly more confident than we are [indiscernible] now, ready for growth returns to bringing customers on board and finding identities that is who we're going to focus upon. But also, Nigeria is slightly different from many of our operating countries. It is idly penetrated with a number of intact companies and advance of their various digital projections. Nevertheless, it's a massive opportunity, and we just want to have the right transition to capture this growth in the country. On the 5G rollout, we've acquired certainly a number of countries, Tanzania, Zambia, Kenya, Nigeria, of course. We can notice selectable [indiscernible] 5G. I think within the five years' growth in the medium term -- in the short term, about cost opportunities to be in our 4G footprint as selectively launching 5G to come up with opportunities we have in Africa. So just let me summarize is, yes, we have acquired spectrum in a number of countries. Yes, we plan to go down. It's going to be selected in key cities, where we have gone to see no far devices and with no purchasing power to really enjoy the benefits of 5G. On your last question around spectrum, which is the opportunity that is spectrum where this is available at commercially correct price and the 5G is good and needed where we would acquire spectrum. We spent about $500 million or plus $500 million in the last nine months in [banking] spectrum in the number of countries, of course, Nigeria, with data in Kenya, Tanzania, Zambia and Mozambique. So we're not spectrum-shy, but the pricing that they provide in more commercially -- with the commercial opportunities are available in the country before we decide to put money behind this. This is Faisal Azmeh from Goldman Sachs. Just a quick question on the Nigerian market and how we think about the margins outlook next year. Obviously, this year has been quite exceptional in terms of inflation. How should we think about the margin profile of the particular segments in 2023? And maybe do you have further measures that you can undertake in order to mitigate any additional inflationary pressure? That's my first question. And then my second is just to maybe a follow up on the spectrum question. How should we think about the CapEx profile in January next year? Are we peaking in 2022? And should we start to see some meaningful normalization next year? And how does that play through the balance sheet? Well, let me start with the second question. On just spectrum, we're going to see a smaller, but that's going to be believing by two things. We're going to start investing behind the data centers. We want to build the number of data centers goes in a number of countries. As of now, we invest in our fiber infrastructure, so that would be a driver capacity, we're looking at between $800 million and $825 million, that was similar to the $750 million, I mean for this year. In terms of spectrum, which is your first question, we wanted in the telco, so we do new spectrum for expansion. We do need spectrum for quality, we do need spectrum for coverage, but the price has got to be right. We look for the right price. We look for the right spectrum. If both mid-commercial positon, we would push money behind it. But at a steady level to high in this current year, these are very unusual. We bought 5G in Nigeria, close to $300 million. We bought spectrum in Tanzania, in Kenya, it doesn't happen like this in many years and that in four, five countries. You've got to put money in the spectrum. And the Nigerian opportunity is a very special one. The 5G came in at almost $280 million, and that's why the income CapEx side in this financial in Nigeria [indiscernible]. Yes, the big driver of challenging in fair price and just to continue. This time last year was little busy, was about 220 [beta] at estimate 800 beta . And unfortunately, energy and business in terms of our cost level compared to [indiscernible] very small. So we do run most of our sites using these power generators, as owned by the telecom with a pass-through cost. So that's been a major, major driver of pressure on EBITDA in Nigeria. What I would do is, we continue to work with the telcos, but to larger partners we're working with PTC and IHS. We look for -- situations, whereby they progressively combat the NIV they use for the site from diesel into lithium battery and solar power it cost money. And we're looking at various, I mean, win-win positions that would [indiscernible] them to invest more in such environmentally-friendly energy sources. And at the same time, reduce any cost of power, and we look for ways to share the cost of this investment. We're talking to our two partners on how we can minimize the impact of where the strategies, and our cost profile in the largest market will increase, I believe opportunity is very low. Firstly, on the OpEx, does you want any impact of devaluation on your OpEx in Nigeria? And do you see any potential impact going forward? [indiscernible] any potential devaluation now higher margin part looking forward? Can you share any more details on mobile terms of what kind of agent network you've got so far? And are there any kind of challenges that you're facing in terms of rolling out the mobile money services anytime soon? Thirdly, just a question on -- apologies if it's already been reported. What kind of ARPU uplift we see from 3G to 4G in Nigeria? And what most of your 4G, what your data subscribers are on 4G? You're going to have to repeat the last question, I didn't get the last question. Just for the last one on migration from 3G to 4G. What was it? [indiscernible] and I come back to this one to the question of the 3G 4G to clarify your course around each. Okay. So on the specific question with reference to the devaluation impact in the OpEx, if I understand it correctly, so our OpEx, the composition of the U.S. dollar complement into OpEx is very minimal. It doesn't have too much impact in our margin as well as OpEx if the devaluation happens. Now we cannot predict the devaluation impact if it is linked to the fuel price or not, because so far, we haven't seen that devaluation, it's the least in Nigeria. But it's -- obviously the fuel price further goes down, that of course is the pressure on the margin. But otherwise, devaluation, we don't have to impact in the OpEx because we have been able to bring down the foreign currency-related OpEx to a very, very minuscule level over the past few years. Our main risk is -- of devaluation is actually in the CapEx side because that's where maximum point currency vendors or foreign currency bills have to be paid. So that's one element. The second element is on finance lease obligations. And the third element is on external debt, which is data point [culture] debt, which is there at the OpCo level. So these are the three areas where the devaluation really impacts our -- and that's what you see in the derivative and foreign exchange fluctuation cost, which is sitting as a part of finance cost. On PLP, we don't have any external factor making it difficult for us to launch. So we're just following the temporary data that can work for us in all of our countries, by being very deliberate on the IT infrastructure, then by deliberate on systems and distribution to be sure that they [indiscernible] cost of acquisition that would be big growth as the only data is making up as we see really now, but I'm very confident that following two, three quarters, you will see very, very quick assertion of our PLP business in Nigeria. That is one. I believe your last question is around the 3G and 4G. Of course, we like to migrate all customers from 3G to 4G. The average ARPU for a 3G customer is about $2.9 and for a 4G customer is more than [indiscernible], which is why we look for various [indiscernible] customers migrate for 2G to 4G from 3G to 4G. We're also very conscious of investment using the product expansion. I see in Africa maybe leap from 2G to 4G, not from 2G to 3G, which is why we're working on a number of tools to really have a quality migration from 2G to 4G [indiscernible] 2G to 3G, given the wide difference between 3G customer in terms of ARPU and a 4G customer. Three questions, hopefully, short. On your CapEx trend for the quarter, it seems like run rate has fallen further. So wondering why the CapEx is this low. And does this CapEx also include spectrum payment? Or this is purely the equipment CapEx, if you could give some color there? Second question is around the FX in Nigeria. Have you been able to take any cash out of Nigeria recently in 2023, especially? And if you could give the rate at what you have been able to get it out? And finally, in Nigeria, how is your discussions going with the regulator around price increases? Is that -- is there any clarity on time line around it? Should we expect something maybe after elections? I'm going to start with the question on pricing. I certainly have said [indiscernible] our growth is not built on site. We have a formula, we use the customer base group and user group to drive revenue. That's a lot most to say with the pricing. Of course, if we do have opportunity to pricing improve in data and et cetera and consider value pricing [indiscernible], in government of our strategy of growing revenues by A, increasing the customer base; B, for customer driving usage, these are the two clear pillars that we use. We have a variety of promos, a variety of price points that I showed and we continue to drive usage by not focusing on stricter pricing too that I look forward. And you can see in our Q3 performance in Nigeria driving growth. If I go to your second question regarding remittances from Nigeria. I don't want you to look across the [indiscernible] business. We operate in 14 countries and with the upstream $800 million in the first nine months of this financial year. [indiscernible] $200 million, in East Africa about $270 million and French-speaking Africa, that's $1.5 million by basically easy for last quarter and this contracted to portfolio, West Africa, East Africa, Nigeria, French-speaking, others. I mean, are we concerned by the fact that it's slightly more difficult to [indiscernible] out of Nigeria? We are. [indiscernible] But Nigeria is our largest market, we need for investment in Nigeria. We just bought spectrum, silicon 5, 2.6 [indiscernible] catering to ARPU spectrum very soon. So that's actually a large appetite for [indiscernible] used in Nigeria as well. So we're not so worried. Of course, the models are distributing easier for our CapEx vendors to make it easier for pilot. But that's kind of the challenge that I mentioned at a fast period of about $200 million from Nigeria in the first nine months of our financial year. That should be the experience of all the things we put in place to get the right level of remittances out of Nigeria and out of our 13 countries. So on the CapEx part of it, our CapEx guidance for the full year remains at the same level of between $700 million and $750 million. Low spend in the current quarter, what you see due to the phasing of the material received, not that every quarter because there is a lag time between the order placed, order received and deployment. So that sometimes gets distorted because of multiple reasons, but overall level CapEx will remain as per our earlier guidance. No. No. Spectrum is not part of this $700 million, $750 million. This is only we're talking about the tangible CapEx, the network CapEx, the IT CapEx, sales and distribution-related CapEx, real estate and those kind of things. Spectrum is not part of this $700 million, $750 million guidance. Right. And if I could ask also another question on the voice revenue trends during the quarter, 14% growth almost. That is very strong growth for voice revenue. So if you could give some color whether this is a sustainable rate in your view? [indiscernible] my product demand about the very low level of unique penetration in our footprint in certain countries where we are good, it's a fair testimony of the very long run we are available for us to grow voice revenue. That is 1 data point. The second data point is just the absolute minutes consumed by the customer network, it is relatively small. This quarter, we took 277 minutes from 240-something in the last quarter, companies in [indiscernible] 600 minutes per person per month. I'm sure most have gone much higher than that. You can see that pick up between where we are and where the economies were. So I firmly believe that I mean, we will continue to grow our voice revenue by expanding the customer base, bringing a lot more between the digital work. And at the same time, primary usage, network as function. Those are the things we continue to increase our voice revenue. And I'm very, very optimistic that I mean we see a long run rate to capture very good potential in the 14 countries where we are based. Just want to check on the cash from all markets, not just for Nigeria. Can you please say how much it was for each of the past three quarters? Not for nine months, but for each quarter. I think for each quarter, I mean we don't give -- we don't have the information for every quarter. What I've done is to give you a very top line of $800 million. We've said in the last nine months, and this came from a variety of countries. It is spread between Nigeria and parts of our $300 million; East Africa, I mentioned about $267 million; and from French [indiscernible] of the top line spread between the three different regions and amounts we've taken out in the last nine months. We gave you part out of Nigeria and good country region. Do you disclose the information for 1H and nine months? I just wanted to try and figure out how much cash you upstream from these markets in the past three months, please. So we -- so for example, just in -- so this quarter, it was roughly about $150-odd million, between $150 million and $160 million. $800 million. $800 million for nine months and about $300 million in -- from Nigeria, and that means another $500 million from the rest of the countries. Congrats for the results. Just focusing on Nigeria. I was wondering if you have any more information on your customer profile in Nigeria. Basically, the split between high income and low-income customers. And then the second one is around tower contracts. My understanding is you have kind of two general contracts, one is oil inclusive and the other one is energy pass-through. All your contracts energy pass-through? Or do you have the split between the two? And could you give us that split if possible? For the energy contract, both of them are pass-through that it will give you more flavor as to the prices between each of the data. Both of them are pass-through in terms of credit cost. For the profile of our customers of [indiscernible] and Nigeria, if I use the type of uncertainty as a positive for EBITDA high end, as I think now about 20% of our customers use 4G phones. About 15% use the 3G phones, and about 65-odd percent use 2G phones, mainly antique rural areas. So as we split some of the 4G phones is slightly more affluent than the personal 3G phone. And of course, the great majority of population is still on their 3G phone around 65% so as we grow their partialization of our customer base, and different ARPU come out from different business. So on ARPU contract, we have the agreement of the contract, which is fixed based on the consumption. So consumption of grid power side, non-grid power side, there are multiple mix of profile on the sites. And based on that, the quantity on the fuel consumption is fixed, and this is also linked to the second tendency, first tendency, and so on and so forth. So it is not a straightforward kind of thing that it is comparable. And obviously, the price -- and the price is linked to the market price of the fuel. So the base price which was fixed in the contract, and then there's an increment, which is linked to the fuel price rise. So that's the way this whole calculation happens and, therefore, effectively in a very simplified way, if I explained it is a pass-through cost. And the only way it can get minimized is, as CEO mentioned in the beginning that we are in touch with the tower focus, see all the future sites should come with the alternative source of energy so that we can reduce that impact if further increase in the diesel price happens. And also, we are looking at conversion of some of the existing sites, especially where the grid power amenability is quite poor, those are the places we are first looking at if we can put up an alternative source of energy to bring down this cost. Just to thank everyone for joining us this afternoon. I look forward to speaking to you again, and hopefully, meeting many affiliates this year. Thank you. Have a good afternoon.
EarningCall_546	Good day, and welcome to the Reinsurance Group of America Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Todd Larson, Senior Executive Vice President and Chief Financial Officer. Please go ahead. Thank you. Welcome to RGA's Fourth Quarter 2022 Conference Call. I am joined on the call this morning with Anna Manning, RGA's Chief Executive Officer; Leslie Barbi, our Chief Investment Officer; Jonathan Porter, our Chief Risk Officer; and Jeff Hopson, Head of Investor Relations. A quick reminder before we get started regarding forward-looking information and non-GAAP financial measures. Some of our comments or answers to your questions may contain forward-looking statements. Actual results could differ materially from expected results. Please refer to the earnings release we issued yesterday for a list of important factors that could cause actual results to differ materially from expected results. Additionally, during the course of this call, information we provide may include non-GAAP financial measures. Please see our earnings release, earnings presentation and quarterly financial supplement, all of which are posted on our website for a discussion of these terms and reconciliations to GAAP measures. Good morning, and thank you for joining our call. Last night, we reported adjusted operating earnings for the fourth quarter and full year of $2.99 per share and $14.43 per share, respectively. This was a solid quarter that included favorable performance across many of our segments and business. Areas of particular strength this quarter include our Global Financial Solutions business in all regions and product lines, Asia Pacific Traditional and U.S. Group and Individual Health. We continue to see very good new business activity and momentum with notable premium growth on a constant currency basis. Our product development capabilities, capital solutions and underwriting expertise are particular strengths that serve as valuable differentiators and are leading to first-to-market and exclusive new business opportunities. Our overall investment performance was good and the quarter saw minimal impairments. This was also a solid quarter for capital deployment with $80 million deployed into in-force and other transactions across a range of geographies and product lines, which brings the year-to-date total to $430 million, another successful year. The transaction pipelines remain very active and broad based across our many risks and geographies and we expect the strong demand to continue. As I look back on 2022, I am proud of our many accomplishments. First, we achieved record adjusted operating EPS of $14.43, despite absorbing $5.02 of COVID-19 claims and $0.53 of foreign currency headwinds, demonstrating the strength of the underlying earnings power of our business. Fourth, Global Financial Solutions had another record performance here. We completed many transactions at attractive returns, adding to the substantial underlying earnings power and the diversification of our business. Fifth, investment results were favorable, in part benefiting from higher available yields and some nice realized gains on our real estate joint ventures and limited partnerships. Interest rates have shifted from a multiyear headwind to a tailwind, and we are seeing a measurable benefit. And finally, I am proud of the progress we made on our ESG efforts. In 2022, we published our first sustainability report, providing transparency into our ESG strategy targets and accomplishments and demonstrating our ongoing commitments. But as proud as I am of these accomplishments, I am even more excited about the future. The life insurance industry delivered on its purpose during the course of the last three years and RGA demonstrated its leadership position and the strength of our business and long-term client partnerships. We have a great franchise, have highly engaged and talented teams and are very well positioned in all our markets. Our business is resilient, our strategy is delivering value to our clients and returns to our shareholders and I am optimistic about our future growth prospects. After 17 years with RGA and more than 42 years in the insurance industry, I will be retiring at the end of 2023. As you've heard me say over many years, one of our key strengths is the depth and breadth of our leadership team and that was certainly highlighted with the recent announcement that Tony Cheng, who has been with RGA for more than 25 years, was named President and will become CEO on January 1, 2024,upon my retirement. Tony besides being a very capable and talented executive has played an instrumental role in the growth of our business in Asia and more recently, in his leadership role overseeing EMEA and Australia. He understands and appreciates our many strengths and our unique culture and I am confident that RGA will be in great hands. Thank you for your interest in RGA. And I'll now turn it over to Todd to review the detailed financial results. Thanks, Anna. RGA reported pretax adjusted operating income of $245 million for the quarter and adjusted operating earnings per share of $2.99, which includes the COVID-19 impact of $0.78 per share and a foreign currency headwind of $0.22 per share. For full year, we reported record adjusted operating earnings per share of $14.43, which includes the COVID-19 impact of $5.02 per share and a foreign currency headwind of$0.53 per share. The trailing 12 months adjusted operating return on equity was 10.3%, which is net of estimated COVID-19 impact of 1.5%. We are pleased with the solid quarterly results produced across the organization and in other fundamental metrics such as new business production, constant currency premium growth, capital deployed into in-force and other transactions and investment returns. For the full year, our book value per share excluding AOCI, grew 4.8% to $146.22. This was achieved after absorbing $447 million of COVID-19 claim impacts. Reported premiums were up 1.1% for the quarter after adjusting for adverse foreign currency impacts, premiums were up 6% on a constant currency basis. For the full year, premiums totaled $13.1 billion representing an increase of 8.4% on a constant currency basis. We continued to see good momentum across our various business segments. Turning to the quarterly segment results, starting on Slide 7 in our earnings presentation that can be found on RGA's Investor Relations website, the U.S. and Latin America Traditional segment results reflected both unfavorable Individual Mortality experience and COVID-19 claims that totaled approximately $48 million. We believe some of the excess mortality relates to the early flu season. Jonathan will provide some additional insights in a minute. Variable investment income was a positive contribution, although below the recent runrate. The U.S. Individual Health Business had favorable experience and our Group business results were above our expectations as most lines performed well. The U.S. asset-intensive business results were strong reflecting favorable investment spreads and our Capital Solutions business continues to be within our expectations. The Canada Traditional results reflected unfavorable experience in the group life and disability business with COVID-19 claim costs totaling $3 million. The Financial Solutions business was above expectations due to favorable longevity experience. In the Europe, Middle East and Africa segment, the traditional business results were in line with expectations, reflecting unfavorable mortality in the UK, offset by favorable overall experience otherwise. COVID-19 claim costs were $2 million for the quarter. EMEA's Financial Solutions business results reflected modestly favorable experience. Turning to our Asia Pacific Traditional Business, Asia results reflected favorable underwriting experience across the region, absorbing COVID-19 claim cost of $13 million. Australia reported another good quarter with a pretax profit of $6 million driven by favorable group experience. The Asia Pacific Financial Solutions business results were very strong, reflecting strong new business and favorable investment spreads. We also saw a decline in the COVID-19 costs related to medical hospitalization claims in Japan. The Corporate and Other segment reported a pretax adjusted operating loss of $89 million, higher than our expected quarterly range due to higher general expenses and some elevated financing costs. Included in the higher general expenses are some incentive compensation true-ups, consulting fees and a number of one-off items. Moving on to investments on Slide 13 through 15 in our earnings presentation, the non-spread portfolio yield for the quarter was 4.45%, reflecting a positive contribution from variable investment income, although lower than the recent run rate. The quarter was also positively impacted by higher new money rates, as well as some benefit from existing floating rate securities. For non-spread business, our new money rate was 5.05% in the quarter, compared to 3.31% in the fourth quarter of last year. Our new money rate was modestly lower than the third quarter due to a more conservative asset allocation of new money and some lower spreads available. Looking at the base yield before variable investment income, we have moved from 3.78% in the fourth quarter of last year to 4.14% in this quarter. Meanwhile, credit impairments were minimal, and we believe the portfolio is well positioned as we move through a more uncertain economic environment. We have taken action recently to lower our high-yield bond exposure. We have also selectively extended duration to lock in higher interest rates. As shown on Slide 16 and 17 of our earnings presentation, our capital and liquidity position remains strong and we ended the quarter with excess capital of approximately $1.2 billion. In the quarter, we deployed $80 million of capital into in-force and other transactions and continue to see a very active deal pipeline. We also returned a total of $78 million of capital to shareholders through share repurchases and dividends. For the full year, we deployed $430 million of capital into in-force and other transactions and returned $280 million of capital to shareholders through share repurchases and dividends. As we emerge from the pandemic and a strong 2022, we are confident in our earnings power and capital generation and we expect to be active in the deploying of capital into in-force and other transactions and returning excess capital to shareholders through dividends and share repurchases. We have included some updated LDTI information in the earnings presentation on Slide 21. The LDTI adjustments as of January and December of 2021 are consistent with our previously provided ranges. As of September 30, 2022, we estimate a decrease in retained earnings of $500 million to $800 million after tax, compared to current financial reporting. We estimate an increase of AOCI of $2.1 billion to $4.1 billion, reflecting the higher interest rate environment. As we have previously commented, we believe the new financial reporting standard will provide better insight into RGA's long-term performance and along with the new disclosures provide additional transparency of our business to investors. We are excited about the future and believe our well-diversified global platform and underlying earnings power positions us to continue to support our clients and deliver attractive financial returns to shareholders over time. Thanks, Todd. As indicated on Slide 8, aggregate non-COVID-19 underwriting experience was modestly unfavorable in the quarter. We continue to benefit from globally diversified book of risks, as higher claims in some markets were in large part offset by favorable underwriting experience in others. Total COVID-19 impacts continue to remain moderate, totaling $70 million pretax across all segments. Starting first with U.S. Individual Mortality, we experienced elevated non-COVID-19 claim costs due to higher claims frequency. Large claim experience was in line with our expectations after two very favorable quarters inQ2 and Q3. Our higher frequency of claims is directionally consistent with the excess levels of U.S. general population mortality as reported by the CDC. Non-COVID-19 population deaths continue to remain elevated, which was compounded by the first material influenza season since the start of the pandemic. Although total flu cases and estimated mortality appear to be in line with an average pre-pandemic flu season, influenza cases peaked about 8 to 10 weeks earlier than historic norms, which we believe shifted the majority of deaths into the fourth quarter. U.S. general population data continues to show COVID-19 deaths are primarily at ages above 65, where there is less life insurance exposure. In the quarter, in our U.S. Individual Mortality business, estimated COVID-19 claim costs of $44 million, which is $13 million per 10,000 general population deaths was at the lower end of our rule of thumb range. Aggregate underwriting results in all other markets were favorable, driven by strong performance across Asia. As expected, we saw the material quarter-over-quarter reduction in medical claim costs in Japan to $11 million consistent with the narrowing of eligibility for at-home COVID-19 claims reimbursement that occurred at the end of September. Turning to Slide 10 in the earnings presentation, our overall year-to-date non-COVID-19 underwriting results were strong. U.S. Individual Mortality had both favorable large claims experience and lower overall claims frequency and Asia Pacific Traditional also had very positive underwriting results across the region. U.S. Individual Health and U.S. Group results were ahead of expectations and Global Financial Solutions underwriting results were also positive, primarily due to better-than-expected longevity experience. These favorable results were partially offset by unfavorable mortality experience in Canada and the UK due to both higher frequency and severity. Full year COVID-19 claim costs of $447 million with the majority of U.S. Individual Mortality was a substantial decrease from 2021. Hey, good morning. I had a question first on just capital deployment. Should we assume sort of a similar allocation between deals and buybacks this coming year as you've had in the past year? This is Todd. So it will be somewhat dependent on the level of deal activity that we see. And right now, the pipeline looks very active around our different geographies and I think if you look back historically, it's âwe've pulled all the different levers between capital deployment into the transactions, the share buybacks and dividends and I think you'll see us continue that going forward, but we do intend to be active to the extent there are not attractive transactions to deploy the capital, we will look to bring down that excess capital level over time through share repurchases and the dividend level. And have you â do you see a similar environment in terms of competition for deals? Because it seems like in the non-mortality like asset-intensive businesses, there's just a lot more interest in those blocks from companies backed by alternative asset managers. Thank you for the question, Jimmy, it's Anna. First, let me shape out the pipeline. As Todd mentioned, our pipelines are very good. Strong demand across everything that we do and right across our geographies and various regions. Now from a competitive environment, yes, steel environment is competitive. It varied by size and it varies by the underlying risks, so we typically will see and do see less competition when there are more complex elements of the deal or as you mentioned, when there is more insurance risks, these biometric risks and also, we tend to see less competition on the larger size deals. Now in terms of our competitive positioning, the way I think about it, Jimmy, is really our proposition is all about bringing a complete package to the table. It's in part how we differentiate from our competitors, so the package, including we have an excellent brand. We have a reputation for getting things done from being creative for finding new solutions, and we also have a reputation on delivering. We honor and meet our commitments. And we have very long and strong, well-established client relationships to add the strength of RGA's counterparty and our long-term commitment to this business, that's a pretty complete package and that's how we compete and that's how we win deals. And you've seen that time and time again, you've seen it through the entire time of the pandemic and our approach is really to prioritize and pick our sweet spots and we expect to continue to be competitive, be active and be successful. Thank you, very much. Premium growth in Asia declined I know there is some 4Q true-ups that occurred last year given elevated mortality that did this time, fortunately. Now that we are arriving at a period of general improved mortality, how should we be thinking about this impacting premium growth given that dynamic in Asia going forward, but also in other geographies? Thank you. Thank you for the question. I'll start. I would say the dynamics in Asia also reflected that in some markets through most of 2022, there were still COVID-related restrictions that were being â that were causing new business to be â at lower levels than we had seen historically. Most, if not all, those restrictions have now been lifted, so we see momentum really picking up. In terms of growth globally, as I think about growth for our traditional business, we are driving a fair amount of that growth with the work we do with our clients on new underwriting programs. Things like simplified issue or accelerated or automated programs. But it's not just these programs, it's also providing the underwriting services for cases that are rejected or fall out of the programs. And as we've shared many times in the past, also providing the more traditional facultative services, those are for cases that require fluids or that are more complex. And then we layer it on product development where we combine all those services, all that expertise to generate new products and new underwriting methods, it's that ability to support all of their needs. That is an advantage for us. I see that contributing to growth. We see that contributing to growth and we see momentum picking up as we get into 2023 and beyond. Thank you. And my follow-up question, Todd, you had talked about a number of onetime items, some consulting fees in the prepared remarks. Is there a way to categorize that the degree or dimension the size of that? And was any of that related to kind of work for replacement vehicle to Langhorne REIT? Thank you. Yes, it was a variety of â as far as the other one-off type items. There were some fees related to the push to get the LDTI implementation ready to go for 2023. There was some various sort of local and state tax items that don't necessarily flow through the income tax line, but flow through the income expense â general expense line, just a variety of little things that added up. I would say that going forward, as our business grows and as we mentioned, there is some elevated of financing expenses, including interest expense, we do expect the corporate loss average run rate to increase and for now, the size that I would say going forward, I would expect it to be more in the average quarterly loss rate to be more in the range of, call it, $30 million to $40 million and we can revisit that as we go forward. But certainly, we're seeing an increase in that quarterly loss rate from the sort of the $25 million to$30 million we were seeing previously. Hi, thanks. Good morning. I guess, when you look back at the full year 2022 for the U.S. traditional business, are you able to give us I guess, a rough sense of how mortality experience was relative to your typical expectations. Yes. Hi, Ryan, this is Jonathan. I mean I think overall, we had great results for the year. So we're very happy with the results in U.S. mortality. Itâs a combination of both better claims frequency relative to our expectations, as well as some favorable large claims experience, in particular in Q2 and Q3 that I mentioned. Of course, that's excluding the impact of COVID, which, again, I think, came in at the lower end of our ranges. So for there, as we've seen the impact of COVID mortality go more into the older age groups, that's also resulted in staying at the low end of our $10 million to $20 million range, which is also positive. Yes. I mean it's â I think â again, if you pull out COVID relative to our expected for 2022, which would have included some assumption for excess mortality, it would be in the high double-digit millions. I think in the past, you've talked about a $60 million to $65 million or so expected quarterly earnings range for the U.S. asset-intensive business. Just given the block has outperformed this range for a number of quarters in a row now. I just wanted to see if you could give any more color on the drivers of the recent strong performance, how much is from onetime items versus maybe more sustainable tailwinds like the benefit from higher interest rates. But just trying to get a sense of 60% to 65% is still the right range we should be thinking about? Or has that run rate moved higher? It's, a lot of the variance in the quarter was due to some higher investment spread and the impact of some of the higher income on the floating rate assets allocated to that portfolio. I will remind you that the asset-intensive business is of a little bit of a shorter duration. So there is some amortization off each year as well that we need to replace with new business. I think the range of $60 million to $65 million on a quarterly rate, I think is â I would stick with that for now. But certainly, I will update that as appropriate as we go forward. Got it. Thanks. And then maybe just shifting gears to Australia. I just wonder if you could give any update or more color on what you're seeing there. It looks like Australia has been profitable. I think it was four of the last five quarters by my count. So â are you at the point now where you'd expect consistent profitability in Australia? And is there a path for that business maybe to become a more meaningful earnings generator over time? Any color you can give there would be great. Yes. Hi, it's Todd. No, it's very good to see Australia producing consistent profitability. We've got a very strong team there, very well positioned in the market in Australia. We're seeing positive signs in the industry, as well as far as making it a more sustainable insurance environment. So that's good, as well. So we're optimistic, positive going forward that we can continue to improve the profitability in Australia. Yes. And I would add on your question about meaningful â making it meaningful â meaningfully higher. In the past, we have not, from a competitive position, been successful on the new business side in Australia. We were just â our view of the risk return was just quite a bit different than the clearing prices in the market. We are starting to see that come back to us. So we haven't changed our views on risk returns. We haven't changed our targets, but we are seeing a pull towards us from the competition and expect that gradually and prudently and with discipline, we will reengage and start to grow that business. Hi, thank you. I was hoping you could talk a bit more about the higher non-COVID mortality in the U.S. this quarter. Are you able to link the elevated claims frequency to the flu that you talked about? And I think you mentioned the CDC data indicating an earlier than normal flu season this year. So do you view some of this as a pull forward of claims that you would typically expect to see in the first quarter? Yes, Erik, thanks for the question. This is Jonathan. So yes, just to reiterate what I said in my prepared remarks, this is the first material flu season since the start of the pandemic and there is clear evidence in the general population that claims have been accelerated, probably about eight to 10 weeks or so. I think consistent with what's showing up in the CDC data, we did see an increase in our frequency in our own claims in the second half of the quarter, and that was factored into our year-end IBNR calculation and therefore, impacted Q4 results. What we've seen so far through January, updated reporting for deaths occurring prior to the end of the year. It's consistent with our IBNR assumptions, which is good. And then looking ahead to Q1, since the flu appears to have peaked in December and has fallen off sharply in January, we would expect that the impact in Q1 would be lower than a normal historical season as the majority of the deaths likely have been shifted into Q4. And maybe one for Todd. You've mentioned in the past that quarterly results should be smoother under LDTI accounting, so is this an example of a quarter where under LDTI, you wouldn't have seen this material decline in the U.S. traditional earnings since the variance in actual versus expected mortality doesn't affect your future assumptions for claims? Hi, Erik, yes. So we do expect with any of the claims volatility, the majority of the claims volatility will be smooth or muted under LDTI. It will be somewhat dependent on the underlying cohorts that the claims where the claims are incurred, but certainly under LDTI, we do expect the volatility to be muted and smooth over time. Yes, and just to add, we expect the smoothing will be both on volatility, which is severity, but it will also be on the frequency, so performance, plus or minus, all cause will, over time, get smooth because of the new accounting standard. Good morning. Just a follow-up to Eric's question on the change in volatility. So, is it fair to say that on the new accounting, we're not going to see as much seasonality, because during from a historic perspective, you would have dramatically different earnings patterns throughout the quarters with obviously, 2Q, 3Q being much stronger. Will that seasonality also be smoothed out? So we're going to see kind of a more consistent quarterly earnings pattern here? And also, can you dimension at all for us when you say reduced volatility if we compare last quarter $5 this quarter $3. Are we talking about dramatically reduced volatility? Or is it going to get cut in half. So any way you can dimension that. Thanks. Certainly, qualitatively, I can provide some comments. So, as we've always discussed in the past, our business is a very long-term business. So the impact of the new financial reporting standard does take more of a look at the long-term nature of the business and looks at the experience and the profitability over time on the business versus letting the short-term volatility flow through to the bottom-line as current GAAP accounting does. So we certainly do intend to see and will see a smoothing of both the positives and the negatives as far as the claims activity under the new financial reporting. I don't have specific dollar quantification for you on the call today. However, we do plan towards the late February, early March time frame to provide restated LDTI information and have a call to discuss some of those results, but should give you more information and detail behind what the impacts and the differences are between sort of old GAAP and the new LDTI financial reporting. So, again, we'll plan to discuss that later on in March, early April time frame. Okay. And then my follow-up is, can you comment on related to the flu mortality in Q4, how much IBNR did you put up dollar wise the range of $13k to $43k is a big range. Did you â should we assume you assume middle of that? Where did you come in with your estimate? Yes. Hi, this is Jonathan. So, rather than give you the sort of the IBNR does that includes changes for things other than the flu, maybe I can give you sort of an estimate of what we're thinking for the flu itself. So there is a wide range, like you pointed out, around the estimate of the population flu deaths. There is also a basis difference between how that translates into our book of business. But having said that, I think you can think of it sort of using our COVID rule of thumb on CDC population estimates is probably not an unreasonable way to think about the impact of the flu that would be included in the total IBNR change that we put through. So if you do that calculation, it works out to probably be in the range of $30 million to $50 million pretax of additional recognition in Q4 that's been pulled forward from Q1. Good morning. We usually see lower mortality for the insured population versus the general population. Yet you mentioned that your non-COVID on the frequency side in the fourth quarter were directionally consistent with the U.S. general population. So I am wondering what is driving that. Yes, and your initial comment is totally correct. We definitely see lower population on â in our insured book versus the general population. I guess as a relative percentage difference those, is what I meant when I say directionally. So absolutely, our mortality is better than the general population. But when you see the percentage of general population deaths go up, that increase sort of comes through in our book of business on a relative basis. You can use the rule of thumb that we've provided for COVID as a way to sort of estimate that impact. All right. Got it. I am also wondering if you share the same view on escalating future mortality losses on U.S. term YRT treaties as European reinsurers that are basically reinsuring the same business. For instance, one of your European reinsurer competitors usually call that out with respect to IFRS17 adoption. Yes. So to make on that, I mean, just to get â go back a little bit in time, as an organization, we've actually been on the forefront of research and activity looking at both terms, so we perform the early studies related to this came up with some industry information, which is used I think broadly across the industry. So I think we consider ourselves to be experts in this space. What we're seeing on our post level term business is that it's performing as expected after adjusting for COVID. So there is nothing specific I would point out, I guess, at this point. Thank you, guys. Good morning. I was wondering if you could help us thinking about the underlying annual kind of run rate earnings power for the U.S. traditional business. I think last quarter, you mentioned you might have some incremental quantifications on this. No specific update on the run rate. We certainly will be updating, as I mentioned earlier, when we provide the updated LDTI information, we can provide some more expectations under the new financial reporting standard. But we are very comfortable with that business. We do see the continued positives from the higher interest rate environment and good momentum around the new business generation, as well as in the U.S. segment. So, we certainly will provide you better and more updated information in a few weeks here. Okay. Thanks, Todd. And so, I guess, if we think about Asia overall, as a growth opportunity for RGA, Curious about the strategy, should we think about growth in Asia as a potential maybe offset to the natural maturation of the traditional U.S. business that you guys have spoken about in prior years? And could growth in Asia over time, change RGA's ROE or capital return strategy? Thanks for that question. Very good question. So, let me piece it out. I think there were a few components to that question. Strategy in Asia. So, both on our traditional business and then I will speak to the strategy on our GFS business. On the Traditional Business, really, I mentioned it before. It's around bringing a package. It's about introducing new products, supporting them with underwriting programs and services. It leads to a much better competitive position for us. In fact, many of the deals that â and transactions that we work on are exclusive because we're taking the idea to the clients and in exchange, we get agreement to get all of the reinsurance on that business. That's been â that's not a new strategy. That's been a growth strategy in that Asia for quite a while and it's been, as you can see, a successful growth strategy, but further, because of our global footprint in Asia, we can leverage the ideas, the successful ideas market-to-market. So again, another growth lever. On the GFS, you will also see that we've been successful and we've been growing that business. And I would point to it's an earlier stage of development. And really, it requires very deep knowledge of the business and also the conditions. And for us, what is an advantage is, we've been there for many, many years, decades. And we have boots on the ground, local teams who are very familiar, very experienced. So another growth engine for us in Asia. But I would say that also is in other markets, that strategy of product development and underwriting programs and expertise and being creative on the GFS side. Look, we see momentum and we see good growth opportunities. Yes, Asia will have on balance higher rates of growth, but we fully expect to grow our business in all our regions as we move forward. Hey, good morning. I am still trying to kind of get clarity around these flu numbers. I know it came up in the last few questions. But if we look at the midpoint of your estimate, it's about 29,000 and if we look back historically at the flu season deaths from, say, 2010 through 2019, it was around, say, 36,000. So was the unfavorable mortality in the quarter due to flu? Or was it something else? That's what I am trying to get a handle on. And then I think Tom was asking a question about IBNR and so forth and the pull forward. So have you lowered your assumptions next quarter for flu mortality, thatâs two parts. Yes. Andrew, this is Jonathan. Let me take a crack at that. So, I think the â you're right. What we're seeing in the flu data now is about the same level as the typical average flu season pre-pandemic. I guess the key difference is those deaths largely have appeared in Q4 as opposed to Q1. So it's not that the absolute amount of the flu impact will be that different probably, but it just has occurred earlier, which is why we've adjusted our IBNR at the end of the quarter. And then that's also the reason why we were talking about the pull-forward effect. So yes, I would expect, all else being equal to see lower seasonality in Q1. It doesn't mean there'll be zero seasonality because there are other things other than the flu, just the winter weather and other things affect mortality in the first quarter of the year too. So, but the flu portion of it, we think, has been shifted to Q4. One other thing to keep in mind, of course, is as we switch accounting base fees, as Todd has talked about already today to LDTI that will again mean that the full experience impacts of any seasonality will be smoothed out largely over time, as well. So, that will also impact what shows up in Q1. And with that new accounting will you share what the actual mortality is? Is that one of the disclosures that will be required under LDTI? Andrew, certainly, you'll start seeing some more transparency on what's going on with the underlying book of business including when we've updated in any material manner our underlying assumptions. So you'll start seeing some of that transparency and we can talk to that going forward. Hi everyone. First one I had is just on the leadership changes. I was wondering and I appreciate we still have some time. I was wondering if you could sort of unpack the direction of the company and sort of how Tony fits into all of that high level as we think through that transition. Morning, Alex. Thanks for the question. I expect that Tony will continue our partnership approach. He will continue our solutions approach. I also believe he'll continue to focus on technical expertise and strong risk management and risk culture. Tony has been with us for 25 years. He knows our people, our business. He knows our clients. He knows the industry really well. But rather than me answering the question for him, you'll have many opportunities through the course of this year to hear directly from him. So including on these calls, he'll be joining our call starting with the Q1 call and he will be at our Investor Day, which we are hosting in New York in the summer. And Tony and I will also spend the remaining 11 months of the transition going out to see our clients, to see investors, and you. So I â great question. Thank you. But I'll leave it there and leave it for Tony to answer. Okay. Fair enough. Second one I had for you is, just on the sort of block transaction environment in the U.S., I mean we've heard from some companies that have had RBC impacts, whether it's like legacy ULSG wallet type stuff or other impacts, I think, even relating to Be well in term life and things like that under principal-based reserving and so forth. So, I was just interested if you're seeing any increased activity around that to help some of these companies optimize their balance sheets a bit? Yes, yes. Yes, we have seen more demand on products like Universal Life with USLG â ULSG. And I would say that on that risk, in particular, we have, in the past, looked at it on both the flow new business basis and on an in-force block basis. Haven't completed any deals in large part, because we were too far apart from what our clients were looking for. Their expectations and our expectations just weren't compatible. But we are starting to see, so I would say our participation on products like that has been limited to providing reinsurance on just the mortality risk elements and we've been successful as part of our business and it's performing. I would say that what we are seeing in addition to higher demand, higher interest is we're starting to see some clients adjust their expectations. So we are taking another look. We are not changing our strategy. We're not going to change our risk return approach or our targets. So not sure yet if we're close enough. But I would say the demand is there. We have all of the knowledge and capabilities to do it. We'd love to be able to support our clients for the right opportunity. Hey, thanks for the follow-up. I guess, I just had one more question. I know we have thought that you're going to give us more LDTI info later. But just if we just remain in an endemic state and you kind of have some level of ongoing excess mortality for a period of time, I guess under LDTI, would that have a material impact on your reported results? Or is the smoothing aspect a meaningful that it would have really â we wouldn't see that come through as much anymore? No, Ryan. So, we would expect, again, the way the underlying new reporting works, we would expect both any adverse mortality or positive mortality, as well to be smoothed out over time. And again, we always do mention as well though, some of it may come through currently depending on the underlying cohort where the claim activity or experience is. But the point of the new accounting is, given it's a long-term business to smooth out some of the shorter-term experience. And Ryan, I do like to point out, we have other business. Yes, we have a substantial book of mortality business. But we also have a sizable book of longevity business. We're at a stage now where we cover roughly two million pensioners and have present value of future benefits in the order of $70-plus billion. So, with the environment that you've sort of sketched out, there are offsets in other parts of our business and then when we consider that yields have turned â available yields have turned from a multi-decade headwind for us to this tailwind, we are really confident in the power of the earnings in this global business. This concludes our question-and-answer session. I would like to turn the conference back over to Anna Manning for any closing remarks. Thank you for your questions and your continued interest in RGA. As we stated throughout this call, this was a solid quarter and 2022 was a very strong year. It demonstrates the continued resilience and earnings power of our business. We're well positioned in our markets to capitalize on the growth opportunities we see right across our global platform. And I remain confident that we will continue to deliver substantial long-term value for our investors. Thank you. And that concludes our fourth quarter call.
EarningCall_547	Welcome to the Sun Country Airlines Fourth Quarter and Full Year 2022 Earnings Call. My name is Chris, and I will be your operator for today's 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. Thank you. I'm joined today by Jude Bricker, our Chief Executive Officer, and Dave Davis, President and Chief Financial Officer, and a group of others help answer questions. Before we begin, I'd like to remind everyone that, during this call, the company may make certain statements that constitute forward-looking statements. Our remarks today may include forward-looking statements which are based on management's current beliefs, expectations and assumptions and are subject to risks and uncertainties. Actual results may differ materially. We encourage you to review the risk factors and cautionary statements outlined in our earnings release on our most recent SEC filings. We assume no obligation to update any forward-looking statements. You can find our fourth quarter and full-year earnings press release on the Investor Relations portion of our website at ir.suncountry.com. Thanks, Chris. Good morning to everybody. To review our multi-segment business is unique in the airline industry. Due to the predictability of our charter and cargo businesses, we were able to deliver the most flexible scheduled service capacity in the industry. The combination of our schedule, flexibility and low cost model allow us to respond to both predictable leisure demand fluctuations and exogenous industry shocks. We believe due to these structural advantages, we'll be able to reliably deliver industry-leading profitability throughout all cycles. And execution of our multi-segment business is critical that we're able to deliver industry leading operational performance. I'm especially proud that, in 2022, Sun Country delivered the industry's best completion factor. During the challenging December period, we delivered 99.6 completion factor, also best in the industry. So proud of our whole team that continues to come through for our customers every day. We continue to see strong demand for all segments of our business. And scheduled service, currently selling through August, we're seeing consistently strong yields even compared to an already strong 2022. The first quarter notably, year-over-year TRASM improvement implicit in our guide is mostly a result of a strong recovery in international demand as compared to Omicron impacted first quarter 2022. This outperformance is overcoming West Florida demand which is still recovering from Hurricane Ian. All indications are that unit revenues will continue to remain strong through the summer, including observable bookings, overall industry capacity across our network, loyalty spend, contracted distribution agreements and local economy metrics. In scheduled service, through the next year, we expect to continue to build out our MSP operation to its natural share. To that end, we've decided to postpone the restart of our summer Hawaiian operations until 2024. Keep in mind that, in the first quarter, which is typically our strongest of the year â keep in mind that the first quarter is typically our strongest of the year on constant deal and normalized demand. I expect charters to put up big growth numbers in 2023. Mostly we're focused on long term contracted charter revenue. We've expanded our casino operation to five aircraft and added a second aircraft to our VIP operation. I expect to have eight aircraft committed to contracted charter flying by the end of 2023. Counting our 12 cargo aircraft, that brings our contracted fleet to 20 aircraft of the 55 we have in service. All these aircraft fly at consistent operational levels with pass through economics. This operating base allows us maximum flexibility with our scheduled business. I expect our sports business to grow this year as well, focused on collegiate sports and Major League Soccer. Charter demand remains strong and we believe it's generally underserved by the industry. Our cargo business will improve this year due to contracted escalation, but we expect volumes to be consistent year-over-year as we focus on building out our scheduled and charter businesses. On the fleet, we'll continue to be opportunistic buyers. I expect most of our 2023 growth to come through utilization increases, which remain well below 2019 levels. This will allow us to deploy capital for debt repayments through amortization, consider share buybacks and some prudent infrastructure investment, like our new training centers that opened in 4Q and technology to support our operations. I'm confident that we will continue to find the growth aircraft that we need as we need them. Thanks, Jude. We're pleased to report strong Q4 results, which I'll detail in a minute, near the upper end of our guidance range for both revenue and operating margin. Adjusted pretax income for the quarter was $10.3 million, a 39% improvement over Q4 of 2021, despite an increase in fuel prices of nearly 44% and the impact of the new pilot agreement that we signed near the end of 2021. Although we are now comparing our results to prior year, it's important to note that our Q4 adjusted pretax income is nearly 26% higher than it was in Q4 of 2019. Additionally, we grew Q4 2022 year-over-year capacity on both a system block hour and ASM basis by 10% and 14%, respectively. Q4 system block hours were 37% higher than they were in Q4 of 2019. Let me start with a discussion of revenue and capacity. As Jude noted, the revenue environment remains very strong. Q4 of 2022 total operating revenue of $227.2 million was 31.6% higher than the year-ago quarter. The scheduled service business is particularly strong as TRASM grew 27% versus last year and an almost 14% growth in scheduled service ASMs. Ticket plus ancillary revenue grew 45% year-over-year as we saw an increase in total fare to $177.36, combined with an increase in load factor from 76.6% last year to 84.4% in Q4 of 2022. This strengthened unit revenue shows no signs of abating as we move into the first quarter. The story is the same for the full-year 2022 with scheduled service TRASM growing almost 37% on an increase in scheduled ASMs of 16%. Both total fare of $175.29 and load factor of 83.5% were the highest full year result since 2018 when we began our conversion to a single class configuration. We finished 2022 with full year revenue of $894.4 million, a 44% increase over 2021 and a record for Sun Country. Charter revenue grew in the fourth quarter by 11% as we saw another quarter of strong growth in flying under long term contracts, referred to as program charter, and steady improvement in our ad hoc business. Ad hoc charter revenue doubled versus Q3 of 2022 and is showing steady progress as we continue to add pilots to pursue these opportunities. We've made a concerted effort to grow the amount of our charter business under long term contracts, and we've been very successful so far. For the full year, program charter revenue was $121.7 million, nearly 2.5 times higher than it was in 2021, and we feel there remains room to grow. We added the equivalent of a third aircraft serving our Caesars contract in the fourth quarter of 2022. Full year revenue for the ad hoc charter business is still about 60% below its peak in 2019, but as we continue to add pilot resources, we expect to see steady growth in this segment. Cargo revenue grew 5% in the fourth quarter on a small decline in capacity. For the full year, cargo revenue declined 1% on a 4% decrease in cargo block hours. During the first half of the year, we had numerous Amazon aircraft in heavy maintenance, which drove the block hour decrease. Our cargo flying remains a consistent source of revenue in all environments, and we do not expect this to change in the future. Let me turn now to costs. Our fourth quarter adjusted CASM increased 7% versus last year. For the full year, adjusted CASM increased 9% year-over-year. Similar to what we have been saying all year, the main drivers of this cost increase have been twofold. First, we have been smaller than we had initially planned to be due to labor and aircraft constraints. Second, 2022 results reflect the cost of the new pilot agreement we signed at the end of 2021. This is an important point, as the results of many of our competitors have yet to fully incorporate the cost of recently completed or upcoming new pilot contracts. Two additional aircrafts are expected to enter service in Q1 of 2023. As we grow into our expanded fleet throughout 2023, we expect to see a deceleration in unit cost increases. Let me say a few words now about our strong balance sheet. We finished 2022 with $289.4 million in total liquidity, including $264.7 million in unrestricted cash and short term investments. Our year-end net debt to adjusted EBITDA was 2.7. During January of 2023, we completed the $25 million ASR portion of our share buyback program, repurchasing approximately 1.4 million shares at an average price of $18.23. We still have $25 million in Board approved share repurchase authority and will execute any buybacks under the program opportunistically, considering the liquidity needs of the business. Let me switch now to Q1 2023 guidance. As I said previously, we're seeing very strong demand, with approximately 80% of our planned Q1 passenger revenue already booked, and we expect the strength to continue throughout the quarter. Total Q1 2023 revenue is expected to be between $280 million and $290 million, which would be 24% to 28% higher than Q1 of 2022. We expect total block hour growth of 3.5% to 6.5%. Just a quick reminder. Q1 is historically our strongest quarter of the year, and we expect to see seasonal trends similar to previous years. The fundamentals of our unique diversified business remain strong and our model is highly resilient to changes in macroeconomic conditions. Our focus remains on profitable growth. Great to hear the strong commentary for 1Q. If you can just kind of give us a little more detail there. How far out the booking curve can you see? Can you see past spring break, maybe into early summer as well? Does it feel like even the tail end of that booking curve kind of continues to remain strong, just trying to get a better sense of what the rest of the year might look like? The main thing that's impacting the first quarter relative to the first quarter of last year is going to be the recovery in international demand. We have a sizable international network, traditionally, during the first quarter. Last year was affected heavily by Omicron. So we're seeing strong demand across the Caribbean, Mexican market, Central America markets that's sort of unprecedented from my experience, looking at traffic down there. We have really good insight. As Dave mentioned, we're over 80% sold for the first quarter. So, there's not a lot of variance there. Most of the variance in our first quarter revenue will come from how much charters were able to sell into the March period. Looking past the first quarter, April is pretty well clear at this point. And it continues the same trend of fairly dramatic year-over-year revenue improvements. The summer, we have a little less insight on just because the summer relative to the first quarter tends to book more close in. And we shift our network to more domestic markets and shorter haul markets, but also tend to book more close in. But if all we're looking at is unit revenue and fares and ancillary production, things like that, for the bookings that we can see, which again for the summer period is well below 20% of our volume, it's very, very strong. I don't see anything that would indicate â I can't find any weakness across the network. I was concerned about Ian's impact because Fort Myers is a big part of our network in March in particular and that area of the country is mostly recovered. It's still lagging the strength in other areas, but there's really no weakness that I can find anywhere across our scheduled service network. That's a pretty definitive statement. Maybe as a follow up to that, kind of sounds like the biggest impediment to kind of growing into that strength is going to be capacity. Can you just comment on what the pilot availability situation is like? And what do you expect in terms of maybe any headwinds there kind of easing in the next 12 months? Our pilot situation continues to get better. As we've detailed and talked through a number of times, we've had some particular issues in our training pipeline. We continue to have no issues with sort of recruiting pilots to come to the company. So that continues to hold. We're making steady progress, like identifiable improvement in pilots that are going to the line here, especially over the last two or three months. We expect that positive momentum to continue in the back half of the year. I think I mentioned 3.5% to 6.5% block hour growth for the first quarter. I think we're looking now at block hour growth for the year of around 10%. So we'll be accelerating as we move into the summer months, and then into the back half of the year. Which is particularly positive because we'll be putting up double-digit growth rates by June, which is â so we'll be able to catch most of â the growth rate will align with where the peak opportunities are. Just to follow up on the last question. And I know we had an interesting couple of years to say the least. And prior to that, you had significantly restructured this business. But that 80% book for 1Q, do you have any feel for how that compares to kind of normal, if there is such a thing as normal? Just on an estimation of about 5 points relative to history. We're booking ahead. And a lot of that is just us aligning our algorithms to the demand environment. We need to load higher fares from the beginning. Recall that pricing is a heuristic algorithm. So, bookings determine fares. And a lot of that depends on our expectation going into the selling period and we're aligning to the new environment. So, we're probably ahead by about 5 points. On CapEx, can you just remind us how are you thinking about 2023 and 2024 maybe versus the year just ended? Where do those plans stand today? And are you seeing any signs that the used 737 market is loosening up as MAX deliveries finally take the appropriate pace here? Without going into precise numbers, let me give you some color on CapEx. So, we added between seven and eight aircraft last year, or I should say in 2022. This year, we are not going to add as many planes. Jude mentioned the fact that we're going to get growth mostly through utilization, but I would expect us to add probably one or two aircraft into the fleet this year. So that CapEx will be down significantly. We're already lining up deliveries right now for 2024 and even into 2025. So we expect to resume growth in 2024, probably seven to nine aircraft, and the same in 2025. So we're going to take a little bit of a pause here, which will bring CapEx down in 2023. On the market, I'm pretty comfortable not being a buyer right at the moment. The opposite has happened, Duane. It's actually a pretty strong market for 737-800 values, as airlines across the world extend leases to accommodate delays in their MAX order stream. There's also sort of a broad rebound in demand across the globe. We're still seeing some spot bankruptcies like Flyr in Norway last week â or this week. But these planes get absorbed really quickly. So we're not going to get, in my view, a lot of price relief. But I'm confident we'll get the planes we need. I know units costs have been lumpy. But if we just solved for unit costs in 1Q based on revenue and operating margin and maybe taking scheduled data for ASM, we get to CASMx growth in the high teens year-over-year. I guess, first, correct me if I'm wrong. But then you alluded to like a lot more block hours coming online. You're doing that via higher utilization, which I'm guessing is pretty accretive on the CASMx side. I don't know if there's maybe like some efficiencies we're getting as we move through the pilot contract. But we'll just find it helpful if you guys could talk about the level of deceleration on CASMx we should expect from maybe that high teens in the first quarter. First of all, I'm not sure what the math is there, we can go through it. But that number is too high. It's not going to be sort of close to the high teens from a CASM basis for the first quarter. I would expect probably a number high single digits, very low double digits. And then as we continue growing here through the first quarter into the back half of the year, that should moderate significantly as we get to the back half of the year. So I talked a bit about CASM year-over-year. We should see any increases that we see in 2023 will be significantly lower than what we saw from 2021 to 2022. One other bit of color is that, just recall, we did our pilot contract a year ago, the rest of the industry is rolling through pilot agreements now. And so, our cost trends will look really good relative to the industry based on that fact. Yes, for sure. Maybe just as my follow-up, we continue to see really strong growth on the ancillary side for you guys. Can you just walk us through where the future opportunities lie there? Is that going to be optimizing for yields? Are there any step function changes, kind of like the offering? First of all, I would continue to guide you to look at total revenue per passenger. Most ancillary initiatives that increase ancillary unit revenues have an effect on the airfare, but increased total revenue per passenger. So, just always keep looking at it like that, particularly bag fees and seat assignment revenue and convenience fees and things like that that most airlines are pushing really heavily on raising right now. What we're focused on in contrast is on new products. We launched our bundle solution in the back half of last year, which is performing as expected. We're also, like most airlines, getting a lot of uplift through our loyalty program, which is setting records in every quarter, certainly in the last quarter, was consistent with that. And then, what's exciting for me in particular is our third party products, which is us selling hotels and cars and travel insurance to our customers. And that is purely accretive. Every bit of revenue that's incremental doesn't affect the airfare for those products. And so, we're really excited to see that. And those on a unit basis are increasing by triple digits as we roll out our car solution for the first time really, which is really, really exciting. So, we're going to continue to have tailwinds on unit ancillary revenues. And for us, in particular, I think that's going to drive continued tailwind on total revenue per passenger because of the kind of products that we're seeing growth in. Probably for the year, depending on exactly what we call maintenance CapEx, we include some of our engine purchases in there, probably on the order of $40 million to $50 million. Just my other question, as you think about aircraft, are you just looking at that 800 NGs or 737-700s make any sense for you? What's like your optimal size that you would be looking for? Good numbers and outlook. Just on the aircraft, I want to clarify. Jude, I thought you said you're taking two airplanes in the March quarter. And then Dave said, we'll be taking one to two this year. Is that one to two that are incremental to the two because maybe those two showed up last year and they're being put in service? I want a clarification around that. Yeah, it's what you just said. So the two that are coming in in the first quarter were purchased last year and going through induction. They'll be entering service. And then, the one to two that I mentioned are incremental to those two. Yeah. We haven't done any operating leases. And we don't intend to do any operating leases. It will be either debt financings, pay cash for them or enter into finance leases, which gives us basically a purchase option. So, yeah, that's how we finance all of them. Just from a modeling perspective, you're down to like just over $1 million of rentals. Does that does that go to zero sometime this year? Or is it next year? Or is there always going to be a little residual there? Lastly, Jude, you have made some interesting comments about how things have sort of shifted and changed through COVID and a few comments maybe a month â well, this is actually several months ago, about how demand was shifting through the week. And was it less business travel or more leisure? I think you made a comment about the fact that the fares were so high during peak period that it was pushing more demand into like Tuesday, Wednesday and helping out with sort of volatility on demand and pricing through the week. Any additional thoughts around that? It's always interesting. As it relates maybe to your March quarter demand, I'm all ears. I think there's been a lot of commentary about leisure and travel patterns being kind of pushed into a more flexible customer base where you can travel on Tuesdays, you can travel in offseason. And my commentary was mostly that I see the same uplift in off-peak periods, but I don't have any reason â I can't go as far as Scott Kirby, for example, to draw a causal relationship. And I think we should be careful about it. So what we're seeing is dollar improvement, roughly the same across all periods. But on a percentage basis then, it's a bigger percentage increase in off-peak. So I think there is an opportunity for us to expand utilization into off-peak periods, but I'm very careful about adjusting that entire strategy towards taking advantage of these opportunities because I think a big reason off-peak has been expanding the way it has is because fares are so high. And so, you get that value shoppers that are adjusting their schedules to find lower fares. And I don't know if that's really a permanent shift in behavior. Yeah. So, if you look at monthly, year over year percentage growth, we'll show the highest percentage growth in September in 2023. That's our weakest month. And that's a function of us just having more opportunity in those months because fares are generally higher. So pretty much everyone else has given us some thoughts on full year. I'm wondering if you could do the same. I understand Q1 will seasonally be the best margin quarter. But do you feel good about double-digit operating margins this year? Can we get back to the 12%, 12.5% we did in 2019? Just any thoughts? Yeah, we've obviously not given full year guidance yet. But we feel very good about the entire year. Our 2023 plan is very strong. I don't want to give specific operating income information, but we'll be largely back on track in 2023, is our plan, to historical margin levels. As other airlines get their labor deals done, do you worry that as rates reset higher that maybe some attrition issues start to emerge again? I think it's a concern. Maybe less attrition issues and more like availability issues. But there's been a number of new deals. We haven't really had any problems so far attracting folks. So we're not overly concerned about that. And actually, our attrition figures continue to underperform what we forecast them to be. So, attrition is actually lower than we've been planning. So, intuitively, you would say yes, that as others increase wages, there's going to be some competitive pressure. We haven't seen any impact of that so far. To the extent it emerges at some point, are there mechanisms in place where you can make adjustments if needed? Would you think about that? We just signed a new deal at the end of 2021. We'd make spot tweaking here and there, if we needed to, to solve particular issues, but we don't contemplate any wholesale changes. And also, the contract that we have has rate escalators embedded in and rate changes as well. So, our pilots will get raises irrespective of amendments to the contract. You guys, I'm not looking for a specific guidance, but coming out of the IPO, we understood the business mix here. You guys do have a unique model relative to your competitors, with the Amazon fine and the charter fine. Hypothetically, you guys should probably be generating margins towards the top end of the group. I guess what is the impediment as you look forward in 23? Or do you think getting the pilot deal done last year was the biggest issue? Yeah, I would call two things to your attention. One is that Amazon has low margins right at the moment because we increased pilot pay rates faster than the escalation in the contract. So those margins were compressed. That'll be a temporary issue. And it will be better this year. And it'll be even better in 2024, et cetera. Exactly. The second thing is, right now, the highest margin opportunities are constrained mostly today by pilots. And as we've talked about, as we bring our staffing up, then we'll be able to add particularly during those periods of time. So, that was what impacted us most strongly during the summer 2022, which we talked about, as we're kind of under allocated into the markets that saw the biggest rises, namely, big city connectivity, Minneapolis and our network. We're under allocated there because we didn't have a crew. That'll be different this summer. And I think margins will continue to expand as we move forward into 2024. I think it sort of more broadly â in answer to your question, the thesis that we had in place when we went public remains, and we think we can generate either the top or one of the â very near the top in industry margins on a go-forward basis. And our 2023 plan reflects that. As Jude said, some temporary things out there. Growth, as we can continue to hit our growth targets, there's plenty of opportunities out there. We don't think we're at sort of marginal fair levels yet. And there's plenty of growth opportunity for us. We actually think the 2023 growth plan is achievable, and actually somewhat modest. And if we hit those numbers, we will be, we believe, near the near the top of the industry again. Maybe just a quick follow-up on the Amazon comment. Do you guys have built-in cost indexes there? So, like, if your pilot wages go up, then the Amazon contract will adjust? Or is that just the normal rate increase that you guys had negotiated previously? Jude, the comment in your prepared remarks on the 20 aircraft that are contracted out of the active fleet of 55, do you have a target level for that piece of the fleet that you want to keep on contracted or charter? Or is that just going to move around in response to the market? And then, could you just remind us of the economics here? What utilization minimums are there, if any, and escalators that are built into those contracts? I would look at it on a block hour basis and we would be optimized at around a quarter of our block hours allocated to fixed fee contracts. And that's because of the mins and maxes associated with our pilot contract. So, if those contracts service minimum hour obligations to our crews, then we're optimized for being peak to off-peak on our sched service. So, we want to keep it around 25. Now, those opportunities aren't reliably presented to us. And we can't just pluck them out whenever we want. So we're going to continue to take those opportunities as they come and build up that side of the business and try to keep scheduled service growing as we can. And that's basically the philosophy. So, about a quarter of our block hours. Now, each of these contracts are different. We were talking about economics. In the case of the Amazon contract, for example, there's a fixed component and then a variable component. So, margins expand as utilization goes down, actually. Most of our fixed fee contracts have something similar where there's a minimum hour obligation from the customer and then a variable component beyond that, and that variable component, in many cases, actually gets cheaper for them to incentivize more flying. All these businesses are going to produce really high margins, and the stability of that operation is really what we're after. Chris, I don't know what else I can tell you on those. On a follow-up, you said utilization driven growth this year, could you just put a finer point there on the moving pieces, stage gauge, departures and then peak versus off-peak? Our peak utilization numbers are going to be â the nature of the business is a very peaky business. Our peak utilization numbers will be 12, 13 hours a day. Our trough utilization numbers will be mid to high-single digits. We do see it coming down a little bit in the summer as we take advantage of the growth opportunities that we talked about, our new markets out of Minneapolis, which I would say are all bookings expectations, feel good about those. So, there will be a little bit of seasonality in terms of the stage length where we do longer in the first quarter and then we shorten it up a little bit in the summer, but it all corresponds with what Dave was saying. Maybe a small percentage of your business, but for large tour operators, Apple Leisure as an example, can you talk about, in this backdrop, how willing you are to sell blocks of inventory to an Apple Leisure and how that may be compares to the past and how you think about that business when the fare environment and the demand environment are so strong? Keep in mind that we kind of do network strategies that are fairly different. We have Minneapolis origination, and that's been expanding into the upper Midwest. In those markets, in Minneapolis, in particular, we're creating a really strong brand, we're investing in the brand through marketing, we intend to originate the maximum amount of that capacity as possible through direct distribution. And we're not having any issue with that. And so, that's a strategy. And partnering with an Apple or any kind of tour operator in those markets isn't that exciting to us. In contrast, though, we're also augmenting our winter peak with summer opportunities, most notably out of Dallas, but also Houston and Central Texas and South Texas and many other markets in the future. Because summer is such a strong peak for most markets, with what we would say is a price driven consumer where we're going to be competitive during peak periods, still generating an average fare that's higher than the incumbents because we're only capitalizing on those very picky opportunities. In those markets, we are very open to block sales of our capacity with tour operators, OTAs, other distribution partners. And in my initial comments, I specifically called out contracted flying. That's kind of what I'm talking about. And we're negotiating those rates now or recently, and we're seeing a lot of demand from them. And we're more than happy to offload some of our capacity into those markets through those partners' channels. Thank you. As I'm seeing no further questions in the queue, I would now like to turn the conference back to Jude Bricker for closing remarks. Thanks for your time, everybody. We're really excited about where we're headed. It's good to kind of get some of the challenges of last year behind us and focus on growth and execution. Thanks for joining us on the call. We'll talk to you in about 90 days. Thanks, everybody. This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a good day and enjoy your weekend.
EarningCall_548	Thank you for standing by, and welcome to the Capital Product Partnersâ Fourth Quarter 2022 Financial Results Conference Call. We have with us Mr. Jerry Kalogiratos, Chief Executive Officer of the company. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you this conference is being recorded today. The statements in today's conference call that are not historical facts, including our expectations regarding cash generation, equity returns and future debt levels, our ability to pursue growth opportunities, our expectations or objectives regarding future distribution amounts, capital reserve amounts, distribution coverage, future earnings, capital allocation as well as our expectation regarding market fundamentals and the employment of our vessels, including redelivery dates and charter rates, may be forward-looking statements, as such as defined in Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements involve risks and uncertainties that could cause the stated or forecasted results to be materially different from those anticipated. Unless required by law, we expressly disclaim any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in our views or expectations to conform to actual results or otherwise. We assume no responsibility for the accuracy and completeness of the forward-looking statements. We make no predictions or statements about the performance of our common units. Good morning and thank you all for joining us today. As a reminder, we will be referring to the supporting slides available on our website as we go through today's presentation. Since the end of the third quarter of 2022, we have taken delivery of two 13,000 TEU newbuilding eco-container vessels, both with long-term employment in place. I remind you these are the first two of a total of three 13,000 TEU eco-container vessels we agreed to acquire last year. In addition, we agreed to acquire latest generation LNG carrier, which is expected to be delivered to us later this month, and whose charters have exercised an option to extend the firm charter period from five to seven years. Turning to the Partnership's financial performance, net income for the fourth quarter of 2022 was $21.1 million compared with net income of $40 million for the fourth quarter of 2021. Our Board of Directors has declared a cash distribution of $0.15 per common unit for the fourth quarter of 2022. The fourth quarter cash distribution will be paid on February 10th to common unit holders of record on February 7th. The Partnership's operating surplus for the fourth quarter was $37.3 million or $6.3 million after the quarterly allocation to the capital reserve. We continued acquiring units under our unit buyback program during the fourth quarter of 2022. We repurchased 102,838 of the Partnership's common units at an average cost of $14.34 per unit. I'm pleased to announce that our Board of Directors authorized a new unit repurchase plan replacing our earlier plan that expired in January. Pursuant to our new plan, we may purchase up to an additional $30 million of our common units effective for a period of two years through January, 2025. Finally, the Partnership's charter coverage for 2023 and for 2024 stands at 92% and 91% respectively, with the remaining charter duration corresponding to seven years, taking into account the two recent deliveries and the two remaining newbuilding vessels we have agreed to acquire. Turning to Slide 3, total revenue for the fourth quarter of 2022 was $79.9 million compared to $63.6 million during the fourth quarter of 2021. The increase in revenue was primarily attributable to the revenue contributed by four LNG/Cs acquired in November and December, 2021 and operating for the full period in the fourth quarter of 2022. The previously announced increase in the daily rate earned by the LNG/Cs Aristarchos and Asklipios effective from September 1, 2022 and the delivery of the Manzanillo Express in the fourth quarter of 2022, partly offset by the sale of the three container vessels. Now total expenses for the fourth quarter of 2022 $42.1 million compared to $35.7 million in the fourth quarter of 2021. Voyage expenses for the fourth quarter increased to $3.8 million compared to $3.2 million in the fourth quarter of 2021 due to the increase in the average size of our fleet and the increase in voyage expenses incurred by the Cape Agamemnon employed under voyage charters, compared to the respective period of 2021. Total vessel operating expenses during the fourth quarter of 2022 amounted to $17.3 million, compared to $14.9 million during the fourth quarter of 2021.the increase in vessel operating expenses was mainly due to the net increase in the average number of vessels in our fleet. Total expenses for the fourth quarter of 2022 also included vessel depreciation and amortization of $17 million compared to $14.8 million in the fourth quarter of 2021. The increase in depreciation and amortization during the fourth quarter of 2022 was mainly attributable to the net increase in the average size of our fleet, partly offset by lower amortization of deferred dry-docking costs. General and administrative expenses for the fourth quarter of 2022 amounted to $4 million, compared to $2.7 million for the year before. The increase in general and administrative expenses was mainly attributable to the increase in the amortization associated with our equity incentive plan and certain one off write-offs associated with long outstanding trade receivables. Interest expense and finance costs increased to $18.4 million for the fourth quarter of 2022 compared to $8.9 million for the fourth quarter of 2021. The increase in interest expense and finance costs was mainly attributable to the increase in the weighted average interest rate, which amounted to 5.38% in the fourth quarter of 2022 compared to 2.85% in the fourth quarter of 2021. The Partnership recorded net income of $21.1 million for the quarter compared with a net income of $40 million for the fourth quarter of last year which also includes a gain of $21.4 million from the sale of the vessel Adonis. Net income for the fourth quarter of 2022 also includes a foreign exchange gain of $3.4 million from the physical conversion of the euro cash balances to U.S. dollars during the quarter, and interest earned on our cash deposits presented under other income/expense net. Net income per common unit was $1.03 for the fourth quarter of 2022 compared to $0.94 excluding the gain on sale of the vessel in the fourth quarter of the year before. On Slide 4, you can see the details of our operating surplus calculations that determine the distributions to our unit holders compared to the previous quarter. Operating surplus is a non-GAAP financial measure, which is defined fully in our press release. We have generated approximately $37.3 million in cash from operations for the quarter before accounting for the capital reserve. We allocated $31 million to the capital reserve an increase of $1.3 million compared to the previous quarter due to the increased debt amortization resulting after the drawdown of the Manzanillo Express facility. After deducting the capital reserve, the adjusted operating surplus amounted to $6.3 million. On Slide 5, you can see the details of our balance sheet. As of the end of the fourth quarter, the Partner's capital amounted to $638.4 million, an increase of $112.9 million compared to $525.5 million as of yearend 2021. The increase reflects net income of $125.4 million for the year end 2022, $6.6 million of CPLP common units transferred to the seller upon delivery of the Manzanillo Express, and the authorization associated with the equity incentive plan, partly offset by distributions declared and paid during the period in a total amount of $12.2 million, the repurchase of common units for an aggregate amount of $5.9 million and other comprehensive loss of $4.8 million. Total debt decreased by $18.2 million to $1.3 billion compared to $1.32 billion as of yearend 2021. The decrease is attributable to the scheduled principle payments for the period of $85.2 million debt repayments in connection with the sale of certain of our container vessels, the repayment in full of two of our credit facilities, the repayment of $10 million seller's credit and the $5.5 million decrease in the U.S. dollar equivalent of our Euro denominated bonds as of year and 2022. The decrease was partly offset by the issuance of a â¬100 million in bonds in July, 2022 and the drawdown of $105 million of a new credit facility to partly finance the acquisition of the Manzanillo Express our new 13,000 TEU container vessel in October, 2022. It's important to note here that following the repayment in full of our 2017 and 2020 credit facilities, seven of our vessels are unencumbered, which can be significant liquidity lever in the future. Total cash as of the end of the quarter amounted $154.8 million, including restricted cash of $10.2 million, which represents the minimum liquidity requirement under our financing arrangements. Turning to Slide 6, we review the delivery of the Itajai Express, the second of the three 13,000 TEU eco-container vessels, which we have agreed to acquire, together with one latest generation LNG carrier. The vessel was successfully delivered from Hyundai Shipyard on January 10th and commenced a 10-year charter with Hapag Lloyd. The acquisition was funded through a combination of $6 million cash deposit paid in 2022, $108 million drawn under Japanese Operating Lease and $8.5 million of cash paid on delivery. Japanese Operating Lease or JOLCO is funded 70% by commercial debt and 30% by tax equity. It has a term of eight years and is repayable in escalating quarterly installments and a balloon of $84.5 million in January, 2031. On Slide 7, we provide an update on the acquisitions announced in June, 2022, which includes three 13,000 TEU container vessels together with one latest technology LNG carrier. Of those, the Manzanillo Express and Itajai Express have now been successfully delivered to the Partnership and have commenced their 10-year charters with Hapag. The last of the three container vessel is to be named Buenaventura Express is currently under construction at Hyundai Heavy Industries Korea, and is expected to be delivered to the Partnership in mid-June 2023. The LNG carrier Asterisk 1 also currently under construction is scheduled to be delivered to us in mid-February 2023. The charter Hartree as previously announced, has exercised the option to extend the vessel's firm employment by two years for a total of seven years and maintains an option to extend by an additional two years exercisable closer to the charter expiration. Moving to Slide 8, after the extension of the employment of LNG Asterisk 1, the Partnership's contracted revenue backlog now stands at $1.93 billion with over 64% of contracted revenue coming from LNG assets with highly diversified customer base of seven charters. Turning to Slide 9, the Partnership's remaining charter duration amounts approximately seven years while charter coverage remains at 92% for 2023 and 91% for 2024. As you can see here, and except for Cape Agamemnon with trade in the spot market, our next charter expiration is the ECO-9000-TEU container vessel Akadimos, which is expected to be delivered from its present charter in April. The vessel is still regarded among the top fuel efficient vessels in its size and type with increased reefer capacity. While vessel chatter rates have for sure softened into the second half of 2022 and into the first quarter of 2023, and the market remains volatile with few new fixtures for this type of vessels, considering the uniqueness of the Akadimos, we are confident that we can fix the vessel at healthy rates and in any case, higher than its current charter rate. We hope to be able to disclose further details in our next quarterly call, if not earlier. It is also important to highlight here that once we fix the Akadimos, our next charter expiry does not come up before 2025. Turning to Slide 10, the LNG carrier sector continues to stand in a strong position despite the recent corrections in the spot market from previous record highs. Currently, the spot market is experiencing short-term pressure on freight rates due to warmer than expected weather in both Europe and Asia dampening demand for both spot and short-term cargos. Term rates, on the other hand, remain firm barely affected by the weaker spot market levels and are significantly higher compared to the start of 2022. One year TC rate for a two-stroke vessel is at around $230,000 per day compared to $110,000 per day at the beginning of 2022. The period market for modern vessels is further supported by freight differentials between the modern two-stroke vessels and the older steam and tri-fuel vessels. This differential reached record highs in 2022 due to the combined benefits of lower boil-off rates, higher cargo volumes, and better fuel efficiency in this high-price environment. Shipping demand in 2022 has been mainly driven by voyage durations while floating cargos have kept tonne-mile mile demand high during the year. LNG tonne-mile trade is projected to grow by 3.8% in 2023, following growth of 0.4% in 2022. Meanwhile, the LNG carrier fleet capacity is projected to grow by 4.4% in 2023, following growth of 4.1% in 2022. The LNG fleet order book stands at 49.7% of the total fleet with 320 vessels currently on order, while CPRs have effectively no slots left until 2027. Record contracting in the sector has been primarily driven by project-related ordering with a record volume of LNG liquefaction capacity scheduled to come online between 2025 to 2027. Most notably 64 LNG carriers were contracted in 2022 backed by charters to Qatar Energy with the vessels set to lift volumes from the Northfield expansion project in Qatar as well as from Golden Pass LNG in the U.S. Simultaneously, the current price of a newbuilding vessel has surpassed $250 million. The positive market sentiments in this year, driven by energy security concerns in Europe is expected to continue at least until the new wave of liquefaction plants become operational in 2026. Looking ahead to 2023, the outlook suggests another positive year for the LNG carrier sector with the market expected to remain tight. On Slide 11, we review the container market. The container shipping charter market has softened during the second half of the year into the fourth quarter from the previously exceptional levels with rates returning towards more normalized levels. The pace of decline has been faster than expected with both trade volumes faltering and port congestion easing against the backdrop of eroding consumer and business confidence and capacity availability increasing. Container spot freight rate levels have softened on most trade lanes with the container freight index down by 80% from the 2022 peak, but still 27% higher compared to the pre-COVID 2019 average. The charter market has seen a correction as well. Clarkson's charter rate index stood at 97 points by the second week of January and down by circa 80% from the 2022 peak, but still 1.7 times higher than the pre-COVID 2019 average. Rates have dropped across all sizes, though declines have been less acute in the larger sizes, while on a relative basis, availability is still lower. Contracting has slowed from the 2021 record high, but has remained robust in 2022 with 2.6 million TEU of new vessels ordered. As of start of January, the order book stands at 912 units of $7.3 million TEU equivalent to 28% of total fleet capacity. Interestingly, only 11 rather small units were scrapped in the full year 2022 with the same number of ships being demolished just in January, 2023. It is expected that demolition volumes will pick up further in 2023, 2024, driven by softer markets and upcoming environmental regulations. Overall, we expect older, less efficient vessels with larger carbon footprints to be hit most in the container segment due to the higher than industry average bunkers consumption of container vessels, but also the fact that containers transport to a large extent consumer goods where increasingly Scope 3 emissions become the focal point by consumers and manufacturers alike. Going forward, the magnitude and timing of further softening in the market will be determined by trends in port congestion, trade volumes and fleet growth, but the market is generally expected to continue to return to more normal market levels, potentially around historical averages. At the same time, windows of increased market tightness could emerge from the potential for further disruption and ongoing efficiencies. Turn to Slide 12, we have exercised our Right of First Offer for four vessels, two of which have already been delivered to the Partnership, and the remaining two will be delivered by the second quarter of 2023. We retain the Right of First Offer in two more LNG carriers currently under construction in Hyundai in South Korea and delivering in 2023 and 2024. In addition, Capital Maritime has contracted an additional seven LNG carriers at Hyundai with deliveries from 2024 to 2026. As these find employment in currently strong charter market and subject to our ability to acquire these vessels, CPLP could be uniquely positioned to control a fleet of up to 16 latest generation LNG carriers with a diversified portfolio of charters. Basis the strong LNG market fundamentals we anticipate that two-stroke latest generation LNG carriers like the ones we own and its potential dropdown candidates will constitute very attractive assets going forward. As we maintain financial flexibility, seven unencumbered vessels and strong cash flow generation we believe that CPLP is strategically positioned to take advantage of such growth opportunities while continuing to return cash to unit holders through distributions and unit buybacks. Thank you. Hey Jerry, thanks for the update. I just wanted to ask -- I just wanted to ask about the platform as you see it now. Youâve obviously got the mix of container ships and LNG carriers, all for the most part on long-term contracts. After you take delivery of the final container ship here in the LNG vessel in the next few months, how are you seeing the business developing going forward? Do you look for more assets to buy? I know you mentioned the Capital Maritime vessels. So do you look to be acquisitive still, do you harvest the cash flow that you now have? Do you monetize some of the ships? How are you thinking about all of that from a platform perspective? I think once we are closer to completing these acquisitions, because this was a substantial -- yet another substantial acquisition, I mean total cost of around $600 million. We would try to balance growth, as we have said in the past with growth. So I think we outlined in the past that we will try to return to our unit holders about a quarter to, 20% to 25% of our free cash flow in the form of unit buybacks and distributions and use the rest to look for more acquisitions. I think the LNG segment is particularly interesting. Long-term fundamentals there are very strong. The nature of the industry that is industrial counterparties, long-term charters, they can vary from anywhere between three to five years, but more often than not around 10 to 15 years. They fit very much our business model, which looks for cash flow visibility. So I think this is an interesting segment where we also have letâs say, access through the Capital Maritime vessels. So I think we will continue to focus on that. Of course, there is the expertise on the container side and potentially also other types of assets if they were very accretive, so we will keep our eyes open. But in a way, the low-hanging fruits after we are closer to completing the current acquisitions would be to look at the LNG carriers. Got it, makes sense. Thanks Jerry for that. And then just as a followup, as you discussed the Akadimos obviously, a big ship Eco design, one of the better ones and bigger ones out there. You mentioned you expect the rate to be higher than what itâs getting now. But what does the charter appetite look like now for -- in terms of, I guess, duration? Is that something you think you could be able to fix on a multiyear basis? It is a market influx and hence, in a way, itâs more difficult to predict where we will come off. When the market moves, thereâs uncertainty on both sides, charters as well as owners and so it is more difficult to -- for people to commit on very long-term right now. And I think also from the owner side, weâre also trying to understand where the market is going to land or stabilize. It doesnât -- as I have tried to convey in my prepared remarks, this doesnât feel like a market that is going to crash below historical averages, at least definitely not in the short-term. It seems like a market that, of course, has come off a lot, but from very high levels. It feels that itâs going to stabilize closer to more normalized historical average levels. Now exactly where this is going to be, and I think we will know in a couple of quarters. So if I had to guess, I think the deal range in terms of duration will be closer, it will be between one to three years and less likely to be five years or more. But again, itâs all a question of numbers and returns, and because this is really a live one in the sense that this is now that we are starting to engage with charters, I think we can have really a better picture within the next couple of months. Okay. Thank you. Yes, so not obviously five years plus, but it looks like one to three years. And do you think that there would be -- just based off of and as you mentioned, the market somewhat influx, everyone is looking to assess how things are, do you see risk of idle time in between when the vessel rolls off contract and when it redeploys or is there enough interest for us to kind of deploy fairly quickly? Never say never in shipping, but I think itâs extremely unlikely. No, it doesnât feel like -- thatâs what I was trying to convey, it doesnât feel like this type of market. This is a market where there is interest. It comes in ebbs and flows. You might see the market a little less active one day, but then you see charters coming back and picking up good tonnage. So no, I wouldnât expect any material idle time in this market. There is interest, but again, as I tried to describe in my prepared remarks, the previous market, given how strong it was and how tight it was, any type of ship would find employment. It was almost indifferent, the speed consumption profile, the reefer capacity or the carbon footprint of the ship. I think going forward, we will see a lot of differentiation. So ships like the Akadimos that are modern ships with eco characteristics will attract much more interest, while the very old ships that found very good employment in the previous two years, they, I think they will see increasingly more idle time. And if I had to guess, we will see increasingly more of these vessels being scrapped. So sorry, thatâs a very long answer, but no fire, no idle time of that sort. Good, thank you. I guess I have to ask a question about your Cape Agamemnon. I know that rates are kind of off now, but is that a source of cash for you or are you just happy to keep it in the spot market? Well, we have been saying now for some time that this is a noncore asset, and this very much remains there the case. The Cape Agamemnon in the fourth quarter and a TCE of just short of $10,000 per day and had also 10 days of unscheduled off hire due to repairs. So itâs not, by any means, given also the size of our fleet and the type of our ships, any material -- doesnât have a material contribution to the overall Partnership. However, the reason that we are sticking with the vessel is that there are expectations of better markets ahead, both charter markets as well as SNP [ph] markets. So hopefully, we can find a better time to exit this vessel compared to now. So I think thereâs no reason for us, thereâs no pressure for us to simply divest the ship for the sake of divesting. So weâll wait it out. I think we have proven over the years that we are astute players when it comes to the SNP [ph] market. We divested a number of container ships over the last couple of years at very good prices. Hopefully, we can -- when we decide to sell the Cape Agamemnon, we can do it at a better valuation. Fair enough. From looking at your drop-down opportunities, theyâre all in the LNG carrier space. Obviously, the container business, as you mentioned earlier, rates have softened, but still relatively high from historic levels. Is this a conscious effort to move more to the LNG side or are you still going to look at the container space once youâve taken the ones that are on order? We like the LNG space, both because of the market fundamentals as well as because of the typical more lengthy profile of the charters that are on offer. So that fits our business model quite well. Also, the fact that these are effectively dual fuel ships that can -- that are built to use LNG as fuel and makes them more future-proof compared, for example, to older container ships. So there are many advantages being in the LNG space. However, this does not mean that we would not look at other assets that have good cash flow visibility. I think the reason that you have exclusively LNG assets on Page 12 of the presentation is because these are offered by Capital Maritime. They are there and they fulfill all this -- they tick of these boxes. But would we look at other assets? Yes for sure. Thank you. There are no further questions at this time. Iâd like to pass the floor back over to Mr. Jerry Kalogiratos for any closing comments.
EarningCall_549	At this time, I would like to turn the conference over to Mr. Patrick Pouyanne, TotalEnergies Chairman and Chief Executive Officer; and Jean-Pierre Sbraire, TotalEnergies Chief Financial Officer. Please go ahead, sir. Good morning, good afternoon, wherever you are. Welcome to TotalEnergies 2022 results and 2023 objectives. We are presenting from Paris in all virtual mode. Our program today, we will start with a safety moment with Thierry Pflimlin, our President, Marketing & Services. And then Patrick and Jean-Pierre will drive us through the results of last year and the objectives set for 2023. And then we'll have a Q&A session. Good morning. I've chosen a safety moment to speak about the fatal accident, which happened during rebranding work at service station in Burkina Faso last year, but let's start with a description of the sad accident. On April 27, in our service station in Ouagadougou, 2 operators from a contracted company moved the mobile scaffolding between the totem and the station canopy in proximity of a 15,000 volts overhead power line. The third operator, who was the sole victim, helped them, but his leg hit a security barrier at the same time, and it became a conductor of the current when the electrical arch occurred. This third operator collapsed due to electrocution. He died on the spot, despite the cardiac massages performed. Kader was 26 years old. The in-depth inquiry made following this dramatic accident showed that the work procedure was -- were inspected before the start of the work, including previsit and risk analysis, pointing on the nearby presence of overhead power lines and the need to move the scaffolding in unmounted position. On the day of the accident, the specific work permit had been signed. So what went wrong? The investigation of the accident identified 2 key noncompliances with the work statement: inappropriate decision by the operator to reduce the height of the scaffolding rather than dismantle it in order to go safely under the power line; and failing supervision at the moment of the accident because the person in charge of this supervision was distracted in a phone conversation. How did we react? We immediately suspended rebranding work worldwide on the site with presence of overhead power lines. A written was issued and explained to define the conditions for restarting the works with 4 main points. First, the obligation to always consider, as a priority, isolation by the electrical network company. Second, the guarantee of minimum lateral safety distances with specific surveillance. Third, the strict control with competent supervisors. And the last one, which most probably is the most important one, no scaffolding under live power lines. However, this fatal accident showed that we must push further the appropriation in the field of our safety rules and programs. And this has to be applied to our teams and to our partner companies. I'm convinced that we must pursue in this way to improve our safety culture. Thank you, Thierry, for this safety moment. I will come back, obviously, on safety. But before, just to introduce this presentation this morning about our results in 2022 and the objectives for '23, I just would like to underline that, in fact, this year 2022 has demonstrated once again the consistency of the multi-energy strategy that we are following consistently within TotalEnergies for many years. On oil, we continue to invest in oil in order to maintain our production to capture opportunities like the one in Brazil. We are of course driven by the fundamental objective for many years to keep or breakeven under $25 per barrel. It was $24. And at $100 per barrel, like it was the price last year, we had the full benefit. On LNG and gas, we embarked in a bold strategy in order to become a very large player. We have, by the way, in 2022, managed 48 million tonnes of LNG, which is more than 10% of the market, which was 400 million tonnes, 12% exactly, with strong positions in Europe. And this strategy is delivering. Of course, this integrated strategy is integrated, of course, results in an exceptionally high gas price environment, which was around $200 per barrel. Integration is about also refining , exceptional refining margins, but the high utilization rate, 82%, and the benefit is there. And last but not least, electricity, which I've demonstrated, there is room for price increase in these markets as well in which we are investing for the future. Consistency, resiliency, integrations are the key of our strategy. And today, in order to continue to demonstrate that we are transparent and with profitability we want to deliver to all our investors, we are announcing that you will have from this beginning of '23 a clear transparency on 2 segments, which are the pillars of our growth, integrated LNG on one side, integrated power on the other side. I would like to underline also in this introduction the, I would say, superior results that TotalEnergies is delivering. We'll come back on it, but you will notice that we have the strongest net cash flow per share increase among all the majors and by far. And we have the strongest return on average capital employed of more than 28%, which demonstrates that we can combine profitability -- strong profitability and transition to new energies. I would also say that this year is giving us -- we'll come back on it, but a strong guarantee for the future by the deleveraging of the balance sheet, which allow us to express a very clear framework of return to shareholders in last September, which is a clear framework of return to shareholders through the cycles. We announced 35%, 40%. We delivered 37% of cash payout to shareholders in 2022. Thanks to policy, which is clear and which we -- the Board of Directors has decided to even reinforce. First, a support to the ordinary dividend through the cycles, thanks to the buybacks we execute, but also to the underlying cash flow growth. And we have announced that we will increase by more than -- by 7.25% the residual -- the final dividend quarter and the next quarterly dividends in '23, but also continuing our buyback program with $2 billion. As previously quarter, no decrease despite a lower environment. And final, last but not least, room for special dividend, like we've done in '22, if we have super -- I would say, super profits like before said. So no zigzag in our strategy, consistency and that's the key for, I would say, the future results and profitability, and this is what we will demonstrate today together with Jean-Pierre. So if I move over at first on safety after the safety moment. Of course, at TotalEnergies, we repeat this message very often. Safety is a core value and comes first because safety requires discipline, and discipline is at the core of operational excellence. So that's this continuum that we insist on. I would say that on the one hand, we can be proud of implementing for the company our safety culture, which has led to a significant decrease in the accident rate, as measured and shown here by the -- what we call the total recordable injury rate, and we are today managed in the last decade to become among the best in the major, if not the best, but, there is a big but. However, on the other hand, we report with deep regret that there were 3 fatalities in 2022, which I consider unacceptable, and that see as a -- and we see as a sign that we must do more to strengthen our safety culture. But to be sure that this culture is really embedded all over the world in all our operations, wherever they are, whatever they are. We purposely show on this slide the details of the 3 fatalities as well as the steps we are taking on a continuous basis to address and mitigate these ever present risks. We will talk today about our strong 2022 results. It's a fact, but understand that we carry the knowledge of this facility like the weight on our shoulders. And therefore, we as a company, and I as a leader, cannot be completely satisfied, but we were as successful last year as we should have been. 2022 is definitely a year, as I said, where we have managed to get the most out of our assets in different businesses. Of course, first, this year was a year of LNG, I would say, which become a star in many -- around the world because, suddenly, because of invasion of Ukraine by Russia and the impact on the European gas. We -- European markets needs more gas. We were in a strong position, the first U.S. exporter, the first Europe regas order. And we have used a lot with regasification capacities in Europe, 86%. And we have increased our LNG sales by 15%, 48 million tonnes. Integrated, the other success, as I said, is a very strong utilization rate of our refining system, more than 80%, 82% in the market, which was really quite high, thanks in particular to distillate. We managed to capture a very high refining margin and our downstream business as -- which showed record cash flow generation. But we have also been able to consolidate these assets through some smart M&A like the one we've done in Brazil at the end of '21, where in a year after, it generated more than $700 million of cash flow. Throughout '22, success is also to prepare the future in all these operations. Preparing the future is, yes, of course, and you will not see in this presentation the word Russia. Russia is behind us, but we have been able to build the future in LNG through the successes of becoming the largest international player in North Field East and North Field South Qatar projects. We also, I would say, underline the success that we had in exploration -- oil exploration. We'll come back on it in Namibia and Suriname. So that's also part of our future and future profits. And last but not least, smart M&A to consolidate on -- our integrated power businesses. Why is this smart M&A? Because both are characterized by the fact that it's direct negotiations to obtain attractive conditions, strong position in the U.S. on the one side with Clearway Energy in Brazil with other site. All these successes is about growing our production, growing our energies. It's -- also, we keep in mind that we have, at the same time, to lower our emissions. And you will see the results knowing that we'll come back end of March with our sustainability climate report deeply in details of our, I would say, net 0 ambition. So at the end, this is a slide we introduced in September, but which is, for me, the results and give me again the strong comfort for the future is that, yes, we had a record cash generation, but what is important to me is that we compare the '22 cash generation to 10 years ago, 2012, with even a higher oil price, we have increased our cash generation by more than 50%, thanks to the strong decrease of the breakeven. And the challenge now is to maintain this breakeven under $25 per barrel by the selection of assets, by the action on cost, despite some inflationary environment, and we'll manage it. And of course, thanks to these cash flows, we allocate quite a lot, like Jean-Pierre will tell you, to deleverage the company, and that's the best guarantee for the future. Thank you, Patrick. So I will concentrate my comments on 2022, a year when we established new records, thanks to perfect match between, on one side, our well-positioned assets. And with no surprise, we'll talk about gas and energy. And on the other side, very favorable markets, which have set new records in 2022. The 2022 environment provided favorable tailwinds for all our activities. Normally, there is a mix of positive and negative. It was not obviously the case in 2022. And so we were able to fully leverage the strength of our global integrated portfolio. Patrick will cover the macro later on, so I will not come back on the rationale. Our oil price sensitivity is sometimes underestimated. But clearly, in 2022, we benefited strongly for the rise in oil prices, thanks to our low breakeven low-cost portfolio, which allow us to capture this price increase. Please note, as Patrick already mentioned, that in 2022, we had the strongest increase of net cash flow per shares among major. I will show you the data later on. Refining margins are linked to oil, but we saw in 2022 massive supply disruption, particularly affecting middle distillates related to sanction in Russia and, more recently, to the European embargoes on both crude and oil products. For gas and LNG, it is a similar story. The Russia-Ukraine war drove gas and LNG prices to never before seen levels, as Europe scrambled to cut, to decouple from Russian pipe gas by importing additional 50 million tonnes of LNG last year. This represents more than 10% of the market. So clearly, across all our business in 2022, markets were favorable. Here you see the list of key metrics demonstrating that for 2022, we talk the talk, we walk the walk. A slight miss on production mainly due to security issues in Nigeria and Libya, some delays in projects and the price effect on our [indiscernible]. Better-than-expected performance for refining, you see 82% utilization rate in 2022. LNG sales were 4 million-ton targets -- 4 million tonnes above targets because of intense LNG spot business in Europe, and we maximized the value of our regas capacities and, of course, renewable as well while, at the same time, meeting our Scope 1 plus 2 emission reductions, despite high utilization of CCGTs in Europe. As announced in July, investment came in above '22 objective at $16.3 billion. This reflects increased short-cycle activity to benefit from the strong price environment, higher net acquisitions mainly for in Brazil and renewable in the U.S., but no meaningful impact from inflation. And I think a great bottom line for shareholders, plus $1 billion of underlying cash flow growth, a key element, as you know, supporting dividend growth, and $47 billion of debt-adjusted cash flow in 2022. So let's move to iGRP results. So iGRP adjusted net operating income was $12 billion in 2022, almost doubling compared to 2021, thanks, again, to fully integrated LNG, which position us to maximize the capture of the high price environment, but also thanks to strong growth in integrated power generation. Cash flow globally at the level of iGRP was $11 billion, up 76% year-on-year. You have here a very important message on that slide to provide a better understanding of the growth strategy of LNG on one side and electricity renewable on the other side. The Board has decided to split iGRP into 2 new segments from the first quarter '23. That means that from that date, we will report separately integrated LNG and integrated power. So integrated LNG is comprised of our LNG assets, gas and energy trading, plus biogas and hydrogen. And integrated power is comprised of renewable and flexible power generation, power trading, plus power and gas marketing. We provide you here with some metrics for these 2 segments, '22 versus '21. For iLNG, sales were up 15% to 48 million tonnes in 2022, thanks to our #1 position in European regas, which allowed increased spot purchases and sales in the context of record LNG demand in Europe. Cash flow increased to $10 billion, up nearly 80%. And adjusted net operating income was $11 million, doubling the contribution compared to '21. iPower generated $1 billion of cash flow and earnings over 2022. Production was 33 terawatt hour, up 57%, thanks to higher utilization rate of CCGTs in Europe and a 53% increase in power generation from renewables. At year-end 2022, we had 17 gigawatts of renewable capacity installed. A lot of you have been asking for the split to better understand our 2 fastest growing activity, LNG and integrated power. We are happy to do it from 2023. In nearly everywhere, 2022 was a record-setting year for TotalEnergies, benefiting from the favorable environment, the increase in LNG sales, plus 15%. And thanks to our unique position in Europe, TotalEnergies generated a very positive adjusted income at $36.2 billion in 2022. Including nearly $15 billion of impairment related to our Russian upstream assets, our reported IFRS net income was $20.5 billion in 2022. Return on equity was 32%. And ROCE, return on capital employed, 28% in 2022. This demonstrating again the quality of our portfolio and the capacity of TotalEnergies to benefit from price increase. Along with record earnings, TotalEnergies generated $46 billion of cash flow in 2022, an all-time high shown on the left side of the slide, split by segment. All segments made stronger cash flow contribution in 2022; $26 million from E&P, up 39% on higher oil and gas prices and despite the U.K. windfall tax profit, which represents -- which has represented in 2022, $1 billion. $10 billion from LNG, a record high that we covered on the previous slides. $10 billion from downstream driven by the contribution from refining of close to $8 billion, more than 2.5x contribution in 2021, thanks to higher refining utilization rates that allow us to capture high margins. And $1 billion, an important milestone for integrated power. On the right, we show the cash flow allocations, which was pretty evenly divided among shareholders, investments and debt reduction. $17 billion return to shareholders, representing 37.2% payouts, delivering on our 35%, 40% commitments, comprised of $7.3 billion for the ordinary dividends, plus $7 billion of buybacks and $2.7 billion of special dividends that was paid in December. $16.3 billion for investments, but I will cover that in the next slide. And $14.5 billion of net debt reduction, which cuts our gearing by more than half, 7% end of 2022 compared to 15.3% end of 2021. The 2022 environment allowed us for all our segments to demonstrate their strong underlying potential. Typically, with an integrated model, we count on strength in one activity to offset possible market challenges in . But in 2022, each segment had a chance to shine. Capital investments came in at $16.3 billion in 2022, above the guidance, $14 billion to $15 billion, mainly due to an acceleration of short-cycle projects in West African countries, but also in the North Sea in order to benefit in 2023, 2024 from a good environment; and $5.9 billion of smart acquisition, notably in Brazil, for oil and in the U.S. for integrated power. Also included here are divestment for $1.4 billion mainly from ongoing farm-down activities, which is key to the profitability of integrated power. For example, in that figure, you have the farm down of 50% of 30 -- 230 megawatts portfolio of renewable in France, but also partial sales of our CCGT Landivisiau, also in France. In that figure, you have also the sales of some E&P mature assets, notably our interest in Block 14 in Angola, but also the Sarsang field in Iraq. Important to note that inflation did not have meaningful impact on 2022 increase in CapEx. We remain disciplined on capital with strict criteria for sanctioning projects. I will give you more about that on the next slide. But important to say that we determined last year, particularly in light of the rapid strengthening of our balance sheet, that passing on the opportunities noted here will not serve our shareholders' best interest. To the right, we split 2022 investments by type of activity. Oil generated most of our cash flow, and we allocated about 60% of CapEx to it, split -- with the split between 60%, 40% between maintenance and growth. And a big piece, $2.8 billion, of that growth was for Sepia and Atapu, the deep offshore field in Brazil. Integrated power and low carbon energy including, of course, the Clearway acquisition was $4 billion, representing 25% globally of the CapEx in 2022. Integrated LNG represented the balance of roughly $2 billion, reflecting the timing of FX , as Qatar NFE and Qatar NFS was not recording in 2022. It will be the case in the first quarter of 2023. When prices increase, cost might follow. However, 2022 cost inflation was not so severe in our key regions and activities, except, of course, energy costs, but we benefited of price increases. There are some upward pressure shown on the right in that slide, but we effectively controlled it in 2022. Using ASC 932 OpEx as a benchmark, TotalEnergies continues to be the low-cost -- the lowest cost producer among the major at about $5.5 per barrel equivalent. On an ongoing basis, we benefit from a high-quality global portfolio that allow us to leverage on purchases power, to negotiate favorable contracts with suppliers and service companies. On deep offshore rates, we signed medium-duration contracts that largely insulates us from inflation in 2022. But nearly, all of our rates are set at about the same level for 2023, with option taking us into '24 at good prices. For new projects, we adhere to strict selection criteria, shown on the right, to maintain the high quality of the portfolio in terms of average cost, but also in terms of emission per barrel as well. Important to note that our criteria on emission per barrel will be more severe in the future as the portfolio average has lowered to 19 kilograms CO2 per barrel equipment. In terms of the constant progress of high grading the portfolio, for example, adding low-cost barrels in Brazil last year at Atapu and Sepia, implementing the spinoff of our E&P subsidiaries in Canada with higher cost barrels this year will reduce our overall cost per barrel in the future. To conclude the 2022 result presentation, what you have here are the benchmark of performance of TotalEnergies versus the other 4 super majors. In terms of growing net cash flow per share, you see here the data, we were the strongest by far, doubling in to almost $13 per share. Similarly, TotalEnergies was best-in-class for profitability with 28% return on capital employed. For the 3 years' return to shareholders, we outperformed our European peers by maintaining the dividend in 2020. We haven't cut the dividend in the middle of the COVID crisis and ended up trailing our U.S. peers. And to conclude, based on the Sustainalytics ranking, TotalEnergies has the highest ESG rating among the super majors. We consider that this continues to be an important factor in terms of ESG leadership through this period of growth and transformation. In summary, a historic year for the company, a big step-up in terms of financial strength and flexibility, in large part due to the strategies that position us to fully benefit from the 2022 favorable market environment. Yes. And this slide demonstrates that you can really deliver, at the same time, superior results and sustainability. There is no opposition between both of us. So executive strategy, of course, will be the motto for 2023. And just some words about the environment. Of course, the price today of oil is no more -- at $100, but more around $80. But I would say, when we look to the trends of the old markets, for me, there are -- there is some uncertainty on the demand, in particular, because there is a feeling -- even this feeling maybe is disappearing a little of the risk of what we call recession, global economy slowdown. But again, this feeling today is a little erased because of what we observed in China. And of course, on the energy markets, either oil or gas, the Chinese recovery -- economy recovery will be fundamental, easing of lockdown restrictions. What is clear, by the way, and I know that in our world of oil and gas, there is a new bible, which is a net zero scenario of IEA, which is supposed to decrease the demand every year and to increase the supply is that for 2023, all experts, including IEA, are announcing a higher demand for oil, around 102 million barrel of oil per day, which will be a record year. So the reality of our world is that the oil demand continue to grow, and that we need to face, in fact, we have the supply. On the supply side, we don't see a lot of, I would say, margin. We see we are entering into this year with very low inventories of products, in particular, very low compared to the last 10 years. We have the impact of the sanctions on Russian crude and refined products. The crude oil -- Russian crude oil is finding its place in the market, China, India. But the refined products of Russia, it's less obvious where the diesel will go, Africa, South America, that's a mystery. And by the way, we have also, of course, the supply side is clearly supported by the OPEC discipline, with the cut which happened, and the OPEC countries wants to maintain the oil above $80 per barrel, we'll take actions. And the other, we could have expected more supply from the U.S. shale, but as it was the case, previous to COVID, but it's no more the case. Shareholders want some returns and today are more speaking about returns than growth. So that means that when you look to this landscape, I think, from our perspective, there is more support to, I would say, a higher price than $80 and a lower one. And so looking to -- we'd not be surprised to see $100 per barrel coming back. By the way, the oil market, and this is very important to understand, is also for me, today, there is no more a world oil market, in fact, and that's for a big lesson of what's happening. We are splitting the market between Europe, which . There are some cap on the prices. So we have today several markets, which does not help, obviously, to ease the price. And I think we did not have seen all the consequences of the growing gray markets and -- for these -- the supply of this -- of oil. On the gas side, this slide is a little complex, but just today, we can have a better vision, better view and maybe even draw some lessons for what could happen in '23. In Europe, as obviously, the European gas is driving the LNG and power markets for Europe. So you have on this slide what happened in '22 compared to '21. First, production in '21 and supply-demand was around 380 million tonnes. It grows to 400 million tonnes by end '22, so plus 20 million tonnes. But at the same time, the European demand for LNG has grown by $50 million. You can see on the graph on the right corner -- bottom corner that the demand of gas, and we have all translated in this slide in of LNG. The demand for -- in 2021 for gas in Europe was the equivalent of 170 million tonnes. In fact, 100 million tonnes was delivered by pipe gas. It is a famous one, the 130 Bcm from Russia. But we had already importing 67 million tonnes in '21. For '22, the Russian gas has been divided by more than 2. We received the equivalent of 44 million tonnes of LNG. And so we had, to add on it, 1 more LNG, and there is an increase of up to 115 million tonnes of LNG. You can see, by the way, that the bar of '22 is a little lower than the bar of '21 because there was a decrease of demand, around 15%, because of the high prices. So to do that, we have done it at the expense of other regions, I would say. And as you can see, there was a sort of supply gaps. So to attract this 50 million tonnes to Europe, we had, in fact, taken out 15 million tonnes, 16 million tonnes exactly, from China. China probably has -- because there was a slowdown in the Chinese economy, which went down from 80 million tonnes to 65 million tonnes, more or less, but also from other countries like Bangladesh [indiscernible]. So in fact, the supplies of Europe has been possible because we took all the LNG out of other countries, which, by the way, have shifted to coal. So yes, the security of supply of Europe has been secured, but at the expense somewhere of the emissions of other countries. Of course, we have done that with a very higher price in order to attract this LNG. So what is the perspective for '23? I might be wrong, but there are some fundamentals. First fundamental is that we expect the Russian gas to be lower in '23 than '22 because, in fact, we have been supplied by Russian gas and Nord Stream pipelines up until middle of the year in '22, and these pipelines are down today. So we expect, I would say, half, maybe up to 20 BCM only mainly by the Ukrainian pipeline. And so if -- even if there is a potential again destruction of demand, we expect more LNG being required by Europe than in '23 than '22, 15 million, 25 million tonnes are our expectations, depending on demand. The increase of supply in '23 compared to '22 is only 10 million tonnes, 410 million tonnes. So this 15 million tonnes to 25 million tonnes, we see it's more than what will be supplied worldwide. And we could expect as well, against the same question mark, a recovery by China and an acceleration of the economy in China, recovering part of all of the 15 million tonnes that we acquired last week. We derived -- we extracted from China. So the supply gap is there again. And so it's why we think there will be some tension. Of course, on the gas, there is one element which is different, which is a small note on the bottom right corner, which is the storage level. So storage level were 54% last year by end of January. Today, they are 85% in Europe. We cannot store more because there is a limited capacity of storage in Europe. This Is why today the prices are lower. But again, we will consume this gas. And so we think that some tensions will appear by middle of the year between the different markets for LNG. So '23, our activity in front of this environment, we'll continue to deploy our strategy. We have already announced, of course, on the LNG side, we are adding some regas capacity in Europe. The one in Germany has been opened. It's operational. We have put FSRU in Lubmin, which is the point where the Nord Stream is landing, which is a perfect access to the German market. So our LNG traders are quite happy with this infrastructure. We have booked half of the infrastructure for our own business. We are adding another one in France where we intend also to book half of it. So that's LNG. And there we continue, of course, to chase opportunities in LNG. As you know, we have ambition in the U.S., and we'll come back to you later. The second part of deploying our strategy, and it's important, Refining & Chemicals, where we have Bernard and its team have worked hard during years to consolidate this Jubail platform, the SATORP platforms. Our strategy is expanding fundamentally in an integrated way. We have been happy to make -- to take the FID of the Amiral project, which is $11 billion world-class petrochemical integrated complex, which will come on stream in 2027. It will consolidate the profitability of our integrated downstream business. And last but not least, integrated power, which is the other pillar of the growth, will benefit in '23 from the acquisition of 70% remaining shares of Total Eren. We have exercised our options. It was, as you know, a transaction where the negotiation took place in 2016, at a time where the multiples were -- on renewable assets were reasonable. So that's already there. So it gives some work to our teams, but there is more to come. Of course, we'll not just sleep during the year, but we'll continue to find smart developments in all our projects. We're lowering, of course, our emissions. It's always -- our motto is more energy, less emissions. So growing our energies for sure, and our delivery for energy, lowering our emissions. In particular, we have announced in September that we have launched a worldwide energy saving plan in the company. The teams have been super reactive. So the $1 billion has been distributed at an average, by the way, cost of $50 per ton. It will -- it begins to be spent in '23 for $400 million spread over the 2 years. And it will allow us, by the way, to lower our targets on Scope 1 and 2 emissions by 2 million tonnes for 2025. We'll come back on that in March. Second point of '23, and I think it's important for all the investors, is our cash allocation priorities. There is a scheme now that has been put in place. I remind you that we want to deliver 35%, 40% of cash payout for the cycles, 37.2% in '22. So we have taken some first decisions with the Board of Directors on this first dividend that we begin to call ordinary dividend to differentiate it from the special dividend. We want it to be sustainable. And this, of course, the increase of 7.25%. We have announced yesterday for the '22 final dividend and the '23 interim dividends is at EUR 74 per share, is supported by both the share buybacks, which we have done last year, which we are representing almost 5% of capital. So of course, this 5% is a return to shareholders only if we translate that in an increase of dividend, which we'll do. And we do more, we go up because there is also an increase of the underlying cash flow growth. So this is the reason why we've done this increase, which is a larger one than the one we have decided for the full year 2022, 6.5%. I would like to remind to all of you that the difference of some of the peers, we didn't cut the dividend in 2020. And so we have -- maybe, we have less room to increase this year, but we increased the dividend year after year, '22, 6.5%. So basis was more than 7% in '23. And so that's our commitment. So CapEx, I will come back on it. We gave you a range of 14%, 18% in September. It will be 16%, 18% in high part, of course, $5 billion in low-carbon energies. So balance sheet, difficult to express a target for the gearing. It's down to 7%. So it will be strange to you to say minus, I don't know what. So we express our ambition in another way, which is to continue to strengthen the balance sheet because it's a guarantee for the future. Today, we are A+. I think we want to target better AA credit rating. It's an ambition for -- it's the objective of my CFO. So he told me it's aspirational. I told him, "No, it's a real objective for you and your team." So -- and I think it's true -- it's because, again, for me, that is the best answer to ensure you that all our strategy in CapEx and return to shareholders will be delivered through the cycles. And the surplus cash flows are, of course, allocated part of it first to buybacks. And last year, we were at an average of a little bit less than $2 billion. It was $1.75 billion. We increased it to $2 billion than in the last quarter for this 2023 in an environment of $80, which is lower than the one of last year at $100 per barrel. So I think it's a commitment to this buyback. And the special dividend, it's only in case of super profits. We will come back on it, even if -- as I will explain you, there will be -- the shareholders of TotalEnergies will be rewarded with a special dividend in kind, as we will organize the spin-off of our Canada upstream assets. I will come back on it. So I think this is a full program, which demonstrates the real way we think to the future. When you look to, in fact, the column 1 and 4 are for the shareholders. Column 2 and 3 are for the company. And we think to that. Of course, we have to -- we'll come back to the other stakeholders. So the capital investment of '23 will support the transition, $16 billion, $18 billion, at which -- out of which, $5 billion for low-carbon energies, let's say, quarter 4 for integrated power and more than before on the new molecules because we grow our ambition in the various segments. In particular, in carbon capture storage, we have been awarded new projects in Denmark. So we have Norway, Denmark, Netherlands. So we build, I would say, our position in this business. Also included in this part is energy savings, let me say, the negative emissions that we can do. And you can see that we have also new projects, of course, coming into our hydrocarbon businesses, oil and gas. In gas, it's growing because it's a Qatari project. There is no Russian LNG, no -- and more in our spending, but which was -- of course, it was less investments in '22. But the Qatar projects are there. We'll have the Cameron project. We have the PNG projects. PNG is targeting FID by the end of the year. Cameron is targeting FID by September. So there is a lot of work on LNG but, of course, on oil as well because we have some new projects on which we work. Like in particular, in Brazil, we have -- Mero 2 will come on stream. We will have Atapu 2 and Sepia 2 to sanction this year. We have also Uganda. So we have new projects coming. You can see that, by the way, we have as much new projects on both sides, a little less nitro carbons and low-carbon energies. And we have the rest of the CapEx is maintenance, and we need to invest, more or less, $7 billion to $8 billion each year to maintain, I would say, the whole system. So the '23 production will grow more energy, will grow mainly coming from LNG. Again, there is no new project coming onstream as last year we had some, I would say, not a full utilization of SnÃ¸hvit, which came back on stream by middle of the year. And from -- it is because there were some big overhaul in Ichthys, so 9% more of production of LNG and pipe gas to Europe. Oil will benefit from the full year of Brazil, plus 5%, so it's good in this environment. So production will grow only by 2% because, at the same time, we have some perimeter effect on domestic gas. We have exited from Myanmar. We have exited from Termokarstovoye. We have -- and we will exit from Thailand. Honestly, these are domestic gas. They don't have -- there is no -- why did we differentiate them from the rest of the gas is that there is no upside on this type of gas or limited upside linked to the gas price -- international gas price or international oil price. So it's -- in terms of economic impacts, we don't have the volume, but the upside is more limited. So at the end, so what is more important for me, what we do in LNG and pipe gas to Europe because there, you see the upside of this market, plus the oil. Startups in Oman, Block 10 has started; Mero 2, Brazil, middle of the year; and Absheron in Azerbaijan for gas. Just to mention that we are quite -- in our company, we don't speak about decrease of oil or decrease of gas. We speak about stabilizing, growing, continuing to supply the market, being a key player of energy supply and taking our role, even if we are not a very large player, but we do our role, which means that we continue to focus as well on reserve replacement. You can see by the '22 reserve replacement ratio in the year are quite good. 108% at the same price, 85% with the price effect, around 100%. There are not so many major companies, which have been able in these last years to maintain their replacement rate at 100%, and we are one of them. Without Russia, which was, of course, for us a source of reserves, but we can do it -- without it as it has been done in 2022. So let's continue. Integrated LNG portfolio, the ambition, as I just mentioned, more production. So it helps -- it will help our colleagues of the downstream LNG to sell more. Of course, there is a spot uncertainty. But our position, as I said before, is strong in regas in Europe. We are increasing our regas capacity in Europe, thanks to the Lubmin and the le Havre FSRUs. So we have more than 20 million tonnes of LNG regas capacity, which is good, which is strong. It will help us to continue to monetize these capacities. As we can see the split on this slide, which is important, we split it into, I would say, 3 pockets according to the margins. There is a pocket of, I would say, long-term Asia, Latin America portfolio, which is fundamentally giving us results and cash. It's a difference between Brent and the cost of production. That's the idea. Then we have the European and flexible markets where we, in fact, we supply the le Havre gas LNG from the U.S. to the spot index. So where the profit will be, I would say, spot minus in le Havre. So today, it's $20 more or less per million BTU, minus 3 or little less than 3. So you can see the margin. And then you have the spot ones where, in fact, gives some sense of margins, but this activity help us, of course, to, by the way, absorb the cost of the regas and to contribute to security of supply. We have put at the top Yamal because there is always -- today, Yamal, by the way, to be clear, we have only -- we have stopped -- we have all the volume, the 4 million tonnes of volume of the long-term contract on which we are committed, but we are strictly only these volumes, as all the activity which was linked to spot extra volumes, we don't take them anymore as per our commitment vis-a-vis the Russia business. Integrated power, we will continue to grow clear because we -- of course, the gigawatt of capacity, as it was said by Jean-Pierre, we have managed more than the 16 gigawatt per -- by end of '22 capacity -- growth capacity. We are at 16%, 17% -- 16.8%, 17%. By the way, I would like to tell you that there are not so many companies able to grow their renewable business by 7 gigawatt in a year. You can look around. We are among the top. And so, again, when we do things in Total, we are consistent. We do that seriously, and we intend to deliver not only growth, but value because this is why. And this is the fundamental reason why we have decided to anticipate the split of iGRP into 2 reporting segments. By the way, there is no split of organization. Stephane is leading the whole businesses. Just to be clear, it's a reporting. We have done it because I think now it's time not only -- it's not only to speak about volume, but value. And the best way to deliver the value is to report the results and to show it as we will improve it. Of course, we have quite a lot of capital unemployed today, but it will come on stream year after year. So we target an increase of production by around 30% mainly from renewables. We benefit today from a very high rate of user utilization rate of the gas-fired power plant in Europe, but there are also some capture of special taxes in Europe on this gas-fired power plant. Having said that, we expect an increase of our integrated power cash flow from $1 billion to, let's say, plus 30%, 40%, we'll see. But these capacities will move, and we have -- we will have to deliver this growth. The year 2023, coming back on oil, and I think it's important to tell you that we have decided to mobilize most -- at least, most 50% of our exploration budget on Namibia. We are maybe today in TotalEnergies, and I hope it's true, and I don't have words, but only plastic here, but it's really -- maybe at the helm of -- it's clearly according to, by the way, for Wood Mackenzie, it's the largest discovery, which has been done in 2022. We are maybe at the helm of a new golden block. So we decided to mobilize 2 rigs and $300 million in TotalEnergies share to, I would say, [indiscernible], return the cards. We have 1, 2, 3 rigs -- wells, plus tests and to have dynamic test to really know what we have in our hand. And with the idea that we -- to accelerate the time to market, not to appraise everything and to be -- I would say, to know everything. But if we have the chance to really confirm the volumes, which seems to have been discovered, there will be room to make fast track developments like we've done on Block 17 25 years ago. And so this is from my perspective, very important, because this could be a new chapter of the oil business in the company. So we mobilize the teams and all E&P teams, and there's supervision of Nicolas. And also the One Tech teams are on these important projects. At the same time, we will divest some oil, the expensive oil. We know we have clearly set 2 years ago. We made some impairments, but we -- not only Canadian assets are not in line with our climate strategy. But fundamentally, there are high OpEx assets, and we are not fitting with our old strategy and our old portfolio. So we look to various options, and we confirm today that we consider that the best way is to maximize value for shareholders is to introduce this independent Canadian company in the market. The idea is to do it -- the objective -- the project is to list it on the Toronto Stock Exchange by -- in the second half of the year. By the way, you can see the metrics of this independent company of 2022. It was a company which produced 110,000 barrels per day, which delivered more than $1.5 billion of cash flow and -- from operations and almost $1.3 billion of free cash flow. So it's quite interesting metrics. We have appointed a leadership team from a Canadian lady, which was the work -- you see working in the company will become CEO of this company and Chairmanship as well by an executive of the company, who knows very well Canada. The idea after that is that in order to manage, I would say, the backflow in this type of listing operation, we will maintain more or less 30%, not more. It will be for some years in order to stabilize the company. But fundamentally, the idea is it will not be a company controlled by TotalEnergies, not at all. We think we'll have to take maybe one Director out of it. But it has to be -- it will be managed as an independent company. By the way, this is the reason why we just preempted for this company, not for TotalEnergies, I would say, for SpinCo, 6% of Fort Hills. There was a transaction between Suncor and Teck, and we considered that if we were in charge of this independent company, obviously, because these were attractive conditions, we would have to preempt. So we've done it in order to strengthen the company before its listing. So for shareholders of TotalEnergies, they will have to approve this spin-off at the AGM of 2023 in May, and they would receive a distribution in kind, so a special dividend in kind of this new SpinCo company. We will report to you, of course, along the coming months on the progress of this project. Coming back to the 2023 objective, which is important, is the cash flow generation. I'm happy to tell you, with the support of the growth in integrated LNG, in integrated power, but also on the oil production, the underlying cash flow growth will grow by another $1 billion. We have announced 1 billion per year. It is the case. This $1 billion is feeding the growth of the dividend. You can see that we gave you there on this chart, I would say, an indication of what could be the cash flow from operation expected at $80, $100 per barrel. We are navigating in both. And you can compare to '22 at $100 per barrel. In the same condition, we expect $1 billion more. If $80 per barrel, you have the sensitivity on the right. It's $3 billion extra cash for $10 per Brent. It's a little lower than last year at 3.2% because of the impact of the U.K. taxation. And also because we have consolidated, I would say, Novatek, which part in Yamal [indiscernible] so -- and because Yamal is linked to Brent, more or less. So -- or we keep our shares in Yamal, but we have deconsolidated our accounts all the share of Novatek in Yamal. So that's why the sensitivity is a little lower. The $0.4 billion for $2 per million BTU is also lower than last year because of the U.K. taxation fundamentally. And for the margin sensitivity on the refining margin, I would say, it didn't change. Just to remind you that -- and I would like to insist is that there is, obviously, for the TotalEnergies sales quite a good potential for stock rating. Free cash flow yield in '22 was at 19.4%, and we have enterprise value per DACF ratio of only less than 4 -- multiple less than 4. So this, we are expecting. We hope that these strong results will be translated in the value of the company. Finally, I would like to tell you that, of course, the company, I've shown you before that we are allocating our cash flow to the company by cap investments and debt reduction in a large way, but also to the shareholders by way of the ordinary dividend, special dividends, buybacks. We are also thinking to our stakeholder. There is one stakeholder missing on this slide, which are the states. The states are benefiting a lot of the oil and gas profits, and people are complaining from time to time. But for TotalEnergies, we have doubled -- more than doubled the taxes and -- but we will -- we'll have paid to states around the world $16 billion in 2022, $33 billion in 2023. Of course, they are mainly paid to producing countries. But the countries like the U.K., it's $3.7 billion, $7 billion, and not to the consuming countries, that's clear. But this is a strong contribution, I think, to, I would say, the public good for the taxes we deliver. We are also thinking to our customers and to our employees. Our employees are, of course, very -- are the engine of all these results. We should never forget that it's not only the strategy, what is -- our 100,000 worldwide employees, which are delivering the strategy. We are rewarded them via a special 1-month salary bonus. We are taking into account the inflation in each country to increase the salary. So we share the value of those salaries, which are also, by the way, shareholders and which 7% of the capital is the property of our employees. So they are also receiving their part of the dividend. For the customers, we have been probably followed a different route than some of the peers. We have decided to make proactively some sharing profit with our customers in order to, I would say, take part of the pain of these high prices -- high energy prices. The 2022 was, in many of our countries, a debate of energy, which was dominated by security of supply, but of course, affordability. So we have put in place some few rebates program, a massive one, more than EUR 500 million for benefit of customers in France. We'll have to -- in '23, we have to face some also other energy crisis, like the SMEs customers -- or SME customers suffering of very high electricity prices, which were contracts because of the increase of electricity price to the sky in Europe second half of 2022. So we take actions, and we continue to take actions because we consider that it's part of our social responsibility to take care of all our stakeholders, of course the shareholders, the company, the employees, the states and also our customers. Could I ask, please, Patrick, just on the dividend again? I mean, 7.25% increase, you said you couldn't do more. That's understandable. It's helped by the buyback. We understand that, too. But in the context of the last -- the long term where you've done, let's say, 5% or 6% growth for the last 1, 2, 3 decades is if we can sustain the dividend and the commodity view cooperates, as you seem to indicate, could 6% to 7% or 7% to 8% become a new trend line at least for that ordinary dividend is the first question? And then thinking about future profits in Namibia, interesting slide you have. So do you think we could get some proper resource numbers in 2023? And when you talk about fast tracking, if successful, what does that mean in terms of time? And a linked question. Obviously, Shell's Jonker well has come in, which might give you confidence on an Easterly extension of , but does also pose some unitization risks further down the line that actually could delay things. Okay. On the dividend, we didn't tell you we couldn't do more. We have decided to do it at 7.5%, which is, yes, you are right, a change of the past trends. But I think, again, for me, it's also the translation of the fact that we have increased the buyback. So as we have bought back almost 5%, it gives some comfort. I think when people speak about return to shareholders through buybacks, if we don't translate it in a higher increase of dividend, I don't understand why it's a return to shareholder. It's a saving for the company of dividend, for sure. So that's logic. I think I've been very logic with what we declared, and the Board is logic. We'll -- we have -- and as long as we can allocate some cash to these buybacks, because we have more cash flows, and we are -- again, we continue -- we did not decrease the buyback rate. We maintained it, despite a lower environment. And I've seen some of our peers have decreased the buyback program for the first quarter. We don't do that. We maintain it, and that's proven. So the answer is -- to you, maintaining this buyback program, yes, will help us to support a new normal, which might be 7% to 8% and will -- in the future, so that's in the future years. But again, there are 2 engine to fit the increase of the dividend. On one side, these buybacks. On the other side, it is the underlying cash flow growth. And I am announcing and again that we target $1 billion. By the way, I understand that the Board, among the new criteria for the variable pay of the CEO, has to decide to introduce the underlying cash flow growth. So it's -- we walk the talk in the company. And so that's what I can answer to you. And again, don't forget, and then like you can compare it to companies who have increased by 10%, but these companies are divided by 2 or more in 2020, which we will give more room to maneuver to increase. We didn't decrease at all. So we are also starting from a much higher point from this perspective. You spoke about Namibia, and let's keep -- Namibia, we have a program. I just tell you, we have 1 well, 1 well. People are super excited. They speak to me about billions of barrels, but we don't have the data. We have no dynamic data. We all know that as long as we don't have a test and dynamic test, maybe there is no good permeability. It could be complex. So let's -- I'm -- we are excited. It's clear, as we mobilize and we have decided to mobilize a lot of our exploration resource this year to Namibia, because we want to know what we have. And if it's true that we have this type of size of resources, obviously, there will be a lot of room to develop. Honestly, unitization, we will not need it. We speak about billions. We can make a first project on our side. We are making complex stories. Having said that, I can tell you on this project specifically there is a very good cooperation between to Shell and TotalEnergies teams. We had to share the data as we have an agreement. So we will discuss together. But the idea, it's really big, is not to be a super optimization to appraise all the discoveries -- or there is a number idea. Like we've done in Angola, let's see if there is a first development. Then we'll have time to optimize. I'll also remind you that there is the same partner on both sides of the license, which is QatarEnergy. We are happy to do it. So let's see. It's premature to speak of the size. What I hope is that when we have drilled all this program, which has been organized in order to have 3 wells and free test, in fact, with 2 rigs, then we'll have a better clarity. And we can speak to you about resources. Today, it's premature. Let's do the job, and we'll come back to you. But I can tell you that as a CEO of the company, we are quite excited like we were when I entered the company. I was lucky. I was assigned in Angola on the Block 17. So I hope we'll have the same in our hand for the next 25 years. It's Christyan Malek from JPMorgan. Two questions, Patrick. First, I know that we've shared a fairly similar view on a sort of super cycle prospects in oil over the coming years and your position for that in the context of your portfolio. So can you walk us through where you see your growth prospects on a 3- to 5-year view? I mean, coming back when you had the best-in-class growth rate for oil, up at sort of 5% to 6%, do you envisage a situation where you could lean into that growth and sanction projects? I know you're moving to short cycle as one of the basis of your increasing CapEx. But if you can provide us with what would be the upside risk on your volume growth if you were to choose to sanction more projects and take a longer-term view around investing in FIDs, a term that I think has become quite rare in this industry. And the second question linked to that and linked to your Canada IPO, do you think this is a template going forward if the market is not going to recognize the value associated with oil, whether it's because of ESG, because of net zero? Could this be a rollout of other projects or other regions going forward where, ultimately, your IPO, your oil business, in a way that it generates better value for shareholders? I can tell you just so we -- if we can sanction projects, we'll do it. And we have in '23, 3 big projects to sanction in the company, oil projects. We have the Block 20, 21 in Angola; Cameia, Golfinho. We have the offers, and we are working on it very hard in order to manage the cost of the projects. That's a key issue, but we'll do it. We have in Brazil, because of the acquisition we've done, we have 2 projects to sanction. One is Atapu 2. The other one is Sepia 2. So this will feed the growth, and we are looking to opportunities to grow our portfolio with always the same motto. It has to be resilient through the cycle of less than $20 per barrel or $30 of cost -- technical cost of $30 breakeven and less than 19 kilograms per barrel of emissions. Now as we lowered it because it's the average of the portfolio. So again, we're consistent. And there are opportunities, and I hope we'll be able to announce you smart opportunities in the coming weeks, in the next weeks. So -- and again, by the way, we have also in our portfolio Suriname and Namibia. I just described Namibia. Suriname, as you know, is a little more complex, but there was a good news by the end of the year because the Sapakara South appraisal is positive. So we have at least a first pool -- oil pool of potential projects. Half of it is confirmed. We are drilling wells on Krabdagu and ran discoveries, 2 wells. I think we have accelerated as well. And I hope that by middle of the year, we'll be able to confirm that we have the oil pool that we are looking for in Suriname. So there is also the short-cycle projects. I think this is what has been done in 2022, to accelerate the mobilization of rigs. Angola, in particular, is delivering a lot, Nigeria, Congo. So these are the -- because there, we have already some infrastructures, FPSO, so we can build adding wells on the infrastructure. So that's the way we look at it. So the answer is a super cycle. But what we will not do is investing in expensive oil just because, today, in the short term, the price is good, okay? So this is the second question on Canada. It's why we think, by the way, that it's the right time. I don't know if the market will fully recognize the value, but I'm sure that's it's probably the best time to recognize it, so -- with the figures that we just announced. And so, no, we have been -- people knows that we want to divest these assets. They are not fitting with the strategy. We make money this year, but this could disappear. So we have the ambition to get a good value out of it. The various acquisition offer we received were not in line with expectations. And so I will say, but we are optimistic about the capacity of the market, which is, for us, the best way to monetize these assets. And is it a model to roll out other E&P assets? No. It's a specific model because, again, these assets are high costs. They are not fitting our strategy. And we are not the best shareholder. But the reality, there is a potential to grow in these assets. Surmont is a very high-quality assets. Fort Hills suffered, but could deliver more. But we are not the best ones because we don't want to put CapEx. Why should we keep in our portfolio assets on which we are not the best shareholder? But the other assets, which we have in our portfolio, we are very happy shareholders. So in particular, I'm quite happy to have directly access to the cash of all the North Sea assets in TotalEnergies today. My first question is on the balance sheet. You obviously enjoy an exceptional balance sheet already with only 7% gearing. And you seem to want to strengthen it further with reference to reaching AA credit rating. I wonder what is the real significance of a AA credit rating, please? And then my second question on LNG sales, up very strongly last year, 22% in Q4. You're still selling Yamal cargos, obviously. Can you let us know, please, how are you getting paid exactly in the middle of these sanctions? Okay. Balance sheet, why is this important? I think just -- I'm trying to fill the gaps with the valuation of some of our peers. So we are quite systematic. We look to the difference. There is one gap which is that our U.S. peers are rated AA. We are not yet rated AA. And when I look, and when I compare the metrics and the results of TotalEnergies with at least one of both, I see very similar metrics. So maybe, there is something missing. So I think -- again, I think it's also a message because for me, that means that AA would mean that you -- our shareholders and new investors could really believe in the future and the guarantee of the future return to shareholders. So I think it's a strong signal. Again, it's a way with the Board we discussed, can we express again a new objective of gearing. It seems to be difficult, why minus 5%, why minus 10%. Keeping the minus 15% would be odd to you today. So we think that there is room to go to another step and, again, giving some challenge to Jean-Pierre. But no, I think it's -- again, I think it's -- it would be a translation of a very strong strength of the company. So let's work. We'll see if we can convince. LNG, Yamal. First, Yamal, which is the only asset remaining, is a source of 2 cash flows. There is the direct interest in Yamal as an asset, 20%, and this company sell is LNG to different buyers, one of them being TotalEnergies on Brent basis. It is true that we have received some dividends from Yamal in 2022, but some -- it's a little -- it's becoming more complex. We have, by the way, decided to book the cash flow from Yamal only when we receive really the dividend. By the way, this is one of the explanation, because I've seen a question mark coming why there is a gap on the iGRP cash flow. There is no -- on LNG cash flow. It's because we don't book the full result. We have decided to be prudent. We book in our accounts cash flow from Yamal when we see the dividend in Paris or somewhere in our pockets. We are prudent. But -- because, again, there is a strengthening of sanctions. So that's the first part of the Yamal cash. But there is another part, which is this long-term LNG contract, which the teams of Stephane and , they acquire this LNG on a Brent basis, and they sell it at the TTF price when it comes to Europe or the JKM if you go to [indiscernible]. So that's also quite a large source of cash. And by the way, it's even better -- maybe better -- or this is -- we don't hedge anymore of this contract because -- why? We do the decision because we are not sure that sanctions on one side of the other side, by the way, could not derail this volume. So that means that, in fact, most of LNG volumes are age 1 year in advance. But Yamal, and Yamal will really -- these volumes -- these 4 million tonnes will reflect in our accounts the reality of the TTF spot market or the JKM spot market, compared to the Brent in the year '23. So in fact, Stephane, most of his business is already done. He has hedged a lot and he can optimize around the hedging, but he has this amount of these contracts, which could deliver. And this is not Russian money. This is a European contract. So this long-term contract and the cash we derive from this Yamal is today, in Europe, there is no constraint and is reported in our account, like the other long-term contract that we managed in our portfolio. I hope it's clear where we are today. Two quick ones, please, if I may. Patrick, Jean-Pierre, if you're looking at your CapEx outlook, can you maybe give us a little more granularity in terms of your assumptions embedded in that $16 billion to $18 billion number for 2023, particularly looking for your assumptions regarding underlying inflation? Jean-Pierre, you said there wasn't really any to report in 2022. Just wondering what you're assuming for '23. And if you can, maybe give us a hint, as you usually do, about how much of that you think will be inorganic. And then lastly, on your point, Patrick, regarding the iPower, the new disclosure. Maybe you could give us, if you had, a view on, as you rightly said, a lot of unemployed capital that we will see growing in the next few years. So maybe you could tell us where you see capital employed going for that integrated power business because you've got access to that pipeline you've worked hard to achieve. I think that would be probably a more important figure than your earnings progression into 2023 here. Okay. CapEx inflation embedded for inflation, you see on the short term, it's quite low. I think maybe it's a 2% to 5%, which has been mentioned by -- but on the short term, there is no real impact on CapEx. The CapEx -- the inflation for us, the -- a deck each for Nicolas and Namita are more about the new projects because, of course, the contractors want to embed higher costs in the new projects, and we don't want. So this is fundamentally the debate for the execution of the projects, which are -- and most of the CapEx of the year are more of the old projects, which are already sanctioned than the new ones. The new ones generally are impacting quite -- will impact the next years. And so there is no real inflation, I would say. And the rig could be one of them. But as Jean-Pierre explained for 2023, we are covered by good -- I mean, good rates. So for me, there is a debate about inflation. With contractors, it is more for these new projects we want to sanction that I mentioned to you. That's a point on which we need to be all serious. Otherwise, we'll wait because we'll not repeat the mistake we've done in 2010, 2014, which is to sanction whatever the cost is. I will not do that. So M&A, I think there is a net assumptions of inorganic, which is around $1 billion to $2 billion. That's okay. It's a matter of buying and selling. And we have some different options in the portfolio to buy and sell in -- and so we'll keep you aware, but this is, I would say -- and it's part why we keep the range because, of course, when we don't -- the range is, for me, sometimes you have divestments which are done, but you -- for example, Dunga, we're during 1 year, but we will receive the proceeds only in '23, not in '22. So we might have some time of execution, which in this type of divestments. So that's the idea. So most of the CapEx we gave you are organic, in fact, to be clear, most of it. On iPower, it's a new reporting, so we will have a full reporting by -- you have to be a little patient because Jean-Pierre and his teams are working. And so from first quarter 2023, in April or end of March -- in April, sorry, end of April, we'll deliver to you not only the quarterly results, but the previous years. We will restate the 3 previous years. So you will have some indication. It's a business where most of the CMO -- we have some capital employed, of course, and productive because -- but the cycle is quicker than in oil and gas because, normally, to build an onshore solar plant or an onshore wind farm, it's more 2 years than 5 -- 4 years, I would say. So normally, the cycle is quicker. Having said that, we also have offshore wind, and offshore wind is more like an exploration cycle than an E&P cycle on a short cycle -- I mean, an onshore renewable cycle. We have also in our -- as we make some acquisition, we have also some unamortized, I would say, value. I don't have the precise figures, and I don't want to introduce something wrong, but you have the idea that it seems the capital employed of this iPower is around, today, $15 billion. We'll confirm that to you. This is what I have seen in some first figures. And I think you have maybe probably 1/3 of it, which might be unproductive. Just run figures, okay? We will -- but I think the exercise to oblige ourselves to make this new reporting is very important. I know that there are question marks about the profitability of this business, and we have to deliver to you. And when you report, you focus on it, and you will improve. That's what I learned from refining and chemicals. And I said to Stephane, you go to Bernard, you ask him, "Have we improved the Refining & Chemicals profitability from 5% to 20% today or 15%?" So I think focusing is important, and this is the answer. And we intend clearly to be consistent with this strategy. And integrated power, all the words are important. It's not only renewables. Again, it's really the capacity to deliver value from a volatile market and from price which will go upwards because we need more and more electricity. So that's my answer. Two questions, if I could. Patrick, thank you for the very comprehensive update around what you're seeing on the commodity markets at the moment. Given everything you said in the kind of cash payout ratio, do you expect that you'll be in a position or Total will be in a position to pay a special dividend this year later on in the year? And then secondly, if I could come back to Adani, clearly, it's relatively small amounts of capital employed there, but does it change anything in terms of how you think about your approach to renewables in certain countries or JVs within that and the growth prospect? Well first, there will be a special dividend, which is a special dividend in kind with the spin-off of Canada. So -- and it's not 0. It's -- when I see the figures, it might represent not far from $1 per share. So don't underestimate that value. So it will come for shareholders. Again, the special dividends, we are very clear. We told you the priority to buy back. And then if we have, again, an environment like we had last year, we might consider that. But it's -- that's my answer to you. It's premature -- or by the way, it's premature because today, what they observed since the beginning of the year is $80 per barrel. So I don't see -- and less than $20 per MBTU. So there is no reason at this type of environment we will not have a special dividend. We prefer the buybacks. This is why we maintained the $2 billion. We don't increase it. If we come back to an environment like last year, we might consider that. But again, there will be a special dividend for the -- in kind for the Canada spinoff. Adani, no, it does not change. I think -- again, first, on Adani, I see a lot of papers, and I thank some of you for having trying to calm down these markets. We have an exposure, which is quite limited at $3 billion -- $3.1 billion. Obviously, the hydrogen projects, which was discussed, will be put on hold as long as we don't have a clarity on all that fight. I'm confident in the fact that Adani and geothermal energy is taking care of this business in a smart way. But as TotalEnergies, of course, we have to form a prudence to understand. We are there. By the way, all the companies of Adani in which we invest, we looked yesterday to Adani Green, for example, is a very safe company. They generate $1 billion per year of revenues. We have a debt of $5 billion. So it could -- it's sustainable, sustainable border. Maybe this will -- could impair the growth, I'm not sure. But again, at the end, the equation is more a strategic one. Do we need to do it by our own or not? Honestly, doing by our own, renewable business in India or even in Brazil, I think it's too complex. So I think I preferred -- and again, I think finding the right partners is the right way. We have been pleased, by the way, that Adani has delivered. Again, Adani Green Energy Limited or Adani-Total Gas Limited are companies which are managed by independent CEO, smart PEOs. We are happy with them, and we are happy also with the partnership with Adani. And of course, then it's Adani to explain what is the way they finance all that. But again, for me, fundamentally, no, it does not change the approach we have. It's true that -- and again, we knew that electricity is not really again renewable. Electricity business is more local, so you take more local risk. But maybe it's also local opportunities. So I don't want to be too -- don't look to the glass half empty. Half full is better. So again, we'll work on this one. I had two questions, if I may. The first one is on your low carbon strategy, and I was wondering how much the IRA has changed your capital allocation. It feels like the renewable molecules businesses, like bioenergy carbon capture, hydrogen, are becoming increasingly attractive, while renewable electrons are perhaps lagging a little bit behind, especially in a higher interest rate environment. And I wonder if that is reflected in your green CapEx allocation as well into the coming years. And then second question, I wanted to come back for a moment on the comments you made about your exposure to spot LNG. It's very clear, your exposure to spot gas in Europe, TTF and NBP, $200 million for $1 per Mcf. I was wondering if you could give us a sensitivity to spot LNG as well, also including what you've actually hedged over the next 12 months. Okay, the IRA is good for everybody, not only for molecules, but also for renewables. So don't -- maybe you don't follow that carefully, but there is some advantage linked to the IRA, but we benefit for more. In particular, there was a production tax credit, which was mainly in favor of wind, which became for the IRA technology neutral and which solar will benefit. So solar projects are now eligible to this type of tax credit. And so it's also another advantage. In fact, the IRA is an extensive law in order to support all green infrastructures, including renewable projects, including, by the way, storage projects. Storage as well is supported. And when we speak about -- for us, it's very important because we speak renewables. We want to be integrated. So capacity to build some battery storage capacities is important, energy storage capacity. So the IRA is also supportive of that. So it's reinforced. In fact, the IRA has given even more value to the Clearway acquisition we have done this year. So it's a happy news for me because we have -- we didn't integrate, obviously, this type of support to the full portfolio of Clearway, and we benefit from it. So it's an upside, which will really materialize because we have a very large portfolio. Having said that, coming back to the molecule business, of course, when you speak about hydrogen today, I was asked by the French Minister of Economy in Abu Dhabi, "Do you want to invest in hydrogen?" I answered to him, "Yes, in the U.S." He was not so happy with my questions -- my answer. But that's the reality. I mean, you have $3 per kilogram. Having said that, the question is not to make projects if you have no demand. So the rush to infrastructure is good, but we need to find the demand. And I would like to be sure that the demand will follow beyond what is obvious. And I think -- because you have 2 types of demand for hydrogen, green hydrogen or blue hydrogen, whatever it is. It is, I would say the [indiscernible] industry, the refining industry, the local industry where we need to make local projects because we have local customers, where there is a market for decarbonization. This one, I understand, and we'll look to that. And we are investing, and we have less assets in the U.S., but we could -- we are looking with Bernard to see if we could benefit from it for decarbonizing [indiscernible], for example, it's obvious. And then you have the export market, so it's a massive market, which does not exist for the time being. So I would like to see where it is before to speak about it. Having said that, we begin to see if we could leverage the IRA. For example, we are looking to make sense to make e-methane projects in the U.S. in order to export synthetic methane in the future for liquefaction plans. That could be a nice answer to have these long-term investments, and the U.S. might be the place to make some e-methane. So that type of things that we are working. We are working at CCS. There is another point. Makes sense to look if there are some projects. I think the direct capture projects today, obviously, is to try to test this technology in the U.S., thanks to this IRA. So it's part of the technology investments we need to do to coping with our ambition of net zero. What I hope, by the way, is that Europe, instead of complaining, should do the same. That's all. We need to have -- if we are serious about global net zero ambition of the world to make this type of support to invest in green infrastructure all over the world. That's the answer to do. So I think -- so I took it as a comfort to not only our, I would say, electricity strategy, but also, of course, to develop the new molecules. You've seen in our budget, it's coming upwards. I didn't mention, of course, the sustainable aviation fuel, which is the obvious market that everybody is rushing to, to the point that there were too many projects but -- because there is not an infinite demand. The question, honestly, is not only demand is demand, not only in volume, but also an affordable demand, accepting to pay more, and regulations will be necessary for that. Exposure to spot LNG, you -- we gave you some sensitivity on our -- but it's more of the upstream asset. I don't -- I'm not sure you have the LNG sensitivity in the figure we gave. Do we have it? The figures we gave for the sensitivity is a global sensitivity. So on oil portfolio, but the impact on the LNG portfolio as well, the portion that is linked to oil and the same for NBP. So the gas pipe, plus the portion of the LNG sold on NANDEX gas. In another way, what we hedged, let's keep. You take the 48 billion tonnes. You deduct the amount of 4 million tonnes. You deduct the 13 million tones spot. So it makes 30 million tonnes. So if I'm not wrong, I see Stephane. We have hedged more or less this 30 million tonnes of LNG, which we have a long-term supply, either from the assets or from the long-term supply agreements, the contracts in the U.S. The rest is not hedged. So this is why I made a comment on Yamal. Yamal is sensitive to TTF minus Brent. Two questions, if I may. So first is coming back on the cash distribution to shareholders. I understand the 35%, 40% through cycle commitment is very clear. But when thinking about 2023, given your balance sheet and if oil price there where they are, $80 plus, strong refining margin, what could refrain the Board to go above 40% cash distribution to shareholders? And my second question is a follow-up on LNG. You indicated that you generally hedge over a 1-year period. Last year, my belief was that you had probably hedged at lower prices than the forward curve. Now given the recent fall in natural gas spot prices and LNG prices and the forward curve, how should we think of your hedging position over the next 12 months? First one, the Board, I'm Chairman of the Board, so I had to convince myself. And so just to answer fully, the Board -- I'm the Chairman of the Board, so I'm fully consistent with myself, I would say. And of course, we -- there is -- we -- no, I think, honestly, don't be -- again, don't -- I mean, we are very consistent through the cycle. We did not reduce this dividend at a time where there are many reasons to do it in 2020, more reason to do it than to maintain it. We do it because we want to demonstrate our consistency, and that we are fundamentally resilient. So if you compare the increase of 7% to 8% that we proposed today to people who have got the dividend. You say it's less. Yes, it's less. But okay, that's a game that I will not play. I prefer to be consistent for the cycle. And again, I think it's an increase. So you should look to that as it was asked to me by -- I think, it was Oswald, the first question, if I remember, long time, we were more at under 5%. We go in years, and so we recognize it. But again, for me, it's very important that it has to be supported for cycles, and we don't want to come to banks anymore. The balance sheet, you're right, give us more to support it. This is why we go up. But again, I think we have also the buybacks to continue to feed this superior -- this higher in the future. Let's see what -- it's difficult to anticipate what will happen fully in '23. So we have already good news to you and to your shareholders. You've seen that last year, we did not hesitate to give a special dividend. We'll see what will be the price in '23. LNG was hedged in '22 with price. And I hope not. Otherwise, I will be super unhappy with Stephane and his team because the price in '22 were incredibly high. So normally, '23 will benefit from this hedging. Or I don't understand. By the way, today, we are lower -- the present TTF level is lower than the average of last year. So I should have more returns from '23 from this hedging in '22. I mean -- so I don't fully understand your question. And we'll continue. We have a policy, which is not to hedge everything. But we hedge, and we want to hedge. So why don't we hedge everything? Because we experienced in '22 the free port interruption on which we had to take. Because hedging is fine, unless you have a physical issue. So we don't hedge all the volumes. And in fact, in '22, we're quite lucky because we managed to be -- when production was interrupted, but we had some new edge on other volume, so we managed to get it. But it's -- so we hedge a certain -- I think it's 90% -- 80% to 90%, and when we keep the rest open. But honestly, '22 with this price is still good. And as I described, the anticipation we have on the LNG market, it's a little slow -- low today, not low. I mean, I know, for Jean-Pierre, it's not low at all. It's $20 per barrel. The $20 per million BTU is quite good. In fact, it's -- we would have told that 2 years or 3 years ago. I would tell you we'd have signed immediately. We don't even dream it. So I think it's a policy that we need to manage these positions. We have long-term contracts. We have exposures to spot markets, and we want to manage this exposure, not to keep it fully on our balance sheet because then you have mark-to-market stories and all that, so we prefer to -- so we are fine with the policy, and we will continue to implement it. '23 will benefit from the hedging of '22, and '24 might also benefit from the hedging of 2023. I had a question about your emissions targets. Recall in September 2022, you guys increased low-carbon CapEx and then you teased us with the potential to introduce a Scope 3 worldwide emission reduction target by 2025 and also a revision of the Scope 1, 2 net emission target. Now Patrick, in your prepared remarks, you did mention a few numbers. And could I push you just to talk a bit more about what those emission targets can look like in 2025? And more importantly, I'd love to hear how you think about returns on that specific CapEx, where it's going towards reducing emissions. I'd love to think about, when your emphasis on your CapEx is always on the value over volume and very high hurdle rates for your capital investment. So for something like low-carbon CapEx that goes specifically to reducing CO2, I'd love to hear about how you think about the returns there. Okay. The emission targets, first, when we speak about for '25, to be clear, the previous target was 40 million tonnes, Scope 1 and 2. I just mentioned that the plan of energy savings that we have put in place should deliver 2 million tonnes lower. So that means that the target will be reduced from 40 million tonnes to 38 million tonnes. I mean, I'm anticipating on the Board decision, but I think there is a logic there by '25. So we'll improve the target by '25 by 2 million tonnes. But we are reviewing not only this one. We are reviewing, like always, year-over-year, what is the status on the various intensity in order to monitor that properly. So I don't want to anticipate the decision will be taken. This is on Scope 1 and 2, I'm quite clear on this criteria. Look, let me be clear, but these emission targets that we have today, lowering our emission today is not a matter of carbon capture by '25. It's a matter of a lot of projects, which are just being more efficient. There's some technology to implement on [indiscernible] on everything. So we could describe to you at a point the type of projects. Maybe it will be a good idea by -- in September, we'll have a strategic day to come back on this topic if you are -- if most of you are interested in it. So carbon capture are more for 2030-plus targets, where we will need to have implemented. Within criteria for carbon capture, it's just a matter of price of CO2. That's why, I think, in the U.S., you have the IRA. In Europe, you have this $100 per tonne price. So when you compare both, at the end, it is -- more or less it gives another economy. And from this perspective, as Europe seems to be very serious about CO2 pricing, I think, on the long term, it's something which is maybe more sustainable, but fiscal incentive, which could -- which is sustainable for 10 years. It could disappear afterwards. The key on CCS will be, of course, the size of the market. We need to -- because there is some infrastructures to amortize. So my view is that you need to reach at least 10 million tonnes, 50 million tonnes per year of storage if you want to have a profitable model. That means proposing transport and storage services to cement industry of less than $50 per tonne. Because they capture costs, they could go around $50 per tonne. So if you speak about $50 per tonne, you need to split it between both. It works, again, if the support for infrastructure is key, if you have enough tonnes to put in those projects. From this perspective, you know the Denmark project is well located, not far from Germany. It's shorter to make a pipeline from German industries to Denmark, one from German, so Norway. Just looking to a map. So that might be a bit of volumes. Now the Dutch project is good because you have the Rotterdam and larger industrial platforms, which could give some customers to these Dutch projects, Aramis, and what we are working on. So that's the idea. Return criteria, again, it's -- we have to look to -- we have to do it because it's -- by the way, for me, for the oil and gas industry, it's a question of permit to operate, all right? We have to be serious about lowering our Scope 1 and 2 emissions. You know that I'm not very a big fan of the Scope 3 debate. But of Scope 1 and 2, I'm very serious because it is a duty for us to do it. We have technologies. We have capacity. So it's a cost. It might become an opportunity if we can commercialize the technology to third parties, and this is -- or one B2B entity is trying to develop that. We have a first project with Holcim in Belgium on these type of things. But again, for me, we will develop first this project because we have to do it for our own emissions. It's a question of permit to operate. And in oil and gas industry, this is embedded in the global strategy of the company. But as I show you, we can be very profitable. Like we are among the best and, at the same time, having CapEx for low-carbon energies, carbon capture, we do it in a large way. It's possible. It's building the future of the company. The $5 billion that we have mentioned for 2023, I think, is a level, which will be maintained for the following 3 years. We don't intend to grow it very much higher. I think it's a good level. If we want now to combine growth and profitability, if -- and we want to do it, so it's not if we want to do it. So I think it's a good level, and it's -- it obliges us to be selective, but selective in a large way. So we have room for improvement for deploying these. Why I say that, it was just because we are not -- in 2022, we have managed our 6 gigawatt per year with this type of amount. So for me, I have enough CapEx to make my 6 gigawatt per year, which is more or less the objective, which are assigned to the teams of Stephane. So I should not -- yes, and the only point is coming back to Michele's question is what is the size of the ambition is the new molecules. And for me, the question on hydrogen and all that is more about where is the market, which will drive our expansion of CapEx. This is Jason Gabelman from Cowen. I have a couple of questions. The first is you press released last week that you had farmed down a position in the renewal power asset at a high multiple, but it was a low overall cash contribution, one that I wouldn't have guess [indiscernible] the materiality of press release. It was a few hundred million dollars. And I'm wondering why you decided the press release was given. The thought was you have been farming down these assets all along. And if that potentially indicates that given the market environment, you're possibly accelerating the farm downs of the developed renewable power business over the next year and what type of cash flow contribution that could bring. My second question is on the LNG portfolio. You're obviously undergoing the review in Mozambique, but there's also been some reporting that you could take a large stake, either offtake or equity in a U.S. LNG project. And I'm wondering, if your case of growth in the U.S. LNG market is at all dependent on what happens in Mozambique and if you'll still continue to view the U.S. LNG market as one in which you want to grow in. Jason, you have complex question, but easy to answer. First, no, there is no acceleration at all. We have been always very clear. But to reach the double-digit profitability we want to have in renewables, we'll have to integrate farm downs. It's part of the business model. This is why we have some growth capacity objectives that is 35 gigawatt growth. But at the end, we'll keep more or less half of it. This is very clear. We stated that 3 or 5 years ago when we began the strategy, and we implement it. So there is no acceleration. It came on our desk. There was some assets in France, which were part of [indiscernible] to being farmed down. It has been done in a very good way. And thanks to this farm down, we have on these assets more than a double-digit return, much better. We don't give all the details because there are also a counterpart, but that's clear. So it's -- to be clear, and we have embedded in the strategies a fact that maybe we developed a 100% project. But when we farm down. And by the way, I always explain to you several times, it's not only a matter for me of profitability. It's a matter of managing the risk. I prefer to have 2x 50% of 2 projects, and 1x 100%. It's just a matter of things could happen. So that's -- yes, I can tell you, by the way, it was 16x EBITDA, if somebody gives me an indication, 16x EBITDA. So I think 16x EBITDA, I can tell you, no problem. I can't continue to develop my renewable business with this type of returns of 50% of my portfolio. And this gives the cash also to recirculate the cash and risk this project. So I think it's a smart way, and we'll stick on this strategy. No, there is no link between Mozambique and the U.S. We like both. We like LNG, okay? We want to continue to grow in a growing business, which is LNG. LNG is good. LNG is international gas. LNG is a way to decarbonize the coal-fired power plants in Asia and elsewhere. So there is no fear about it. Maybe, there may be some cycles. Today, it's at the top. It could go down because we are not able in the industry, of course, to plan all the plans very smartly. We invest, but -- so we are -- we think that the U.S. on the long term is competitive because you have the U.S. gas price is about the lowest in the world, so $3 to $5. Even at $5 per million BTU, it will be very, very profitable. So that's the reason why. So yes, we have Cameron LNG. Yes, we have ECA in Baja, California, Phase I, which is being built, and Phase II may be in the near future. We are looking over opportunities in the U.S., and it's independently of Mozambique. Mozambique, just to make -- to answer your question, I spent a day last week, Friday, a day in Cabo Delgado because my -- that -- my company, I said there is no way for me to envisage any restart of Mozambique as not as you don't allow me to visit Cabo Delgado. And I can travel around with a car, not an army, but alone. So we are only 3 of us, 2 cars. I want to go there. I want to check. I want, in fact, to go to see what if life is back to normal. I can tell you what I've seen from a security point of view is good. Even life is back to normal. Villages, people are back. But it's one step. There is more steps to be done. The 2 next steps, it varies and I -- because there have been some, I would say, controversies about human rights, about the -- around the project, not because of us. We inherited that from Anadarko acquisition. So I want a clear view on these human rights issues, which is a salient issue for me. It's important. I have given a mission to -- especially to human rights, a very well-known doctor in France, was accepted. He's making his job, so I'm waiting to see his report to understand exactly what is, I would say, these -- what are these issues. If there are things to be done, we'll execute the recommendation. We'll be transparent on it. We will share obviously with our partners because it's a Mozambique LNG decision to restart. It's not a TotalEnergies decision. It's -- all the partners should be on board. And there is a third step, which I can use this question to deliver is that, of course, we have to reengage with the contractors. And one key condition to restart will be to maintain the costs that we had. If I see the costs going up and up, we'll wait. We have waited. We can continue to wait. And the contractors will wait as well. So I'm not in a hurry in this condition to restart. Don't -- so there are conditions, I think, are okay. Human rights, I need the report. Costs, we will need another report from my teams. We will -- probably, I will ask them to reengage, but smoothly. No hurry. Again, I can wait on Mozambique LNG. If costs increase, we will wait, and we'll take the time. So that's where we are on these projects. So my message is positive, but it will take time. And it's not in competition with the U.S. We are ready to finance both. We have the capacity to finance both within our $16 billion, $18 billion. These are 2 good projects. It did all that -- by the way, on the U.S. projects, we could say the same. What I see when we discuss with some project developers is that costs are increasing also. So it's good to rush for volumes. But if you destroy the value because costs are too high, we know what is the impact at the end, and we experience it. So that's the same for me, debate. It's more a question today on -- we are very convinced by the U.S. and by the LNG market, but we need to have cost efficiency in the project. Patrick, simple one for you. I think contracting LNG long term, not into portfolio, but out of portfolio, I mean you've waited sometime, I'd say, too, for the cycle to turn in terms of oil-linked contracts. Pricing has obviously improved quite significantly. Should we be expecting you to offload an increasing amount of your unhedged -- or not unhedged is the wrong word, uncontracted volumes in to customers and give us a greater visibility and ways on duration and long-term people and oil linkage into the future with it? You're right, Lucas. We can employ you if you want to manage my LNG business. It's the right time to contract long term. Of course, the buyers, there is a little more willingness by the way of buyers because, suddenly, they see some value. Of course, when you contract long term, it's linked to brand sometimes. So it's an arbitration between [indiscernible] and -- I mean, gas spot index and Brent. Where it is one projects on which we want to balance the risk, it's PNG, Papua LNG. We said -- of course, my team today, we would like to keep a volume. So we'll have right to keep a volume, but most of the volume will be contracted in the long term because it's -- again, it makes a little sense to contract when you have some 11% -- or 10%, 11% Brent proposal from customers. When you are going up to above 13%, you can consider you are again there. So that's the right time. Having said that, I think a philosophy for us is more to keep this balance of 70% long term, 30% spot. We have the balance sheet. We can use our balance sheet to keep part of the risk. Okay, when you keep an exposure to spot index, you take the risk like in 2020, but you take -- you keep the upside like these years. So I think this is, for me, the core of the business model of a company like TotalEnergies. So strong balance sheet must allow us to take these type of risks -- spot risks. But the 70-30, okay, it's not a bible. It's more or less we are comfortable with that in terms of management of risk in the company as we grow. So today, there are some projects on which we will lose long-term contracts. And again, it's like -- by the way, we can also develop some project being spot, knowing that we can use this window of opportunities to then sign long-term contracts. This is what we say even to our renewable people. You want PPAs, but sometimes you could -- we could accept to develop projects not with a PPA merchant projects with the idea that, tomorrow, when we have the right opportunities, we will cover part of the exposure with a long-term PPA. So that's the beauty of the balance sheet. Patrick, both BP and Shell have recently made a pretty large acquisition in the biogas area to jump start their operation and also to grow in that area. Just curious that you did mention that you guys have a largest unit of the biogas in France that you just start out. You also have a venture -- or joint venture that -- to manage you -- to developing some biogas project in the U.S. Do you think biogas would be a more important part of your low-carbon energy business going forward? And if so, do you think you need to have a larger platform maybe through an acquisition that -- to accelerate the growth there? That's the first question. The second question, first, thank you for breaking out the integrated power business starting in the first quarter. Can you tell us that what is the return on that basis that currently that you achieved? Your peers, I think BP and Shell, seems to stop questioning the overall return on that business. And just want to see that what's your view -- or what you guys have been able to achieve so far. Biogas, honestly, M&A is a way to grow if you can deliver the value you pay. And I have difficulty to be convinced to put several billion dollars in biogas. Why? Because then, we are doing things, and we have -- we bought a platform in France. We just bought a new platform. It will be announced soon in Poland. Why? Because it's quite a local business. It's like renewables. The way you manage -- the technology is not high tech. Okay, you can do larger ones, but there is no rocket science. So then it's becoming a question of local development. And I'm sorry to tell you, this is not because you are good in a Nordic country to develop biogas, but you can be good in France, where the agriculture organization, the agricultural ecosystem is quite different. And so at this stage, we have not been convinced, and we have studied some of these files. But really, these platforms will give us the edge to grow beyond the core country. Just -- so we prefer -- maybe we are wrong to go step by step, not bringing a lot of noise with billion dollars, but we prefer, by the way, to make smart direct negotiation, but bidding with banks, which, of course, push price up in order to do that. There is a country where, obviously, we have more size is the U.S. The U.S. is more attractive for this perspective because, by the way, the system, the -- all the CFS system and all that is more liquid. So you can not only produce, but you can imagine to get more value of trading, the volumes and mixing the biogas with others. So the systems, the carbon systems markets in the U.S. give more liquidity to that. In Europe, it's fragmented. All the regulations are not the same. It's one of my advocacy when I go to Brussels to tell them that if they want this business to be developed, it could -- should have a unique -- you want European market and not -- the rules are different in all the countries, so it does not help to grow it. So when you are in the gas, you look to biogas. In particular, because our customers are looking for that. They want to -- if you have customers, we have made the bet to go to LNG for transportation, which we would love to have, bio LNG. So volume is not there. So there is a good momentum for selling these molecules. Then the question is scalability of all that, to be clear, and that's a question mark. So we are looking to -- we have some options in our portfolio. We grow it more locally. If we do something larger, it will be probably in the U.S., rather than in Europe, but that's part of it. On -- I mean, I listen to my peers. And again, I respect them, but I think being consistent in the strategy is just fundamental. And we have decided a strategy, which is clear. Again, we are -- with the business model I described, we will be able to deliver a double-digit business, and that's the commitment we took. There's no reason for me today to derive from this objective and from the capacity to do it. Of course, we have to build that. We have to be -- we make very good projects. Some are not as good. But I don't see what we should -- and I think if we make zigzag on the strategy, we'll do nothing at the end of the day. So I prefer to keep on my strategy, which is -- and again, we are very consistent, by the way. I think the decision, I have proposed to the Board to accelerate this segment, this reporting of the IP power -- integrated power business because having discussed with our shareholders after our roadshows in -- after the presentation in New York in October and November, it is clear that there is a legitimate request from them. You invest this amount of money in this business. We want you to demonstrate to clarity -- given clarity of these businesses. So I think this is a question. But I've been CEO for 9 years now. I think it's -- listen, is you need to stick on the strategy and not to be -- otherwise, in this new low carbon business we will not -- never reach the size, and I prefer to reach a size which is consistent. We will become a key player. And again, being able to grow our renewable business by 6, 7 gigawatt per year, we are among the largest one compared to the large -- and so I think we can -- and we're mixing that with our capacity to use the balance sheet to integrate that in a larger platform, trading, et cetera, will allow us to deliver this profitability. So it's a commitment. It's also part, by the way, of our net zero ambition that we have and on which we are serious about it. But at the end, for me, is positioning the company on the long term on a profitable business because we are convinced that the world will need more electricity, and more electricity means higher prices. I have two. Going back to the emissions, I think they became -- they came in below target in '22, but they were still up year-on-year. Part of it, I think -- most of it was driven by CCGT. And I was wondering if you can give us perhaps a target for 2023, how you see Scope 1 and Scope 2 emission evolving. And also -- I'm also seeing that Scope 3 have come down, and I was wondering what are the main drivers for the reduction in Scope 3. That's the first question. The second question is on refining. Of course, the EU ban came into effect on the 5th of February. I was wondering how you see the market for diesel in Europe with the ban. Will we be able to source more diesel from somewhere else or it's going to be as tight as -- especially in the second part of last year? And also on refining, of course, we are seeing protest in France. Is that going to have an impact on Q1 margins? That's all for me. Okay. Emission targets for '23, as I announced that we will lower the 25% target to 38%. I think the target for '23 should be something like under 40 million tonnes. So we'll have to repeat at least and lower the same performance in '22. No increase. So we are accelerating the target. There was -- the Board has made a linear decrease, I think. So probably 39.8% exactly, if you want the figure. Jean-Pierre is putting that on the paper. On refining, diesel market, honestly, it's -- the source of the product is diesel. There is a strange machine, which is organized in the world, which is . You -- India and China are buying Russian crude and they transform it in an Indian and Chinese diesel, which will come to Europe. I'm not sure it's good for the climate. It's not good for the cost. It's not good for the customers, but that will happen. So I'm not worried about finding diesel. It will be just more expensive, but it's a cost. So question for is it real -- does it has -- does the market has already anticipated or not the disruption of the Russian diesel in the spread of the diesel, which were quite high? By the question mark, I mean, it's difficult to answer to this. Normally, they anticipate, but there is a cost issue of transportation cost. The margin for the time being, I don't know. It's difficult for me to predict on Q1 '23. What I have observed since the beginning of the year is that the margin in January were higher than in the last quarter. They came back probably because the market was anticipating again distress. So we see increasing . I think we are today at an average since the beginning of the year above $100 per tonne probably. So again, this market is still strong. It's weakening. And so we'll see. But again, as -- it's difficult to understand what the operators in the market are taking into account or not, but this is what I think. Just one question left. On your comments around the global LNG market and European gas in '23, when you show European LNG imports potentially up to 25 million tonnes for this year, can you expand on the assumptions around European gas demand? It seems like this will imply quite a rebound this year. So where do you see that coming from? I'm not sure I have understood the question. Is the European gas demand -- yes, in 2022, I think what we have observed is more or less minus 15%. I mean, this is the figures I have in mind. I mean, I'm controlling -- stephane confirms. As your question for me, will it be accelerated in '23 because we see a trend, it was a shift mainly from gas, by the way, to oil. A central number of manufacturing industries shifted from gas to fuel, which we can understand. The gas was at $200 per barrel, and the fuel was probably at $120 per barrel. So there was an arbitration down. Part of it has been coal, but less than what we were thinking. What will happen in '23, I think, again, this price still today is $120 per barrel [indiscernible], $2 per million BTU, it's still high, so it could damage it. We gave you, I think, in the slide, we are quite clear about what our expectation. We think that EU LNG imports will be higher in '23 than in '22 by 15 million, 25 million tonnes. Maybe part of the demand disruption will come back. I'm not fully convinced it's really linked to the price. So that -- and again, I think people today, we are entering into a new world in Europe where energy prices are high. Energy costs are high. For energy consumers, I think the idea that they should be serious about the way they consume energy will be deeper in their mind, and they will invest like we do. By the way, I think this is the only advice we can give to them. If you want to lower your energy invoice, you have to consume less, and so to be efficient, like we are doing in TotalEnergies with our energy saving platform, refineries, et cetera. Emma, thank you. Thank you to all of you. I've seen that we have a good attendance to this presentation. So next meeting will be in March, either the 21st or 23rd. We'll confirm you the date very soon, to make this presentation on strategic sustainability and climate based around our sustainability and climate report, like we've done last year. It will be live. It will be live in London, and no more with Teams because we like also to have the opportunity to have more discussions, informal discussions with all of you.
EarningCall_550	Good day and thank you for standing by. Welcome to the Synaptics Inc. Second Quarter Fiscal Year 2023 Financial Results 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. Thank you, Josh. Good afternoon, everyone and thank you for joining us today on Synapticsâ second quarter, fiscal 2023 conference call. My name is Munjal Shah and I am the Head of Investor Relations. With me on todayâs call are Michael Hurlston, our President and CEO, and Dean Butler, our CFO. This call is also being broadcast live over the web and can be accessed from the investor relations section of the companyâs website at synaptics.com. In addition to a supplemental slide presentation, we have also posted a copy of these prepared remarks on our investor relations website. In addition to the Companyâs GAAP results, management will also provide supplementary results on a non-GAAP basis, which excludes share-based compensation, acquisition related costs, and certain other non-cash or recurring or non-recurring items. Please refer to the press release issued after market close today for a detailed reconciliation of GAAP and non-GAAP results, which can be accessed from the investor relations section of the companyâs website at synaptics.com. Additionally, we would like to remind you that during the course of this conference call, Synaptics will make forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. Although Synaptics believes our estimates and assumptions to be reasonable, they are subject to a number of risks and uncertainties beyond our control and may prove to be inaccurate. Synaptics cautions that actual results may differ materially from any future performance suggested in the Companyâs forward-looking statements. We refer you to the Companyâs current and periodic reports filed with the SEC, including our most recent 10-K - Annual Report on Form 10-K and current report on Form 10-Q, for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statement. Synaptics expressly disclaims any obligation to update this forward-looking information. Thanks, Munjal. Iâd like to welcome everyone to todayâs call. Our fiscal second quarter financial results were within our guidance range, a good outcome given the dynamic macroeconomic conditions. Our financial performance would have been at the midpoint of guidance or better save for one deal in our IoT product group that did not close in the quarter as expected. Dean will provide more details regarding this later in his remarks. Let me start with an overview of the macro conditions and how it is impacting our business. Given our exposure to a wide range of end markets, we have seen different facets of our business experience headwinds at different times. We first saw weakness in mobile phones, followed by PC, then consumer and are now beginning to see softness in our enterprise business which is now our second largest end market. The good news is that recovery is also expected in phases and we have already seen early signs of improvement in mobile and PC. In general, the biggest issue we are facing is an accumulation of inventory. Our visibility into channel partners indicates sell-through exceeded our sell-in during the December quarter in many product areas. We anticipate we will continue to under-ship natural demand in the first half of CY 2023 as we clear inventory. While we remain uncertain as to the precise timing of recovery, our best estimate at this time is calendar Q3 given current rates of inventory bleed off. With that said, we continue to innovate and focus on our three biggest market opportunities all of which are in our IoT product area. The first of these is our initiative to drive wireless workspaces. At this yearâs CES, we showcased the first wireless docking station from our partner, Lenovo. The product features our Wi-Fi, video conversion, and video decoding ICs. The next phase of growth involves enabling high fidelity wireless monitors. Ultimately, we see a clean desktop with no wires at all. In addition, we can enable advanced video conferencing hubs where the base system is connected to monitors wirelessly, saving corporate IT departments time and money. All of this is possible with our advanced, low latency video compression technology. While wireless workspaces represent the future, our present is also strong as we continue to dominate the current generation of docking stations and are already beginning our move into video conferencing systems. Our latest chip, Navarro, will bring a new level of performance to universal docking stations, enabling two 8k or four 4k monitors simultaneously. In addition, we recently introduced our latest video conversion device, Carrera, with industry leading SerDes technology, optimized for USB4 Version 2 and DisplayPort 2.1, that brings both video and graphics to high-definition monitors. As an early sign of success in video conferencing, we had a key $10 plus design win in HPâs new Presence system that was named one of the best inventions of 2022 by Time Magazine. Our second large opportunity is in wireless connectivity. Our design wins and pipeline of opportunities continue to increase, giving us confidence to target $1 billion in annual sales over the next three to five years. We offer the broadest portfolio of wireless technologies among all our IoT competitors, including Wi-Fi, Bluetooth, Thread/Zigbee, ULE and GNSS. Our latest combo chip design wins encompass large customers such as Amazon and Google, kitchen appliances, and wearable cameras. Our Wi- Fi, Bluetooth combos have also started to see success in new market segments such as enterprise, operator, health care and even smart cities. Our ULE technology has been an entrÃ©e into customers such as ADT, Vivint, and Verisure, where we are able to sell a litany of products including video decoders for hubs, Wi-Fi for security cameras, and edge AI devices for glass break detectors. In GNSS, we recently announced the availability of the 4778, a chip designed in 7 nanometer CMOS that offers customers up to 80% more power efficiency. This monumental step function improvement in power savings is particularly important for any product depending on a small battery such as wearables. Despite a recent speedbump in terms of significant inventory buildup, we remain confident in our wireless business and expect it to return to outsized growth in the calendar year. Our third major growth driver is automotive. At CES, we introduced a new product, SmartBridge. This device replaces an existing protocol conversion device, but adds a feature dubbed local dimming. Local dimming greatly increases the contrast ratio in automotive displays, making a typical LCD display look and perform like OLED. The SmartBridge increases our content per vehicle to $25 to $30. In addition, we continue to benefit from the rapid conversion of discrete touch and display circuits to TDDI in the infotainment display. We will look to expand our automotive footprint through both M&A and organic development. Other notable parts of our IoT portfolio include enterprise telephony and audio headsets. In enterprise telephony, we continue to expand content with both wireless and video decoding for small screen conferencing. In audio headsets, we continue to dominate in enterprise class products, particularly with DECT connectivity. Turning to PCs, revenues were in line with our expectations but down sequentially as customers work through their inventories. We are shipping below the reduced end demand and are seeing signs of an improving inventory situation. As it stands, we expect the March quarter to mark the low water mark for revenue and measured improvement thereafter. In the meantime, we are pursuing content and TAM expansion. We are gaining traction with our presence detection technology and announced wins with both Dell and Panasonic. In fact, all major customers are engaging with us for this technology which saves battery life by using AI algorithms to determine when a user is not actively engaged with the laptop. Presence detection has use cases beyond the PC which we intend to pursue aggressively. In conclusion, we are working with our customers to reduce inventories in the channel. We are managing our expenses while continuing to invest in growth areas of the business. We will focus on things we can control such as timely new product introductions, innovative roadmaps, and design win conversions. Together, this gives me confidence in our long-term growth potential. Thanks Michael, and good afternoon to everyone. Iâll start with a review of our financial results for the recently completed quarter and then provide our current outlook. Revenue for the December quarter was $353 million, toward the low end of our previous guidance. December quarter revenue from IoT, PC, and Mobile were 68%, 16% and 16%, respectively. We had one customer for our processor products that did not complete certain milestones during the quarter which resulted in lower IoT results relative to our prior expectations. We now expect to complete these deliverables in the March quarter and have included in our guidance as such. Year-over-year, consolidated December quarter revenue was down 16%, driven by double-digit declines in our Mobile and PC products. December quarter IoT product revenue was down 8% year-over-year and was down 30% sequentially due to an accumulation of inventory at customers and channel partners. Outside of the single deal that was delayed, all other customers performed in line with our prior forecasts. In PC, our December quarter revenue was down 13% sequentially and down 32% year-over-year, in line with our expectations, reflecting a weaker PC market as customers drive to reduce inventory. Our higher commercial mix generally leads to a more stable performance, but it is not immune to economic downturns when enterprise IT spending is curtailed. We are seeing early signs of PC inventories clearing and expect demand to begin recovering by June. Our December quarter Mobile product revenue was up 43% sequentially but declined 25% year-over-year. The December quarter outperformed our expectations as customers took delivery of products before the calendar year end, which likely comes at the expense of our March quarter forecast. We view this as an unanticipated timing benefit versus a fundamental change in end market demand. We believe customer inventories are coming down in this area and we signs of stabilization. During the quarter, we had one customer greater than 10% of revenue, at approximately 11%, a distributor servicing multiple OEMs. For the December quarter, our GAAP gross margin was 52.9%, which includes $23.3 million of intangible asset amortization and $1 million of share-based compensation costs. December quarter non-GAAP gross margin was 59.8% and was negatively impacted by the delay of the IoT deal previously mentioned. GAAP operating expenses in the December quarter were $140.6 million, which includes share-based compensation of $29 million, intangibles amortization of $8.9 million, amortization of prepaid development costs of $2.5 million, and transaction related costs of $1.8 million. December quarter non-GAAP operating expenses of $98.4 million were down from the preceding quarter and toward the low end of our guidance primarily due to lower personnel related costs as we begin to slow our rate of new investments. Our GAAP tax rate was 44.2% for the quarter, and non-GAAP tax rate was 17%. In the December quarter, we had GAAP net income of $22 million or GAAP net income of $0.55 per diluted share. Our non-GAAP net income in the December quarter was $88.5 million, a decrease of 38% from the prior quarter and a 33% decrease from the same quarter a year ago. Non- GAAP EPS per diluted share of $2.20 was above the low end of our guidance range as the impact of lower revenue and gross margin was offset by lower operating expenses. Now turning to the balance sheet. We ended the quarter with $859 million of cash, cash equivalents, and short-term investments on hand; a decline of $53 million from the preceding quarter with cash flow from operations of $48 million, offset by $18 million of cash used for payroll taxes related to our equity compensation program, $16 million used for acquisitions, and $61 million of cash used under our share repurchase program. Cash paid for capital expenditures was $9.1 million and depreciation for the quarter was $6.4 million. Receivables at the end of December were $255 million and days of sales outstanding were 65, consistent with the prior year, but up from 57 last quarter. Days of inventory were 112, above 96 days last quarter and ending inventory balance of $177.5 million was down slightly from 179.4 last quarter. During the last quarter, we have actively reduced orders to our suppliers and expect our inventory next quarter to decline further as we work to bring our inventory down to normal levels. We bought back approximately 634 thousand shares during the quarter for an aggregate cost of roughly $61 million. Since restarting our buyback program in September and through todayâs call, we have repurchased approximately 1 million shares for $100 million and have an additional $477 million available under our current authorization. Our capital allocation priorities continue to be unchanged. Our balance sheet is healthy and we have sufficient cash to execute on tuck-in acquisition opportunities that will enhance our product portfolio and help us expand further in our target markets. We plan to continue to utilize our excess cash flow for share repurchases and debt paydown absent any M&A activity. Now, let me turn to our March quarter outlook. The macro situation remains challenging and opaque. Our customers continue to react to the macro environment with their forecasts and are focused on reducing inventories. We continue to work with our customers and channel partners in mutually beneficial ways to manage pushouts and cancellation requests. We anticipate revenue for the March quarter to be in the range of $310 million to $340 million, a sequential decline of approximately 8% at the mid-point. We expect our revenue mix from IoT, PC, and Mobile products in the March quarter to be approximately 72%, 15% and 13%, respectively. We are seeing early signs of inventories being worked down with sell-in greater than - sell-out greater than sell-in for most products. We expect customers will continue to deplete their inventory throughout the first half of calendar 2023 before returning to more normal run rates of consumption. As previously communicated, we expect to maintain our strong gross margin profile, with GAAP gross margin for the March quarter expected to be in the range of 52% to 55%. We expect non-GAAP gross margin in the range of 60% to 62%, an improvement from the previous quarter as we expect to close the previously delayed deal during the March quarter adding approximately 100 basis points. We continue to believe that non-GAAP gross margin will trend toward our long-term target of 57 as we progress through the calendar year. We expect GAAP operating expenses in the March quarter to be in the range of $139 million to $144 million, which includes intangibles amortization, prepaid development cost amortization, and share-based compensation. We expect non-GAAP operating expense in the March quarter to be in line with our December results and be in the range of $98 million to $102 million. We remain committed to our focused investment areas and will continue to monitor our spending levels but believe our current levels balance both near-term pressures and long-term growth opportunities for the company. As a result, GAAP net income per diluted share for our March quarter is expected to be in the range of $0.20 to $0.50. And, non-GAAP net income per diluted share is anticipated to be in the range of $1.65 to $2.05 per share, on an estimated 40 million fully diluted shares. As a result of an increase in the interest rate on the variable portion of our debt, and partially offset by an increase in interest income on our invested cash, we expect non-GAAP net interest expense in the March quarter to be approximately $9 million. Finally, we expect our fiscal 2023 and long-term non-GAAP tax rate to remain unchanged in the range of 16% to 18%. This wraps up our prepared remarks. Iâd like to now turn the call over to the operator to start the Q&A session. Operator? Yeah. Thanks for taking my question. Congratulations for working through such a tough environment we have. But I guess I'll ask the obvious question first, and the processor customer. Was it the milestone not hit? Was it the product wasn't qualified in time or wasn't completed in time and now it's ready to ship? Or is there - was there something else involved with that? Yes. No, I don't think it was any more complicated, Kevin, than you are just completing the deliverables that were due. We had originally anticipated completing those deliverables in the December quarter. Unfortunately, those didn't quite make it, which now will be in March. So it's not really any more complicated than just deliverables not quite being met. Okay. And maybe we're all trying to figure out the inventory correction as we're going into this year. And can you say for your IoT business, that seems to be - that's of course, your biggest portion, but a little harder to track exactly where your exposures are. Can you say where the inventory is highest as it consumer related products or industrial? Or maybe in your first remark you said the cycle is kind of improving in the PC and handsets. Now they were the first to go down and is this how you're seeing it roll over? Yes, I think we sort of see it as a bit in ways. I mean, I think the products that are closest to call it retail consumers saw some of the corrections first, meaning some corrections in demand, a build up an inventory. But also we think those are the first set of markets that likely come out of it as they sort of reacted first, if you will, on the timeline. So the more consumer facing applications have seen sort of the bigger impact, and therefore, some more of the inventory. And then now only recently a few of the other markets such as enterprise that we talked about corporate enterprises, that's just starting to roll out. You see sort of corporate IT departments cutting some budgets as people sort of tighten the belt, and that's affecting a few of those products that we didn't see prior. Yeah. Thank you for taking my questions. I appreciate it. Just a question on the gross margins. So the margins, you guided a 61% to factor in that benefit that got pushed down to the March quarter. But Dean you're kind of also indicating that margins will kind of drift to a floor of 57% throughout the year, if I read that correctly. So how do we think about kind of the cadence of that drop in margins? And are there any potential opportunities to have margins above the 57% as the floor? Yes, what I would say Raj, one, I think we've been pretty clear over the last several quarters. We sort of do see margins eventually sort of trailing to our long-term. Right now we're still in 60s. Last quarter, December is essentially 60% guiding 61% here. I don't think there's any step function that we see coming. I think over time, I do think that that's probably the right target for the company to continue to operate sort of consistently. And so, I think sort of the -- likely a sort of a gradual move in that direction, Raji. Okay. That's good to know. And on the shape of the recovery, you talked about potentially in the third quarter, starting to see a recovery. So if I interpret that, is it fair to assume that June could be kind of flat off the March quarter, and then we start to see sequential growth? And if that's the case, what's driving that confidence? You do have - you mentioned the consumer part of the business is the first set of the markets that will come out of this correction. But you are mentioning some softness on the IT departments. I know is your best guess in that - with that time frame. But just kind of walk me through your thought process in some of the puts and takes for that shape of recovery? Thank you. Hey, Raji, it's Michael. I think you kind of got it right. I think in general, we sort of see this as a low watermark, I'd say, although we're not providing any guidance. I'd say, I wouldn't expect a big bounce up in June. It's probably we're kind of bubbling along the bottom. And then, as Dean said, with inventory bleed off, with some early signs in Mobile and PC that we're coming off the bottom, I think Dean characterized it well in his comments in Mobile. We saw a nice bounce in our Mobile business, but I wouldn't yet call that a trend line. But certainly we feel a little bit better about kind of the macro in consumer and the macro in PC. And so, I would say that although everybody - nobody has a perfect crystal ball, I would say, our best guess continues to be that things get better in the back half of this kind of local minimum that you're seeing. Hey, guys. Michael, love to hear your thoughts on if there is any particular geographic area that's more weak than others and also lot of the other semis have been taking about China stabilizing, maybe not really moving up. I'm curious, your view on your sales into China and then I had to follow-up after that. Anthony, I mean, I think our comments would be consistent with others that we've seen. China is driving a big portion of our mobile business, as you know, and our mobile business definitely saw a bit of bounce here. And I still think that we're coming off kind of low water mark in our mobile business, as you know. It's too early to call that we're absolutely on the road to significant revenue increases there. I think we - as Dean said in his remarks, it's sort of - we definitely saw a little bit of a balance, but again too early to call. I do think that we have limited exposure in the rest of China, outside of mobile, our business there is relatively concentrated. So it's harder to give a macro view. I think that where we're starting to see sort of early weakness as we indicated is our enterprise business, which is now a pretty big part of what we do, and that's primarily U.S. customers. So we're seeing just some early softness there. So our guide certainly is in line with the cautiousness that seems to - we're trying to - cautious approach that we're trying to take. Got it. Thanks for that. And then as a follow-up, I'm curious if you've seen any change in behavior from your competitors on price. And then, secondly, maybe you guys haven't talked about this in a while, but I think you've got a pretty decent roster of VR design wins. I'm curious your view on kind of when that comes to fruition? Yes. Maybe I'll take the second one first. I mean, I think, on the VR piece, unfortunately, that's where we've seen a lot - I think Raji asked a question before, a lot of weakness in our VR business. That was a big story for us in the first half of calendar 2022. And from a design win perspective, we're still doing great. I mean, we're winning virtually every goggle that's out there. The problem is, that particular consumer facing segment just isn't selling through. So - as well as we did in 2022, we're simply not seeing those results in 2023, despite continuing to win almost everything that there is. Dean, I don't know if you want to comment on the first part of the question. No, but maybe just let me add on to VR for a second, Tony, I think we're - Synaptics is in a great position. When that market sort of does bounce back and - we're a believer that actually these early markets do take a little while to develop. We're actually in really great position. So I think when VR comes back, you'll see Synaptics as a big participator on that. Hey, guys. This is Eddie for Krish. Congrats on strong results in light of challenging environment. Just touching on the gross margin question. How should we think about the delta between the 61% you guided for March, and 57% long-term target? How much of that is due to higher input costs? And how much of it is due to weaker demand environment? Yes. Eddie I would say, I mean input cost is definitely a factor. I mean without precise quantification, input cost is not insignificant, we are in the face of rising input cost, which I think in a place we're probably a little bit more limited than we were the last couple of years on be able to pass all of that along. So I do think there'll be a little bit input cost that we end up getting caught with on this cycle. As far as competitive pressure, I mean, certainly there is some, but it differs by technology area. There are certain areas that we complete very heavily, there are certain areas we have a pretty dominant technology lead, where we don't have to deal with such competitive pressures. And then in general, I mean mix as well. So we continue to evolve the mix, push the portfolio forward, a lot of our designs come in both consumer facing, and then also enterprise facing. So as we continue to move the portfolio forward, balancing the mix between the two, you do see different growth rates between those two different dynamics. So hopefully that sort of helps give some color, Eddie. Hey, guys. Thanks for the question. And I joined a little late, so sorry if this was asked. I heard something there about VR. I wanted to know about your opportunity in AR, whether you think you have one and the size of that, or if you could potentially size that for us. And then also the opportunity for set-top box. I don't know if we've talked about that too much roughly? Thank you. Yes, Chris. I mean I think it depends - there is sort of two different classes of AR. I think with AR glasses as strict pass through. Honestly, our opportunity is fairly limited. And display drivers, it's a different type and it's relatively simple. There is opportunity in Wi-Fi and audio in those AR glasses, but the core business and where we've been very dominant in VR not so much. There are mixed goggles that are coming into the market. There the display drivers are fairly similar to what we would do for VR. And we would expect a very similar opportunity, again, depending on that market size, we would expect to do relatively well in kind of mixed AR,VR goggles. I think there was a second part of the question. Yes. Set-up box has been kind of mix for us. I mean, I think the good news for us with the wireless asset that we got some time back, we've been able to increase content per box, that actually story has gone relatively well. Where I've been a bit disappointed is our ability to pick up overall share. We've kind of held the sockets that we've had. We've held - we have gained one or two. So we've been pretty pleased with our ability here and there. But generally speaking, I would say that we're not doing as well in terms of picking up share as we would have anticipated two years ago had you asked the question. The other thing I would I would share, Chris, I mean, we talked about this set of deliverables on a processor piece of business, that's actually engaging with an operator end market. So that's sort of the set-top box processor technology. So it actually is progressing. I think, what we find ourselves, and you hear some of our comments, it just doesn't grow as fast as some of our other opportunities in automotive, in wireless, in some of the video interface devices. For sure. Thanks, Dean. And for the second question, and again, I apologize if this was asked. But around connectivity a lot of others have kind of described this shortage situation moving to go lot fairly quickly for lack of a better word and a potential inventory overhang and potential pricing pressure even moving forward here. Would you guys kind of describe that similar situation or do you see something different? Yes. For sure, Chris. The inventory is a big problem. I mean, I think we highlighted this in the last call, our wireless business - in our IoT area, I'd say right now, we've talked about two problems. One is VR, demand just simply isn't there. As Dean said, I think we're positioned well when that recovers. Wireless is very much an inventory problem. There was a lot of shipping going on into various phases. And remember in our business, we depend on module partners to service a long tail. So we have an extra step in our supply chain, we go from ours to a distributor to a module guy to an end customer. And that created some visibility challenges for sure inventory there is high. I think we're less subject to some of the pricing pressures because remember our products compete in this very high end, where we're doing video transfer, where â in power sensitive applications like wearables. So the pricing challenges there. We're in a little bit of an island from a competitive standpoint. We've heard to list [ph] like you are that wireless is seeing competitive pricing challenges, but we have a bit of a safe harbor there, but inventory very much is part of our story. Yes. Thanks for letting me have a follow-up question. Just - when talking about your suppliers, when you first came over to Synaptics and start making the changes. One of the things you're going to do is consolidate your number of suppliers, and of course, we had the shortage hit. Can you say where you stand with that now? Is there an opportunity for cost reductions by consolidating suppliers again? Yes. Good question. I think that what we've done Kevin is, we basically concentrated all our starts with one supplier. So any new product is essentially going to the largest manufacturer in the world, and for the most part we've stopped engaging with the long tail of suppliers that we have. Now, that said, it takes a long time, and we still, I think we've gone from 10 wafer partners to nine. So our supply chain and operations guys have a lot of problems. And as we become a diminishing part of these supply chain, these various suppliers, we're obviously subject to pricing increases because we were just not meaningful to them. So when Dean says, hey, the big part of what we forecast out in the next x quarters is a glide path down to this 57% gross margin, that's very reflective of input prices more than anything. There is certainly some competitive pricing dynamics in there, but the long pole is to do with costs. As we concentrate, right now, we're not seeing that pricing benefit that we would get from the one supplier where our starts are concentrated. I'm optimistic that we're going to get some help there, and if that does happen, then perhaps our outlook changes. But right now, what we are seeing and what we're forecasting is serious increases from places where de minimis customer and not a lot of help from the place where meaningful - very meaningful customer on a go-forward basis. So hopefully that answers the question, Kevin. Hi. Thank you for taking my question. Michael, I have a question regarding your wireless roadmap at the time of acquisition from Broadcom, you did have - I mentioned to the back has two road map products. Can you give us update on where you are today with roadmap products? And what's your plans are after the two products or after you have exhausted the two roadmap products? Yes. Good question. Thank you, Martin. I would say the volume. So on the two roadmap products, both are sampling and one is nearing production. So we've got both of those products in our hands. We're actually pleased with the performance of both. Both are in 16-nanometer, which we think gives us a pretty good competitive footing particularly on a power - from a power standpoint. And in parallel, we brought up our own engineering capabilities. So we've actually taped out our first set of products that are done with our internal engineering team, and we expect that part of the vision that I am outlining here is, we really want to become a major player. Today, we've got a very small share, I would say in this IoT landscape as it relates to wireless. We have really retooled our road map. And I think part of what you're going to see is very targeted ships, a litany of very targeted ships coming from different segments of this IoT market that will be done by our internal team. So we've adjusted our spend to make sure that our wireless opportunity is well served, because we believe this is actually the biggest TAM that we have in front of us. And if we execute to, what I believe we can, I think we're going to be in really, really good shape. So wireless is a big part of our story, we've had this bridge that we got from these Broadcom designs, but we're beginning to really hit the ground running with our internal capability and I'm pretty optimistic that we have a plan to really make this thing into big, big business for us. Thank you, Michael. I have one more question on the automotive display opportunity. At CES, we saw a demo for mini LED backlighting driver. Can you maybe give us more details on that market? Do you - how unique are you coupling the driver chip with TDDI? And who are you competing with for that LED driver - video LED backlighting drivers? Yes. So the thing that we have, Martin, I mean we have, as you know, being around the company for some time, our big opportunity is in TDDI. So the state of the automotive market is still the predominant number of cars on the road have discrete touch circuits and discrete display drivers for the infotainment system. That's converting to TDDI, where you have integrated touch and integrated display in one circuit. What we introduced at CES is a bridge product. So now there is an additional chip that takes input from the applications processor, converts it from EDP is kind of a standard format that it gets sent to the display to LVDS, Low-Voltage Differential, that goes into the display. So this is a chip that's there today, since in almost every car to convert from the applications processor up to the display. What's unique, what we've been able to add is this technology called local dimming. And in local dimming, that's where this backlighting comes into play. We're actually able to make the contrast ratio much, much sharper. Your blacks are very deep, your whites are much brighter, and that's a differentiator. As we think about this is a great opportunity for us, because there is additional content that we can gain. We have some differentiation there. And we actually see more and more of our focus as we go forward, playing into the SmartBridge area, where we think there are different pieces of puzzle we can bring to bear over the next couple of years. So, hopefully, that answers your question. I like that opportunity and I think for us automotive, as we said, it's one of our three focus areas. And I think that if we play our cards right, we can really increase our content over time. Hi, guys. This is Jamison on for Ambrish. I'm hoping you guys could maybe just give a little bit more color on this IoT Processor pushout. Just looking at it, it sounds like it's about a $30 million pushout. So if this is correct, does it imply that in December it would have been closer to $200 million, just given your guidance? And second, as inventory clears through the first half, is it reasonable to think that this IoT segment can hit 300 number - $300 million number again sometime in the second half of calendar '23? Thank you. Yes, Jamison. This is Dean. Let me give you just a little bit more about this customer engagement that pushed out from December, we got delayed into March now. It depending on sort of the milestones and various deliverables, it's sort of between sort of 10 and 30. So that's sort of the ranging depending on what deliverables are sort of met in any particular quarter. So that's sort of the rough range. We said it's kind of about 100 basis points and sort of margin impact, depending on what quarter is that - the deal actually ends up getting completed and the major deliverables done. On the IoT side, basically this is where a lot of the inventory consumption really is happening, this is where sell through is highly dependent on our sell-in. So what we're looking at is, you're really trying to let our customer base sort of consume on their side, on the OEM side, which then needs to eat their inventory or put it on a distributor side. And so the timing on how both of those elements of inventory gets burned down really sort of depends on how the specific timeline of sort of return to normal demand consumption. I mean, I think the thing to remember here Jamison is largely, this is a work known as inventory, and there hasn't really been any fundamental shift in the business and sort of what we're pursuing and the growth drivers around it. And so that's I think how most people should think about it. Okay, wonderful. Thank you. And then I guess just following-up with this maybe the best visibility just to rank order for your - I guess, to your best ability for inventory, I guess in channel drain would be PC first, it sounds like mobile second in IoT is kind of a little bit more murky. Is that the correct way to frame it? You got it. Yes. We're just comparing notes here and it matched exactly what you said, yes. I think PC looks like it's getting better. And we have - part of our IoT business is sort of attached to PC indirectly, I think that's getting better, mobile sort of second, and IoT third. And to your point, I mean, we expect to get back to sort of normal IoT levels, timing is a question as Dean said, but I don't expect this to be a persistent problem. Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Michael Hurlston for any further remarks. I'd like to thank all of you for joining us today. We certainly look forward to seeing you at our upcoming investor conferences and speaking to you further during the quarter. Thank you.
EarningCall_551	Hello, everyone, and welcome to the National Fuel Gas Company Q1 FY 2023 Earnings Conference Call. My name is Drew, and I'll be your operator today. [Operator instructions] Thank you, Drew, and good morning. We appreciate you joining us on todayâs conference call for a discussion of last eveningâs earnings release. With us on the call from National Fuel Gas Company are Dave Bauer, President and Chief Executive Officer; Karen Camiolo, Treasurer and Principal Financial Officer; and Justin Loweth, President of Seneca Resources and National Fuel Midstream. At the end of the prepared remarks, we will open the discussion to questions. The first quarter fiscal 2023 earnings release and February investor presentation have been posted on our Investor Relations website. We may refer to these materials during todayâs call. We would like to remind you that todayâs teleconference will contain forward-looking statements. While National Fuelâs expectations, beliefs and projections are made in good faith and are believed to have a reasonable basis, actual results may differ materially. These statements speak only as of the date on they are made, and may refer to last eveningâs earnings release for a listing of certain specific risk factors. Thanks, Brandon, and good morning, everyone. National Fuel's fiscal year started off with a great first quarter. Adjusted operating results were $1.84 per share, an increase of 24% versus last year, with each of our four business segments contributing to the increase. Starting with our Upstream business, production in Appalachia increased by 11%, which when combined with the $0.50 per Mcf improvement in our natural gas price realizations, led to a 29% increase in EBITDA. This increase is particularly impressive, given that last year's EBITDA includes the benefit of our California assets, which we sold last summer. Seneca's production growth also contributed to a 6% increase in gathering EBITDA. The combination of our valuable transportation and marketing portfolio, along with great operational execution by our team, drove the improved performance of our nonregulated businesses during the quarter. Justin will add more details on these results in a few minutes. Our regulated segments also had a good quarter. Despite the inflationary headwinds I've discussed on past calls, earnings were up in both businesses. We saw continued growth in pipeline and storage revenues, driven principally by the FM100 expansion and modernization project. As you recall, this project went in service in December 2021, so we saw the impact of a full quarter of both expansion revenues and the modernization rate increase associated with the project that went into effect last April. In the Utility business, excluding some rate making adjustments that did not impact earnings, our underlying customer margin was up about $6 million, driven by the ongoing benefits of our infrastructure modernization tracker in New York and increased usage, which was largely related to colder weather versus last year. The increase in margin more than offset the inflationary pressure on our operating expenses, leading to earnings growth for the quarter. Turning to capital allocation. Our fiscal '23 capital spending guidance is unchanged at $830 million to $940 million. At Seneca, we plan to continue our 2-rig program. Despite the near-term drop in natural gas prices largely due to reduced demand in the early stages of winter, the long-term outlook is still constructive. The pipeline of LNG projects expected to come online mid-decade as well as the continued transition from coal to gas generation support long-term baseload demand. Having said that, we remain flexible, and if market conditions warrant, we can adjust our spending to ensure we continue to generate free cash flow. As you saw in last night's release, we've lowered our NYMEX natural gas price assumption to an average of $3.25 per MMBtu for the remaining nine months of the year, which is in line with the forward markets. Obviously, this is a big decrease, but the impact is dampened by our hedging portfolio. We continue to believe in our disciplined hedging strategy as a way to protect earnings and cash flows from the inherent volatility of commodity prices. Looking forward, long-term prices haven't moved quite as much as the front end of the curve. Our program economics are quite attractive at the current strip and should generate robust returns and significant free cash flow, which as I've said in the past, we expect to use to deleverage the balance sheet, pursue growth opportunities and return capital to shareholders. As you likely saw in the media, over the Christmas weekend, we experienced exceptionally challenging weather conditions across our operating footprint, including a once-in-a-generation blizzard within our New York service territory. It's no exaggeration to say that Winter Storm Elliott wreck havoc in our region, which is particularly noteworthy given that our region is no stranger to big snowstorms. I want to thank all of our employees who went above and beyond the call of duty to keep our system running safely. Our region needed us to deliver and the National Fuel team was up to the challenge. Whether it was dealing with freeze-offs at Seneca's wells, keeping our midstream compressor stations operational or assuring the gas supply was adequate and emergency calls were responded to at the utility, I'm very proud of the effort of our entire National Fuel team. This storm highlights the importance of resilient weather-hardened infrastructure. Less reliable to critical energy sources bolstered, there's tens of thousands of customers throughout our service territory who were without power at some point during the holiday weekend. Across social media and anecdotally, our people express their appreciation for national gas service as they huddled around natural gas fireplaces to stay warm, continue to use natural gas stoves for food preparation, and in many cases, use natural gas generators to run furnaces, appliances or to power entire homes. Against this backdrop, it's astonishing that New York state policymakers are unwavering in their push for a rapid transformation to a predominantly electric future, powered primarily by intermittent wind and solar. In December of last year, the state's Climate Action Council finalized its scope opening plan as required by the Climate Act that was enacted in 2019. If adopted is written, the scoping plan would remake the way energy is produced, distributed and consumed in almost every element of the state economy. The breadth of what's contemplated is truly remarkable. On the demand side, the scoping plan would have in New Yorkers electrify almost everything at any cost. This will cause the demand for electricity to skyrocket. Electrifying just the space heating demand in our service territory would require a near quadrupling of the electric grid. On the supply side, the scoping plan foresees this increased demand for electricity being met almost entirely with new wind and solar generation. The scale of what's required is truly unprecedented. Currently, there's approximately 2 gigawatts of wind and solar capacity in the state, which was installed over the course of the last two decades. To meet its targets, the state will need to install on average, more than 4 gigawatts of wind and solar every year for each of the next 18 years. Stop and think about that. It's taken us decades to get to our current 2 gigawatts of capacity, but we'll somehow be able to build double that amount each and every year for the next two decades. While many might consider that incredibly aggressive, the scoping plan sees it is a sure thing. And even if the more than 80 gigawatts of wind and solar is built as planned, there will still be as much as a 45 gigawatt shortfall in winter electric generation that cannot be met with existing technologies. Then you have to consider the cost to build the electric transmission infrastructure needed to deliver these increasing power supplies, and utilities will need to make unprecedented investments in system modernization to upgrade electric service in our neighborhoods and address critical grid constraints that exist across our region today, all of which will almost certainly cause electric prices in New York to climb sharply. On top of that, consumers will bear the cost of converting, which could be as much as $50,000 per household. Within our service territory, those costs could be crippling with the median income in Erie County at just over $62,000 and well below that level in the City of Buffalo. Despite all of this, the scoping plan urges policies to encourage a rapid transformation by specific dates that aren't tied to any reliability milestones. This is an incredibly irresponsible approach. It makes no sense to mandate the electrification of space in Western New York. When it's uncertain, the necessary power and electric infrastructure will be there to meet the increased demand for electricity that will result. Instead, the state should embrace a more reasoned approach to the energy transition, one that sets electrification targets that are linked to generation and reliability milestones while also continuously evaluating the cost effectiveness of these actions and their impact on customer affordability. And I could see it happy in phases. In the near-term, the focus should be on improving -- wind and solar can be built at the pace contemplated by the scoping plan. During that period, consumers should be free to electrify based on their preferences, but there shouldn't be a mandate to do so. And in the meantime, policymakers should encourage no-regret solutions like energy efficiency and improved building installation, both of which will be required regardless of the energy used in the home and workplace. It should also scale existing technologies like renewable natural gas that can achieve significant emissions reductions now, and it should support research and development for new technologies like hydrogen, which will be critical for hard-to-carbonize sectors of the economy. Once we're satisfied that the wind and solar contemplated is feasible, the state can then move on to another phase, where it encourages hybrid solutions for heating at a pace that's consistent with the build-out of generation. Our own pathway study has shown that by including a hybrid approach to heating and an all of the above energy strategy, emissions from our system can be reduced by more than the 85% call for in the New York climate legislation. And most importantly, by continuing to leverage the natural gas system, this approach is far less costly and goes a long way to ensuring energy reliability in the winter when it's needed most. Only once the state has developed a cost-effective solution to the 45 gigawatt and winter generation capacity should it even consider moving to full electrification. Based on current technology, that's likely many decades away. Again, forcing electrification before reliability is assured is an incredibly risky proposition. Imagine it during a winter storm with no heat or no reliable means of transportation. The administration in Albany acknowledges the scoping plan is not a legally finding document rather that's intended to serve as a blueprint for the future of energy in the state. The laws and regulations to achieve that blueprint will be written in the months and years to come. We will be proactive in urging legislators and policymakers to forgo the scoping plans risky all-in approach that tries to do everything all at once yet still falls dangerously short and instead embrace a more incremental, all-of-the-above approach that sets realistic targets based on existing technologies and builds upon them as technologies improve. Thanks, Dave, and good morning, everyone. Seneca and NFG Midstream kicked off the year with a strong quarter. Seneca's 91 Bcfe of production was a 3% increase sequentially and an 11% increase when compared to last year's Appalachian production. We've continued our trend of solid operational execution with 17 wells turned in line during the quarter, which was in line with our plan. Additionally, we saw better-than-expected well performance on these new pads, and we boosted PDP production with some additional compression on the Trout Run system, which was time to capture peak winter pricing. These results were particularly impressive given the extreme weather we faced in December related to winter storm Elliot. The Seneca and Midstream operations and marketing teams did a brilliant job managing through this multi-day event. In spite of sustained windshield temperatures below negative 30 degrees, we saw limited production impacts with any volumes offline being brought back very quickly. While the basin experienced significant and sustained production impacts, we estimate less than 0.5 Bcf impact during the quarter. This is a testament to the entire team who collectively deserve a huge thank you for keeping our production flowing in very challenging conditions, especially given that the storm occurred when most people should be at home and join the holidays with their families. Turning to our future development activity. Drilling and completion operations are proceeding according to plan. As a result, our production rate should continue at about 1 Bcf per day net through the second quarter before production ramps up again into the second half of the fiscal year with several pads expected to turn in line in the spring and early summer. This is in line with our prior expectations, and as such, we are maintaining our full year production guidance of 370 Bcfe to 390 Bcfe. As previously communicated, our first quarter of fiscal '23 had a significant amount of completions activity. Not only did we have our dedicated frac crew operating in the WDA, but as planned, we also utilized a spot crew in Tioga County for the entire quarter. We have now wrapped up our spot frac activity, and going forward, we will only utilize our single dedicated completions crew across our operations. As a result, our capital is expected to moderate and level out through the remainder of the fiscal year. Given this is consistent with our prior plans, capital guidance remains unchanged at $525 million to $575 million. As we look out to fiscal '24, natural gas prices will govern our level of spending. We will be focused on balancing capital efficiency, growth and free cash flow generation across our integrated development program and will modify our plans to best maximize these factors. Longer term, we remain bullish on natural gas pricing, particularly in fiscal '25 and beyond as new LNG export facilities come online. Unfortunately, a large percentage of our fiscal '23 and fiscal '24 production is protected by hedges and fixed-price firm sales. At the midpoint of our guidance, we have hedges in fixed price firm sales in place for nearly 70% of our expected remaining fiscal '23 natural gas production. We have another 20% with basis protection that is not hedged, which leaves only about 10% of expected production exposed to in-basin pricing. We've been opportunistic with our marketing portfolio over the past few months, locking in favorable basis differentials that result in strong realized prices. For example, we recently locked in a long-term basis of NYMEX plus $0.50 for some of our Leidy South capacity. We remain committed to building a marketing and hedging portfolio that delivers strong returns and supports meaningful free cash flow generation. This positions us well for stability through commodity price cycles, which can be hard to predict. At Midstream, we are focused on system expansion to meet both Seneca and our third-party shippers' needs with particular emphasis on meeting our customers turned in line target dates. Additionally, for Seneca, we are building out centralized facilities in our Tioga system and ensuring gathering lines are in place to provide fuel gas to Seneca's e-frac fleet, which will allow us to display substantially all-diesel fuel for completion operations with dual benefits of both lower emissions and lower fuel costs. We also continue to focus on growing our third-party shipper throughput. With over 400 miles of gathering lines able to connect into multiple interstate pipelines, there are various opportunities to serve third-party producers proximate to our existing systems. During the quarter, we signed an updated agreement with a third-party shipper and expect additional volumes to flow in our system later this year. While this project is not a game changer, it demonstrates the value of our system and our willingness to develop commercial arrangements to tie in incremental volumes. In fiscal '23, I expect third-party volumes will represent about 10% of system throughput, up from zero just three years ago, and we will continue to chase similar third-party opportunities to drive value from our midstream systems in the years to come. Turning to our sustainability practices; I want to highlight some of our recent work and achievements. In our Gathering business, we commenced the EquiOrigin certification process and hope to complete the process by the end of the year. And at Seneca, we completed our annual EquiOrigin reverification assessment in December '22, demonstrating continuous improvement under all five principles of the EO100 Standard for responsible energy development. We continue to focus on emissions monitoring and have made strides there as well. We are using LIDAR and OGI equipment mounted to aircraft to identify and measure methane emissions across our operations, and we are evaluating the potential to use satellites in the future. In conclusion, it was a great quarter across the board. As we look forward, lower natural gas prices will impact our near-term cash flow, but the combination of growing production, holding the line on capital and a robust marketing and hedging portfolio mitigates a good portion of that decrease. Beyond '23, Seneca's deep inventory of high-quality acreage combined with our low-cost integrated approach to development, positions us very well for strong returns and continued growth. Thanks, Justin, and good morning, everyone. Last evening, National Fuel reported first quarter fiscal 2023 adjusted operating results of $1.84 per share, up 24% compared to last year. Dave and Justin already hit on the high points for the quarter, so I'll briefly touch on one other item. At the Utility, I want to remind everyone of the impact of an order issued in our New York jurisdiction relating to our pension and post-retirement benefit plans. Based on the fully funded status of these plans, we made a filing last summer, seeking to temporarily suspend recovering revenue from our customers in connection with these obligations. While this order has no earnings or cash flow impact to National Fuel, it does lead to a drop of approximately $18 million in EBITDA, which is fully offset by a benefit to non-service costs that fall below operating income. During the quarter, the impact to revenue, and therefore EBITDA, was a reduction of about $4 million. This was correspondingly offset with lower non-service costs. Looking forward, we'd expect this EBITDA impact to be largest in our fiscal second quarter as the revenue impact nears customer volumes, which are highest during these peak winter months. Turning to guidance; we've lowered our full year earnings guidance to a range of $5.35 to $5.75 per share. This decrease was almost entirely attributable to the drop in natural gas prices, partially offset by some smaller tailwinds across all of our businesses. We're now forecasting NYMEX pricing to average $3.25 per MMBtu for the last three quarters of the year. Somewhat offsetting this is the modest improvement in Appalachian basis differentials, which we now expect to average $1 per MMBtu for the remainder of the year. As Justin mentioned, we have firm sales in place for 90% of our remaining expected production and fixed price firm sales or hedges in place for nearly 70% of our remaining expected production. We also entered into some favorable colors [ph] during the quarter, adding 11 Bcf of new positions with a $4.75 floor for April through October. These are well timed and helped to mitigate some of the impact we've seen with this recent pricing pullback. While our hedge portfolio adds a nice level of protection, we still do retain exposure to movements in pricing. To that end, a $0.25 decrease from our updated NYMEX guidance price will impact earnings by $0.21 per share for the year. Keep in mind that we do have 65 Bcf of costless collars, so this impact is not necessarily linear. As noted in the release in our investor presentation, the remainder of our earnings guidance assumptions are largely unchanged. We are holding our capital spending forecast the same with a range of $830 million to $940 million for the full year. Moving on to cash flows; we are now expecting funds from operations to exceed capital spending by $200 million for the fiscal year. This is a reduction of about $125 million from our prior estimate. The impact of lower pricing is being partially offset by a lower expected cash tax rate this year. Previously, we were expecting our cash tax rate to be in the high single digits, but with our lower forecasted taxable income, that is now forecasted to be around 5% to 6% for the year. While our FFO is lower, we are projecting a larger source of working capital for the year, principally due to an expected decrease in receivable by Seneca and lower storage injection costs at the utility based upon our lower natural gas price assumptions. These improvements are expected to keep our total cash flow after capital spending generally consistent with last quarter. In addition to operating cash flows, we also have reduced hedging collateral deposits to zero as of today, down from $90 million to start the year. As a result, we are well positioned to deliver on our near-term goal of deleveraging. We originally had $549 million of long-term debt maturing next month. Last fall, we borrowed $250 million on our 364-day term loan, which matures at the end of June. A portion was used for working capital needs and the remainder was used for an early redemption of $150 million of our March maturity. Next month, we expect to redeem the remaining $399 million, largely with cash on hand. We expect to meet any shortfall using short-term liquidity. This leaves us right on track with our plans in the near term. Longer term, the forward NYMEX curve is still averaging near $4 per MMBtu in 2024 and beyond. At that level, we'd expect to see steady growth in our free cash flow based upon our current plans. Furthermore, our integrated model and consistent and methodical approach to hedging provide a level of stability and predictability that underpin our cash flow outlook. Combining this with credit metrics that continue to improve and are headed towards the mid-BBB area, we expect to have great flexibility as it relates to capital allocation decisions going forward. Hey. Good morning, and thank you for taking our questions. My first question is to you, Dave. It's -- my first question is -- yes, my first question was potential deal opportunities. In the past, Dave, you'd express some interest and potentially adding to your regulated businesses. Now assuming that something did become available, what sort of size would you be sort of thinking about that if you were to go down that path? And how do you sort of think about a potential funding of that opportunity if that were to become available? Yes. Well, ideally, it would be of a size that we could do within our balance sheet or with a, call it, a modest amount of equity. That puts it in a kind of more modest-sized transaction to the extent that we were to look to go bigger than that, we have to be more creative in how we finance it either with a partner or some other means. And then my second question is for you, Karen. I mean, you appreciated the color on cash taxes for this year. I think you said, around 5% or 6%. How -- if you sort of look into the future, Karen, you look into 2024, how do you see cash taxes progressing at this point in time based off strip pricing? So there will be an increase, but we're largely looking at moving into the, call it, lower teens at current strip prices going out into '24, '25. Thanks for taking my questions. First one centers around CapEx; obviously, unchanged for the full year. And I guess, for Justin, how are you kind of viewing the OSS [ph] environment right now with regards to inflation? Obviously, you are a quarter ahead of most of the Appalachian E&Ps. And so just kind of seeing maybe peaked from '22 levels? Or you're still seeing kind of a higher rate of inflation similar to last year? Sure. Yes. So right now with where we sit, I would say, generally, the service costs have kind of peaked. It's always hard to say exactly the peak goes flat from here or maybe we come down depending upon obviously commodity prices. But if you're thinking more holistically across the industry, what that really means, though, is anyone entering the new contract, it's going to be at a higher level. But from the current levels that people are entering, it's largely -- it seems to largely be kind of reaching the max of where they're going on major services. More specific, as it relates to Seneca, we pretty much have most of our services certainly for the balance of this fiscal year locked in. We have a new contract we executed with next tier on our e-frac fleet as well as working on some of our longer-term rig contracts. But generally for the most part this year, most of that's locked in. So we're pretty relatively insulated from any further inflation beyond what I've already talked about. So we feel confident in our budget and our guidance that we put forth. Perfect. Appreciate the color on that. And then our second question now similar to John's question earlier. What about at this price environment, potential bolt-on opportunities for Seneca? How do you look at that? And then kind of, I guess, what's kind of the bid-ask spread been going around given the recent fall in natural gas? We are seeing more opportunities come available. Yes. So we haven't seen a lot of new stuff come available. It's always tricky in a rapidly increasing or declining market in trying to find needle in the middle on what value makes sense. We remain very interested in opportunities that kind of fit us nicely. And so when I talk about that proximate or contiguous with our existing acreage, ideally have some element of takeaway capacity. We love it if it has a gathering midstream angle. So we're continuing to look at opportunities that offer us those kind of -- some or all of those attributes and really, we'll kind of watch to see as the prices evolve. I'm hopeful that there'll be more -- that will come available, but there's definitely bid-asked or why just given how much volatility we've seen on the way up, and it will probably be hard for people to accept a lower price given what they could have done if they just executed, say, three months ago. My first question was, I really appreciate your comments around the scoping plans, and to the extent, you can share any insights and color regarding -- on the discussions which you're having with the regulators or the policymakers about managing the need to decarbonize as well also maintaining reliability of service would be appreciated. And then just to bolt-on to that question, how are you thinking about your business mix longer-term as to grow EPS and dividend while managing this potentially -- which could potentially be a regulator dust on the road? Yes. So on the -- our engagement with regulators, the New York Public Service Commission has got a series of proceedings on the future of not just the gas business, but also the -- all of the utility business in the state. And we've been active participants with that and have made a number of filings that we've gone back and forth on with the state. I mean, it's still really early innings on this, but the discussion so far has been constructive. In terms of the long-term business mix, I'd like to see a balance between regulated and nonregulated. And at times, we may be higher on the nonregulated side than regulated. But I think over time, we'll be able to achieve that balance and the utility will be an important part of that. Got you. That's really helpful. And then I guess just to follow up on that previous discussion. It sounds like a lot of your rig and your completion crews are under contract here, and to your point, you are hedged out in the near term. So I was wondering if there's any price levels at which you will look back at your activity levels for the CRM. Like maybe it's beneficial to push the completions out by a quarter or two quarters because the pricing is a little bit more favorable down the road. Because we agree with you, the long-term outlook is much more favorable with LNG coming online in 2025 and beyond. Yes, absolutely. So we are not -- while we've spoken to and I've mentioned this on a number of calls that our longer-term plans envision continued growth in kind of the mid to single digits at least for the -- call the near to intermediate term, that's not something that we can't evolve and so we're going to be very mindful of the price environment. We're going to try to really balance capital efficiency, growth and free cash flow generation. We want to achieve the best mix of those three things. And if that means we're going to make some delays or slow things down, then that will make the most sense. So really what I guess I would just want to make sure it's really clear is; we're going to strive to find the optimal balance of those three things. And if we have a view or we're locking in longer-term pricing that we think makes sense to defer some things, then we'll be very open to evaluating that and incorporate into our longer-term operations plan. [Operator Instructions] So we have no further questions at this time. So I will hand you back over to Brandon Haspett for closing remarks. Thank you, Drew. We'd like to thank everyone for taking the time to be with us today. A replay of this call will be available this afternoon on both our website and by telephone, will run through the close of business on Friday, February 10. To access the replay online, please visit our Investor Relations website at investor.nationalfuelgas.com, and access by telephone, call 1 866 813-9403 and enter conference ID number 856816. This concludes our conference call for today. Thank you, and goodbye.
EarningCall_552	Good afternoon, and welcome to the Fourth Quarter and Full Year 2022 Earnings Discussion for PennyMac Financial Services, Inc. The slides that accompany this discussion are available on PennyMac Financial's website at pfsi.pennymac.com. Before we begin, let me remind you that our discussion contains forwardâlooking statements that are subject to risks identified on Slide 2 that could cause our actual results to differ materially, as well as non-GAAP measures that have been reconciled to their GAAP equivalent in our earnings presentation. Now I'd like to begin by introducing David Spector, PennyMac Financial's Chairman and Chief Executive Officer who will review the Company's fourth quarter and full-year 2022 results. Thank you, Isaac. In the fourth quarter, PennyMac Financial delivered net income of $38 million, or $0.71 in earnings per share. These results include a non-recurring tax rate change which negatively impacted earnings per share by $0.22. Dan Perotti, PFSI's Senior Managing Director and Chief Financial Officer will provide greater detail later on in this discussion. For the full year, PFSI achieved a return on equity of 14%, driving continued growth in book value per share, which ended 2022 at $69.44. Our servicing portfolio ended the year at $552 billion in unpaid principal balance as additions from loan production continued to exceed prepayment activity. The growth of our servicing portfolio continues to differentiate PFSI from its competition, serving as an increasingly important asset, which I will discuss later on. We remained active in stock buybacks and in the fourth quarter we repurchased 1.1 million shares of PFSI common stock at an average price of $46.99 for an approximate cost of $51 million. Repurchase levels were down meaningfully from the third quarter as we prefer to maintain flexibility to address potential risks and opportunities in the evolving market environment. In PFSI's Investment Management segment, net assets under management were $2 billion at quarter end, down slightly from the prior quarter due to PMT's financial performance. PFSI's Board of Directors also declared a fourth quarter cash dividend of $0.20 per share. While 2022 was a challenging year for the mortgage industry due to the rapid and significant increase in interest rates, our operating discipline combined with the meaningful actions we took throughout the year to right-size our business for a smaller origination market, led to strong financial performance. In fact, for the full year PFSI produced net income of $476 million, which drove book value per share up 16% from year end 2021. Though profitability was down from last year, our strong financial performance enabled us to continue returning capital to shareholders while simultaneously positioning the company for success in the future. To that end, for the full year 2022, we returned over $460 million to stockholders through stock repurchases and dividends, and opportunistically raised $500 million in five-year term notes secured by Ginnie Mae MSRs at attractive rates. Total production, including acquisitions made by PMT, was $109 billion in UPB. This led to servicing portfolio growth of 8% for the year to more than $550 billion in UPB with nearly 2.3 million customers. With mortgage interest rates currently still above 6%, the most recent third-party forecasts for 2023 originations range from $1.6 trillion to $1.9 trillion, down meaningfully from 2022. While many industry participants have taken the appropriate steps to reduce capacity, it has been happening slowly and we believe overcapacity still remains. As we have demonstrated with our 2022 performance, we believe mortgage banking companies with large servicing portfolios and diversified business models like PennyMac Financial are better positioned to offset the decline in origination profitability that has resulted from lower volumes. As a key part of our balanced business model, our large and growing servicing portfolio provides significant value to the company. Servicing and sub-servicing revenues, the majority of which are cash, totaled more than $1.2 billion in 2022. Additionally, higher short-term rates have driven strong earnings on custodial balances. Our proprietary servicing technology provides us with significant operational scale and workflow efficiencies that enable us to adapt quickly to forthcoming market conditions and regulations while also providing quality service to our customers. Finally, given the scale we have achieved, we have begun offering our customers, homeowners and title insurance through joint ventures, which we expect will provide recurring fee income over time as the businesses grow. As I briefly mentioned earlier, our servicing portfolio growth can be attributed to the large volume of loans we produce every quarter, as we retain the MSRs on nearly all of our mortgage loan production. On Slide 7 of our earnings presentation, you can see PennyMacâs total production over the most recent three quarters against average mortgage rates. Even as interest rates increased, the UPB of our production volume on a quarterly basis consistently represented 4% to 5% of the total servicing portfolio balance. As we continue to add significant volumes of servicing to our portfolio at current market rates, we will continue to build significant refinance opportunities in the future for our consumer direct division if mortgage rates decline. Again, we implemented meaningful expense savings and capacity reductions early and throughout 2022 given the anticipated significant decline in the overall market, and we took additional actions in the fourth quarter. Quarterly operating expenses in the fourth quarter were down 44% from average 2021 levels. While we believe the majority of expense management activities have been completed, we remain disciplined, continuing to rapidly adjust capacity levels relative to the size of the origination market, whether growing or contracting. While PennyMac Financial is not insulated from the challenges presented by todayâs mortgage market, I believe we are the best-positioned in the industry to continue executing with our balanced business model in 2023. Our multi-channel approach to mortgage production provides the flexibility to adapt to different market conditions and drives organic growth of our servicing portfolio. Our servicing business provides ongoing cash flow to support business operations and produces low cost leads to our consumer direct business in the future. We have a long history of successfully developing and deploying innovative mortgage technology, which has resulted in an extremely flexible and scalable platform as evidenced by our ability to rapidly right-size our cost structure. Finally, I believe this management team is the best in the industry and Iâd like to thank them all for their various contributions to PFSIâs strong performance in 2022. More than 15 years ago we founded PennyMac with an unwavering focus on enterprise risk management and doing the right thing for our customers. Since then, we have become one of the largest mortgage producers and servicers in the country, while also providing strong returns to our stakeholders. So while PFSIâs ROE is projected to trend towards its pre-COVID range during 2023, I remain confident in our ability to continue delivering strong financial performance as the market returns to more normalized conditions over time. Now Iâll turn it over to Doug Jones, PennyMacâs President and Chief Mortgage Banking Officer, who will review our market share trends and fourth quarter mortgage banking results. Thanks, David. Overall production was solid in the fourth quarter with total production volumes down only 12% from the prior quarter, while industry volumes were down 34%, according to Inside Mortgage Finance. PennyMac widened its leadership position in correspondent lending as our strong capital position and consistent commitment to the channel provides our partners with the stability and support they need to successfully navigate the challenging mortgage market. We estimate that over the past 12 months we represented approximately 15% of the channel overall. Total correspondent loan acquisition volume in the fourth quarter was $20.8 billion. 51% were conventional loans and 49% were government-insured or guaranteed loans. Purchase loans accounted for 93% of total correspondent acquisitions during the quarter. Acquisitions for PFSIâs own account totaled $14 billion, up 15% from the prior quarter due to the acquisition of certain conventional loans from PMT in addition to government loans during the quarter. Conventional acquisitions for PMTâs account totaled $6.8 billion, down from $10.2 billion in the prior quarter, as a result of the previously mentioned sales to PFSI. Similarly, correspondent lock volume for PFSIâs account was up 25% from the prior quarter. Revenue per fallout-adjusted lock in the fourth quarter was 21 basis points, down from 24 basis points in the prior quarter, driven primarily by PFSIâs purchase of lower margin conventional loans from PMT. While we respected Wells Fargo as a competitor in the correspondent channel, we believe their exit from the channel creates additional opportunities for PennyMac, particularly in the community bank and credit union sector of the market where they previously had a strong presence. The scale we have achieved in our correspondent business, combined with our low cost structure and operational excellence in the channel allow us to operate efficiently through the volatile market environment, even as other participants have exited or retreated from the channel. We stand ready and able to absorb the volumes left by Wells Fargoâs exit and remain committed to being a strong capital partner for independent mortgage companies throughout the country. In January, we estimate that correspondent acquisitions totaled $6.8 billion and locks totaled $6.1 billion. Turning to consumer direct, we estimate we accounted for approximately 1.2% of total originations in the channel over the last 12 months. Origination volumes for the fourth quarter were $1.1 billion and interest rate lock commitments were $1.7 billion, down meaningfully from last quarter due to seasonal impacts and declining refinance volumes. Purchase lock volume for the quarter of $681 million was 40% of total locks, compared to $1.37 billion, or 36% in the prior quarter. Margins in this channel were down slightly with revenue per fallout adjusted lock of 358 basis points versus 366 basis points in the third quarter. We estimate originations in our consumer direct channel in January totaled $300 million, and locks totaled $700 million. We estimate the committed pipeline at January 31st was $700 million. Originations in our broker direct channel totaled $1.1 billion and locks totaled $2 billion, also down meaningfully from the prior quarter, reflecting a smaller market, seasonal impacts and the continuation of intense competition from channel leaders. Purchase loans were 85% of total originations. Revenue per fallout-adjusted lock was 56 basis points, down from 70 basis points in the prior quarter, although we have seen margins in this channel improve thus far in the first quarter. We estimate that in 2022 we represented approximately 2% of the origination volume in the channel. Despite elevated levels of competition currently, we believe PennyMac is well-positioned for market share growth in the channel over time given our strong capital position, operational excellence and the exit of channel participants. Last quarter, we completed the roll out of POWER+, our next generation technology platform providing brokers with the tools they need to successfully grow their businesses and convert leads into loans. Thus far, we have received very positive feedback on the new portal, garnering the attention of top brokers in the channel who are looking to expand their relationship with PennyMac. We estimate broker originations in January totaled $500 million and locks totaled $800 million. We estimate the committed pipeline at January 31st was $800 million. As David discussed earlier, these acquisition and origination volumes continue to drive the organic growth of our servicing portfolio. I am pleased to report that we ended the quarter with a servicing portfolio of $552 billion, or approximately 4.1% of all residential mortgage debt in the U.S. Prepayment speeds have slowed meaningfully given higher mortgage rates. PennyMac Financialâs owned servicing portfolio reported a prepayment speed of 5.4% in the fourth quarter, down from 9% in the prior quarter. Similarly, prepayment speeds in PennyMac Financialâs subâserviced portfolio, which includes mostly Fannie Mae and Freddie Mac mortgage servicing rights owned by PMT were 4.4%, down from 6.9% in the prior quarter. PFSIâs owned servicing portfolio, which consists primarily of Ginnie Mae MSRs, had a 60-day plus delinquency rate of 3.8%, up from 3.5% at the end of the prior quarter, while our subserviced portfolio, consisting primarily of conventional loans, reported a 60-day plus delinquency rate of 0.6%, up from 0.5% at September 30th. The UPB of completed modifications was $2.3 billion, down slightly from the prior quarter while EBO loan volumes remained low. We expect EBO revenues to remain low in the coming quarters as lower overall volumes and redelivery gains are expected to be limited due to the higher interest rate environment. Thanks, Doug. As David mentioned earlier PFSIâs net income was $38 million or diluted earnings per share of $0.71. The fourth quarter included non-recurring tax items, which resulted in an effective tax rate of 44.4% versus 27.1% in the prior quarter. The increase in the effective tax rate was primarily driven by an increase in the provision tax rate, which increased from 26.5% to 26.85% for 2022. The increase in tax rate resulted in the repricing of PFSIâs net deferred tax liability, which was the primary driver of a non-recurring tax expense of approximately $11.9 million in the quarter. The impact of this tax rate change was negative $0.22 in earnings per share. Production segment pretax income was negative $9 million. As you will see on Slide 12, we provide a breakdown of the revenue contribution from each of PFSIâs loan production channels, net of loan origination expenses, including the fulfillment fees received from PMT for the conventional correspondent loans it retains. Production revenue margins were lower across all three channels. Revenue per fallout-adjusted lock for PFSIâs own account was 55 basis points in the fourth quarter, down from 99 basis points in the prior quarter driven by lower volumes in Consumer Direct and lower overall margins. This includes $24 million in gains realized related to the timing of revenue and loan origination expense recognition, hedging, pricing & execution changes, and other items. As David mentioned earlier, we remain focused on managing expenses in the current market environment, and although fallout adjusted locks were up 11% from the prior quarter, production expenses net of loan origination expense were down 13%. The Servicing segment recorded pretax income of $76 million, down from pretax income of $145 million in the prior quarter and $126 million in the fourth quarter of 2021. Pretax income excluding valuation-related items for the servicing segment was $79 million, up from the prior quarter as higher realization of MSR cash flows, interest expense, and lower EBO-related income was more than offset by higher loan servicing revenue, higher earnings on custodial balances and deposits, and lower operating expenses. Operating revenues increased from the prior quarter as loan servicing fees grew by $9 million primarily due to growth in our servicing portfolio. Earnings on custodial balances and deposits and other income increased $17 million. With rates at current levels, we expect a continued meaningful contribution to overall servicing profitability. Operating expenses as a percentage of average servicing portfolio UPB decreased. Payoff-related expenses, which include interest shortfall and recording and release fees related to prepayments, decreased by $1 million. Realization of MSR cash flows increased by $7 million driven by higher average MSR values during the quarter. In order to protect the value of our MSR asset we utilize a comprehensive hedging strategy. This strategy is designed to moderate the impact of interest rate changes on the fair value of our MSR asset and also considers productionârelated income. On Slide 16, you can see the fair value of our MSR increased by $83 million in the fourth quarter, driven by lower than expected realized prepayment speeds as well as expectations for lower prepayment activity in the future. Hedging losses totaled $73 million, primarily driven by hedge costs and higher interest rates. While overall delinquency rates increased from the prior quarter, they remain consistent with our expectations for a primarily government-insured or guaranteed portfolio. Servicing advances outstanding for PFSIâs MSR portfolio increased to $520 million at year end from $397 million at September 30th due to seasonal property tax payments. No principal and interest advances are currently outstanding, as prepayment activity continues to sufficiently cover remittance obligations. Regarding the $650 million of Ginnie Mae MSR term notes originally due February 2023, we exercised our option to extend the maturity for 2 years. Importantly, the $650 million of Ginnie Mae MSR term notes due in August 2023 also contain an optional extension at PFSIâs discretion. Finally, our Investment Management segment delivered pretax income of $1.2 million, down from $1.6 million in the prior quarter. Net assets under management totaled $2 billion as of December 31st, down 3% from September 30th. Segment revenue was $9.9 million, down 4% from the prior quarter. Thank you, Dan. More than 15 years ago, we founded PennyMac with a vision to help revitalize the mortgage market and become a trusted partner in home ownership. Since then, we have grown responsibly and profitably into one of the largest residential mortgage producers and servicers in the country with an industry-leading correspondent production business, and a growing presence in the direct lending channels. Though 2023 is expected to be another challenging year for the mortgage industry, I remain confident in PennyMac Financialâs ability to continue executing given its balanced business model and long history of generating stockholder value through different mortgage market cycles and environments. This concludes PennyMac Financial Services, Inc.âs fourth quarter earnings discussion. For any questions, please visit our website at pfsi.pennymac.com, or call our Investor Relations department at 818â264â4907. Thank you.
EarningCall_553	Greetings and welcome to the UDR, Inc. Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Trent Trujillo, Director of Investor Relations. Thank you, Trent. You may begin. Welcome to UDRâs quarterly financial results conference call. Our press release and supplemental disclosure package were distributed yesterday afternoon and posted to the Investor Relations section of our website, ir.udr.com. In the supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. Statements made during this call, which are not historical, may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurances that our expectations will be met. A discussion of risks and risk factors are detailed in our press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. When we get to the question-and-answer portion, we ask that you be respectful of everyoneâs time and limit your questions to one plus a follow-up. Management will be available after the call for your questions that did not get answered during the Q&A session today. Thank you, Trent and welcome to UDRâs fourth quarter 2022 conference call. Presenting on the call with me today are President and Chief Financial Officer, Joe Fisher and Senior Vice President of Operations, Mike Lacey, who will discuss our results. Senior officers Andrew Cantor and Chris Van Ens, will also be available during the Q&A portion of the call. To begin, 2022 was an exceptional year for UDR. First, our same-store revenue growth was near the top of the sector and we achieved record high full year same-store NOI growth of 14% and FFOA per share growth of 16%. Second, we further advanced our already industry leading operating platform by investing in our people, which included establishing a 16-person task force to generate and execute innovation initiatives. Additionally, we engaged in various PropTech and ClimateTech investments. Together, these resources should further expand our peer-leading operating margin into the future. Third, we adhered to the capital market signals, growing opportunistically when our equity was attractively priced early in the year and actively pivoting to a capital-light strategy when our cost of capital increased. Being a good steward of your capital is paramount. Fourth, while we had next to zero debt maturities in 2022, we continue to reduce leverage, strengthen our balance sheet and enhance our liquidity. And last, we were honored to be recognized by a variety of organizations for our ongoing commitment to our associates, stakeholders and the environment. These include UDR earned a 5-star ESG designation from GRESB, the highest rating possible. Company was named by Newsweek as one of Americaâs most responsible companies for the second year in a row and institutional investors recognize our ESG program, our board, IRR team and numerous executives being top three in the respective categories among all U.S. REITs. In short, we have the right strategy and leadership in place to continue to propel UDR forward. Looking ahead to 2023, we are very aware of the wide range of economic scenarios that are forecasted to play out, but we build our strategy around diversification and the ability to perform in any environment. This is well demonstrated by our history of cash flow growth and TSR outperformance, specifically an 11% TSR compounded annual growth rate over my 22 years at UDR. The constant over this time is our focus on what we can control and how that sets up for relative long-term outperformance? This includes: first, the strong relative setup of U.S. multifamily industry. Housing is a needs-based business, supply is stable, demand and traffic remain healthy, job growth has remained positive, rent to income levels are steady, and relative affordability versus single-family ownership and rentership remain near all-time highs, while the cost of capital across the industry continues to improve. Second, the favorable setup for UDR within the industry. We entered 2023 with approximately 5% earnings, the second highest amongst our peers and the highest in UDRâs history. Innovation initiatives and prudent capital allocation should enhance this growth through margin yield expansion. Furthermore, our balance sheet remains highly liquid with $1 billion of capacity and we have no debt maturing until 2024. And finally, we increased our dividend by a robust 10.5% this year, enhancing our already strong return profile. Taken together, we feel confident that we will effectively manage whatever macro environment we face and continue to produce strong absolute and relative results. In closing, I am very optimistic on the relative strength of the multifamily industry and UDRâs relative advantages within the industry. We have a strong talented, experienced and innovative team, with a track record of strong relative performance. The key that unlocks our potential is our drive to continue to listen to our associates, our customers and stakeholders, which enables us to determine where we excel, where we can improve and how we can better innovate for the future. To my fellow associates, thank you for all you did during 2022 again to make UDR a successful year and I look forward to what will come in 2023. Thanks, Tom. The topics I will cover today include our fourth quarter same-store results, early 2023 trends, our full year 2023 same-store growth outlook, including factors that could drive results to either end of our guidance range and an update on our continued innovation and operating efficiencies. To begin, strong sequential same-store revenue growth of 2% drove year-over-year same-store revenue and NOI growth of 12.1% and 14.5% in the fourth quarter. Results were driven by: first, robust blended lease rate growth of 5.4% was well above historical norms for what is usually our slowest leasing period of the year. This growth locked in our approximate 5% 2023 earn-in, the highest level in our history by more than 200 basis points. Second, sustained strong occupancy of 96.8% exhibited our ability to efficiently convert traffic into signed leases. Third, we remain focused on enhancing our rent roll, which resulted in higher turnover than expected from twice the usual volume of resident skips and evictions. And fourth, collection rates held steady. The number of long-term delinquent residents across our portfolio continues to trend closer to our historical average, with approximately 400 residents today or less than 1% of total units. This is down from over 700 delinquent residents earlier in 2022, helping to reduce our bad debt reserve. Next, early 2023 results and trends. In my experience, there are four primary indicators that help inform us of the strength of the operating environment. These include leasing traffic, concessions, absolute affordability and relative affordability. Thus far in 2023, we continue to see favorable trends. First, demand remains relatively healthy. Traffic is roughly in line with the elevated levels we saw a year ago and well above the long-term average, but prospective residents are taking longer to make their rental decisions. Second, concessions remain minimal and have been primarily concentrated in certain submarkets of San Francisco and Washington, D.C., averaging around 2 to 3 weeks. Recently, concessions of 1 week on average have appeared in Austin, Dallas and Denver. Third, our residentsâ balance sheet appear to be holding up, portfolio-wide wage growth has largely kept pace with rent growth since COVID began, resulting in steady rent to income levels in the low 20% range. To-date, we have seen scan evidence of residents doubling up. In fact, 42% of our households are single occupants, up slightly compared to pre-COVID levels. And last, relative affordability remains in our favor. Renting an apartment is approximately 50% less expensive than owning a home versus 35% less expensive pre-COVID. Only 8% of move-outs in the fourth quarter were due to home purchase, roughly 30% less than typical. With this backdrop, blended rate growth for the first quarter is expected to average between 3% and 4%, similar to historical norms and driven by renewal rate growth of 7% to 7.5%. New lease growth of negative 70 basis points in January was slightly below the pre-COVID average, but it is positive in February and we expect further improvement as we enter peak leasing season. Turning to full year 2023, our same-store revenue and NOI growth guidance is 6.75% and 7.5% respectively at the midpoints. We are also forecasting expense growth of 4.75% at the midpoint, with real estate taxes and insurance, the largest pressure points. Underlying the midpoint of our guidance range is a 2023 blended rate growth forecast of approximately 2% to 3%. We triangulated into this estimate using third-party forecast, input from our field teams and the output from a multifactor rent growth forecasting model we developed internally. Through our predictive analytics work, we have found that total income growth is the primary driver of market rent growth. Within this model, consensus expectations that job growth will be slightly negative in 2023 are fully offset by the expectation of approximately 3% wage growth. In addition, a declining homeownership rate and slowing, but still positive, consensus real GDP growth should continue to benefit market rent growth this year, offset somewhat by increased new supply. In short, even if job growth goes slightly negative, we still see a path to positive rent growth in 2023. With this in mind, our 6.75% same-store revenue growth guidance midpoint can be achieved through our approximate 5% earn-in, a 125 basis point contribution using a midyear convention from blended rate growth comprised of new and renewal rate growth of 1.5% and 3.5% respectively, an approximate 50 basis point contribution from our unique innovation initiatives. The high end of 7.75% would be achieved through improved year-over-year occupancy, additional accretion from innovation and blended rate growth similar to the pre-COVID average of 4%, comprised of new and renewal rate growth of 3% and 5%, respectively. Conversely, the low end of 5.75% reflects a 75 basis point contribution from full year blended rate growth of 1.5% comprised of flat new lease growth and 3% renewals, which is approximately 250 basis points below the pre-COVID average renewal rate. Because of the relative strength of our January and February blended rate growth, we need only nominal blended rate growth of 1% on average through the rest of the year to achieve the low end. For reference, even during past downturns, our lowest trailing four-quarter average renewal rate growth was approximately 2%. Ongoing regulatory challenges could impact our views as 2023 unfolds, but we should have visibility into 65% to 70% of our full year same-store revenue by the end of April. We plan to reassess our guidance assumptions at that time. Finally, we continue to drive forward on innovation with the intent of further expanding our 300 basis point controllable operating margin advantage versus peers. Initiatives underway are expected to generate at least $40 million in incremental NOI by year end 2025. $5 million to $10 million of this is included in our 2023 same-store guidance ranges and will largely be focused on revenue upside, such as our building-wide WiFi project that enables seamless whole-building connectivity, our customer experience project to enhance satisfaction and drive property-level ROI initiatives, and the expanded use of big data to improve our pricing engine. Innovation has and will continue to drive more dollars to our bottom line as we rollout initiatives across our legacy portfolio and on external growth over time. As an example, on the $2.6 billion of third-party acquisitions we completed between 2019 and 2021, innovation has accounted for an additional 50 basis points in yield expansion above what the market alone would have provided or around $13 million of incremental NOI. This translates to approximately $275 million of value creation. In closing, a special thanks goes out to all of our teams for their relentless efforts to drive the best results possible across our markets. Your performance in 2022 was exceptional. And with your help, we will continue to leverage new and the innovative tools to drive results in 2023 and beyond. Thank you, Mike. The topics I will cover today include our fourth quarter and full year 2022 results and our initial outlook for full year 2023, a summary of recent transactions and capital markets activity, and a balance sheet and liquidity update. Our fourth quarter FFO as adjusted per share of $0.61 achieved the midpoint of our previously provided guidance range. Full year 2022 FFOA as adjusted of $2.33 was 16% higher year-over-year, reflecting the companyâs second strongest year of earnings growth in its 50-year history. Similarly, our Board authorized a robust 10.5% increase to our dividend this year, enhancing our total return profile. Based on our AFFO per share guidance, our 2023 dividend of $1.68 reflects a payout ratio of 74%, in line with our historical average. Looking ahead, our full year 2023 FFOA per share guidance range is $2.45 to $2.53. The $2.49 midpoint represents a 7% annual increase supported by mid to high single-digit forecasted same-store NOI growth. The $0.16 increase versus our full year 2022 result of $2.33 is driven by the following: a $0.20 benefit from same-store and joint venture NOI, a $0.04 benefit from non-same-store communities through the continued successful lease-up of recently developed and redeveloped communities, offset by $0.06 from higher interest expense and a higher average share count, and $0.02 from increased G&A expense and other corporate items. For the first quarter, our FFOA per share guidance range is $0.59 to $0.61 or a 9% year-over-year increase at the midpoint. The slight sequential decline is driven by higher average share count from the settlement of forward equity agreements at the end of the fourth quarter and the higher interest expense. Next, a transactions and capital markets update. First, in alignment with our shift towards a capital-light strategy in mid-2022, we made no acquisitions or DCP investments during the fourth quarter. And second, we generated approximately $220 million of capital from dispositions and forward equity settlements. Specifically, during the quarter, we sold 1 community in Orange County, California for approximately $42 million and settled all remaining forward equity sales agreements at roughly $57 per share or a 20% premium to current consensus NAV and a 35% premium to our recent share price. We used the proceeds to further improve our balance sheet and execute approximately $21 million of share repurchases at a 20% discount to consensus NAV and a high 5% implied cap rate. Next, our investment grade balance sheet remains liquid and fully capable of funding our capital needs. Some highlights include: first, we have only $115 million of consolidated debt or approximately 0.5% of enterprise value scheduled to mature through 2024 after excluding amounts on our credit facilities and our commercial paper program. Our proactive approach to managing our balance sheet has resulted in the best 3-year liquidity outlook in the sector and the lowest weighted average interest rate amongst the multifamily peer group at 3.2%. Second, we have $1 billion of liquidity as of December 31, providing us ample dry powder and strength. And third, our leverage metrics continue to improve. Debt to enterprise value was just 29% at quarter end, while net debt-to-EBITDAre was 5.6x, down nearly a full turn from 6.4x a year ago and a half turn better versus pre-COVID levels. We expect these metrics to improve further throughout 2023. Taken together, our balance sheet remains in excellent shape. Our liquidity position is strong, we remain selective in our capital deployment with balanced forward sources and uses and we continue to utilize a variety of capital allocation competitive advantages to create value and drive earnings accretion. Thank you. First question is for Mike, you went through some of the markets where you are giving out some concessions. Can you maybe just step back and give us a sense as to which markets you see as being strongest and weakest in the portfolio in â23? Yes. Hey, Tony. How you are doing? Itâs a good question. I think probably starting at a high level you have heard us talk a lot about just the convergence of trends over the last few months as it relates to both the Sunbelt and the Coast. So let me start there. I think with the Sunbelt, you have heard us talk a little bit about that earn-in. We are right around 6% going into â23, the Coast, for us, just over 4%. And when you think about it, East Coast was around 4.5%, the West Coast around 3.75%, the difference in what we are seeing today though, is we are seeing higher market rents as well as a higher loss to lease in the Coast. So we are seeing a little bit more forward strength and leading indicator there, if you will. And what we are experiencing and expect to see is the Sunbelt will probably have higher blends to start the year, and a lot of that is driven due to renewal growth and whatâs been sent out in the foreseeable future. That being said, we do think the Coast, given the market rent and locales, could catch up and potentially surpass that sometime midyear. But what itâs coming down to is what we are doing differently. And a lot of this has to do with what we have done with the pricing system, the fact that we are able to see current demand trends coming through the door. We are able to price a little bit more efficiently there. But we are also utilizing a lot of feedback just in terms of what the customers are saying, what our teams are saying. And we think that this is going to continue to drive outperformance as it relates to our customer experience project. So a lot of exciting things to come on the innovation front that will continue to differentiate us. Okay. Thank you. And then just my follow-up is, you didnât put much in the guidance with regards to, I guess, nothing on the acquisition side and just very little on the sales. But to the extent capital markets or investment sales markets perk up here the next few quarters, what would you look to either sell or buy? Hey, Tony, itâs Joe. We did not. We took a relatively conservative approach on guidance as we typically do when it comes to sources and uses. So we really look strictly at what do we have identified in terms of development, DCP, redevelopment NOI enhancing spend and then have that funded primarily with free cash flow plus potentially some disposition in the DCP repayment. So pretty conservative on that front. Iâd say, as we kind of go through this period of price discovery in the broader market, a number of our team were down to NMHC last week and you still do have a bid/ask spread out there, call it, 10% or 15% with sellers kind of looking for that mid-4s type cap rate, buyers kind of looking for more in the high-4s. So they are still going through this period of price discovery, but I think as we potentially stabilize with debt costs really kind of start to come to an end on the Fed Fund side and then spreads compressing and getting more towards the high 4s, low 5s borrowing cost, we could see more of that price discovery moving forward. If that occurs, Iâd say, in terms of uses of capital, where we have been leaning into more so, I think the developer capital program continues to be a great place to put capital to work in this environment, both on new projects within development, but also within potential recap opportunities. So those present a good return, several hundred basis points higher than what we had been doing previously, but also a lower attachment point in terms of loan to values and loan to cost. So we expect us to try to remain active there if we have capital. On the redevelopment side, weâve got a pretty big redevelopment pipeline that we continue to build up that has a good opportunity to achieve pretty good returns as well as refresh assets and take advantage of the markets as they start to come back. So those are probably the two bigger pieces. To get there, we are exploring disposition activity in this market. So as always, we are exposing assets to market, including looking for potential JV partners, both on the operating development and developer capital program side. So if and when we have something there to discuss, we will bring it back to the market and talk about it, but we are looking at alternative sources to help us grow in this environment. Thanks. You touched on the blended rent growth and kind of on the market side, but just from the data youâre collecting and I recognize itâs a lower traffic time period so maybe we can go back for the past few months, is there anything youâre seeing change from a migration trend perspective? Obviously, weâve seen some better growth in the Sunbelt on that side, but wondering if there is anything changing in the data? Not really, Nick. Iâll tell you, overall, we are seeing less people move out of MSAs, but also less people moving in from outside of the MSA. And just to give you a few stats to put it in perspective, move-outs right now, 25% move-outs from the MSA versus 27% last year. And for move-ins, what weâre seeing, 29% move-ins from outside of the MSA, and thatâs versus 31% last year, so not a big difference. And basically, they are back to kind of pre-COVID levels. Yes, Iâd say two other things. Itâs kind of demographically and you mentioned traffic as well there, Nick. Demographically, one of the big macro tailwinds that I think we have going into this year and help support kind of our outlook is homeownership rate overall. We do expect that to come down. So given the relative affordability dynamic between single-family housing and multifamily housing, we think we do have a tailwind there. So thatâs going to help on the demographic or household formation side for multifamily. The other thing, just you mentioned the low traffic period. 4Q was a lower traffic period. I think our traffic got down to about flat year-over-year. So perhaps a little bit less demand in fourth quarter. That said, as you look at year-to-date, I think weâre up 7% or 8% in terms of year-over-year traffic coming here through January and February. So we have seen us kind of come through that typical lull that we see seasonally and seeing traffic come back quite strong at this point. Thank you. And then just, Joe, on your comments on DCP and the attractiveness there, how much of the return hurdles changed relative to the 12 or 24 months ago? And I recognize there is different levels of risk and different structures. So if you can try to just normalize that kind of how has it changed just with higher rates? Yes. Itâs â overall, if you look back to what we are doing in terms of the fixed coupon transactions on a typical developer capital program deal over the last several years, that was typically in that 11% to 12% type of targeted return. Today, thatâs going to be several hundred basis points higher, so call it 13% to 14% returns on that paper. One of the big differences, though, is where weâre attaching in terms of the risk profile. So if we were in the 80% to 85% loan-to-cost previously, we think there is good opportunities in this market to actually be down in the 75%, up to 80% loan to cost. So youâre getting more return while taking less risk. You are also seeing some of the preeminent developers come back and look for this type of capital. And so you may get better sponsorship within those investments as well as potentially better assets within those investments. So across the board, I think having capital for that bucket in this environment, youâre going to be a little bit more selective and pick and choose pretty good opportunities. Hey, itâs Daniel Tricarico with Nick. Tom, you mentioned a wide range of economic scenarios for the year. Looking to get a feel for what type of economic scenarios baked into guidance, whether this is a softer landing with modest job losses. We know you have a more broadly diversified portfolio, which in theory should reduce volatility in your results, but any commentary on your view of the economic outlook would be helpful. Yes. I mean, first, Iâll call out to Chris Van Ens in the data analytics team in creating a wide range of predictive models for our business and help drive our decisions. I think the baseline midpoint of our assumption assumes about 1 million job loss for the year on a national basis. And then they try to really drill down to four or five more factors, which is really income growth and employment picture that drive our business and pricing power. And through that, back testing it, I think they have come up with about an 83% confidence weighted model that points to the midpoint of our scenario that weâve outlined for guidance. Joe, Chris, anything youâd add to it, pat on the back? Yes, definitely a pat on the back for Chris, on the predictive analytics side, but John nailed it, itâs a multifactor model. Weâre, of course, looking at broader consensus expectations, plus some industry-specific expectations around rent growth. But while a lot of the focus comes into the potential job losses and layoff announcements, the recent job support was quite strong. We still expect to see wage growth throughout 2023, which is the biggest driver of rents within our industry. You also have homeownership rate expectations to come down. And while we focus a lot on the supply outlook within multifamily, which does look to be up slightly, call it, 10% to 20% year-over-year, a broader total housing picture actually should have a supply decrease next year given whatâs going on in the single-family market. And so you kind of roll all those up, and you kind of get to a little bit lower expectation than typical. I think Mike talked about needing 2.5% blends. At this point, given we know already now January, February, we only need 2% blends the rest of the year, which is, call it, 150, 200 basis points below historical averages for those 10 months. So weâve clearly assumed a little bit more of a lower-than-typical dynamic from a macroeconomic standpoint to get to those guidance numbers. Great. Thanks for that. A quick follow-up. So you look at new versus renewal pricing in the fourth quarter. Itâs a noticeably wide gap for most markets. And, Mike, you gave helpful sensitivity in your opening remarks for 2023, but at what point do you see renewals converge to new lease pricing or is there an expectation maybe to meet in the middle as new lease pricing accelerates? Any thoughts on that dynamic and how you see it playing out for the year? Thatâs a good question. What weâre seeing today is itâs starting to converge a little bit as we look out into February and March. My expectation is probably by 3Q, you start to see it come down to 100, 200 basis points. Because what we are experiencing and what we expect market rents to continue to increase as we go into leasing season. And we are eating away at that loss to lease. So our renewal growth should come down a little bit, and I think we will probably meet in the middle somewhere. Yes. Thanks, guys. Just want to touch a little bit on the model. And I was curious if there were any specific periods that youâd point us to where you back tested the model where you saw some significant or notable job losses, but during a period of still attractive wage growth that resulted in market rent growth holding positive? Yes. Weâd have to go back and take a little bit more of a deep dive on that. Weâve got the scenarios, but not in front of us. Yes. What comes to mind is if you go back to â05, â06, and look at the shift to a readership nation, despite the magnitude of job losses, you did see overall rent growth and revenue growth, but we do some extent because even during that dramatic period of time, I think our NOI was down roughly 10%, both as a company and as an industry. So thatâs with fairly draconian jobs outlook because you did have another tailwind there from a demographic and household formation perspective. So weâd have to take a little bit deeper dive and look at that, but I do think just being in a needs-based industry, one in which individuals are going to need shelter, and this is the cheapest cost of shelter in this environment relative to single family, youâre going to have any incremental housing thatâs formed really biased over into our part of the world. So I think itâs going to be a pretty big tailwind combined with wages going forward. Thatâs helpful. Appreciate the comments. And then, Joe, going to your comments on kind of evaluating joint venture opportunities, would you characterize these as more one-off opportunities? Or are you guys looking to â or would you consider something more significant like you did historically with MetLife or maybe other partners in the past? Yes. Right now, weâre thinking about it in terms of probably a little bit more like the MetLife joint venture. They have been a phenomenal partner to us for the last 12 years plus. And so finding a partner that thinks like us, views real estate and operations similar to us and as capital grow with us along a number of different avenues. So as we look at exposing a portfolio of assets to the market to potentially find a joint venture partner with, of course, we want to find a partner that will meet the market in terms of pricing and terms, but also then has the capital and the wherewithal to grow with us, both on operations, potential developments over time as well as DCP investments over time. And so weâd like to find that partner. If it takes several partnerships to accomplish that, that would be okay. But itâs a way for us to continue to expand the enterprise, utilize our operational and transaction skill sets to grow accretively and continue to gain scale overall. Good morning. Good afternoon. Thanks all for taking my question. The breakdown of the range of same-store revenue guidance was helpful. Can you break down the expense growth guidance of 4% to 5.5%? Where are you seeing pressure? And then how much more savings can you see from your centralization and property headcount reduction efforts? Michael, Iâll start with that one, Joe, and can help clean it up if it needs to. But basically, weâre talking about 475 at the midpoint. And I think itâs important to break it down into those components of controllables and non-controllables. So first and foremost, controllable expenses make up just over 50% of the stack at around $250 million. We do expect between 4.5% to 5.5% growth, and we are seeing pressure points on utilities. We are seeing anywhere from about 6% to 6.5% growth in â23, and thatâs coming off of nearly 8% growth in â22. R&M should continue to see a little bit of pressure around 6% to 7% growth for us this year, and that compares to 11% in 2022. Personnel continue to see some efficiencies there. So weâre seeing around 2% to 3% growth, and we were flat in â22. As it relates to non-controllables, this is just under 50% of the stack. We expect around 4% to 5% growth, taxes being in that plus or minus 5% range as well as insurance in that 4% to 5% range. So a little bit of pressure there, but itâs what we are doing, and you asked a very good question, how much more is left. We think there is quite a bit. On the personnel side, weâve been running with about 30 properties that are unmanned. We expect that to go around 35 to 40 this year. So we are finding efficiencies there. Weâre putting in place some technology as it relates to maintenance, and we think we can compress our days vacant on the term side. So we think R&M will be benefiting from that. And then on utilities, we are working on different ROIs that should make us a little bit more efficient with our vacant electric as well as just common area lighting. So we are doing plenty of things. Weâre trying to compress these numbers, and we feel pretty good at our 4.75% range. And I do think, too, if you take kind of the whatâs next piece and look at revenue, Mike talked about the 50 basis points thatâs additive to our guidance expectations this year. I think thatâs a big differentiator when you look at what weâve seen from others put out there in terms of other income expectations. I think just given a little bit more concrete facts behind it as we do have identified projects with that. So thatâs a lot of our bulk Internet, our package lockers, third-party parking, tenant deposit, insurance, things of that nature, thatâs very well identified. So itâs not a hope that we get that 50 bps, I think itâs a known. And I think thatâs a key differentiator for us as we go into â23. But also as you look back into â22, just to give Mike a pat on the back, we think when all said and down here in fourth quarter, weâre shaping up for the number two overall same-store revenue growth this year, which is a phenomenal outcome given the diversified portfolio that we have. We donât have as much Sunbelt as some of the others. So coming in number two, I think a prideful fact thatâs driven by market selection, submarket selection, everything thatâs taken place on the innovation front. So more to come on that for sure. Thatâs really helpful detail. And you talked about the affordability of renting and those that are moving out due to buying a new home is down, I believe, you said 30%. I guess given the slowdown in single-family home price appreciation and signs of stabilization in mortgage rates, do you expect move-outs to purchase a home to rise in â23, and so maybe that becomes a little bit more of a pressure as the year progresses? I think, usually, what you see from a psychology perspective is that home prices come down even as affordability improves. You do see a delayed response in terms of that affordability. So when we had the kind of â07, â08 crisis and that shift to rentership, that was a shift that developed and took place for the next 7 years or so. And so you do have a different psychological impact that sticks with you a lot longer. So Iâd expect that trend to stay with us throughout all of 2023. Hey, guys. Thanks for the time. I noticed in Seattle, effect of new lease growth in 4Q is down 7.4%. Just kind of what are you seeing in that market? And I guess, whatâs your expectation built into 2023 for Seattle? Great. Josh, this is Mike. Just starting with kind of our exposure if you will, we are around 6.5% of our NOI in Seattle. A lot of that is in the Bellevue area and the remainder is out in the suburb. So what we experienced during the quarter was strong growth in the suburbs. I mean what we saw was 10% to 12% growth on a revenue basis. Down in Bellevue, we are still in that 5% to 6% range. What weâre experiencing today, rates are coming back a little bit. Over the last few weeks, weâve seen market rents increase. Weâre really not utilizing any concessions in either Bellevue or out in the suburbs, and we expect new lease growth to start to show positive here in February and March, and our blend should be in that 2% to 3% range as we move forward here. And ideally, this is a very seasonal market. What weâve seen in the past is typically about a 600-basis-point drop off from the third quarter. It was a little bit more pronounced this quarter, but we do expect that, that market will bounce back just given that itâs so seasonal in nature. Okay. I appreciate that color. And then just â appreciate all the info you provided on the same-store revenue guide, just wanted to kind of clarify? I donât know if I heard it, the occupancy assumption at the midpoint in the high, low end of the range? Yes. Weâre expecting roughly flat occupancy. So weâve been running right around 96.7% as we go into January, February here. I expect more of the same for the foreseeable future. Weâre really focused on continuing to drive that rent roll. And so weâre going to be pushing rents for the next few months and see how it all shakes out. Thatâs correct, across the range. Some markets being a little bit higher, some being a little bit lower, but right around that 96.7%, 96.8% is about where we will land. Yes. Thanks. Good morning. I realize youâre not providing sort of quarterly cadences, but, Mike, could you maybe just talk about how you think revenue growth progresses throughout the year? And I guess Iâm just trying to get a sense for maybe where the exit velocity might be as we get sort of towards the end of the year and into â24? Yes. We havenât talked much about the cadence, Steve. But what I would tell you is, the first half of the year should still be relatively strong just given what weâve done with the earn-in. I mean, obviously, we put a lot of focus on that over the last 6 to 9 months. So I would expect anywhere from 7.5% to 8.5% in the first half. That being said that would imply about a 5.5%, 6.5% in the back half. But we will see what happens with market rent If they continue to go up closer to that high end of the range that we provided, you could see that migrate up. So thatâs kind of how weâre seeing it shake out based on everything weâre seeing and experiencing today. Got it. Okay, thank you. And then second question, I guess, Joe, coming back from NMHC, I mean how are you guys thinking about new development starts? And I know you own a bunch of land parcels. I guess where would you today be penciling out new development? And if those yields donât really work for you, how much higher do the yields need to be in? Is that a function of cost coming down, rents going up? Obviously, it could be a combination of both, but just how do you see development starts maybe unfolding over the next year or so? Yes. Good question. Iâd say, number one, just related to the current pipeline, I want to point out. From a cost perspective, we are primarily locked in. So of the three projects still under construction, weâre 95% bought out. And with that 5% remaining risk, weâve got contingencies in place. So from a cost and return standpoint, feel very good about all the projects on Attachment 9, still kind of trending to the high 5s, low 6s for majority of those deals as they go through lease-up. So thatâs on the current pipeline. As we kind of go forward, the one project that weâve talked about in the past is a Phase 2 Newport Village in Northern Virginia. In the next 30 days, we should get kind of final cost estimates on that and final refinement of return expectations. We fully expect that to be in the kind of mid-5s current type range. And when I say current, thatâs current rents on inflated or projected cost and so that should stabilize over time as we go through that somewhere into the low to mid-6s. We think thatâs an acceptable level for that project, especially given that itâs a Phase 2 and has ancillary benefits to Phase 1 from a efficiency and padding perspective. So thatâs the near-term decision for us. The next decision is probably not going to be for another 6 months plus as we get into the back half of the year, at which time, I think we will have more price discovery and views in terms of cost of capital and best alternatives for that capital, so nothing else near term in terms of growing the pipeline. Hey, guys. Really appreciate all the kind of the color earlier, just framing the high end, low end and midpoints. I was just wondering kind of given the strong renewal growth, even with kind of a new lease decel, where does that loss to lease stand today? And maybe just kind of framing out, could that shift to a gain to lease if renewals kind of do stay in this elevated range with new kind of modest growth? Thatâs a really good question. Iâll tell you whatâs been promising to see is, today, weâre sitting around 2.2 loss to lease. Last month, we were around 1.5. So weâve actually seen our loss to lease increase, and a lot of that has to do with what weâve seen with market rents on a sequential basis, go up almost nearly 1%. So even though weâre sending out high renewals and capturing it, weâre pushing our market rents, which gives us the ability to continue to have a relatively high loss to lease. And just to put it in perspective, this time of year, weâre usually around 1.5. So weâre actually a little bit above that. So we feel pretty good about where weâre tracking. Thatâs great. Thanks. And then just I think there was a question earlier on maybe one of the weaker markets in Seattle. Maybe just the flip side of that question, looking in New York, I mean, 16.3% effective new lease rate growth in the fourth quarter. I guess, whatâs kind of driving the continued strength there? I guess maybe the question is, can that continue? And is there a world where maybe that kind of continues to be a really strong market even with new kind of deselling in other markets? Yes. No, Iâm glad you asked that. New York feels very strong today. And just to put it in perspective, again, this is about a 7.5% market for us in terms of NOI way. We are heavily focused in the financial as well as Manhattan just around 75%, 80% of our exposure. So what weâre experiencing there is strong demand. So weâve got traffic up on a year-over-year basis, still running around 98% occupancy, no concessions in the marketplace and really no supply to speak to in the city itself. So New York feels very strong for us. I expect that youâll continue to see high blends as we move forward into the first quarter and second quarter here. And quite frankly, we think New York could be one of our best markets this year with anywhere from 10% to 12% revenue growth. Hi, thanks for the time. Just curious on what youâre expecting for turnover and bad debt as the year rolls on some noise in out of LA County just curious on how that impacts your business plan or expectations? Yes. Juan, right now, this is Mike. What we expect is turnover to stay pretty relatively flat on a year-over-year basis. Itâs up a little bit because we have seen a little bit more on the turnouts due to skips and evictions. Iâll let Joe get into a little bit more on bad debt. But right now, weâre continuing to focus on driving renewal rate growth. We expect we will have a little bit more move-outs due to that. But again, weâre not seeing people move out to buy homes. So thatâs helping us offset that. And I do expect turnover to be relatively flat year-over-year. Juan, itâs Joe. So we actually had a number of these questions last night and this morning on bad debt. So weâre still talking through this topic. Hopefully, â23 is a little bit different picture for us. But maybe just a recap on our approach, and then I can kind of take you through current trends and outlook. So our approach going back to 2020 when we started COVID, was to consistently estimate what we thought the collectibility for each individual resident was. So we didnât take a draconian view and simply write off all delinquencies. We didnât get overly bullish and say weâre going to collect all of it. But we try to think through, be it from cash or be it through government assistance, what the ultimate collectibility was for each of those different groups. So what that resulted in was, when we had government assistance come in, of which I got to give a plug to that team, we ended up getting $60 million of government assistance on behalf of our residents and our investors this period of time, which, I think, if you look at that as a percentage of revenue, probably number one in the space when we took a look at it. So a big plug to those individuals have worked hard on that. But when we had that come in, it wasnât a positive surprise to our numbers, which means it wasnât a big benefit this year, also not a headwind as we go into 2023. And so if you look at recent trends, despite the fact that government assistance has been coming off, it was sub $2 million benefit in 4Q. Itâs down under $200,000 here in the first quarter. So a de minimis amount, but yet we saw the best in-the-month collections and in-the-quarter collections in 4Q and into January that weâve seen throughout COVID. So weâre seeing the ability to get higher-paying residents in, find new residents that have the wherewithal and ability to pay as we go through this eviction and [indiscernible] process and ultimately help benefit â23 numbers. In terms of the assumption, though, for â23, we think itâs relatively flat in terms of total bad debt expense. So maybe a little bit of upside as we work through some of these abilities to get back some of our units, some of the eviction moratoriums burn off. But net-net, weâre thinking itâs probably about a flat benefit in our guidance. Thanks. Super helpful. And then just on same-store expenses, the guidance for â23, what would you say the differential is in expectations between the Coast and the Sunbelt, and the main drivers of that? Biggest difference, what we are seeing today is really around taxes. So we do expect high single digits in the Sunbelt, where we are capped at around 2%, obviously, with our California exposure. So thatâs probably the biggest difference. Aside from that, we do see a little bit more pressure as it relates to some of our vendors working down in the Sunbelt, just given the supply pressure down there, you do see more expenses there. But for the most part, itâs pretty tight across the board. Yes. Thanks everybody. Can you walk through what you are seeing in terms of demand in some of the tech markets? Obviously, you mentioned Seattle already, but San Francisco and Austin as well. And is there any noticeable impact that you are seeing from the layoffs? San Francisco today feels pretty good. I will tell you, over the last few weeks, I have seen a little bit more traffic return to that market. But again, I think itâs always good to put this in perspective. That is about 8% of our NOI, 50% our exposure is in that SoMa downtown area, the rest is down the peninsula. I have seen pretty good traffic across the board. I am not really seeing downtown outperform Santa Clara, San Mateo necessarily. Itâs pretty good. And I will tell you, it goes back to some of the exposure that we have in these markets. Seattle is just under 15% tech exposure as it relates to our resident base. In San Francisco, itâs actually between 10% and 12%. Itâs a much more diversified resident base. And so during the months of November, December, when you heard all the layoffs, we did see people kind of sit back. Demand was a little bit slower as people were just assessing whatâs going on. But lately, it does feel, and what we are hearing from the ground is, people are going back to the office. They want to make sure that their faces are being seen, and we are seeing traffic return a little bit. Yes. I think one other thing we saw, obviously, early in COVID, we saw a lot of the dispersion of the tech jobs around the country. Similarly, what we have been taking a look at, and I know there has been a couple of reports out there on the warrant notices related to some of those layoffs. Our business intelligence team has done a lot of special analytics work looking at where those WARN notices are, and you would be shocked to see the distribution of them. So, itâs not just a San Francisco or in Austin and Seattle. When you look at the percentage of those layoffs that are taking place, or a percentage of the workforce in those markets, itâs not nearly as impactful as I think most of us typically think when we see the headlines just based off where certain companies are headquartered. So, there is more of a dispersed impact around our portfolio and as well as markets we are not in. Okay. Appreciate that color. And then in the prepared comments, you mentioned that renters are taking longer to make decisions, even though the traffic levels are basically the same. I was just curious if you could delve into sort of what you meant by that comment and what the implication is? Yes. Brad, I would tell you just to quantify that a little bit. The way we think about it is in terms of vacant days. And so itâs taking about two days longer just to move somebody in after they start trying to figure out where they want to live and when they want to move in, so about two days on average. Other than that, we havenât seen much of a difference. Hi. Thank you for taking my questions. So, you guys talked about inter-market differences between coastal and Sunbelt, but perhaps could you talk about intra-market differences, A versus B, urban versus suburban? Yes. I am happy to go into that a little bit, just to give you an idea of what we are experiencing today and what we did experience. So, as it relates to A versus B, first of all, in â22, we did see our As outperform on a revenue basis. And what we expect in â23 and what we are seeing today, our Bs are likely to outperform As. As it relates to urban versus suburban, urban outperformed the suburban in 2022. We do expect that to flip as we move through â23. And I think just to point to something here, you can see on Attachment 11a, our MetLife portfolio, high-quality, urban in nature, we have 16% growth during the quarter. So, you can see whatâs happening there just as it relates to different parts of what we are seeing in our mature portfolio. So, overall, itâs in good shape. Great. And for my follow-up, in the event that you donât see viable acquisition or DCP opportunities or we stay in that price discovery mode for longer, how would you think about the appetite for buybacks this year? Yes. We have definitely had the appetite and willingness and ability to pivot over time. So, I think our most recent $50 million buyback that we did in 3Q, 4Q, it was actually our third buyback in the last 5 years. So, we have got a demonstrated history of pivoting when we can. As we get through price discovery, continue to see where the fundamental picture develops, then importantly, what is that source of capital and the price of that capital, as those all come together, I think we will have a better picture on whether or not we have the capacity for buybacks. And if it makes a good risk return trade-off, it was somewhat of a fairly easy decision when we are thinking about it in 3Q and 4Q because we had done the forward equity back in March of â22. So, we had proceeds available. We had a set price. We also sold that asset in Southern California. So, I think as we expose some of these assets to market, see where they come in on pricing, we will be able to potentially take proceeds from that to determine do we want to do more operational acquisitions and put that into our platform and get the lift we typically see. Do some of the DCP transactions we talked about earlier, help fund potential development starts and then of course, buybacks will be on that menu as well. Okay. Sorry about that. I think the question earlier, Sakwa asked about the cadence of performance over the course of the year, and you gave a good answer there. And then when I think about the year ahead, itâs somewhat of a pedestrian year except for the fact that you have this 5% earn-in. So, you are kind of whittling away this great growth profile you had last year. So, when you think about the end of the year, is it the best probability that you will be looking at like a return to CPI plus type of growth in 2024 or what has to happen for â to have another year of above-average growth and for the story to continue, or just curious what the building blocks might be when you are looking at December of this year? Yes. Good question. And obviously, we are not macroeconomists, but we can kind of focus on what we can control and see coming down the pipe. So, I would say two things that are beneficial as you start to go into â24. One on the supply side, I mentioned the total housing stock already starting to come down. I think thatâs going to only continue when you look at permanent start activity on single-family, and what we are starting to see roll over in terms of permits and starts on the multifamily side. So, you start to bring down total housing stock. The other thing is the relative affordability piece that we have talked about quite a bit, that should be beneficial. So, those all help market rent growth. Beyond that, then you still have innovation, which we talked about that adding 50 basis points here in the 2023 numbers. I think you have at least another year of 50 basis points coming in 2024 when we think about what we have coming, especially on building wide WiFi and some of the other initiatives that will roll into the pipeline. So, I think there is a couple of dynamics that hopefully help get us above inflationary type of numbers as we go into â24. And then beyond that, you have still a very strong balance sheet in terms of lack of maturities coming due really in 2024 with only $100 million. So, you donât have the debt resets. And then we also have capital allocation. We will see where our cost of capital goes, and where we can deploy, but hopefully, some opportunities there. Okay. And then, Joe, on the DCP, what would you say the exit strategy is for the $480 million of commitments that you have currently in terms of getting paid off or participating in the development? Like is there any change to what you are thinking in terms of strategy as it relates to those investments as it stands today? I wouldnât say any change overall. When we go into those, obviously, we are looking to make sure we have a partner in an asset that we want to be there with. Itâs an asset that we ultimately want to own, and we have done that. I think those have come through maturity over the last â we started that program in 2013, so the last 9 years. And I think we have had about a 50-50 hit rate on buying those out. I would say the only change in dynamic today has to do with as we go through this period of price discovery and figuring out where cost of borrowing is. We have got some upcoming maturities and equity partners that, while they may have been thinking about exiting the asset and either us buying it or selling it to the market, they are maybe looking for a little bit more time to wait to get through that price discovery mode and optimized pricing and economics for themselves and of course, us. So, we are going to work with some partners on potentially extending and making sure we get to a better window to transact. But in terms of our desire to buy out, itâs going to be case-by-case as we move through those. Hey Rich, this is Toomey. I would just add. Think about it as an option. Itâs an option that we get paid for, why we sit there and collect it. So, not a bad position to be in. And if our cost of capital responds, we could be aggressive on that opportunity set because we know it, assets we would want to own. And if it isnât, we are glad to just cash our check and go away to the next opportunity. Hey. Good morning everyone. A lot of good things on this quarter and in the year and the outlook, but I just had one, I guess minor negative following up on DCP. It looks like junction was extended. And can you give us a little bit of an update there? Was it just driven by the financing markets? Is the project still under construction? Just a little more details there. Yes. It really goes back to kind of that prior comment and response. Itâs just trying to find an optimal window for them to potentially transact. So, they do have certain rights from a senior extension perspective. And so, in some cases, you are going to have borrowers that look to extend for their rights. In other cases, we will work with them and the senior lender to figure out what the right extension is. So, they did extend, and we are still in discussions with them to actually extend even further to ensure that we have perhaps a year or 2 years window by which to evaluate the market and figure out what the exit is. Wes, Toomey, again. A couple of points to make. We still accrue our prep during that period of time. So second, this particular asset, 20% market rents below pre-COVID. So, itâs still trying to bring itself back. And the truth is Santa Monica is a great market. And so we will see how it plays out. I think itâs again one of those, we like our options. At this juncture, we will see how they play through. Got it. And then I think it was a few quarters ago, you had mentioned when a tenant moves out due to the higher rent increase, you typically have a large move out â move up in rent. Are you still seeing that? We are still seeing it, not to the same level as we saw probably one quarter or two quarters ago, but we are still experiencing that and like to see the same more at least the next one quarter or two quarters. Hey guys. Thanks for taking the quests. Just two quick ones for me here. Want to follow-up on your comments on the transaction markets. We were at NMHC 2 and heard a lot of chatter about the stalled market, lots of capital willing to buy, but fewer sellers and a pretty sizable bid-ask spread. So, I guess I am curious about how you are thinking about the market clearing cap rates in the current environment and what you are willing to pay? And when do you think we will get back to a more normalized level of transaction activity? Thanks. Yes. I think you are right, we got to mention that 10% to 15% delta in terms of buy/sell price discovery window. And itâs â we are unsure at this point which group is going to move which direction. But I would say you do have a pretty good buyer set out there in terms of unlevered buyer pools or individuals that already have capital raised. They can find pretty compelling IRRs when you are buying in the high-4s, you get to a 8% unlevered IRR. So, be it high net worth pension, closed-end funds, a lot of private capital is definitely efficient around the space. And I think once again, plenty of capital looking to come over to multifamily. So, for us, in terms of our ability or willingness to transact at certain levels, obviously, we are fairly focused from the cash flow accretion standpoint. So, whatever allows us to get cash flow lift, if we could sell at x and then redeploy into assets that are undermanaged and get a day one left with our operating platform, we are more than happy to transact at different cap rate levels as long as that opportunity to redeploy is out there. And so thatâs probably the biggest thing we are thinking about in terms of meeting the market and where that pricing comes in. Thatâs helpful. Curious on maybe one set of maybe potential sellers here, I heard a lot of talk about merchant builders who clearly started project during maybe different economic times or different cost of capital and capital expectations. So, curious if you are getting more inbound calls from that set of potential sellers, how you maybe would assess or rank that opportunity? And if thatâs an area where we expect to be more active in the coming quarters? Haendel, this is Andrew. Good question. And we did quite â there is the opportunity for DCP recaps, I think in that space. Itâs still a little early as it relates to that. We have done a few of them late last year. And we have begun to have some of those conversations, but I still think there is some discovery that needs to take place before we know for sure if those opportunities exist. But itâs definitely a place where we are going to â like Joe mentioned earlier that we have a reduced risk in that scenario where the property will be â have been completed. We will have cash flow. We will have the ability to get a loan thatâs not a construction loan, so you can work with the agencies and so on. And so you are in a much safer position on those DCP type transactions, but itâs still been too early, but some additional conversations have been had. Good afternoon. How are you guys thinking about the regulatory environment where the industryâs lobbying time and money needs to be targeted over the next few years? You have got rent control, DOJ going after RealPage, tax is increasing everywhere and the potential for re-imposing eviction moratoriums. How are you guys thinking about this? And whatâs most important, where are you targeting most of your efforts and prodding the industry to target theirs? Hey Rob, itâs Chris. Yes, thatâs a really good question. I would say we are fighting on a lot of fronts. You mentioned rent control initiatives, right. We see those in six states or seven states thus far in the 2023 legislative sessions. We are still coming off COVID restrictions, whether thatâs eviction moratoriums, couple of holdouts out there, eviction diversion programs, etcetera. And we are working with our trade groups, right. So, the California Apartment Association, places in Maryland, Florida Apartment Association, all that kind of stuff. And we are giving money. I would say rent control is obviously a top priority. The proposition to get rid of Costa-Hawkins in 2024 in California is going to be a top priority, and then everything else. As you think about just cause eviction rules, fee limitations, longer rent increase notice periods, all that kind of stuff that we are seeing, which are going against landlords right now, we are working through, but those are probably lower priorities. So, most of our dollars are once again to go and go are those kind of top one, two, three things, and we are going to be working with the major trade groups to, not only fight the measures, but educate legislators on what a better solution is, right. It should be a supply-based solution. So, thatâs kind of where we are working right now. Thatâs alright. That is the correct answer, Chris gave, but I want to emphasize the education piece because California, I mean the capital right now of a regulatory landscape thatâs all over the place. You actually go to the cities next door that arenât proposing these and they embrace the idea that new development, new housing stock is a great way to enhance their city. And you take those cities as examples. I mean Huntington Beach, which we have been at for 10-plus years now, it has turned out to be a great city with a refreshed stock and competes very nicely against Newport, which is just the opposite. And so we think the best long-term path is, these cities that are embracing new supply, new product, particularly ESG focused, are going to realize the only way to solve their long-term housing and ESG directives is by opening up the development windows. And we are going to have good conversations along that corridor with a lot of people, and we are seeing responsiveness. And so we are well our capital flow, where those opportunities are embraced. And I guess the one sort of numerical question, how much when you take a look at it, did you guys lose from the eviction moratoriums dollar-wise or percentage of rent? And if those get re-imposed if job loss is mount, how big of an issue is that going forward in a tougher rental rate environment? Hey Rob, itâs Joe. I do have to know the numbers. So, the write-offs that we had throughout that period of time, we are probably right around $60 million in terms of total write-offs as we came through 2021, â22 and even here into â23. So, we have seen fairly elevated numbers on that front. That said, I mean it sounds like a big dollar amount, but put it in perspective on $1.6 billion of annual revenue. We are collecting 98.5% of the rents that we are billing. So, we are maybe off 100 basis points from where we would have been at pre-COVID. So, therein lies the opportunity to the extent that eviction moratoriums or diversion programs come off over time. We donât expect it to. We donât think we are going to recapture that 100 basis points near-term, but we donât see a material downside either. Hey. Thanks for taking my questions. Regarding the D.C. market, the government workers are still working from home. So, could you just comment on how thatâs affecting the apartment demand? Yes. D.C. is, obviously, itâs a big market for us. Itâs right around 15% of our NOI. I will tell you what we are expecting to see as people start to return to office, hopefully, here in May timeframe. Over the next few weeks, given itâs a 60-day market, we do expect demand to start to pick up a little bit. What we are seeing today just on the floor is concessions a little bit in the 14th Street corridor out in the suburbs, very minimal concession activity. So, again, once people start coming back to the office a little bit more, we think D.C. has some likes to grow and could be a pretty strong market for us in 2023. Appreciate that. And then my second question, with the increased attention on EV fires [ph], could you guys just put some color on how you are going about upgrading your fire suppression systems, in the garage? Just since EV fires use a lot more water than the average fire? Yes. That may be one to take offline. So, we do have a pretty robust EV rollout program working within our redevelopment team. And so between electrical load, fire suppression, etcetera, you are right, it is a pretty decent cost relative to the ROI that you receive on those. But maybe you wanted to take offline if you want to follow-up, and we can get to our experts in that space to talk you through it? Hi. Good afternoon. Question about how you see your Sunbelt markets progressing this year. Are you seeing good trends there, good demand trends? And could you expect Tampa, Orlando, Nashville and Dallas to see positive new lease spreads in 2023? Hey Anthony, what we are seeing with the Sunbelt today is market rents as well as our loss leases a little bit lower to start the year. That being said, we do expect with seasonality and as we return to just a more normal period of time, market rents will increase as we move forward. But as we started the year off, itâs a little bit lower than what we are seeing on the coastal side of the house. Got it. Thanks. And maybe one just a general question, I think you said your loss lease was increasing in February, traffic trends improved January, February. Doesnât that suggest that demand may be stronger than people are expecting across the board this year? It seems like things are loosening up across the nation. And how does that impact your overall macro view for the year? Yes, Anthony, I would tell you, we are cautiously optimistic. And a lot of that over the last few weeks has really shown more strength. I will tell you, the start of the year, the first two weeks of January, it was pretty slow. Demand was slow. It typically is given the holidays. But we are hopeful that what we are experiencing over the last few weeks is a trend, and something we will continue to see as we move forward. And obviously, the leasing season is just around the corner. We will have a lot more to talk about here at the Citi Conference as well as we get into 2Q, if you will. Hi. Good afternoon. Congrats on the quarter on the solid outlook. Just on the OpEx side, just given that your same-store OpEx growth forecast is pretty much, much lower than most of your peers. I get some of the operational efficiencies you guys are working on. But curious, on the real estate side as well, you only had 2.7% year-over-year growth in â21 â as in â22, sorry, on any in â23, you are kind of forecasting that growth just below 5%, which again seems much lower than your peers. So, I am just trying to understand whatâs driving that? Is it you guys just challenging a whole bunch of appraisals, or how do we kind of think through that on the real estate side? Hey Tayo, itâs Joe. So, I would say starting off when you look at what we know today, we actually already know about 40% of our taxes for the year. And so you start to get a pretty good read at this point. And we have an in-house team, but they are also working with consultants in the field. We do challenge or appeal probably about 50% of those on a yearly basis that are available for appeal. When you look at the markets, Mike mentioned earlier, Sunbelt is kind of in that 5% to 10% range is the range that we have factored into expectations at this point. So, we saw more pressure in 2022 as you look through our Texas and Florida markets. We expect that to continue, just given the phenomenal growth that they saw over the last couple of years and the fact that, typically, you are in a little bit of a lag basis. So, even though NOI growth has been a little less proficient this year and valuations with cap rates moving up may have come down a little bit, thatâs more of a lagged impact that maybe you see in â24. When you get to the coast with Prop 13, you are capped at 2% there for about 30% of our portfolio. So, then that just leaves Seattle plus New York, Boston, D.C., which are actually generally on fiscal years. So, we are right now six months of the growth rate there. So, net-net, it gets us to about a 5% impact for real estate tax for the year. Thank you. There are no further questions at this time. I would like to turn the floor back over to Chairman and CEO, Tom Toomey, for any closing comments. Thank you, operator and thanks to all of you for your time, interest and support. Clearly, we remain very enthusiastic about the apartment business and believe the industry has a variety of tailwinds that should lead to another very strong year in 2023. And UDRâs operating capital allocation and innovation advantages should deliver relative outperformance. With that, we look forward to seeing many of you in future non-deal roadshows as well as the Citi Conference. And with that, take care.
EarningCall_554	Good morning, ladies and gentlemen. Thank you for standing by. Welcome and thank you for joining the Coloplast's Q1 2022-2023 Earnings Release Conference Call. T Throughout today's recorded presentation, all participants will be in a listen only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions] It's my pleasure, and I would now like to turn the conference over to Kristian Villumsen, President and CEO. Please go ahead, sir. Good morning and welcome to our Q1 2022-2023 conference call. I'm Kristian Villumsen, CEO of Coloplast, and I'm joined by our CFO, Anders Lonning-Skovgaard, and our Investor Relations team. We'll start with a short presentation by Anders and myself and then open up for questions like we usually do. Please turn to slide number three. We delivered 7% organic growth and a 29% EBIT margin before special items. Return on invested capital after tax and before special items was 20%, impacted by the Atos Medical acquisition. I'm satisfied with the solid start to the year. We continue to outgrow the market across regions and help more people with intimate health care needs. Today, we also announced the launch of LUJA, our next-generation male intermittent catheter with a unique micro-holes zone technology. This is the first product launch from our clinical performance program, aimed at setting a new standard in Chronic Care by launching clinically differentiated products. LUJA is designed to reduce the risk of urinary tract infections, a significant burden for people using intermittent catheters and health care systems as a whole. Users of conventional catheters today experience urine flow stops and blocks up the cathode islets, increasing the risk of residual urine in the bladder and mucosal microtrauma, two key UTI risk factors related to intermittent catheterization. As such, LUJA is a game-changer as it ensures complete bladder emptying in one free flow and does not require repositioning. The launch of LUJA will be backed by two pivotal clinical studies, the results of which are expected to be publicly available within the next few months. The new catheter will be introduced in key markets over the next 12 months as we obtain reimbursement starting with Denmark and Finland here in February. I'm excited to follow the launch and the difference that LUJA will make for the many uses of intermittent catheters as well as its contribution to our growth agenda. Now, let's take a look at today's results in more detail. Please turn to slide number four. Let me start off with a few highlights from our first quarter. We had a strong start in our Chronic Care business despite continued impact from COVID-19 in China and backorders in our collecting devices business. In the US ostomy care market, we continue to advance our competitive position, and I'm pleased to share that our group purchasing agreement with Premier, a leading health care improvement company, has been renewed and will be valid for another three years starting April 1, 2023. In China, most of the COVID-19 restrictions were lifted nationwide towards the end of our first quarter and this gives me confidence for the mid and long-term growth prospects of our Chinese business, but it doesn't change our outlook for the current financial year as the reason spike in COVID cases continues to negatively impact procedural volumes and hospital access. Lastly, our smaller business areas, Interventional Urology and Voice and Respiratory Care both had a solid start to the year with continued good performance. Now, let's dive into the details by business area. Ostomy Care organic growth was 8% for the first quarter, with growth in Danish kroner of 8%. Our SenSura Mio portfolio continues to be the main growth driver, followed by the broader range of supporting products. At the product level, SenSura Mio Convex was the main growth contributor driven by Europe and the US. From a geographical perspective, growth in the quarter was broad-based with solid contributions across all regions, excluding China. In Continence Care, organic growth was 7% for the first quarter and growth in Danish kroner was 8%. Growth continues to be driven by the SpeediCath ready-to-use intermittent catheters with a good contribution from SpeediCath Flex as well as our SpeediCath Compact and standard catheters. The new addition to the portfolio, SpeediCath Flex set, has been launched in nine markets and continues to perform well. Backorders and collecting devices continued to have a negative impact on Continence Care growth in the quarter of around one percentage point. The backorders are expected to persist into the second quarter of 2022-2023 at a similar level to Q1 and to be resolved in the second half of 2022-2023. From a geographical perspective, all regions contributed to growth, led by Europe and the US. Voice and Respiratory Care contributed nine percentage points to reported growth in the quarter. The organic growth for Voice and Respiratory Care was high single-digit, with both laryngectomy and tracheostomy delivering high single-digit growth in the quarter. Growth in laryngectomy was driven by an increase in the number of patients served in both existing and new markets as well as an increase in patient value, driven by the Provox Life portfolio. All regions contributed to growth, led by Europe. Growth in the tracheostomy and E&T business was ahead of expectations in the quarter, positively impacted by phasing of sales orders. In China, the National Medical Administration has approved the registration of the Provox Voice Prosthesis, and this completes the registration of the laryngectomy product portfolio in China and marks an important step towards establishing presence in the market and setting a treatment standard for the many laryngectomy patients in the country. In Wound and Skin Care, organic growth for the first quarter was 1% and reported growth in Danish kroner was 5%. The Wound Care business alone delivered negative 4% organic growth in the first quarter. Growth in Wound Care was negatively impacted by a high baseline in Q1 last year, continued impact from backorders mostly in Europe, and negative growth in China due to COVID-19. The underlying momentum in Europe continues to be positive with key markets posting solid growth in the quarter. The negative impact from backorders in Wound Care was around 200 basis points. The impact from backorders is expected to continue into the second quarter of 2022-2023 at a similar level to Q1 and is expected to be resolved in the second half of 2022-2023. In Interventional Urology, organic growth was 11% for the first quarter and growth in Danish kroner was 18%. Growth in the quarter was nicely balanced across business areas and geographies. The US Men's Health business was the main growth contributor, driven by the Titan penile implants. With this, I'll now hand over to Anders, who will take you through the financials and the outlook for the year. Please turn to slide five. Thank you, Kristian and good morning everyone. Reported revenue for the first quarter increased by DKK936 million or 18% compared to last year. Organic growth contributed DKK353 million or around seven percentage points to reported revenue growth. Acquired revenue from the Atos Medical acquisition contributed DKK480 million or around nine percentage points to reported revenue growth. Foreign exchange rates had a positive impact of DKK104 million or two percentage points to reported growth due to the appreciation of mainly the US dollar against the Danish kroner. Please turn to slide six. Gross profit for the first quarter amounted to around DKK4.1 billion, corresponding to a gross margin of 68%, on par with last year. The gross margin includes positive impact from pricing as well as country and product mix. Pricing remains a high focus area and is progressing as expected with a significant share of the planned price increases implemented in the first quarter. The inclusion of Atos Medical leverage on production cost and efficiency savings from the Global Operations Plan 5 also contributed positively to the gross margin. Currencies contributed with around 90 basis points to the gross margin. On the other hand, the gross margin was negatively impacted by increased prices for raw materials, energy, and transportation, double-digit wage inflation in Hungary, and ramp-up costs at our sites in Costa Rica. Operating expenses for the first quarter amounted to around DKK2.4 billion, an increase of DKK491 million or 26% from last year. Atos Medical contributed with DKK290 million to operating expense, of which DKK54 million were related to the PPA amortization included under distribution costs. The distribution-to-sales ratio for the first quarter was 31% compared to 29% last year. Distribution costs increased by DKK373 million or 25% compared to last year, impacting -- impacted by the inclusion of Atos Medical and increased sales and marketing expenses post-COVID-19. Higher logistics costs and continued commercial investments in interventional urology, consumer and digital initiatives, and Atos Medical also contributed to the increase. The admin to sales ratio in the first quarter was 5% compared to 4% last year. Admin expenses increased by 52% in the first quarter, primarily impacted by the inclusion of Atos Medical. The R&D to sales ratio for the first quarter was 4% of sales, on par with last year. Overall, this resulted in an increase in operating profit before special items of 8% for the first quarter, corresponding to an EBIT margin before special items of 29% compared to 32% last year. The EBIT margin includes a positive impact from currencies of around 100 basis points, mainly related to the appreciation of the US dollar against the Danish kroner. Financial items in the first quarter were expense of DKK333 million compared to a net expense of DKK58 million last year, driven mostly by non-cash impact from currencies. The increase in net expenses was primarily due to losses on balance sheet items denominated in US dollar and Swedish kroner and interest expenses related to the financing of the Atos Medical acquisition. The tax expense in the first quarter was DKK300 million with a tax rate of 21% compared to DKK350 million last year, positively impacted by the transfer of Atos Medical intellectual property. As a result of the increase in net financial expenses, net profit for the first quarter declined 7% compared to last year despite the development in operating profit and the lower income tax level. Please turn to slide seven. Operating cash flow for the first quarter amounted to DKK487 million compared to around DKK1.1 billion last year. The negative development in cash flows was driven by an increase in working capital. Inventories increased due to a higher level of safety stock and raw materials, price increases, and an increase in finished goods due to the transfer of production to Costa Rica. Trade receivables also had a negative impact due to phasing. Other payables were negatively impacted by timing of payments related to missed lawsuit settlements and the US Veteran Affairs matter. High income tax paid also had a negative impact on the cash flow. Cash flow from investing activities was an outflow of DKK275 million or around 5% of revenue compared to an outflow of around DKK200 million in the first quarter last year. As a result, the free cash flow for the first quarter was an inflow of DKK212 million compared to an inflow of DKK930 million last year. Adjusted for the above above-mentioned mesh and US Veteran Affairs payments, the free cash flow was an inflow of DKK576 million. The trailing 12-month cash conversion for the first quarter was 72%, impacted by the development in working capital. Net working capital amounted to 26% of sales compared to 25% at the end of 2021-2022, impacted by the increase in inventories and timing of the trade payables. Please turn to slide eight. We maintain our financial guidance on organic revenue growth and EBIT margin and continue to expect organic revenue growth of 7% to 8% and an EBIT margin before special items of 28% to30%. Reported growth in Danish kroner is now expected at 9% to 10% from 11% to 12% previously negatively impacted by currency development, mostly the US dollar against the Danish kroner. The currency impact on reported growth is now expected around minus one percentage point. Contribution from the Atos Medical acquisition to reported growth is still expected around three percentage points. For 2022 to 2023, I still expect around DKK50 million in special items related to the integration of Atos Medical. The net financials for 2022-2023 are now expected at around minus DKK600 million from previously around minus DKK450 million, impacted by currency adjustments on balance sheet items as well as higher interest payments. The blended interest rate for Atos Medical financing is now expected around 2.6% from previously 1.9%, impacted by the adjustment of the variable interest rate on the two-year bond issue. The CapEx guidance for 2022-2023 is still expected around DKK1.4 billion, and our effective tax rate is still expected to be around 21%. As mentioned, the assumptions laid out in November on organic revenue growth and the EBIT margin still hold. Overall, we expect continued solid performance in Chronic Care across all geographies, excluding China, where we still expect the key leading indicators of growth, patient inflow and access to hospitals to remain impacted by COVID-19. In Wound and Skin Care and Interventional Urology, we continue to expect the performance in line with our Strive25 ambitions. Voice and Respiratory Care growth is still expected 8% to 10%. The gross margin is still expected at 66% to 68%. Overall, the price development in electricity and freight is more favorable than in November. However, this is largely offset by unfavorable development in currencies. On the EBIT margin guidance, I would like to call out the impact from currencies, which is now expected around 10 basis points from previously around 50 basis points. Before opening up for questions, I would like to provide a comment on the Italian payback system for medical devices. Coloplast is closely monitoring the development, and we expect to be able to manage the potential financial impact within our guidance for full year 2022-2023. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] We have the first question from Hassan Al-Wakeel from Barclays. Your question please. Thank you for taking my questions. I have two, please. Firstly, could you talk about the launch of LUJA, which looks to be earlier than what was signaled the CMD last year? Why this is and the confidence in the data that you expect to present in the second quarter as well as the potential for any premium pricing? And then secondly, on growth, Q1 was meant to represent the trough and has come through stronger. So, I wonder if your views on phasing over the rest of the year have changed at all or if China is creating any offset? Thank you. Thank you, Hassan. Why don't I start out? So, LUJA mark is a big milestone for the company. It's the first launch out of the clinical performance program, and we really hadn't faced any delays. So, we've gotten to launch maybe a little ahead of plan, that's correct. We are optimistic and excited about this product. I brought the product last week to some customer visits I had in the UK. And the benefits are very intuitive, they're easy to explain, and they will be backed up by, we think, a compelling clinical story over the coming months. As you recall, Hassan, this is -- the ambition is to get a price premium. This is a more expensive product. It's taken us longer than normal to make. We've also invested in clinical trials. So, we are going to launch gradually over the course of the next 12-plus months, and we'll expect to be in the main markets then. We haven't commented specifically on the premiums. I've earlier said that you should probably expect single-digit, low double-digit depending on country. And we are optimistic that we will be able to do that. The -- was there anything else on LUJA? Should I take the other question, Kristian? The other question Hassan that was the phasing of the year on the growth side. So, we are still exiting at the low end of our guidance in the first half of the year. And then we're expecting the growth -- organic growth to pick up in the second half of the year. So, overall, there are no changes as such to the phasing. We also explained back in November. That's very helpful. Thank you. If I could just follow-up on the decline in electricity spot prices and what that drives in terms of an EBIT benefit for the remainder of the year on the unhedged portion and what the full year potential benefit again at spot rates for next year would be? Thank you. Yes. So, let me take that one, Hassan. Yes, we are seeing that the prices on electricity are coming down. But please remember, for this financial year, we are hedged of around 600 -- 60% at a level of around â¬400 per megawatt. And right now, the spot rates are around â¬150 to â¬200. So, for the remaining 40%, we are going to see some positive impact. And for 2023-2024, we will see a quite significant impact if the current spot forward rates continue. But on the other hand, we are unfortunately see more headwinds on the currency. So, when I started the year, I expected to see tailwind from currencies of around 50 basis points. Now, it's closer to 10 basis points on the EBIT margin. So, that is going to offset some of the tailwind we are seeing from energy, but also some of the tailwind that we are seeing currently on the freight. Yes hi. Good day. Two questions from my side as well, please. Could you please elaborate a bit more on the situation in Italy? I don't know whether you can quantify it a bit for where you think this the impact, let's say, for 2022-2023. But more importantly as well, how does that impact your growth outlook for Italy going forward? That would be my first question. And then my second question is also on the cost side. I mean we can all track very well energy prices. But could you also give a bit of a feedback on what you're seeing on the raw material prices? Has that been in line with your expectations? Or has that fared a bit better or worse? Thank you. Hi Maja. Yes, so let me take your questions. So, on Italy, as I mentioned earlier, the government has introduced a payback system that the industry should payback an amount above a certain level from 2015 to 2022. And what we have seen is that it has really gone into more activity over the last month or so. My expectation is that we are going to manage this within the financial guidance we have. When that is said, we are disagreeing with the implementation of this payback decision. And we have also, together with the industry, appealed the legal grounds for this decision. In terms of your second question around the raw material costs. My view for the year is that our raw material costs will increase around the double-digits. That still stands. We are not seeing any improvements yet. So, my assumptions on the raw materials are unchanged compared to what I said back in November. Thank you very much. So, just to go back on Italy, does it change anything with regards to your growth prospects in Italy? Or is that just more of a one-off? So, in terms of our Italian business, it does not expect -- or impact our Italian business as such. We are having a good business in Italy across our business areas. And we continue to expect that we outgrow the underlying market growth in Italy. So, it does not really impact our business as such. Hi, good morning. Thanks for taking my questions. I have two, if I can, please. Firstly, on guidance. Historically, I think you've normally given a one-point EBIT margin guidance range. Just wondering at what point do you think you might have enough visibility to narrow the current 2% range? And related to that, I think in your prepared remarks, you mentioned R&D was in line, but I think it did have around a 40 basis point benefit to EBIT margins in Q1. So, is this sort of the level we can expect R&D for the year? And then my second question is, obviously, today is a focus on LUJA's launch, but I'm just wondering how the [Indiscernible] study for Halo are progressing? Thank you. Yes. So, I will try to answer the first couple of questions, and then Kristian can go through the Halo. In terms of our guidance, yes, this year, we are guiding a little bit broader interval. So, our EBIT margin guidance is, as I said earlier, between 28% and 30%. And we have decided to do that because we have more uncertainties, especially around the raw material, freight, and energy. And as I said earlier, we are maintaining our full year guidance of 28% to 30% level. In terms of your R&D ratio question, yes, it is sitting around the 4% of sales that is within our expectations. So, -- and we continue with our activities we have agreed. So, I would not expect a significant change to that at the full year. Kristian? Yes. And to your question around the Halo studies that are ongoing in UK and Germany, they are on plan, on time. Early feedback coming out, this is qualitative is positive. We'll be able to say some more about what the results will be when we get to the May conference call. Good morning. Thank you. Could you just update us on where you feel the wound market -- your addressable wound market -- the underlying market is growing in your first quarter and more broadly, your expectations for the underlying market for this year? And related to that, could you update us on the French reimbursement cuts and the potential effect you are seeing from those? Thank you. For the Wound Care market, we maintain that the global market is growing between 2% to 4%. Bear in mind, though, that the composition of our business is really unevenly distributed across the different geographies. So, we have our largest Wound Care business in China. China has, of course, been heavily hit by COVID. This is a real drag on our performance also in this quarter. In addition, we are also impacted somewhat by backorders and really don't have a footprint on Wound Care in the US, but we see nothing that should suggest that the fundamental market rates or growth rates are changing. What was your second question? Well, we are not seeing any reimbursement cuts on the Chronic Care business in France that there have been some minor things happening on the Wound Care side last year, but it was -- the impact was negligible for us. That's where we are in France. So, there's no reform there at the moment. Yes, good morning. Thank you for taking my questions. First, on China, can you just clarify where you were in terms of growth here in the first quarter relative to your full year expectations for low single-digit growth in the country? And then second question is also to this Italian potential payback. So, can you give us some kind of guiding poll [ph] for the order of magnitude on this? Should we expect it to be roughly similar relative to the size of your business as what we saw and scientific provision for earlier this week, I believe they provisioned about the equivalent of 0.5% of full year sales for the last seven years in total? And then maybe a final question, if I may. Just given that the net financials were significantly higher this quarter, how should we -- what should we expect for the full year in terms of net financial items? Thank you. Thanks Christian. Why don't I get started with China and then Anders can comment on your two following questions? We came out of Q1 in China with low single-digit flattish Ostomy Care momentum and negative Wound Care, which was really also in line with expectations. And we are expecting that the trough is going to be here in Q2 on the back of the opening for COVID. Once we get better visibility on pace and inflow, we would expect that we would see some improvement. We also have a favorable baseline in the second half. But it's too early to become more optimistic on the outlook of China. I don't want to do that until I see a real change in our numbers, in particular, the patient inflow. Andres? Yes. So, good morning Christian. So, your question around Italy. So, what we have decided at least until now is not to communicate any numbers because it's still in process and there's still a lot of uncertainties around where we will land. But my expectation, as I said earlier, is that we will handle it within the current financial guidance. We expect it to be resolved sometime in the second half of this year. That's at least what I'm currently being told. So, that's how we see Italy. The third question around our net financials, I'm now expecting net financials for the year to be around minus DKK600 million, and it is more negatively impacted by higher interest rates. And now I'm expecting the blended interest rate to be around 2.6% due to higher interest in general versus 1.9% in the autumn. So, that's how I see the financial items for the year. Great. Thank you very much Kris and Anders. Maybe just a very quick follow-up on Italy. The outcome of this is this something that you will treat as a special item or how should we think about that? Hi guys, good morning and thanks for taking my questions. I'll keep it to two, please. One, Kristian, I would just love to get your thoughts on the competitive environment that you're seeing, especially in Continence Care. Obviously, we've seen one of your competitors bring out a couple of new products to the market recently. And I'd love to get your insights on what you're seeing in the UK and in France in particular, and any impact you're seeing from those? And then my second question is just a follow-up on China, and apologies for harping on this. But I guess you said you expect the trough in the second quarter. Are you seeing any signs of improvement at the moment? Or this is just mathematical and the assumption that we should be sort of thinking through is that really the improvement in growth comes through the easier baseline as opposed to an improvement in patient flows? Thank you guys. Thanks. Veronika. So, on the competitive environment, we're really not seeing much in UK and France. We have really strong momentum in both geographies. I was on the ground myself in the UK for three days last week. We -- of course, we keep an eye on all the products that come into the market. But like I think [Indiscernible] have talked about multiple times over the years, the impact in the market comes from a combination of product, long-term partnership with the health care professionals and a strong direct-to-consumer model. So, you need all that to basically make headways. And we are seeing good momentum for both the recent Flex Set launch and I'm expecting that LUJA will make a big splash in Europe. But really not much to report on the competitive side. When it comes to China, I mean, we are seeing early signs that access is improving. It is still limited, but it's too early to call any marked improvement, Veronika. On my main KPI for changing my view on China is what the new patient inflow is going to look like. And there, we're still at indexes, 80, 90 to pre-COVID, but once that starts to pick up, we'll also become more optimistic. Understood. And if I can just a quick follow-up on the supply chain issues that you've had in the collection devices and in Wound Care. I think historically, you've talked about these being resolved by that now. Obviously, this morning, it seems like you have another couple of months to go. Anything there that we need to worry about beyond the second quarter? The next question is from [Indiscernible] from HSBC. Please go ahead. Maybe unmute your line. We cannot hear you. Maybe try to dial it back in for another question. Hey, thanks for taking my questions. I have two. One was just on the development of cash in the first quarter. I think you mentioned the movement [Indiscernible], are you expecting that to sort of unmined by 2Q? Or is it going to be more back-end loaded sort of phasing through the second half of the year? And then the second one was just around, I guess, the expectation within raw materials in the bridge to 2022-2023. Where are you seeing the biggest sort of pressure points on raw materials at the moment? Thank you. Yes. So, thanks for those questions. In terms of our working capital, I am expecting it will improve during the year. So, I am expecting it will start to improve also from, yes, Q2 and onwards. In terms of your second question around raw materials. So, as I said earlier, you're still expecting our raw materials to be in the level of -- a price increase of around double-digit. And it is still quite broad-based across our main categories such as injection molding, film packaging, chemicals, and also primary packaging. And so it is really broad-based that we still see high price increases compared to last year. So, I have no changes to the underlying assumptions that we also laid out back in November. All right. Thanks very much and thanks for taking my questions. I have two questions. The first one is we've seen some growth of 11% in the Interventional Urology business and we've also seen some contribution from the US as well. So, my question is how is the reimbursement landscape in the US for this? More specifically, would it be affected by the Center of Medicare Services rule that caused the tougher auditing on the Medicare Advantage program? My second question is on backorder issue. You've been impacted by the backorder issue in Continence Care and Wound Care. Could you elaborate a bit more on this and talk about what are the raw material shortages that can that actually have been acting as a bottleneck? Thanks. Thank you for the question. I'm -- I'll try my best. I'm not sure I can fully answer your first question. We've got really good underlying momentum in the interventional business. We had that last year. We finished strong. We started strong. And it's broad-based across regions, also in the US. The products we sell are covered by insurance. And I've had no intel over the last quarters that we are in danger of reimbursement cuts on the products and procedures that are relevant to our business. But your question will lead me to do a follow-up. But with what I know now, no. On backorders, really, the situation has been we've had two main areas that have been -- where the business has been affected. One is on the Continence business in collecting devices, and this primarily been related to silicon and shortages in the silicon market. We've worked hard to get through that. We are through that. But once you get supply back, you have to work through a few months for things to normalize. That's what we are now. So, we're -- we feel confident that we're going to be through that by the end of Q2. And on the Wound Care side, the plans are also that we that we are going to get through these are sporadic material shortages that we'll get through also during Q2. So, with what I know now, I do not expect that to persist later into the year. Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you very much for joining and have a pleasant day. Good bye.
EarningCall_555	We will now begin the financial results briefing for the first nine months of the fiscal year ending March 31, 2023 for Mitsui & Co. Thank you very much for taking time out of your busy schedule to join us today. Todayâs presenters are Tetsuya Shigeta, the CFO; and Masao Kurihara, Global Controller Division; and I, the Head of IR, Tokoyoda will be moderating this session. CFO, Shigeta and Global Controller Kurihara will spend the next 15 minutes giving you a presentation. Then we will open up for Q&A. Presentation material is available on Mitsui & Co. website, investor information page for your reference. Before we begin, we would like to inform you that copy right of todayâs audio belong to us and our management company. Please refrain from reproducing or diverting all or part of the audio without permission for any purpose. Todayâs meeting will be recorded and will be available on demand on Mitsuiâs website at a later date. Good afternoon, Iâm Tetsuya Shigeta, CFO. Thank you for joining us today. I will begin with an overview of the operating results for the first nine months and full-year forecasts. I will then hand over to Masao Kurihara, Global Controller, who will speak on the results in more detail. In the first nine months of the current period, Mitsui continued to generate strong earnings and posted record profit and Core Operating Cash Flow or COCF, both on a single quarter and nine-month accumulated basis, through our globally diversified business portfolio. Based on this good performance, we are revising upward our full-year earnings forecast to JPY1.08 trillion. We are constantly aiming for healthy growth of shareholder returns, and will be making an additional JPY100 billion share repurchase, and will also be raising the dividend. Please turn to Page 3 of the presentation materials. I will provide a summary of operating results for the first nine months. COCF increased by JPY98.3 billion year-on-year to JPY961.2 billion, while profit for the period increased by JPY207.5 billion year-on-year to JPY840.8 billion. Furthermore, it resulted in solid progress from the previous forecast, announced at the time of the second quarter financial results. In-light of this solid progress, we have revised upward our full-year forecast. Compared to the previous forecast, we have increased our forecast for COCF by JPY70 billion to JPY1.2 trillion and profit for the year by JPY100 billion to JPY1.08 trillion. For shareholder returns, the year-end dividend is planned to be raised to JPY70 per share, bringing the full-year dividend to JPY135. Furthermore, we plan to set a minimum full-year dividend of JPY140 per share next fiscal year based on the JPY70 year-end dividend planned for this fiscal year. In addition to the JPY140 billion share repurchase currently in progress, we have decided to make an additional JPY100 billion share repurchase and extend the buying period. We will also steadily progress with the cancellation of these treasury shares. Please turn to Page 4. As you can see, each segment achieved solid progress toward the previous forecast. With regard to individual businesses, trading of raw and processed materials, and other products, automotive business, and healthcare business all continued to record solid performance. LNG trading in the Energy segment recognized losses related to derivative transactions for hedging and other factors in the first half in advance. During the third quarter, physical deliveries corresponding to hedging transactions were realized and timing differences were resolved, and the business returned to the black. Please turn to Page 5. As I mentioned at the start of my presentation, we have revised upward our full-year forecast for COCF to JPY1.2 trillion. We revised upward our forecast for the Energy segment by JPY60 billion, mainly due to LNG trading in which offtake volume from Cameron LNG increased. For the company as a whole, COCF was revised upward by JPY70 billion from the previous forecast of JPY1.13 trillion. Please turn to Page 6. We have also revised upward our full-year profit forecast to JPY1.08 trillion. We revised our forecast for the Energy segment up by JPY80 billion, mainly due to LNG trading in which offtake volume from Cameron LNG increased, and for the Mineral & Metal Resources segment by JPY15 billion, mainly due to commodity prices. For the company as a whole, the forecast has been revised upward by JPY100 billion from the previous forecast of JPY980 billion. Please turn to Page 7. In this section I will explain the cash flow allocation for the first nine months. Cash-in for the period was [JPY1.268 trillion] [ph], comprising COCF of JPY961 billion, and asset recycling of JPY307 billion, such as from the sale of the Australian metallurgical coal business, SMC, financial assets measured at fair value through other comprehensive income in the Machinery & Infrastructure and Lifestyle segments, and the Falcon power generation business in Mexico. Please turn to page 8. Reflecting the upward revision to the full-year forecast that I mentioned earlier, I will give an update on the cash flow allocation for the three years of the medium-term management plan. We are revising upward COCF to JPY3.02 trillion, and are expecting expansion in cash inflow. We expect we will have allocated JPY1.5 trillion to investments, JPY520 billion to the dividend, which reflects the increase in this fiscal yearâs full-year dividend to JPY135 per share, and JPY1.78 trillion to the management allocation. The Management Allocation of JPY1.78 trillion will be allocated in a balanced manner towards shareholder returns, growth investments, and strengthening our financial position. For shareholder returns, in addition to the decided share repurchases totaling JPY480 billion up until the end of the third quarter of this fiscal year, we have decided to make an additional repurchase of JPY100 billion. Of this JPY100 billion, the portion repurchased by March 31 will be designated as shareholder returns within the current medium-term management plan. I will now explain growth investments. The globally diversified business portfolio is the source of Mitsuiâs profitability. Leveraging this business portfolio, accumulated knowledge through growing and expanding existing businesses, and collaboration with trusted partners, we are promoting bolt-on type investments to existing projects and investments in adjacent areas. We are positioning such type of investments as core of growth investments. The allocation to growth investments during the period covered by the current medium-term management plan is expected to be accumulated total of JPY280 billion. Furthermore, there has been progress in investment pipeline projects and we expect to have cash outflows in the next fiscal year. As already announced, we plan to invest approximately JPY70 billion in making AIM SERVICES a wholly-owned subsidiary, and approximately JPY60 billion in the tender offer and business integration of Relia. In addition, as pipeline projects that at present negotiations have progressed and have a certain level of executional probability, we also have items related to energy transition, strengthening of natural gas value chain, strengthening healthcare and the creation of food and nutrition value chain. We believe growth investments that fully utilize Mitsuiâs strengths such as knowledge and networks accumulated over the years, will directly lead to the strengthening of our business foundation and the formation of business clusters with adjacent businesses, with a high probability of success. Also, we plan to temporarily allocate funds to enhance short-term liquidity in order to strengthen our financial position based on higher interest rates and increasing market volatility. Please turn to page 10. With regard to growth investments, I will explain the decision to make AIM SERVICES, a Japanese contract food service provider, a wholly-owned subsidiary as announced. AIM SERVICES is a contract food service company established as a joint venture between the Mitsui Group and US-based Aramark Corporation in 1976. The company has expanded its business from contract food services for offices and factories to contract food services and facility operation support for hospitals, other medical facilities, stadiums and entertainment facilities. At present, it has approximately 3,900 business sites across Japan, and provides approximately 1.3 million meals per day. Net sales were approximately JPY170 billion in the fiscal year ended March 31, 2022, and on a net sales basis, is ranked first in workplace dining and second for hospitals and other medical facilities. This additional purchase of JPY70 billion of shares to make the company a wholly-owned subsidiary will further strengthen and accelerate the expansion of its core contract food services business, and contribute to the enhancement of health and wellbeing through providing delicious and nutritious food. Furthermore, we will promote the formation of a wellness business cluster by combining the contract food service business with nutrition and healthcare businesses. Please turn to Page 11. Regarding the share repurchases and raising of the full-year dividend I just mentioned, total shareholder returns as a percentage of COCF for the three-year period for the current medium-term management plan is expected to reach our target of 33%. We will aim to continue to increase the dividend and also carry out share repurchases in a flexible manner corresponding to the stable improvement of our cash generating ability. That completes my part of the presentation today. I will now hand over to Global Controller Masao Kurihara for details of the performance in the first nine months. I am Masao Kurihara, Global Controller. I will now provide details of our operating results for the first nine months. Please turn to Page 13. First, I will explain the main year-on-year changes in COCF by segment. COCF for the period was JPY961.2 billion, a year-on-year increase of JPY98.3 billion. In Mineral & Metal Resources, there was a positive impact from higher metallurgical coal prices, but COCF decreased by JPY77.5 billion to JPY355.5 billion, mainly due to the decline in iron ore prices and the fall in dividends from Vale. In Energy, COCF increased by JPY123 billion to JPY275.9 billion, mainly due to an increase in oil and gas prices, and LNG trading in which offtake volume from Cameron LNG increased. In Machinery & Infrastructure, COCF increased by JPY45.5 billion to JPY158.7 billion, mainly due to higher dividend income from associated companies, primarily in the automotive and commercial vehicles related businesses. In Chemicals, COCF increased by JPY600 million to JPY72.5 billion. In Iron & Steel Products, COCF increased by JPY6.2 billion to JPY15.4 billion, mainly due to higher dividend from affiliated company. In Lifestyle, although grain trading and other areas performed well, COCF decreased by JPY2.3 billion to JPY31.2 billion, mainly due to the valuation loss on the fair value of the drug discovery support fund. In Innovation & Corporate Development, COCF decreased by JPY700 million to JPY34.4 billion. Other factors, such as expenses, interest, taxes, etc., which are not allocated to business segments, totaled JPY17.6 billion. Please turn to Page 14. I will now explain the main changes in profit by segment compared to the first nine months of the previous fiscal year. Profit for the period increased by JPY207.5 billion to JPY840.8 billion. In Mineral & Metal Resources, there was a positive impact from higher metallurgical coal prices, and a gain from the sale of SMC, an Australian metallurgical coal business, but profit decreased by JPY15.5 billion to JPY355.4 billion, mainly due to the decline in iron ore prices and the fall in dividends from Vale. In Energy, profits increased by JPY162.5 billion to JPY190.8 billion, mainly due to an increase in oil and gas prices, and LNG trading in which offtake volume from Cameron LNG increased. In Machinery & Infrastructure, profits increased by JPY38.9 billion to JPY131.1 billion, mainly due to good performance of the automotive and commercial vehicles businesses, primarily in North America. In Chemicals, although profits were reduced due to falling prices and rising costs in the North American methanol business, profits increased by JPY3.1 billion to JPY54.7 billion as a result of prices and sales volumes centered on fertilizer and fertilizer raw materials performing well. In Iron & Steel Products, profits decreased by JPY1.8 billion to JPY19.5 billion. In Lifestyle, profits decreased by JPY500 million to JPY42.3 billion. In Innovation & Corporate Development, profits increased by JPY7.5 billion to JPY49.7 billion, mainly due to gains on sales in the real estate business. Other factors, such as expenses, interest, taxes, etc., which are not allocated to business segments, totaled a loss of JPY2.7 billion. Please turn to Page 15. This page shows the main factors influencing year-on-year changes in profit for the third quarter of this fiscal year. Despite performance being driven by trading such as in LNG, commodity derivatives, chemicals, grain, etc. and the automotive and ship businesses, base profit declined by JPY23 billion due to decreases in dividends from iron ore and LNG businesses, and the absence of profit from fair value through profit or loss that was present in the previous fiscal year. Although costs decreased in the energy upstream business due to lower depreciation and a reduction in exploration costs, there was a decrease in volume in iron ore and coal operations in Australia and copper operations in Chile, and an increase in unit costs as a result of that volume decrease, as well as increases in fuel and labor costs. This resulted in a profit decrease of JPY41 billion under resources-related costs and volume. Asset recycling resulted in an increase of approximately JPY62 billion, mainly due to the sale of the Australian metallurgical coal business, SMC, and gains from the sale of assets in the real estate business in the United States and Singapore. In Commodity prices and Forex, profit increased by approximately JPY207 billion. For market conditions, despite the JPY65 billion decline in profit caused by falling iron ore prices, higher metallurgical prices resulted in a contribution of approximately JPY45 billion and increases in oil and gas prices contributed approximately JPY97 billion. Please turn to Page 16. Here we have a comparison of full-year forecast and the previous forecast, with a summary of the factors involved. Base profit is expected to increase by JPY122 billion, mainly due to trading of LNG and commodity derivatives, good performance of the ship business, and increased dividends from the LNG business. Resources related costs and volume is expected to reduce profit by approximately JPY10 billion, mainly due to a decrease in volume owing to factors such as tightening of the labor market and bad weather in the Australian coal and iron ore operations, an increase in unit costs arising from lower volumes, and increased labor and fuel costs. Asset recycling is expected to decrease by approximately JPY7 billion. Commodity prices and Forex is expected to increase by approximately JPY13 billion. Following revisions to the outlook for commodity prices, market conditions are expected to drive increases in profit of approximately JPY8 billion for coal, approximately JPY6 billion for iron ore and approximately JPY3 billion for oil and gas. In Forex, a decrease in profit of approximately JPY8 billion is expected, mainly due to the stronger yen. Valuation gain and loss is expected to decrease by JPY18 billion, mainly due to the impairment of fixed assets in the Brazilian freight railway business. Please turn to Page 17. Now, letâs take a look at the balance sheet as of the end of the third quarter of the current fiscal year. Compared to the end of March 2022, net interest-bearing debt increased by approximately JPY200 billion to JPY3.5 trillion. Meanwhile, shareholder equity increased by approximately JPY500 billion to JPY6.1 trillion. As a result, the net DER fell to 0.57x. Now we would like to open the floor for questions. [Operator Instructions] There are two questions. Page 9, [just for clarification] [ph], management allocation is [indiscernible] what I like to ask about, earlier, the balanced allocation was considered to explain about this [range] [ph], that's how I heard. So, 1.78 trillion, I will be evenly divided on one-third basis, and JPY100 billion for each and the JPY100 billion difference was for share repurchase, and the management allocation for the three-year period is now over. Is that what, [indiscernible] that's just for gratification. And Page 16 is the second question. The JPY110 billion, excluding one-time factor, just for three months, JPY110 billion is [crossing] [ph] earnings power cumulated. And of that JPY80 billion is from Cameron, that's how I understood. So, what is the background for Cameron, and also this base profit earnings power, the blue part business, including those can explain about the background? And also, sustainability of this base profit accumulation is something that I like to ask about, how long would it last? Well, to answer the second question. Global controller will supplement my answer after myself. And for the first question, what you understood is correct. But just to be in the safe side, I would say that shareholder returns JPY100 billion was added for share buyback, that has been decided, but in the medium-term management plan or by the end of March, what we can achieve is, of course, this is up to the brokerage firms, and discretionary for them. So, there's something that is not â that can't be told, but if you look at the proportionate portion 25 billion to 30 billion will be probably implemented by the end of this fiscal year. And in this, as you can see in the footnote in start, this is the cash flow. This is the performance in the cash flow allocation for this fiscal period. And as for [growth investment] [ph], what we can expect to be achieved is JPY280 billion, that it can be completed by the end of this fiscal year. And as [indiscernible], so there are things that we wanted to complete by this medium-term management plan, but some are carried over to the next period. So that would be probably JPY400 billion approximately that's in the pipeline. So that's how we are supposed to understand and then the remaining portion will be in the short-term liquidity. And to answer your second question, so from the base profit accumulation from the second quarter earnings forecast. So, the focus at the time of second quarter earnings briefing proved to be conservative a bit and maybe this has been reflected in this earnings for base profits accumulation and as for LNG trading Cameron, liquefaction or tolling business there is a constant fee based on the volume that can be obtained, and it's coming out from that will be sold in the market and that is the trading business. But as the demand supply situation becomes tight, the production needed to be increased as much as possible, and we focused on that. And so, the tolling production progress more than expected. And as a result, the offtake for us increased and the gross margin has resulted in the base profit increase and also LNG dividends has increased as well. And the energy projects that were responsible for each of those projects has been performing well. And dividends has increased each. And that's the second part. So, LNG business has been revised upwards and those are the two factors behind that. Global Control, will add some comments. So, as was explained, as a major factor, LNG trading, and LNG dividend, those are the two major factors. But in addition, commodity trading â in the commodity trading, the market volatility has been reflected properly in the business opportunity or revenue opportunity. And it has enhanced the profit. In the ship related business, the tanker market has been quite strong, which has increased profits. And a one-time factor in the tax refund was done in food and grain collection business in Brazil there was a one-time tax refund that was made, and in a coffee trading has recovered. And green trading has been also performing quite well. That's all. Thank you. Well, there's a follow up question. You talked about tolling businesses made more progress than expected. And your profit has increased as a result, based on that in Investor Day, the other day, LNG trading volume in March 2020, it was close to 10 million tons and tolling businesses progress. So, the volume has just simply increased from that. That's how I understood. So, what about the durability of sustainability? Of course, if the tightness of the supply demand of LNG is continued, then this level of volume, do you think that this can be maintained? So, can you give us your thoughts on how sustainable this will be? Well, for the near-term, if you look at the geopolitical risks that are manifesting themselves, LNG selling prices have been normalized for the short-term, but they have been maintained at the higher levels. But, for example, in Cameron business, the base gas is a [Henry Hub] [ph] price and even if you add tolling costs, the Asian prices have also followed the European prices, but spot prices between Europe and Asia has expanded and how long would it last? How sustainable would it be? Well, the current situation in this year, whether it will be continued for long, that is quite unimaginable, but it is not the preferrable situation, but if the geopolitical risks continues, that we are facing and the supply chain changes derived from those risks, and energy market volatility increase, if those who continued then there will be heightened needs for global supply demand adjustment. So, that's what we assumed and then the LNG trading business opportunity for us would be increased and our strength is that we own LNG ships and the shipper bottom tonnage allocation, and also users request can be accommodated. And there are business opportunities there. So, if you look at the margin itself, whether we can enjoy as much margin as we have enjoyed this year, but cannot tell, but continued profit opportunities will be there, and we can assume that. Thank you very much for taking my question. I have two questions. The first question is on LNG once again. The profit is more than what we had expected. In the fourth quarter, I believe the derivatives will progress and advance. And as we have been explaining, [can you have] [ph] the low gas price, and with LNG there was a difference that was resolved, and spot price is going back to the normal price range, and if that continues, timing wise, from the start of next fiscal year, I think you need to look at the price difference or I may be asking the same question once again, but we do not know how the prices will fluctuate. So, after the contracts, and its transactions complete, and should we expect it to go back to the previous price range? And when will the timing be? That was to be my first question. And my second question, the upward revision was announced this time. And in the fourth quarter, you are looking at about 240 billion. So, you're looking at higher prices. I mean, energy prices are high. So, what will be at your ability will be a question, but there may be some dark spots as well. I don't think there are any dark spots except resources. For example, in the U.S., you have a lot of businesses. And I don't think you are seeing it going down. So is that the correct perception? Thank you very much for your question. First of all, after the second quarter until the end of the first half, we had phase differences and that has been solved in the third quarter. And at the end of fourth quarter, there will not be any phasing that will go into the next fiscal year. That will be my additional comment I'd like to make here. When it comes to the [fourth quarter] [ph], the actual realization that volume there may be some seasonal factors, but it is quite large. So, the [fourth quarter] [ph] outlook is being included as a profit and the [fourth quarter] [ph] profit outlook group compared to other quarters is quite large when it comes to profit. And E&P and mining business amongst those businesses volume, time market, that is not how we calculate the profits. But we need to look at demand and supply and do trading on the spot. Therefore, how much of a profitability opportunity there will be and how much there will be when it comes to volatility, and the frequency of profit taking is going to differ so it's very difficult to do the calculation. But stable profitability if the management requires that the traders may have to take the risks and unexpected risks may be put on the trader. So that is something that we want to avoid. So, how much we will be able to take the opportunity to turn them into profit is something that we'd like to consider so that we can reap the profits. I'm sorry, I can't explain this well. However, I do believe this will not bring us big losses. However, for the sustainability of the profit that we have shown this quarter, I don't think that we have the same confidence that it will be sustainable, but there may be some contracts that is going to give us profits at a certain time, but that is not something that we have. We have a spot trading and also increasing production may increase spot trading, and how we can reap the profits in the market is something that we need to consider. So, it's very difficult to comment on sustainability in that sense. And when it comes to the fourth quarter, whether we see any darkness in the output, of course, in the trades, and also in the prices being very high for raw materials, for it to normalize, I think we are seeing some progress in those areas. However, to maintain the supply chain, and looking at data globally, by region or by product, there may be supply chain disruptions, and there may be some difficulties of maintaining the status. And many customers are having a difficult time. So, in the next fiscal year, we would like to continue with initiatives so that it will be included in the profitability base. In the U.S., for the fourth quarter outlook, automobiles is strong. That is something that we expect to continue. And as I explained earlier, of course, there'll be some adjustments when it comes to prices, like in chemicals trading, or in the manufacturing businesses. Compared to the previous quarters, the margins will be suppressed. So, as a whole, we don't see [darkness] [ph] ever as a whole, but that margin may be suppressed to a degree in some segments. And what will happen in the long-term, of course, we need to contribute to maintaining the supply chain so that weâll be able to utilize the ability of the companies so that we'll be able to turn them into profits in a continuous manner. Thank you. Thank you. I have also two questions. Firstly, as was asked, Page 9, management allocation. I like to ask for more. For the three years JPY1.78 trillion management allocation [indiscernible] and earlier, what you explained the following. In the shareholder returns JPY480 billion will be in the allocation, but JPY100 billion is just for March and that is included and gross investment 280 billion will be included, but the only at the bottom will be in the next fiscal year. So, the shareholder return JPY480 billion and [20 billion] [ph] in March probably, and 280 billion if you add all these up, and the management allocation of 1.78 only points [indiscernible] will be allocated for this fiscal year and the remaining 1 trillion will be in that short-term liquidity for the time being. So, what does this for the time being mean? That's my first question. And second question, the iron ore, the short-term increase or mid-term increase how do you see this increase in iron ore for the near-term? Well, thank you very much for your questions. First, how you should look at these numbers. Your understanding is exact and correct. So, for the time being means that there is uncertainty in recent months, and for the near-term, so we have to have more liquidity at hand for the short-term. And once the situation is resolved and alleviated, then the funds can be allocated for growth investment or shareholder returns. So, that's how we are planning to do. And that's the meaning behind for the time being [or once] [ph]. For example, net DER is 0.57 times, seven times, which is quite low. We have reduced this down to this small number. So this can be further reduced or leverage can be increased, but that's not what we're doing. But if you look at the current situation, and this is the decision that weâve made, and once the situation is gone, then we will consider how the funds can be used. That's the idea behind this. As for the shareholder returns, [25 billion or 30 billion] [ph] is incorporated in this medium-term management plan and the goal, the core operating cash flow 33% of that can be achieved, but the balance will be carried over as you [indiscernible] and for growth investment, we wanted to complete all the growth investment by the end of this March, but the JPY400 billion will be carried over. That's how I explained. And as for what iron ore prices, in China, there's COVID-19 or zero COVID-19 policy was completed, and this was also the reason partially, but if you look at the supply demand balance in the third quarter, if you look at the movements in the market that â with each of the producers there is cost incurred and given all these, to some extent in terms of prices, there might be some downward trend. That's how we are looking at the market. And so going forward, the zero COVID-19, if China sticks with the zero COVID-19, while the zero COVID policy was maintained, the prices did not decline that much. But going forward, once the Chinese economy recovers, then there is a certain level of increase in the market prices that can be expected, but on the other hand in the next medium-term assumptions to be incorporated will be discussed going forward and depending on the timing of the disclosure, we would like to decide which price levels to be incorporated. Thank you. For the first question, management obligation I have a follow-up question. In this medium-term plan, a 33% of the operating cash flow was target and actually the calculation shows that it was 34%, but management allocation there is an extra of [indiscernible] that will be in the liquidity for the time being and then this will be allocated to share buyback or shareholders [and our] [ph] growth investment. And then in the next medium-term management plan, the management the shareholder return will be more than 33%. But what about the one that is carried over from this fiscal year to the next fiscal year? How do you look at that, and how do you treat that? Well in this medium-term management plan and the next medium-term management plan there is a line drawn, we would like to separate between these two. So, in the next medium-term management plan, is this plan from the previous term or from this term? I think that question or discussion could be quite unclear. So, we just do align for this fiscal, for this medium-term management plan, and then we'll start a fresh, and 33% for this medium-term management plan brand, whether it was sufficient or not that â or in the next medium-term management plan, how we should treat that 33%. In addition to that topic of discussion, the financial position and liquidity at hand will be looked at and what will be the extra part that can be allocated to shareholder return, we need to start our discussion assuming that there should be some that can be allocated for shareholder return. Well, but after the three-year period was over, the free cash flow is [indiscernible] yen, so, net debt will be reduced, but liquidity will be increased because of these profits every year. So, ROE â if we are to maintain ROE at a certain level, then in the next medium-term management plan you have to have a certain level of shareholder return, ROE, in order to increase ROE are you having any discussions in that direction to increase ROE? Well, the perspective that you just shared with us is something that we are looking at internally in that and we have been repeating our discussions. And another perspective is that we have to have satisfaction or the gross investment level that can make sense to you. And also, the level and value, the scale of the growth investment that can make sense. And which should be prioritized is something that we are discussing internally and kept in terms of capital efficiency. ROE is one important index or indicator. So, we shouldn't just focus on any single metrics in our discussion. Thank you very much for taking my question. I also want to ask about management application about the contents of investments. From this fiscal year you made explanation, you talked about the bolt-on of the existing investments and also investments into adjacent businesses. So, at the start of the [indiscernible] as a strategic focus, you talked about the three areas when it comes to management, allocation, and when it comes to allocation, when it comes to gross investment, expanding the existing business will be the core. So, I think the turn of your explanation has changed and regarding these investments. I believe there is an impact on the investments going forward. In the management allocation, the explanation given around investments. So, returns corrected for investments are covered by the explanation and the weighting may change going forward. So, the status of your investments may change and may have changed. So, can you talk about your investment policy as a whole please? And upward revision was announced and progress rate was also mention and when it comes to cash flow and also for net profit, I think adjustments or revisions were made on a rounded manner. So, if you reflect the progress rate, what will be the gap between the announcements that you have made so far? That is my second question. As for your first question, [indiscernible]. The energy solution or healthcare nutrition and [market Asia] [ph], these are focuses that we have announced. And during this MTMP we have maintained that focus. How they tied to that next MTMP whether they will be sustained, that is still under discussion, there may be some changes, but they are still our focus when it comes to a strategic investment. And as for gross investments, each of the projects as we explain them, from the angle of strategic focus, instead of explaining from that angle, we want to talk about successor probability or as a pattern of winning. By showing user rationale, we talked about bolt-on investments and adjacent businesses. And from the existing partnership, we have deepened trusting relationships so that we'll be able to rely more on our partners and from that perspective, the expectations of such investment was explained starting this fiscal year. So, it is not as if the angle, the perspective on investment has changed, but the projects that are selected over the period from the point of profitability and growth for the future, et cetera. So, that is how we have made the sophistication of investments. And maybe we were off balance when we provided an explanation, but we believe that the core focus has not changed. I like to answer your second question. If you look at Page 4 of the presentation material please. So, when we look at the progress rate for Mineral & Metal Resources, the progress for the profit is 89%. For the fourth quarter, of course, we have revised the annual profit forecast, but SMC sales there was a JPY30 billion or sales. So that had made a big contribution to the progress rate and as far as iron ore and metallurgical coal, we are going to see deceleration. So, that is why we are looking at this figure and as for energy, we have given the explanation. So, I will skip. Machinery & Infrastructure, 75% progress. So, it is progressing steadily. So, this has been maintained. Next Chemical, 78% progress have been made. So, it is progressing well as well. As for iron and steel products [EV] [ph] and the volume decline has been included here. So the progress rate is a high at 98%. However, we maintain the original forecast. As for lifestyle, one-time profit up to the third quarter that came from tax refund, I mentioned earlier that is included. And grain trading was very steady. However, it is normalizing now. And when it comes to fashion and retail distribution here in Japan, they will be declined that is forecasted, that is all. Thank you. Thank you very much. Considering the time to end this discussion, we like to take one last question. The last questioner please. Thank you. I have one question. Page 15 and Page 16 [indiscernible], this is the reason for participation and this is the reason for the downward revision. So, what will be the resource cost trend, are you taking this royalty into account? And also what has been incorporated in this [price] [ph]? Well, thank you very much. So, it's a general answer that I can give you. The volume has declined and the cost per unit has increased. So, cost and volume could become the factors for profit decline. In terms of geography, in Europe, for example, the labor shortage has been preserved. So, there's an influence or impact from the inflation, [fuel] [ph] and labor costs has increased. And whether that would continue in the next fiscal year is a question and we talked about iron ore prices and future market prices, but as a producer and operator, they would like to â we'd like to leave this to sales. So, as a result in the net margin or the â in terms of impact on the business performance we like to keep close eye on that. That was a simple answer I would just give you. Thank you. Thank you very much. So, it is time. We would like to end the financial results briefing for today. Thank you very much for taking your time out of your busy schedule to join us today. Thank you.
EarningCall_556	Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom conference call for the company's fourth quarter 2022 operating results. [Operator Instructions]. For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within an hour after the conference is finished. Please visit CHT IR website, www.cht.com.tw/ir under the IR Calendar section. And now I would like to turn it over to Ms. Angela Tsai, the Director of Investor Relations. Ms. Tsai, please go ahead. Thank you. This is Angela Tsai, Director of Investor Relations for Chunghwa Telecom. Welcome to our Fourth Quarter 2022 Results Conference Call. Joining me on the call today are Harrison Kuo, our President; and Vincent Chen, our Chief Financial Officer. During today's call, management will begin by providing an overview of our business in the fourth quarter, followed by a discussion of our segment performance and the financial highlights. After, we will move on to the question-and-answer portion of the call. I'd like to please note our safe harbor statements. Thank you, Angela, and hello, everyone. Welcome to our Fourth Quarter Results Conference Call. To begin, we would like to send our best wishes to our peers as their merger plans were approved by the NCC in January. We believe the resulting change of the market landscape is positive to the telecom industry in Taiwan as the health of the market development for the strength and the overall 5G adoption in Taiwan could consistently maintain its stable growth. Under the new landscape, we will continue our focus on building ecosystems and creating long-term value for customers. As the market leader in terms of network quality, service quality and the subscriber number in Taiwan, we are confident in remaining ahead of our peers in all these aspects going forward. Now let's turn to Page 4 for an update on our performance in the fourth quarter. In the fourth quarter, our mobile revenue share and subscriber share climbed to 39.5% and 36.6%, respectively, achieving another solid period of growth on both year-over-year and quarter-over-quarter basis. In addition, the year-over-year increase of both revenue share and subscriber share also progressed in the consecutive quarter, affirming our strong leading positions in Taiwan's mobile markets, subtend by our notable growth momentum. Please turn to Slide 5 for a closer look and our mobile business. In the fourth quarter, our total mobile service revenue was up by 5.8% year-over-year, maintaining its year-over-year growth for 20 consecutive months, attributable to the upsale resulting from 5G migration and outperforming subscriber number increase. As of penetrations progressed, we absorbed an average 41% uplift in mobile monthly fees, attributable to consumers who migrate from 4G to 5G. In addition, we are delighted to see the increase of roaming revenue and the prepaid revenue during the quarter. The mobilized cross-border activities also contributed to the increase of prepaid subscriber numbers. Together with strong growth of postpaid subscriber numbers as well as the lowest of churn rate among our peers, our total mobile subscriber numbers, excluding IoT SIMs increased by 3.5% year-over-year. In general, our postpaid ARPU achieved 3.3% year-over-year growth in the fourth quarter, maintaining its upward trajectory for the seventh consecutive quarter. We are also delighted to report that both SPEEDTEST and Opensignal have commodities as the fastest 5G service provider in Taiwan recently. We are proud of the results, and we are continuing to provide first-class 5G network quality for customers to top up 5G migration. Moving on to Slide 6. You may find an update of our fixed broadband business. In the fourth quarter, our fixed broadband revenue increased by 3.7% year-over-year, and the subscriber number continues to grow as well. In addition, the accumulated setup for solid speeds of 300 megabits per second or higher increased by 51.9% year-over-year, mainly thanks to our promotion strategy which effectively accelerated our subscriber's migration to service and to higher service speed. By 2022, we were excited to see more than 70% of the package offers of CYBG upgraded their service speed. Now more than 60% of the adopters signed up for solid speed of 500 megabits per second or higher. Our fixed broadband ARPU thereby achieved 2.1% year-over-year growth in the fourth quarter, maintaining its upward trend for 14 consecutive quarters. In 2023, we will continue the momentum by rolling out another promotion strategy and further strengthen the incentives by lifting the upstream speed that tailed with 300 megabits per second studies from 100 megabits per second to 150 megabits per second, distinguishing ours from our peers. Now let's move on to the performance of our customer-centric business group. Slide 8 presents the revenue of our Consumer Business Group or CBG. In the fourth quarter, total revenue of CBG decreased by 2.1% year-over-year in spite of the strong growth of our core business. Mobile service revenue grew by 7.1% year-over-year, propelled by the increase of postpaid subscribe numbers and the steady 5G migration. While fixed voice revenue continued to decline as expected. Our total fixed line service revenue of CBG still in a slight year-over-year increase, thanks to the successful upsell propelled by the speed upgrade promotion packages as well as the FIFA World Cup broadband -- broadcast and the campaign in November. However, sales revenue decreased by 12% year-over-year, mainly due to the continued unstable iPhone supply during the quarter. Other revenue also decreased by 34.9% year-over-year, owing to the higher base resulting from the government subsidies for accelerated 5G construction in the fourth quarter of 2021. Slide 9 further illustrates our Consumer Business Group highlights. In the fourth quarter, our multiple-play packages continued to support the growth momentum of our CBG business. The subscriber numbers of mobile, fixed broadband and WiFi services altogether demonstrated a 28% year-over-year growth. In particular, our home WiFi device subscription number grew more than 1.5x on a year-over-year basis, testing our subscription-based revenue and sustaining the popularity of home-centric applications. The number of our video subscription that comprised of MOD and Hami Video, which are paid in monthly fees on an annual basis, rather than one time sign up, grew by 8.9% year-over-year in the fourth quarter, with growth mainly driven by Hami Video, thanks to the popular FIFA World Cup taking place in November. We were also delighted to see the related advertising revenue was 5 points more than that of the loss of FIFA World Cup third -- fourth year ago -- years ago, demonstrating our success in presenting our popular content to customers. Turning into 2023. We will continue the content engagement strategy with a focus on sports events and the exclusive channels to further enhance overall subscriber stickiness and contribution. Please turn to Slide 10 for an overview on our Enterprise Business Group performance. In the fourth quarter, EBG maintained its growth trajectory by demonstrating 2.9% revenue increase on a year-over-year basis, mainly attributable to the growth of our ICT business, particularly in IDC, service delivery, 5G networks and big data services. Also, our EBG mobile service revenue increased by 3.3%, driven by 5G upselling and the increase of customers. Other revenue also increased by 46.8% year-over-year, mainly due to the equipment sales driven from subsidiaries. Additionally, we see the digital transformation trend and its opportunities continue to jump up data communication and broadband assets revenue to grow by 5.4% year-over-year, especially the speed upgrade demand from enterprise and schools although fixed line revenue kept flat year-over-year in the fourth quarter, affected by the decrease of revenue. Slide 11 illustrates our enterprise business highlights. In the fourth quarter, our total enterprise emerging application revenue increased by 8.8% year-over-year as most of our major applications demonstrated double digits year-over-year growth rate. 5G private network revenue delivered a multiple-fold growth, mainly due to the increased accumulated projects but in recurring revenues. In addition, we are evolving the 5G private network business model by providing leasing arrangements for enterprise to recurring revenue. We were delighted to report that the 5G private network leasing arrangements gained popularity in the PCB industry in the fourth quarter and is expected to extend to other verticals going forward. For IDC, big data and cyber security services, we are delighted to see year-over-year revenue growth by 45%, 37% and 17%, respectively, owing to the increased demand of digital transformation and opportunities. In the fourth quarter, we successfully leveraged our big data analysis, information, security and blockchain technologies to deliver integrated solutions for the insurance industry. In addition to the Big Data platform, government for insurance regulatory oversight, we also helped the industry to consolidate our clients across different insurance companies, owning by the same policyholder to streamline reinvestment process. Slide 12 illustrates our international business performance. In the fourth quarter, our international business group revenue decreased by 7.1% year-over-year, mainly due to the higher base of other revenue recognized in the fourth quarter of 2021 related to ST-2 compensation. Excluding the non-recurring impact, IBG revenue in the fourth quarter maintained its growth momentum and increased by 19.7% year-over-year, mainly driven by emerging business revenue and the fixed broadband revenue due to strong demand for IDC and the cloud services from global clients. In December, our technical support center in Malaysia has officially started operating for -- to fully support business expansion in the Pacific home market. Let's start with Slide 14, income statement highlights. For the fourth quarter of 2022, while revenue generated from our core business increased by 2.3%, total revenue decreased by 0.7% on a year-over-year basis, mainly attributable to decreased sales revenues resulting from the shortage of handsets. Net income decreased by 2.2%, primarily due to sales decline and the grant of government subsidy for the acceleration of 5G deployments in Q4 of 2021. Meanwhile, our EBITDA margin increased to 35.05% from 34.82%. For full year results, we were glad with total revenue increased by 3% compared to 2021, driving by growing core business, including mobile, ICT and broadband services. Income from operations and net income grew by 4.2% and 2.1% on year, respectively, mainly due to our robust core business and growing ICT business. EBITDA margin rose from 39.59% to 39.80%. Now move on to Page 15 for balance sheet highlights. Total assets at the end of 2022 increased by 2.1% on year, mainly driven by the increase in cash and cash equivalents as a result of cash proceeds from issuance of sustainable bonds as well as decreased negotiable certificates of deposits. Total liabilities increased by 6.5%, primarily attributable to increase of bonds payable and revenues and deferred government grant income. Our balance sheet remains strong and that debt ratio stays below 25% and net debt over EBITDA is 0. Page 16 presents the summary of our cash flows. Cash flows from operating activities increased by 1.4% on year mainly due to higher net income arising from our strong operating performance. As for capital expenditure, the amount of mobile and nonmobile CapEx combined decreased by 10.7% on-year, of which mobile-related CapEx was reduced by about 18% year-over-year as 5G capital spending was peaked in 2021. Additionally, relative to 2021, free cash flows increased by 12.4%. Overall, our robust cash flows together with strong balance sheet enable us to still see expanded uncertainty and focus on long-term value creation. On Slide 17, we provided a table that compares our financial results with our financial guidance. In the fourth quarter of 2022, key performance measures such as revenue, net income and EBITDA meet or beat our financial forecasts. For the full year results, all performance measures exceeded our guidance with operating income and net income within our projections by a modest margin. Turning to Slide 18. Please see our guidance for 2023. Looking ahead, total revenue for 2023 compared to 2022 is expected to increase by between 2.1% and 2.8%, primarily driven by growth momentum in our core business that benefit from 5G migration and broadband upgrades. ICT business also contributed as we expect growing emerging services to meet customers' demands for digital transformation and its opportunities. Operating costs and expenses for 2023 are expected to rise by 4% as a result of net investments impairment and infrastructure that supports future business development in core and emerging businesses. Given these projections, we expect our EPS to be in the range between TWD 4.45 and TWD 4.65. As for capital spending, we budget TWD 35.32 billion for 2023. Mobile-related CapEx accounts for 1/3 and represents an expected decrease of about 13% on year. Non-mobile related CapEx, which comprise of investments in fixed line network, IDC and supplement cables is expected to increase by 32% on year to support business expansion in mentioned business. Thank you, Vincent. We have always considered ESG while operating our business, and the next page demonstrates our ESG efforts. Our ESG efforts have been widely recognized by both domestic and international organizations and rating agencies such as Dow Jones S&P Global, Forbes and The Asset. Before I expand our influence, in the fourth quarter, we launched a Green ICT Supply Chain, joining hands with 45 key suppliers to power net zero emissions. We also partnered with KIPP inspired school of Taiwan to reach out to cities that have a relative lack of teaching resources to help facilitate online meaning. We believe these new developments are key to our success and the long-term growth, and we will continue to focus on ESG development going forward. This concludes our prepared remarks. Thank you for your attention. And this time, I would like to open up our conference call for questions. Two questions, please, both on the mobile side of the business. You mentioned that you're pleased with the recovery in roaming and prepaid. Is it possible for you to quantify the contribution that made. And if you expect that to continue to increase through 2023. The second question relates to 5G. Obviously, a large number of customers have now moved to 5G tariffs. So what level of revenue growth do you expect this year on the 5G side? And also, what level of contribution do you expect from some of the new corporate services you mentioned such as the 5G private networks? Thank you, Neale, for your questions. For the first question about the prepaid, right, so briefly, we don't provide numbers on our prepaid in terms of revenue or subscriber space. But with the total reopenings so it was back to growth in revenue and subscription will grow in prepaid subscribers. And this is quite positive because we have seen there is a huge demand for overseas travels, and we will also grow out the promotion packages to our customers and not only the outgoing but also the incoming travelers. And for your second question about 5G, right? So basically, this year -- sorry, last year, we're very pleased about our performance about our mobile business. So for the -- not only for the revenue -- total revenue growth in mobile business but also uplift from the margin migration. So we don't disclose openly about our internal data, we're still quite optimistic, and we believe in terms of the progress of our 5G penetration rate, actually, the market has been developed in a positive and steady manner, and we believe that will contribute to our revenue modestly. Got it. Could I just follow up on the roaming side? So I understand you don't disclose the exact numbers. But in the fourth quarter, was it pretty much back to pre-pandemic levels in terms of roaming service revenue? So it is now going back to the impact -- not yet to pre-pandemic level yet, but we expect we'll recover about like 70%, 80%, yes, for this year. Yes. So I have two questions. First is that how is the margin of the enterprise ICT business? And then my second question is that I understand the ICT or enterprise business still requires investment. So we do see increase in OpEx and CapEx in 2023. So any time line or expectations for the ICT business through the earnings quarters or how shall we think about EBITDA and net margin going forward? Okay. So for the margin for the enterprise business, right? So it's about -- I think it's about 20% or so, yes. So it depends on the individual projects. It's about that level. What's encouraging is actually our ICT margin has gone up last year. And also for the time line for us to provide the margin and EBITDA numbers, right, so we will provide it starting from first quarter next year -- this year, yes, 2023. I had a follow up on the supply chain. I know some of the delays. So you mentioned that the handset revenue was down a little bit due to weaker handset suppliers. And I think some of the CapEx was also deferred into this year. Do you -- is that improving? How much visibility do you have on that? Do you expect to see continued issues this year? Or can you see that improving? So basically, the supply chain interruption issue has been reviewed recently. But to the extent of whether how soon or to what extent it goes back to the normal level, we are still unsure. So it depends on the situation. [Operator Instructions]. And if there are no further questions, I will turn it back over to President, Kuo. Please proceed. Thank you. Thank you, President, Kuo, and we thank you for your participation in Chunghwa Telecom's conference. There will be a webcast replay within an hour. Please visit www.cht.com.tw/ir under the IR Calendar section. You may now disconnect. Goodbye.
EarningCall_557	Welcome to the Carlsberg's Full Year Results for 2022. For the first part of this call, all participants are in a listen-only mode, afterwards, thereâll be a question and answer session. [Operator Instructions] This conference call is being recorded. Good morning, everybody, and welcome to Carlsberg's Full Year 2022 Conference Call. I am Cees Â´t Hart, and I have with me our new CFO, Ulrica Fearn; and Vice President of Investor Relations, Peter Kondrup. Before we go into all the details of 2022 and the 2023 outlook, I would like to welcome Ulrica Fearn who, as you know, joined us only five weeks ago. We are pleased to have Ulrica onboard. And as Ulrica will join us on our road show in the coming weeks, many of you will have the opportunity to meet her in person. At this call, I will go through the key headlines and the regions, and Ulrica will take you through the financials and the 2023 outlook. Let's now look at the financial performance, please turn to Slide 3, and some of the many headlines for the year. 2022 was a challenging year due to the war in Ukraine, rising input costs and COVID-19, particularly in China. The war in Ukraine has had a profound impact on our business both from a humanitarian, operational and financial perspective. Because of the Russian invasion of Ukraine, we decided in early March to do a strategic review of our long-term options in Russia and is led to the difficult but necessary decision to sell our Russian business. Regardless of these challenges, the group delivered a very strong set of results with revenue growth of 15.6% to DKK70 billion. Note that these figures exclude the business in Russia, which is no longer part of Central and Eastern Europe but reported separately as business held for sale. We delivered all-time high operating profit of DKK11.5 billion while at the same time increasing marketing investments by 19% organically, corresponding to DKK1 billion. Thanks to the very strong cash generation, we returned DKK7.8 billion to shareholders through dividends and share buybacks. This morning, we announced another increase in dividends of 13% to DKK27 per share. We are very satisfied to end SAILâ22 on such a strong set of numbers, and we are well prepared to deliver on the growth priorities of SAIL'27. Please go to Slide 4, where we take stock of the financial achievements since we launched SAIL'22 in 2016. The group's financial health is strong. When we launched SAILâ'22 in early 2016, it was with the ambition to invest in and develop our portfolio, geographies, capabilities and winning culture in order to deliver consistent organic operating profit growth through top line and margin improvements, improve ROIC and increase the annual cash returns to our shareholders. As you can see from the chart on this slide, we have successfully delivered on all key financial metrics. Despite the war, the significant commodity price increases in COVID, we have achieved strong earnings growth and cash flow while increasing marketing investments by more than 25%. We have achieved these results, thanks to our highly engaged people and the significantly improved strategic health of the group. We have strong market positions and strong brand portfolios in our key markets. We have clear strategic priorities. We have invested behind our key growth drivers in terms of brands and markets. We have embedded the Funding the Journey cost focus across our markets and functions, and we have significantly strengthened our capabilities. The organizational health in Carlsberg is very good. Our purpose of brewing for a better today and tomorrow is clear and well understood. Our purpose-led and performance-driven culture is well embedded. Our employee engagement and commitment are high, and we have a strong ESG agenda with ambitious target. As we deliver the final year of SAIL'22, it's therefore safe to conclude that the group is in a good place with a strong financial, strategic and organizational health. Building on this resilient foundation and with the clear long-term strategic direction set out in SAIL'27, we are confident that we will continue to deliver appealing top and bottom line growth and value creation for our shareholders and our stakeholders. Please turn to Slide 5 and performance of our international premium brands. As presented at the Capital Markets Day in Copenhagen in September, a key growth and value driver in SAIL'27 is to step up in premium. Notwithstanding the current macroeconomic environment, we continue to trust in the long-term opportunities for premium both for international premium brands and local premium brands. We saw a good development of most international premium brands. Carlsberg grew by 14%, driven by Asia and key European markets. Tuborg grew by 9%, also driven by Asia, especially India and Vietnam. Brooklyn grew by 42%, achieving good growth in most Western European markets, supported by the launch of Brooklyn Pilsner. Blanc delivered good growth in many markets, including Switzerland, Denmark, Malaysia, Vietnam and the Baltics, but due to the war in Ukraine and lockdowns in China, the brand declined by 4%. Somersby grew in markets such as Denmark, U.K., Laos and the Balkans and in China, where we launched Somersby 2021, volumes tripled. However, total volume growth of 1% was impacted by the war in Ukraine. Excluding Ukraine, Somersby grew 5%. Several local premium brands, Jacobsen in Denmark, Eriksberg in Sweden and Wind Flower Snow Moon in China delivered solid growth. Please turn to Slide 6. The growth of our alcohol-free brews continued in our Western European markets as penetration of the alcohol-free option continues to increase. The Western European region delivered 7% volume growth, driven by brands such as Total, Somersby 0.0 and Carlsberg 0.0. As Ukraine is a large market for alcohol-free brews, total volume growth was impacted by the war. Excluding Ukraine, total alcohol-free brew volumes increased by 1%, impacted by lower volumes in some export and license markets. Including Ukraine, volumes declined by 6%. Digital is a key focus area in SAIL'27 that we will invest more in, for example, in rolling out our B2B e-commerce platform, Carl's Shop, which is currently live in 11 markets across our three regions. There was a continued positive momentum on the platform, and revenue increased by 51%. In Western Europe, revenue per hectoliter on Carl's Shop increased by 6%. Our e-commerce revenue grew by 42%, mainly driven by strong growth in China, our most advanced online retail market. In Western Europe we improved our online market share in several markets, including the Nordics, France and the U.K. Slide 7, and an overview of our enhanced ESG program Together Towards ZERO and Beyond, which we announced in August 22. Together Towards ZERO and Beyond reaffirms our commitment to help tackle global challenges and raises our ambition level even further, addressing a wider array of material topics to create a more holistic ESG program. When we launched our previous program Together Towards ZERO and Beyond in 2017, we set a number of targets for '22 against the 2015 baseline within the areas of carbon emission, water, health and safety and responsible drinking. Evaluating our accomplishment against these '22 targets, we have delivered on two out of three targets for carbon reduction at our breweries. We exceeded our target to reduce CO2 emissions at the breweries by more than 50%, reaching a reduction of 57%. Looking at renewable energy sourcing, we now source 100% renewable electricity for our breweries in Western Europe and Asia, but we have not met our 100% target globally, achieving 92% in 2022. This is due to lack of availability of certificates in four Eastern European countries where we will continue to explore alternative solutions. Looking at water, we have cut the amount of water we use from 3.6 to 2.5 hectoliter for every hectoliter of beer produced. This equals a 31% reduction, beating our 25% reduction target for '22 and making us one of the most efficient major brewers in the world. We are working hard to create a safe environment by making improvements each year on a steady course towards zero accidents, and we have cut our lost time accident by 41%. The changing behavior takes time, and we still have work to do in embedding our zero accidents culture across all our markets. And now to the regions. Please turn to Slide 8, and Western Europe that experienced a volatile year with a strong H1, thanks to the on-trade recovery at a weaker H2 due to the continued increase in commodity and energy prices and price increases lagging the cost increases. Revenue per hectoliter increased by 8%, mainly driven by the positive channel mix in H1 and related positive brand mix. Despite the on-trade recovery, our on-trade volumes are still around 10% below 2019 levels. To compensate for the significant commodity and energy cost increases, we took price increases in most markets during Q1 and Q3. As our costs will continue to go up in 2023, we will need to take more pricing during this year. Revenue in 2022 grew organically by 13.8% and operating profit by 12.6% supported by the on-trade recovery. Looking at the markets, volumes in the Nordics grew by mid-single digit, mainly driven by high single-digit growth in Denmark and Sweden. In Denmark, our business benefited from strong on-trade recovery, especially in H1. After two very strong years in 2020 and '21, volumes in Norway declined by mid-single digit as borders reopened and cross-border trade and travel restarted. Our Swedish business delivered good volume and revenue per hectoliter development. The business benefited from the reopening of the Norwegian border and the on-trade recovery. In France, volumes grew double digit in a slightly declining market. Revenue per hectoliter was up by a mid-single-digit percentage with good growth of our premium beer portfolio and alcohol-free brews. Volume growth in Switzerland was in the high teens, driven by the recovery of the on-trade being an important channel for us in Switzerland. Key growth drivers were Feldschlosschen, including the alcohol-free variant, then Valaisanne and the Pepsi portfolio, which has been part of our portfolio since the beginning of 2022. Volumes grew slightly in Poland. Revenue per hectoliter increased significantly due to the several price increases taken to offset significant cost price inflation. We saw good growth for our local mainstream brands and Garage, while the flavored category declined as consumers traded down into mainstream and lower mainstream lagers. In the U.K., we had a good H1, supported by the significant rebound of the on-trade. During H2, we experienced an increasingly challenging trading environment with consumer behavior being impacted by the high inflation. Volumes for the year grew mid-single digits but declined in H2. Slide 9 and Asia, where we achieved very good results, supported by market recovering after the many COVID restrictions in 2021. Volumes grew by 10.3%. Growth was stronger in H1 than in H2 because of the impact from cost restrictions in our China footprint from August. Revenue per hectoliter improved by 8% as a result of a positive channel mix, premiumization and price increases, the combination of which led to a high organic revenue growth of 18.8%. Reported revenue grew by almost 22% due to a positive ForEx impact, mainly from China which more than offset the depreciation of the Laotian kip and deconsolidation of Nepal. Organic operating profit grew by 11.2%. In China, volumes grew by 2% in a flat market and revenue per hectoliter grew by 3%. While we continued to have good momentum for our growth priorities, including expanded distribution, the international and local premium portfolio and the big city strategy, we were more impacted by local COVID restrictions and lockdowns in our strongholds and big cities in H2 and especially in Q4 than in H1. This is the reason why volumes in H2 declined by 3%. Looking at our brands in China, Carlsberg and Tuborg did very well, while 1664 Blanc was impacted by the nightlife restrictions and WuSu by lengthy lockdowns in its home province. There was a limited impact in December from sell-in to the '23 Chinese New Year, as this happened in January 2023. Shipments in January were largely as expected, but we do not yet have a good view on consumer offtake during the New Year celebrations, and it is therefore too early to give a firm indication on how the New Year celebration is planned out in China. We will only know this once we get the sellout data from distributors in February and early March. In Vietnam, we achieved more than 25% volume growth in a market that grew by more than 20%, strongly recovering from the previous year's COVID restrictions. Our volume growth was driven by the Huda brand and our international premium brands, benefiting from our strengthened routes to market and a significant increase in marketing investments, especially behind our international premium brands. Our Indian business delivered more than 30% volume growth, supported by easy comps and warm weather. We had a solid revenue per hectoliter growth, thanks to strong growth of Carlsberg, Tuborg and packaging mix. Despite the challenging macroeconomic environment, our business in Laos delivered a strong set of results with around 20% volume growth, supported by easy comps. All other markets, except Hong Kong delivered very good volume growth. Slide 10 and Central and Eastern Europe, where we had a very difficult year due to the war in Ukraine. Despite a substantial volume impact in Ukraine, regional volumes were flat. Excluding Ukraine, volumes grew by 5%. Revenue per hectoliter was strong at 15%, driven by price increases, a positive channel mix due to the on-trade recovery in Southeastern Europe, brand and country mix. Revenue was up organically by 14.7%. Operating profit and operating profit per hectoliter were flat due to the significant commodity and energy cost increases. It was a terrible year for our Ukrainian employees, who have shown incredible strength and resilience, delivering an outstanding effort while, at the same time, navigating their very difficult situation. The safety, health and well-being of our people will always come first. And therefore, we suspended production at our three breweries and stopped operations in the country in late February and early March. However, at the recommendation of our local employees, we restarted production during Q2 2022. Due to the market decline and the suspension of operations, our volumes declined by 20%. Revenue per hectoliter was positively impacted by fewer promotion activities, a positive channel mix and pricing, while cost of sales was up significantly. Our volumes in Southeastern Europe grew by high single digits, driven by double-digit growth in Italy, Greece, Croatia and Serbia. Growth in all markets was supported by easy comps and increased tourism. Revenue per hectoliter improved in all markets due to price increases, a positive channel mix from the improved on-trade and positive brand mix. In Kazakhstan and Belarus, volumes grew low single digit. Revenue per hectoliter increased significantly due to the high price increases in the inflationary environment and a positive brand mix. The export and license business delivered solid growth, mainly driven by good performance for Tuborg and Carlsberg in many larger markets. In December, we announced the intention to acquire Waterloo brewing in Canada. We're excited about this acquisition, which will enable us to integrate our local sales subsidiary with Waterloo and by that strengthen our market position and reduce transport costs. Please go to Slide 11 and a few words on Russia before I hand over to Ulrica. We announced our intention to sell our Russian business on the 28th of March. It has been and continues to be a highly complicated task to separate and prepare the Russian business for divestment, involving more than 150 separation projects. As part of the separation, we are investing more than DKK100 million in CapEx in Eastern Europe related to IT and the new accounting line and expanding the regional office as some regional functions were previously managed out of Russia. Alongside the separation process, we initiated the necessary steps for divestment, including a process to clarify the impact of sanctions and the Russian government's approval process, select advisers, identify potential buyers and formalize the sales process. A careful screening process is underway to evaluate the bidders' appropriateness to participate in any transaction. We will take the needed time to execute the separation and the divestment to seek the best possible solution for all stakeholders, in particular, our more than 8,000 Russian employees and our shareholders. At this time, we aim at signing a divestment agreement by mid-'23. In the accounts, Russia is presented separately as discontinued operations held for sale. Volumes in Russia declined by 3%, reported revenue grew by 56% to DKK10.2 billion due to significant price increases and the appreciation of the Russian ruble. The net result was minus DKK8.1 billion, impacted by the write-down of DKK9.9 billion. The net asset value amounted to DKK7.5 billion. The decline of DKK2.1 billion compared with June, 30 was mainly due to the depreciation of the ruble during H2. Well, thank you very much, Cees, and hi, everyone. As you've already heard, my name is Ulrica Fearn, and I joined Carlsberg on the 1st of January. And I'm very excited about this opportunity and I'm looking forward to getting to know the company fully and also contribute to the continued positive development in momentum of Carlsberg. And my first impression is very positive. I'm impressed by how well the performance-driven and commercial culture and also the cost focus is embedded in the company. So, a few words about myself before I go through the numbers. I joined Carlsberg from Equinor, where I was the CFO. And before that, I was Director of Group Finance at BT Group, and my career started in Diageo, where I worked for almost 20 years in various senior finance treasury roles as well as generic management and operational roles across several regions and markets. So, I hope to get to know you a little bit closer in the months to come. So, with this short introduction, I will now go through the headlines of 2022. So please go to Slide 12 for a few words on the P&L. Revenue was up organically by 15.6%, driven by volume growth of 5.7% and a 9% growth in revenue per hectoliter. The latter is driven by positive channel mix in many markets as well as the positive brand mix and price increases. In reported terms, revenue was up by 16.9%. The positive currency impact of 2.2% was mainly due to the strengthening of the Chinese and Swiss currencies, which more than offset the depreciation of the Laotian kip and Ukrainian currency. A small acquisition impact of minus 0.9% was due to the deconsolidation of the Nepalese business. Operating profit was strong at DKK11.5 billion. Organic operating profit growth was 12.2%, while reported growth was 13.2% due to a positive currency impact offsetting the small negative impact from the deconsolidation. Looking above operating profit, cost of sales per hectoliter was up by 13% due to higher commodity and energy costs. But thanks to the good growth in revenue per hectoliter, gross profit per hectoliter increased organically by 5%. Reported gross profit increased by 11.3%, while gross margin declined by 190 basis points to 45.6%. In years with high inflation, I very much support the focus on offsetting the absolute cost increases through the higher revenue and continued focus on costs using our OCM toolkit and driving the Funding the Journey culture. Total OpEx increased by 13%, while OpEx as a percentage of revenue was down by 70 basis points despite significantly increased marketing investments of 19%. OpEx was also impacted by higher logistic costs on the back of the on-trade recovery and higher annuity price. Operating margin was 16.3%, and this is a decline of 60 basis points. A few specific comments on performance in half two, where operating profit declined organically by 5% compared to the 32% growth in half one. And this was expected and as flagged in half one and Q3 due to several factors. Firstly, there was a time lag between commodity and energy cost increases and our price increases, especially in Western Europe. Secondly, because of the financial health of our business, we have the capacity to invest, and we were confident to increase sales and marketing spend across all regions, but most significantly in Asia, especially Vietnam and China. Thirdly, we had tougher comps in half two, where half one was still benefiting from easy comparable in half one 2021, which was still impacted by COVID restrictions. And fourthly, there was a softening in the on-trade in Western Europe in Q4, mainly in the U.K. Special items amounted to minus DKK784 million, a main contributing factor was the DKK700 million write-down of goodwill in Central and Eastern Europe. Net financial expense was DKK725 million. Excluding FX, net financials amounted to minus DKK506 million compared to minus DKK333 million in 2021. The increase was mainly due to a reversal in 2021 of the previous write-downs of the loan to our partners in India. Average funding cost was slightly lower, and interest expense declined accordingly. The tax rate was 17.9%, impacted by noncash one-off adjustments of around DKK400 million. Excluding these one-offs, the effective tax rate was approximately 22%. The net profit for the group was minus DKK1.1 billion, impacted by the write-down of goodwill in Russia and Central and Eastern Europe. Adjusted net profit, and that is net profit adjusted for special items after tax in both the continuing business and in Russia, was DKK9.7 billion and an increase of 40%. This strong performance was driven by the operating profit growth and the lower tax rate. Adjusted earnings per share from continuing operations increased by 24% to DKK55.7. So now please go to Slide 13, and some comments on cash flow and net interest-bearing debt. Operating cash flow was DKK12.9 billion as a result of the higher earnings and a positive contribution from trade working capital of DKK1.9 billion. This was partly offset by the change in other working capital of minus DKK465 million, impacted by higher VAT payables. Looking at the average trade working capital to revenue, this ratio was strong at minus 21.5%. Free cash flow was never strong at DKK9.9 billion. CapEx was DKK4 billion on par with 2021. Net interest-bearing debt of DKK19.5 billion was on par with last year, with free cash flow offsetting the DKK7.8 billion cash recurrence to share. So now to Slide 14 and a follow-up on our capital allocation priority, which was set in 2016. These priorities are well embedded and also part of SAIL'27. Our first priority is to ensure sufficient investment in the business to secure sustainable long-term growth. As already mentioned, marketing investments increased by 19%. These investments were made in support of our SAIL'27 priority. The strong financial results gave us the capacity to invest, making it possible to even accelerate some growth investments, for example, in Vietnam. We also stepped up on our ESG initiatives. Our second priority is to have a leverage below 2 times. With a leverage ratio of 1.23, we remain well below this target. We are currently operating with a conservative leverage due to the likely acquisition of our partners' ownership of the Indian holding company. In addition, we are facing an uncertain 2023 related to consumer sentiment, the war in Ukraine and COVID recovery in China. And we will also have around DKK800 million cash out related to the Waterloo acquisition in Q1. Our third priority of an adjusted dividend payout ratio of around 50% was realized in March when we paid dividend of DKK3.4 billion equal to 49% of the adjusted net profit for 2021. For 2022, the Supervisory Board will recommend an increase in the dividend per share of 13% to DKK27, equal to an adjusted payout ratio of 48%. Excluding the previously mentioned one-off tax adjustment, this adjusted payout ratio is a little over 50%. Our fourth priority is distributing excess cash to shareholders. In 2022, we carried out share buybacks totaling DKK4.4 billion and at an average share price of DKK926. Despite the strong free cash flow and low leverage, the Supervisory Board has decided not to initiate a new share buyback for this quarter due to the recent developments in the put and core process related to our partner ownership in the business in India and Nepal. According to the shareholders' agreement, the put option price for the partner 33% shareholding has now been determined by the valuators at a value of $744 million or approximately DKK5.1 billion. This value is the simple average of valuations done by two external valuators, one appointed by us and one by the partner. And yesterday, our partner exercised this put option. And we will now evaluate the detailed assumptions and the valuation before deciding next step. Look to Slide 15 and the outlook. 2023 will be an uncertain year, firstly, with regards to pricing and consumer behavior. We are in unprecedented inflationary environment with an expected total increase in our cost base of around DKK10 billion over two years. In 2023 specifically, we expect a low teen increase in cost of sales due to less favorable hedges in 2023 compared to 2022. We also expect an increase in operating expenses due to higher logistic costs, further overall inflation in the rest of the cost base, and we will further increase marketing investments. We seek to offset this higher cost per hectoliter through pricing and mix, and we are in the process of increasing prices across our markets. And we will also use our OCM tool to ensure we maintain our rigorous approach to cost management and also continuing our disciplined approach to resource allocation. As I already mentioned, I am impressed how strongly this cost focus and disciplined lead integrated in this company culture here at Carlsberg. And while the beer category is generally a resilient category, significant price increases combined with the overall high inflation may impact consumer behavior, and subsequently, volumes, channel and brand mix, particularly in Europe. And we believe that we are well prepared. We have a strong brand portfolio with different price points that takes a different consumer choices. It is very early days, but we are currently seeing in terms of down-trading, mainly in Poland. With regards to the negative channel mix, it is mainly in the U.K. In some other markets in Western Europe, the on-trade traffic during Christmas was a little slow, but whether it was because of the fewer holidays or reaction to high inflation is difficult to tell. In terms of any volume impact, it is not possible to make any conclusion based on January performance due to the insignificance of this month in Europe. Secondly then, the war in Ukraine remain an uncertainty for our business. And lastly, whilst we're positive on the reopening of the COVID in China, we cannot yet make firm conclusions regarding the success of the New Year celebration in China. So because of these uncertainties, unprecedented pricing and uncertain consumer behavior, the war in Ukraine and the reopening of China, our guidance range is broader than usual. At this point in time, our best estimate is an organic development in organic operating profit of minus 5% to plus 5%. As we get more clarity during the year, we will narrow the range, and we will, of course, do our utmost to ensure that we continue the positive trajectory of continuous earnings growth and value creation. Based on yesterday's spot rate, we see the currency impact on operating profit of minus DKK550 million, mainly due to the weakening of Chinese, Laosian and Norwegian and Ukrainian currencies. Net finance costs, excluding FX, are assumed to be around DKK600 million, which is slightly higher than in 2022 due to higher interest rates. We assume a tax rate of 21%, which is lower than our previous long-term assumptions, mainly due to country mix. CapEx is expected to be around DKK5 billion, remaining at 6% to 7% of revenue. Thanks, Ulrica, and great to have you on board. Before opening up for Q&A, let me summarize. 2022 was a challenging year due to the war in Ukraine, rising input costs and COVID '19, particularly in China. Regardless of these challenges, the group delivered a strong set of results with revenue growth of 15.6% and all-time high operating profit of DKK11.5 billion while, at the same time, increasing marketing investments by DKK1 billion. SAIL'27 was launched at the beginning of the year. With our new strategy, we embarked on a more ambitious growth agenda. We returned DKK7.8 billion to shareholders through dividends and share buybacks, and today, we announced a 13% increase in dividends to DKK27 per share. 2023 will be another challenging year, but we are well prepared, and we are entering the year with a strong company both strategically, financially and organizationally. [Operator Instructions] The first question will be from the line of Andrea Pistacchi from Bank of America. Please go ahead, you line will be unmuted. Yes, good morning, Cees, and Ulrica. My two questions are as follows, please. So could you talk a bit about your pricing plans for 2023 in Europe, in particular, what you're expecting in terms of timing of the price increases in Europe, and any countries where you've already reached agreements or maybe the fact that you took price -- or your second round of pricing last year effectively only happened in Q4 in some markets, whether this may push back a little the price increases this year. And the second question, please, is on your marketing spend. A significant increase in H2, I think 24% organic increase or thereabout. So could you talk a bit about the plans for '23, whether we should expect marketing to grow ahead of sales this year and whether there will be a further step-up in Asia or whether you're done in Vietnam? Or will we see more there? Thank you. Thank you, Andrea. And good morning. With regards to pricing in Europe, you have seen that in Q4, we increased our revenue per hectoliter in Western Europe by 7%. The majority of that was through pricing in Q3. There was also a positive country mix, but the majority again is in pricing, and that will have an impact in 2023. With regards to the current status for 2023, pricing, especially in Q1 in Western Europe, we can say that we are cautiously optimistic. We have finished most of the negotiations. We have a few outstanding accounts that we still need to have an agreement with. And especially in France, we have not come to any conclusion like many of our colleagues. And that will be done, as you know, by law before the end of February. So, investor of Europe, we just now need to wait for the impact of these price increases in -- with regards to volume and mix. Then looking at the marketing investment for 2023, we will continue to invest in our brands, of course, very much in countries like Vietnam and China, but also in countries in Central Eastern Europe. We're very much focusing on the development of SAIL'27. And with regards to H2 of last year, the increase was very much skewed towards Vietnam and China. The next question will be from the line of Olivier Nicolai from Goldman Sachs. Please go ahead, your line will be unmuted. Good morning, Cees and Peter. First, I think in your press release, you mentioned some on-trade weakness in the U.K. in Q4. What do you think is driving that? Is it linked to the strike that they've seen in the U.K. in December? Or do you think it's kind of a sign of a softer consumer environment? And then second question is on China. I know you're not going to comment on Chinese New Year yet, but perhaps could you give us some indication of your level of inventories in the trade in China at the end of Q4. And how have you faced shipments for Chinese Year this year? Did they fall into Q4? Or actually, there was some in Q1? Thank you very much. Thank you, Olivier. And good morning. With regards to the on-trade weakness in the U.K., there are three elements: first, as you know, the impact of disposable incomes of the consumer, second, there was still a lot of sickness in flu and COVID, and the third, the train strikes, which probably impacted people going to the cities. So yes, let's see what happens in Q1. But these were the three elements we think have impacted the on-trade in the U.K. at the end of the year. With regards to Chinese New Year, the inventory is more or less in line with what we expected. So in that respect, we feel comfortable. With regards to shipments, that's very much in the beginning of January, maybe good to say that we only have some qualitative feedback from China that they see. And it's positive, of course, that people started to travel again. The total was up by 51%, but still 53% lower than 2019. There's also more tourism, up by 23%, but basically 90% lower than 2019. The good thing is that there's no large scale infection in rural and the closure of late night entertainment was lower than we expected. On the other hand, some Chinese New Year events were canceled. There is some lower alcohol consumption probably also because of the fact that consumers just went through being -- suffering from COVID themselves. So all in all, a bit of a question mark still on how the sell-out of our volumes in trade will be. And we -- as we said earlier, only see that -- or can conclude on that by the end of February, beginning of March. The next question will be from the line of Trevor Stirling from Bernstein. Please go ahead, your line will be unmuted. Good morning, everyone. Two questions from my side. So the first one, just a little bit more color on the disposal process of the CSAP, so I've got the numbers were. So I understand the process is that there are two valuations. There's a valuation from the vendor and then you have a call and there's an average. Is that right? And then you talk about potential legal action around this put option valuation, so maybe just a little bit more color what's going on there. As a final sub question in there is, if you had owned the stake all the way through 2022, what would have been the net incremental earnings from this? And second question around coming back to A&P investment. I saw a lot of it went in there in the second half. It went into Asia. Margins were down about 400 basis points. Should we be thinking the same order of margin compression in the first half? So do you match that level of investment in the first half as well? Thank you very much. Yes, I'll answer the question on the transaction. So not quite what you said. I think what we have here is the put option being exercised, and that's been valued by valuators at $744 million, and that's for the one-third of CSPL or approximately DKK5.1 billion. So this is to valuating the put option and an average of that. And yesterday, the partner exercised the put option. And what we will do now is evaluate the new-term assumptions in that valuation before we decide next steps, and that's what we're referring to undermine the assumptions, valuation. And then we will come back as soon as we have more information to share. That's on CS ABL [ph]. In terms of E&P margin and ending into next year, we expect another marketing investment increase in 2023, but it's basically into -- we talked about the investment into Asia, but there's also inflation in there. So this -- but despite this increase in absolute terms, I think marketing investments per revenue might likely decline due to the price increases, and that's the continuation of the current strategy, investing ourselves '27 priorities, continuing to invest up. But given revenue, I don't know what that's going to look like from a ratio point of view. The next question will be from the line of Simon Hales from Citi. Please go ahead, your line will be unmuted. Good morning, Cees and Ulrica, welcome aboard. So two questions for me as well, please. Just on your 2023 guidance, particularly the minus 5% to plus 5% range. It's wider than usual, given the uncertain backdrop and the COGS inflation you're still facing. Just how should we think about that delivery and the shape of delivery through the year? Should we expect still a strong decline in organic EBIT in the first half because that COGS inflation really continues to bite and then some recovery in the second half? And maybe a sub point to that, when you look at your low teens COGS inflation guidance for this year, how is the hedging on that? Is there some scope for that to improve, perhaps if gas prices remain low as we get into the second half of 2023? So that's the first question. And then just briefly on the Russian divestment process. Cees, you said you aim to sort of sign an agreement hopefully by mid-2023. Do you have any visibility beyond that? Perhaps how quickly any signed agreement could the proposed transaction could actually complete? Because my understanding is you might end up having to go through quite a lengthy regulatory process in Russia. Yes, you're right. It's a wider guidance, and we are always cautiously realistic at the start of the year. But it's -- that it is more uncertain than usual, and you heard the recent uncertain consumer behavior, cost increases, the war in Ukraine and the recovery from COVID restrictions. And following that further and following the development of those factors, it will have a higher impact on half 1 to half 2. And then, of course, you have the COGS of the year before to take into consideration. In terms of COGS, the program we've got now, we are very well hedged into 2023, but we do have some variable limit to it as well. It's too early to speculate beyond 2023. But in this, we are pretty much well hedged even if prices come down. But for the part that isn't, which is small percentages, of course, we'll take that into consideration as we go through the year. And basically, the shape of that will be that there will be harder impacting half 1 than half 2. Thank you, Ulrica. And with regards to Russia, so basically we anticipate to sign a deal with the present a buyer by the end of Q2. And the next phase is that we need to ask the Russian authorities for authorization of the deal. And frankly, we don't have any experiences. There are not that many countries -- companies that went through the process. So it is a bit opaque with regards to how long that could take. So it's a learning by doing. But the first and foremost focus from us is now signing a deal with a potential buyer. The next question will be from the line of Sanjeet Aujla from Credit Suisse. Please go ahead, your line will be unmuted. Morning, Cees and Ulrica. Two from me, please. Firstly, I think in the past, you've often talked about an ambition to maintain or grow gross profit per hectoliter through your pricing actions. Is that still the way we should think about 2023 i.e., growing gross profit per hectoliter? And secondly, just coming back to the COGS outlook. Is it fair to say when you look at spot commodities today that they are below where you've hedged for 2023? Thank you. Thank you, Sanjeet. With regards to the gross profit per hectoliter, indeed, that's the ambition. We are fully focused on that in each region, so you can take that as an input. And some of this -- indeed, some of the spot prices are below our hedge at this moment of time. It fluctuates. But indeed, in average, it is a bit down vis-a-vis our hedge. The next question will be from the line of Laurence Whyatt from Barclays. Please go ahead, your line will be unmuted. Hi, good morning, Cees, Ulrica and Peter. Thanks so much for questions. A couple from me also. Firstly, in the Indian business, if you were to be able to take full ownership of that business, what main changes do you think you'll be able to make or would you like to make? And what impact do you think that will have? And then secondly, in the U.K., so the on-trade weakness. Just wondering around the success of the Carlsberg-Marston's joint venture. I know you've disclosed the cost synergies that you're expecting to achieve. But in terms of top line synergies, have you succeeded in increasing perhaps the on-trade sales with the joint portfolio or perhaps the off-trade sales going into the supermarkets as well? I'd love to hear any sort of insight from the synergies at the top line level from that joint venture. Thank you very much. Thank you very much, Laurence. With regard to India, well, basically, we just had the news yesterday. So we are looking now to finalize this part, and we hope to do that, of course, as soon as possible. Then the next step is indeed that we will review our strategy in India, very much focused on our portfolio. At this moment of time, we only have to work in Carlsberg. As you know, we have a richer portfolio than only that. So yes, we have plans in our mind to further develop growth in India. And also in SAIL'27, India plays a very important role. With regards to the U.K., yes, indeed, with regard to the synergies, the GBP24 million, GBP24 million, we said that we would be able to get out of this business, thereâs a reasonable synergies that indeed came out. The top line is a bit more difficult because more or less in COVID period, we made this -- we agreed to this deal. And we have not -- since then, we have not had any, let's say, whatever a normal year can be defined as, but we have never had a stable year so far. What we see, however, is that we have strengthened our position with regards to the distribution in the on-trade, but also in the negotiations in the off-trade because we have a broader portfolio. We also now have the L segment that we can bring in. So with stronger brands, a broader portfolio, we have been able to strengthen our business. But the full impact, we hope and we expect to see this year. The next question will be from the line of Soren Samsoe from SEB. Please go ahead, your line will be unmuted. Yes, good morning. And welcome, Ulrica. First of all -- actually, just one question on Asia. The margin dropped some 590 bps in second half year-over-year. And I think the EBIT practically was quite modest. Can you try to bridge the margin development in the second half in Asia? How much was from COGS development? How much was from price mix and so on? That would be interesting. Thanks, Soren. Well, with regard to the second half, first of all, we announced it already. We had the marketing investment in both China and in Vietnam. So that depressed the margin. Then we had some cost increases that came in earlier than we were able to cover that in price increases. And the third, in general, China in the second half of the year and especially in Q4 did less well and contributed as less well. And of course, that had an impact -- a negative impact on the margins for the region. So given that some of this will ease, I guess, in 2023, do you -- is it fair to assume a rising margin in Asia in 2023, do you think? Yes, depending on how China further develops, yes. But we also will continue -- as we said earlier in this call, we will continue to invest in Asia and especially in China, India and Vietnam. The next question will be from the line of Mitch Collett from Deutsche Bank. Please go ahead, your line will be unmuted. Good morning, Cees. Hi, Ulrica. Two questions, please. So the first, I appreciate on the India and Nepal put option that the valuation is an average of two numbers and that you're contesting the valuation of the vendor. Would you be able to give us the two different numbers or maybe explain the range so we can understand where that price might ultimately come out? And then to help us understand what sort of value you may be able to extract from the Russia business, would you be able to give us the 2022 Russian EBITDA, please? So Mitch, good morning. With regards to India, we are studying at this moment of time, let's say, the put and basically -- so contesting is maybe a bit too early. We just need to review that at this moment of time. But we are not giving any further information about the two different valuations, but you know the average of that. Then with regards to Russia, as I said, it's a very opaque process. Whether we get significant value out of that, we just need to be seen -- that just needs to be seen in the process that we will start after finishing our negotiations and having a deal. As said, we then need to go to the Russian authorities, and that will be then the part that we really start to understand whether we get value out of Russia or not. If you want to go into the details on Russia, just look it up. Page 38 gives you all the details, Page 38 of the announcement, gives you all the details on Russia. [Operator Instructions] The next question will be from the line Andre Thormann from Danske Bank. Please go ahead, your line will be unmuted. Thank you. And good morning, everyone. So just two questions for me. First of all, in terms of China during 2022. I just wonder whether some of your investments, especially within marketing was delayed, and therefore, whether we should expect even more investments in 2023 in China, especially on marketing. That's my first question. My second question is just in terms of your guidance, I just wondered, do you assume for Europe that we will see a volume backdrop due to a price increase? Or what you actually assume here? Thank you. Thank you, Andrea. I will cover the first one, and Ulrica the second one. With regards to China, we continue to invest in half 2. However, it's also fair to say that in the Q4, it was a bit lower because of so many COVID cases and cities being closed or part of cities being closed, especially in the beginning of Q4. So yes, we delayed something of that. It's not that by delaying that we're now accelerating in Q1 and Q2 because we had already in our budget a real step-up in marketing for China. So we continue to invest in that country. We will increase the number of cities by 15 for this year and continue with the -- hope to continue with the momentum that we had before COVID broke again out in China. So hopefully, after Q1, we can say that we are back to where we were before COVID with regards to underlying momentum, but that's to be seen. Ulrica? Yes, on the guidance and Western Europe, yes, we are assuming a slight volume decline in Western Europe. And I guess I could put a little bit more color on that saying that in the limited in the volume decline limited channel and brand -- negative channel and brand mix. So on the back of price increases early in first quarter in all markets and then into the next year with the second. And also those volumes declines is assumed to be on the back of restrictions, which means that overall, EBITDA margins will be under pressure. And there is some risk of profit decline in 2023 in Europe. The next question will be from the line of Richard Withagen from Kepler Chevreux. Please go ahead, your line will be unmuted. Yes, good morning all. And thanks for the question. I have two as well. First of all, maybe coming back on product mix, Ulrica, you just referenced to it. But what's your view on product mix trends in '23? Is it indeed realistic to assume only limited upside in Europe or maybe even some pressure, but on the other hand, good prospects in Asia? And then the second question I have is what's -- can you give your considerations for the view on net debt to EBITDA below 2 times? Obviously, refinancing rates have increased. There is this uncertain external environment. So even with the M&A in the back of our mind, should you -- should we assume that you're going to be, yes, more cautious than what your official targets are? Thank you, Richard. I will take the first and Ulrica the second question. With regards to product mix, basically the first phase, if you like, is achieving the price increases, and that's what we do in Europe at this moment of time. And then we will need to see what the consequences of that are in volume, in channel mix or in brand mix. So I think, indeed, in Western Europe, given the fact that in some countries, we need to increase prices by more than double digit that means that it's unprecedented with regards to the consequences of that. And as you also know, so far, we have seen limited evidence of any impact. But again, that needs to be seen in the course of this year after the second price increase that we do now. Then with regards to Asia, I think there, you can indeed assume further development of the product mix, also on China. Because assuming that after this quarter, we will not have any big impact of COVID anymore in China, then, of course, we have easier comps in the second half of the year. Ulrica? Yes. On the debt ratio levels, I mean, we -- yes, it is an uncertain year and it's more uncertain than usual. And yes, we do want to be comfortable with your financial position and make sure that you can continue to operate and drive through in that environment. As you said, we got -- we're looking at some M&A, we need to take it for that. And maybe in an environment like that, we are slightly more cautious, but our long-term statements around our debt levels remain as it was. The last question will be from the line of Thomas Petersen from Nordea. Please go ahead, your line will be unmuted. Good morning, everyone. And thanks for taking my question. One here regarding price increases in 2023. Could you maybe elaborate a little bit on what you have in the pipeline here? And then also a bit on the risks here regarding competitor behavior, consumer and customer behavior, inflation is coming down. And what do you see here risk-wise for taking further price increases in '23? Thank you. Thank you, Thomas. With regards to the price increase, we very much focus on the rest of Europe. There, we need to take the highest prices. Again, we are more or less at the end of the negotiations with many of our customers, and we are cautiously optimistic that we can land the price increases that we need for the first half year. Indeed, there is a second price increase planned for some countries in Europe in the second half of the year. So that needs to take place later. With regards to any insight with regard to consumer competitive pricing and so on forth, you can see that many of our competitors have the same kind of pressures as we have. So that's what we see back on shelf, that many of our competitors take price. And again, with regards to consumer impact on these price increases, it is too early to conclude. I think that -- thank you very much for your question, Thomas. And I think that leads then to concluding the call. This was the final question for today. Thank you very much for listening in, and thank you for your questions. We are really looking forward to meeting many of you in person during the roadshow in the coming days and weeks. Have a nice day. Bye-bye.
EarningCall_558	Hello, and welcome to the Cboe Global Markets Fourth Quarter 2022 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Ken Hill, Vice President of Investor Relations. Mr. Hill, please go ahead. Good morning and thank you for joining us for our fourth quarter earnings conference call. On the call today, Ed Tilly, our Chairman and CEO, will discuss our performance for the quarter and provide an update on our strategic initiatives. Then Brian Schell, our Executive Vice President, CFO and Treasurer, will provide an overview of our financial results for the quarter as well as discuss our 2023 financial outlook. Following their comments, we will open the call to Q&A. Also joining us for Q&A will be Chris Isaacson, our Chief Operating Officer; Dave Howson, our President; and our Chief Strategy Officer, John Deters. I would like to point out that this presentation will include the use of slides. We will be showing slides and providing commentary on each. A downloadable copy of the slide presentation is available on the Investor Relations portion of our website. During our remarks, we will make some forward-looking statements, which represent our current judgment on what the future may hold. And while we believe these judgments are reasonable, these forward-looking statements are not guarantees of future performance and involve certain assumptions, risks and uncertainties. Actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. Please refer to our filings with the SEC for a full discussion of the factors that may affect any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise after this conference call. During the call this morning, we'll be referring to non-GAAP measures as defined and reconciled in our earnings materials. Thank you, Ken. Good morning, and thanks for joining us today. I'm pleased to report on record fourth quarter and full year results for Cboe Global Markets. During the quarter, we grew net revenue 17% year-over-year to a record $457 million and adjusted diluted EPS by 6% to a record $1.80. These results capped a record year. We saw us grow net revenue 18% to a record $1.7 billion and adjusted diluted EPS 15% to a record $6.93. Our outstanding results were driven by strong volumes across our global network led by Derivatives complex and continued growth in our Data and Access Solutions business. Our Derivatives business delivered another outstanding quarter driven by robust performance in our index options franchise, where average daily volume increased 55% year-over-year while multi-list options trading increased 6% year-over-year to an ADV of 11.2 million contracts. We saw record volume across our suite of S&P 500 Index options products with fourth quarter ADV and SPX contract increasing 73% year-over-year to 2.7 million contracts. Our Mini-SPX options contract, known by the ticker XSP and 1/10 the size of the SPX options contract, increased 188% year-over-year to an ADV of nearly 66,000 contracts. Additionally, ADV for VIX options increased 7% year-over-year in the fourth quarter. During the quarter, net revenue in our Cash and Spot Markets business decreased 5% while we saw a 13% increase in net revenue for our Data and Access Solutions business, including strong organic net revenue growth of 10% year-over-year. We continue to execute on the transformational opportunities we saw in our business: Derivatives, Data and Access Solutions and Cboe Digital. I'll touch on Derivatives and Data and Access Solutions at a moment, but first, I want to provide an update on Cboe Digital. In November, we completed the syndication of minority equity interest with a group of 13 firms announced as investor partners in the Cboe Digital business. Our investor partners include many of the most sophisticated and active participants in fiat and digital asset markets globally and contribute to the momentum of the franchise. We are actively onboarding these partners to the Cboe Digital platform and look forward to working together to bring trust and transparency to the digital asset marketplace. Now more than ever, we believe the experience that established market operators provide with the benefits of their regulated framework is critical to helping enable the opportunities afforded by this asset class. With the onboarding of new participants and marketplace evolution, we have seen continued volume increase in industry-leading spreads in Cboe Digital to start the year with January average daily notional value topping a record $71 million. Our Derivatives business delivered strong results as we continue to expand access to our unique products to customers around the globe leveraging our extended distribution network. For the year, a record 558.4 million SPX contracts were traded with an ADV of 2.2 million contracts, a 63% increase year-over-year. We continue to see increased demand from our non-U.S. customers and liquidity providers for the ability to trade or hedge broad U.S. market and global equity volatility conveniently across all time zones day and night. As a result, we have seen a sizable increase in SPX volume during our global trading hour session with ADV increasing 216% year-over-year during the fourth quarter to nearly 55,000 contracts, capping off a record year for global trading hours with total volumes up 3x over the 2021 levels. This year is off to an even stronger start as January volumes ran approximately 55% above 2022 levels. In December, we also added XSP to our global trading hour session, enabling customers to trade this product nearly 24 hours a day, five days a week and providing the ability to adjust positions around the clock with even greater precision and flexibility. With the addition of Tuesday and Thursday expirations late last year for XSP, both SPX and XSP now offer options that expire every weekday. We continue to see increased demand for same-day trading in SPX with many market participants opening and trading positions on the same day the options expire as they engage in tactical trading strategies around market events. ADV for SPX options open on the same day of expiration increased 83% throughout 2022 and comprised over 43% of overall SPX volumes in the fourth quarter. With the utility and flexibility that options provide in any market environment as well as the varied trading strategies utilized by a diverse customer base, we believe we will continue to see sustained momentum in options trading as customers continue to tap the benefits this product offers. Turning to the VIX products. ADV and VIX options increased 7% year-over-year to over 550,000 contracts traded in the fourth quarter. During global trading hours, we saw VIX options volumes increase with ADV up 72% year-over-year in the quarter, and we have seen strong momentum to start the year as January volumes ran 56% above 2022 levels. Our Data and Access Solutions business posted strong results during the fourth quarter with the integration of our recent acquisitions continuing to fuel the durability of this business. Through our bundled debt offerings and cloud strategy, we were able to package high-quality data from across our markets and deliver to customers globally in a consistent and cost-effective manner, extending the reach of our content and opportunity for this business. Additionally, we continue to see strong customer uptake of Cboe Global Cloud, a real-time data streaming service to provide simple, efficient access to Cboe's robust suite of market data. We now have 25 customers connected to the service with 52% of revenue coming from the Asia Pacific region and 38% from Europe. Additionally, many customers are subscribing to multiple data products offered via Cboe Global Cloud. This diverse customer base reaffirms that our strategy of providing simple, efficient access to our market data is resonating with customers who want access to a global set of market data through a single unified service. Additionally, we have seen solid customer adoption of the Cboe One Canada Feed, a real-time market data feed that provides a comprehensive view of Canadian equities market data since launching last fall. As we integrate Cboe Australia and Cboe Japan post technology migration, we look forward to further expanding our portfolio of market data solutions globally. Through product innovation, thoughtful integration and superior customer service, we continue to expand our ecosystem as we build one of the world's largest and most comprehensive derivatives and securities networks. In our Global FX business, net revenues were up 14% year-over-year in the fourth quarter as the business expanded spot market share to a record 18.4% with average daily spot notional value traded of nearly $41 billion. Our non-deliverable forward volumes on Cboe SEF also grew significantly with annual ADNV of $836 million last year compared with $406 million in 2021. In Europe, the Cboe Europe Equities business continued to perform exceptionally well with overall market share reaching 24.9% in the fourth quarter. While we saw increased adoption of our services in Europe, it was our lit order books that predominantly drove our market share gains with lit-only market share rising from 21.9% at the start of the year to 27.3% in December 2022. Additionally, Cboe BIDS Europe remains the largest block trading platform during the fourth quarter with 34.5% market share of the European block trading market. At the end of 2022, the BIDS Europe platform had over 600 active traders across 243 buy-side firms and 28 sell-side participants. And we expect to have a strong pipeline of new firms this year. The strong foundation of participants utilizing Cboe BIDS Europe will create opportunities as we continue to expand the Cboe BIDS network around the globe. Moving to North America. The power of the BIDS network helped propel Cboe BIDS Canada to another record quarter with 65 million shares traded. Overall equities market share in Canada grew to 13.6% in the fourth quarter while U.S. equities market share was 13.1%. Turning to Asia Pacific. Cboe Australia market share grew to 17.2% in the fourth quarter, up from 16.1% in the previous year. We remain on track to extend the BIDS network to the region with the launch of Cboe BIDS Australia this month. Our experience bringing BIDS into new markets globally, including Europe and Canada, has enabled us to perfect our approach, and we are very excited about the demand we have seen from local participants for this distinctive block trading platform. We also remain on track to launch Cboe BIDS Japan in the fourth quarter of this year, further extending our reach of the BIDS network into another key global equity market. Additionally, in Japan, we saw our equities market share grow to 3.6% during 2022, up from 2.7% in 2021. We continue to be in full integration mode since announcing our last acquisition more than 14 months ago. As mentioned, subject to regulatory approvals, we plan to migrate Cboe Australia and Cboe Japan to Cboe technology this year with the Australian migration happening later this month alongside the launch of Cboe BIDS Australia. We've been working with our customers closely over the last year in preparation for the migrations. And look forward to the benefits of bringing both of these critical markets on to our technology, creating a seamless and consistent experience for customers and unlocking value for our global market participants. We have also continued to make solid progress enhancing the framework of our global listings business since welcoming NEO, a Canadian exchange last year. Our goal is to provide issuers with access to an integrated and global network of capital formation and secondary liquidity while working to harmonize our processes and create efficiencies for our customers around the globe. Building on a strong foundation as the second largest ETP listings venue in the U.S., we are enthusiastic about both the near- and long-term opportunities to grow and expand our listing business globally and believe we have the momentum as we kick off 2023. We are excited by the many growth opportunities we see across our ecosystem today. Brian will do a deeper dive on this in a moment, but this excitement is fueling our attractive 2023 revenue growth targets. Specifically, we anticipate total organic net revenues will increase in the range of 7% to 9% in 2023 above our medium-term guidance range of 5% to 7%. We anticipate that our Data and Access Solutions organic net revenues will grow at a robust 7% to 10% in the year ahead. While we expect to invest behind the meaningful opportunities we see in the market today, we expect that the investments we make this year will help position Cboe to grow in 2023 and beyond. Thanks, Ed, and good day to all of you. Let me remind everyone that unless specifically noted, my comments relate to 4Q '22 as compared to 4Q '21 and are based on our non-GAAP adjusted results. As Ed highlighted, Cboe posted another incredibly strong quarter to cap off a record year. Adjusted diluted earnings per share for the fourth quarter was up 6% on a year-over-year basis to a record $1.80. The strong performance was again characterized by the continued growth of our Derivatives franchise as well as a steady contribution from our Data and Access Solutions business. Over the course of the year, we made meaningful progress advancing our numerous initiatives, plans that span multiple asset classes and geographies. We see these investments as driving growth in Cboe as reflected in our 2022 record results and in the healthy outlook we have for our businesses. I want to quickly touch on some of the high-level takeaways from the fourth quarter before delving into the segment performance. Our fourth quarter net revenue increased 17%, setting another quarterly record at $457 million led by the strength in our Derivatives markets category and robust results from our Data and Access Solutions business. Specifically, Derivatives markets produced 33% year-over-year organic net revenue growth in the fourth quarter as innovations like Tuesday, Thursday expirations continue to resonate with customers and fuel same-day trading in our SPX complex. Data and Access Solutions net revenues increased 13%, up 10% on an organic basis, finishing a very strong year where D&A organic revenue increased by a very healthy 12%. Cash and Spot Markets net revenues decreased 5% during the quarter or 7% on an organic basis. Adjusted operating expenses increased 28% to $177 million. Adjusted EBITDA of $292 million also notched a quarterly high, up 11% from the fourth quarter of 2021. And as noted previously, our adjusted diluted earnings per share was a record $1.80, up 6% compared to last year's quarterly results. Turning to key drivers by segment. Our press release and the appendix of our slide deck include information detailing the key metrics for each of our business segments. So, I'll just provide summary thoughts. Our Options segment was a standout for the quarter, again delivering the strongest growth with net revenue increasing 35%. Results were driven by robust volumes in our index business and stronger revenue per contract, given the favorable mix trends. Total options ADV was up 15% as our higher-priced index options ADV increased 55% over 4Q '21 levels. RPC moved 25% higher, given a continued positive mix shift to index products and a stronger mix of higher-priced SPX options in our index business. And lastly, we continue to benefit from another quarter of double-digit growth in market data and access and capacity fees, up 34% and 15%, respectively, as compared to 4Q '21. North American Equities net revenue increased by 5% year-over-year. Results benefited from NEO, which was acquired in June of '22, contributing $5.5 million in net revenue during the quarter. In addition, access capacity fees increased 10% as compared to 4Q '21, and market data was up 4%. Net transaction fees fell by 4%, given a mixed volume environment across our businesses, softer market share and capture rates. The Europe and APAC segment reported a year-over-year decline in net revenue for the fourth quarter of 15%. However, adjusting for a $5.6 million FX impact given the stronger dollar during the quarter, net revenue fell by a more modest 4% on a constant currency basis, impacted by softer industry volumes in Europe. The lower activity levels were partially offset by a 5.1 percentage point increase in market share on a year-over-year basis, making Cboe Europe the largest stock exchange in Europe, again for the quarter. Fourth quarter net revenue decreased 10% in the future segment as transaction fees declined 15% on a year-over-year basis. Lower volumes were the primary driver of the decline, falling 16% in the fourth quarter '22 as compared to fourth quarter of '21. Non-transaction revenues continued to tick higher with access capacity fees up 2% and market data up 25% as compared to 4Q '21. And finally, net revenues in the FX segment were up a strong 14% as compared to 4Q '21, capping a very strong year for FX, where net revenues grew an impressive 18%. Net transaction and clearing fees in the fourth quarter benefited from a 21% increase in average daily notional value and higher levels of market share, hitting another quarterly record of 18.4%. Turning now to both Data and Access Solutions business. Organic revenues were up an impressive 12% for the full year. Net revenues were up 13% year-over-year in the fourth quarter, up 10% on an organic basis. As we have seen in past quarters, net revenue growth continues to be driven by additional subscriptions and units, accounting for over 90% of access fee growth and 58% of market data growth. In our data and access businesses, we saw robust physical and logical port usage in our options and equities businesses driven by increased demand for trading capacity. And on the market data side, the equity's top of book and options depth of book products continued to perform well. Cboe Global Indices feed also benefited from some pricing enhancements during the quarter. In 2023, we anticipate that trends will remain resilient as we are forecasting 7% to 10% organic net revenue growth for Data and Access Solutions, in line with our medium-term guidance range outlined at our November 2021 Investor Day. Turning to expenses. Total adjusted operating expenses were approximately $177 million for the quarter, up 28% compared to last year. Excluding the impact of acquisitions owned less than a year, adjusted operating expenses were up 21% or $28 million for the quarter, largely reflecting higher headcount as compared to fourth quarter of last year as well as some inflationary comp adjustments and additional incentive compensation in 4Q '22. Moving to our expense guidance. We are introducing a full year 2023 expense guidance range of $779 million. This compares to our 2022 expense base of $652 million. There are three basic components to the year-over-year increase outlined on Slide 17 of our earnings presentation that I want to walk through in detail, namely expenses from 2022 acquisitions, revenue-enhancing investments we are making in our business and core expense growth. The first component is the normalization for the two transactions ErisX and NEO, we completed in 2022. We anticipate these deals will add approximately $36 million to $38 million in incremental expenses in 2023. In our expense base, we are again calling out growth-generating investments we are making, given the numerous attractive growth opportunities we see today. These are costs we expect to drive incremental revenue to our bottom line, furthering the robust growth trends we have enjoyed over the past few years. Specifically, we are investing in global listings, DNA expansion, a more aggressive marketing campaign given our 50-year anniversary as a company and targeted R&D efforts across our ecosystem. In 2023, we expect revenue-enhancing investments to be in the range of $28 million to $30 million accounting for roughly 4.5 percentage points of our 2023 adjusted expense growth. The last component and the largest portion of the year-over-year increase is our core expense growth, showing approximately $53 million to $59 million or 8% to 9% of our expense increase in 2023. I think it's important to understand the moving pieces within our core expense base. First, we continue to invest in the infrastructure of our business. As we strengthen our footprint as a multi-asset class global exchange and services provider, we will continue to invest behind a robust technology offering to deliver a best-in-class client experience. Roughly 2% of our expense growth in '22 was related to core infrastructure. And we would expect a similar contribution this year as we continue to build a cohesive offering around the globe, facilitating the expanded capacity, access and distribution of our products and services globally is important to our success, and we will continue to ensure Cboe can meet the needs of our clients. Unrelated to our infrastructure spend is an incremental two percentage points of expense growth we are attributing to the Consolidated Audit Trail or CAT project. These costs, which we have limited direct control over, are expected to add an incremental $10 million to $15 million to our 2023 expense base based on our initial estimates. The remaining core piece is related to our day-to-day cost of doing business. In '22, we talked about some inflationary pressures impacting these expenses. And while we do still feel some of those pressures today, we expect core day-to-day expenses to be up a modest 4% in '23, down from the 7% growth we saw in '22. Cboe has enjoyed some of the most consistent and most durable revenue growth, operating margins and earnings generation in the industry. The expense forecast we are providing today highlights the continued investment we are making to sustain those trends moving forward. To state this more directly, it is because of the investments we have made in our business that we generated record '22 results and are able to guide to a robust seven to nine percentage point increase in organic total net revenue in the year ahead. We believe that the investments we make in '23 will position us well to generate attractive return for years to come. Now turning to a summary of full year guidance on the next slide, I want to call out some highlights for '23 following our record net revenue results in '22. For Data and Access Solutions, we expect net revenue growth to be in the 7% to 10% range for '23, in line with the medium-term guidance of 7% to 10% we introduced at our Investor Day a little more than a year ago. We expect acquisitions held less than a year to contribute around 0.5 percentage point to total net revenue growth in '23. Most importantly, we are guiding our organic total net revenue growth in the range of 7% to 9% for 2023. This is above our medium-term guidance of 5% to 7% introduced at our Investor Day a little more than a year ago, a function of our confidence in the durable growth of our business and the progress we are seeing behind the investments we have made to increase the access and distribution of our products in markets globally. During this year, we are introducing an expected contribution of $27 million to $33 million for minority investments benefiting our other income line. Cboe has made and we'll look to continue to make investments in businesses that align with our strategic vision. Our 4Q '21 investment in 7RIDGE with Cboe becoming a limited partner in the acquisition of Trading Technologies is a great example of how we plan to utilize our network of partners to invest in strategic assets. We look for the impact of these investments to become a more regular contributor to company earnings and are providing our best estimate of the benefits we anticipate in '23. We are introducing full year guidance on depreciation and amortization of $48 million to $52 million and expect the effective tax rate on adjusted earnings under the current tax laws to come in at 28.5% to 30.5% in '23. Outside of our annual guidance, interest expense for the fourth quarter of '22 was $15.7 million. Moving forward, we expect interest expense to be in the range of $14.5 million to $15.5 million for 1Q '23. On the capital front, our focus has been and remains maximizing shareholder value through the effective use of our capital. In the fourth quarter, we returned total of $53 million to shareholders in the form of a $0.50 per share quarterly dividend and $15 million in the form of share repurchases. Year-to-date '23, we've also repurchased $30 million of our shares. We remain well positioned to invest in the business, support our dividend and opportunistically repurchase shares with $188 million in remaining capacity on our share repurchases authorization as of January 31, 2023. Our leverage ratio decreased to 1.5x at the end of the fourth quarter, down from 1.7x at September 30 and from 1.9x from June 30, reflecting our significant growth in earnings as well as the repayment of $120 million of our term loan facility in 4Q '22. And through prudent debt capital markets transactions, we have also locked in low medium- to longer-term fixed rates averaging below 3% on over 80% of our total debt. Overall, we remain committed to maintaining a flexible balance sheet and striving to put capital to work in the most value-enhancing way possible for shareholders. Given where we are today in our capital structure, we plan to shift slightly to prioritize opportunistic share repurchases over further debt pay down, given our leverage ratio at 1.5x at the end of 4Q '22. In summary, 2022 was a tremendous year of record revenue generation and earnings growth. We expect that momentum to continue, fueled by the attractive investments we are making across our ecosystem. We are incredibly pleased with the start to '23 and look forward to delivering attractive returns to our shareholders in the quarters ahead. Now, I'd like to turn it back over to Ed for some closing comments before we open it up to Q&A. Thanks, Brian. In summary, Cboe delivered a very strong fourth quarter to close the year. And 2022's record results give us increased confidence that if we continue to invest in high-value growth initiatives that further expand the Cboe ecosystem, we can continue to deliver strong long-term results for our investors. I'm also proud of the work we did to advance our corporate ESG initiatives in 2022. We will continue to look for opportunities to support our communities and associates while driving for a more sustainable future. I would like to thank our team for the incredible results achieved during the fourth quarter to cap off a fantastic year. As we enter our 50th year of business, we are more optimistic than ever about the future. Our history of innovation, client service and good citizenship will be the foundation for building trusted markets for the next 50 years. I am extremely proud to lead this incredible team and our organization as we continue to push Cboe to new heights. At this point, we'd be happy to take questions. We ask that you please limit your questions to one per person to allow time to get to everyone. Feel free to get back in the queue. And if time permits, we'll take a second question. Thank you. At this time, we will begin the question-and-answer session. [Operator Instructions] And this morning's first question comes from Rich Repetto with Piper Sandler. Yes. I guess my question is going to be focused on expenses and expense growth. I guess, Brian, I calculate last year the overall expense increase when you subtract the acquisitions was 13.5%. And I thought we would expect a step down. It looks like 13% ex the acquisitions again this year. So, I guess when you look at just the core -- everything beyond the acquisitions, so can you explain, what's the tangible payback? I know you had something about minority investments, but is this the ongoing -- it looks like other exchanges are investing less than half of that, and just trying to understand this 13% growth rate each of the last two years in investments and core expenses. Yes, Rich, great question. I think a foundational to probably a lot of folks when they're looking at the guidance. So, we do want to spend some time kind of continuing to walk through that. So I'll break it up into a couple of parts here, again, to your thoughts around the core and then the incremental revenue investments and where that was. And honestly, to your last comment about the other exchanges in that profile, I will suggest that our revenue and earnings profile actually is different and actually, I think, has been fairly strong relative to that as well over the last couple of years. So we've taken a very explicit, very transparent approach to growing that long-term growth rate. So if we look at behind the core, and this is the -- I'll say the -- one of the issues of having, I'll call it a relatively smaller say some of our peers, but also, I'd say, high-margin, a very efficient exchange in the first place so that if there is a slight uptick, it shows, right? We're very transparent about what those expenses are and where they show up. So as we break out the core, as I alluded to in my prepared remarks about looking at the incremental regulatory expenses coming from the consolidated audit trail, right, that's going to hit us a little bit higher from a pure expense standpoint. We're laying it out there so we can see that as far as what's driving that expense base higher, given our history with what we've seen where that project is going. With respect to infrastructure, if you look at the incredible amount of volume, and I'll ask Chris Isaacson to jump in later here about what this exchange operations have been able to do as far as volumes and the ability to actually continue to facilitate that capacity, and our belief that it's important for us to continue to be a trusted marketplace. So it was important for us to continue to invest and facilitate that increased capacity, both in the U.S. and the non-U.S. markets, again, which many of those markets saw record peak volumes at some point during '22. And technology and operations handled that with really no issues. And in the midst of all this also, we're doing a replatforming in Japan and Australia. Again, all right now, slightly incremental expense as we layer in as we go into 2024 moving forward. And then you look at the overall core of those other incremental I talked about is, again, we're still, as I mentioned at the end of last year, we still have to incorporate some of the inflationary pressures. We're seeing that moderate a bit. But again, it's against a lot of the expense categories, not just comp. As far as the revenue growth investments and you made an explicit where do you see some of the payoff for that, I'll ask Dave to jump in here as well as some of the other teams. As we kind of walk us through and remind folks, there was a little bit of a similar question at the beginning of last year, as you recall, as we broke this out for everyone. So, I'm going to take a walk back as our big investment thesis and how we thought about growing and the approach of growing Cboe is, right, the underlying themes of increasing our global network, increased access and distribution, providing new and existing products. And given the size, again, those incremental investments, we call them out, we want to give investors transparency. Here's what we're doing, and here's our expectations for growth. So if you go back and think about what did we carve out for 2021, right? We talked about the EU derivatives, we're going to launch that, again, based on the back of the success of acquisition of then EuroCCP, now Cboe Clear, Cboe Euroclear, right? We talked about the investments in our U.S. Derivatives business with 24x5, incremental investment in sales and marketing teams. We started beginning the dialogue around DNA, around incremental investment around sales, products, marketing and cloud, really leaning into the cloud as far as increasing access and distribution enable that. And then with BIDS, we started rolling that out to our other geographies with respect to Canada. As we think about how did that contribute then to the success of '21 and '22, it did help growth in '21 but again, starting to set the foundation for growth in '22 as we saw continued another record year. So, we do expect to see those -- that continue, right? And we expect to see some of that BIDS and European derivatives investments in '21, more of a '24, '25 continued payoff. Shift to '22, shift to last year, we had this conversation, right? So we called out DNA, sales, products, marketing and further leaning into cloud to increase access. And like I said, Dave will talk about kind of some of the success we've seen there more explicitly. We talked about more of the U.S. Derivatives investment with respect to incremental sales, distribution and product innovation that we did around the Derivatives. The continuation of the EU Derivatives rollout, again, we pushed that to a more of '24, '25 contribution. And then finalizing the Canadian rollout and starting in Australia with respect to this. Again, we saw the efforts from D&A and U.S. Derivatives initiatives add to 2022 results with the continued expectations that '24, '25 are going to continue growth drivers. Now flip to 2023, and that is a backdrop as we continue to lay this out, continuing themes here, right? D&A, as I mentioned earlier in my prepared remarks around incremental sales products, cloud investment and marketing, more U.S. Derivatives investment around the sales and expanded marketing, continuation of our EU Derivatives buildout to a less extend this year, looking to expand with our listings, a new listings effort around globally. In BIDS, finalizing Australia and Japan, a targeted disciplined R&D effort. So, we continue to expect to see some benefit in the current year, again, but supporting that longer-term growth rate and support those efforts for both today and tomorrow. And you'll see a little bit more of that this year and a little bit bigger around the marketing category as we continue to create a broader brand awareness around Cboe, again, creating a foundation for that incremental growth. So first, I'd like to turn it over to Dave to more address these, I'll call it, the revenue growth investments. And then, Chris, I know I mentioned, we'll talk some of the core as we go back to that. Thanks, Brian. Yes. As Brian said, really, we're looking for the revenue investments to really capitalize on opportunities that we see to build on the foundation that we've built. We've got this tremendous network, 26 markets around the globe. We're looking to lean into where we have momentum to build on those strong foundations to offer differentiated offerings, but also to look for white space to look for the opportunity to move into those adjacencies with it from a position of strength. I'd probably call out the -- Brian gave a great backdrop of the previous year. You'll see that continuing into this year. And in particular, as you look at the results of 2022, these should really all be pretty -- make some good sense. As to the five areas top entailed with marketing and surrounded with marketing throughout the message here. So you've got Derivatives, you've got D&A, listings, BIDS and research and development. Certainly, Derivatives there, you heard Ed and Brian describe a great result. So leaning into education, content, sales and marketing, that global trading hours tripling volumes in 2022 really looking to lean into that as we think about broadening the access and distribution, XSP, the Mini-SPX being added to 24x5 in the back end of last year with the addition of Tuesday, Thursday, really sales and marketing there pushing into the APAC region and really capitalizing on the boots on the ground we have from the Asia-Pacific acquisition. D&A exceeded my expectations for 2022. That 12% growth, they're fantastic. And so continue to lean in their sales, quantitive analytic marketing as we look to move those products and services into -- throughout the rest of the globe. Think about our options analytics capability we're going to be bringing to Europe. Cloud is a great theme that's been here throughout the years. 2022 saw 72% of all revenue as incremental sales. That's across the nine products, five regions that we've got set up for cloud right now. And we're really looking forward to investing this year to add Cboe Digital data to that, some great spreads coming through this year from Cboe Digital, adding a new quality data set to the CCC-wide channel 24/7 data that's leaning into expanding the distribution there. And last year, we saw themes around defined outcome and override strategy bench for the index business. We saw great gains in 2022 as well. And then the continuous theme of selling the package and bundle data so Cboe One Canada there really showing great green shoots for this year. Listings is another one I'd probably drill down a little bit more into. The opportunity that is afforded us by having those listings exchanges around the world is unique. We get to provide a global cohesive offering across legal frameworks, liquidity provision in conjunction with our liquidity partners and also access and help navigating global regulators as we go there. So, great opportunity there coming off that great standpoint, number two in the U.S. as an ETP listings, venue with 28 increase in some rather large name issuers in the U.S. And then BIDS, BIDS has been a great story for us since the beginning of the partnership. But after we closed the acquisition with BIDS, we saw us spring to the -- grow to the number one block trading venue in Europe there. So we're leaning into that with people, sales and marketing this year as we think about Asia Pacific. Canada, 76 buy side added within one year. And when you look at the 243 connected to Europe, you can see the growth potential there that we're going to be leaning into as we go through into the Asia Pacific region. Then research and development, key thing for us, we're a product company with some world-renowned products. We formed Cboe Labs this year to really focus completely on how we can develop new ways to measure and benchmark exposures and bring those to the marketplace to afford our customers a range of defined outcome opportunities, which we saw really come to fruition in the SPX complex, in particular, last year. And finally, marketing wraps the whole thing. It's about people, technology, working with partners and suppliers from the tailwind of our 50th year anniversary here as we go into new regions with new products, Asia Pacific and lean into digital, bringing our awareness to new regions, new audiences so that we can better penetrate the markets that we operate in. With the syndicate in place now for Cboe Digital, can you give us more details on the investments you plan to make here? And I think one of the goals is to enhance flow in the platform for 2023. If you can give us some approach on how you want to build that liquidity. And to the extent that things have changed for Cboe Digital since FTX has imploded, how has your strategy evolved in the recent quarter since the environment seems to have changed quite a bit? Yes. Thanks, Ken. Thanks for the question. We continue to be very excited about Cboe Digital. And as Ed mentioned in his opening remarks, we're coming off a record month in January after closing the syndicate of those 13 great investors that are deeply embedded within both traditional finance and in the crypto space. So, we have industry-leading spreads now in Bitcoin and Ethereum. About 1 basis point is what we're seeing through the month of January. So why we continue to be excited about this and focused on the future is we're working with the CFTC on margin futures. And we're looking forward to the approval there of bringing that to the market in a way that has not been brought to the market in the U.S. thus far, continuing the onboarding of that syndicate as they -- about half of them are now onboard, and others are in different phases of onboarding. And our strategy relating to how has it changed, if at all, since the FTX bankruptcy, I would say our strategy is unchanged, while the market has gone up and down as far as crypto prices, our strategy has stayed the same. We're going to bring a trusted, transparent regulated market to crypto to Cboe Digital. We're going to bring intermediary-friendly products and services. And we're going to access ultimately to end users through those intermediaries, which we view as great partners and clearly, as part of our syndicate. So, we see growth in this nascent asset class for years to come, and that's where we're building a strong foundation right now alongside and with this syndicate. So, margin futures expand the distribution of our data as the market quality has improved dramatically, as Dave mentioned, and continuing to grow as we onboard this syndicate. Ken, this is John Deters. Just a couple of other points to tag on there, I think first of all, when you look at the data, it's interesting. The number of active addresses for Bitcoin, for example, has stayed relatively consistent since really the Three Arrows Capital collapse, so even through the FTX issue. And what does that tell you? It tells you that engagement overall has stayed fairly consistent once the period when leverage was taken out of the system. So what our partners are seeing, and this is really one of the great benefits of having this around us they're seeing that the remaining customers and the new customers that continue to come into the space are gravitating towards highly compliant, regulated marketplaces. You heard this from China, for example, in his conversation in December. And so when this market ultimately begins to grow from its stabilization period today, we believe we're set to be -- among the winners in this space. We're investing for the long term. Can you please walk us through the growth dynamics in the data and access segment? Organic growth came in at 12% in 2022 above your medium term 7% to 10% guidance. But on your 2023 outlook, you kept it in the range. Can you expand on what some of the new product sale opportunities are? And if there is a growth deceleration or maybe some of the factors that drove the elevated growth in 2022, is that why you stick to the medium-term range? Yes, that's a good question, Ken. So as you point out, 2022 was a phenomenal year with a 12% growth there. We continue with the industry-leading 7% to 10% guide as we really see continued opportunities to build on what we've built there. We talked about the revenue investments to really build that great platform for the index business to make everything scalable and also the cloud investments there. As we look forward to build on that growth rate of 7% to 10% after a 12% year is really solid and reflects our excitement for this particular segment. So, what we're excited about is, again, the cloud opportunity. I mentioned that 72% of incremental revenue that came through there for the business, for the cloud portion of the business in 2022. The great story there is that we see people taking different portions of the data, whether it'd be Australian, European or Canadian data through that single unified source. So, the opportunity there to continue to grow the sales and access as it comes through there. And then also adding new data sets, we mentioned the Cboe Digital addition to the CCCY channel then 24/7 Cboe global indices channel, so really excited about that as we go forward. And then leaning in again to that defined outcome override strategy trend we've seen as within the home of those index calculations and many of the listings associated with those products from global issuers that we've been able to attract to the platform. And then, it's the options analytics, we're going to move that capability by adding the European data sets and bringing that capability to Europe with our customers that take their U.S. product there looking to expand that into Europe. And then, the growth really is predominantly around selling what we have is growth of existing subscribers and units at the platform there. And when you look at it, you look back on 2020, you see 60% of new market data sales coming from outside of the U.S. You can see the real focus there as we think internationally. I want to switch gears to the SPX ecosystem and specifically the zero DTE trading. I'm curious to what degree you see a real ecosystem building there, particularly on the institutional side. I guess what I'm asking is, I think people still believe 50%, 80% of that business is retail. And institutionals, I think, are entering the market. And -- but what I hear is that trading more around certain events versus being there systematically every day. So just wondering, are you seeing that maybe changing this business this zero DTE becoming a real ecosystem? And then more importantly, what are you doing to maybe encourage and educate those institutional investors that maybe a little bit more sticky than some of the retail folks that you never know about? Thanks, Alex. I'll start. So, we are seeing institutional flow certainly in the zero DTE. But I think most importantly is it's not the expense of more traditional and historical third Friday, that's the good news. That base remains very, very constant. So any new movement into the dailies similar to retail looks to be accretive or new flow and new strategies. And it is very much based on the moves that we see over the last year or so, substantial and meaningful moves in the S&P 500 on a daily basis today, yesterday, basically every day this week is a perfect example. As far as education, it's -- you really make the products available for institutions, and institutions talk to other practitioners on the success or not of new strategies. So our focus has been on wallet size and having products for everyone to access the zero DTE. In particular, we called out the 1/10 size SPX and XSP and watching that growth. I would point to that as being more retail. And the SPX volume and growth that are coming from retail platforms are still small orders and still a mix between single leg and multi-leg strategy. So you hear the theme repeated here defined outcome investing tends to be much more sustainable, and that's what we're teaching. Institutions, I think, will catch on and add to that traditional third Friday and simply just gain more exposures on short dated. Brian, I want to come back to expenses, and I know you just gave a lot of color on the growth and what the initiatives are. I was hoping you could put some numbers around the ROI or the incremental revenue growth you're expecting from those investments. But also to maybe avoid some of the confusion going forward, how do we think about normalized expense growth? Or are you in a multiyear period where we should be thinking about growth investments plus core expense growth? So this elevated expense growth isn't just for '23, it should be over a multiyear period. Yes. Thanks, Dan. Good color and I'm happy to provide a little bit more around that. The -- I would say part of this is as we continue to see that return. And a little bit of this is we'll continue to provide the, I'll call it, the incremental contribution to the extent that we can, the -- with the network that we have, and we don't have a perfect clarity given the way the clearing works as to some of the investments and the increment of every single initiative. We know that in the aggregate, when you look at the broader ecosystem that as you increase access and distribution and, let's say, for the SPX complex and the things that we've done there, right? So, we may see that incremental trading volume on certain initiatives and broadening 24x5, for example, introducing the new more expirations. The collective benefit of that is hard to separate into any one single niche from that investment. So, we tend to look at it in totality to try and measure it again because we don't have the clarity of the back end to see exactly who traded what. But we can see the broader volumes or so we have some limited view of that, but we will look at it, like I said, in the aggregate and continue to make an assessment every year as to did that exceed our, at a minimum, that invested return on invested capital. And because that is our more primary, I'll call it, preference as far as capital allocation goes, those organic initiatives to generate incremental returns, so as we think about that, we'll continue to evaluate that on a -- some of that might be a multiyear basis to understand the traction behind that. I would say that -- and we said this last year, again, I think the moderation maybe was a little bit less than maybe what folks were expecting. But we would expect in '24 and '25 as we've continued to expand the network and as we start seeing some of these initiatives take off, we expect to see some -- a little bit of margin expansion in some of those new initiatives from the -- particularly from the acquisitions that are coming on board, right? It's -- the wonderful thing actually, we love our margins, we love the scale of our core business. And as we continue to expand when we bring some of those operations on, right, you're going to get a bit of a mixed dilution as far as margin goes. But you're having some really strong revenue -- future revenue opportunity. And you're going to start seeing that in '24 and '25. And so, we would expect to see more margin expansion. And you'd see a moderation of that adjusted operating expense growth kind of beyond '23. So I want to say we're going to back off of the growth investments. Again, we've called that out, I'll call it because of our efficiency and what we've done historically. And we don't want to just blur that and say, we're just -- the way that we're spending. So, we want to call it out, continue to measure those returns. We have a return on invested capital expectation of greater than 10% on everything that we do. Again, some of those are going to be multiyear periods to wait to measure, and some of those will be current year. So that's the framework with how we're thinking about it. And I would say without giving explicit guidance for '24 and '25, we would expect to see that growth rate moderating. Maybe just building on Dan's question. The -- how do you think about that long-term sort of trajectory of pass because obviously, there's so many different growth opportunities, and you're really building a very large ecosystem across both trading and in recurring revenue streams. But with -- as you see those opportunities continue to unfold, is there a desire to continue to invest? And are you thinking maybe in the long term, you start to shorten some of those time frames for profitability? Or is it sort of the sky's the limit on the potential for investment? And then just maybe real specifically, are we still looking at $25 million in annual revenue for European Derivatives in year three, which I believe will be 2025 and then the timing to get to profitability in Cboe Digital. So I'll try to make sure I got all those. Okay. So on the first one, on the -- similar to following up on Dan's question, the one thing I realized, and thank you for kind of asking to expand on that is the point that I didn't make as clearly as I would like to is with these investments and say, we have the -- we might see an increase in transactional activity, say, the SPX complex or the other project in this complex, what we see with that also is incremental D&A. We see the incremental non-transaction pieces because of the need for incremental access. You'll see that incremental access fees. You'll see that in incremental market data fees. Dave touched on that as far as we've seen that growth. And then by enhancing the distribution or our ability then to deliver that, we're seeing that growth of not only share of wallet, say, in the access, but also then more new clients. And I'll pass it over to Dave here in a second as we continue to round that out. So, we'll see it across the entire flywheel as far as maybe some of the underlying, but also the transaction and non-transaction side as that entire ecosystem continues to build. So -- and Dave, do you want to expand on that a little bit and then maybe talk about the EU Derivatives? And then we'll come back to -- and then maybe follow up with you and Chris on the Cboe Digital? Sure. So, I guess I'll start with the European Derivatives piece. The last quarter, the value proposition, the opportunity set remains the same. The customer feedback remains the same. And the gap between the volumes of trading of index options between the two regions remains the same. Q4, we saw good growth. It was a record quarter in terms of volumes on the platform with new customers coming on, particularly in futures. And as we laid out in the past last time, it's about getting that stable price picture in the futures, then it will be the options that follow suit from that. And then for us this year, the single stock options launched in Q4 completely rounds out the offering in order for us to bring together the full ecosystem and offer the full benefits of a single margin pool and a single lit on screen market there in Europe. So for us, the three-year guide, which we moved a year last -- we reported last quarter. So the exit of 2025 is still the target for us. And then... Yes, I'll take that. On Cboe Digital, as we said on the slide there, this has been Slide 11. It's a long-term growth trajectory for us. And we haven't put out guidance on exactly when we'll have breakeven there. But a lot of this is dependent upon our Derivatives growth, margin futures and as we said, onboarding the syndicate as we bring them on. So, we haven't put out exact breakeven timing, but we are very bullish on the long-term growth trajectory for that business. Going back to Cboe Digital, I think you guys are planning to list more tokens beyond the five tokens you have. Could you please talk about what other tokens you feel comfortable to list? And what's the process and timing of getting approval so that you can -- these tokens? Chris, let me start, and then I think you can give a view of the Board and the direction. But really, what we're most sensitive to is regulation as we went -- gone into this eyes wide open. And you've been following along with the rest of us that there's uncertainty over regulation and oversight. We're embracing that regulation. So, we need clarity around securities versus non-securities. But our customers, our syndication partners are interested with us in broadening beyond the current coin offering. But we are patient. We have said this is a long-term play, a long-term move for us. So, we will be participating in and helping to form what the future looks like for oversight regulation. But we are very much -- we're very sensitive to where the SEC and the CTC come out on classification. Chris, a little bit more? Yes, I think Ed covered it well there. We are going to be very conservative on our listing. We do desire to list new coins as there's clarity around regulation and as we see genuine customer demand from our customers and intermediaries. But we'll make sure that there's clarity there before we start listing the coins. Owen, this is John. Additional thought there. We mentioned that we see real stability in the market. And that doesn't mean that the market won't be unchanged in this new environment. And among the things that we see going forward is that there will be an increased concentration on the tokens people feel comfortable with from a regulatory standpoint, from a compliance standpoint. So that -- I think that's just the reality we see going forward. And we're fine with that. We recently had a reach up from significant asset manager who wasn't prepared to join us in our first iteration, really interested in considering offering exposures to their clients. And they're not talking about the long tail of smaller assets. They're really focused on the most embedded, the most comfortable and understood exposures. That's the opportunity for us. I wanted to circle back to your revenue outlook, your total revenue guide of 7% to 9% organic total firm-wide. That includes the D&A, right, but also I imagine also captures transactional revenues in there as well. So just a question on that, what areas do you anticipate being most meaningful and contributing on the transactional side to your 7% to 9% organic revenue growth? What underpins your confidence and strength in that into '23? Thanks for the question, Michael. The continued momentum that we see in the interest and engagement from our broad range of customers did execute in a broad range of strategies in the -- on our Derivatives complex forms a good portion of the driver for the continued revenues growth of 7% to 9% into next year. As you say, that's total. So it does include the Data and Access Solutions as well, which is also a combating driver as part of that growth guide that we've given that as we see the growth of the utility in -- that customers are finding in deploying option strategies we see that continuing throughout the year. And really one of the catalysts there last year, of course, was the addition of the Tuesday and Thursday weekly contract expirations that opened up the opportunities that Ed talked about earlier on. I think in the quarters past, what we called out is when investors move from the binary outcome of being long or short in Delta 1 and employ option strategies that allow them to define their outcome that is an incredibly sustainable, sticky, if you will, strategy. So, we continue to teach that here in our institute. We continue to bring new products to the market through Cboe Labs, and we engage with our customers globally as the demand for particular for U.S. Derivatives. But if you follow along like we do listening to and observing what retail platform operators are saying, that Derivatives demand is global. We see that. And of course, our concentration while primarily leading into '23 is U.S.-based as Dave laid out, we see potential, obviously, in Derivatives as we broaden the scope in Europe. Just on fixed futures volumes. We know there seems to be a bit of a mix shift in customer hedging to SPX and as your DTE option contracts with implied volatility underperforming realized vol. Outside of changes in some of these dynamics and more unknown unknowns, what could Cboe do on the innovation front and perhaps education front to boost volume growth of VIX features? We'll start with just from an exchange perspective. We've recognized the power of the stack, the interplay and the rotation. We've talked about that for years that our customers are very rational in the way they deploy their hedges or exposure. You've called this out. If in the -- over the last year, the observations of incredibly large moves interday like today, yesterday, as I said earlier, all this week, the Greeks associated with the exposure in the SPX allow -- customers believe that they allow themselves a much better chance of monetizing those positions. Gamma, for example, the group that you pick up in the SPX. We did see in the observation yesterday is when investors think that the market may have run too far, they do grab the optionality and the hedge that's afforded by fixed exposure. So again, indifferent from -- basically indifferent from the economics there, what we are -- have always said is the rotation makes sense. The hedges are rational. So, we continue to teach the differences in the expected payout and just want to make sure that we're bringing those exposures to customers with every sized wallet and teaching that through many contracts in futures, for example. And of course, I mentioned earlier, XSP is the mini-500. So that's the approach, but we do see Derivatives as sticky and sustainable. Maybe just one more on expenses. I apologize, Brian. But I wonder if you could talk about the potential expense flex and how dependent it is on the revenue environment. So for example, if revenues came in below the low end of that 7% to 9% organic guidance range, should we expect a similar outcome in terms of coming in line with the expense guidance range? And would there be any pause on investments? And then likewise, if revenues come in above the guidance range, should that cause expense growth to move higher than the range? Or should we expect the incremental growth to fall to the bottom line? So, any kind of framework you could help us with understanding that the really the expense flex on either end of that range will be helpful? Thanks Kyle. I think your next -- if you choose to have another career as a CFO as part of that, that would be awesome. So, I think you think about exactly the way we frame that and the way we've talked about it, right, is that we've laid out this guidance. We've laid out our plans. We have certain expectations around how these investments are going to contribute to the revenue and some of the traction we think we will gain. So, there's definitely opportunity to flex. There's obviously our natural flex that is a part of our incentive plan, our short-term incentive plan that will flex based on how we're doing relative to, I would say, these very strong growth targets that we've set aside, so we set for ourselves. So, there's definitely an inherent part of that is that we are not achieving that, we will titrate the various levers there to say, how does this pull back to make sure we get to those earnings expectations of what we're trying to deliver for shareholders and continue to measure that. And then on a go-forward basis, outside of, call it, that incentive structure as far as exceeding expectations. We're a little bit more cautious on the upside. We'll be faster to move on the downside as far as pulling that back, if we don't see the results that we're expecting, but we'd be more cautious to actually raise it as you've probably seen historically with some of that kind of expense growth going forward. So that's the way I would frame it, Kyle. I was hoping you could speak to the competitive environment in SPX options. Your competitor has now announced their intention to launch daily expirations for their micro S&P futures. Do you expect us to have any direct impact on the success you've been seeing? I don't. Just a reminder to everyone on the call, the amount of retail futures accounts is dwarfed by the amount of retail securities accounts. It's quite a bit more difficult to open futures accounts for retail that is not to take any away from the effort. But once a retail investor is satisfied and happy with liquidity, which is what we provide each and every day, they tend to be sticky. So, the liquidity and the experience we measure each and every day, we try to make that experience better. I think feeding the system and growing the pie, if there are investors for futures, we think that's a good thing. So, the daily exposures and what our competitors might be doing in the space on daily futures, we just think the opportunity to pilot the awareness is growing. And we're confident that we will continue to be the leader in this space. Yes. So that completes our call for today. Thanks, everyone, for the time and the interest in the Company, and have a great weekend. Thanks.
EarningCall_559	Good evening, ladies and gentlemen. Welcome to the Conference for Keppel Corporation's Second Half and Full Year Financial Results for 2022. We have on the panel this evening, from your left are, Mr. Manjot Singh Mann, CEO of M1; Miss Cindy Lim, CEO of Keppel Infrastructure; Mr. Chris Ong, CEO of Keppel Offshore & Marine; Mr. Chan Hon Chew; CFO of Keppel Corporation; Mr. Loh Chin Hua; CEO of Keppel Corporation; Ms. Christina Tan; CEO of Keppel Capital; Mr. Lu-yi Lim, CEO of Keppel Land; and Mr. Thieng Hwi Pang, CEO of Keppel Telecommunications and Transportation. We will begin the session with presentations by Mr. Loh and Mr. Chan, followed by a question-and-answer session. Mr. Loh, over to you, please. Thank you. Good evening. Welcome to the webcast of Keppel Corporation's second half and full year 2022 results. 2022 was a challenging year for the global economy, marked by the war in Ukraine, heightened geopolitical tensions, slowing global growth, inflation and rising interest rates. The International Monetary Fund has projected that global growth is expected to slow from 5.9% in 2021 to 4.4% in 2022 and 3.8% in 2023. Amidst a difficult environment, we continued to accelerate Keppelâs Vision 2030 transformation, simplifying and focusing our business, while executing our asset-light strategy. We completed the divestment of Keppel Logistics and are currently in the final stages of executing the proposed combination of Keppel Offshore & Marine with Sembcorp Marine, and resolution of our legacy rigs and associated receivables. The offshore & marine transactions have received strong support from Keppelâs shareholders at our Extraordinary General Meeting last December, while Sembcorp Marine has announced that it will be holding its EGM on 16 February to seek its shareholdersâ approval. Amidst improving conditions in the O&M sector, we are optimistic that the combined entity, with a very strong order book and synergies realised from the integration, will be well positioned to seize opportunities in the evolving landscape. In 2022, Keppel O&M achieved an annual revenue of S$2.8 billion, its highest in six years. During the year, Keppel O&M secured about S$8.1 billion of new orders, bringing its net orderbook to S$11.0 billion at the end of 2022, which is at the highest level since 2007. This includes the FPSOs projects with Petrobras, which are currently tracking on schedule and within budget. We have also made good progress in putting our legacy rigs to use. All the available KFELS B Class jackup rigs in the fleet have secured bareboat charters, while we continue to receive active enquiries for the remaining legacy rigs. With higher utilisation and day rates, we have, based on the value-in-use assessment conducted by our independent advisers, written back part of the impairments which had been made for the legacy rig assets in 2020, when oil price had fallen sharply following the COVID-19 outbreak. As a result of this writeback, the Asset Co Vendor Notes will increase, bringing the total realisable value to Keppel from the O&M transactions from S$9.05 billion to S$9.35 billion. Had the proposed transactions been completed at the end of FY 2022, we would have booked a pro forma disposal gain of approximately S$3.4 billion or S$1.94 per Keppel Corporation share from the Sembcorp Marine shares received6. On the same pro forma basis, this gain would have increased our Net Tangible Assets as at end-2022 by approximately S$2.05 per share, including other adjustments, from the reported S$5.51 per share to S$7.56 per share post transactions3. Upon the completion of the transaction, we will distribute in specie 19.1 Sembcorp Marine shares7 to our shareholders for every Keppel Corporation share they hold. The distribution in specie has an implied value of S$2.33 per Keppel Corporation share, based on Sembcorp Marineâs volume-weighted average price of 12.2 cents per share when the transaction was announced in April 20226. Following the distribution in specie, our pro forma NTA would be reduced from S$7.56 to S$5.23 per share, which is quite close to our reported NTA of S$5.51 per share at the end of 2022. In short, this distribution in specie is backed by the disposal gain that will be booked. Post distribution, our NTA will only be marginally reduced. Of course, the gain as well as the final value of the distribution in specie will depend on the actual value of Sembcorp Marineâs shares when it starts trading on the SGX post-transaction. Based on Sembcorp Marineâs closing share price of S$14.01 last evening, the implied value of our distribution in specie would be even higher at S$2.69 per Keppel Corporation share. Including the new shares that we will receive, as well as the vendor notes from the sale of the legacy rigs to Asset Co and the out-of-scope assets, we will in total unlock close to S$9.7 billion from the transactions. This is equivalent to S$5.52 per share in value. Just as important, the completion of the O&M transactions will accelerate Keppelâs transformation from a conglomerate of diverse parts into a global asset manager and operator, with strong capabilities in energy and environment, urban development and connectivity, which is well-positioned to seize opportunities through creating solutions for a sustainable future. In the midst of an inflationary environment, we see strong demand from investors for real assets with cash flows, which the Keppel Group is able to develop, operate and manage. Later this year, we will share more details on the next phase of our transformation plans. Robust performance in FY 2022 Keppel delivered robust performance in FY 2022, achieving a net profit of S$927 million, bolstered by stronger results in Asset Management and Energy & Environment. Net profit was 9% lower compared to S$1.02 billion in FY 2021, mainly due to lower earnings in Urban Development as well as provisions for specific projects at Keppel O&Mâs yard in the US, which were partly offset by the partial writeback of impairments for our legacy rigs. 2021 had also benefitted from a higher fair value gain of S$277 million from our investment in Envision AESC. Our CFO Hon Chew will elaborate more on the financials later. Return on Equity was 8.1% for FY 2022, compared to 9.1% for FY 2021. Free cash outflow was S$408 million in FY 2022, compared to an inflow of S$1.76 billion due mainly to lower divestment proceeds. Net gearing remained stable at 0.78x as at end-December 2022, compared to 0.79x as at end-September 2022. We have also continued to strengthen our business resilience amidst rising interest rates. As at end-December 2022, about 67% of the Groupâs borrowings were on fixed rates, with an average interest cost of 3.24% and weighted tenor of about three years. In appreciation of the support and confidence of our shareholders, the Board of Directors has proposed a final cash dividend of 18.0 cents per share for FY 2022, to be paid on 10 May 2023. Together with the interim cash dividend of S$15.0 per share, we will be paying out a total cash dividend of S$33.0 per share to shareholders for the whole of 2022, which is the same as the 33.0 cents per share in 2021. This does not include the additional 19.1 Sembcorp Marine shares7, which I had mentioned earlier, that we will distribute in specie for every Keppel Corporation share held, when the O&M transaction is successfully completed. Assuming the EGM for the acquisition by Sembcorp Marine is passed by their shareholders on 16 February, it is currently anticipated that Keppel shareholders will be credited their entitlement of the share distribution within a week or so of the ex-dividend date, which will be announced by Keppel in due course. We have emphasised our plans to move away from an orderbook business and lumpy property development profits, and focus on growing recurring income. For FY 2022, recurring income made up S$560 million or 67% of the Groupâs earnings10, an increase of 114% from S$262 million in FY 2021. Since the start of our asset monetisation programme in October 2020, we have made good progress with over S$4.6 billion announced to date. This puts us well on track to exceed the higher end of our S$3-5 billion target by the end of 2023. As I have said before, we will not stop at S$5 billion but will continue to unlock capital which can be used to invest in our growth engines alongside co-investors, and also reward our shareholders. We have made good progress in harnessing our asset-light model for growth, with the announcement of about S$2.8 billion worth of energy & environment and sustainable urban renewal-related investments in 2022, jointly undertaken by Keppel together with the private funds and/or business trust managed by Keppel Capital. This allows us to make large investments in energy transition-related projects without pushing up our gearing significantly. We plan to pursue more of such joint investments going forward. The Asset Management segment delivered improved earnings of S$311 million in FY 2022, compared to S$301 million in FY 2021, and is the largest contributor to the Groupâs net profit. As we transform to be a global asset manager and operator, Asset Management would not just be a vertical within the Group, but a key focus of Keppelâs business, and a horizontal that pulls the other business units together to deliver value, as one integrated company. In 2022, Keppel Capital completed more than S$7.7 billion in acquisitions and divestments across its REITs, Trust and private funds. Our asset management fees grew about 15% year-on-year to S$267 million11, further boosting the Groupâs recurring income. During the year, we also launched the new Keppel Core Infrastructure Fund and Keppel Sustainable Urban Renewal Fund, which are attracting positive interest from global investors. Having achieved the Assets under Management target of S$50 billion at the end of 2022, we will work towards our next AUM target of S$200 billion. In our Energy and Environment business, Keppel Infrastructure delivered strong performance, more than doubling its earnings year-on-year to S$241 million12, driven by higher contributions from electricity and gas sales, Keppel Seghersâ overseas projects and an associated company in Europe. During the year, we actively expanded our business in sustainability-related solutions, in line with our Vision 2030 strategy. These include commencing Singaporeâs first renewable energy import, developing Singaporeâs first hydrogen-ready power plant, and gearing up for the low-carbon economy through exploring green ammonia and green hydrogen solutions with international partners. We are also expanding our provision of Energy-as-a-Service for commercial and industrial customers, as we both grow recurring income and contribute to global decarbonisation efforts. Our announced portfolio of renewable energy assets has more than doubled to 2.6 GW, including projects under development, compared to 1.1 GW at the start of 2022, on track towards our target of 7.0 GW by 2030. Looking ahead, we will continue to tap our asset-light model and harness Keppel Infrastructureâs strong track record to seize growth opportunities in the energy & environment sector. Our Urban Development business was affected by headwinds in our key markets, especially China, but we were still able to put in a creditable performance. Asset monetisation remained healthy with the divestment of two projects in Shanghai, though it was lower than in 2021. China, post its zero-COVID policy, should see stronger domestic demand and higher growth. The Chinese authorities have also announced constructive policies which should benefit the real estate sector. Keppel Land will continue its push to grow recurring income and provide Real estate-as-a-Service solutions to enhance our relevance in a world characterised by flexible work arrangements, climate action and where digitalisation is redefining the built environment. We are seizing opportunities in sustainable urban renewal and senior living, as demonstrated by our recent acquisition of an office tower in Seoul and a senior living facility in Nanjing. In our Connectivity segment, M1âs earnings grew significantly, rising 32% year-on-year to S$75 million in FY 2022, underpinned by its transformation from a traditional telco to a cloud native connectivity platform. Roaming and prepaid revenues have also risen with the progressive reopening of economies. M1 is expanding its enterprise solutions and developing 5G business applications, as it captures new profit pools. The enterprise business has been growing steadily, making up about 33% of M1âs revenue in 2022, up from 20% in 2020. We expect profit contributions to improve in the coming years as M1 migrates customers to its new cloud native digital platform, which allows subscribers to enjoy its new 5G plans, and cloud services such as cloud gaming, among others, improves customer acquisition and lowers its cost to serve. In the data centre business, Keppel is uniquely positioned to provide integrated end-to-end solutions, from the provision of clean energy, to the development and operation of high quality green data centres, to the raising of funds to invest in greenfield developments, to the monetisation of stabilised assets through Keppel DC REIT. In FY 2022, our integrated data centre business yielded total earnings of S$66 million13. We have also continued to grow our data centre portfolio with acquisitions in China and the UK. Looking ahead, we see the trend of increasing digitalisation, including cloud computing, artificial intelligence and the metaverse, generating further demand for the Groupâs digital connectivity solutions. To conclude, 2023 will be an important year for Keppel, as we take the next leap forward in our Vision 2030 trajectory. With sustainability at the core of our strategy, we will continue to both run our business sustainably, and also make sustainability our business through the solutions we provide, which can help the world progress towards Net Zero. We are encouraged to see our sustainability efforts recognised with the inclusion of Keppel Corporation in the Dow Jones Sustainability World and Asia-Pacific Indices, as well as the retention of our triple A rating in the Morgan Stanley Capital Index (MSCI) ESG ratings. The Keppel of tomorrow will work towards being a leading global asset manager and operator, focused on harnessing the Groupâs different capabilities to create solutions for a sustainable future. With the growing global focus on sustainable development and climate change, I believe Keppel is in the right space at the right time. While the macro environment is expected to remain challenging, I am confident that we can build on the momentum Keppel has achieved to deliver strong value for all our stakeholders. Thank you, Joo Ling and very good evening to everyone. I shall now take you through the group's financial performance. For the full year, the Group's net profit including discontinued operations decreased 9% year-on-year to $927 million. All segments were profitable with improved year-on-year performance from Energy &Environment and Asset Management. ROE was 8.1%, as compared to 9.1% last year. In 2022, Asset Management was the largest contributor at $311 million net profit, representing about one-third of the Groupâs earnings. Despite the headwinds in some markets, our Urban Development business continued to contribute significantly, accountingfor $282 million or 30% of the Groupâs profits. Reversing the net loss in the prior year, Energy & Environment contributed a net profit of $172 million, or 19% of the Groupâs bottom-line. Connectivity and Corporate & Others accounted for 8% of the Groupâs profit. Discontinued operations registered a net profit of $88 million, compared to 2021âs net loss of $225 million. I will further elaborate on the performance of each segment later on. Beyond profitability, the Group has maintained a healthy balance sheet. Net gearing was 0.78 times as at end of December 2022. Compared to the end of 2021, net debt has increased mainly due to investments, dividend payments, as well as the $500 million share buyback programme completed during the year, partly offset by proceeds from divestments. Capital employed decreased as a result of dividend payments, effects of share buybacks and other reserve movements, which were partly offset by profits earned during the year. Free cash outflow was $408 million as compared to the free cash inflow of $1.76 billion in2021. This was largely due to lower divestment proceeds from asset monetisation completedand higher investments made during the year. During the year, the Group invested in severalenergy & environment and sustainable urban renewal-related investments including Cleantech Renewable Assets which is a solar platform, Eco Management Korea Holdings Co., Ltd which is a South Korean waste management company, an office building in South Korea which the Group will look into incorporating sustainability features. The Group continued to scale up and expand its sources of recurring income. Recurring income increased $298 million year-on-year to $560 million. This was underpinned by higher earnings achieved by the power & renewables business and M1, stronger share of results from an associated company in Europe under Keppel Infrastructure and higher contributions from the stakes in the REITs and Trust that we own. Earnings from Development for Sale were lower year-on-year mainly due to lower contributions from trading projects in China and lower gains from enbloc sales. These aroselargely as a result of the slowdown in the Chinese economy and Chinaâs zero COVID policy, which have affected home sales, the completion and handover of units, as well as asset monetisation. However, the Chinese economy is expected to recover in the coming months following the relaxation of COVID restrictions. The implementation of support policies targeted at both property developers and homebuyers should also help to bolster market sentiments. Although lower year-on-year, the Group continued to record healthy revaluation gains on our investment properties and data centres, as well as fair value gains on investments in2022. Moving on to the performance by segment. Energy & Environmentâs net profit for the year was $260 million, a sharp reversal from the net loss of $414 million in 2021, which had included an impairment of $318 million related to the Groupâs exposure to KrisEnergy, partially offset by share of Floatelâs net restructuring gain of $215 million. Net profit from our infrastructure business more than doubled year-on-year to $241 million, driven by higher electricity and gas sales and contributions from Keppel Seghersâ projects abroad, as well as a higher share of results from an associated company in Europe, as mentioned earlier. Discontinued operations recorded net profit of $88 million, as compared to a net loss of $225million in the previous year. Keppel O&M recorded healthy revenue growth of 39% due to revenue recognition from new projects and higher progressive revenue recognition on existing projects. However, OpCo recorded a net loss of $143 million largely due to provisions made for cost overruns on certain ongoing projects in Keppel O&Mâs yard in the US, mainly arising from a shortage of manpower, higher-than-expected labour costs, as well as COVID-related supply chain disruptions. Apart from the yard in the US, the projects in Keppel O&Mâs other yards, including the FPSOs projects with Petrobras, are progressing well and are on-track and within budget. Keppel O&M continues to build on its strengths, having secured S$8.1 billion of new orders in 2022, which are expected to yield reasonable gross margins. As at year-end, Keppel O&Mâs net order book stood at S$11.0 billion, the highest level since 2007. Notably, significant deposits were also received for the new build FPSO P-80 and P-83 projects, whichhave contributed to Op Coâs healthy net cash position as at end-December 20221. With improving offshore and marine market conditions including recovery of oil prices, higher rig utilisation and day rates contracted, and supported by the value-in-use assessment conducted by our independent advisers, the Group has partially written back $293 million of impairments which had been made in 2020 for certain legacy rig assets. As mentioned during 1H 2022 results briefing, following the definitive agreements for the proposed combination of KOM and Sembcorp Marine and the Asset Co transaction, the Group has also ceased depreciation for the relevant assets that have been classified under disposal group held for sale. This amounted to about $71 million for the year 2022. As such, discontinued operations recorded net profit of $88 million in 2022 mainly from the partial write back in respect of certain legacy rig assets impairment made in 2020 and cessation of the relevant depreciation, partly offset by Op Coâs net loss largely due to cost overrun provisions for certain ongoing projects in the US yard. Urban Developmentâs net profit was declined year-on-year at $282 million, mainly due to reduced contributions from China property trading projects and lower fair value gains from investment properties, as well as lower gains from enbloc sales. Keppel Land completed the disposal of the Upview and Sheshan Riviera projects in Shanghai in 2022, which booked a gain of $20 million. This is lower compared to the recognition of $338 million in gains from the disposal of the Dong Nai project in Vietnam, Serenity Villas project in Chengdu, and China Chic project in Nanjing, and divestment of apartial interest in Tianjin Fushi Real Estate Development Co Ltd in 2021. Contribution from the Sino-Singapore Tianjin Eco-City was lower year-on-year, as there were no land sales in 2022, compared to the sale of a commercial and residential plot in2021. However, market sentiments are improving following the relaxation of COVID-related restrictions. 1 Net cash position is calculated as at a point in time and may change subsequently depending on the working capital requirements of the projects as they progress, and is not indicative of the future financial position of Op Co. The Connectivity segment recorded a net profit of $37 million, which was lower year on year as 2021 benefited from gains from the disposal of interests in Keppel Logistics Foshan and Wuhu Sanshan Port Company Limited in 2021. M1âs mobile and enterprise revenue grew as it continues to expand its enterprise business and 5G offerings. Net profit from M1 was 32% higher at $75 million on the back of better operating results, underpinned by higher revenue and lower depreciation and amortisation expenses, which were partly offset by network service fee expenses. The Groupâs OneDC business, comprising Keppel Data Centres working in collaboration with the private funds and Keppel DC REIT managed by Keppel Capital, contributed total earnings of about $66 million of which $62 million is reported under the Asset Management. Performance of the data centre business under Connectivity segment improved year on yearmainly due to higher fee income, partly offset by lower fair value gains from data centres. Asset Management achieved a 20% increase in revenue underpinned by higher fee income arising from successful acquisitions completed during the year. Net profit rose by $10 million to $311 million, backed by higher top-line and higher fair value gains on investment properties under Keppel REIT. These were partly offset by lower fair value gains on data centres under Keppel DC REIT and our private funds, as well as mark-to-market losses from investments, as compared to mark-to-market gains recognised in2021. Contribution from Corporate & Others was lower year-on-year at $37 million. Our investments in new technology and start-ups continued to yield good returns thatsupported the $91 million of fair value gains recorded in 2022, mainly from investments such as Envision AESC Global Investment L.P. and Fifth Wall. Investment income was lower due to the absence of distribution of income from iGlobe Partners Platinum Fund I, which matured in 2021. With that, we have come to the end of the presentation, and I shall hand the time back to CEO, for Q&A. Thank you. So okay, we have first question. This is from John Lee retail shareholder in Singapore. Mr. Loh, can you elaborate on your point about Keppel's NTA rising first, when the SMM transaction is approved and completed, and then falling after the Sembcorp Marine shares are distributed to shareholders. Does this mean that Keppel's share price will rise and then fall? Okay. Maybe, let me be clear. All this -- this will all take place, more or less at the same time. So, in other words, at completion of the transaction. So this is all assuming that the shareholders of Sembcorp Marine approves the resolution place in front of them at the EGM on the 16th of June. So when the completion takes place, we will, as I mentioned in my remarks, opening remarks will make significant gain from the transaction, which will result in our NTA rising first and then of course, we are distributing 19.1 shares per KCL shares, and that will then result in the NTA falling. The net of it all is that the NTA will be more or less just slightly below what our NTA is as at the end of December, 2022. The key difference here is that unlike distribution from our portfolio to shareholders in species where there is no accompanying transaction, you would have, you would have then let to our NTA falling by the value of the distribution. So, in this case, the value of the distribution is backed by the gains that we will make or we were booked when the transaction is completed with Sembcorp Marine. Next question. This is from Nicholas Lim investor in Singapore. Congratulations on the good results in spite of the global economic headwinds. I have two questions. First on dividends, the final dividend is lowered than last year, despite an increase in the company's recurring income. Should we view S$0.33 as the minimal annual dividend by Kepcorp? The second question, ROE Keppel's, ROE of 8.1% is still some way off your ROE target of 15% for Vision 2030. Could you share what steps you're taking to achieve your targeted 15% sooner? So maybe, let me explain. I think whilst we don't have a specific dividend policy, the board and the management is well aware that dividend is a very important part of the consideration for our shareholders. And we have so far in recent years endeavored to pay somewhere between 50% to 60% of our earnings. So this is how we arrive at the S$0.33 final, I mean, the final dividend of S$0.18, making a total of S$0.33 for the year. As the group's recurring income goes up as you have noted, which is also part of our Vision 2030, you will give us more confidence to pay more of our earnings in dividends, but I wouldn't say that this S$0.33 is a minimal annual dividend. It will all depend on how successful we are to continue on our Vision 2030 to improve the quality of our earnings as well as of course the absolute amount of the earnings going forward. On your second question, I think that's a fair point. We are still somewhere off the 15% but we're working towards, towards that even in the capital that you see today. You can see that through the asset monetization, we are actually creating a lot more headroom in our balance sheet to take on growth -- new growth opportunities in energy transition in real estate as a service, and of course, in connectivity solutions, and of course in asset management as well. So, over time, as we move away from having assets in our balance sheet that are sitting there, such as our land bank, which may not produce returns. In fact, the land banks will have a certain holding cost attached to them, and we replace them by new investments with recurring income. I believe our re-target, our ROE will continue to rise. So we are working towards that 15%, and we remain confident that we will achieve that well within the Vision 2030. Next question. Okay. This is from Terrence [ph] of Phillips Securities. High management. Thanks for the presentation. Can I find out if the fine pit by capital had an impact on the dividend distribution this year? Hon Chew, do you want toâ¦ Sure. Thanks for that. I think as we have announced after taking into account the crediting of the US$52.8 billion, which the Attorney General Chambers of Singapore and CPID have agreed to, the net fines and damages paid by QM was actually US$2 million. So there is really no material impact on the earnings, and as a result, there's also no material impact on the decision regarding the dividend distribution decision. Thank you. Next question is from Jame Osman of Citi Singapore. Hi. Thanks for the presentation. Could you share what was the earnings contribution from the new energy and environment investments that were made in financial year 2022, as well as expectations on how these investments could contribute to the segment's growth in financial year '23 and beyond? Which projects or investment are you most positive on in terms of potential? Hon Chew, are you able to address this? I think we've as we mentioned earlier, there are a number of investments that were made during the year, but I don't think we're vulnerable to expect these investments to make material returns within such a short span of time. Okay. So, some of these investments was made during the year. So, and of course, it is also investments that we make jointly with some of the private funds and trust that we have. So over time, we would expect that we will get our share of earnings from these investments or investment dividend income, depending on the type of investment it is, whether it's an associate or an investment. But on top of that we will also be getting, of course, our asset management fees, etcetera. So this will all add to the returns and the recurring income that the group makes. I guess you are referring to new projects, because obviously we are positive on the projects that we have gone into. But maybe I can invite, Christina, you want to share a bit about what are some of the things that Keppel Corporation is excited about despite the very difficult environment. Thanks. Regarding our investments, I think we are really happy that we have made investments into renewables projects in Europe as well as in Asia. I think the investments referred to, like in Cleantech where we have solar platforms in India, in the C&I space, as well as in the Southeast Asia, I think that's doing really well. So we are very positive about that. Unfortunately with Ukraine war as well, I think energy prizes have actually gone up substantially in Europe. So our investments in onshore wind in the Nordic, as well as offshore wind in Germany has actually done really well compared to our underwritings probably about three times of what we have underwritten. So we expect that these segments of investments are really something that we can look forward to in terms of contributions to our earnings. Thank you. Okay. We have a question now from Ms. Lim Siew Khee of CIMB in Singapore. Okay. Well, she has quite a number of questions. So I will try to address them one at a time. So first question, which by itself has, okay, what is your r target, ROE in financial year '23? I guess, we don't give you a specific target for ROE in financial year '23, because that would be like giving you a forecast of what our earnings is going to be. Second question, why this continued profit came down half-on-half to S$24 million in second half '22 versus S$63 million in first half '23. Do you -- can you decipher her shorthand? Let me try it. I think if you look at the second half of discontinued volumes, indeed, I think as you have already pointed out, there was some provisions made for overrun, which we have already kind of mentioned in our opening address. As you know, every financial year as we close the books, we will have to do a very extensive review of our cost for each of the projects, looking at cost incurred to date and projection of what are the future costs to complete those contracts. We need to make certain provisions for any overrun that we may expect to incur in future. And given some of the increase in labor costs, and especially in this case, in the US as a result, we had to make certain provisions and as you know, these are live projects, and as we speak, the team is also working with the customers to try and recover some of these cost overruns. So due to the sensitivities, I will not be able to tell you which projects and how much. But suffice to say that if you look at OpCo, as I have covered in my opening address, OpCo has made a loss of S$143 million. OpCo would have made a profit, if not for this provisions that we made for the second half. I hope that helps to give to add some color. To give you a flavor of the second half performance for the discontinued operations. I think you answered her question. How much was the provision made for the cost overrun and what project it was? Any more provision ahead of course, you come project. Yes. So as we mentioned, we actually did a very, very extensive review of all the projects for the financial year end. So we can say that up to this point in time, we do not expect any additional provisions to be made for these projects. And I've also covered in the opening address that this is specific to our year in the US. All the other projects in other yards, we don't have the same issue. We don't have to make such a provision, and the other projects are expected to be on budget on time. Thank you. She has a third set of questions. Energy and environment made S$127 million. I guess this is the second half versus S$46 million in the first half '22. Would you please help to quantify how much is due to strength in power and gas and how much related to Europe associate under capital infrastructure? She's looking for a split between the two. Yeah. Well, a lot of our business is actually run through not just subsidiaries, but also through associates, right? So this particular associate, I think we can name is actually MET is also in an area in the new energy area and so on, that we are also going into. So I think to kind of try and split the I'm not sure whether it is meaningful, because increasingly more and more of our projects, more and more of our business is actually done through associates. They're both strengthened. So with the increase in oil prices, gas prices, power and gas has gone up as well as some of the businesses done through associates such as MEP. Okay. I think that's another question coming up that Cindy can help clarify this. This is from the Paul Chew, Phillip Securities. Paul has two questions. The first question is what are the key drivers for electricity spreads in Singapore for 2023? Any opportunity for spreads to widen in 2023? There's a second question, but Cindy, would you take the first one? Thank you. Thank you, Mr. Loh. Thank you, Paul for the question. The electricity -- the electricity spreads in Singapore for 2022, I believe you are asking, was due to, of course, the increase in HSFO price increase in gas prices brought about by the Ukraine, Russian crisis, as well as the global energy crisis in Singapore, particularly, is also affected by certain plant maintenance activity in some of the generation assets as well as I think throughout 2022, there are occasions of pipe gas disruption upstream in our neighboring exporting country. As to opportunities for spreads to widen in 2023, can't tell, but I think suffice to say it is healthy and strong, but we remain vigilant in terms of the global activities. Thank you. Thank you, Cindy. Can I ask Lu-yi to take the next question? Okay. So the next question is from Paul Chu, is, what are the planned number of residential launches in China in 2023? And what is your view of buyer sentiments? Thank you, Paul. Perhaps I'll start with the second half of the question first. I think as mentioned earlier, we have faced headwinds in China. But at the same time, we are optimistic about the path forward with the leveraging policies and the COVID lockdowns has affected the market. But with the opening of China, we've also seen positive signs. We are getting more inquiries, which have also led to an uptick in sales. So with that in mind, we will be planning launches based on how we read the market. We're not going to say how many exactly we will be launching, but we do have a number of projects across UCI and Tianjin that we're looking to launch more units next year. Thank you, Lu-yi. Next question is submitted by a retail investor, Mr. or Miss, or Mr. H.C. Lim of Singapore. With the improvement in O&M sector, will the divestment of com affect future earnings of Keppel Co? We have a very good business in com [ph] and as you rightly said the O&M sector is also improving, but this is really in keeping with our Vision 2030. As we look for more recurring income rather than lumpy profits that we are doing this divestment or the spinoff. And of course, there are other reasons associated with that, creating a stronger global player that can play a bigger part in the energy transition. But as far as how you affect capital also depend, or what do we do with the balance sheet space that has been freed up both from the fact that we have the S$500 million in cash coming back. We will also have some of the -- some of the debt space would be reduced. So that would allow us to invest in the other growth segments that we've identified, including infrastructure, energy transition projects, as well as real estate urban renewal projects, senior living, asset management, as well as connectivity data centers, etcetera. So it's not just about what we would potentially -- could potentially lose, but also what do we do with the balance sheet that we have now, the additional balance sheet space. What do we do to look for future growth engines under vision 2030? Next question. This next question looks like is from a retail investor [indiscernible]. Why is the final dividend lower? I think we had or I had explained earlier that whilst we do not have a specific dividend policy, we have been paying about 50% to 60% of our net profits every year. So our net profits this year is 9% lower than last year. We have paid, of course, a higher interim dividend compared to last year. So overall, the dividend is the total dividend for financial year 2022 remains unchanged from the year before at S$0.33. No questions for connectivity. We must have explained it quite well. There's a duff of questions this evening. This question is from Jamie Osman of Citi. Hi. Could you show -- could you share what are the main drivers behind the flattish revenue trend in second half '22 for connectivity, despite the growth in subs and ARPU at M1? At least talk a bit about M1I Sure, sure. Thanks James for the question. I think while our ARPU and subscribers have both grown, there has been a bit of slowness in the handset sales in the second half of 2022 compared to last year, which we are seeing as a trend in the market where handset sales are going down and people are more adopting same-only plans and I think that is what probably you are referring to that the revenue trends are flattish due to handset sales primarily. But otherwise from a service revenue perspective, roaming subs and ARPU all have grown. So service revenue is quite handsome. It's just the handset sales, which have diluted the revenue to a certain extent. Thank you. Okay. This is a question that was submitted by [indiscernible] in Singapore. Her question, can I clarify the new launch of new RESI projects in [indiscernible], I heard it will be next year, but is it this financial year or next? Would you also comment on the pace of the recovery in property market in China, Lu-yi? Okay, thank you. Sorry. To clarify, clarify this year so 2023. Across all four quarters, we do have plans to, to launch units in our RESI projects. The pace of the recovery in the property market, I would love to say it's going to be brilliant, but I think this is very much up to the market itself, but what we have seen is more recently with the Chinese New Year. There was an expectation that there would be a second wave, which did not quite materialize. So overall, I think we are cautiously optimistic that the market will pick up. Right now, the pickup is more on consumer and tourism, but we look forward to that translating to the property and market in the next few quarter. Okay. We have a question from Terrance of JPMorgan in Singapore. Thanks for the opportunity. I wanted to ask on data centers, there was mention of potential divestments and asset recycling into Keppel DC REIT. Can you share on which of the data centers in the portfolio alpha are ready for divestments? And also, how is the progress for Keppel DC Singapore Seven. Maybe I can ask Thomas. You want to Thank you, Mr. Loh. Thank you, Terrence, for the question. DC7 is under construction right now. Phase 1 RFS ready for service should be within the next -- within this quarter. And there will be subsequent phases where we will continue with the fit out and construction and it would be in the fourth quarter. So we will continue to complete the construction and the fitting out and get the space ready for service. And once the revenue stabilize, we will look at potential recycling of asset to the DC REIT. Okay. Next question. This is a follow up question from Mr. Osman of Citi. Just to follow up on the service revenue trend for M1 in the second half '22, there was a deceleration of growth in second half versus first half. So was the trend of lower handset sales only apparent in the second half? Manjot? Yeah. Thanks, Jim, for the follow up question. Yes, you're right. The second half was lower than the first half because most of the launches of hand new handsets primarily driven by Apple as well is in the second half of the year. So your observation is correct. Okay. There's another question from [indiscernible] of Phillips Securities. In connectivity, what are the planned Greenfield data centers, if any and is Singapore's mobile industry right for consolidation? Thanks again. I think the second part of that question is highly speculative. So we won't touch on that, but can I ask Thomas, you want to speak to the first part of his question on Greenfield data centers? Thank you very much, Paul. Together with our private fund managed by Keppel Capital, we are looking at quite a number of projects in both in Southeast Asia and North Asia. So there will be -- there are currently projects that is under construction in China and in Singapore. And in other parts of North Asia, we are looking at announcing as soon and negotiating and developing projects for the North Asia market and in addition to that, we are working on designing new generations of innovative green data centers and that being are planned in Singapore. Thank you. Okay. We have a question from Towe [ph] of Macquarie in Singapore. High management; thanks for the presentation and generous dividend, or thank you for acknowledging. So on the dividend payer ratio, the S$0.18 payout in second half is more than the 50% to 60% range on the second half basis. And as you've mentioned, net gearing was higher due to dividend payment and share buybacks. With this in mind, how would you think about the dividend payout ratio in 2023 and its impact on gearing, if any? I guess taken as a whole right, we are kind of looking at dividend payout within those ranges as guidelines, but ultimately we also look at things like, how fast our monetization is going. And for 2023 whilst we were very happy with that we were able to continue monetizing those assets that we've identified in our portfolio that are due for monetization. It has been a bit slower compared to 2021. So it will depend on how the monetization goes this year. As you've heard from Lu-yi, the outlook for China seems a bit more positive now. But again, that's what Lu-yi say is probably too early to celebrate. But we certainly are encouraged by what we see there. And we do have a number of assets there that we potentially could monetize. So this is -- this would depend on how that goes for the rest of the year. Okay. So this is -- I believe this is the last question. I want to thank everyone for listening in. Since this is still the Chinese New Year period, I want to wish everyone very happy Lunar New Year. Thank you.
EarningCall_560	Good morning. My name is Glen, and I'll be your conference operator today. At this time, I would like to welcome everyone to Timken's Fourth Quarter Earnings Release 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. Thanks, Glen, and welcome everyone to our fourth quarter 2022 earnings conference call. This is Neil Frohnapple, Director of Investor Relations for The Timken Company. We appreciate you joining us today. Before we begin our remarks this morning, I want to point out that we have posted presentation materials on the company's Web site that we will reference as part of today's review of the quarterly results. You can also access this material through the download feature on the earnings call webcast link. With me today are The Timken Company's President and CEO, Rich Kyle; and Phil Fracassa, our Chief Financial Officer. We will have opening comments this morning from both Rich and Phil before we open up the call for your questions. During the Q&A, I would ask that you please limit your questions to one question and one follow-up at a time to allow everyone a chance to participate. During today's call, you may hear forward-looking statements related to our future financial results, plans and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the timken.com Web site. We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials. Today's call is copyrighted by The Timken Company, and without expressed written consent, we prohibit any use, recording or transmission of any portion of the call. With that, I would like to thank you for your interest in The Timken Company, and I will now turn the call over to Rich. Thanks, Neil. Good morning and thank you for joining our call. Timken delivered another excellent quarter which concluded an outstanding year. Organic revenue in the fourth quarter was up 10%, demand continued to be strong, with North America and Asia both up double-digits. Price contributed meaningfully to the fourth quarter revenue gain, and our outgrowth initiatives also added to the results. Fourth quarter EBITDA margins improved 380 basis points from prior year, with improved price-cost being the largest driver. Earnings per share of $1.22 was a record for the fourth quarter, and was up 56% from prior year. We also closed on the GGB Bearings acquisition and the Aero Drives Systems divestiture, and purchased 250,000 shares. And free cash flow in the quarter was very strong at $186 million. For the full-year, we delivered 9% total growth, and around 12% organic growth, which was the second consecutive year of double-digit organic growth. Organic growth was at least 10% all four quarters of the year, and we start '23 with very good momentum. EBITDA margins, of 19%, were up 160 basis points from '21, and were more consistent through the course of the year. Our price realization exceeded the 4% that we guided to at the beginning of the year, and price improved sequentially each quarter for the second straight year. The rate of cost increases leveled off around mid-year, but costs were up over prior year each quarter, and we remain in an inflationary environment. There have been a lot of moving pieces on costs. Steel and logistics were the early inflationary pressures. They have both eased off peak, but labor, energy, other material, and SG&A costs all increased. Internal inefficiencies from supply chain and labor challenges were better than '21, and improved through the course of the year but remained elevated. Earnings per share, of $6.02, we 28% over last year's record level. Free cash flow, of $285 million, was up from prior year. In addition to the M&A, we continue to invest about 4% of sales in CapEx for growth and cost initiatives. We advanced our products, advanced our footprint, improved our productivity, invested in our digital platform, and expanded our capacity through these investments. We also purchased about 4% of our outstanding shares during the year, and we ended the year with a strong balance sheet. We were also named one of America's Most Responsible Companies, by Newsweek, for the third year in a row. This recognition underscores our commitment to being an excellent corporate citizen. We're driving sustainability through the products we make, the industries we serve, and across our global operations. We also invest in the development of our people, the diversity of our workforce and safety across the enterprise. In summary, 2022 was a very good year for industrial demand, but also had a lot of unexpected challenges. And we once again capitalized on the opportunities while navigating through and responding to the challenges to deliver outstanding results for both our customers and our shareholders. Before I turn to '23, I want to highlight slide 12 in our quarterly deck. This slide is from our recent Investor Day, and is updated for our '22 results, and our new adjusted EPS definition. Through the five-year period, we delivered an 8% revenue CAGR, an 18% earnings per share CAGR, and an average EBITDA margin of 18.5% with only 180 basis points of margin variation through the five years. When you reflect back on the macroeconomic volatility through that five-year period, from tariffs, pandemics, inflation, supply chain challenges and more, these results demonstrate the resiliency of the demand for our products and technology, the diversity of our business, and our commitment and capability to drive value through economic cycles. So, while uncertainty remains elevated today, Timken is well-positioned to continue to create value in the years to come through industrial cycles, and through evolving technologies. Timken enters '23 a larger and better version of the company that we were in 2018, and we are confident that we will be able to continue the trajectory of this performance in the years to come. And we expect that '23 will be a good start to the next five years. Turning to 2023, I will start with our recently announced acquisitions. First, American Roller Bearing, or ARB; ARB has been family-owned and operated in the United States for three generations, they have a long-standing position in the U.S. process industries markets; they have a large install base of products throughout the U.S. and sell primarily through bearing distributors through a fragmented base of OEMs and end users. These are markets and channels that Timken knows very well, and we are confident that we can create value for customers and shareholders through integrating ARB in the Timken's engineered bearings portfolio. ARB enters the portfolio at modest EBITDA margins, but we expect, over time, to get it to Process Industries' level margins. Nadella will add a combination of new products to our portfolio, and also expand existing product lines and market positions. The largest product line is linear motion actuators. The product compliments and scales our linear motion platform, and we will deliver strong synergies with our Rollon business. Nadella also brings industrial needle roller bearings, ball screws, and rod ends to the portfolio. Timken entered the rod end market with the 2020 acquisition of Aurora, and adding Nadella will globalize our rod end market position. Nadella will further scale our position in several of our targeted markets as they serve a fragmented customer base across markets like automation, packaging, food and beverage, logistics, and medical. Nadella will join Timken with a margin profile slightly above the company average. And with synergies, we will both expand margins and accelerate the global growth rate. We're excited to be adding both ARB and Nadella to our portfolio. Upon completion, we will remain comfortably within our targeted leverage ratios. And with our '23 cash flow, we can continue to be opportunistic with capital allocation opportunities through the year. Turning to our markets, in slide seven in the deck, we are guiding to a 3% organic revenue increase in total. We expect price to be over 2% for the year, so price comprises over half of the organic revenue outlook. We are confident in achieving at least the 2% price. Starting on the right, we're expecting a strong full-year in renewals, driven by Asia wind, both from the market as well as from our outgrowth tactics. This is a market where we have good visibility into demand for several quarters out. The order book and backlog are strong, and customers are committed to a step up in revenue for the full-year. We're planning for the rest of our markets to range from flattish to up mid-single digits. I'll talk more about the first quarter in a moment, but this guide assumes we will start the year well above the 3% level, and then moderate the second-half of the year partly from tougher comps, but primarily from taking a cautious view of the markets where we do not have extended visibility. We are also anticipating some channel inventory pullback in this outlook as supply chains improve and customers return managing inventory with higher precision. If our outlook for the second-half proves to be low, we will be in excellent position to capitalize on the situation. From a margin standpoint, we are guiding to roughly flat margins for the year. As I said in my '22 comments, there have been a lot of moving pieces on the cost and margin front and that continues into '23. We are expecting price cost to be modestly positive for the full year. We also expect margin help from better operational execution, supply chain improvements, our '22 CapEx and footprint investments, and lower steel and logistics cost. However, we remain in an inflationary environment. And we do anticipate further cost increases in SG&A, labor, and other purchase materials. Currency and mix are also expected to be margin headwinds for the year. We have been dealing with a rising and volatile cost situation for a couple of years. And I am confident that we will successful navigate through the price cost dynamics again in '23. Earnings per share would be up about 5% at the mid-point. We expect much stronger cash flow in '23 primarily from higher earnings and lower working capital requirements due to both moderating growth rate as well as improved supply chain execution. While we are taking a cautious view on the second-half, we are starting the year strong. We have good visibility for the first quarter and well into the second quarter. And we expect organic revenue to be up high single digits in the first quarter. We have a healthy backlog, good order input, and the benefit of another sequential price improvement. We would also expect our normal sequential step-up in margins from the fourth quarter to the first. In summary, we delivered an excellent year in 2022 both strategically and financially, and we are off to an excellent start to '23. We are in a great position to extend our strong performance. We are excited about the opportunities in front of us, and we feel confident in our ability to continue to create shareholder value for a long-term as we continue advance Timken as a diversified industrial leader. Okay, thanks, Rich, and good morning, everyone. For the financial review, I am going to start on slide 14 in the presentation material with a summary of our strong fourth quarter results which capped off a record year for Timken. We posted revenue of close to $1.1 billion in the quarter, up over 7% from last year. We delivered an adjusted EBITDA margin of 17.2% with strong year-over-year margin expansion. And we achieved record fourth quarter adjusted earnings per share of $1.22, up 56% from last year and over 20% than our next best fourth quarter. Turning to slide 15, let's take a closer look at our sales performance. Organically, fourth quarter sales were up 10.2% from last year driven by strong growth across most end markets and sectors, and with healthy contributions from both volume and pricing. Looking at the rest of the revenue block, foreign currency translation was a sizeable headwind in the quarter driven by a stronger U.S. dollar against the euro and other key currencies. And the impact of acquisitions net of divestitures contributed modestly to the top line. On the right-hand side of the slide, you can see organic growth by region, which excludes both currency and acquisitions. Let me touch briefly on each region. In Asia-Pacific, we were up 10% driven by strong growth across the region with renewable energy and distribution posting the strongest sector gains. In North America, our largest region, we were up 13% with most sectors up led by off-highway, distribution, and general and heavy industrial. In Latin America, we were up 5% driven mainly by year-over-year growth in distribution. And finally, in EMEA, we were down slightly as lower renewable energy revenue and lost Russia sales were mostly offset by growth in other sectors. And notably if you exclude Russia, we would have been up modestly in the region for the quarter. Turning to slide 16, adjusted EBITDA in the fourth quarter was $186 million or 17.2% of sales compared to $135 million or 13.4% of sales last year. Looking at the increase in adjusted EBITDA dollars, we benefited from strong price mix and higher volume in the quarter, which more than offset the impact of unfavorable net manufacturing performance and higher SG&A other expense. As you can see on the walk, material and logistics costs were relatively flat year-on-year, a significant improvement from the sizeable headwinds we've experienced over the past several quarters. Overall, we delivered an incremental EBITDA margin of 68% on the higher sales driven by our positive price cost performance, which enabled us to expand margins by 380 basis points, versus the fourth quarter of last year. Let me comment a little further on a few of the key drivers in the quarter. With respect to price mix, pricing was meaningfully higher in both mobile and process industries reflecting our significant pricing actions over the past year. Mix was also positive, driven by our strong growth in attractive sectors like industrial distribution. Moving to material and logistics, as I mentioned, the year-over-year impact in the quarter was largely neutral as higher material costs from continued supplier price increases are mostly offset by lower logistics and transportation costs. I would also point out that material and logistics costs were down sequentially from the third quarter. On the manufacturing line, we were negatively impacted by continued cost inflation, including energy and labor, as well as lower production volume. And we were also impacted by higher costs that had been capitalized to inventory in prior periods. This will continue to be a headwind in 2023. On the positive side, we're seeing improved execution from our teams around the world as supply chain and other constraints continue to ease. We should also benefit more in 2023 from our manufacturing footprint actions, and other self-help initiatives. And finally, on the SG&A other line, costs were up in the fourth quarter driven by higher compensation expense, and other spending to support the increased sales levels. But I would point out that SG&A expense was in line with our expectations, and up only slightly organically from the third quarter run rate. On slide 17, you can see that we posted net income of $97 million or $1.32 per diluted share for the quarter on a GAAP basis, which includes $0.10 of net income from special items. On an adjusted basis, we earned $1.22 per share up 56% from last year, and a record for the fourth quarter. You'll note that we benefited from a lower share count in the quarter, reflecting the significant buyback activity we've completed over the past year. And lastly, the higher interest expense and 25.5% adjusted tax rate are in line with our expectations. Now let's move to our business segment results starting with Process Industries on slide 18. For the fourth quarter, Process Industries sales were $586 million, up 11.1% from last year. Organically, sales were up 13.5% driven by growth across all sectors, with distribution, heavy industries and general industrial, posting the strongest gains in the quarter. Pricing was positive once again and that acquisition contributed nearly three percentage points of growth to the top line. But currency translation was a sizable headwind in the quarter, reducing growth by over 5%. Process Industries adjusted EBITDA in the fourth quarter was $143 million, or 24.4% of sales compared to $105 million, or 20% of sales last year. The increase in Process segment margins reflects the benefit of positive price costs and higher volume, which more than offset the impact of higher manufacturing and SG&A costs in the quarter. Now let's turn to Mobile Industries on slide 19. In the fourth quarter, Mobile Industries sales were $496 million up 3.3% from last year, organically sales increased 6.4% with the off highway and rail sectors posting the largest revenue gains. We were also up in heavy truck while aerospace and automotive are relatively flat. Pricing was positive once again, our net acquisitions contributed modestly. Currency translation was a headwind in the quarter, reducing growth by nearly 4%. Mobile Industries adjusted EBITDA in the fourth quarter was $56 million or 11.3% of sales compared to $41 million or 8.6% of sales last year. The increase in Mobile segment margins was driven by the benefit of positive price costs which more than offset the impact of higher manufacturing and SG&A costs. And notably, mobile margins were up sequentially from the third quarter, which is unusual given our seasonality and reflects a moderation of costs over the past few months. Turning to slide 20, you can see that we generated operating cash flow of $242 million in the quarter. And after CapEx, free cash flow was $186 million, or more than tripled what we delivered last year. Looking at the full-year, free cash flow was $285 million, up from $239 million in 2021. The higher free cash flow was driven mainly by earnings growth, which more than offset the impact of higher working capital to support the record sales levels, as well as higher CapEx to fund our growth and operational excellence initiatives. During the year, Timken paid $92 million in dividends, or $1.31 per share, making 2022 the ninth consecutive year of higher annual dividends per share. In addition, we repurchased over 3 million shares of stock during the year or about 4% of total shares outstanding, and we have nearly 6 million shares remaining on our current authorization. We also completed the acquisitions of GGB and Spinea and with those acquisitions, 2022 marks the 13th straight year where Timken has made at least one acquisition. When you take into account our CapEx, dividends, net acquisitions and share buybacks, Timken deployed just over $900 million of capital in 2022. And we did it while maintaining a strong balance sheet. Turning to the balance sheet, we ended the year with net debt-to-adjusted EBITDA at 1.9 times while within our targeted range. In addition, we completed several debt financings during the year to provide us with additional financial flexibility, including the $350 million issuance of 10 year bonds back in March at an attractive fixed rate. We also refinanced and upsized both our revolver and U.S. term loan in December, extending their maturities to 2027. With our strong capital structure and cash flow, we remain in a great position to continue to drive shareholder value creation in 2023 and we're off to a great start with ARB and Nadella. Now let's turn to the outlook with a summary on slide 21. As Rich highlighted, we expect strong top and bottom line performance again in 2023 with a large step up in free cash flow generation. Starting on the sales outlook, we're planning for another year of record revenue, with sales up 4% to 8% in total or 6% at the midpoint versus 2022. Organically, we're planning for revenue to be up above 3% at the midpoint, driven by positive pricing and modest volume growth, with our volume assumptions, reflecting some prudent cautiousness around the second-half, given our limited visibility. We expect the acquisitions net of divestitures to contribute around 3.5% to our revenue for the full-year. This includes the recent ARB acquisition, but does not include Nadella. We will include Nadella in our outlook after the deal closes, which will be around the end of the first quarter. And finally, we expect currency translation to be a 50 basis point headwind to the top line for the full-year based on December 31st spot rates. On the bottom line, we expect record adjusted earnings per share in the range of $6.50 to $7.10 per share, which represents around 5% growth at the midpoint versus last year on a comparable basis. Note that the guidance range reflects our new definition for adjusted EPS, which excludes acquisition intangible amortization expense of roughly $0.50 per share. I'll come back to this later in my remarks. The midpoint of our earnings outlook implies that our 2023 consolidated adjusted EBITDA margin will be roughly in line with 2022. Note that our margin assumption reflects a sizeable headwind from currency off the positive impact we saw last year. Organically, we should see strong incrementals as favorable price costs momentum, and improved operational execution should more than offset headwinds from higher manufacturing, and SG&A costs, lower production volume and unfavorable mix. Moving to free cash flow, we expect to generate approximately $400 million for the full-year 2023 of approximately 90% conversion on net income at the midpoint. This is over $100 million higher than 2022 and reflects the impact of improved earnings and working capital performance. We're estimating CapEx at around 4% of sales for the year, with the spend continuing to fuel our long-term growth and operational excellence initiatives. And finally, we anticipate higher interest expense, and we expect our adjusted tax rate to remain around 25.5%. Turning to slide 22, let me comment further on the revision to our adjusted EPS calculation. As I mentioned, our new definition for adjusted earnings excludes acquisition intangible amortization expense, which has grown in recent years with the cumulative amount of acquisitions we've made. Overall, we believe this change will provide a better representation of our core operating earnings and improved comparability of our performance versus peers. So, to summarize, the company delivered strong results again in the fourth quarter to finish another record year. Our team continues to win in the marketplace, and drive our profitable growth strategy. We're off to a strong start in 2023, and we're well-positioned to continue to scale as a diversified industrial leader through any environment. Thank you. [Operator Instructions] With our first question, comes from Steve Barger from KeyBanc CM. Steve, your line is now open. Rich, you said price is 2% of the 3% organic growth. If I go back to slide seven, you have the worst case for the four sectors as flat, and most of the sectors are mid single-digit or better. Can you talk about which of the end markets, if any, you think are going to have negative volume growth this year? Yes, and we don't specifically split out the volume versus the price. But certainly if those middle markets all have price realized over the last year on them, so if they end up at zero their volume would be down a little bit. But it sounds to me like you're taking a pretty conservative approach just based on what this slide looks like, since you do expect positive price-cost. I guess I'm trying to get to the idea of whether you really think volume is negative or positive in 2023 for most of your end markets? Well, it's certainly not negative to start the year. And if you look at this, slide seven, we have four markets on this slide that we have visibility well into the second-half on, renewable energy, aerospace, heavy industries, and marine. So, the four markets where we have good visibility into the second-half volume as well as price were all looking, overall, for them projecting to be up mid single digits or more for the full-year. And as I said, we're looking to be up high singles organically in the first quarter. So, certainly to get to these numbers for the full-year, you'd have a moderating, from high single digits down to low single digits as the year advanced, in total. So, as you look at your internal model, do you show positive growth in the back-half or in 4Q specifically or do you expect that that goes negative in the back-half? And -- but I'd also want to emphasize again as we -- as you part there, Steve, again, we don't have visibility into that. We're taking a cautious outlook into it. But again, we're starting the year up. We just finished the fourth quarter up 10, and starting the year up high single. Hi, thank you. I have been jumping between calls, so sort of if I missed this, but earlier, you said mix would be part of why margin is only flattish year-over-year. Did I miss some growth guide particular to Process versus Mobile, where Mobile is up more? I'm just trying to figure out why would the mix be down? And was there something unique toward the end of '22 that really skewed the mix? I mean, obviously, process in general, right, gives you the better margins. But did I miss something about the bigger mix comment or is there already been something within Process? I don't think we made a comment. But within Process, if you look at slide seven, with renewable up high singles and distribution flattish, that's negative mix within Process. So, we actually expect -- Yes, I'd say a little bit of destock and just moderating more of a sell-through. And a couple of our U.S. distributors have made statements that they're looking to manage inventory a little tighter this year. But again, within that, we would expect, within this guide, for Mobile margins to be up a little bit, Process margins to be down a little bit. And then, as Phil also said, you have the currency impact across both -- Yes, I was just going to comment, David, as Rich said, I mean our mix is really driven by the -- obviously, the mix of OEM, not just in process but across the company, the OEM growth versus the distribution or aftermarket growth. And we have both the distribution and services sectors, if you will, sort of neutral for the year. But we got renewables up high single digits-plus, as well as a lot of the other OEM markets up. And that dynamic, compared to 2022, where distribution was up significantly, is producing a little bit of a mix headwind which would affect process a little bit more than Mobile. And then Mobile, a lot of the self-help we've been talking about over the course of the year around footprint and consolidations, and the like, should help Mobile, as Rich said, improve margins year-over-year with Process feeling a little bit of a headwind. But net-net, roughly neutral year-over-year, at least as we've assumed it in the guide. Okay. No, that adds a little more legitimacy to the guide. Just distribution is such a powerful force in that business, but the destock, if you can give us a little bit of insight on those conversations you've had? I think distribution is, what, I'm not including the services, just really distribution, was it 40%-45% of the division, something like that, if I remember correctly? How long is the destock when you speak to them? Is it just a slow grind down over the course of the year or is it more of a -- you know, in the first quarters, and then they're ready to go. I wouldn't overplay it. It's more -- it's not an increase in inventory, which is what we've had the last two years, right? So, again, as you look at the comps, they've building inventory, so even a leveling off in going to the sell-through rate is a reduction or a tougher comp. And I wouldn't say there is a big destocking, but lead times have improved, transit times have come down, over-ordering is over. And we're just anticipating a little bit of headwind from that. I think we already had a little bit of a headwind with that in the fourth quarter, still grew 10% organically. And we expect a little bit more in the next couple quarters. All right, that's helpful. So, not as much an absolute destock, just was a little more of a benefit in '22, that we can't quite [indiscernible]? Yes, and the extended supply chains. I mean, the extended supply chains have had a lot of stranded inventory in the supply chain that I think is coming out. Thank you, David. We have our next question, comes from Rob Wertheimer from Melius Research. Rob, your line is now open. Thank you. And just to clarify. So, I guess I went into the call assuming there would be a channel inventory drawdown there, and the fact that you're calling out as more the prior years had an inflow from distributors and others taking more inventory, you're not and just getting a large drawdown in this guide? Okay, just a quick question on pricing then. So, you've obviously captured a lot. Your margins have reflected that in the last couple quarters especially. Are you back to kind of neutral-ish with the 2% outlook for next year? Is there still more catch-up to go and that's embedded in the two or are you still working on getting catch-up pricing as contracts or other things roll though? And just in general, it's been a tumultuous couple years for pricing, I wonder if you could step back and just comment on your overall structural initiatives, COVID and inflation out of the picture for how you're capturing price? Thank you. Yes, I think if you look over -- if you added our two years of walks, maybe two years in a quarter because we really started in -- 9-10 quarters ago, inflation, we would be close to neutral, maybe slightly behind, with a little bit of offset into our volume. So, we're close to neutral. The 2% -- more than 2% is expected the very modest -- is just expected to be slightly better than neutral. But we're looking at roughly neutral. And then, to your latter question, we feel good about our ability to capture price. We feel good about your ability to respond to volatility in commodity prices and supply chain issues, et cetera, I think we've demonstrated that. We've got -- as talked before, we've got thousands of customers and a lot of complexity in our price, which tends to make it sticky and also tends to make it a little more complicated when these things happen than just pushing a button and raising and in a matter of a week or a month or a quarter. But we're there now. We've got good systems and processes. And feel good about being able to adjust to whatever comes our way in the course of '23. And my question was around pricing as well. I guess I'm just surprised at your two-points kind of a forecast for '23 because, obviously, you're coming off a fourth quarter that's way bigger than that. And I think your chief competitor sort of said mid single-digit. So, why wouldn't we think about follow-on pricing for actions done during the year in '22? Why wouldn't that kind of have a stronger effect in '23? And I think, Rich, you even said something about another recent price increase. So, are you seeing declines, I guess, is the other way to ask this, in certain parts of your customer base already and is that sort of the offset? Just help us think through why that wouldn't be higher? Yes, on the chief competitor comment, I'm not sure where they would stand on going back to pandemic to current, if they would be behind that or looking to play catch-up on that or not. But as I said, we, as you go back and add ours up, we're pretty close to neutral, and the more than 2% would build on that modestly. And again, we'll see how the cost dynamic goes through the year just to how much of build that is. We would expect the greater than 2% under any normal moderating improving cost scenario. And then, if costs go up we'd probably expect that to go up a little bit more. So, I think we've got good coverage there. And we feel good about the 2%. There's no -- where we have indexed pricing to steel or currency, there could be some give-back there happening. But, in total, as we show our walks, our costs have not gone down in total. We need the 2%, and we'll get to 2% net of the -- any index clauses is the expectation. Yes, and just maybe a clarification, Steve, the fourth quarter walk would also include -- mix was favorable in the fourth quarter. So, there would be favorable mix in there as well. But as Rich said, we're targeting the two, looking to beat the 2% for the year, and feel really good about the outlook for both -- for price-cost heading into '23. Okay. And it feels like you're going to start the year, like first quarter is going to be significantly higher, I would think, just based on what we've seen recently. And I guess that implies that we exit the year flat or negative on price. Is that the way to think about it? Well, no. I think price will still be up in the fourth quarter. But we have been improving price sequentially for nine are 10 quarters. So, every quarter the year-over-year comp gets harder. And as you highlight, that our fourth quarter number was pretty sizable, so that becomes a challenging comp for us in the fourth quarter, but would still expect it to be positive. But to your point, the first quarter would be pretty good because it's on a lower comp than what the fourth quarter just was. And we just rolled some more sequential pricing in. And as we said, we've taken a conservative view on the second-half for purposes of setting the guide. So, I mean, if we are in a more robust environment, which translates to a more robust cost environment, we have the ability to continue to move price as needed, as we've shown over the last couple of years. So, I think we do have those levers if we need to pull them; it'll all depend on where we're at in time and space as we enter the back-half of the year. It's encouraging to see renewable energy transitioning back to growth mode, and it certainly aligns with the market projections we've seen on the wind energy side, and particularly for offshore. And just curious, in terms of the high single-digit-plus growth outlook for the sector, how is your team thinking about relative growth rates on the wind and solar side? And I'm assuming that your projections are going to be back-half weighted for the year? Again, specific to that space, and how should we think that about that cadence? On the split between wind and solar, for us, wind stronger. We've had more -- we have more outgrowth tactics there, we'd have more capital going into that space; both markets, good. And then, there's also -- within solar, there's probably a little more -- well, there is a little more split between if fixed technology wins out over rotating technology, and then which technology wins as well in the solar channel. So, we have a different mix there, and depending on which growth rate is, whereas with wind, we participate across that, a little higher in gear drive than direct drive, but we have good content across all of it. So, we're more neutral on the technology side, and we have more self-help. Yes, I was going to say, Bryan, I think the -- we've seen momentum build in renewable and wind, in particular, the last couple quarters. So, we would expect to be at or even -- could even be slightly above that rate in the first quarter just given the comp we'd be working off of, as well as the momentum we've seen in the last couple quarters, kind of building into the first. Yes, appreciate the color there. And can you provide an update on Spinea and GGB integration, and offer a little more detail on the sources and potentially the magnitude of the ARB synergies? Sounds like there could be a little bit of heavy lifting to do there? And then if we combine Spinea and GGB carryover with ARB contribution, how much deal accretion you have baked into the guide, so understanding that Nadella, for the time being, is not factored in? Yes, maybe I'll take them in reverse order. So, ARB is certainly some heavy lifting, but also, again, family-owned business for several generations. So, when you look at our scale, our U.S. manufacturing presence, our purchasing power, et cetera, I think we're going to be able to bring pretty quick synergies to that. That being said, going from the modest EBITDA margins that joins us to Process Industries'-type margins will certainly probably be more '25 before we get up to that level. But I would expect improvement -- significant improvement in the run rate by the second-half of this year, and then another step up in next year before we would get to that; a lot of synergies within that business for us. GGB, similar, it's been integrated into our bearing business. The early priority was standing up some of the carve out from EnPro, and that's largely done. And so, we're operating largely without them and weaning ourselves off the transition service agreements there. So, really focused now on integrating that, and a lot -- probably more emphasis so far on sales synergies than the operational side, but I think everything looks good there. And we have a good plan in place for that this year. And then Spinea, pretty light synergy case for Spinea, that was really about entering a new product technology in a growing market. So, certainly there are some synergies in selling our existing harmonic product along with their cycloidal product. But they are largely different technical solutions for different applications, and not an enormous amount of operational synergies there. So, all three, exciting, and particularly since we didn't have Nadella in the guide at all, I'll let Phil clarify the accretion comment. Yes, so specifically with ARB, it would have been in the guide -- the guide that we provided, so that would be very, very modestly accretive just given the size. Nadella will add both to the revenue as well as all the way down after it closes. And from an accretion standpoint, under the new definition, it would be likely -- depending on timing, likely north of a nickel, somewhere between sort of $0.05 to $0.10, somewhere around there. Thank you, Brian. With our next question comes from Michael Feniger from Bank of America. Michael, your line is now open. Hey, guys, I recognize you're taking a conservative approach to the outlook with a lack of visibility just on the pricing front, how much pricing just rolls into 2023 alone when we think of that 2% increase? And can you just remind us in a typical year, when do we normally see price increases? I know it's different between the OE and the distribution, last year was an abnormal year, so, where we kind of look like in a normal year, when we think of, when we see these price increases? In a normal year, we would see our biggest sequential step up from Q4 to Q1. And we've seen that in the abnormal years last couple of years as well, the biggest sequential improvement from Q4 to Q1, but then we've had this steady sequential growth from there. And I would expect a modest step up from Q4 to Q1, and then further sequential pricing and gains through the year like we've done the last couple years, I think the difference this year could be if steel prices moderate, then there would be a little more netting, which again, we factored into that more than 2% outlook for the year. So, I think to the earlier question, comp lower because of the sequential in the first quarter. So, we did expect pretty good price realization in the first quarter. Thank you. And there's a fairly big acquisition in the industrial motion space for 13, 14 times EBITDA multiple, way above where you're trading today. How big is industrial motion of your portfolio right now? And I know you just announced a few acquisitions. Is there any view to slow that down, integrate and maybe shift more to repurchasing given that valuation discount of what we're seeing out there in the market to where your stick shares are trading? I mean, we did purchased 4% of the outstanding shares last year, and we've been pretty active in the buyback market for the last seven or eight years. And I don't think the acquisitions that we've done would preclude us from doing that. But I will all say we don't think it's either or answer. And the answer is probably both. And we've been, and we've been doing both. Yes, I would just answer the question, Mike. Industrial motion would be roughly $1.4 billion in revenues. So, well over a $1 billion now, and we've targeted getting that to $2 billion, as Rich said, I think with our and we like what those businesses are doing for our portfolio, Rich showed the slide of our five year performance, that part of our portfolios contributed significantly to that performance. And while there's a big acquisition and spending, there are still, we believe ample acquisition opportunities out there for us to continue to move the needle. So, I think you'll see us continue to advance on the M&A front, with a disproportionate view toward industrial motion to continue to build that out, but still have the ability to buy back stock. And we've systematically done that. And as I mentioned, we allocated $900 million of capital across the board in 2022, and across all across all fronts, buyback, M&A, dividends and CapEx. And we're in a great position to continue doing that as we move forward with our balance sheet in such strong condition. Great, and I'll just sneak in one last question I wrote -- you might have addressed this already. I know there's a lack of visibility right now. Have you observed anything in January or early February, that would provide cause of concern, or conversely signs of encouragement, given some of that macro high level data points we've seen out there. Thank you. Yes, I think I commented on this in my statement. I mean, we're starting the year very strong. So, I think in general, the environment that we're operating in here in the first week of February is a very positive one. Great, good morning. Thanks for the question. Sort of as quickly on the APAC revenue growth in the quarter, another sequential acceleration in the rate of growth probably skews a bit, I think more positive versus some of the other industrial reads have gotten from the channel around China over the last quarter or so. So, could you just talk about how much of the growth there right now is being driven by renewables versus any other kind of growth that we're seeing across the rest of your end market mix? Yes, certainly our Asia business has become pretty, pretty significant mix to renewable energy. So, our outlook there, I think would continue to give us higher, a more positive outlook as well as more positive results than peers with a more diversified market mix for more industrial market mix. Yes, I would say Dillon, when you look at the quarter, I mean, it was -- we were up 19%, it was broad. I mean, China was up high teens, India, up high teens, the Rest of Asia up in that range. As Rich said, renewable was by far the largest growth sector, but distribution was right behind it, as we continue to see positive performance across distribution as well as other sectors. So, it's been broad growth, but there's no question particularly China has been very renewables, at least that's been the biggest driver in the last few quarters. Okay, that's helpful. Thank you. And maybe just one last one on the housekeeping side with regards to the currency impacts, you called that out as a headwind and into your margin bridge for next year. I know, it was still negative in the fourth quarter. But you did talk about some more challenging comps from that perspective as well. Could you just talk about how impactful expense might have been either as a tailwind or a headwind to margins in 2022? And then what you are kind of baking into the headwind for 2023? Yes, I would just say Dillon, in 2022 with some movements in the currencies, and on the transaction side, we had some transaction favorability in 2022, which was actually, it was a margin tailwind actually helped our margins in 2022 and really, the non-recurrence of that -- of those positive gains in 2022 kind of not repeating in '23, coupled with the continued headwind on the top line, is going to produce year-over-year, pretty significant headwind to margins, just by the flip of that, if you will, from one year to the next. And so, that's sort of baked into the guide, and really just talking -- taking a maybe a bigger step back. And the guide sort of implies 20-ish percent all in incrementals, in that currency being a big headwind. And then, as you know, M&A comes in at really an EBITDA margin, when you back it out, our organic incrementals with the pricing and operational execution cost moderating I mean, the organic incremental implied in the guide would be much closer to 30% versus 20% and I think that speaks to a lot of the work we've been doing the last year, year plus in getting the price cost move in our favor. So, guess my first question, just a clarification question. So, you're starting off the year with high-single-digit growth. But then kind of the midpoint of your guidance is at 3%. So, I mean it sounds like you're expecting the second-half to turn negative, I just want to be clear that that is kind of like the expectation into your guide for the second-half of the year? Let's say we're probably starting off the year closer to the, the highest single-digit price at the higher end of our guide. So, I'd start there. So, the year is off to a strong start, if you but yes, to go up high-single-digits we're not expecting anything that would that's coming off of 10. So, if you go from 10 to 7.5 would be high, the low end of high single-digits, or 8 or 9. To get down to the fourth quarter, you probably got to be down to a 0 to 1 sort of number to come to the midpoint of the guidance. But I would say we're also as I said, we're starting the year pretty strong, probably starting more towards the higher end of the guidance. Yes, I would say, Joe, we like to think of it as, as seen in the back half, we're sort of the outlook sort of implies a flattening out in the back half of the year as opposed to a decline and as we said, we don't have great visibility beyond the second quarter. So, we will have to see how things develop over the next couple of months, how the order book fills in. And then, we'll be able to kind of assess how accurate that is as we moved through the year. Yes, that's helpful. And I know you guys are a fairly short cycle business, but because of supply chain issues, some companies have had a little bit more visibility I guess at the start of the year than they normally would. So, I want to hear maybe some comment around whether your visibility is little bit higher than normal today? And then also, Rich, if I just could ask you more broader question like what concerns you -- what's your biggest concern around the year? I want to hear your thoughts on that as well. Well, I would say we have significantly greater visibility than what we normally would. I think the supply chain issues have reduced significantly. They are still there. Everybody had problems operating in China in the fourth quarter as an example. And there is other issues out there. So, our backlog organically if you adjust for the acquisitions and divestures, is up modestly from where it was a year ago. And our run rate of shipping is up again high single digits from where it was a year ago. But, our backlog also peaks around the middle of last year. So, we have been liquidating backlog modestly. So, I would say we have very good visibility out for the next 3 to 4 months. And the demand picture looks quite good. In our geographic walk, we show that Europe was down modestly as Phil mentioned. If you adjust for Russia, it was up a little bit. But that would include price. So, if you -- Europe from a volume in the fourth quarter was down. So, that would be really the only geographic area that's soft. And to come back and answer your last question, we want to feel really good about the position we are in. I think we are going to get off to a really good start. The midpoint of our guide is based again on I think a pretty cautious softening in the second-half. And even that's a good result. And we are in an excellent position. But, we are being too cautious on it, we will capitalize on that. And predicting these industrial markets and inflections is not an easy task. So, focus on where we have the visibility. And then, really focus on growing the earnings power and the revenue of the company through the cycle. And I feel great about that. So, I think we are in a really good position. One other point, Joe, when you look at the backlog all-in, I mean we are actually higher. We ended the year higher than the end of 2021. So, we are sitting here with a stronger backlog than we had a year ago. And I think that bodes well at least for the near-term visibility. Hey, good morning, guys. Thanks for taking the questions. I guess first off, Phil you had mentioned when we were talking about the margins in '23 [kind of] [Ph] flattish now. I think on the last call, we were kind of hoping to be able to nudge that a bit higher in '23. The moving parts there I mean you called out higher labor and material et cetera. But really are there any investment cost keep in mind in that margin guide they are stepping up in the New Year because I assume for the most part, the labor rates and FX was if anything kind of improved versus fourth quarter, no? Yes, I mean it's a great question, Chris. I mean as I think about overall with investing, but I would say year-on-year, there's probably not a sizable headwind there, but as you think about some of the -- put the currency aside because that will be a year-on-year negative. And you will see that on the walks as we move through the year. When we talk about SG&A, we are going to have normal labor increases and spending to support the higher levels. We actually, for example, we are going to have higher pension expense just with the change in the discount rate and the like. So, things like that, talked a little bit about the mix with the OEM versus the distribution. You know, the manufacturing line still seeing some inflation there whether it's labor. Should see better operational execution, but the other dynamic that happened there is around -- lot of the inflation we got hit within '22 is working its way through the inventory. I think that will be a cost that's going to come through in '23. Frankly earlier in the year, we thought we might see some of the come through in '22. But we are planning at it now to come through in '23. So, that will be a not a permanent headwind. But, that'll certainly be just a temporary headwind while it comes through. So, those are the main drivers kind of offsetting the positive price we expect to get, the material and logistics being down, and other self-help and other initiates in addition to the modest volume kind of propping this up. As I said, organically, we would expect strong incrementals closer to the 30 than 20. It's just a combination of the currency and the M&A that are just depressing it a little bit. Got you. That's super helpful. And then, just kind of moving to process, again, when we think kind of outside of [bulk] [Ph] energy flattish, but I guess within that that kind of other bucket, automation has been kind of standout. Do you have any comments on automation? Kind of how that fits into process growth in the New Year? Yes, automation I mean that's a market we still see good growth. Rich talked about the Spinea and talked about some of the other initiatives going on there. But, I mean that is a market that we would expect to grow. It's kind of inside the general industrial category that we have in [indiscernible]. There is a lot in general industrial, but the automation piece particularly factory automation, we expect to continue to see strong growth, strong trends. And that will be both organic and inorganic opportunity for us as we move forward. Yes. Thanks, Glen, and thank you everyone for joining us today. If you have any further questions after today's call, please contact me. Thank you. And this concludes our call.
EarningCall_561	It is now time we would like to begin financial results presentation session by Eisai for the Third Quarter Fiscal 2022. This is held in hybrid format, including attendance in this room as well as online attendance. Those of you who are attending in this room, please make sure that you have distributed the materials including the deck of slides and fast reports. Those of you who are watching line, please continue to watch your screen. Let me introduce the officers in attendance. President -- Senior Vice President, Chief Financial Officer, Chief IR Officer, Mr. Tatsuyuki Yasuno; Senior Vice President, Global Alzheimer's Disease Officer, President, Americas Region, Ivan Cheung. Ivan Cheung, will be presenting in English. And in this room, we are securing enough distance, so masks will not be worn by the speakers. Presentation will begin. Microphone to you Mr. Yasuno. Now, first, myself Yasuno, CFO, will present the consolidated financial results for the third quarter of fiscal year 2022. The main points of the financial results this time are as follows: due to the impact of many one-time revenues recorded in the previous year, revenue and profit decreased. However, the pharmaceutical business, which is our organic business grew steadily and both revenue and profits increased. In addition, we are continuously making solid investments for future growth. First slide, here is the P&L. At the top line, revenue decreased to JPY546.2 billion, or 97% of the previous year's level. This includes the impact of foreign exchange rates of JPY53.6 billion. And although there is a JPY51.8 billion impact from foreign exchange rates even including -- excluding this impact of ForEx revenue grew steadily to 104% of the previous year's level. R&D expenses totaled at JPY121.4 billion, which was 98% of the previous year's level, with a total decrease of JPY1.9 billion despite JPY20.6 billion increase due to weaker yen. Excluding the impact of ForEx, R&D expenses would have been 82% of the previous year's level. SG&A expenses were JPY273 billion, which was 107% of the previous year's level, but this includes a JPY37.5 billion increase due to the impact of foreign exchange rates. Excluding this impact of ForEx, SG&A expenses would have been at 92% of the previous year level. Although expenses regarding shared profit of Lenvima paid to partner increased in line with its sales expansion. SG&A expenses excluding this shared profit expenses decreased significantly, indicating that the company is firmly managing its expenses. Other income or expenses amounted to JPY1.3 billion for 9 months of the current fiscal year. As a result, operating profit was JPY13.8 billion, which was 19% of the previous year's level. The foreign exchange impact was minus JPY10.8 billion. For the Fycompa, the agreement for the divestiture of rights of Fycompa in the U.S was signed in December of last year, the closing of which was completed in January. And the impact will be recorded in the fourth quarter of this fiscal year. The divestiture of Eisai distribution, the agreement of which was also signed in December last year, is expected to be accounted for at the time of the share transfer slated for March 31 this year. Although the progress in operating profit, which was JPY13.8 billion during the 9 months, this seems to be delayed as compared to the full year forecast. But as I said earlier, there were two strategic options for which agreement has been already signed and for other strategic options as well which are steadily progressing. Therefore, in addition, our core business, pharmaceutical business which is showing the steady growth. Therefore we're even more confident that full year forecast will be achieved. Next please. Here, I'll be explaining the factors behind the increase and decrease in revenue, utilizing this waterfall chart. Top left, last year's revenue was JPY565.3 billion, in the first 9 months of last fiscal year, and this year was JPY546.2 billion was recorded for this fiscal year, a decrease of JPY19.1 billion and JPY68.1 billion year-on-year increase was recorded with double-digit 15% in pharmaceutical business. And so both revenue and profit increased. So this was mainly due to the growth of global brands. For Lenvima, which grew by JPY50.2 billion year-on-year mainly in the U.S. Dayvigo grew mainly in Japan by JPY10.6 billion. Halaven and Fycompa also showed a solid growth both in revenue and profit. And therefore, there was a JPY69.8 billion increase from the previous year for the four global brand products combined. On the other hand, in other business, there was the one-time upfront payment for MORAb-202 with JPY49.6 billion recorded in the last fiscal year and also Lenvima sales milestone payments received in the amount of JPY34.5 billion. Therefore, inclusive of these impacts, the revenue decreased by JPY87.2 billion. Although there were a decreases in the revenue because of the one-time payment. However, as I have said earlier, we have seen the solid growth, particularly in the pharmaceutical business. I would now like to touch on Lenvima, which is driving the strong growth of pharmaceutical business. As you see on the left graph towards right side of the left graph, in the first three quarters, revenue was globally JPY191.3 billion, growing up 36% year-on-year. Excluding foreign exchange impact, the growth was 14%, which was a double-digit growth. Lenvima is establishing position as backbone therapy with six indications in five cancer types. In particular, combination with KEYTRUDA in RCC in endometrial cancer is driving growth. As shown at right bottom, with these data, we will continue to aim at further expansion as a standard therapy. Next, I would like to touch upon the breakdown of the operating profit migration using similar waterfall chart. Left chart shows that April to December, TICS scored 21 operating profit was JPY74.3 billion. And in this fiscal year, there was a decline of JPY13.8 billion. As shown on the right side, the earlier mentioned pharmaceutical business revenue rose, and as a result, pharmaceutical business segment profit increased JPY54.1 billion year-on-year or 27% year-on-year which is a high-level of double digit growth. Furthermore, regarding the profitability, there was a substantial improvement. All five regions achieved increase in operating profit. Below that, in other business, as I mentioned in relation to revenue, because of one-time income in the previous year, in this segment operating profit was negative JPY88.7 billion. As for [indiscernible] R&D expenses this year in AD area including LEQEMBI, there was a prioritized investment of resources also in other focus areas. On the other hand, Lenvima and ADUHELM-related expenses decreased. Partnership model was used to improve efficiency and overall efficiency was improved. And on the whole, in comparison to the same period previous year, R&D expense decreased by JPY1.9 billion, pushing up the profit. However, R&D expense including partners reimbursement was 32.1%. Growth investment continues at high-level and we are making -- continuously making active investment in the future growth. As for other SG&A expenses, Lenvima shared profit is increased -- include -- included here and increase of a shared profit Lenvima result [indiscernible] decline of other SG&A expenses of JPY16.5 billion. Other profit and loss decreased by JPY11.3 billion year-on-year because in the previous year, Zonegran rights for divested. As you can see, there were many one-time factors in the previous year, where one-time income was recorded in the previous year third quarter operating profit declined. However, pharmaceutical business segment operating profit further improved. This is the full year forecast for fiscal 2022 on a consolidated basis. There is no change or revision to the full year forecast. With respect to the dividends, based on our strong balance sheet, as forecasted annual dividend payout forecast is JPY160 and we see no problem in maintaining that forecast. As I mentioned earlier, pharmaceutical business profitability, organic business is improving. And towards the end of the fiscal year, we will continue to work on improving profitability further. With regards to R&D investment, we will also make efforts to improve efficiency further. In addition, there are already signed two strategic projects, which will be booked on the accounts in the fourth quarter. And there are strategic options that we are working on currently, which are showing steady progress and we will make sure to realize these. And with this, we believe that we will be able to achieve full year forecast. That concludes my part of the presentation. Thank you. As many of you already know, we at Eisai are honored for the LEQEMBI innovation to be recognized by Prime Minister Kishida during his Diet opening speech 2 weeks ago. Today, I want to provide an update about the positive dynamics and momentum behind LEQEMBI, since the Accelerated Approval granted by the U.S FDA on January 6. First and foremost on this slide, we are more than grateful to the hard work by the FDA and the Eisai team to deliver a transparent and informative label, which has drawn significant interest from physicians, medical institutions and payers, to engage with the Eisai teams, to discuss how to select patients, how to administer the therapy, and how to do monitoring, such as how to identify ARIA and what to do when ARIA occurs. We have received many, many requests for engagements from physicians, medical institutions and payers. For example, one neurologist recently told the Eisai team that he needs his clinical practice and Eisai to be both successful for LEQEMBI, because if we are both successful, it will start a paradigm shift that will change patients lives. Overall, what I can say is the feedback from the market are positive with high enthusiasm from physicians, medical institutions and payers to seek out more information about LEQEMBI. Next slide please. We are also very encouraged that on January 6, both the FDA and the CMS put out public statements about LEQEMBI's Accelerated Approval, underscoring the importance of this day to the Alzheimer's disease community and to the American public. Let's first take a look at the FDA public statements. On January 6, Dr. Billy Dunn, Director of the Neuroscience Division at the FDA said, as you can see on this slide, Alzheimer's disease immeasurably incapacitated the lives of those who suffer from it, and it's devastating effects on their loved ones. This treatment option is the latest therapy to target and affect the underlying disease process of Alzheimer's, instead of only treating the symptoms of the disease, where the Eisai share his sentiment. Next slide please. Now let's take a look at the CMS public statements on January 6. The CMS often does not make these public statements, but they do on January 6. Chiquita Brooks-LaSure, CMS administrators said, at CMS, we will continue to expeditiously review the data on these products as they become available and are committed to timely access to treatments, including drugs that improve clinically meaningful outcomes. If LEQEMBI subsequently received traditional FDA approval, CMS would provide broader coverage using the framework we announced last year under coverage with evidence development on the same day. The last phrase is very important. On the same day, we at Eisai commend her statement that broader coverage for Medicare beneficiaries would be provided on the same day when LEQEMBI received full traditional approval from the FDA. Next slide please. One consistent feedback from our stakeholders upon the FDA Accelerated Approval is Eisai team's efficiency to move with urgency for the sake of patients and their families. On January 6, on the same day that we received the Accelerated Approval for LEQEMBI from the FDA, we submitted the supplemental BLA to the FDA, based on Clarity AD data for full traditional approval. The same day action reminded our stakeholders of another reason same day action from Eisai, which was back in November 2022 when we publish our Clarity AD results in the New England Journal of Medicine on the same day we presented the detailed data from Clarity AD for the first time at the CTAD Medical Congress. Shortly after January 6, which was a Friday, on Monday, January 9, we submitted the Marketing Authorization Application to the EMA in Europe for LEQEMBI. Then quickly on the following Monday, on January 16, we submitted the new drug application to the PMDA in Japan. In just 10 days, we received the priority review destination for LEQEMBI from the MHLW in Japan. Meanwhile, we continue to be making solid progress with health authorities in other countries. For example, we have already started submitting data to the China CDE in December last year under the price Category 1 designation that allows for the most expedited review. Overall, fiscal year 2023 will be a critical year for Eisai and for LEQEMBI with many approval and launch milestones. In the United States, if the FDA grants Priority Review to our supplemental BLA application, we could receive full traditional approval and broader coverage from the CMS in the summer of this year, just several months away. In Japan, under Priority Review, we could receive approval by the middle of fiscal year 2023, again, several months away only. For both Europe and China, we could receive approvals before the end of fiscal year 2023 where Eisai committed to bring LEQEMBI to appropriate patients and their families even one day earlier around the world. Next slide please. Another consistent feedback from our stakeholders upon the FDA Accelerated Approval is Eisai's transparency with regard to the rationale and the detailed mathematics behind the U.S pricing based on societal value of LEQEMBI, the industry first with this level of transparency and the commitment to give back to society. We estimated the societal value of LEQEMBI in the United States to be $37,600 per year per patient. And we priced LEQEMBI at $26,500 per year for a patient of average weight and this number will further go down significantly during the maintenance dosing regimen of less frequent dosing. Over 10 years, the gradual adoption of LEQEMBI at this pricing approach could give back about 60% of the potential positive social impact of several tens of billions dollars to the U.S society, including patients, families, caregivers, health care providers, and payers. On the other hand, the remaining 40% to be accrued by employees and shareholders will be reinvested into further research and development to create new AD therapies and new ecosystems for inclusive AD communities. Since January 6, when this U.S pricing announcement went out, Eisai has been held in high regard by many stakeholders with this pricing approach. While initial conversations with payers in the United States in a typical pharmaceutical launch, start with discussing and oftentimes defending the price. Our transparent pricing announcement allowed our initial engagements with payers in the United States about LEQEMBI to go straight to the important clinical discussions. Moreover, payers in the U.S appreciate our published at AD ACE model, which produce results similar to the ICER model despite different methodologies. Beyond the U.S., we will apply similar pricing approach based on the AD ACE model with Clarity AD data tailored to the unique conditions in each country. Next slide, please. Now let me give an update on how we are accelerating our efforts with various payers in the United States. So far, we've received many, many requests from payers to conduct clinical data presentations. With high-level of engagement, payers appreciate our transparency in data exchange and frequent discussions about LEQEMBI safety profile, efficacy profile and clinical meaningfulness. With regard to the CMS on the left hand side of the slide, which covers about 85% of eligible early AD patients in the United States. The Eisai team has had numerous productive interactions with the CMS, since the CMS issued the NCD policy last year. We met many times to discuss a Phase II data and a Phase III Clarity AD data for LEQEMBI. Our goal with the CMS is simple. Our goal is to motivate CMS to establish broad and simple right and simple Medicare access to LEQEMBI. As I mentioned earlier, we are glad to hear on January 6, that the CMS could provide broader access on the same day after LEQEMBI receiving full traditional approval from the FDA. Let me add two more points here about the CMS. One is that we recently did meet with the CMS post Accelerated Approval and we went through how LEQEMBI's clinical data from the Phase III Clarity AD as well as our Phase II and also the open-label long-term extension data fully answered the three key questions required in the NCD policy, and therefore we believe qualifying LEQEMBI for high-level of evidence so that broad and simple Medicare access to LEQEMBI can be made available by the CMS within the existing NCD framework. Second point is that we are pleased to know that the CMS and the FDA are communicating and working closely together with regard to evaluate LEQEMBI's clinical data, which we believe is a very positive development in our view towards broaden Medicare access on the same day of LEQEMBI receiving all traditional FDA approval. With regard to Veteran Affairs, VA, in the middle of the slide, VA is the largest integrated health system in the United States serving 9 million veterans and their families. VA makes their own independent formulary decision. And the Eisai team has had already several productive engagements with the VA, including explaining LEQEMBI's clinical data and initiating preliminary contract term discussions. We're hopeful that the VA will provide access to LEQEMBI soon, potentially even before LEQEMBI receiving full traditional approval from the FDA. With regard to the commercial payers on the right hand side on the slide that cover individuals under the age of 65, the Eisai team has already completed clinical data presentations to all major commercial payers. There are many discussions about our clinical trials inclusion exclusion criteria, and monitoring approaches which signaled to us positively that these payers are working on their utilization management and prior authorization approaches that consider placing LEQEMBI on their formularies. Our overall objective is that shortly after LEQEMBI receiving full traditional approval from the FDA, vast majority of the eligible early AD patients in the United States will have unimpeded access. That's our goal. Next slide, please. Going back to the CMS topic, let me use a couple more slides to provide further insight. On December 19 last year, the Alzheimer's Association which is the largest patient advocacy group in the United States, sent their final and formal request for reconsideration of the NCD for monoclonal antibodies directed against amyloid for the treatment of Alzheimer's disease to the CMS as you can see on the left hand side. On the right hand side, attached with this request by the Alzheimer's Association is a letter undersigned by 220 AD researchers and clinicians titled treating Alzheimer's, a new era begins with lecanemab. As you can see on the right hand side on the slide, let me read the last paragraph of this letter. As you can see at the bottom of the slide. The many undersigned AD clinicians and other experts know this terrible disease all too well from witnessing it up close. We have wrote the foundational advance represented by the advance of lecanemab therapy. Now, we must build on the success of science to translate these gains into even better outcomes for patients and families. Autonomy and justice dictate that our patients have equitable access and the opportunity to make informed choices regarding reasonable treatments that can impact their lives and well being. No barrier can be allowed to stand between our patients and a treatment that has the reasonable risk benefit ratio and significantly reduces the causative pathology. Next slide, please. Just last Thursday, the American Academy of Neurology, AAN which represents over a 38,000 neurologist put out their public letter to the CMS requesting expedited review of the NCD as it pertains lecanemab, because there is consensus among the AAN's member experts and leadership, who have reviewed the Phase III data that the Clarity AD trial was well designed, and its findings are clinically and significantly and statistically significant -- clinically and statistically significant. Let me read the second last paragraph in this letter as you can see on the slide. To summarize, the AAN believes that the Phase III data from the Clarity AD trial indicating a direct clinical benefit warrants a focus expedited reconsideration of the existing coverage policy, as it applies to lecanemab. As it would have been impossible for CMS to consider this highly relevant data at a time that the NCD was published. We believe to promote patient access to therapy, that it will be appropriate for this reconsideration to occur so the revised decision can be released with an effective date concurrent with a potential traditional approval of lecanemab. Furthermore, the AAN believes that a similar approach could be applied to future products which meet the standard set by the Phase III data published in New England Journal of Medicine. Once again, the key concept here is AAN wrote, same day or CMS coverage when lecanemab receives traditional approval from the FDA. Of course, Eisai has nothing to do with the AAN letter or the Alzheimer's Association letter on the previous slide, but you can see how stakeholders in the United States are coming together behind LEQEMBI with regard to early access for Medicare beneficiaries, which are, as I mentioned earlier, about 85% of the early AD patients in the United States. Next slide, please. Besides the Alzheimer's Association and the AAN, let me also share the comments from FDA commissioner, Dr. Robert Califf during his interview on CNBC, on January 10, when he was asked about the NCD situation for LEQEMBI. He said, the company, meaning Eisai, just submitted their data for full approval, not the Accelerated Approval. That's going to be coming up. So I don't expect the CMS policy to be a totally fixed policy. We have a lot of communication. We, meaning the FDA and the CMS. And I think they'll reach a good spot. They meaning the CMS. He went on to say, I liken it to a relay race, where we need to make the baton handoff a lot smoother. It's not a new problem, but this has really brought it to public attention, I don't think is a bad thing. We agree with Dr. Califf, that the coverage decision for LEQEMBI is an important for the American public, and it's good for this to be brought to public attention. And we are very encouraged that the FDA and the CMS are working together closely on this matter. Next slide please. Now let me provide an operational update of the LEQEMBI launch since the Accelerated Approval. On January 6, immediately after the Accelerated Approval, our Patient Assistance Program, or PAP was launched through the Eisai patient support start with patient navigators. Uninsured or underinsured individuals, including Medicare beneficiaries, who meet certain financial and other program criteria could be eligible to receive LEQEMBI at no cost under the PAP. I'm glad to report that prescriptions have already been written for approved PAP patients. Commercial product availability of LEQEMBI was achieved ahead of schedule with a first batch of vials arriving at the warehouse on January 17. On January 18, first sales were recorded when the vials were shipped to various specialty distributors based on their first orders. To our knowledge, on January 23, the first prescription was written. And on February 3, the first infusion on the first patient occurred. At this moment, prescriptions and infusions have been for individuals under the PAP or paying cash. While our primary goal during the accelerated approval launch phase is to ensure market readiness for LEQEMBI upon full traditional approval and upon broad and simple access. In the meantime, we will make every effort to support health care providers and patients for those who are able to access LEQEMBI. On January 25, we are very proud that our proactive ARIA education program called understanding ARIA went live. In addition to self directed educational modules, peer-to-peer interactive training and case reviews will be available in partnership with medical imaging experts and academic societies. Overall, what I can say is that the initial LEQEMBI launch, post accelerated approval has been smooth and very much on track. Next slide please. Eisai's commitment to supporting the patient journey of Alzheimer's disease does not stop with the Accelerated Approval of LEQEMBI or the positive Clarity AD result. The graph on this slide depicts a progression of Alzheimer's disease based on biomarkers as well as cognitive [ph] decline. In the middle of this graph for MCI due to AD and mild AD dementia, the subcutaneous auto injection formulations of lecanemab is under development with a sub study in the Clarity AD open-label expansion, and we expect the file for approval before the end of fiscal year 2023. In addition, we are also progressing the maintenance dosing regimen of less frequent dosing for lecanemab with a sub study in Study 201 open-label extension and we also expect the [indiscernible] for approval before the end of fiscal year 2023. Let's go earlier to the left hand side on this slide into the asymptomatic preclinical Alzheimer's disease stage. The AHEAD 3-45 Phase III study for lecanemab continues to grow with A45 cohort enrolling individuals who are amyloid positive and the A3 cohort enrolling individuals who have intermediate amyloid. Now let's go to the right hand side into the later part of the Alzheimer's disease progression into the mild to moderate AD dementia. You'll see that our anti-MTBR tau antibody, E2814, which targets extracellular propagation of tau [indiscernible] in the AD brain is in a Phase Ib/II study in DIAD subjects, dominantly inherited Alzheimer's disease subjects. We believe E2814 specifically targets a disease progression in Alzheimer's disease in terms of both early tau pathology and late tau pathology. And we very much look forward to the readout of the biomarker results later on this year. Last but not least, back to the middle part of this graph is a DIAN-TU tau NexGen Phase II/III study, which studies lecanemab and E2814 in combination. This is the first combination of this sort. And we believe this combination approach holds tremendous potential going forward, and is crucial to Eisai's aspiration to moving closer to one day stopping the progression of this disease altogether, instead of slowing down a disease. Next slide please. This is my last slide. The FDA accelerated approval of LEQEMBI, first in the world opened a new page, a new page for Eisai, the AD community and society at large. The fundamental strategic mission of a modern pharmaceutical business are in the vision and access for which we will put forth our maximum effort from everyone in Eisai to ensure the realization. Thank you so very much for joining us today. We would like to receive questions. Now the Q&A session is open. First, we'd love to receive questions from the audience in this venue. And then we would like to receive questions from those who are participating online. If you wish to ask a question, please utilize microphone and state your name and affiliation before asking one question. If you have any questions, please raise your hand. The gentleman in the third row, please. To ask a question in Japanese. This is the first time I am seeing you, Mr. Ivan Cheung in face-to-face manner. I was glad to hear your presentation directly. First, in the [indiscernible] newspaper this morning, there was a report about LEQEMBI. An analyst made a comment on the sales prediction between JPY400 billion to JPY500 billion as the sales of LEQEMBI forecasted. And I thought that this is rather small. But according to the presentation that you have made today, perhaps the reimbursement or insurance coverage will become quite broad. So I would like to ask you what size or scale of sales are you projecting annually? Let's say in 2030, in 7 years from today, how much sales are you projecting with LEQEMBI? Thank you very much for very important question. Let's go country by country. So for the United States, as you may remember, on January 6, when we released our U.S pricing approach, we estimated that in 3 years, potentially about 100,000 patients could be eligible for a treatment like LEQEMBI. And going forward beyond 3 years, 5 years 10 years, the market will continue to expand upon important market expansion catalysts such as why the adoption of blood tests. Thatâs the United States. And of course, you can see similar picture in other key markets in Japan, in China. In Europe. We believe this is a gradual adoption upon a number of important developments, such as, as I mentioned earlier, wide adoption for blood tests. And you heard in my presentation earlier, the subcutaneous or the injection formulation. So I think, first and foremost, we have to look at the total potential for LEQEMBI not only in the United States and Japan also, but also around the world. I think that's one key point. Another key point is beyond the early AD stage, we're working very, very intensely for LEQEMBI also into the asymptomatic preclinical AD stage as well as the combination with E2814. So I may not be able to provide an exact figure today. But as you can tell, there are a lot of potential areas we ought to look at in terms of within each key market, across many markets around the globe, and also across a disease continuum expanding beyond that early AD. Thank you. I think many of us in Eisai, including myself, would believe that the number you quoted earlier, maybe too small. Now, I think at Eisai, we prefer to take actions than talking too much. That's why I tend not to say too much, because I think actions are more important. But I agree with you and many of us agree with you that given the significant potential of how LEQEMBI can help so many patients and families, we believe that number needs to be further improved upon. Thank you. Thank you [indiscernible]. May I ask one more question. And I just would like to know the situation in China. I think that the system is very different from that to western countries. And your slide says that Eisai submitted all data of Phase III to the Chinese [indiscernible] and you are waiting for the day of approval or so, could you explain the background of Chinese approval system and how soon do you expect -- you to get the day of the approval in China. Thank you very much for your question. Regarding the submission we made in China, first, the submission of data has been initiated based upon the global data and from Clarity AD study where Chinese patients were enrolled. So data from Chinese subjects are going to be submitted going forward. Regarding the timing before we can get approval is by the end of next fiscal year. We are aiming at getting approval and this is about the regulatory matters. Therefore we like to try our best in order to get approval as soon as possible. Thank you very much. Next question, please. If you have a question, please raise your hand. Is there anyone in this room who has a question? Then turning to participants who are participating online. If you have questions, please indicate by raise hand button on the Zoom. And once called upon, please unmute and state your question, please. I see hand. Mr. Yamaguchi from Citigroup Securities, please. Thank you. First question is about Priority Review in Japan. The timing, I was listening to Mr. Ivan Cheung. Did you say the middle of the year? Currently it is February. So around June you expect approval? Is that what you indicated? That is my first question. And regarding the United States, around the summer, I believe is what you've mentioned. But this is immediately after submission. So I don't think you know the PDUFA date. Basically what is the timeline you anticipate, 6 months after submission. If you know the PDUFA date, please indicate that as well. I'm Nakahama, responsible for this product. Thank you for your question. In Japan, Priority Review designation products on average go through 9 months of review. Over the prior review system, some of the submission materials already provided to PMDA for their review since last year. And we would like to assist our expeditious review so that even by one day earlier lecanemab will be accessible to patients, and we will make our best efforts. Earlier. Mr. Ivan Cheung said, middle of the year. Next about the U.S approval timing, Mr. Cheung will respond. Fiscal Year 2023. So that's why, as you heard from Nakahama [indiscernible] a 9-month review process, we hope to be a bit earlier. So we'll see how that pans out and the Eisai team is working day and night on this matter. With regard to the United States, we do not have the PDUFA action date yet on the supplemental BLA as you know very well. For supplemental BLA, as I mentioned earlier, if we get a Priority Review, again, we don't know yet. This is a 6-month process. That's why I said in the summer of this year, only a few months away potentially. Finally Iâve I have one more question. So in CMS comment, use the word would. So PDUFA on the same day, does PDUFA coverage may be expanded on the same day. Is that the correct understanding? That is what the CMS said on January 6 in their public statement, and we commend the CMS proactive statement and the Eisai team is continuing to work and discuss productively with the CMS on multiple with regard to the three questions in the NCD policy. So we are on track and we look forward to that positive outcome on that same day. Earlier regarding the question from Mr. Shimoyama [ph], regarding ADD MT [ph], the potential population of the eligible patients we are estimating 2.3 million in 10 years from today. That was announced in the press conference which was held the other day. This is the supplemental follow-up comment for your question. Next, I would like to receive question from Nomura Securities, Mr. Kohtani. Mr. Kohtani of Nomura Securities, the floor is yours. Mr. Kohtani of Nomura Securities, can you hear us? First question, regarding amyloid beta diagnostics, can you please elaborate on how this is diagnosed. With ADUHELM [indiscernible] different. And I think CSF the diagnosis has been already approved for two companies. But I don't think that the PET diagnostic is approved. And I think that the agreement for covering the expenses to be paid by Biogen and Eisai for ADUHELM, but it doesnât seem that there is one. So could you please elaborate on what is your expectation for the PET diagnosis? And in CDR-SB is not penetrating into clinics in the United States. And I think the education is necessary. I think the brain battery, I believe that you have the diagnostics of battery CDR-SB and also Alzheimer's disease symptomatic diagnosis, CBB [ph] penetration as well. Could you please make comment on this? On your first question, if you look at the LEQEMBI Accelerated Approval label, it requires amyloid confirmation prior to initiation of treatment. It does not specify which modality. Meaning it could be PET, it could be CSF and very soon, we believe, a blood test. With regard to your question on payment methods, of course, in the United States, PET has an NCD, also, from the CMS. Certain level of PET coverage is to be provided by the CMS, but not to the extent, of course, as stakeholders would like to see and this is also an other CD -- this is also another NCD under consideration by the CMS right now to expand further reimbursement. And Eisai very much supports all the stakeholders that are urging the CMS to expand the reimbursement coverage for PET. With regard to CSF method in the United States, the process of receiving IVD approval from the FDA, and then subsequently CMS reimbursement, that process is ongoing. And again, we of course, are very much a support as such a development in the United States. In Japan, as you know, with regard to PET, a one very important matter is the expansion of the indication into the MCI due to AD stage, which is also we believe, a very important discussion that the MHLW is taking into consideration right now. And we are very hopeful for a positive outcome when LEQEMBI receives approval in Japan. So overall, we believe it's important -- very, very important. And we're doing that Eisai is to work with all the stakeholders involved, the diagnostic companies, academic societies, the payers in different countries to ensure that the diagnostic ecosystem, including reimbursement will be very much in good shape as LEQEMBI receives approvals worldwide. That's the first part of the question. Second part of your question with regard to CDR sum of boxes, you are correct. This is an instrument used in clinical trials in the real world. There will be additional efforts on the Eisai's part to work with providers in different countries on more simplified clinical approaches, those efforts are ongoing and we take your point are very well. Just to note, in real world practice, in addition to CDR sum of boxes, which we do have to figure out how to provide more simplified approaches. Please remember that in the clinic -- back in a clinical trial, there are also other scales being used. Can you hear me? Yes, and how those may also translate into real world clinical practices. You mentioned a cog [ph] state, which is more -- which is a cognitive assessment tool. Not used in the clinical trial for endpoint evaluation, we are using -- we do believe a CBP [indiscernible] holds a very important role in the ecosystem in terms of screening and screening for our patients in order to allow more individuals to go through amyloid testing. Thank you. Second question is [indiscernible] E2814. Could you please -- when can we get an update on the clinical trial Phase I study? I think the -- DIAD patients were targeted. I think the study is ongoing. And I think this is the open-label, therefore, whenever you like, you're able to get the data and [indiscernible] is engaged to stop the propagation of tau in the brain. So if there is any such data available, when can we get that data AAIC Academic Conference, or by the end of this year or next year, can we get that data? Thank you for the question. We will select a medical Congress this year to present the biomarker results tentatively at the AAIC. That's the plan right now. Thank you. The first question is about the timing of approval in the United States. Could you elaborate on this? PDUFA date will be announced within 60 days of submission, meaning in the beginning of March. Around that time, can we expect some announcement from Eisai? And do you expect something like Advisory Committee? Youâre correct. The FDA has 60 days to accept the file and issue the PDUFA action date. And of course, once we have the PDUFA action date, we will probably inform the public. Just want to clarify one point. Since this is a supplemental BLA, that means the 60 days of accepting filing, and I mentioned earlier, if this is a priority review, it's a 6-month process. That 6 months and the 60 days can occur simultaneously because this is a supplemental BLA which is different from the initial BLA. And with regard to your second part? Oh, I apologize, Advisory Committee. We're still waiting for the PDUFA action date. So I think it's premature to comment on Advisory Committee. One thing I will say is with or without Advisory Committee, I think the Clarity AD data is so robust that whichever approach the FDA chooses to do, our confidence in receiving full traditional approval for LEQEMBI does not change. Thank you very much. Understood. The second question. Three questions from CMS, a clinically meaningful, side effect issue and long-term efficacy. This in a very abbreviated way, regarding these three questions from CMS, you've said that you expect to address with the existing data, data is already shared with CMS. And so CMS is likely to give okay on these three questions, and do you have an inkling of that? I would like to ask you to specifically address these questions. On the three key questions in the NCD, as I mentioned earlier, we have already started to supply the answers, meaning the rationale, the evidence, the data and the analysis specific to each question. And I want to clarify that is not just the Phase III Clarity AD data, also the Phase II data. Remember, the Phase II data has open-label long-term extension with data up to 5 years. One of the three questions from the CMS is how benefits and harms change over time. We obviously from Clarity AD has the 18-month data where you can see the CDR sum of boxes showing statistically significant benefit from 6 months onwards across each time point and across each time point from 6 months to 18 months the benefit expands over time. That's very important. Benefits expanding over time from 6 months to 18 months. And then as I mentioned earlier, we have the Phase II plus open-label extension 5 years of data. So I'm not going to go through all the answers to every single question from the CMS NCD document, but we are confident in the provision of our answers to the CMS. Of course, ultimately, this is a CMS decision, but from all the productive interactions we have had with the CMS so far, and also, the FDA is communicating with the CMS on understanding all these data, we are hopeful and we believe the CMS and the FDA ultimately want to do the right thing for the American public and we have utmost respect for both agencies. Thank you. AD DMT [ph] so much, subject. Globally 2.5 million by 2030 is the estimate. I would like to make correction to the early announced estimated 2.3 million in 10 years. It's rather 2.5 million by 2030. [Indiscernible] next question after full approval and if others coverage from Medicare, summer -- from summer onwards, you will be able to book revenue, book sales, is that the correct understanding? And I do not understand fully how you are going to sell sales reps? I think Eisai will be leading. How are you preparing the sales rep capabilities? Thank you for the question. Yes, once we have the Medicare coverage, then 85% of the market in the United States will be able to prescribe this therapy. Right now for those 85% that those are Medicare beneficiaries, even if their physicians want to write a prescription since the government is not paying for it, that market is basically not active and that's why the CMS coverage will be critically important to open up the market. And yes, Eisai book sales globally, for LEQEMBI. And with regard to the deployment approaches in the field, if you're asking about the -- again, country by country, it's going to be a different situation. And we have to, of course, tailor our go-to-market model based on the unique characteristics in each market. In the United States, I believe that's probably what your question is, yes, Eisai will lead the launch. Right now we are in the accelerated approval launching phase with limited access. So the primary goal right now during this launch phase, this Accelerated Approval launch phase, as I mentioned earlier, is really get the market ready in terms of the diagnostic pathway, the infusion capacity, the education on how to monitor for this therapy, get all the hospitals and clinics ready, so that when full approval and CMS access are available, then these sites will be able to support patients and their families to be on LEQEMBI. I hope, I answered your question. I have only one question. According to the presentation, I don't want it to put the cold water over the presentation where FDA and CMS have put forward a very positive opinion because they are core stakeholders. And I think that this is -- this should be taken for granted. But on the other hand, there is such a high expectation towards this drug. I understand that as well. Those people who wanted to have access to this therapy, most important stakeholder, patients, how are they going to be motivated, early stage AD patients, how much subjective symptoms they have. So such patients need to be encouraged to get access to this therapy. I think there should be some measures to be taken. On that regard, what kind of a partnership collaboration, cooperation is being done with Biogen now? Thank you for the question. Youâre correct that especially the MCI due to AD stage, the disease awareness, and the ecosystem development to encourage individuals and their families to be screened for a potential cognitive problems so that they can go to physicians and hospitals for a further follow-up, including confirming the presence of amyloid positivity or not. You're right. And that is going to be a very important part of our strategy to drive adoptions of LEQEMBI going forward. This is going to be a gradual process. Country by country, we will have to take different approaches. But you can see that, at Eisai, we've already been working on the ecosystem approach since a few years ago with a number of partnerships earlier, the [indiscernible] partnership was mentioned. We are also doing a lot of work with different blood test companies right now. There are of course, a lot of works in different countries with patient efficacy groups, because they are the ones with firsthand interactions with a lot of patients and families in local areas. Last but not least, of course, a lot of efforts underway with physicians and medical institutions in different countries around the world, so there's no one simple answer. This is a multifaceted, multidimensional approach, country by country, area by area, street by street and that's what we're going to be doing. Thank you. Fortunately, we are almost running out of time, but I see four people in the queue for questions. So if I may ask each one to limit the number of question to one and quickly please. [Indiscernible]. Can you hear me? My apologies. I had two questions, but I will ask one question. I believe prevention will be a greater focus after the approval of LEQEMBI, AHEAD 3-45, I do not know how correctly to pronounce this study. When did this study start and when is the readout expected? I understand this is a Phase III study. And in relation to this in terms of insurance coverage, since this target is preclinical AD, it will be targeting asymptomatic patients. And so clinical significance will be appreciated by CMS, is Eisai able to persuade CMS in terms of clinical significance? This study started approximately 2 years ago. We will have read out in a couple of years. This is still under enrollment. We're in the middle of enrollment right now. We're very encouraged by this study. This study enrolls 1,000 people in the A45 cohort and 400 people in the A3 cohort. With regard to your second part of the question about coverage by the CMS, I think in a couple of years time, the NCD may or may not look like it is today. So I'm very hopeful that in a couple of years that the clinical -- the strong clinical relevance of LEQEMBI will be well established at that point among all stakeholders, including the CMS in the United States, so that coverage and reimbursement won't be an issue when we have positive outcome from AHEAD 3-45. Thank you. Yes, I can. Iâve one question from me for Ivan. I was -- thank you for Slide 8. The excerpt from the statement from CMS. I was looking at the entire statement and it says that they will generally issue a proposed NCD within 6 months from the initiation of the NCD analysis. Has the formal NCD analysis be done? See if I understand your question. To reconsider the entire NCD, it will take months. You're right. What you're hearing from the CMS right now, for example, on this slide is what they may do within the existing NCD framework. And we believe within the existing NCD framework, the LEQEMBI dataset from Phase III, Phase II, open-label long-term extension data, fully answered those three key questions for the CMS to provide [indiscernible] and simple access within the current NCD construct. That's the point I want to convey. And I think that's what the CMS is trying to convey from their statement. Yes. Thank you for taking my question. This is [indiscernible] speaking. Iâve a question for you for -- regarding LEQEMBI. So we understand that currently the treatment with LEQEMBI requires the free treatment as well as on treatment monitoring of ARIA using MRI. I like to understand the insurance coverage of these monitoring the test? And also the impact for the -- your estimate of the impact of such coverage for the uptake of the drug? Thank you. Yes, with regard to MRI monitoring, at least in the United States, we don't believe that reimbursement situation is an obstacle at this moment, unlike the diagnostic procedures, which are more work will need to be done on the reimbursement front for those procedures. Thank you. This is [indiscernible] speaking. I have a question for Mr. Ivan Cheung. On the 18, LEQEMBI was launched in the United States and what about the uptake and ramp up of the sales going so far? Could you please give us your take on the sales ramp up? Thank you for the question. We are actually quite encouraged by the initial orders from various specialty distributors for LEQEMBI vials. As I mentioned, we also encouraged that already prescriptions have been written, infusions have occurred. Again, of course without Medicare access these prescriptions and these patients right now they're either PAP patients or a cash paying patient, but again, they occurred very quickly within the first month of the Accelerated Approval. Again, this is not a pill you take. This is an infusion with the dynastic procedure than infusion, even with those steps involved, we have these accomplishments within the first month and actually within the first 2, 3 weeks. So I think everything is very much on track as we expected and when they even see a bit ahead of our expectation. Thank you. We apologize, we have gone overboard with the schedule with our time. And with that, we would like to close today's earnings announcement session. Thank you very much for participating despite your very busy schedule.
EarningCall_562	Good day and thank you for standing by. Welcome to the UGI Corporation Q1 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tameka Morris, Senior Director, Investor Relations. Please go ahead. Good morning, everyone, and thank you for joining our fiscal 2023 First Quarter Earnings Call. Today, I'm joined by Roger Perreault, President and CEO; Ted Jastrzebski, CFO; and Bob Beard, Chief Operations Officer. 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 and our most recent annual and quarterly reports 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'll start today by providing an update on the quarter, then Ted will provide an overview of our financial results and our liquidity position. We had a good start to fiscal 2023 as our reportable segments delivered a $63 million increase in EBIT over the prior-year period. In totality, UGI reported adjusted diluted EPS of $1.14 compared to $0.93 in the prior-year period. In fact, our adjusted diluted EPS would have been $0.08 higher without the noncore energy Marketing business. These results reflect the robust performance of our natural gas businesses including the effect of weather that was colder than the prior-year period, higher gas base rates at UGI Utilities and continued growth from our UGI Appalachia assets. In the global LPG businesses, we realized benefits from disciplined margin management and expense control efforts, which helped offset elevated inflationary pressures. These benefits, along with continued growth in National Accounts volumes at AmeriGas helped to offset the effects of significantly warmer weather in Europe. In addition to the strong earnings performance in the first quarter, I'd like to comment on several other key accomplishments across our business. First, we are off to a strong start in our utilities capital expenditure program, and we invested $117 million of capital during the quarter. We are deploying record levels of capital to support our growth and infrastructure replacement programs, and we expect to invest roughly $2.4 billion in this area between fiscal 2023 and 2026. We continue to see attractive customer growth at the Utilities with more than 4,500 new residential heating and commercial customers added during the quarter. Our recent acquisitions continue to perform well, and we realized increased earnings at Mountaineer when compared to the prior-year period as well as incremental margins from our UGI Moraine East and Pennant acquisitions. Also at the Utilities, last week, our UGI Utilities electric division filed a request with the Pennsylvania Public Utility Commission to increase rates by approximately $11 million. This increase would fund ongoing system improvements and operations that are necessary to maintain safe and reliable electric service. Similarly, on February 1, Mountaineer filed a notice of intent to file a general rate case with the West Virginia Public Service Commission. We will provide updates as appropriate throughout the process. In our global LPG businesses, despite elevated inflation levels and driver availability challenges at AmeriGas, we were pleased with the positive impact of strong margin management and disciplined expense control actions. In addition, national account volumes at AmeriGas increased over the prior-year period due to our continued focus on customer growth and satisfaction. As I mentioned during our fiscal 2022 year-end earnings call, we have initiated a strategic growth project at AmeriGas, focused on accelerating customer growth through an enhanced customer experience, acquisitions and operational efficiencies. Through this AmeriGas operations enhancement for growth project, we will leverage our scale to improve customer satisfaction and retention and optimize pricing. This is an important strategic focus for AmeriGas and UGI as we strive for operational excellence and growth. Turning to renewables. During the quarter, we made meaningful progress in executing on our renewable strategy with additional RNG projects announced in New York and South Dakota. To date, we have committed over $450 million to renewables projects that support our financial commitments of delivering 6% to 10% EPS growth and 4% dividend growth over the long-term. Lastly, I am pleased with the continuous progress that we have made in our ESG programs. Our efforts to maintain robust governance practices and improved greenhouse gas mitigation strategies continue to be recognized. And in December, UGI was upgraded to AAA rating by MSCI. This rating positions us among the leading companies worldwide for action across ESG matters. Thanks, Roger. As Roger mentioned, UGI delivered adjusted diluted EPS of $1.14 compared to $0.93 in the prior fiscal first quarter. This table lays out our GAAP and adjusted diluted earnings per share for the quarter in the comparable prior period. As you can see, our adjusted diluted earnings exclude adjustments totaling $5.68 that relate to a number of items, including the impact of mark-to-market changes in commodity hedging instruments, a loss of $4.73 this year versus $1.37 in the prior-year. The loss of $4.73 for Q1 fiscal '23 is largely attributable to the decline in natural gas and power prices in Europe between September 30 and December 31. This year, we had $0.14 loss on foreign currency derivative instruments compared to a gain of $0.02 in the prior-year. We also had $0.02 for external advisory fees associated with the AmeriGas operations enhancement for Growth project that Roger highlighted earlier, $0.72 related to the loss on disposal of the U.K. Energy Marketing business in October 2022. This loss was substantially related to the noncash transfer of commodity derivative instruments that underpin the customer contracts that were sold with that business. Consideration for the sale was a net cash payment of $19 million, which includes certain working capital adjustments. And lastly, $0.07 for impairment of certain PP&E and intangible assets in the energy marketing business located in the Netherlands. We're off to a good start in fiscal 2023 with a $0.21 increase in adjusted diluted EPS on a year-over-year basis. At a high level, Global LPG was up $0.02 due to effective margin management and strong expense control efforts, which offset the effects of significantly warmer weather in Europe and continued inflationary pressure, particularly in personnel-related costs. Our natural gas businesses were up $0.20 as both businesses benefited from colder weather conditions in the U.S. In addition, higher gas base rates in Pennsylvania and increased throughput on our midstream systems contributed to this strong performance. Turning to the individual businesses. AmeriGas reported EBIT of $110 million versus $86 million in the prior-year period. Retail volume declined 2%, reflecting staffing shortages and key delivery-related positions, which also limited customer growth as well as some continuation of customer attrition and structural conservation. Subsequent to the quarter, we have made significant progress in addressing the staffing shortages in order to increase our distribution capacity. Total margin increased by $20 million, which was primarily attributable to higher retail propane margins, and this was partially offset by the effect of lower volumes. Operating and administrative expenses decreased $5 million, reflecting lower employee compensation and benefits as we saw the carryover impact of workforce reductions made during fiscal 2022. This benefit was partially offset by higher overtime and contractor costs for distribution activity given the staffing shortages and key delivery-related positions, increased vehicle expenses as well as the effects of sustained inflationary pressures. UGI International reported EBIT of $66 million compared to $82 million in the prior-year period. The decline of $16 million at the EBIT level is attributable to lower volume in the European LPG business. For the quarter, weather was significantly warmer than prior-year. With the ongoing geopolitical situation in Europe, we also saw the effect of energy conservation efforts on retail volumes, primarily for residential customers. The total effect of warmer weather, energy conservation and reduced crop drying volume was an 18% decline in retail LPG volumes year-over-year. Total margin decreased $41 million, reflecting the translation effect of weaker foreign currencies and lower LPG volumes. Turning to operating and administrative expenses. There was an $18 million decline due to the translation effects of the weaker foreign currencies, which was partially offset by the impact of the global inflationary cost environment on the underlying distribution, personnel and maintenance costs. Individually, while revenues, costs and expenses were impacted by the translation effects of foreign currencies, ultimately, the net effect to EBIT was immaterial. And when combined with the impact of our multiyear currency hedging strategy resulted in a nominal impact. Lastly, for the European Energy Marketing business, EBIT was relatively flat year-over-year and $0.08 impact in both years. As we previously shared, we've been managing volumes as we exit this noncore portion of our business. Based on warmer weather and our exit strategy, there was a significant reduction in year-over-year volumes, particularly in natural gas marketing, where volumes were down close to 50%. However, the benefits from lower volumes were offset by the effects of increased intra-month and intra-quarter volatility in European natural gas and power prices. Moving to the natural gas businesses. Midstream and Marketing had a strong quarter, reporting EBIT of $107 million, an increase of $25 million over the prior year. With the 13% colder than prior year weather, the business experienced increased margins from natural gas marketing activities. This also included roughly $0.03 of opportunistic margins from peaking and capacity management activities due to the cold weather at the end of December. Our build-out of the UGI Appalachia systems continue to enhance our earnings capability. And during the quarter, we had incremental margin of $14 million in total from the UGI Moraine East that was acquired in January 2022 and Pennant Midstream where we acquired the remaining interest in August 2022. These increases were partially offset by a $6 million reduction in margin from renewable energy marketing activities as there were lower volumes of environmental credits sold. Lastly, the $25 million increase in EBIT was due to higher operating income partially offset by lower other operating income as our buy-in of the Pennant assets allowed for discontinuation of equity method accounting given that the assets are now fully owned by UGI. Our Utilities segment also had a robust first quarter with EBIT of $128 million, $30 million higher than the prior year period. Core market volume was up 17% on weather that was colder than the prior year as well as from continued growth in residential and large delivery service customers. This increase in core market volume along with higher gas base rates at UGI Utilities which went into effect at the end of October 2022 were the primary drivers for the $43 million increase in total margin when compared to the prior year. With weather being close to normal in this quarter, the effect of our new weather normalization mechanism was minimal. As a reminder, weather in Q1 of FY '22 was warmer than normal and at the time, we had no weather normalization provision in our tariff. Operating and administrative expenses increased by $11 million, largely due to higher uncollectible account expenses, increased sales and use tax expenses and higher compensation and benefits expenses. In summary, we're pleased with the strong results across the business units, which is the product of our attractive diversified portfolio, strong strategic investments and disciplined capital deployment approach. Turning to liquidity. As of the end of the quarter, UGI had available liquidity of $1.2 billion. Cash collateral previously held was largely returned as commodity prices declined between September 30 and December 31. The business continues to generate strong cash flows, and we're pleased with our current liquidity position, since we typically experience higher seasonal working capital requirements in the first quarter. Thanks, Ted. As we've been reminded over the past several years, we are living and operating in an ever evolving economic environment with sustained inflationary pressures and geopolitical tension. I am pleased with our teams who have worked tirelessly to manage through these headwinds. I also believe that our 3R strategy, which is to deliver reliable earnings growth, invest in renewables and rebalance our portfolio, provides the framework that we need to drive continued success. With an unwavering commitment to safety, creating operational efficiencies, customer focus and embracing a diverse and inclusive culture, we are well positioned for growth. I am grateful for our dedicated and committed employees and remain confident in our ability to generate attractive value for our customers, employees and shareholders. We thank you for your interest in UGI and your participation in today's call. Hi, good morning. Congrats on the quarter. Maybe just to start, I was wondering if you could give some context around how 1Q shaped up relative to your guidance expectations coming into the year. And obviously, we still have February and March still to go, but with warm weather in January. Any color on the trajectory of the business thus far into the quarter -- second quarter would be helpful as well? Yes. Good morning, Marc. Thank you for your question. So as we stated, right, Q1 was a solid quarter, one where we saw some weather here in North America, offset, of course, with some very warm weather in Europe. However, very pleased with how our teams delivered margin management efficiencies, which led to the solid first quarter. So I would say solid first quarter, not a huge surprise, but robust, right? When that we certainly saw some upside given some of the volumes and some of the activities that we talked about. Moving on to the second quarter. As usual, we're going to provide an updated guidance at the end of the quarter. So we're not going to talk about guidance now. However, as you pointed out in your report this morning as well, which I noticed, Marc, January has been a warm month. So we have started the quarter with some warm. There's still a lot of heating degree days ahead of us. So we certainly continue to look forward to what February and March will do. And as I mentioned, at the end of the quarter, we'll be happy to talk about guidance and the impact that we will see after the first two quarters. Got it. Appreciate the color there. And then in the Midstream and Marketing segment, you referenced the benefit from commodity marketing and capacity management. Could you talk about some of the dynamics there? And if you expect it to carry forward into 2Q? Or is that mostly just a function of the weather volatility in December? Yes. Also a very good question, Marc. What we did see in December, we saw some spikes. We saw some pretty severe weather volatility at one period in time. So we did see some additional benefit that we highlighted for that period. Very difficult to know and say if that's going to carry through. I think we'll wait and see. Please standby for our next question. At this time, I'm showing no further questions. One moment for our next question. Our next question comes from Michael Gaugler with Janney. Your line is now open. I guess I'll start first with the -- you had mentioned the Mountaineer gas rate case. Are you looking for that to be effective fiscal 2024 or calendar 2024? Yes. So we -- as we mentioned in the earnings release, we are planning on doing a rate case filing with -- for Mountaineer. What I'll do is I'll ask Bob to comment a little more on some of the details. That's what we expect to be filing and in the period that we're going to be covering. Sure. Yes, what we've said so far is that we filed the necessary paperwork to notify the commission that we will be filing a rate case in the not-too-distant future. We're not going to predict whether we're going to get it in FY '23 or calendar year '23. Since this is really under UGI's ownership, the first case that we'll execute in West Virginia. I will tell you, and I'll reiterate that as I have in the past, we find so far that the West Virginia Commission is very reasonable and very pragmatic, but we don't want to get out ahead of the process. So we'll have more in the coming months on that. Okay. And then next question and last. Given where you are right now with the RNG projects that are already announced. Do you pretty much have the scale that you want? Or should we expect more? Yes. As we highlighted, Michael, we're making good progress with our 3R strategy and more specifically the renewables portion of that strategy. So we've now committed over $450 million in RNG projects. I think we have a very healthy pipeline, right? So we have a pipeline of opportunities, but as we always stress, we are very, very disciplined looking at these projects. So we are targeting double-digit rates of return. We take conservative assumptions with RINs and LCFS values, and we're looking at these projects. So I certainly expect for us to continue to build on the very solid platform we've now built with the amount of capital we've invested. And also I would like to highlight that we certainly continue to work on bio LPG projects, and we certainly continue to work on renewable dimethyl ether as other renewable solutions to the products we serve. So overall, I think we can -- you can expect and we certainly expect to continue to see some momentum in this area. At this time, I am showing no further questions in the queue. I would now like to turn the conference back to Roger Perreault, President and CEO for closing remarks. Thank you, Michelle, and I'd like to thank everybody for joining us today and your continued interest in UGI. We look forward to our next earnings call. Thank you.
EarningCall_563	Hello, everyone, and good evening. I am Shirish Jajodia, Vice President of Investor Relations and Treasury at MicroStrategy. Iâll be your moderator for MicroStrategy's 2022 Fourth Quarter Earnings Webinar. Before we proceed, I will read the Safe Harbor statement. Some of the information we provide during today's call regarding our future expectations, plans and prospects may constitute forward-looking statements. Actual results may differ materially from these forward-looking statements due to various important factors, including the risk factors discussed in our most recent 10-Q filed with the SEC. We assume no obligation to update these forward-looking statements, which speak only as of today. Also, during today's call, we will refer to certain non-GAAP financial measures. Reconciliations showing GAAP versus non-GAAP results are available in our earnings release and presentation, which were issued today and are available on our website at microstrategy.com. I would like to welcome you all to today's webinar and let you know that we will taking questions through the Q&A feature at the bottom of your screen. You can submit questions throughout the webinar, and Michael, Phong or Andrew will answer questions at the end of the session. Please be sure to provide your name and your company's name when submitting your questions. Now I will walk you through the agenda for today's call. First, Phong Le will cover the business results for the full year 2022. Second, Andrew Kang will cover the financial results for the fourth quarter of 2022; then Michael Saylor will provide a strategic review and discuss recent bitcoin market enlightening network market updates. And lastly, we will open up to Q&A. Thank you, Shirish. I'd like to welcome all of you to today's webinar regarding our 2022 fourth quarter and full year financial results. I want to start by recapping our strategy and underscoring our key highlights for the full year 2022. We have two corporate strategies, first, an operating strategy and second a balance sheet strategy. The Business Intelligence operating strategy is how we generate revenues and where most of our operating costs are incurred, and generates our cash flows. MicroStrategy at this point is the largest independent publicly traded business intelligence company in the world. Our goal is to remain a leader in this space by being modern, open and enterprise oriented. Substantially all our employees in the company over 2100 people are focused on our software business. Our Bitcoin acquisition strategy is a balance sheet strategy. As of today, we're the largest publicly traded corporate holder of Bitcoin in the world. We were the first public company to adopt Bitcoin as a primary treasury reserve asset. Our strategy is to acquire and hold Bitcoin for long term. We purchase Bitcoin using our excess cash, and with the net proceeds of capital raising transactions. I'll address our Bitcoin acquisition strategy first. In the fourth quarter, we purchased 3,204 bitcoins at an average purchase price of $17,616 per Bitcoin. And we sold 704 Bitcoins for the first time, at an average sale price of approximately $16,786 per Bitcoin, resulting a net increase in our Bitcoin holdings of approximately 2,500 for a net aggregate purchase amount $45 million, or approximately $17,850 per Bitcoin, inclusive of fees and expenses. Andrew will discuss our Bitcoin transactions in the fourth quarter later on this call. As of December 31 2022, we held a total of 132,500 bitcoins acquired an aggregate cost of $4 billion, or average cost of approximately $30,100 per Bitcoin. We remain committed to our Bitcoin acquisition strategy for the long term. In the fourth quarter, the broader crypto and digital assets markets witnessed significant financial distress. In addition, various prominent participants in the digital assets industry filed for bankruptcy, such as FTX, Voyager, Celsius and Genesis. And we do not have direct exposure to any of those companies. In addition, we conducted further diligence of our custodians and execution partners to assess their exposure to these companies and understand that their exposure was minimal. Since the adoption of our Bitcoin acquisition strategy, we've taken a simple approach from day one, which is to buy and hold Bitcoin. We've taken steps along the way to minimize risk, particularly with counterparties. We buy only Bitcoin in U.S. based markets. We custody Bitcoin with institutional grade U.S. based regulated custodians and cold storage, and we have not lended our Bitcoin to third parties for yield or any other purposes. As a result, we've been able to avoid transacting with bad actors in the space. To summarize our view on Bitcoin. First, we continue to have a high level of conviction in the value proposition of Bitcoin. We're very supportive of the Bitcoin network on a go forward basis. Second, we continue to follow a risk managed approach to executing our Bitcoin acquisition strategy. And third, we're long term focused, we plan to continue to accumulate Bitcoin over time, our core business is not impacted by near term bitcoin price fluctuations. With that, I will now turn to our software strategy highlights from 2022. We achieve constant currency total revenue growth for 2022 on the strength of our cloud business, despite a challenging macroeconomic environment last year, with high inflation, weakening foreign currencies in the ongoing war in Ukraine. Total Revenue for 2022 was $499.3 million, which increased 2% year-over-year on a constant currency basis. Total software licenses which consists of total product licenses and subscription services revenues in our consolidated statement of operations were $147.2 million, which increased 6% year-over-year on a constant currency basis. We've also made important progress in our shift towards our cloud offering, resulting in annual subscription revenues of $60.7 million, an increase of 46% year-over-year on a constant currency basis. Annual subscription billings were $77 million growing 39% year-over-year. The strong growth in our subscription revenue and billings was driven by both existing customer migrations to the cloud, and new customer wins. Our customer revenue renewal rates continue to be among the highest we've ever experienced. Overall, we continue to see further global adoption of our cloud platform among our international customers. We're also seeing the benefits of being a single analytics platform in the industry that is both enterprise grade and easy to use. As an enterprise grade platform, we're benefiting from the trend of BI modernization and consolidation from enterprise tools like SAP Business Objects, and IBM Cognos. As an easy to use platform for govern Ad Hoc Data Discovery, we are the tool of choice for corporations that have outgrown Microsoft Power BI and Salesforce Tableau are no longer want to be locked into a single vendor ecosystem. On the cost side, we believe in a thoughtful approach to cost management on an ongoing quarterly basis, rather than annual surges in hiring, followed by mass layoffs. We continue to invest in R&D to innovate our product, while being thoughtful about sales and marketing, and general and administrative cost. As a result, we saw relatively flat operating cost from 2021 to 2022. Next, I would like to discuss our key focus areas for 2023. First, we aim to launch something called MicroStrategy One [ph 0:04:03 part02], which will serve as our core analytics platform designed to meet all of an organization's analytics needs. It will be easy to use powerful, comprehensive and cutting edge. It's intended to be a one stop shop for all of our business intelligence customers and prospects. You should expect to hear more about this from us throughout the first half of 2023, culminating in our MicroStrategy world event on May 1 through fourth in Orlando, Florida. Core differentiators for MicroStrategy continue to be our enterprise analytics, embedded analytics and cloud offerings. Our focus on these three areas has resulted in more customers choosing to decommission and consolidate legacy platforms in favor of an enterprise wide adoption of MicroStrategy. So this has led to increasing revenue renewal rates every year in the last three years. Our customers depend on these differentiating capabilities to build mission critical applications to run their field forces, store operations, bank branches, risk analysis groups, corporate operations and much more. As such, it's worthwhile to highlight the resiliency of our business even in the tough macro conditions that existed in 2022. Weâre the only remaining publicly traded independent Enterprise BI company, and the stickiness of our products and the long standing tenure of our top customers are testament to our resiliency. Our continued investment research and development has enabled us to modernize our platform and enable our customers to transform how they do business through innovative analytics tools and techniques. These include personalized applications, immersive interactive, visualizations, simple no code and low code application development with open API's, flexibility of consumption through mobile interfaces, and innovative capabilities like hyper intelligence. We continue to see growth with customers who build MicroStrategy into the software solutions that they sell to end users, leveraging our open embedded analytics capabilities. Second, not new, but even more in our focus, is growth. We're going to focus on simplifying our processes growing our pipeline and growing our revenues. We plan to get back in the market and in front of our prospects through in person field events, field marketing, aggressive account based marketing, and a revitalized partner program. Third, cloud is at front and center, when we talk about focus on growth. As MicroStrategy Cloud continues to be growing part of our business mix, we're seeking to accelerate growth through increased cloud adoption by both new and existing customers. New customers are increasingly cloud first and immediately reap the benefits of our managed service offering. That includes business agility, enterprise security, regular updates and upgrades and cost savings. At the same time, more and more existing on-premises customers are brought migrating to the cloud and expanding their MicroStrategy usage to new departments and user groups. Intentional in our approach to cloud is our belief in cloud agility and independence. The power of multi cloud hybrid and the portability between private and public clouds resonates with our customers who do not want to be locked into a single technology stack. We seek to take advantage of the best that each major cloud provider has to offer, optimizing our platform to run on and across each. We'll continue to invest in this area to support our customers need for flexibility, scalability and security. In Q4, MicroStrategy Cloud for Governments, or MCG is our new cloud offering received authorization to operate under FedRAMP guidelines. MCG is a managed software as a service solution and our first generally available release of our cloud platform that is built on a modern high performance cloud native architecture that also utilizes containers and micro services. It delivers on sophisticated security and data privacy requirements across the public and private sectors. It opens up the possibility migrating a large part of our business, federal government customers to the cloud. Our fourth area focus on our employees. Our employees are our key assets. And we will continue to develop and promote people internally and seek to improve employee engagement. Our employee engagement survey results indicate that we have made great improvements to employees, mental wellbeing, loyalty, and belief in the company's two corporate strategies. We're also continuing to develop technical training and certifications to keep our employees up to date on the latest MicroStrategy software enhancements and soft skills training to keep our managers engaged and employees motivated. And the last thing is that we'll focus more on innovation, both on business intelligence, as well as on our Bitcoin acquisition strategy. On the BI innovation side, MicroStrategy Insights is our first set of products released in the area of artificial intelligence and machine learning to augment more traditional reporting capabilities, and provide contextual and immediate insights. The insights feature accelerates decision making uncovers data patterns with automated alerting, and library applications. The alerts are based on machine learning models working behind the scenes to proactively detect data trends, outliers and anomalies, equipping users with the timely insights to drive action. This is the basis on which we're combining MicroStrategy semantic layer, hyper intelligence and open architecture to provide the data tracking alerts, forecasting recommendations, and ultimately artificial intelligence that will be key for the future of analytics and intelligence. We believe this is something MicroStrategy is uniquely positioned to provide and we expect to release more functionality in this area every quarter. On the Bitcoin innovation side is indicated on our last earnings call, today I'm delighted to share a preview of MicroStrategy Lightening, our new product that we're developing, which utilizes the lightening network, a second layer network that sits atop to Bitcoin network. We envision MicroStrategy lightening is an enterprise platform designed to leverage the power of the Bitcoin lightening network to enable new ecommerce use cases and tackle modern cybersecurity challenges. The first component of MicroStrategy lightening platform is lightening rewards, lightening rewards is attended allow any enterprise to reward their employees, customers, partners and prospects for their engagement. Companies spend vast amounts of time and money and digital marketing, driving engagement with their brand and their customers and for some monetizing online contents. We believe a platform like MicroStrategy lightening can enable them to drive that engagement, rewarding their customers for that engagement directly, rather than lining the pockets of online ad giants. We expect future capabilities the lightening platform will provide opportunities for new business models to monetize online content, or minimize threats and the nuisance of bots and other malicious actors. While we envision MicroStrategy lightening is independent product offering, it builds on our core strengths and deep experience building highly available, easy to use enterprise software delivered in the cloud. We're taking a very disciplined investment approach such that our lightning development efforts currently occupy less than 1% of our R&D capacity. Weâre currently in the initial pilot stage of the product with our early prerelease version rolled out internally to MicroStrategy employees. While our core focus remains on BI innovation. We believe we're uniquely positioned to bring value here. Mike will elaborate further on this topic. Last but not least, I'm thrilled to share again, that our next MicroStrategy world will be in person from May 1 to fourth in Orlando, Florida. Our customers have expressed willingness and desire to for meaningful rich in person connections alongside virtual meetings. So we're bringing back world â23 as a bigger scale event with multiple trucks. The Business Intelligence track on May 1 through fourth will be a working event designed to help modernize analytics for innovative organizations looking to transform with data. We're excited to showcase some of the world's best brands use modern experiences to break through and achieve extraordinary results. The Bitcoin track on May 3 through fourth will include our third annual Bitcoin for corporations on May 3, and a dedicated lightening for corporations to and May 4. There'll be a first of its kind gathering of corporations looking to integrate Bitcoin and Lightening as a part of their corporate treasury or product offerings. The conference will also include dedicated networking opportunities workshops and training. And finally MicroStrategy will be incomplete without an epic party. We're hosting a theme park conference party Universal Studios, Florida featuring roller coasters and an evening of unforgettable fun and excitement. We look forward to your participation at the conference. Registrations are open and additional details can be found on our event website at microstrategy.com/world 23. Thank you, Phong. Before jumping into the quarterly results, I'd like to quickly reemphasize MicroStrategyâs revenue priorities. Our three-decade long history of providing data analytics solutions to large and small corporations, has established a long tenured and diverse customer mix, where our platform has proven to be a critical component in running our customers businesses day to day. Our platform has demonstrated durability through tough economic cycles and has been strategic during times of growth, and important foundation to our revenue it is through supporting our existing customers as their businesses evolve. We continue to deliver for our customers as seen in our consistently high renewal rates. And over 90% for the last five consecutive quarters and as high as 95% in Q4 of last year. Second, growing cloud revenue, which for us means migrating existing customers into a fully hosted and managed cloud subscription model, which Phong talked about earlier. Winning new logos into the cloud is important and uplifting services for existing cloud customers is also critical. We are very pleased with our performance in all these areas this past year. But keep in mind as we migrate to the cloud we inherently experienced some offsets in areas like audit license and support revenues. However, the transition to a subscription model will establish high quality annual recurring revenues that will allow us to scale even stronger growth in the future. And Q4 of last year approximately 64% of our total revenue was recurring, compared to approximately 60% in the same quarter over prior year, a trend that we expect will continue in 2023. Lastly, our consulting business which has been and continues to be essential in providing expert support and solutions to our customers. They not only champion solutions, but they also drive modernization and also impact growth through partner opportunities. Okay, turning to the results. Total revenues for the fourth quarter were $132.6 million, down $2 million, or approximately 1% year-over-year. However, at constant currency Q4 total revenues were up 4% year-over-year, similar to the trend we saw in Q3. Total software license revenues were $45 million, up 1% year-over-year, and up 8% at constant currency. When we look at product license revenues and subscription service revenues together, year-over-year growth on both a GAAP basis and at constant currency continue to show the overall growth momentum or cloud transition. Subscription service revenues were $17.5 million, an increase of 47% year-over-year and up 54% at constant currency. While product licensed revenues were $27.6 million for the quarter, down 15% year-over-year and product support revenues were $66.8 million down $2.3 million year-over-year, but up 1% at constant currency. These trends are consistent with revenue themes that I mentioned earlier. Finally, other services revenues were $28.7 million, a slight 1% decrease year-over-year, but an increase at 5% at constant currency. Our worldwide consulting business which makes up the majority of our other services revenues saw higher bill rates globally in Q4, with particularly strong performance among our European and Argentina consultants. To add to that, we're also seeing early success and momentum in the build out number of India workforce, where we plan to grow strategically in future quarters. Turning to slide 14, we continue to see growth in our software license and subscription billings driven by the continued strong momentum in cloud. Total current software license billings increased to $61 million in the fourth quarter, which was an increase of 10% year-over-year. Current subscription billings were $31 million, an increase of 28% year-over-year, our 11 straight quarter of double digit growth. And full year â22 annual subscription billings was 39% compared to the prior 12 months, with both subscription service revenue and current deferred subscription revenue growing over 40% each year for the full year 2022 compared to 2021. We are extremely pleased with cloud growth in 2022, which has exceeded expectations in the timeline for transforming and modernizing our BI platform. 2023, will provide to be a pivotal year as well, as we began to see the benefits of the scaling up of our cloud business and the adoption for our customers in the past two years. Turning to costs. Total non-GAAP expenses, which exclude share based compensation costs were $309 million in the fourth quarter, or $50 million higher year-over-year. $51 million of the year-over-year increase was attributed to Bitcoin impairment charges in the quarter as a result of the price volatility we saw in Q4. This was driven largely by the clubs of FTX and its impact to the broader digital asset market. The price of Bitcoin which fell to a low of approximately $15,460 during the quarter, which drove the additional impairment for Bitcoin holdings under the current accounting rules. Non-GAAP cost of revenues were $26 million in the fourth quarter an increase of $2.5 million or 11% year-over-year. As a percentage of total revenues non-GAAP cost of revenues increased 2% year-over-year, related in part to the growth of our cloud business similar to what we've seen in recent quarters. Non-GAAP sales and marketing expense decreased $3 million, or 8% year-over-year to $37 million or as a percentage of total revenues lower by 2% year-over-year. This was due in part to a combination of higher net capitalized commissions this quarter, plus some favorable X FX impacts compared to the same quarter in the prior year. Non-GAAP R&D expenses were $28 million in Q4, a slight increase of $300,000 compared to the prior year. In this area, we continue to prioritize vendors, as Phong mentioned, and increase their talent and resources on average for the year. But we did so intentionally and in a way that kept expenses flat by leveraging a more cost efficient global delivery centers. Our non-GAAP G&A costs were $21 million, pretty much flat, the decrease of about $400,000 or 2% year-over-year. As Phong mentioned earlier, our focus on lowering costs has been ongoing and frequent with a strict discipline in managing efficient personnel and non-personnel costs. It's not something that we just started thinking about in the second half of last year. In fact, we were fortunate to add this focus even prior to this past year when we did see higher wages and expenses, revenue headwinds due to weaker foreign currencies and we also saw the negative impacts from the war in Ukraine. Aside from our Bitcoin impairment related expenses, we kept our costs flat year-over-year. Looking forward, we plan to remain cost conscious while continuing to invest in higher end growth areas like optimizing our talent and resources across our growing global footprint focusing on lower cost markets. On slide 16, total non-GAAP operating loss in the fourth quarter was $177 million, while the digital asset impairment charge for the quarter was at $198 million. As I have said in past quarters since the adoption of our Bitcoin Strategy in Q3 of 2020, the digital asset impairment charges we have incurred each quarter has always been greater than our non-GAAP operating losses, showing the significant impact it has had on our reported income. On slide 17, as of December 31 2022, the carrying value of our Bitcoin holdings was approximately $1.8 billion, compared to approximately $2.2 billion, based on the price of $16,556 as of the last day of the year. So far this year, Bitcoin prices have rallied significantly, along with the market value of our Bitcoins, increasing to approximately $3.1 billion as a close of markets yesterday, and trending even higher since then. To touch on the regulatory perspective, we continue to be optimistic with the progress that the Financial Accounting Standards Board has made and its steps update how companies measures certain digital assets, including Bitcoin on balance sheets. Since announcing this as an inject agenda item last year, the FASB has moved expeditiously and voted and agreed on how crypto assets should be presented in financial statements and what disclosures should be required under expected fair value accounting standards. We recognize that what has been completed thus far are just the initial steps in the standard setting process. But we are encouraged that the progress up till now has been aligned with standard fair value practices. We continue to remain committed and supportive of FASB decisions under focus on improved investor transparency for digital assets. On slide 18, as of December 31 2022, we held a total 132,500 bitcoins, of which 14,890 bitcoins were held directly by MicroStrategy at the parent, with the remaining 117,610 bitcoins, held at the MicroStrategy subsidiary. Although bitcoins held at the sub approximately 34,600 bitcoins are pledged as collateral to Silvergate loan and just over 82,900 bitcoins or 63% of our total Bitcoin holdings, equivalent to approximately $2 billion at the current approximate market value of $23,800 remain unpledged and unencumbered. Regarding the Silvergate loan, we remain fully in compliance with the loan to value requirements, and as we have detailed in the past, we continue to have sufficient unencumbered collateral to address any foreseeable volatility in Bitcoin prices in the near term. It is worth highlighting again to that if the Bitcoin prices increase and the loan to value ratio is less than 25%, we're able to release any excess collateral from being pledged to the loan. Our current LTV on this loan is now very close, if not at that level. As Phong mentioned earlier, for the first time in the fourth quarter, we sold approximately 704 Bitcoins that carried a higher tax cost basis compared to the market price of the Bitcoin at the time we sale. The transactions generated capital losses of approximately $34 million which we expect to carry back against previous capital gains. And to the extent such carry backs are available, we expect to generate a tax benefit. Even with the aforementioned sale, we increased our net holdings by 2500 bitcoins during the quarter. And we continually explore opportunities to use our bitcoins to generate shareholder value, and we may consider pursuing additional transactions that may take advantage of the volatility in Bitcoin prices, or other market dislocations that are consistent with their long term Bitcoin strategy. We will thoughtfully consider any other opportunities in the future and if we choose to pursue anything, we will carefully assess any potential risks and do so in a prudent manner as we have done in the past. Turning to slide 19, our debt capital structure remains unchanged with the total $2.4 billion of its outstanding debt and convertible instruments, which carry a blended interest rate of approximately 2.1%. The convertible senior notes carry an extremely low cost of funds with the earliest debt maturity not until March 2025. These convertible notes are very attractive in terms of costs, and with over two years remaining until the earlier of the maturities, not outstanding long term capital remains very valuable. In Q4, we activated a $500 million at the market or ATM equity offering, an issued an aggregate 218,575,000 [ph 0:01:35 part07] of shares Class A common stock at an average gross price per share of approximately $213.16. We raised approximately $46.6 million in gross proceeds, which leaves us with approximately $453 million of outstanding ATM capacity available under our program. We will continue to evaluate and sell equity under this existing program, when we believe there's an embedded valuation premium in our stock, compared to the market value of our Bitcoin holdings and our estimated value of our software business. Use of those proceeds will be for general corporate purposes, including for the purchase of Bitcoin, or for other general corporate liquidity needs. As we execute under the program, we will do so with a discipline focus on growing shareholder value, optimizing our capital structure and maintaining adequate liquidity to run and grow our business. The overall liquidity from both our operating and financing activities remains more than sufficient to manage our ongoing working capital needs grow our business as well as manage our debt expense. Our outlook for 2023 remains cautious but optimistic. We are planning for the recent trends in macro and market volatility to likely persist in the near term. However, we are encouraged that even in this environment of constant change, businesses need actionable data and analytics to succeed. And open architecture to be agile and cloud capabilities to be cost efficient and effective. MicroStrategy delivers all of these. In 2023, we will target modest constant currency total revenue growth. We will continue to grow cloud subscription billings as a percentage of total revenue and we will continue to strengthen the quality of our recurring revenue as we continue to transform our platform to the cloud. We will remain disciplined and scrutinized costs on investing in growth areas. And we will continue to execute on our dual strategy of growing our business intelligence and acquiring and holding Bitcoin. Thank you for your time today and for your continued support of MicroStrategy. I'll now turn the call over to Michael for his remarks. Thank you, Andrew. I'm Michael Sailor, the Executive Chairman of MicroStrategy. First, I'd like to provide our performance review. When we think about the corporate strategy and its effectiveness, we go back to the summer of 2020 when we made our major strategic decision, and it was on August 11 of 2020 that we announced to the world that we had acquired $250 million worth of bitcoin, along with a tender offer. At that -- on the day before our stock was about $121 to $122 a share. Today, the stock closed to $292 a share. So of course, we measure our success based upon the creation of shareholder value. And if we look at the performance of the company stock since August 10 2020 to the close of business 4pm Eastern Time February 1, you can see the MicroStrategy stock is up 117%. We pick a number of different benchmarks. I think the most important benchmark is bitcoins performance. And you can see from this chart that Bitcoin notwithstanding the fact that it is -- it is known by all to be volatile. Everyone that talks about Bitcoin talks about it being volatile, nobody that talks about Bitcoin actually points out that, despite its volatility, it is the number one performing asset over the past 2.5 years. So we can see bitcoin is up 98% versus August 10 2020. And that's just a really critical day. So MicroStrategy stock is levered against the Bitcoin. And so through our execution, we've been able to outperform Bitcoin as an index. So we're pretty pleased with that. We can trust the performance of Bitcoin to other major asset classes and indexes. And you can see that while bitcoins up 98%. A diversified portfolio of high quality companies, such as the S&P 500 is up 23%, in that same time period. The NASDAQ is up 8% over the course of the 2.5 years. Gold is a loser, gold has lost 5% since the summer, since August 10 of 2020. Bonds have been even worse performers. So if you'd invested your treasury in long dated bonds, like the BOND and [indiscernible 0:01:41 part08] down 16% in your capital. And although people often talk about gold and silver is money, you can see that silver is even a weaker monetary asset than gold, it's down 19% over that time period. So benchmarking a digital commodity or in this case, a digital scarcity like Bitcoin versus all of these other asset classes, you can see that Bitcoin has been the strongest performer not by even a small amount by a factor of five to 10x over other options. We also benchmark ourselves against big tech stocks. And so if we look at big tech, you can see that Google, Apple and Microsoft, which are three effective digital monopolies, and three of the strongest companies in the world, without dispute, they're up respectively 36% 29% and 21%. They've underperformed Bitcoin by a factor of three to four, or three to five, and MicroStrategy of course has outperformed them all substantially. Now Netflix, Amazon and Meta group, all down minus 25% minus 33% and minus 42%. So this is a sobering observation because most of those names are actually monopolies and they have overwhelming crushing domination. But what this illustrates is that in the summer of 2020, investors were faced with a very, very difficult challenge, because it's just not easy to figure out what to invest in when interest rates went to zero and when we'd already had a substantial bounce in risk assets. And you can see of all these choices, Bitcoin, clearly would have outperformed them all. We also benchmark ourselves against enterprise software stocks. So Oracle is very well known and it's huge, its up 64%, it's actually done quite well it's done better than all the big tech stocks. It's very conservatively managed industrial software company. But still dramatically underperformed Bitcoin and MicroStrategy as an asset and of course IBM up 11%, Salesforce down 13%, SAP down 24%. People often ask us so why did we do this and are we pleased with the result and of course there are lots of headlines about accounting charges and quarterly losses or GAAP losses but as you can see, if you're a shareholder and your choice was to choose from any of the bars on this screen, MicroStrategy is still the number one choice and Bitcoin is the number two choice of what you want to invest in as commodity bitcoin is the winner as a commodity and asset class and if you want to invest in a security, MicroStrategy has worked very hard to provide shareholder value to our investors. We have lots of decisions to make as quarters go by. And we always try to evaluate what is the best path forward for our shareholders, what is most accretive for the equity holders of MSTR. And I think that the scorecard illustrates that. To-date so far, we have been effective in that. And we'll continue to focus. This chart really illustrates why we are so committed to our Bitcoin strategy. And as you can imagine, it also illustrates the benefits to the corporate brand and micro strategy, all of our employees, all of our partners, all of our customers and all of our shareholders of this strategy. I would like to say a few words about a couple of other areas. Let's start with the macroeconomic situation. 2022 was a brutally difficult year on a macroeconomic basis as short term interest rates went from effectively nothing to 4.5% and that resulted in a drawdown in all financial assets. That was quite painful. I expect as we go forward, there'll be some normalization in 2023 and 2024. And I think the general macroeconomic environment is rotating to a more beneficial place for us, and generally for the Bitcoin community. We have always focused on Bitcoin rather than crypto. And so if you look at the micro economic situation the past 12 months, most of the crypto enterprises and the crypto assets, and the crypto use cases have melted down in that time period. Of course, we know the stories of the bankruptcies of BlockFi and Celsius and FTX and Genesis, and Voyager and Alameda. And we also know about the meltdowns of all the crypto tokens, the Luna token, the Terra token, the FTT, token etcetera. In our opinion, these were all very weak use cases, and they were very fragile structures, and it was a matter of time before they do meltdown. The meltdown of that has created short term negative headwinds for Bitcoin because Bitcoin has cross collateralized with all these other cryptos. But long term, the rationalization of the crypto market will be beneficial for Bitcoin, it has educated an entire generation of investors on the benefits of Bitcoin as a decentralized digital commodity, and the benefits of not having counterparty risk. It's made, I think, pretty clear what the difference between an asset with an issuer versus an asset without an issuer. And it's also illustrated the benefits of being able to solve custody and the risks of being dependent upon another custodian. The reason that MicroStrategy was able to get through this entire crypto winner is because we weren't exposed directly to any cryptos. Nor did we do business with any of the crypto exchanges and we didn't do it for very clear reasons, because we don't believe in the value proposition of unregistered securities. And we felt that at some point, eventually, the combination of risky behavior in the crypto industry and the ethical and the legal overhang of the unregistered securities would eventually create a liability. I think as we go forward, you're going to see much stronger institutions that will be entering the space and they're going to be entering because the industry has rationalized. So the future is fewer assets, fewer -- better institutions, less of the crypto risk taking. And if there is any other result of the crypto winner is, so we can see that everywhere in the world regulators and the general public are enthusiastic about the promise of digital assets. They're hungry for a clear digital asset framework. I think that there'll be more focus on creating a constructive framework and I think people understand better. Why you can't create a digital asset framework based upon unregistered securities without proper disclosure. We've said before, the only real safe haven for an institutional investor is Bitcoin. Bitcoin is the only universally acknowledged digital commodity. And so if you're an investor, Bitcoin is your safe haven in this regard, the others are all question marks, they're all generally unregistered securities and they operate in a regulatory gray zone. I expect that we will make progress with regard to regulatory developments that will be constructive for the industry. It's not going as fast as we would like. The consistent denial of Bitcoin spot ETFs has been a disappointment. The lack of a clear digital assets framework from coming from regulators or legislators is a disappointment. But having said that, it's pretty clear that that will arrive in time and we do see signs of optimism here auspicious developments. All the FASB initiatives to introduce fair value accounting for Bitcoin is very auspicious development. The bipartisan support for Bitcoin and for digital assets in general in Congress is an auspicious development. The acknowledgement by all major public figures to Bitcoin is a digital commodity worthy of attention is an auspicious development. And the fact that Bitcoin has managed to survive the meltdown of most of the crypto banks and crypto lenders and most of the crypto exchanges and most of the other crypto assets is a very auspicious development. So I think 2022 prove the resilience of Bitcoin and then also prove the resilience of MicroStrategyâs business model. And now we look excitedly forward to 2023 and 2024, where we think most of the poor behaviors or the irresponsible behaviors have been squeezed out of the system. And most of the inappropriate leverage has been squeezed out of the system. And I don't think that people in the crypto market will, I don't think they'll engage in the same behaviors that they got away with in the previous few years, because I think the public has been educated. And I think generally, we have a much more sophisticated set of investors and actors in the space, all of which I think is good for Bitcoin. The last point I'll make on Lightening, Lightening is really spreading rapidly. And it's being adopted by many, many, many businesses. We see dozens and dozens of lightening startups being launched, lots of lightening wallets. We see some exciting applications of lightening. And I think that's only going to continue -- lightening liquidity continues to increase. We as a company have been very pleased with the early results of our lightening R&D effort and MicroStrategy lightening product development. It's quite impressive what you can do with lightening. I think. Traditionally, the primary criticism of Bitcoin was the slow transaction rate on the base chain made it difficult for people to see how billions of individuals would onboard to the network and how billions of transactions could take place. But now I think as lightening has spread, it's becoming fairly straightforward and quite easy to see how that's going to happen. We're going to see first dozens and then hundreds and then 1000s of layer three applications to move Bitcoin within a custodial network like cash app, or like a coin base, or a binance. And then we're going to see, all of those applications start to knit together with a layer two protocol, which we call lightening. And as they adopt lightening as their Layer 2 protocol, we'll see, there'll be massive transaction throughput on the Layer 3, and then we will see people depositing and withdrawing satoshis, on layer 2s, and then we'll see the layer 1 will evolve to become the settlement network of the entire global digital monetary system. And that's why we decided to host a lightening for corporations track at MicroStrategy world coming up in May. This will be a first, to my knowledge. No one's actually hosted a lightening for corporations conference. But we think that 2023 is the right time, it's become increasingly clear that you can build Bitcoin and Satoshis and micro transactions into your products and into your services using the lightening protocol. And I think that there'll be a whole set of breakthrough applications and breakthrough products using lightening. So 2023 is an exciting year and I think we're moving into the most exciting phase of Bitcoin development ever. Bitcoin is emerging as the grown up institutional asset in the digital ecosystem. And lightening is emerging as the universal language for moving money over IP. And so with that, I'd like to go and pass the floor back to Shirish to open us up to questions and answers. Great. Thank you, Michael. So we are going to jump right into the questions. And the first question is for Phong. Phong, could you could you update us on the progress of your cloud product and capabilities? And how customer migrations are faring today? And what are your expectations for cloud business growth, given the different macro? Thanks, Shirish. Cloud growth is going very well, in 2022, grew on a revenue basis 46% constant currency and on billions basis up 39%, which both represent a bit of an acceleration in 2022. I think we'll be able to see that same pace of growth or something a little faster will be our goal in 2023. I don't think the macroeconomic headwinds will slow or cloud growth. If anything, we might see a slowness of cloud growth because we're getting into bigger and bigger customers. Now, we've moved at this point, about 20% of our recurring revenue is in the cloud. So we moved to a good amount of sort of medium sized customers. But that's where MCG MicroStrategy Cloud for Government or a FedRAMP offering is going to help us. There's quite a bit of federal customers, large banks that require some sort of a FedRAMP certification, those will take longer to migrate. But I think that's really this sort of next passion that we'll go after. But I'm pretty excited about where cloud growth is going. And obviously, is getting to be more and more the standard sort of way we sell our software. Thanks, Phong. Next question is for Andrew. Can you please provide more detail about your sale of Bitcoin in December? And do you intend to make any further sales? Thanks, Shirish for the question. As I mentioned in the prepared remarks, we sold 704 Bitcoin in December, which generated a capital loss, which we expect to carry back against the capital gain from 2019, which was through an old domain name sale. Apart from that sale, we have not sold any other Bitcoin. And, in fact, I think the main takeaway should be that we have continued to increase our total Bitcoin holdings each quarter since inception, including Q4. And I mentioned this before as well. But, we don't really stop exploring opportunities and thinking of ways to increase shareholder value related to our Bitcoin. And in the future, we may consider doing other things that may take advantage of market volatility or be opportunistic in the market I guess either way anything we do, we'll do it consistently, within the construct of our long term Bitcoin strategy, which is to buy hold and grow. Thanks, Andrew. Next question is for Michael. In light of the recent crypto market events, what do you think, are the key catalysts for more adoption of Bitcoin by corporations? I think fair value accounting is going to be a big plus for corporate adoption. Since clearly, the gap volatility created by indefinite intangible accounting is a negative for CFOs. I think the rollout of lightening for corporations are going to be another big catalyst because the ability to build Bitcoin and play to earn or a Bitcoin rewards or Bitcoin into marketing programs, and to do micro transactions is going to be viewed as a real exciting benefit, it could be a great solution for Chief Marketing Officers, or CHR, or CEOs or heads of sales. I think that the overtime one big driver is payment networks are inefficient, and slow and expensive. So as companies figure out how to monetize their applications and move small micro transactions around friction free at zero cost, I think that there's going to be an interesting use case for heads of sales and CEOs. So in short, maybe the last thing is any regulatory clarity that comes from Washington DC, with regard to the digital assets, ecosystem, will be a big driver. And so I think we're all eagerly awaiting some sort of digital assets framework. Bitcoin is, is right now, as I said, the only universally acknowledged digital commodity. And so in a way, it's the one thing you can deal with in the absence of asset framework. But I also think Bitcoin will probably be the biggest winner if there is a digital assets framework, because it'll just accelerate institutional adoption, both on the investor side and the corporate side. So I would look to those three drivers. Thanks, Michael. Next question is for Phong. With respect to the competition and demand. So there are two parts? Have you seen any changes in the competitive environment, as customers look to bring down the cash burn? And what is the impact of macro on demand with respect to sales cycles and cloud migration? Yes, the first item, I think the biggest trend we're seeing as customers try to bring down their software costs is consolidation of vendors. And in the BI world, it's really two credible choices for consolidation right now. It's MicroStrategy, if you want a full enterprise solution, it's Power BI, if you want a point, solution that integrates well with the rest of the Microsoft ecosystem. I think what we've seen in the last six to 12 months is that as more companies are trying to use Microsoft, whether it be Azure, Power BI or otherwise, they're realizing the limitations, there's not a common semantic model, there aren't reusable objects. It's not scalable, it's not as secure. And I think customers are also realizing that free Power BI with your office 365 Enterprise license just means you're going to pay more than Azure cost. And it's a well-worn model where you give certain things away for free to drive more usage costs. And so we see a lot of customers consolidating on MicroStrategy. And so even though there may be a reduction in overall spend, we get more of the pie. And I'm excited about that. As far as the macro environment, Q4 was more difficult, especially internationally as because customers are trying to spend a little bit less. With that said, we still had a reasonable outcome in terms of our Q4 financials driven by our move to cloud. And I do think 2023 is looking a little bit brighter in terms of companies needing to spend to improve their data and analytics environment. So I'm optimistic about the growth potential in 2023. Thanks, Phong. Next question is for Andrew. Can you please provide your thought process on how do you plan to address the 2025 loan maturities coming up? Thanks, Shirish. So there has been some volatility in our bond prices recently. And just looking back to Q4, we've seen that pretty clearly. But we've also seen that same volatility pretty dramatically rebound prices here in January in a very short period of time. I think with that kind of backdrop, and changes in the market, we are comfortable with our outstanding debt levels. And we're confident than that when it does come due, we will be able to either refinance it, advertise it or pay it off. And we have a lot of different options available to us to manage those maturities. And the fact is, we still have a lot of time left to do so in the next two plus years. Thanks, Andrew. We'll take this one last question for Phong. What is your margin outlook for 2023? And how are you thinking about balancing revenue growth versus margin preservation? Like that both are like, we're going to focus on driving revenue growth and profitability or margin growth in 2023. I think big driver, that's our acceleration of conversions to cloud, which allows us to see an uplift and cloud revenue and overall revenue from hosting term licenses and support fees. And a cost side Andrew mentioned it but we were we kept our costs relatively flat, our operating costs relatively flat from 2021 to 2022. The goal would be to do something similar or even reduce our costs a little bit. If you exclude the impact of the coin holdings. I'm talking about non-GAAP costs here. So if we can grow revenues and keep flat or reduce our costs in 2023, then we should be able to grow margins. And I think if the macroeconomic environment improves faster, we can do that even faster in 2023. Great, thanks, Phong. I think that brings us to the end of the time for today's webinar. Thank you everyone for the questions. This concludes the Q&A portion of the webinar and I will now hand over the call to Phong for closing remarks. Thanks, Shirish. I want to thank everyone for being with us today. And we appreciate all of your support. We're enthusiastic as ever on both of our strategies, our enterprise software strategy and our Bitcoin strategy. I wish you all a good quarter, and happy Spring and looking forward to seeing you again in 12 weeks. Thanks/
EarningCall_564	Good day and thank you for standing by. Welcome to the BEP, Brookfield Renewableâs Fourth Quarter Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today Connor Teskey, Chief Executive Officer. Please go ahead. Before we begin, we would like to remind you that a copy of our news release, investor supplement and letter to unitholders can be found on our website. We also want to remind you that we may make forward-looking statements on this call. These statements are subject to known and unknown risks and our future results may differ materially. For more information, you are encouraged to review our regulatory filings available on SEDAR, EDGAR and on our website. On todayâs call, we will provide a review of our 2022 performance and growth initiatives. Then Julian Thomas, who heads up strategic initiatives within our group, will discuss how we are harnessing our partnership with institutional capital to accelerate our growth. And lastly, Wyatt will conclude the call by discussing our operating results and financial position. Following our remarks, we look forward to taking any of your questions. We have had another successful year, continuing our track record of double-digit average annual FFO growth for over a decade. We generated funds from operations of over $1 billion or $1.56 per unit, an 8% increase over last year as a result of the stability of our high-quality cash flows, organic growth in commercial initiatives and contributions from acquisitions. We agreed to deploy capital well ahead of our targets growing in every market we operate, while dramatically expanding our renewables operations and making our first transition investments. We also delivered record performance from our development activities with 19,000 megawatts of capacity either under construction or in advanced stages as well as we increased our global development pipeline to almost 110,000 megawatts. We are now in the early days of more of these high returning development dollars beginning to flow through our income statement, a trend that we expect to continue as more and more of our projects reach commercialization. As it relates to capital deployment, 2022 has been our strongest year to-date. We closed or agreed to invest up to $12 billion or close to $3 billion net to Brookfield Renewable, which will be deployed over the next 5 years. This represents almost half of our growth target for that period. The investment environment for renewables remains highly compelling. Renewables low cost energy profile, combined with the themes of corporate clean energy demand, electrification and energy independence, continue to be key trends accelerating renewable deployment. Our disciplined approach to investing and long history of owning and operating renewables enables us to capture some of the most attractive opportunities going forward. And as Wyatt and Julian will discuss later, we maintain a best-in-class balance sheet, robust levels of liquidity, and access to diverse and deep pools of capital, including our ability to invest alongside large scale institutional capital, which enables us to execute on sizable transactions that generate strong risk adjusted returns. During the year, we agreed to invest up to $4.6 billion or $1.4 billion net to Brookfield Renewable of capital into our renewable development initiatives through both organic growth within our existing business and by acquiring new complementary platforms that enhance our current offering. This includes our investment in three large renewable development businesses in the United States: urban grid, standard solar and scope clean energy. These investments enhance our position in whatever our largest market, bringing our total size to 74,000 megawatts of operating in development capacity in the US. Since acquiring these businesses, we have worked quickly to integrate them into our overall U.S. platform and have begun executing on the business plans we set out. We are already seeing strong performance from these new investments. They are all benefiting from the Inflation Reduction Act in strong corporate demand, which is enabling us to accelerate the development pipelines and grow these businesses beyond our original underwriting expectations. Turning to nuclear power, as many are aware, we formed a strategic partnership with Cameco to acquire Westinghouse, one of the worldâs largest nuclear services businesses and a critical player in the energy transition. We are moving forward with obtaining the required approvals for this investment and are on track to close the transaction in the second half of 2023. The business is performing well and we are already seeing benefits of the investment beyond our underwriting as nuclear is increasingly recognized as a provider of clean dispatchable baseload power generation. As an example, the Polish government announced that it has selected Westinghouseâs AP1000 technology for the build-out of the first three of its planned large scale nuclear reactors. This is the key step towards the country achieving its decarbonization targets and greater energy independence. We are also progressing our transition asset investments, including most recently, our investment in California Bioenergy, a leading California based developer, operator and owner of RNG assets, where we have the ability to invest up to $500 million or $100 million net to Brookfield Renewable in downside protected convertible structures that support the development of new agriculture renewable natural gas assets. This investment is another in the continuation of our strategy of entering into high growth transition asset classes that are complementary to our core renewables business. Similar to carbon capture and storage, recycling and renewable natural gas, we have invested through small upfront capital deployments with experienced partners through investment structures that provide us with downside protection, discretion over future investments, and significant potential upside returns on our capital. As we enter 2023, our business has tremendous momentum. As a leading global clean energy company with deep access to capital, we are uniquely positioned to execute on the most attractive clean energy and decarbonization investment opportunities around the world. Given our strong financial and operating performance, robust liquidity and positive outlook for the business, we are pleased to announce a 5.5% increase to our distributions to $1.35 per unit on an annualized basis. This is the 12th consecutive year of at least 5% annual distribution growth since 2011, when Brookfield Renewable was publicly listed. With that, we will now turn it over to Julian to discuss the importance of our capital sources in supporting our growth. Thank you, Connor and good morning everyone. We have said for many years that the strength of our balance sheet and our ability to invest alongside large scale institutional capital represents a significant competitive advantage. We have always prioritized capitalizing the business with a strong investment grade balance sheet, utilizing long duration non-recourse debt and maintaining high levels of liquidity. This allows us to maintain a low risk financial profile and focus on financial strength and flexibility so we can invest throughout the cycle. We believe this is critical to our long-term success as it contributes meaningfully to the compounding of our cash flows and the total returns delivered to our unitholders. In addition to this approach is our structure of investing alongside Brookfieldâs private funds, which provides access to scale, long-term institutional capital, enabling us to target sizable deals, where there is often limited competition. At Brookfield, we manage capital for more than 2,000 institutional clients that collectively have trillions of dollars of capital under management to invest. This means we have the ability to target multibillion dollar transactions, instead of smaller investments that are in many cases far more competitive. We believe this structure is often underappreciated by the market. However, we think it represents a very meaning meaningful competitive advantage for our business, particularly in this economic environment. Combined with our platform capabilities, this means that on a recurring basis, we can generate strong risk-adjusted returns by executing some of the most attractive, large scale decarbonization opportunities. Investor appetite for energy transition remains very strong. We have significant institutional demand to invest alongside experienced owners, operators and investors like us. The success of Brookfieldâs first transition fund demonstrates this. We raised $15 billion, establishing the worldâs largest private fund dedicated to facilitating the global transition to a net-zero economy. The Fund features some of the largest commitments in Brookfieldâs history, with around 30% coming from new clients, illustrating investor desire to allocate meaningful capital towards energy transition. A key part of Brookfieldâs private fund strategy is developing relationships with large pools of long-term private capital who seek the opportunity to invest alongside us both by investing in our private funds and also directly in our investments as co-investors. The program both enhances our access to capital and provides another source of liquidity. Our Westinghouse investment, given its size, is a great example of our co-investment program in practice. We have had strong interest from our LPs to co-invest with us in Westinghouse and the process is moving along well. Today, access to capital is limited for some market participants. So accessing this funding source represents an even more meaningful competitive advantage. Institutional capital supports our ability to invest in great businesses and achieve strong results that maximize long-term returns for our investors. The scale of our transition fund and the institutional relationships and capital it brings is another meaningful step change in our funding strategy that we will continue to employ as we grow our business and seek large-scale attractive investment opportunities. Thank you, Julian. As Connor mentioned in his earlier remarks, we had strong results in the quarter as our operations benefited from strong global power prices and continued growth both through development and acquisitions. We generated FFO of over $1 billion or $1.56 per unit, reflecting solid performance and an increase of 8% versus the same period last year. Our business is backed by high-quality cash flows in large part from our perpetual hydro portfolio, which has become an increasingly valuable source of clean, baseload power, as more intermittent renewables come online. With over 5,000 gigawatt hours of generation available for recontracting across our portfolio over the next 5 years and the positive pricing environment for our hydro portfolio, we have significant capacity across our fleet to execute on accretive contracts that we expect to contribute additional FFO and generate a low-cost funding source for our growth. Our financial position remains excellent and our available liquidity is robust, providing significant flexibility to fund our growth. Julian already touched on the importance of our access to capital and maintaining a strong balance sheet. We are resilient to the rising interest rates globally, with over 90% of our borrowings being project level, fixed rate non-recourse debt, with an average remaining term of 12 years, no material near-term maturities and only 3% exposure to floating rate debt. Despite market volatility, our access to deep and varied pools of capital continues to be differentiated. We have approximately $3.7 billion of available liquidity, giving us significant financial flexibility during periods of capital scarcity. During the year, we secured approximately $10 billion of non-recourse financings across the business, resulting in approximately $1.2 billion in financing proceeds to Brookfield Renewable. We are also accelerating our capital recycling activities, which are both in accretive funding lever and a critical part of our full cycle investment strategy. We continue to see a very constructive environment for selling de-risked appropriately sized mature renewable assets to lower cost of capital buyers and we are advancing numerous capital recycling opportunities in this regard. We have initiated several processes, where we have successfully completed our business plan and executed on our investment thesis. These assets could generate up to $4 billion in aggregate, approximately $1.5 billion net to Brookfield Renewable of proceeds when closed and provides significant incremental liquidity in the coming quarters. In closing, we remain focused on delivering 12% to 15% long-term total returns for our investors. To do this, we will continue to be disciplined allocators of capital by leveraging our deep funding sources and operational capabilities to enhance value and derisk our business. On behalf of the Board and management, we thank all our unitholders and shareholders for the ongoing support. We are excited about Brookfield Renewableâs future and look forward to updating you on our progress throughout 2023. That concludes our formal remarks for todayâs call. Thank you for joining us this morning. And with that, I will pass it back to our operator for questions. Thank you. Good morning. Couple of questions. With respect to the broader asset recycling plan that that you laid out, Wyatt, beyond the Mexican solar portfolio, can you give us any context on the regional or technology focus for that asset sale program? And further to that any guidance on returns you expect you will be able to crystallize through those initiatives? Sure. Sean, itâs Connor. Perhaps Iâll take that. We probably donât want to comment on any of the live sales processes that we have going. But we are certainly happy to provide some incremental color. The background to this is during the second half of 2022, we saw significant inbounds from potential buyers for a number of our businesses. And what we are finding is those inbounds are particularly coming on businesses that we feel we have largely de-risked and we have largely executed our initial investment thesis and our initial business plan and thatâs when we like to sell assets when we have an interested buyer and we have completed the de-risking and value creation process that we initially set off to do. What I would say in terms of locations, itâs what we would probably say is the vast majority of capital recycling that we see the potential for in the next few quarters is largely in the Americas, both North and South America for us. And then in terms of IRR, we are very â we absolutely recognize that underlying rates have gone up, but we have not seen much if at all any widening in terms of target investor returns on a total IRR basis in the inbound price indications that we have seen. So we continue to monitor that, but we do still see a very, very constructive bid for de-risked high quality renewables assets and those are the types of things that we would look to sell as part of this program. Thanks, Connor. Thatâs useful detail. Second question, in your supplemental information, the buildup of your advanced stage development pipeline for 2023, it looks like there is quite a bit added to your Asia platform at least compared to the guidance you gave a quarter ago. Can you give us any detail on whatâs been added to that particular piece of the development platform? Yes, certainly. So I will start and Wyatt if I miss anything, please donât hesitate to jump in. There is two things in particular that have been added that jump to mind. One is in India, in the latter part of last year, we have pursued this strategy of building out renewable energy parks in India. And that is a somewhat unique strategy within India, where you buy large plots of lands that have strong grid connection and you can build out renewables over multiple phases and sell the power from those projects to multiple off-takes. We have done a number of those transactions in the latter part of the year and that would certainly be inflating that number. The other thing that I would highlight is our previously announced arrangement with BASF, where we are looking to build renewables for them in China that will be directly contracted to a new large chemical production facility that BASF is building in the region that they want to be supported by green power. That is a very sizable arrangement we have with them. We are talking gigawatts. And that is another thing that would support the pipeline in Asia. Wyatt, I am sure that covers most of it, but anything else you would add there? Only other thing Connor, I would add is, we had in past highlighted our rooftop solar business in China, where the business or the momentum for that business continues to build. And so we are seeing a little bit more activity of that business, but you highlighted the majority of them, Connor. Good morning, everyone. Maybe hoping you could comment on what your investment pipeline looks moving forward in terms of we will call it asset acquisitions or maybe larger platforms, any geographies or assets that are looking the best? And you mentioned that inbound indications for pricing hasnât changed on your end, but what about assets that would require maybe a little bit more work in the financing or contracting side? Thank you. Thanks, Rob. No doubt the pipeline remains strong and there is probably two key things that we would highlight. Clearly in 2022 and we will make a comment here that weâve made previously. If we go all the way back to 2021, we looked at buying a lot of renewable development platforms in our core markets around the world. We did a lot of due diligence processes. We analyzed a lot of opportunities. But we found the market was very, very frothy and we struggled to see things where we were comfortable with the value entry point. As we moved into 2022, there were a number of things in the market, a little bit of macro uncertainty, rising rates, some supply chain pressures that perhaps other market participants arenât as well suited to manage through. We saw tremendous opportunities in 2022, sorry, to buy renewables developers, high-quality renewables developers in our core markets at entry points that, quite frankly, we would have fallen out of our chair to execute on in 2021. One big theme as we enter 2023 is we see that dynamic continuing. We do see that dynamic continuing in the early part of the year. And we are seeing the ability â we believe to acquire renewable development platforms, where we can obviously use our corporate capabilities to enhance those businesses. We are still seeing attractive value entry points there and hope to execute some of those transactions in the near-term. If thatâs point one, the other thing that we would highlight is with the rise in rates in some of the market uncertainty and perhaps capital scarcity in the market, we do believe that we are going to see more opportunities in 2023 to buy operating assets than perhaps we saw in last year or the year before that. So that continues to be an increasing portion of our pipeline, something we are obviously excited to see begin come back in the strike zone. Alright. I appreciate the color. And then maybe a follow-up there, if we take a look at your development pipeline you have accelerated some investment into 2023. How are you looking at the supply chain? Are most of the issues behind us as well as inflation, do you have a good handle on that to give you the confidence to further accelerate development into 2023? Yes. So well perhaps split that into two chunks. The one thing I would say about our 2023 pipeline, and as referenced in the supplemental, we see 2022 was our biggest year of development on record. We brought 3.5 gigawatts of new projects online. As we look to 2023 that number is sitting today, we expect to bring about 5 gigawatts online. The first thing we would highlight is of these 2023 projects, a large portion about 5 gigawatts in our minds is very largely de-risked at this point. Itâs â a lot of itâs either under construction or itâs already fully contracted. And we often make the comment that funding is secured in a lot of these projects all the funding is already in the ground. We donât need to contribute any incremental equity to get those projects across the line. So, our confidence on delivery in 2023 is very strong. When you speak about the supply chain issues for us, we think about that probably beyond 2023, because our 2023 is very well wrapped up. And I think there is probably two dynamics to consider there. One is on a global basis we are really seeing the costs of solar modules drop significantly. In the past year or so we have seen them quoted as high as call it $0.40. Now, we are largely seeing that prices in the low $0.20, so not all the way back to where they were in 2019, but the majority of the way back. The one place where there continues to be some uncertainty in management of the supply chain required continues to be the United States. But the good news is there is with the benefits of IRA and the things we can do with our central procurement system, putting orders in ahead of time working with our key suppliers we definitely see the supply chain in total getting much easier to manage than where we were 6 or 12 months ago. So itâs definitely a good news story from both an execution and an economics perspective. Hi, good morning. Just following up on the U.S. solar development question, can you talk a little about how the availability of grid interconnections is evolving and are you seeing increasing competition for interconnection spots? Thanks, Rupert. Itâs â appreciate you asking it, because itâs one of our favorite questions. The focus on grid connection and interconnection availability is certainly something that has grabbed much more headlines across the industry, I would say in the last 6 or 12 months. And as it should, as part of any development process you need to secure land, you need to secure grid connection and you need to secure permitting from there, you need to get equipment and EPC and a contract, but you need those first three. And with the amount of renewables going on to grids around the world, there is probably very few grids around the world that the value of high-quality interconnection hasnât gone up in recent years. The reason why we really liked this question is, this is something that we have been focused on probably now for 4 or 5 years. And when we assess developers in the quality of their pipelines, we have always been taking into account what grid connections they have and where do they fit within the interconnection queue, when valuing those pipelines and the likelihood and the economics at which they can be built out. A great example of this is urban grid, which we bought last year. One of the reasons why we felt we saw value in that platform where maybe perhaps didnât â is we feel that urban grid has an incredibly strong portfolio of positions in the PGM interconnection queue that most would recognize PGM is a very high value market for renewables development. So this will continue to be a focus, but we feel itâs something that we have well in hand, not because of our work in the last 6 or 12 months, but because of our work over the last 4 or 5 years. Not at all, in fact, when we lay out our expected pipeline in the projects that we want to bring online, that already takes into account our views of when we will get those grid connections. Thanks. And a follow-up on the asset recycling question, would you consider recycling any of your hydro assets in North America? And if you, how do you assess the value of those today versus the value of a solar and a wind asset given some of the storage potential? Yes, certainly. We will always do what is in the best interest of ourselves and our unit holders in terms of capital recycling, where will we allocate capital, where will we seek to recycle some assets. We do believe that our portions of our hydro portfolio around the world are truly irreplaceable assets. And they have a long runway of continued value growth, given their ability to not only provide base load clean, dispatchable power, but also the ability for them to provide grid stabilizing ancillary services to electricity grids that increasingly are going to have more intermittent renewable wind and solar connected. So, would we sell those assets at the appropriate price, absolutely, but only at a price that we feel takes into account that extremely robust outlook for those assets that we are seeing from our vantage point. Alright. Thanks. Also a question on the U.S. market, and I am wondering, how do you see your U.S. initiatives shaken out the next couple of years, is that I know you mentioned the star rating some of the projects there, but do you think itâs development backlogs can increase some M&A around the corner? And then maybe share a little bit, I know you mentioned a decentralized purchasing competitive advantage. But anything else you could share in terms of how you position yourself in the U.S.? Certainly. So, itâs a good question, Ben. I think the thing to recognize about our U.S. platform is, there are two things that differentiate us in the U.S. at a level that is very, very tough for almost any other platform to match. And those two things are, one, the scale of our platform, and two, the fact that we have a very diverse set of renewable technologies at a scale in the U.S. And thatâs really driving our business in two different ways. One, we are seeing increasing opportunities to provide unique contract solutions in the U.S. And when I say unique, they could be unique in a multiple of different ways. But I will give the first example. We have over 70,000 megawatts of operating and development capacity there. We can provide green power on a scale in the U.S. that a very few others can. So, when you are thinking of the largest corporate procures of green energy in that market, we can satisfy not only their existing needs, but their growing needs in the future in a meaningful way. The other thing that we are increasingly seeing, in particular in the U.S., given not only the size, but the breadth of our portfolio, is to use our different asset classes together to provide unique solutions to our customers. That might be pairing one of our hydro assets with wind and solar projects in the regions to provide 24/7 green power solutions to a customer that wants 100% clean energy. So, the U.S., itâs our biggest market today. But itâs also the market that we saw the most amount of M&A deployed into last year and the most amount of development progress last year. Different years might have been slow, but the U.S. is always going to be one of our most active markets for at least the foreseeable future. Yes. So, I think itâs important to recognize we see solar as the fastest growing technology in terms of megawatts that will be added to the grid on a global basis, because it is the cheapest form of bulk electricity production in most markets. And it is on a relative basis, less operationally intensive to one, build and two, maintain. So today, I would say that, as we look at grids in major markets around the world, we would probably expect solar to be the fastest growing renewable technology. In terms of where we will invest our capital, we are completely in different. We will go wherever we see the most attractive risk adjusted returns, and we are seeing things across all technologies in the current environment. Okay. And maybe one last question on the countries, is there a country that are reaching that you are maybe initially looking right now that you want to be in potentially in 5 years? Yes, sure. So, we have said for many years now that we are in all the regions around the world where we feel the need to be there. Obviously, last year, we made our first investments in Australia. We set up a team there. In fact, in this last quarter, we brought our first project online. Thatâs a market that we will continue to look at opportunities in. And I would say, we will continue to expand in Europe. We are not a large player in all the European markets, and they do have slightly different electricity grids. And we are seeing very, very strong moves by many regulatory bodies and governments in Europe to enable the faster build out of renewables, as that continent, if you will, tries to establish a greater form of energy security. So, I would say we are not talking any major changes beyond our historic geographical footprint, but probably just deepening our positions in what we already consider to be our core markets. Good morning. Brookfield Infrastructure said yesterday, itâs taken some model still positions in publicly traded stocks. When you think about adding or acquiring operating assets to your portfolio, is the opportunity more weighted towards corporate carve outs right now? Are you also seeing good opportunities to forum for take private transactions? Yes. I would definitely say itâs both. In the last call it 12 months to 18 months, as demonstrated by the transactions that we have done, we have really focused on a lot of businesses that are what you would call pure play developers. We felt like a lot of those â the pipelines in those businesses were very far advanced. There were projects that were either under construction or about to come online. So, a very few of them had operating assets. Even when you look at something like Scout Energy that we did at the end of last year, you could already see the market moving in that direction as when we bought Scout, it comes with not only a very large pipeline of future development opportunities, but a large portfolio of operating assets as well. So, we are seeing opportunities on the private side as well. But no doubt, the current economic environment and some of the down wins throughout Q4 across public markets have certainly increased the opportunities we see in the public take private space as well. So, what I would say is we take to hold positions almost on an ongoing basis throughout the cycle. I wouldnât say our activities in that regard have gone up or down, in particular over the last couple of quarters. But itâs something we do on an ongoing basis and something we will continue to do. Itâs been a useful way to help us source transactions over the last 5 years to 10 years. Okay, cool. Thatâs helpful. Last one for me, of the 19 gigawatt of advanced stage and construction ready projects that you highlighted, how much of that will be commissioned this year versus next year and the following years? Thank you. Oh, sorry. I jumped. Itâs about 5 gigawatts for this year. And a little bit more, closer to 5.5 gigawatts the next year. But I would say 5 gigawatts, probably a pretty healthy run rate of where we are at right now. Hi. Good morning. I just wanted to go back to the funding picture. So, $1.5 billion of targeted asset sales for this year, a large part of I think your overall targets for proceeds from asset sales for the next few years. How much of this pulling forward of capital recycling as a function of near-term funding needs versus just the strong valuations on the assets as you previously mentioned? Yes. So, I will answer that question in two ways, I would say the asset sales that we are planning, I would say those will happen throughout 2023. And some may stretch into 2024. So, we wouldnât want to give anyone the impression that that itâs all coming in the next 11 months. Some of these processes are for large businesses and may take time, so certainly could extend into next year. To answer your second point, whatâs driving this, I would say, itâs almost the entirely the latter part of your question. Itâs the robust demand we are seeing for our assets. And the simple fact I would almost say itâs coincidental that we are at a point where we are completing the business plans, and believe that we have extracted the value add opportunity that we saw in a number of businesses around this time. The timing of when those business plans and those operations complete is going to ebb and flow over the wide variety of businesses we have, but we have had a number complete throughout 2022. And that just creates the opportunity for a very attractive and accretive capital recycling this year, really bringing together call it, the full cycle value creation approach we like to deploy. Okay. Thatâs helpful. Thank you. And just one last question on offshore wind â two part question. One, if you can just discuss the latest auction in the Netherlands. And if you are thinking strange around participating in that market going forward. And then if you also see the potential to participate in the sort of the launch or the beginning of the offshore wind industry in Colombia? Thank you. Certainly. So, we werenât successful in our bid in the most recent Dutch auction. We continued to believe that is a very compelling market. I would say we monitor all the major offshore wind markets around the world. And there are certain attributes about market that that we thought were very interesting to us, in particular, the ability to leverage our power marketing capabilities in an outsized way. And therefore, we will continue to look at opportunities in that market. We would not hesitate to go back there in the future. Apologies, a trolley just went by outside the meeting room here. The second thing I would say is, we do look at offshore in many markets around the world. When you are talking about a market like Colombia, we continue to believe that that is a long way in the future. So, we will monitor it, but itâs not something on â high on our radar right now. One thing I would say, however, is our existing offshore pipeline in Poland continues to move forward in a really constructive way. The adjustments the governments has made in the region around inflation indexation and the ability for those contracts to be priced in euros are both very, very helpful to our investment thesis and underwriting for that business. Thanks. Good morning. Maybe a big picture question, we saw a lot of tech companies have a lot of appetite for effectively renewable PPAs. A number of those companies kind of got over their skis with data center build out, their house build out are now pulling back a bit. What are you really seeing from that customer base as far as appetite for PPAs on a go forward basis? Was there a little bit of a pause, or is it still, full throttle ahead? Absolutely, full throttle. Well, we say that without hesitation. The demand we continued to see from the tech sector, particularly in our biggest markets, North America, Europe is tremendous. They continued to be many of our largest clients. And simply, given the size and scale of their business, they are trying to go 100% green over the next 4 years or 9 years, I am sorry, 3 years or 8 years. And that is a huge undertaking given the size of their businesses today. And that undertaking, it becomes even more monumental when you consider the growth of those businesses going forward. Even if that growth trajectory comes off just the shade. So, the amount of demand coming out of that sector continues to be tremendous. And we continue to feel that there is very few that can supply on the scale that those types of customers desire. Okay. Thatâs very helpful. And then maybe just another way to think about Brookfieldâs optionality with providing solutions. You have got, like the infrastructure funds, which you participate in, there is the energy transition fund now, is there an opportunity to have like a super core renewable fund in the broader Brookfield product shelf that you would participate in? Certainly, we wouldnât rule anything out. We obviously have had significant success recently with the launch of the transition fund. And that has seen not only tremendous interest from investors, but itâs also seen tremendous opportunities for deployment. And therefore, if the market continues to be constructive, which we expect it will, we could see that that product easily back in the market in the next 12 months. So, not only are we seeing scaling of our existing products, absolutely as the industry continues to get bigger, and we see more opportunities both across the capital stack and across the risk reward spectrum. We wouldnât rule out different products, if thatâs one what our customers were looking for. And two, we saw a significant opportunity to put that capital work at attractive risk adjusted returns. Given the way the market is going, absolutely wouldnât rule it out. Okay. Thank you for that. And maybe just one final extension on that as your comments earlier on solar, it would seem that stabilized solar would marry up really well with like a super core product for some clients. Is that kind of how you are conceptually thinking about that? Well, the way we probably see it most â itâs a great question, Andrew. The way we would probably see it most today is you think about things like stabilized solar. Those are the types of assets that that work really well into an asset-recycling program right now. And that once we built them out, once we have de-risked them, once they are under a long-term PPA with long-term financing and a long-term O&M contract, that is a very, very direct attractive inflation linked cash flow stream. Those are the types of opportunities we are seeing for asset recycling. And given how many dollars we have put in the ground in recent years, and how many projects we are bringing online, thatâs the type of opportunity that lends itself to some of the asset recycling initiatives that we have kicked off. Great. Well, we very much appreciate everyone dialing in. We always appreciate the support and interest in Brookfield Renewable and we look forward to providing an update all in the next quarter and throughout 2023. Thank you everyone and have a good day.
EarningCall_565	Welcome to Brookfield Business Partners' Fourth Quarter 2022 Results Conference Call and Webcast. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] Iâd like now like to turn the conference over to Alan Fleming, Senior Vice President of Investor Relations. Please go ahead, Mr. Fleming. Thank you, operator, and good morning to everyone. Before we begin, I'd like to remind you that in responding to questions and talking about our growth initiatives and our financial and operating performance, we may make forward-looking statements. These statements are subject to known and unknown risks, and future results may differ materially. For further information on known risk factors, I encourage you to review our filings with the securities regulators in Canada and the U.S., which are available on our website. Joining me on the call today are Cyrus Madon, our Chief Executive Officer; Denis Turcotte, our Chief Operating Officer; and Jaspreet Dehl, our Chief Financial Officer. Cyrus will start with an update on our strategic initiatives, and Denis will then discuss progress on our business improvement plans. Jaspreet will finish with a discussion of our results, and then we'll be available to take your questions. Thanks very much, Alan. Good morning, everyone. Thanks for joining us on the call today. 2022 was a great year for our business. We made excellent progress on our growth and capital recycling initiatives, committing $2.7 billion to acquire several high-quality market-leading businesses that should contribute meaningful value to our business. We also generated $2.3 billion from distributions and business sales, including an agreement to sell Westinghouse. We're also pleased with our solid financial performance, continued resilience of our operations. Adjusted EBITDA increased to $2.3 billion and free cash flow increased to a record $3.40 per unit for the year. Stepping back, like many, our business has experienced a lot of volatility in the operating environment over the past year. Inflation has been persistent, supply chains continue to be stretched, labor markets remain tight, and energy costs in many developed markets we operate in are far higher than a year ago. We all know that interest rates are also higher and global growth is decelerating. Despite this backdrop, our business has continued to perform very well. Adjusted EBITDA is up 30%, compared to last year and up 3% on a same-store basis, which after adjusting -- is after adjusting for the impact of acquisitions and dispositions. Our EBITDA margin has also continued to improve to a record 19%, up from 11% just three years ago. This improvement is driven by both the quality of the businesses we've been acquiring over the last few years and the progress we've achieved on our improvement plans. And Denis is going to talk to you about that more shortly. The value we're building in our business contribute to adjusted free cash flow of $740 million, an increase of nearly 20% on a per unit basis, compared to last year. We'll use this cash flow to fund our growth, reinvest in our operations and pay down debt. As we look forward, our business should continue to generate strong performance in all market environments. Our balance sheet is also in good shape, and we ended the year with -- over $9 billion of available liquidity across our operations. At the corporate level, we've drawn on our credit facilities to bridge the timing of our growth activities. This is temporary knowing that at some point, we'll be in a position to repay these borrowings with the proceeds we expect to generate from our capital recycling activities. And to that point, as many of you know, we reached an agreement to sell Westinghouse last year. We'll generate about $1.8 billion in proceeds for BBU when the sale closes in the next few quarters, which will substantially reduce our borrowings at the corporate level. This sale also demonstrates that even in difficult markets, high-quality businesses, like many we own today are readily salable especially to strategic buyers. At any given time, we are progressing sales process for a handful of our businesses, several of which are substantial, which will be sold in due course and generate significant proceeds for BBU. While we're pleased with our business fundamentals, we're equally disappointed in our trading price performance, which has become materially disconnected from the value of our business. I thought, I wanted to put that in context. Today, we're trading at about 8 times annual EBITDA. This is a massive discount to the S&P 500 that's trading at 13 times and businesses generating margins on par with ours that are trading at 15 times or more. In our view, it's a great entry point for BBU. We're going to continue building value in our business as we execute on our improvement plans. And as a result, investors should out earn the underlying performance of our operations as the discount between our trading price and intrinsic value narrows. Thanks, Cyrus, and good morning, everyone. The core capability of our organization is the ability to provide incremental support to our portfolio companies and even take a hands-on approach as required to ensure systematic focus and adjustments to changing economic conditions. With that in mind, I wanted to spend a few minutes today providing an update on the progress we've achieved at a few of our businesses over the last year, illustrating in more detail how we do this. Last July, we acquired CDK Global, the leading provider of technology and software services to automotive dealers. Our value creation plan for the business is straightforward. Adjust the commercial strategy to refocus CDK on the core product and service offerings that drive the most value for its customers and improve the efficiency and effectiveness of its operations by adjusting the organizational structure, reengineering a few core processes and introducing a new cadence of focus and execution. Fundamentally, this is same strategy we executed at Westinghouse and other portfolio companies, which enabled us to generate a step change in the business and phenomenal returns on our investment. We have made tremendous progress at CDK within the first six months of acquiring the business. To provide some specifics, we've organized the core team of Brookfield personnel and established a transformation team with management to ensure focus and intensity. Through the closing process, we recruited and redesigned the organization to be in a position to appoint a new senior leadership team immediately after closing and within several months, rightsized the organization by reducing global headcount by 15%. We've also sold or exited some non-core product and service offerings and are working closely with management to optimize the customer product and service offerings. While there is still more to come, the steps have already -- we've already taken are targeted to improve the business' EBITDA by approximately $200 million annualized once fully implemented. After adjusting for the impacts of these improvements, our buy-in multiple of less than 10 times pro forma EBITDA is exceptional value for a high-quality, market-leading software and technology business. We're now pivoting our focus on modernizing the business' technology stack and improving its user interface and functionality, which will enhance the value of CDK's solution to its customers. Moving to our investment in Nielsen, the global leader in third-party audience measurement across all forms of media. As a reminder, we privatized the business alongside our partner last October. Since then, we have worked closely with our partners and management and made considerable progress supporting the businessâ advancement of our value creation plans to improve profitability and position for long-term growth. Last month, the business reached a critical milestone with the launch of Nielsen ONE Ads. It's cross media measurement service, which unifies audience measurement data for advertisers across all platforms and devices. The business is also focused on enhancing its existing ad-supported streaming capabilities. Recent customer wins such as Netflix with its new ad-supported video tier, are validation of Nielsen's value proposition as the leader in third-party audience measurement. In addition, we are working on several work streams to improve Nielsen's operational efficiency and optimizing its organizational structure, resulting in significant cost reduction and a more focused go-to-market strategy. Apart from our recent acquisitions, we're making similar progress in other areas of our business. Everise, our business process outsourcing company is a great example. In just over two years, we have built considerable value by scaling the businesses servicing capabilities by growing revenue and increasing margins through increasing headcount by more than 50% and shifting a significant portion of its delivery capabilities to lower-cost offshore locations. We've also executed on meaningful cost reduction initiatives around IT, human resources in certain areas and facility management costs, while growing the business' addressable market in the health care sector to cater to adjacent sectors, including providers, health systems and distributors. The impact of these improvements has contributed to more than a doubling of EBITDA in the two years, since we've owned the company and it continues to grow. This is another great example of how we build value across the sectors and regions in which we operate through the application of our playbook and the systematic approaches that focus on adjusting product and market strategies to dynamic market conditions, reducing business model complexity, reorganizing to simplify operations, eliminating non-value-added activities and driving supply chain improvements to improve margins and optimize the capital deployed in these businesses, all ultimately driving cash flow return on investment. Thanks, Denis, and good morning, everyone. We generated strong financial performance in 2022. Adjusted EBITDA increased to $2.3 billion, compared to $1.8 billion in 2021 with strong results across each of our three operating segments. Adjusted EFO, excluding gains, increased 15% to $1.3 billion during the year. Our Industrial segment generated full-year adjusted EBITDA of $879 million, compared to $713 million in 2021. Adjusted EFO was $473 million and included a $29 million after-tax net gain on the sale of -- on the partial sale of public securities. Some of the businesses -- I'll highlight some of the business' performance within the Industrial segment. Our advanced energy storage operations generated adjusted EBITDA of $482 million for the year. Overall, volumes benefited from increased demand for higher-margin advanced batteries and a recovery in original equipment manufacturer demand as auto production challenges continue to ease during the year. Pricing actions and progress on our operational improvement plan helped to offset the impact of inflationary headwinds, particularly later in the year as ongoing price actions caught up to higher input costs. Our Engineered Components manufacturing operations generated adjusted EBITDA of $141 million. Performance benefited from commercial initiatives and cost reduction despite volume softening in North America and Europe. The business is focused on fully integrating its recent add-on acquisitions to drive efficiency, scale and value creation. Moving to Infrastructure Services. Adjusted EBITDA for the year was $872 million, compared to $613 million last year. Adjusted EFO increased to $513 million, compared to $396 million. Lottery Services generated $98 million of adjusted EBITDA in 2022. Demand has been stable and the business continues to execute on initiatives to offset inflationary cost headwinds, including increased material costs. Recent customer wins are supporting an improving outlook for the business, and we expect to largely complete our carve-out activities during the first half of this year. Our nuclear technology services operations generated strong performance in 2022, contributing $314 million to adjusted EBITDA. Performance was in line with expectations. Modular building leasing services contributed $158 million of adjusted EBITDA. Utilization levels supported by increased demand in Germany and Asia Pacific more than offset softer market conditions in the U.K. The business recently closed the acquisition of a leading rental provider in the U.K., which increases the scale and diversification of its product offering in the region. And finally, our Business Services segment generated 2022 adjusted EBITDA of $722 million, compared to $561 million last year. Adjusted EFO increased to $508 million in 2022. Our residential mortgage insurer had a strong year, generating $277 million of adjusted EBITDA in 2022 driven by higher levels of premiums earned and low claims on losses. During the year, the business provided us with approximately $200 million in dividends. While claims and losses are expected to increase from historically low levels, the business should continue to generate positive earnings and cash flow as housing market normalizes. Our dealer software and technology services operations generated adjusted EBITDA of $89 million in 2022. Strong subscription-based revenue growth and progress on our value creation plans are contributing to improved margin performance. Healthcare Services operated in a challenging environment during the year, contributing $64 million to adjusted EBITDA. Performance was impacted by temporarily high rates of surgery cancellations and higher operating costs as Australia dealt with its flu season and the pandemic. We ended the quarter with $1.6 billion of liquidity at the corporate level, which provides us with ample capacity to support our operations. I thought I'd end with a few comments on our capital structure. Today, we have about $15 billion of proportional net borrowings across our business, which includes our proportionate share of nonrecourse borrowings within our operation. Based on our current hedge position, a 50 basis point increase in overnight borrowing rates would result in less than a $50 million [Technical Difficulty] in our annual interest expense, which we believe is readily manageable with the cash flows our operations generally. As our operations delever and we repay a portion of our corporate borrowings when the sale of Westinghouse closes later this year, the impact will be more muted. Great, thanks, and good morning. Cyrus, can you give us an update on the monetization plans over the next 12 to 18 months? You've mentioned Clarios in your letter to shareholder, what market conditions do you need to see that IPO? And maybe also touch on Everest that's been in the news as well. Yes. Look, I wouldn't want to comment on anything specific. I will just say that you should expect we are constantly evaluating businesses that have reached a state of maturity for eventual sale and constantly testing the market. Obviously, we're not going to sell anything or IPO anything unless we get a value that makes sense for us relative to the earnings and the intrinsic value of the underlying business. So specific to those two businesses, I wouldn't want to say anything more than that. I think what we've said to you about Clarios, just to clarify that, we're making great progress on many fronts and the business continues to improve its position as a potential candidate for an IPO. To get there, we need and want to do some things within the business to strengthen its position. We're making great progress in doing so. We also want to deleverage the business, and that's underway given just how strong the cash flow generation of the company is. We're not there yet, but we're making good progress. Okay. Great. And then maybe as a follow-on to that. Looking out, are you spending more time on a monetization opportunities over deployment into new investments or vice versa? Well, today, we're constantly looking at monetization opportunities, constantly looking at acquisition opportunities. But where we're really focused today is on all the businesses we bought over the last year, 18 months. As you know, we've added a number of great companies to BBU, and we're really focused on enhancing the value of those businesses, implementing our operating plans. That is our number one priority today. Okay. That's very helpful. And then maybe I can sneak in one more. You've been very clear on your valuation disconnect message in the Investor Day and also today in your prepared remarks. What else can you guys do to help narrow the gap versus the intrinsic value? And would you be open to maybe publishing a quarterly NAV or -- at some point? Or anything else that you're thinking? Gary, it's a great question. It's one we -- as you can imagine, we agonize over every day here. We really are frustrated and we realized that our shareholders, our unitholders are more frustrated, because we see the value of the business improving and the discount to NAV just getting wider. Look, we don't think publishing a quarterly NAV will actually make any difference. And I think what we need to do is just continue demonstrating that the businesses we own are super resilient and that we're continuing to generate increasing EBITDA and cash flow and therefore value. And ultimately, as sentiment shifts in the market and the fear of recession is no longer there, we think that will probably create the catalyst for a step change improvement in our valuation multiple. And obviously, as we grow, we will also increase our float and that will help a lot, too. But I don't think a NAV publication is going to make a more regular NAV publication, it's going to make a difference. Thank you. [Operator Instructions] And our next question comes from the line of Jaeme Gloyn from National Bank. Your question, please. Yes. Thanks. Good morning. My first question is what kind of tied to the performance of Clarios, it really does look like the pricing initiatives there are running well ahead of the inflationary pressures on expenses. Could you, I guess, confirm that? And then also, do you see that trend in any of the other key businesses where pricing is starting to get ahead of inflation, and we should see the kind of margin improvement that Clarios has delivered, especially in this quarter? Denis here. If I heard the beginning of your question right, it was related to the pricing at Clarios. And your observation is correct, pricing initiatives have started to get some traction there. And if anything, though, it's been in effect, responding to significant price increases or cost increases as it relates to inflation, in particular, on the lead side. In general, you see that same phenomenon, right? Whenever you have rapid rises in inflationary inputs, it takes some time because, of course, customers resist, markets resist in general. So it takes a bit of time. But you're starting to see that kick in, in a whole host of different businesses we own globally. There are always regional unique situations. For example, in the UK, as I'm sure all reporting issuers are commenting the markets there, the macroeconomic environment is soft. So you end up if demand is instantaneously a little bit weak, it's a little harder to put a price increase through. But in other areas, Germany as an example of surprise to the upside. France remains strong, the U.S., in particular. You're seeing those price increases go into as a minimum, offset inflation. We also try to focus on adjusting our product mix to provide more value to our customers so that we can get actual margin expansion as well while doing so. Nothing. Like they're all experiencing this kind of phenomenon. Again, there are always unique examples of where things go either way. With the oil and gas push, for example, our rates across the Ultera Systems are very strong and capacity utilization is improving, so pricing is improving. We'll have little segments, for example, at DexKo, the RV trailer segment in North America, as you might imagine, in this environment is softening a little bit. So pricing is a little bit more difficult there. Having said that, steel prices have fallen significantly. So you get the cost advantage as a way of maintaining your margins even when you're not increasing pricing. So there are unique circumstances, but on average, that's what's happening. Okay. Great. And second question, I suppose, for Jaspreet. Just thinking about the interest expenses and the sensitivity you provided around 50 basis points increase would lead to an increase in interest expense of about $50 million. Just thinking about the last quarter and the number of increases that we had in Q4. If rates were to stay like at the level today, how much more of an interest expense increase should we expect? So the idea is just trying to get a sense as to like how much of the rate environment that we see today is showing up in your financials at this stage? So thanks for the question. So the total interest expense for the quarter was about $249 million on our nonrecourse borrowings and then about another $20 million on our corporate RCF. So in total, about $269 million. And outside of the 25-basis point rate hike that happened in January, the Q4 interest expense is fully loaded, so it has the impact of all of the previous rate hikes and part of our book is floating and part of it is fixed. So that Q4 interest cost is fully loaded. So with the 25-basis point increase, we gave you as you noted, the sensitivity that of 50 basis points is $50 million to $25 million, it's about a half. So we'd expect to see that increase. But I'd say on balance, what we should see this year is as we get the proceeds coming in from Westinghouse, we'll use those to pay down our corporate borrowings, and that should lower overall interest cost for the business. So I'd say while Q4 is fully loaded, they are higher for corporate borrowings than we'd expect for the full-year 2023. And then the other piece is Westinghouse. The interest costs were higher. So those will come out of our results once the sale closes. So I'd say on balance, I'd expect the full year 2023 to be lower than the Q4 run rate, but it will be more in the back half of the year once the Westinghouse sales closes. Understood. Got it. And last one is with the proceeds from Westinghouse coming in and correct me if I'm wrong, but it looks like the BAM preferred equity is now at the $1.5 billion. Is there an ability to repay that preferred equity down? What's the appetite from, I guess, both sides of that piece of paper that paid down? And I guess what's the strategy around that? So look, I can't speak for BAM. But from our perspective, we are drawn on RCF. And as you noted, we are drawn on the preferred securities, the preferred securities are perpetual. There's no maturity. It's not a good rate. But there is an option that BAM has. So to ask for redemption if we have monetization. So as we get closer to the closing, we'll have those discussions. But for now, either way at all -- overall kind of lower the interest cost that we have and the preferred distribution that we're making. Even if you add the 2 RCF and the preferred securities, getting the Westinghouse proceeds will pretty much cut it in close to half. So it will be good for the business hopefully. Good morning. Thanks for taking my questions. Just wondering, as we think about sort of the higher interest rate environment here and kind of uncertainty as to when the Fed might start cutting beyond proceeds from Westinghouse and sort of repaying the corporate credit facility. Has your thinking changed at all in terms of capital allocation at the proportionate level and at the company level in terms of the amount of proportionate borrowings that you want to hold within businesses long-term? Look, it's Cyrus here. I'll start and Jaspreet will add anything that she feels appropriate. But as we've said many times, we set up our company so that they can withstand volatility in earnings, volatility in the market, interest rate increases. And every business, every operation is unique. Some of them have more financial leverage. Some of them have less. Some of them have no financial leverage because they have very volatile earnings. So that thinking hasn't changed, and we think it's appropriate, irrespective of the interest rate environment we're in. At the corporate level, we really will -- over time, we really do want to repay the facilities that we've drawn on, and we believe we'll be able to, as we monetize our larger investments. We don't have a time frame to achieve that. But with Westinghouse, we're certainly getting a large way there. Thank you. [Operator Instructions] And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Cyrus Madon for any further remarks. Thank you very much for joining us. We appreciate it. And we'll look forward to speaking to you next quarter. And in the meantime, if any of you have any thoughts or ideas for us, we are -- we'd be grateful to hear them. Thanks very much. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
EarningCall_566	Good afternoon. Thank you for attending the GoPro Q4 2022 Earnings Call. My name is Matt, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. [Operator Instructions] I'd now like to pass the conference over to our host, Christopher Clark, Vice President of Corporate Communications. Christopher, please go ahead. Thank you, Operator. Good afternoon, everyone, and welcome to GoPro's Fourth Quarter and Full Year 2022 Earnings Conference Call. With me today are GoPro's CEO, Nicholas Woodman; and CFO and COO, Brian McGee. Today's agenda will include a brief introduction from Nick, followed by Q&A. For detailed information about our fourth quarter and full year 2022 performance and our outlook, please read the detailed management commentary will be posted to the Investor Relations section of GoPro's website. Before I pass the call to Nick, I'd like to remind everyone that our remarks today may include forward-looking statements. Forward-looking statements and all other statements that are not historical facts are not guarantees of future performance and are subject to a number of risks and uncertainties, which may cause actual results to differ materially. Additionally, any forward-looking statements made today are based on assumptions as of today, including, but not limited to, any continued impact from the COVID-19 pandemic or the war in Ukraine. This means that results could change at any time. Our commentary about our business results and outlook is based on the information available as of today's date and we do not undertake any obligation to update these statements as a result of new information or future events. To better understand the risks and uncertainties that could cause actual results to differ from our commentary. We refer you to our most recent annual report on Form 10-K for the year ended December 31, 2021, which is on file with the Securities and Exchange Commission and in other reports we may file from time-to-time with the SEC. Today, we may discuss gross margin, operating expense, net profit and loss, EBITDA as well as basic and diluted net profit and loss per share in accordance with GAAP and on a non-GAAP basis. We believe that non-GAAP information is useful because it can enhance the understanding of our ongoing economic performance. We use non-GAAP reporting internally to evaluate and manage our operations and we choose to provide this information to enable investors to perform comparisons of operating results in a manner similar to how we analyze our own operating results. A reconciliation of GAAP to non-GAAP operating expenses can be found in the press release that was issued this afternoon, which is posted on the Investor Relations section of our website. In addition to the earnings press release and management commentary, we have posted slides containing detailed financial data and metrics for the fourth quarter and full year of 2022. The management commentary slides, as well as a link to todayâs live webcast and a replay of this conference call are posted on the investor relations section of GoProâs website for your reference. Unless otherwise noted, all income statement related numbers that are discussed in the management commentary, other than revenue, are non-GAAP. Thanks, Chris, and hi, everybody. Thank you for joining us today. Before we get to Q&A, I have some brief remarks that summarize the detailed management commentary we posted to the Investor Relations section of our website, which I encourage each of you to read. I first want to congratulate and thank everybody at GoPro past and present, who contributed to GoPro's incredible 20-year history. In Q4 2022, we celebrated our 20-year anniversary, and it's been inspiring to consider how far we've come from our first product, a 35-millimeter film camera designed to be worn on the wrist while surfing, to today, one of the world's most popular brands serving millions of the world's most active, creative and inspired humans. Gratitude to all. The strength of our brand and subscription-based business strategy was evident in 2022, a year marked by macroeconomic challenges. Our high-margin subscription business is serving as a powerful financial engine, contributing meaningfully to our bottom line. In 2022, we grew GoPro subscribers 43% year-over-year to $2.25 million, exceeding our annual target of $2.2 million and bringing our subscription and service revenue to an annual run rate of $100 million with 70% to 80% gross margin. The growth in our subscription business helped us deliver profitability and positive EBITDA. We paid off debt of $125 million and repurchased $40 million in stock and we exited the year with a strong cash balance of $367 million. 2022 benefited from our complementary direct-to-consumer and retail channels, with each meaningfully contributing to our business throughout the year. Direct-to-consumer revenue from GoPro.com was 40% of overall revenue in Q4 and 38% for the full year of 2022, up from 33% and 34%, respectively. In addition, our GoPro.com business grew 5% in 2022 over 2021, driven by 52% growth in subscription and services revenue. We estimate GoPro.com revenue growth was 12% in constant currency. Like many companies, GoPro's results for the year and quarter were impacted by a stronger US dollar. On a constant currency basis, we estimate that revenue for the year would have been approximately $50 million higher or 5% above actual results. Gross margin would have been nearly 41%, versus 38.1% actual results and the EBITDA to revenue approximately 13% versus 9% actual results. Considering the global FX and macroeconomic challenges, we believe our 2022 results reflect the strength of our subscription-based business model and the strong execution of our teams. The future of GoPro is subscription based and we're laser-focused on what we believe is a significant high-margin growth opportunity. GoPro's focus on building our direct-to-consumer channel has increased our understanding of consumer behavior, and we are successfully leveraging this to drive engagement and LTV. While still early in this journey, we see significant opportunities to add further value for new and existing subscribers. Our 2023 plan is to maintain GoPro's ongoing profitability and end the year with a strong cash position of $325 million to $350 million, while investing in critical long-term growth opportunities that we believe will position GoPro well for when the global economy recovers. We're investing in the people, technology and innovation that we believe will drive subscriber growth, retention and ultimately, LTV. This includes expanding our hardware lineup to court a broader consumer base and rolling out a synced mobile, cloud and desktop experience that will target GoPro owners and non-owners alike with a new premium subscription tier. As I reflect on our 20 years in business, Iâm most proud of the innovation GoPro has become known for, as well as our purpose; serving the worldâs most active and creative people with digital imaging solutions that help them capture and share their lives in exciting ways. This purpose combines with the strength of our brand, our people and our subscription based business model to give us confidence that we are well-positioned for the future, despite near-term challenges that we and many businesses including GoPro likely to face in 2023. In the meantime, weâre innovating towards an exciting tomorrow where we believe GoPro will serve significantly more people than we do today. Hi, good afternoon guys. Thanks for taking my question. First, I want to start on this premium subscription here. Could you talk a little bit more about the research that you're seeing that justifies it? And what would be the additional features and options that it would give the subscribers? Yeah. That sounds great. Yeah. Thanks, Anna. On our current subscription business, we ended the year with about 2.25 million subscribers thatâs up 43%, and revenue was up 52%. So we're very excited about our subscription business and the fact that it's 70 to 80 points of gross margin. If we kind of unpack that a little bit, just for everyone to remember on gopro.com, our tax rates are greater than 90% as we largely bundle a subscription with our cameras. The expanding part of the year was continue attach in retail, so someone buys at a retail store and then comes to the app store and signs up for subscription. And that increased substantially from low 20% attach in 2021 to nearly 35% attached in all of 2022. So we saw a substantial growth on the retail side given the value proposition, which is great. And I think just to add to that point, as we look at the subscribers from gopro.com who came in on the bundle and those who came in retail and paid the initial 50 to the one who now through most of 2021 and 2022 paid 25 and upgraded to 50 when that one year came up. Our retention rate across all of those cohorts have essentially stayed the same. And so we're seeing a nice uptick in ARPU from the cohort that Page 25 and now is moving up to 50. So as a backdrop, Iâll turn it over to Nick. Yes. So based on the success that we're having with converting those people that buy their cameras at GoPro.com and as well as consumers who buy their cameras at retail, converting them to become GoPro subscribers. We have a lot of engagement. We've learned a lot from our subscribers about what more they want to see from GoPro. What they value the most. And then in parallel, we do a lot of consumer research to learn perhaps why some people aren't subscribing and what they'd like to see. And then we're combining that also with data that we have from a previous desktop app that we had in the market some years ago. It was actually called Quik for desktop. And at the time of some setting that app some years ago, we had 1 million monthly active users of that desktop app, and it was really encouraging to see that for years after some setting that desktop application with no product updates, no product support, whatsoever. We still have hundreds of thousands of monthly active users. So it's a clear sign that there is significant demand for a desktop application from GoPro and our more recent consumer research confirms that. And it also confirms that the launch of a desktop application that is synced to GoPro subscribers, cloud and mobile apps will definitely represent value that they're willing to pay a premium subscription amount for. But what's great is it will be an upsell because we'll still provide the current GoPro subscription pricing and benefits to existing subscribers and new subscribers, if they're not interested in the more premium tier. But all of our research and past experience indicates that this is a significant opportunity for us. We're really excited about it. And I'd like to add that we do have experience selling subscriptions to people that don't even own a GoPro. As we mentioned on the call, we've seen nice growth with the Quik mobile app. And we are going to be taking those learnings and extending them to the desktop application and premiums here and be making that available to people that don't own a GoPro, so that they can leverage the app and cloud benefits and mobile editing benefits for editing their phone footage or footage that they're capturing with any camera, regardless of whether it's a GoPro or not. So this is an important TAM-expanding initiative for us. And it's something that we're going to be more and more focused on when we have the full mobile cloud and desktop suite out in the market. Got it. Thanks a lot. And then turning to guidance, 1Q implies probably a double-digit drop in units. Can you talk a little bit about where we are in terms of seeing a more normalized sell-in and sell-through balance, particularly at the big-box retailers that have been destocking for several quarters now? Yes. Yes. Actually, let me start before I get into Q1 guidance, talk about Q4 a little bit. Given the environment and how we guided, we're very pleased with how revenue came out pretty close to the midpoint of what we guided to and we beat earnings by about 33% on the bottom-line. So, very proud of that for the quarter, and we increased cash. This is a tale of comparing sell-in and sell-through. If you actually look at on a sell-through basis, the fourth quarter was down about 8% year-over-year. And most of that was in North America. The US market is definitely under more pressure with the consumer. So, that's definitely been an issue. On a sell-in basis, of course, we were down quite a bit more, mostly in North America and Europe, which were down 21% and 24% kind of respectively. But again, the sell-through kind of balanced out. Now, if we look at it, the good news is GoPro.com helped to offset some of the negative retail trends. and was actually flat year-over-year. So, we're very pleased with that outcome. As I'll also note in our management commentary, we wanted to sell through about 950,000 units in Q4, and we ended up at about 900,000. So, a little bit short. Channel inventory actually is in line with kind of where we've been historically, and up a little bit just because of -- we introduced a new product with HERO11 Mini late in the quarter. So, since that and pull that out and actually were down year-over-year in channel inventory. But we wanted to be 50,000 less and put us in a healthier position kind of exiting the year. So, we'll actually see that come out in Q1, which is impacting our sell-in in the first quarter. Sell-through is actually normalizing to that down 9% on the midpoint of our guide. So, not as bad as the sell-in. So, the channel inventory aspect, the consumer and retailers trying to get their own inventories healthy, it's not a GoPro thing, it's -- they're trying to just manage their own business has impacted us in Q4 and then in Q1. I think that starts to normalize because they're getting down to you're going to get down at some pretty low levels in Q2 or in Q1 and getting into Q2. So, that's kind of how we see that playing out. And hopefully, as a much stronger market as we get to the second half of 2023. Thank you for your question. The next question is from the line of Erik Woodring with Morgan Stanley. Your line is now open. Hi, thank you. This is Maya on for Erik. Just starting, where do you believe kind of year-end subscribers will land for 2023? Yes. So, we didn't give guidance for the whole year just because of the macro complexity that's going on in the market. We do expect subscribers to be up. It will be up about 100,000 in Q1. We expect to end that. We're not going to give guidance for the year, but we do expect to have growth. I think the other thing we'll point out is we expect to have at least $100 million of revenue from subscription and service in 2023 that will be up from about $82 million or so in 2022. So we'll see nice revenue growth. We'll still have a subscriber growth, and we'll be adding to the subscriber tiers. As Nick had said, which will have a nice upsell, generate a higher subscription dollar amount and better margin. So, looking forward to that. Great. Thank you. And then just as a follow-up, how would you kind of characterize the pricing environment from the December quarter? And do you expect that to continue trending into the March quarter, or how do you see that the pricing environment? Yeah. I think the pricing environment were promotional in Q4 and we're able to come in within our numbers. I think Q1 will it's not as promotional in Q4. That's only the more promotional period. But the margins, we expect about 36%, plus or minus a bit, and 39% in constant currency in the first quarter. That takes into account, the pricing environment we expect in the quarter. Thank you for your question. The next question is from the line of Jim Suva with Citi. Your line is now open. Thank you. Brian and Nick, the December quarter also was pretty challenged in terms of like weather and airports and people being stuck and canceling vacations, and just getting from point A to point B. I'm wondering, if that has some impact. And also, post-COVID, now that people are starting to travel again â are there behaviors turning back to pre-COVID purchasing of GoPro, like when they go on big exciting trips, whether it be skiing, scuba diving or any changes in behavior? Thank you. All right. On the first half, Jim, I think we saw really good travel and sales in like September, October. November as a lot of people were traveling to Europe. So our business has been really strong there. It kind of ebbed off a bit in December. I think the bigger issue, quite honestly, is the North America and the consumer followed by retail coming back on their inventory that's had, I think, a bigger impact than necessarily travel? And then China kind of in the fourth quarter was going through ebbs and flows, with COVID. They're trying to come out of that. But as people want to travel in China, or out of China, they're being restricted in a number of countries. As a matter of fact, I saw flights to, I think, into Europe and UK have basically been reduced dramatically from China, just given the current COVID situation. So, and China represents about 20% of that â or historically have 20% of the travel market. So that's been an area that's been a little bit more challenged, but the North America places, Europe places kind of propped up, I would say, from a travel perspective and use the GoPro. Yeah. And on the behavioral front, we're definitely seeing an increase usage of customers using their GoProâs, connecting with the GoPro app since the start of COVID when travel shut down. We shared that, in 2022, we had approximately 15 million unique GoPro cameras connect to the GoPro Quik app during the year, which is great, because in 2020, that number was about $12.1 million. And we've seen it steadily climbing back since. So that's really encouraging to see the correlation between people's increased activity, increased travel and increased camera and app usage. We think we're also benefiting from the improved overall GoPro experience and how well the camera works with the app, how your GoPro now auto uploads, your most recent footage to your GoPro cloud account while the camera is charging. If you're a GoPro subscriber, now you're SD card is automatically cleared after that upload is complete, and you can now access, edit, share and enjoy your content without ever offloading to a computer or dealing with previous complexities. So we're seeing overall improved engagement, improved user success rates. And that's also, we believe, contributing to that 15 million active camera connects in 2022. But to your question, Jim, there's a direct correlation between people getting out more and people getting more use of and seeing more value in their GoPros. And we're seeing that through purchases as well. And unfortunately, that's somewhat tempered by the macroeconomic challenges and consumer confidence as it relates to their spending, but it's really good to see the overall GoPro community becoming more and more active as we move further and further from the pandemic. Thanks for the color. And my last question is, the equilibrium of retailers working down basically everything on their shelves, not just GoPro, but everything. But can you comment on when we're going to hit the equilibrium for the GoPro product on the channel side, you feel? Yes. I know that there's some retailers who are hitting out of stock too, and we can see that. So they're getting down to a point where they're going to have to sort up the inventory balances. I think we'll get to Q1 with our guide, and we'll pull channel inventory down another 50,000 units. And I think at that point, we're probably pretty darn close to the equilibrium level. So, I think, it starts to normalize in Q2. Thank you for your question. [Operator Instructions] The next question is from the line of Martin Yang with Oppenheimer. Your line is now open. Hi. Good afternoon. Thank you for taking my question. My first question is on margins. Do you expect any non-foreign exchange related headwinds to dissipate in the rest of 2023 that could potentially improve your margins? Yes. We're -- we -- in our management commentary, took down what our current assumptions are for FX and we're just holding to that. I'm not hedging one way or the other on FX and trying to provide a directional element. I can say in Q1, and I'll repeat it, we think we'll be at 36%, plus or minus 5, 0.05, but that equates to about 39% margins relative to 2022, actually, if you went back to 2021, it'd be even better. So margins have still been a headwind for the company at these levels. Yes. I mean if we -- you mean from 2021, no, it'd be more on currency to and then a little bit on the component pricing. So it's 1% to 2%. So components have come up -- that's an area that is probably, at some point, going to come under pressure too, and youâll start to see components coming down. I haven't seen that yet other than maybe memory. But I think that's some tailwind probably given the current environment as we get through look our way to 2022 Got it. Thank you. My next question is about the direct-to-consumer or GoPro.com sales contribution in the fourth quarter. Usually, in the previous years, we see during the December quarter, GoPro.com have a slight dip in revenue contribution relative to previous quarters, maybe from high 30s or 40% down to mid-30s. This quarter, it was really strong. Is there any particular factors that is driving up the GoPro.com sales in 4Q? Yes. I think there's a couple of factors. And actually, it will play into 2023 as well. So one is, we obviously have the better pricing on GoPro.com and I think that's the word on that by giving out, we can measure a part of that. Retail coming back probably helped on the DTC front. So that was good on the holiday. I think we had quite a bit of promotional activity on GoPro.com. So we were being bashful in driving sales and margin and subscribers. So the sub aspect to this is very important, because that's where we get some real good lifetime value going into 2023, 2024, 2025 with those customers. And then, of course, our revenue from subscription and service being $22 million in the quarter and about $82 million on the year really helps on the GoPro.com front. And so as we look ahead, as we drive more than $100 million of subscription and service revenue and continue to drive GoPro.com, weâll probably be over 40% on our B2C business in 2023, right? This directional trend is moving that way partly because we've got a very good competitive position on GoPro.com, but also the growth of subscription and service revenue. Thank you for your question. There are no additional questions waiting at this time. So I'll pass the call back to the management team for any closing remarks. Thank you, operator, and thanks, everyone, for joining us today. As we mentioned, we're really excited for the year ahead despite macroeconomic challenges. We're investing in the people, technologies and innovation to continue releasing market leading hardware and software products that we believe will continue to grow our subscription business and position us well for when the global economy recovers. So here's to the start of GoPro's 21st year as a market leading company. Let's go. This is team GoPro signing off.
EarningCall_567	Good morning, and a warm welcome to Electrolux Fourth Quarter 2022 Results Presentation. With me today, I have our CFO, Therese Friberg; and our Head of Investor Relations, Sophie Arnius. I would like to mention that this session is recorded and will be available on our website as an on-demand version. So, let's look at our performance in 2022. We're leaving a highly challenging year behind us that resulted in a significant drop in profitability and an organic sales decline. The decrease in organic sales was driven by lower volumes. Market demand declined in most of our markets compared to last year when demand was, in general, strong. During the first half of the year, supply chain constraints limited the ability to fully meet the underlying demand while the increased general inflation, interest rates and geopolitical tension impacted consumer sentiment and purchasing power negatively during the second half. The other main factor behind the large drop in earnings was significantly elevated cost levels. The supply chain constraints and irregular supply led to low planning visibility, causing production and logistics inefficiencies, including increased use of spot buys and airfreight. This was especially severe in business area in North America. To return to stability and increased profitability, we initiated a group-wide cost reduction in North America turnaround program towards the end of the year, expected to increasingly gain traction during 2023. On the positive side, we have had a very large intensive year across all regions with well-received products, and we continue to generate a positive mix. Our average consumer star rating for 2022 was 4.64 out of 5 stars. Net price realization was strong despite promotional activity returning to normal levels towards the end of the year. And we fully offset the significant cost inflation, primarily in raw materials and logistics. So, if we then move into the fourth quarter specifically, we had an organic sales decline in the quarter across business areas and a loss at EBIT level of SEK612 million, excluding non-recurring items. The loss was due to a combination of lower volumes in a weak market environment and elevated cost levels from inefficiencies in the supply chain and in production in North America. Volumes declined across business areas, mainly as a result of the lower market demand driven by high general inflation and low consumer sentiment, coupled with inventory reductions at retailers. This also led to further production inefficiencies. We delivered a strong mix in the quarter, also in this weak market environment through successful product launches. Our strong price realization continued, and we offset the significant cost inflation. This, despite the promotions now are back to normal levels in general. We have firm plans in place on for our group-wide cost reduction in the North America turnaround program and have started execution. Based on our review of production capacity needs, we have decided to discontinue production at the Nyiregyhaza factory in Hungary from the beginning of 2024. In Q1 2023, we will take a charge for this of approximately SEK550 million reported as a non-recurring item. The strategic direction is to optimize our refrigeration production footprint from a cost perspective through both outsourcing and own production, leveraging group scale. In the quarter, we had non-recurring items, which impacted across business areas and group common costs. SEK1.5 billion in total was related to the cost reduction program with a regional charge reflecting country-specific conditions. SEK0.2 billion was related to the termination of the U.S. pension plan that was transferred to a third party. We also had a positive effect from the Swiss real estate sales as previously announced. Having clarified this, let's go into the results for the quarter. We had a strong organic contribution to earnings in the quarter despite a large decline in sales. We continue to have very good price realization from these price increases, while the promotional activity in the quarter returned to normal levels. Our attractive product and brand offering continued to generate a positive mix also in the fourth quarter. Volumes declined significantly, mainly as a result of the large market decline in our main markets in the quarter. Our investments in consumer experience, innovation and marketing decreased mainly by lowering marketing spend given the market environment. Cost efficiency was negative as a result of the large inefficiencies in production, exacerbated by low production volume in the quarter to adjust to lower demand and reduce the inventory levels. Also, logistic cost increased, and despite implemented reduction in the use of express freight and spot price components, the elevated cost level continued as it takes some time to realize these savings through the value chain. Price offset the continued significant cost inflation, mainly in raw material that is included in external factors and in logistics that is part of cost efficiency. Let's take a brief look at the EBIT bridge for the full year. Also, for the full year, we had a very strong organic contribution to earnings. We had a very good price realization that also for the full year was offsetting the significant cost inflation from raw material and logistic costs. This was a result of the list price increases implemented during the year, whilst the promotional activity also intensified towards the end of the year. Volumes declined significantly, mainly as a result of the weaker consumer demand and large market decline. Our most launch-intensive year with an attractive product offering generated positive mix every quarter during this year, despite supply constraints during a large part of the year and then the sharp market decline in the second half of the year. Our investments in consumer experience, innovation and marketing increased for the full year to support product innovation and product launches. Cost efficiency was very negative. The constrained and irregular supply chain resulted in considerable increased cost for logistics and components, as well as large inefficiencies in production from low visibility and ability for efficient production planning. The higher cost was both inflation-driven and due to the use of express rate and spot price of components. Measures under the cost reduction program were taken in the fourth quarter, but it's important to note that it takes some time to see the effect of the structural changes. And also, for the immediate cost reduction, there is a delayed earnings impact due to the high inventory levels before the program started. If we then take a deeper look into our price and mix development, the EBIT margin accretion for the group from price and mix was 12.9 percentage points for the full year and 13.9 percentage points in the quarter. And this was mainly from price as we had strong price execution across all regions, driven by the list price increases implemented from the end of 2021 and during 2022 in order to offset the significant cost inflation. The promotional activities increased gradually during the year and in the fourth quarter, were back to a normal level, mainly in North America and Latin America. Mix was, as mentioned earlier, positive in every quarter in 2022. And in this quarter, we had positive mix in all business areas. In Europe, the favorable mix was driven by our clear focus on our premium brands, Electrolux and AEG, as well as some high mix products, which continued to deliver a positive mix also in this quarter. In North America, we continue to mix up based on our new product range. In Latin America, positive mix was a result of successful product launches, including well-received built-in ovens produced in the renewed factory in Sao Carlos that was part of the reengineering initiative and the strong performing multi-door fridges. In Asia Pacific, Middle East and Africa, mix also increased, partly driven by successful product launches in water care and washing machines. An attractive product and brand offering is essential for our profitable growth, and Jonas will now give you some concrete examples of this. In recent years, we have expanded the offering in the globally growing multi-door refrigeration category. This high-value category offers the possibility to deliver strong consumer innovation in terms of dedicated climate zones and easy access. Our modular architecture significantly reduces time to market and cost as we rapidly increased our product offering. Looking at the North American business, we recently launched a refreshed line of Frigidaire Professional wall ovens from our new factory in Springfield. These wall ovens feature our new total convection system, which gives consumers maximum flexibility in the kitchen with meaningful and easy-to-use cooking modes. Examples of these are air frying, slow cooking, steam baking and no preheat. This wall ovens have also undergone an extensive visual update, adding backlit knobs and eliminating lower trim piece that will make them stand out on the sales floors and in consumers' homes. Early reception in the market has been very positive and retailers are dedicating new showroom space to these wall ovens. Early consumer reception is above target, with a combined 4.7 out of 5 consumer star rating for the three wall oven platforms we offer; single wall ovens, double wall ovens and micro combis. Operating cash flow was negative SEK6.1 billion for the full year, while the fourth quarter was positive and amounted to SEK0.2 billion. From a year-over-year perspective, the decline is mainly related to the lower EBIT, both for the quarter and for the full year. For the full year, also higher level of CapEx impacted cash flow negatively, as did the sharp decrease in accounts payable. We managed to substantially lower our inventory in the fourth quarter, mainly of in-house produced finished goods, which are now at an overall normal level. It will take somewhat longer to see the result of our efforts in our inventory of supplies and sourced products. We will continue to work to further optimize the inventory levels gradually during 2023, while applying the normal seasonal pattern with some inventory buildup in the first half of the year. The significantly reduced production level to adjust to lower market demand in combination with inventory reduction impacted accounts payable negatively. With more than two years of very high volatility, we will continue to focus on stabilizing the working capital level in 2023. Let's now go into our business areas performance in Q4, starting with Europe. In Q4, the market demand continued at a low level, impacting our sales volumes negatively and exacerbated by retailer destocking. We continue to execute well on price and mix improvements through our focus on the premium Electrolux and AEG brands. The low sales volumes, exacerbated by successful destocking in our in-house produced finished goods products, led to revenue decline and higher product costs. Additionally, we saw significant inflationary cost pressures. This was partially offset by the strong price and mix execution in several of the European markets. Market demand in Europe continued to decline in the fourth quarter, excluding Russia, and was down 12%. In the quarter, Western Europe declined by 11% and demand in Eastern Europe by 19%. The market demand continues to also be at lower levels than before the pandemic, declining by 8% compared to the fourth quarter of 2019. Consumer confidence remained low with consumer demand being negatively impacted by the high general inflation, increased interest rates and geopolitical tensions. The decline in consumer demand was amplified by retailer inventory reductions, subsequent high levels entering the quarter, also outside the white goods category. For white goods, retailer inventory levels now seem to be normalized, while other categories such as electronics are estimated to remain high. With the lower consumer purchasing power, there are signs of consumers mixing down. This is mostly seen in the lower price points, leading to increased polarization in the market. Let's continue with our business area in North America, which had a substantial EBIT loss for the second quarter in a row. The loss was a result of lower volumes due to the weaker market environment, combined with elevated cost levels. The high-cost level is a result of previously -- previous supply chain constraints and the ongoing production transformation with our two new factories and several new product platforms. Actions under this turnaround program for North America are well underway, the main focus being to adapt sales and production plans and to rightsize the workforce. However, there is a delay in earnings impact since we had a high level of inventory going into the quarter, produced at the cost levels before the program started. Price offset the significant cost inflation, mainly in raw materials and logistics. This is an environment where we now see promotional activity being back to normal levels. Mix contributed favorably. Looking at the U.S. market. Industry shipments of core appliances in the U.S. decreased by 7%, but still increased compared to the fourth quarter of 2019 by 3%. High general inflation and increased interest rates impacted consumer sentiment negatively. The drop in consumer demand was amplified by retailer inventory reductions. These are now estimated to be normal to high compared to high in Q3. Market demand for all major appliances, including microwave ovens and home comfort products decreased by 9% year-over-year. Let's move on to Latin America. Volumes were lower in the quarter, driven by consumer demand in Brazil and Chile, while Argentina was up. We continue to execute well on pricing despite higher promotional levels offsetting significant cost inflation. Aftermarket sales continued to grow at a high rate. Our record number of product launches in 2022 contributed to positive mix contribution despite market mix pressure. Price and cost control offset currency and inflation headwinds. Finally, turning to Asia Pacific, Middle East and Africa. Consumer demand weakened in key markets, which also led to retailer inventory management actions resulting in lower sales volumes. We continue to execute on price improvements, and our strong product launches drove favorable mix in the quarter. Profitability was impacted by the lower volumes, while efficient cost control contributed positively. Price increases offset cost inflation and currency headwinds. So, let's turn then to our market outlook. We expect consumer sentiment in 2023 to be negatively impacted by a high inflation and interest rate environment, although with regional differences. In Europe, the tight energy situation and Russia's invasion of Ukraine further weigh on consumer confidence and purchasing power, while we see, in general, less pressure from inflation on interest rates in the Asia Pacific region. China's reopening could also have a further positive impact for this region. The housing market, a key driver for appliance demand in mature markets like Europe and North America, is expected to decline in 2023. On the back of this, we expect demand for appliances in 2023 full year to be negative for Europe, North America and Latin America and neutral for Asia Pacific, Middle East and Africa compared to 2022. Although the outlook is uncertain, it's probable that reduced inflationary pressures will lead to demand stabilization in Europe and North America in the second half of 2023. Let's look at the business outlook. On the back of this market outlook, we estimate our volumes in 2023 to decline year-over-year, partly mitigated by mix improvements from a strong offering. 2023 will be another launch-intensive year, although less than 2022. I'm very pleased with how well received the new products have been the last couple of years even in this challenging demand environment with reduced consumer purchasing power. This gives us confidence that we have a great platform to drive mix improvement from. Looking at price. We anticipate differences in the price dynamic for our business areas, given the regional variations in cost inflation and demand outlook. Since most of the expected cost inflation will impact Europe and Latin America, we will, in these regions, structure our product execution in terms of list prices and promotional activities to reflect this with the aim to offset cost inflation. In North America, on the other hand, reduced commodity and transportation market prices, combined with lower consumer demand, are predicted to result in continued high promotional activity following the increases we saw in Q4 2022. As a consequence, on a group level, we do not expect to fully offset the negative impact from external factors in 2023 full year with price. As mentioned, we expect external factors to be negative for the year, driven by energy and labor inflation as well as currency headwinds, and most of this will impact Europe and Latin America. Although we foresee benefits from lower raw material costs, the positive impact on earnings is reduced as the higher share than normal of raw materials procured at last year's rates will be consumed in 2023. This is as a consequence of higher inventory levels of supplies and reduced production rates in Q4 2022. The outlook for external factors in the second half of '23 is difficult to predict as energy and plastic prices are volatile and a portion of steel prices are on price mechanisms. The expected positive year-over-year earnings contribution of SEK4 billion to SEK5 billion from cost efficiency and reduced investments in innovation and marketing combined related to the group-wide cost reduction and North America turnaround program is reconfirmed. Total cost reductions from the program is estimated to be in excess of SEK7 billion in 2024 compared to 2022. Investments to strengthen our competitiveness through innovation, automation and modernization continue in 2023, and total capital expenditures are estimated to be in the range of SEK6 billion to SEK7 billion. And if we look at the phasing of the impact of these items during the year, it is primarily three items I wish to highlight. Starting with price. The carryover from list price increases implemented a year ago will taper off and mainly benefit the first month of 2023 for the group as a whole. Last year, promotional activities returned to normal levels in the second half from being at low levels in the first half of the year, mostly impacting North and Latin America as these are the two most promotional-intense regions. External factors are, just like Jonas commented on, impacted by a higher share than normal of raw material produced at last year's rates that will be consumed in 2023. This lag will mainly impact -- negatively impact the first quarter. And finally, a few words on the timing of the impact of the group-wide cost reduction and North America turnaround program. The activities implemented under the program will gradually contribute to earnings over the course of 2023. And an important element of the program is reducing logistics costs and sourcing of components, especially in North America. Just like with raw material, the higher inventory level of components results in a lag before the measures we are taking will have an earnings impact. In terms of logistics, contracts are, in general, negotiated around this time of the year, and the new rates are implemented during the second quarter. Also relevant for the phasing of the earnings contribution from a year-over-year perspective is the baseline, where cost efficiency and innovation and marketing combined last year was less negative first half of the year compared to the second half of the year. So, to sum up the quarter and the strategic drivers we've delivered on. Needless to say, this has been another very tough quarter with a further weakening market environment and cost challenges, but there are also highlights. I'm very pleased with the way we continue to drive mix through successful product launches also in this environment, with lower consumer purchasing power and confidence levels. Our strong price realization continues in all regions, and we have been able to fully offset the significant cost inflation phase this year. We have now also gained traction from our efforts to reduce the high inventory levels we built up during the period with significant supply chain constraints and high market demand and our overall back to normal levels when it comes to our finished goods. Activities under the group-wide cost reduction and North America turnaround program, instrumental to re-establish stability and profitability, are now well underway. This, while we simultaneously progress on our long-term strategy. As these cost actions take hold during the upcoming year, we will be able to take advantage of our record strong product lineup as inflationary pressures and consumer confidence and purchasing power gradually subside. I'd like to take this opportunity to remind you of our upcoming Capital Markets Update, where we will share more of our progress on the program, especially in North America, where we will have a deep dive into how we create stability in this business area to pave the way for sustainable growth and profitability in the region. The other focus area for the Capital Markets Update will be on how we harness growth opportunities in the aftermarket, while gaining deeper consumer insights and relationships via new touch points. You are very welcome to join on March 20, either in Stockholm or digitally. If you have not yet registered, you can do so until March 1 on our corporate website. Thank you, Jonas. We will now open up for Q&A. I know there are many that wants to ask questions. So, please limit yourselves to one question per person and, if time allows, you can go back into the Q&A queue and, hopefully, ask a second question. Thank you. [Operator Instructions] And your first question comes from the line of Andre Kukhnin from Credit Suisse. Please go ahead. Your line is open. Hi, good morning. Thank you for taking my question. I wanted to just unpack the external factors a little bit more. Could you talk about how much is in there for the exit labor inflation and for energy versus raw materials? And on raw materials, within that, could you help us understand that kind of phasing of H1, H2 between that kind of effect of carrying over excess of normally high inventory and then, hence, kind of how much of a swing could we see in the second half as you mark-to-market to the spot prices? Yes. So, if we start with the favorable drivers, we have, obviously, seen a significant decrease in market prices for steel and also plastics, the drivers for plastics. So, those will be favorable for the year. As mentioned, we are still sort of consuming both materials and contracts from the prior year that will sort of delay these favorable impacts into the second quarter. So that's one significant headwind in terms of realizing these new more favorable raw material prices there. So clearly, we will see -- if current marketing conditions are maintained, we'll see it -- some fairly noticeable favorability in the second half of the year on steel and plastics. Then, I think on -- it's important to mention, normally, we don't talk so much about other metal commodities and so on. But here, we have a fairly significant headwind mainly from lithium. We use -- or our suppliers use a fairly significant amount of lithium, mainly in glass cooktops to increase the hardness of that. So that's a fairly significant headwind to take into account on the raw material side. Then, we have fairly substantial headwinds also from currencies, the way they currently stand. Obviously, that changes over the course of the year. But right now, based on current outlook, that's a fairly substantial negative. And then, as you indicated, we have these elevated levels of salary inflation, which, historically, we haven't really had much to report of that in external factors because we typically say that normal salary inflation, we just taking -- deal within our ongoing cost efficiency. But here, we have, as you know, in many markets, like in Eastern Europe, like in Latin America, very, very significant salary cost inflation that we report here in external factors. And then, finally, energy. Right, so, this is mainly a European factor, although there are some energy head cost headwinds in other regions as well. But in Europe, it's a combination of -- yes, last year, we're pretty much on locked energy prices, both for electricity and gas for the full year. So, we were enjoying, yes, very favorable prices from, let's say, the 2021 levels, which is true for lithium, by the way, as well. And then, despite the market prices having come down from the peaks we saw in the fall for gas and electricity, for example, it's still a very significant increase, both for us and for some key suppliers that have highly energy and gas-intensive production processes. So, we report that as a combined effect in external factors here as well. So, having said that, there is a significant amount of uncertainty as we go through the year, especially into the second half on energy prices, on plastics prices and on, let's say, the open portions of our steel and other metals contracts. So, given that high level of uncertainty, that's why we're not giving a detailed range as we historically have. As you understand, there's this fairly significant positives and negatives that combine to give this negative guidance overall for external factors. Sure. I understand. If I may just follow up on this. So, if we carry on at the current spot rates, second half becomes kind of a smaller negative or is there a scope for that to turn into a net positive? Yes. I mean there's a lot of uncertainty in the second half. So, I would refrain from giving a specific guidance there. But yes, no, I think there's a lot of opportunities for that total equation to look different in the second half than in the first half, for sure. Great. I respect the one question and a follow-up rule. So, I'll go back in line. Thank you for your time. Thank you. We will now go to our next question. And the next question comes from the line of Johan Eliason from Kepler. Please go ahead. Your line is open. Just coming back a little bit to this carryover inventories and high cost, et cetera, it sounds like it will be a very tough start for you in Q1. Will it still be a loss-making quarter on the group or potentially just North America? Yes. So, obviously, we don't give earnings guidance in that sort of level of detail. But to your point, we have -- I mean, we have some positives and some negatives kind of rolling over into Q1. So, as mentioned, we have high inventory levels of components. We still have -- we're still operating on, let's say, last year's contracts in general for logistics. Those typically flip over in the second quarter. And it takes time for these -- the cost reduction initiatives that were -- that we've initiated to fully kind of gain traction, right? So, all of those would be negatives for the first quarter. And also, to remember that last year, first quarter, we were in the opposite situation where we're sort of benefiting from more favorable contractual levels in the first quarter compared to what we saw over the course of the year, right? So that year-over-year impact becomes fairly negative. Then, we have a positive, which is that obviously, we're still seeing the benefits from the price increases that we implemented throughout last year, throughout the first quarter, even though promotional levels have increased in the fourth quarter compared to certainly where they were in the first half of last year, we also -- so we expect that to continue at a fairly high level. But on the other hand, we have positive year-over-year impact from the list price increases we executed during the year. So, it's a bit of a mixed bag. But clearly, there are some remaining cost headwinds that will impact the quarter, especially in North America, to your point, and also time required until the significant cost reduction initiatives that we're implementing run through the P&L. And are you still confident that the North American business can sort of return one day to your target margin level for the group? Yes, very much so. And I think the fact that we've had a challenging journey here recently in North America is less about the market, and it's more about, unfortunately, our performance in the market. And I would say the good news here is that the massive efforts that we've put in place to significantly improve our product offering, innovation level and automation, they will come through. It's just a question of how quickly. And here, clearly, we have not met our own expectations or the market's expectations on the speed of implementation of that. But that's what we're now putting all of our efforts in, with new management, strong focus from the group to support it. And the U.S. market is very attractive, high purchasing power, consumers that are continuing to invest in their homes and their kitchens. We have a bit of a cyclical weakness right now, but that underlying strength is definitely there and will come back. So, we're very committed to and very convinced around the turnaround program for North America. And we'll talk much more about this just another -- a bit of marketing here. We will really deep dive in North America in our CMU on March 20. Thank you. We'll now go to our next question. And your next question comes from the line of Gustav Hageus from SEB. Please go ahead. Your line is open. Thank you. Thanks for taking my questions. If I can start with the cost reduction program and the phasing of that, just to be clear, what will be the exit level as you budget now for those savings at the exit level for this year? I wouldn't say no impact because we are reducing discretionary spending. We did implement headcount reductions already in Q4. But as it works its way through inventory and things like that, it takes a little while to hit the P&L. And then, of course, we have actions that continue to accelerate throughout the year. So no, I mean it's true. The impact will be limited in Q1. Great. And if I can have a follow-up on the promotional level that are normalizing, as you say. Do you believe that promotions will continue to rise now in U.S.? Or are you rather thinking that promotional activity will stay a bit muted for the longer period as some other companies have indicated through different purchasing patterns and so forth? Yes. It's true that in the fourth quarter, we saw quite high promotional levels in -- especially during the sort of black November period. But of course, that is from substantially higher starting points than before. So, the net prices realized in North America are significantly increased. So, what we're referring to is more sort of the promotional intensity from that high level. And that was quite high during the quarter, partially, of course, or I would say maybe significantly because both retailers and industry participants focus on destocking inventory levels. And then, as we go into 2023, with relatively subdued market demand, it's -- and in many cases, we see costs. For example, ocean freight and steel and so on as is mentioned, combination of these factors will most likely lead to continued fairly high levels of promotional activity, probably less because of destocking, which we had in Q4 and more because we're seeing these sort of lower costs coming through. And so, our estimate, our guess is that, that will lead to continued fairly high promotional levels. Now, the actual sort of promotional calendar in the first half of the year is less intense typically than in the second half of the year. So, in that sense, the actual promotions are typically lower in the first half. Thank you. We will go to our next question. And your next question comes from the line of James Moore from Redburn. Please go ahead. Your line is open. Yes. Good morning, everyone. Hi, Jonas. Thanks for taking my question. On price/mix, you're talking about a positive price globally in '23. It sounds like negative in North America. I understand your U.S. peer is a bit more North American, but they're seeing more like a sort of minus 2 and a bit. I just think -- do you think that's the same as market pricing? Or do you think that you're going to end up pricing above the market, which I guess runs some elastic risk on volumes? And if market pricing is less in Europe and Latin America than your ambition, will you come down with the market? Or will you try and hold on to that? Yes. I mean, I'm sorry to -- and I would refrain from comparing pricing to competitors, of course. But generally speaking, I would say that there will likely be significant regional differences in terms of pricing. In Europe, we see the bulk of the impact from, as we indicated, energy cost, salary inflation. Also, this impact of lithium, for example, is mainly a European impact. And because of high energy prices, we also see much less favorability in steel prices and plastics in Europe as well. And the same more or less applies to Latin America. So there, I would be surprised to hear if anybody sees that, that's going to be a significant positive combined effect of those factors for those two regions. And as usual, we are committed to attempt to offset external headwinds through pricing, right? So that's what we're predicting to do in Europe and in Latin America, which are very important regions, as you know, for us. I'll refrain to comment on what I think market prices will do, but that's what we will do. And then, in North America, to your point, we do expect year-over-year price -- or net price compression as a consequence of higher promotional activity mainly during the first half of the year, right? So, most of our list prices happen in the early part of 2022 increases. And then, as promotional patterns are normalizing, the year-over-year impact will be negative on net price for North America. And as indicated, we see less of the inflationary pressures in North America from energy and so on. We also see fairly substantial reductions in steel prices and in ocean freight, in particular, in North America. So, it's, I think, a fair assumption to say that the market conditions for reduced net price realization are definitely higher in North America than in Europe and in Latin America. So, the balance of these factors are kind of the main drivers between -- behind our guidance. That's very helpful. And as a quick follow-up on mix. Is the SEK1 billion that you've done over recent years sensible? Or is that a different story this year? Well, I think we will definitely see favorable mix. I think it's -- again, given the uncertainties in the market, I wouldn't commit to SEK1 billion. I think it's going to be favorable. I think it can be fairly substantially favorable, because we have a really all-time high, let's say, level of innovation and product freshness, both with what we launched here in '22 and the further launches in '23. And that's playing out, as I mentioned, in our consumer star ratings. We're at 4.64 globally, and I'm particularly impressed by our significant increases in North America where these new products are very well received. So, as we get our cost structure in place, I think we're quite favorable -- quite positive in our ability to continue to drive mix globally and particularly in North America. Thank you. We will now take the next question. And your next question comes from the line of Martin Wilkie from Citi. Please go ahead. Your line is open. Yes. Thank you. Good morning. It's Martin from Citi. My question was around cash flow. I mean, obviously, you've not proposed a dividend for this year. I understand that's a sort of technical formula given your negative net income in 2022, but you've also said the buyback didn't continue in Q4. What should we read into your cash expectations in 2023? I know there's some improvements in inventory in the fourth quarter, but obviously, there's a lot of moving parts in terms of the inventory built last year, the market is still a bit challenging at the beginning of the year, but a lot of these supply constraints easing. So, it'd be good to understand just how you see those building blocks of cash flow in 2023. Thank you. Yes. So maybe starting with one topic then on CapEx, whereas you saw our guidance then is SEK6 billion to SEK7 billion. So that's, of course, one component of the cash flow. And then, as indicated, we've been going through very volatile period in our working capital levels over the last two to three years, actually. I mean, we have come down, as you saw, substantially in inventory in the last quarter here in 2022. As indicated, we still have an imbalance in our inventory where we are now at normal levels in terms of number of units in our in-house produced products, but we will still need to go through a period here in the beginning of 2023 to normalize our suppliers' inventory and also some parts of the sourced finished goods. Of course, what we also then saw at the end of 2022 was a sharp reduction in the payables to actually adjust them to the correct inventory levels going forward in the new market demand. And this will continue, specifically during the first part then of 2023 when we will also need to recalibrate our inventory levels going forward. So, there will still continue to be some volatility, I would say, in the working capital levels. But as it normalizes the conditions, we will come back to more stable production rate, this will also then stabilize during the year. That's our aim. So overall, I think the conditions for favorable cash flow are much better going into '23 than we had in '22. Okay. Got it. That's helpful. And obviously, you've got a very efficient -- if we look historically, you've been very efficient with working capital. There's no reason to think that there's a structural change if we look sort of over a multiyear period, but we're just in this sort of temporary difficulty just now and that you aim to get back to those ratios once the world sort of normalizes. Yes, that we can confirm. We have no structural changes. Of course, we have also had the impact in the working capital from the high inflationary pressures. So, I think all of the values, both in terms of payables and inventory, has also been impacted by the inflationary pressure. But if that also then goes back, then we structurally don't see any differences in our working capital as we have it right now. Thank you. We will now go to our next question. And your next question comes from the line of Akash Gupta from J.P. Morgan. Please go ahead. Your line is open. Yes. Hi. Good morning, everybody, and thanks for your time. My question is on financial expense. If we look at Q4, it increased significantly also given the increase in gross debt. When we look at for 2023, I mean, last year, you had SEK1.5 billion roughly in financial expense. Can you guide us or can you indicate what level should we expect for full year 2023 in terms of incremental, also given your plan to potentially reduce gross debt over time? Thank you. Yes, we don't give specific guidance. But of course, with the debt level that we have now that is, to your point, has increased, even though we are expecting cash flow then to turn positive into next year. But it wouldn't significantly change the current level as we have it currently, I would say. So, I think to look at then, the later part of the year would be a good indication also for the full year of '23. Thank you. We'll now go to our next question. And your next question comes from the line of Olof Cederholm from ABG Sundal Collier. Please go ahead. Your line is open Good morning, everyone. Just one follow-up to some other questions. Can you talk a little bit more about the phasing of the volume price/mix outlook? It's negative for the year, but I assume that volumes will be stabilizing towards the end of the year, you mentioned that, Jonas. And how about mix in that respect? If you could just talk a little bit more about that? Thank you. Absolutely. So yes, I think it's fairly reasonable to assume that the demand levels that we saw in the second half of 2022 is kind of the new run rate. And that, of course, means that we will see some fairly noticeable unfavorable volume impact in the first half of the year and then more of a normalization or flattening out in the second half of the year unless something significant happens in one direction or the other, but that's the assumption that we're guiding for. In terms of mix, I don't see any significant differences on a quarter-to-quarter basis. I think that's -- that should be a contributor throughout the year. Thank you. We'll now go to the next question. And your next question comes from the line of Uma Samlin from Bank of America. Please go ahead. Your line is open. Hi. Good morning, everyone. Thank you for taking my question. So, my question is on the market share development in North America and Europe. So, from your report, it seems like the product launches that have taken -- have started to see some momentum. So, I was just wondering what are the market share development that you see in North America and Europe in the past quarter? And what do you expect in 2023? And I guess for Europe, also wondering that in light of the recent combination of the Whirlpool EMEA operation and [Arcelik] (ph), what are your plans for production in Europe? Are you worried about the strong market share erosions in Europe? Yes. So, I would say that in both Europe and in North America, we did lose a little bit of market share last year. I think that was unfortunately a consequence of us being quite heavily hit by supply disruptions throughout the year. So, we were able to protect our more recent product launches to some extent from the supply disruptions, but they definitely had an impact. But -- so I think, yes, we did suffer a bit more than the market on average there. As we go into this year, though, I would say those supply constraints are past us. We're sort of rebalancing our inventory, as Therese mentioned. So, we should be in good conditions to really leverage the great new products that we've launched over the past year and into 2023. So, I don't see that as a headwind continuing into 2023. If we then look at, let's say, the market conditions in Europe, I would say that the, let's say, segmentation of the market is quite significant there where with our main offering in Electrolux and AEG is playing a substantially higher price points than the competitors that you mentioned. So, we don't expect to have a significant impact, frankly, from that combination. Thank you. We will now take the last question. And the last question is a follow-up from Johan Eliason from Kepler. Please go ahead. Your line is open. Yes. Hi, again. Just a follow-up here. You mentioned mix being positive. Now typically, when consumers are facing difficult times, they tend to trade down. And I think sort of in North America, that's been a little bit in favor of you, trading down to the Frigidaire brand. But in Europe, you've obviously moved to these higher premium brands, Electrolux and AEG to a big extent. So, overall, how do you see this potential trade down among consumers impacting you this time around? Yes. I think the -- if we look at Europe, there clearly was some mixing down in the market, but that was predominantly, let's say, inside of the more mass market price points. So, I would say in the premium of the market, we didn't really see any noticeable mixing down. So, I think it, of course, has to do with how inflation impacts the sort of different income groups in Europe. So, we haven't seen that. In North America, we actually haven't seen any significant mix down at all. I think it's more of -- there, I think it's more a question of that the -- let's call it, the segment of the population that is heavily impacted by inflation are typically renters. So typically, not buying appliances as we can see. So, it's more an impact on volumes than on mix. Now, I'm speculating frankly here. It's not something I have solid data on, but that's the indication that we're getting. No. I mean I think we would have even better mix in a more favorable market environment. But we saw here in the fourth quarter that despite some quite challenging demand conditions, we continue to deliver solid mix improvement. So, I think that's an indication that we can continue to do that. Sorry, sir. I was just going to say thank you. That was our last question. I will hand back to you. So, we're now leaving this very challenging year behind us, and that was, of course, not least visible in our financial results. However, we also have very positive aspects that I think are important to recognize. 2022 was a very launch-intensive year, partly enabled by the ongoing reengineering investment initiatives. And I'm very satisfied with how our new products are being received by consumers, contributing to our positive mix development. Another part is our price execution that fully offset the significant cost inflation during the year. We also took strategic steps, such as establishing a new commercial and consumer journey organization. Our attention has been on better products, more targeted brands and increased manufacturing efficiency. We now add a focus beyond the product itself to all interactions we have with our consumers, including the aftermarket. To me, it's vital that we also engage -- also in challenging times, progress on our long-term strategy of consumer-centric sustainable innovation.
EarningCall_568	Good morning and welcome to the SKF Year-End Report 2022. My name is Charlie and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Patrik Stenberg, Director of SKF Group, Investor Relations and Mergers & Acquisitions. Patrik, please go ahead. Thank you, Charlie and good morning and welcome to all of you listening into this webcast. This is, of course, the SKF conference call on the fourth quarter results. And as usual, we'll start with the presentation followed by Q&A. Presentation will be initiated by Rickard Gustafson, our CEO; followed by our CFO, Niclas Rosenlew. After the presentation is over, we will continue with the Q&A session. And you are happy to post your questions over the phone as directed by the operator or you could use the chat function if you prefer that. Thank you very much, Patrick and a warm welcome, everyone, to this webcast related to our fourth quarter report. And I would like to start by looking back at the full year of 2022. We delivered a strong organic growth, just about 8% which takes us to the top of our previous guidance for the full year. Our adjusted operating profit came in at SEK10.2 billion, representing an adjusted operating margin of some 10.5%. I think we should see or view our numbers against the backdrop of very challenging external circumstances throughout the year. We have the war in Ukraine and all the consequences thereof, including our exit of our business in Russia. We have had and lived with exceptional cost inflation levels. It has been a moving target for us throughout 2022 but we're happy to see that the gap is now closing towards the end of the year and you will hear more about that in this presentation. And of course, we also have experienced significant lockdowns from the COVID restrictions in China for a rather lengthy period of 2022. But the year of 2022 was also the year when we accelerated our strategic agenda. We have capitalized on our growth opportunities and delivered double-digit growth in most of our targeted industries. We are taking a more active approach to portfolio management to improve our operational performance. Our technology initiatives are progressing well and I will share more details later in this presentation. We have further accelerated investments in our regional engineering and manufacturing capabilities to enhance our competitiveness. And I'm going to share some examples of that as well during this presentation. So all in all, we have established a strong foundation for 2023. If we then take a look at the fourth quarter in isolation, net sales maintained very strong in the quarter and came in north of SEK25 billion, representing an organic growth of approximately 10%. Roughly 2/3 from this growth comes from price/mix and 1/3 from volume. The adjusted operating profit was SEK2.5 billion, corresponding to adjusted operating profit of 10%. This represents a sequential profitability uplift versus Q3 but not yet at the level where we want to be. And the main reason for this is still the cost situation that we have a rather high cost inflation, even though it starts to level out and I'll share some more details on that shortly. In this quarter, we had somewhat of a different business mix than normal, where automotive contributed with some rather large growth of 12%. And then, we ended the year in China with some exceptional sick leave rates after they lifted the COVID restrictions in China, basically, most of our people then ended up being out of sick leave during the month of December. But net cash flow for the full quarter was very strong. It came in at SEK3.4 billion compared to SEK1.2 billion the same quarter last year. And this is primarily related to activities within net working capital that we have conducted during the quarter. And you will hear Niclas talk more about that shortly. All in all, we saw strong organic sales growth as well as sequential price realization in the quarter, supporting an improved adjusted operating profit versus previous quarter but also versus the same quarter last year. If we look into our growth activities. And again, I'm very pleased to report strong progress on all of our 4 core growth levers. Starting with the industries. In the quarter, we saw strong double-digit growth across most of our targeted segments. And as you can see on the right-hand side of this chart, see that electrical vehicle stands out with a significant growth of 46% in the quarter. But also a number of those industries that we also highlighted in our Capital Markets Day in December, continued to deliver solid double-digit growth, such as agriculture and food and beverage and rail as an example. When it comes to new technologies, strong progress there, starting with magnetic bearings, solid growth, partly driven by energy application, an area where magnetic bearings really have a role to play. And we're also pleased to see that they report a record order intake in 2022, reaching north of SEK1 billion for the first time ever. RecondOil continues its strong progress, significant interest in the RecondOil box. But now in this quarter, we also started to operationalize some new strategic partnerships, such as the one with Quaker Houghton and Castrol which we are excited about. We continue to expand our service and aftermarket business and our distribution business grew by 10% in the fourth quarter. In relation to this, we have renewed our focus on condition monitoring where the responsibility for connected technologies have moved closer to our customers by being distributed to our business areas. And finally, on portfolio management, we continue those tactical and strategic activities that we described in detail at our Capital Markets Day in December. And we have commenced on the strategic review of our aerospace business as we also announced back in December. Moving on and taking a look at our pricing activities. We continue to increase prices and prune our portfolio to further strengthen our business and market position. Our efforts have resulted in another quarter with a growing positive price/mix contribution. And as you can see from this chart, in this quarter we have a positive contribution of SEK1.8 billion from these activities. However, though, cost inflation is still an issue that we're wrestling with. And even though it's moderating and leveling out, it's still at a high level and we had headwinds of roughly SEK1.8 billion in the quarter, of course, a significant drop versus what we had in Q3 last year. So also what's obvious on this chart, after 5 consecutive years of negative price/mix inflation balance, now the bars are starting to finally even out. This is, of course, a positive data point but it's a bit premature to call it a trend. Now if we take a deeper look into our Industrial segment. We saw a very strong organic growth across our industrial businesses at around 9%, roughly 50-50 split between price/mix and volume. But also which is obvious on the slide, it's not evenly distributed across our geographies. We saw very solid growth in Americas, coming in at some 6%, with strong performance in automation, material handling and agriculture, to mention a few. The organic growth in EMEA was actually surprisingly strong at 13%, with very strong growth in aerospace, rail, marine and agriculture as well. We see a strong and continued momentum in India and Southeast Asia, where they're growing 16%, mainly from wind, rail, off-highway and heavy industries. While finally, China and Northeast Asia is more flattish or moderate organic growth, also heavily impacted by the COVID situation at the end of the Q4 in China. If we look into the Industrial business and the financials a bit further, the adjusted operating margin came in at 12%. This is due to the good pricing momentum that we have in our industries and we're able to better balance the cost inflation. That has enabled us to deliver an adjusted operating profit that is actually on par with what we saw the same quarter last year at SEK2.2 billion. And we're excited about that. We see that our ability to really deliver tailored and specialized solutions to our customers provide true value and enable us to continue to drive profitable growth. I'd like to bring 2 examples to life today. Starting with one that is derived from our sustainability capabilities that is becoming a major differentiator in our offerings. And here, I'm going to bring your attention to an example with the contract that we signed with a mining company in Latin America. And my second example relates to application-specific offerings, where we have been able to sign a contract also within the elevator industry. Now let's start by taking a look then at the sustainability-related example. Sealed spherical roller bearings is a great example of how SKF supports industries to reduce CO2 emissions. We recently delivered a sealed SRB solution to a mining company in Latin America. And as you can see from this slide, these are not small bearings, they are massive. They are 2.5 meter in diameter and weigh about 3 tons a piece. But the key customer values that the sealed SRB solution brings to our customers is threefold. Firstly, from a cost point of view, these bearings, they have a superior service lifetime, at least 2x versus traditional open SRBs. The environmental benefit is also rather significant. They have enabled us to help reduce the grease consumption. And as you can see from the slide, in this particular case, the annual consumption dropped from 540 kilograms to only 7 kilograms, a massive transformational shift. And finally, circular economy is starting to become more and more important. And these bearings, they are designed for remanufacturing possibilities, adding another dimensional value to our customers. And finally, I'm also pleased to say that in order to win this business and win this contract, we were also able to leverage our recent acquisition at the back end of last year of Tenute and their capabilities and technologies helped us to finish off and sign this deal. Moving on to my application-specific offering example and relating to the elevator business. SKF is the leading supplier in the elevator segment with a strong and growing market share. We are gaining market share due to our outstanding quality but also due to our application-specific offerings in this particular industry. And what we mean by application-specific offering is when we design solutions to fulfill specific customer performance requirements related to cost, noise, vibration or friction. In this case, when we signed -- or renewed, I would say, a major contract with a large OEM in the elevator industry, it was really due to our ASO capabilities. In this case, the customer had a clear requirement on us. They needed us to significantly reduce the cost of the bearings for them to stay competitive. Our engineers took on this challenge and came up with a solution where we created a product with reduced number of rollers and optimized ring material and new lubrication system. As a result, we were able to deliver the price expectation to the customer. The bearing itself came with lower noise which was an additional benefit to the customer. And also from an SKF point of view, this enabled us to significantly improve our operating margin on this particular contract. So through ASO activities like this one that I just described, we are able to drive profitable growth across many of our industries. So now I think it's time to turn to our other area, our automotive business. And like for our industrial business, we see strong organic growth in the quarter of roughly 12%. And this time, it's primarily from price/mix. As for the industrial side, it's not evenly distributed across our geographies. We see continued and strong growth in the Americas, reflecting very strong growth in light vehicles. In EMEA, organic growth is very, very significant at 19%, coming from primarily commercial vehicles growing some 25% and light vehicles growing some 20%, 21%. India and Southeast Asia grew also solidly at 12%, primarily driven by light vehicles in this area and then China, flattish. And again, the COVID outbreak at the back end of 2022 is the main driver behind the rather weak growth performance in that region. Going further into the financials of automotive. We delivered an operating profit of SEK400 million, corresponding to an operating margin of 5.4%. This is a significant sequential improvement versus Q3 and also versus the same quarter last year. And this is primarily due to the positive price contribution that we're able to achieve, both from the OEM market and the aftermarket. And as you all know, we are in a transformational journey to transform our automotive portfolio. And in the fourth quarter, we have signed some contracts that will enable and further accelerate this transition. We have signed major contracts with large commercial vehicle OEMs, both in Europe and Asia, really creating an even stronger foothold for us in that particular segment, large commercial vehicles which is of strategic importance to us. And we also signed high-volume agreements for ceramic bearings with 2 Asian EV producers, again, strengthening our position in the important EV area or EV segment. And speaking about EV, to support this significant growth that we see in this segment, I mentioned 46% in the fourth quarter, close to 60% for the full year, we must and we will continue our regionalization efforts. And to bring this to life, I'm going to share one example today where we now announced an investment of roughly SEK700 million to build the greenfield operation in Monterrey, Mexico. This plant will provide bearings both for industrial and automotive applications, supporting the growing demand from electrification. The investment will improve our localization rate and thereby enhance our overall competitiveness and flexibility to support customers in Americas. And the first channels will actually open already in the mid-2023. So that ends my introduction and remarks to our numbers. And I'm now going to hand over to our CFO, Niclas, who will take you through some more details. Thank you, Rickard. Hello, everyone. So let's take a closer look at the financials. Starting with sales. So in Q4, our net sales was SEK25.4 billion, quite significantly up from last year at SEK21 billion. Our sales grew both sequentially and compared to last year, driven by a pretty broad-based demand from multiple industries and from multiple product segments. If we look at the sales bridge compared to last year, our sales increased by 20.9%. The impact of the Russian exit was a negative 1.8%. And as a reminder, we exited our Russian business back in Q2 2022. The organic sales increased by 9.7%. And as Rickard mentioned, 1/3 being volume and 2/3 being price/mix. The currency effect on sales was positive at 13%, with the largest effect coming from the dollar, the renminbi, the Brazilian real and the euro. So all in all, a very strong sales performance. Moving on to our operating profit. Our adjusted operating profit was SEK2,542 million versus SEK2,260 million last year. And overall, we continue to have a good momentum in price/mix which compensated for the higher cost in the quarter. When it comes to cost, as Rickard mentioned, we did see some moderation of inflation but costs are still at a high level. So if you go through this step by step, firstly, the currency impact was positive at SEK148 million compared to last year. And here, while the strong dollar contributed to higher sales, as we just discussed, we have a relatively high portion of our costs in euro, resulting in a more limited benefit on our profits from FX. The Russian business was divested as discussed and this had a negative impact of SEK11 million in the quarter, meaning that we had a profit last year which we did not have this year. Our organic growth which is volume, price and mix contributed with a positive SEK1.9 billion. Out of the SEK1.9 billion, approximately SEK1.8 billion, so the vast majority was price/mix and the rest was volume. And as we discussed, the price/mix continues to develop or continued to develop favorably throughout the last few quarters. And if we go back in time a year ago in Q4, so in Q4 2021, it was SEK700 million, then SEK1 billion in Q1, SEK1.3 billion in Q2, SEK1.8 billion in Q3 and now we had roughly SEK1.8 billion in Q4, this being year-on-year comparisons. Then moving on to costs. The total impact from costs, so higher costs was SEK1.8 billion which is roughly equal to price/mix. What comes to cost inflation, just to give you a bit more flavor, it did moderate somewhat in Q4 from the very high levels seen in earlier quarters. It's a bit of a mixed bag with material costs still high but we did see some moderation. For logistics, we've seen costs actually start to come down. For energy, we did see some moderation or actually cost coming down somewhat during the quarter. On the other hand, salary inflation impacted the cost picture negatively, i.e., increasing salary inflation. As previously stated, we are working on offsetting inflation and higher costs with price/mix over time. We are pretty confident we'll get there. And in Q4, this was the case. When it comes to other parts of cost management or cost management in general, as you know, in connection with Q3 results, we launched a SEK2 billion cost reduction initiative. We worked on this during Q4. And as a consequence, we had approximately SEK400 million in restructuring costs and expect the benefits then to come gradually throughout 2023. So to sum up, we had a continued good momentum with sales with price and mix and moderating, although still high cost levels. Moving on to cash flow. We generated a net operating cash flow of SEK3,350 million in the fourth quarter, compared to SEK1,231 million last year. A driver for this strong cash flow was working capital which turned positive in the quarter after having been negative throughout 2022, or prior quarters in 2022. Net working capital as a percentage of sales decreased to 32.4% with inventory sequentially down and a positive contribution from receivables. Also worth mentioning that we have seen some normalization of supply chain bottlenecks throughout the quarter. When it comes to net working capital, we continue to work on reducing it across all of our businesses. And here, there's no quick fixes really but we are confident that we'll start to see net working capital come down over time. So all in all, a strong cash flow in the quarter. When it comes to our balance sheet, it continues to be strong and our liquidity to be solid. The net financial debt amounted to approximately SEK10 billion by the end of the quarter which is a clear sequential improvement driven by the strong cash flow. In the quarter, we repaid a SEK300 million bond. And looking at the 12-month rolling return on capital employed, it stabilized and was 12.6%. If we then turn to our outlook. Looking into specifically first, the first quarter of 2023, we expect mid-single-digit organic sales growth. And then, looking at the full year 2023, we expect also mid-single-digit organic sales growth compared to 2022. We do expect continued volatility and geopolitical uncertainty in the markets. And as a result, we expect continued high levels of cost inflation and volatile demand. Thank you very much, Niclas. And before we go into the Q&A session, I would like to wrap this up. And starting with the fourth quarter, we are pleased to report a sequential improvement of our financial performance in Q4 versus Q3. And for the full year of 2022, as I said before, we had a strong organic growth at 8% at the top end of our guidance and an operating margin of 10.5%. Throughout the year, we have been operating against a backdrop of very challenging circumstances but I do like to reiterate that 2022 was the year when we accelerated our strategic agenda. We're delivering double-digit growth in most of our focus industries. Our technology initiatives are progressing well, as I described previously in my presentation. We are taking a more active approach to portfolio management to improve our operational performance. We have also implemented a decentralized operating model which is a significant culture change in SKF. And we have accelerated our investments in regional engineering and manufacturing capabilities. Altogether, as we enter the new year, we are confident that we've built a strong platform for 2023 with a clear strategy for driving profitable growth, while supporting a cleaner and more sustainable industrial development. And finally, our Board of Directors proposed a maintained dividend of SEK7 per share, subject, of course, to AGM approval. So that ends our formal presentation and I'm now going to ask Patrick to come back up and help facilitate the Q&A session. Thank you, Rickard and Niclas, for the initial presentations. And operator, with that, we are good to go for the Q&A session. So please bring the first one on. Klas at Citi. So great to see that you're now compensating the cost inflation fully. I'm just thinking about the first quarter, it looks like you will get a price/mix of around SEK1.6 billion or a bit more than 7%. When I do stacked pricing, if nothing changes, that's down 2% of volume within the mid-single-digit growth guide. You're now saying that energy, I think, was flat; logistics, a slight positive; raw mats negative SEK900 million, around half of it of the SEK1.8 billion. When we think about these 3 components, Niclas, to what extent will they now turn positive in the bridge in the first quarter? It looks like you can get quite a solid margin here at the start of the year if you go positive across the board on raw mats, logistics, energy, I'll start here. Yes. Klas, as we know, I mean, the whole kind of cost picture of cost inflation has been a volatile mixed bag and trying to predict now what's coming in the future, we'll leave that to others. But specifically, as you said, in Q4, we did see which is obvious from our bridge as well, we did see the cost levels coming down exactly in the areas that you said. And of course, if things continue as is, we should see kind of a further positive kind of tailwind and lower cost levels but exactly starting to predict which row within the cost is going up or down, we'll come back to that in the future when we have the results. Yes. No, I appreciate that. It was more like at the current level. And it looks like price cost can turn positive, all else equal, when I looked at the bridge. That was more my point but I get it. Yes, I mean -- yes, absolutely. Eventually, that's what we are working towards also and want to see. And as we saw now in Q4, it was evening out. So same level. But longer term, of course, we expect and hope and work towards a positive gap there. And then for you, Rickard, a question on your mid-single-digit growth guidance for the year. It seems like 3% to 4% pricing, if nothing changes, within the mid-single-digit growth, if I just drag out the current level of price/mix, it's a little bit of volume growth. You typically have low visibility but industrial backlogs out there are currently solid and feeding into your demand. China is also likely to come back here from the second quarter. So I'm trying to understand how you think about price/mix within the outlook and how you think about the demand picture, the volume outlook within the mid-single-digit growth? Right. Well, as you know, we don't guide for price/mix but rather for the organic growth. And to give you some perspective, I think we come out of the Q4 with a rather good run rate and also, as I said, a surprisingly strong growth in EMEA, while we were a bit disappointed of the growth rate in China due to the COVID outbreak and the very severe sick rate ratio that we experienced in December. I mean, then we look into the order book and what to expect. And our best guess is that we should be at around mid-single-digits for the first quarter. And we do acknowledge that it's hard to predict the full year. It's a lot of volatility. It's a lot of uncertainty. But to your point and as I also mentioned in my presentation, we do believe that China would be in for a rebound at some time during Q2 next year that will then help to drive some of the growth going forward. So still our best guess or our best bet is still around mid-single-digit growth also for the full year of 2023. I have 3 things, if possible. One is a follow-up, I guess, on the prior question. But just if we look at your industrial business, a couple of years back, 14%, 15% margin level. Then since then, obviously, lately, last year, you had like huge headwinds on energy and raw mats. And you're still expecting very good growth going forward, those headwinds, as you just mentioned, they may be easing out. Is there anything structural that would prevent you to go back, you think, to those levels? Or it's just the timing matter of these headwinds going ahead? So that's number one. And then regarding also this point on a prior question regarding end demand and your confidence on the mid-single-digit growth. We hear a lot of industrial companies talking about sort of reducing their inventories at the moment. So as you look through your customer base in terms of the inventory of bearings that they have, what do you see? And then the final thing which is just more conceptually, just curious on the thinking behind on why do you guide on growth rather than guiding on margin when you guide Q1 and full year? Just trying to think about sort of what you want to signal internally to the organization, given a lot of the things you talked at the CMD in December were more self-help cost related improving margin. So just interested on the thinking there, if possible. Thank you, Daniela and thank you for your questions. I'll try to address your first and third one and then Niclas, if you take the inventory one. Yes, you're right. We have normally or historically an industrial margin that should be at around 14%, 15%. And my answer to your question can only be that we are determined to further strengthen our profitability in our industrial segment. And we are not shying away from our long-term financial target which is a 14% operating margin. And that's what we're aiming for and that will imply that we need to further strengthen the profitability in our Industrial business. I'm not standing here today to give you timing of this. I can give you that, that you can rest assure that, that's our ambition and that's what we're driving for and we're not shying away from our financial targets. On the guidance of growth, I think it's something that we are comfortable with in an area where we think we have a track record to give the market some confidence in our performance and also our ability to predict the future also in a rather volatile environment. But to your question, how we address this internally? Of course, we have a significant emphasis on the key things that we addressed at the Capital Markets Day. Everybody is fully aware that in here, we work on lifting our profitability. We're working on driving our portfolio management activities. We are obsessed with improving our net working capital activities and we will relentlessly drive cost efficiency and productivity across our business. So we have our priorities clear internally, even though we guide for the organic growth rate, as we have done for a number of years. Niclas? Yes. And maybe just to add which I'm sure, Daniela, you know but guiding on growth is quite in line with kind of market practice in the Scandinavia and actually not too many, as far as I'm aware, guide on margins in Scandinavia. But anyway, just to add one more comment on the industrial. I mean there's nothing structural why we shouldn't and couldn't and will not get to where we were, 15%, 16%. Of course, our ambition is higher than that. When it comes to inventories, for obvious reason, we are talking about it and many others, as you say. We don't see -- in general terms, we don't see an overstock out in the market out with our distributors, for instance. So that's a short answer or short feeling view on kind of inventory levels in the market. Could you please talk about the stocking and destocking decisions that you took during Q4 and how that impacted P&L? And then what do you intend to do on that front in 2023, please? Andre, on the stocking side, we have actually managed to reduce our net working capital in the quarter and part of that comes from reduced inventories. So all in all, we are able to reduce the volume of finished goods inventories to some extent in the quarter. On the contrary, last year, we actually built inventories to some extent. So we have a slight headwind in the bridge on the operating profit to an extent of SEK70 million to SEK75 million, probably somewhere there. In line with our ambition for reducing our net working capital and the ratios, of course, inventories is one of the main levers in achieving those targets. So yes, we do have an ambition to continue to drive inventories down. Great. And if I may, just last one. In terms of that cost line swing around and I apologize if this is a repeat, we're kind of on multiple conference calls at the same time, there was quite a swing, obviously, in Q4 versus Q3 and a substantial kind of moderation in that headwind. Could you help explaining that a bit? And then secondly, just in terms of the energy cost inflation that you've now incurred in 2022 versus where the spot prices sit, does that now imply a tailwind for 2023 versus 2022, or a headwind? Or are we broadly equal with a very high Q3 than smaller Q4 and spot prices being kind of lower than that now? Yes. Andre, super relevant point, of course, question. I mean, first of all, just a reminder, when it comes to our cost base, the biggest chunk in the cost is actually materials, general supply for manufacturing and then personnel, while energy is quite a lot smaller component in the overall cost. But anyway, I mean -- and maybe then another general comment is that we are largely unhedged, whether it's energy or other things. Of course, we have contracts and so on. But if you really, really kind of grossly generalize and look at the market, the spot prices and then ask when will you see it in SKF's cost base, maybe it's 6 months, maybe 6 to 9 months, 4 to 9 months, something like that. But the point is that there's quite a delay. And we did see, again, a moderation in materials which, in our case, is mostly components, still high but again, a slight moderation in the inflation levels. The logistics cost actually came down in absolute terms somewhat. And then energy was actually pretty much at the similar level to last year. So those are just a few of the moving parts. Then on the other hand, salary costs continue to go down -- go up, sorry. So it's a bit of a mixed bag. But as you say, I mean, in the bridge, it came down quite significantly compared to Q3. And keep in mind that kind of delay from spot prices to when you see it in our P&L. I have 3 questions. First one on China and the sick leave. I don't know if I got you correct that more or less our full workforce was on sick leave in December. But anyhow, what was the -- could you sort of quantify the profit impact from such a level of sick leave? And then the number 2 and number 3 questions are on the new investment in Mexico. And the first question is, as I understand, it will produce bearings for applications for both industrial and automotive. And how does that square with your ambition there to get to some kind of strategic flexibility when it comes to automotive building a plant that will produce for both? And then a follow-up on that one, is it all sort of to shift production from other regions and to localize? Or is there sort of incremental business and customer awards that will ramp up here as well? Or is it entirely to replace existing business? Talking about China, trying to be more specific about the sick leave ratio there, sick leave ratio. What we saw when we started December, kind of December 1, I think we had less than 1% of our workforce had been infected with COVID. At the end of December, 80% of the workforce were either impacted by the COVID and on sick leave or back from COVID. So roughly, I think at the peak, we had 40% out on sick leave and some people coming back from sick leave. So it's kind of -- basically, entire workforce have been through the COVID during the month of December. And we are not unique. I think this represents kind of the society in general in China. So of course, this had a negative impact. And we don't disclose the actual number that this had. But of course, it had a negative impact because we could not run our operation at normal pace due to this, of course. But on the other hand, it seems to be the peak is now behind us and now we're looking forward to 2023. And on your question on the investment in Mexico. It is primarily that we -- rather than that we do today, import bearings to support the Americas market, this will be then shifted onshore to stay reduced cost and increase our competitiveness and, of course, also our profitability in that regard. While it's also going to serve both automotive and industrial markets, it's primarily an automotive factory. But some of those bearings, they also fit very nicely in some industrial applications, so it makes logical sense to also produce it there and support some industrial applications in the EV space, or in the electrification space. So it is an automotive factory but it would provide some components also for industrial applications. So firstly, on your organic growth guidance of mid-single-digit organic growth in 2023. Could you please give some color on what you expect by division and by region? No, we don't break it down Andreas, is the short answer. I mean, as Rickard mentioned earlier, I mean, we do foresee, at least in the near term, a dynamic where China starts the year low and then bounces back. Also, as Rickard mentioned, I mean, Europe has actually been somewhat surprisingly strong. So let's see how long that continues but so far so good. So we don't really break it down... Yes. Understood. Yes. Then secondly, on the cost development line. What did savings amount to in the quarter? And where are you in terms of run rate on the world-class manufacturing program and the recently announced fixed cost program? Yes. So world-class manufacturing, I mean, we discussed in the Capital Markets Day and the picture is pretty much the same. So we are at SEK2 billion out of the SEK5 billion ambition, so SEK5 billion being the ambition by 2025. And we are at roughly SEK2 billion now. What comes to the SEK2 billion cost reduction program, there hasn't really been any impact -- positive impact yet, while we've started, as I mentioned, started to take some of the actions which resulted in restructuring charges. So that's the kind of short overall picture. Okay. So it sounds like you didn't have any meaningful savings in the fourth quarter. Would you say it is fair to expect that cost savings will be at least SEK2 billion in 2023? No, the run rate exiting 2023, is SEK2 billion, correct. So it's significantly less that you'll see in the full year result 2023. But nevertheless, it will ramp up over the year, yes. Yes. But I guess you will also have SEK1 billion or so maybe coming from the world-class manufacturing program. So in total, that will take it to SEK2 billion. Yes. Okay. And lastly, on the world-class manufacturing program, if volumes are not growing in 2023, do you think you will be able to step up the pace of factory closures? When it comes to factory closures, it is primarily a European issue for us, where we have a legacy, where we have to think through long term, where and how we want to develop our European manufacturing footprint and supply chain. And of course, if we end up in a downturn, that might open up for some opportunities to drive some of this. But I still think we have a little bit of a homework to do internally to really define what our end game should look like and then clearly articulate the path towards that end game regardless of the economic development around us. One for Niclas, please and then perhaps one for Rickard. Niclas, I just wanted to clarify, sorry, just to avoid confusion. I think I heard you said price/mix of SEK1.8 billion, so 9% in the quarter. I thought I heard Rickard earlier say, 2/3 of the 10% organic was price/mix of 7%. So maybe just clarify that. And on the SEK1.8 billion cost line, so I had ROS at SEK900 million, the other SEK900 million bucket, I think I've heard energy neutral, small logistics tailwind. I'm assuming wages, call it SEK350 million. So we're still missing SEK400 million, SEK500 million. It feels a bit like the last quarter where we had a so-called other bucket of a similar size that wasn't specified. I wonder whether you can, a, confirm those numbers and b, give a bit of color around that other bucket? Yes. So Lars, sorry, I'm not sure I got the question fully here. But the -- so in the operating profit bridge, we had kind of a positive SEK1.9 billion and SEK1.8 billion of that roughly of that SEK1.9 billion is price/mix. Let me know if it doesn't answer your question fully. But then on cost inflation, without digging into all the details, because I mean we tend to kind of simplify it and talk about these large buckets. But of course, there's quite a wide array of different types of costs going up and down within the overall cost bucket. So we were just trying to provide you an overall picture, generalizing it but then there's a lot of other ups and downs, other cost inflation also. You can get into a lot of details but maybe that doesn't add to the big picture. No, that's fine. But ROS at SEK900 million and energy neutral in the bridge, small logistics tailwind, those are all fair assumptions, correct? Yes, that's clear. I think we can take the rest offline. And maybe briefly just to Rickard. The EMEA acceleration, a bit of a head scratcher, I think, at least for me, I think I also heard Niclas say, let's see how long it continues? You called out aero, I think, rail, marine in EMEA. I wonder whether there was sort of any bigger framework deliveries in the quarter that might have swung it? I also noticed your industrial distribution business is holding up very well in Europe. So maybe you could give us a bit of color as to what you saw in the quarter and maybe what you see going into the early part of this year? No, I think I have to reiterate roughly what I said in my presentation, Lars. I used the word surprisingly strong because it was a stronger growth in EMEA than we anticipated when we entered into the quarter. We do see that -- in some areas, we do see that the activity is starting to level out a bit for sure. And in some industries, like the ones that you mentioned, we have seen extraordinary strong order intakes. We are sold out in aerospace, for example. It's a big back swim after the COVID implications for the aerospace industry. So of course, we now experience significant growth rates in that particular industry. And also Marine has been growing very, very nicely. But we cannot ignore the fact that we see that companies more targeting or active in the B2C segment, they start to see this more tangibly in their business, an economic downturn. And in my logic, they will be the first one hit and then B2B businesses will follow. So we watch this carefully and we are leveraging the opportunities that we have in the market. But we're also preparing ourselves for winter, if I may use that phrase. I would just like you to clarify that you exit unprofitable deals and contracts as you have announced at the Capital Markets Day. And I was wondering if your guidance for Q1 and for the full year would include any of these exits? And maybe you can give us an idea of how big these exits are? That would be my first question. And maybe straightaway my second question, because of time. Again, on raw materials, we know that iron ore and steel prices have come down but we also know that the contracts that you have with your suppliers, they are very much delayed when it comes to passing on energy costs and so on. Maybe you can give us a little bit more detail on what you see on the steel prices development at this stage? I'll try to answer your first one and then Niclas is going to go for your second question. Firstly, I'm going to disappoint you. No, we will not give you some more guidance on exactly how much we anticipate to exit. But I can do confirm that we are actively engaged in all different parts of our portfolios, in all of our business areas to work on this. But it's also kind of a right bucket, left bucket, where you define things. In many of these occasions, it's about that we have maybe, let's say, a contract that is subperforming and we engage with that customer and try to find a way forward to fix that. It could be through a different type of offering or a price change or something like that, that will turn that contract into profitability. Then that will end up in kind of the price/mix bucket. If we can't see a way towards a sustainable, profitable operation, we will exit and then it will end up as an exit. But I will not disclose what our ambition will be in that regard for 2023. But to your question, if it's included in our growth forecast, the answer is yes. Yes, yes. So of course, we take portfolio management into account when we look into the future and then provide the guidance, as Rickard says. In terms of iron ore and market prices, I'm sure you are much better to predict that. But just a reminder, we buy very little actually raw materials when it comes to steel. It's mostly components which then kind of adds to the kind of gap between what's happening to the spot prices to iron ore and what's the effect then on the P&L, on the cost. So that's a reason also for why there's quite a gap between kind of market prices and what we see in our P&L. Yes, exactly. And that's the question I have. So how do the customers pass those energy costs on? And when we look at the market prices, metal exchange and so on, these are not the price that you would have to pay. You pay contract prices. And so my question is, had the energy cost arisen, energy costs being fully passed on? And can we see an improvement going forward? Or are we still on an upward trajectory for the contracts that you have -- supply contracts you have? It's an ongoing thing. I mean, we have large teams involved in sourcing, of course and ongoing price discussions with our suppliers as we do have them with our customers. So it's a bit tricky to provide a general answer to the specific question, has everything been passed on or not. So ongoing work. Thank you, Niclas. And sorry for cutting the question a bit short. We have completed our full hour that was allocated for this exercise. So with that, I would like to thank all of you for putting the questions and we do realize that we have a couple of questions left to answer on the shut. We would be happy to do so afterwards, me and Andreas. And with that, I'll leave the word for a couple of short closing remarks to Rickard. Yes, very short. And thank you very much. Again, just to reiterate the main message from today. We are pleased to see a sequential improvement in our financial performance in Q4 versus Q3. And as we described, we believe that we have made a lot of heavy lifting in 2022 that built a strong foundation for 2023. So I think I end there and I thank you so much for your attention this morning and I wish you a very good day. Thank you.
EarningCall_569	Good morning and thank you for holding. Welcome to Aon plc's Fourth Quarter and Full Year 2022 Conference Call. [Operator Instructions] I would like to also remind parties that this call is being recorded. If anyone has an objection, you may disconnect your line at this time. It is important to note that some of the comments in today's call may constitute certain statements that are forward-looking in nature as defined by the Private Securities Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historic results or those anticipated. Information concerning risk factors that could cause such differences are described in the press release covering our fourth quarter and full year 2022 results as well as having been posted on our website. Thank you and good morning, everyone. Welcome to our fourth quarter conference call. I'm joined by Christa Davies, our CFO; and Eric Andersen, our President. As in previous quarters, for your reference, we posted a detailed financial presentation on our website. We begin today by thanking Aon colleagues around the world. Our strong performance in the fourth quarter and through 2022 and our strong momentum as we start 2023, continues to reflect tremendous dedication by our colleagues and the power of our Aon United strategy to support clients, both in their demands of today and as they plan to address their needs of tomorrow. 2022 was a year in which we continue to see clients focus on both the challenges and opportunities from increasing global risk and the opportunities to engage clients continues to grow. In commercial risk, our latest weather climate and Catastrophe Insight report sized global economic losses from natural catastrophes at $313 billion, 4% over the 21st century average and it was only 42% covered by insurance, $190 billion protection gap. In Wealth Solutions, equity and fixed income market volatility in the back half of the year created demand for our Wealth Solutions colleagues to help organizations reassess retirement readiness and financial well-being. And in Health Solutions which includes our human capital business, the continuation of broad trends around a changing workforce, encompassing health, culture, wellness, engagement and inclusion, our growing and focus and importance across the C-suite and the stakes have never been higher. In this environment of increasing risk and complexity across so many fronts, our colleagues are increasingly relying on Aon United. This would enable them to bring the full force of our firm, including core offerings and innovative solutions at scale to address evolving client demand. Turning to financial performance. In the fourth quarter, we delivered organic revenue growth of 5%, highlighted by 9% growth in reinsurance, 7% growth in Health Solutions and 6% growth in Wealth Solutions. In reinsurance, our teams were able to deliver strategic advice and data-driven analytics very early on in the renewal process to help clients navigate difficult market dynamics. This market leadership benefited our clients greatly in a challenging 1/1 renewal and reflects our strong performance. In Health Solutions, we saw strength in our core H&P and human capital. Both of which benefited from enhancements to our offerings, tools and platforms and increased client focus on employee health, rewards, engagement in well-being. In Wealth Solutions, our team delivered the strongest quarterly organic revenue growth in over 5 years. As our teams worked tirelessly to respond to client demand resulting from market and interest rate volatility, particularly in the U.K. and continue to help clients execute on pension risk transfer, strategic pension management and respond to regulatory changes. And finally, commercial risk grew 4% in the quarter and 6% for the year. We delivered double-digit organic revenue growth in Canada and Latin America and strong growth in Europe, the U.K. and Asia Pacific. In the U.S., otherwise strong results continue to reflect the impact of the external M&A and IPO environment on M&A services. This impact reduced quarterly organic growth by 5%, an annual growth by 2.5%. And while this short-term pressure may continue into Q1, over the long term, we are very well positioned in this highly attractive business but has significant opportunity to contribute to long-term top and bottom line growth. For the full year, our organic revenue growth of 6% is a direct result of our Aon United strategy and is a key driver of strong top and bottom line results for the full year. Noting adjusted operating margins expanded 70 basis points to 30.8%. Adjusted earnings per share grew 12% to $13.39, overcoming a 3% or $0.44 FX headwind. Free cash flow exceeded $3 billion with free cash flow margins of 24.2%, both our highest ever and we completed $3.2 billion of share buyback, demonstrating our confidence in the long-term value of the firm. Our team's performance positions us exceptionally well to deliver in 2023 and over the long term. Looking back, since 2010, we've reported 4% average organic revenue growth. Over 1,100 basis points of margin expansion or about 90 basis points per year, while adjusted EPS and free cash flow increased at a compound annual growth rates of 12% and 13%, respectively. More important, we view the go-forward opportunity and momentum higher now than any time in our history. Looking ahead, we continue to expect mid-single-digit or greater organic revenue growth for the firm, margin improvement and double-digit free cash flow growth for the full year 2023 and over the long term. Reflecting on the year, we would offer a few observations on how Aon United continues to deliver for clients. The steps we've taken over the past decade, including our single brand and single P&L, put us in an exceptionally strong position to deliver for clients and have significant impact on some of the greatest opportunities and challenges they face. These ideas are not new. There are a continuation of over a decade of progress on the areas highlighted in our Aon United blueprint, clients, colleagues, innovation at scale and Aon business services that are increasingly interconnected and mutually reinforcing. On delivering innovation at scale, the platform we've built not only enables innovation of new concepts as we've demonstrated in areas like intellectual property solutions and climate but increasingly enables us to bring together our analytics and expertise for new solution development, both from within solution lines and connected across our business. For example, our Health Solutions team has developed an Aon health analytics platform, supported by hundreds of data scientists and credential health actuaries, as well as experts from human capital and ad business services. It's designed to help clients assess and improve their employees' health which in turn helps deliver well-being, productivity and lower cost. Within this offering, driven by proprietary analytics, we can assess data around employee health information, insurance and claims, workplace safety, absence engagement data and external data on health trends and solutions which together form a robust view of employee physical well-being. With this insight, our teams can recommend individualized solutions, including better insurance offerings and targeted program. As an example, 1 manufacturing client wanted to improve employee physical well-being and reduce costs. Together, we designed a comprehensive long-term well-being strategy and a customized health program that includes 12 vendors and targeted specific health and well-being programs for employees based on individual factors correlated success. The results were impressive. In our target group as compared to nonparticipants, we saw meaningful improvement in selected health metrics at 24% lower cost per person. Further, the platform allows for rapid scale and distribution of a solution to help our clients drive workforce health, wealth and productivity. Equally important, our colleagues while having this kind of impact which is an important driver of our very high Aon colleague engagement. And we see examples like this across the firm every day as we help our clients manage risk and support their people. And this demonstrates the opportunity to continue delivering innovative solutions at scale to address our clients' biggest challenges across the backdrop of rapid change and ongoing volatility. To summarize, we began 2023 in a position of strength. Our firm is more connected than ever before, enabling us to deliver better solutions for clients and to better support our colleagues. Aon United will continue to deliver results now and over the long term for our clients, colleagues and shareholders and is reflected in our progress to achieve key financial objectives. Now, I'd like to turn the call over to Christa for her thoughts on our financial progress in Q4 and 2022 and our long-term outlook. Christa? Thanks so much, Greg and good morning, everyone. As Greg highlighted, we delivered another strong quarter of performance across our key metrics to finish the year. In the quarter, we translated 5% organic revenue growth into 40 basis points of adjusted margin expansion and strong growth in adjusted earnings per share. For the full year 2022, organic revenue growth was 6%. Adjusted operating margins increased 70 basis points to 30.8% and we generated over $3 billion in free cash flow, an all-time high. We look forward to building on this momentum as we head into 2023. As I reflect on results, as Greg noted, organic revenue growth was 5% in the fourth quarter and 6% for the full year. We continue to expect mid-single digital greater organic revenue growth for the full year 2023 and over the long term. I would also note that reported revenue growth of 2% in both Q4 and the full year includes an unfavorable impact from changes in FX of 4% in both periods. Primarily driven by a stronger U.S. dollar versus most currencies. I'd also highlight that fiduciary investment income which is not included in our organic revenue growth, was $41 million in Q4 and $76 million for the full year or 1% in both periods. Moving to operating performance. We delivered strong operational improvement in Q4 with adjusted operating margins of 33.2% an increase of 40 basis points driven by organic revenue growth and efficiencies from Aon Business Services, overcoming expense growth, including investments in colleagues and technology to drive long-term growth and some ongoing resumption of T&E. For the full year, adjusted operating margin of 30.8% reflects margin expansion of 70 basis points year-over-year. And I'll note over the past 12 years, we delivered 90 basis points of margin expansion a year. Looking forward, we expect to deliver margin expansion in 2023 and over the long term as we continue our track record of cost discipline and managing investments in long-term growth on an ROIC basis. As we've previously communicated, we think about margins over the course of the full year, driven by 3 areas: the first is top line revenue growth. The second is this portfolio mix shift to higher margin businesses as we invest disproportionately in areas of increasing client demand, supported by data-driven solutions to deliver the insights and advice that help our clients protect and grow their organizations. And third area is increased operating leverage from ongoing productivity improvement from our Aon Business Services platform. I'd highlight that Aon Business Services continues to be a key contributor to margin expansion and represents a competitive advantage, especially in a high inflationary market. Our Am business services platform continues to drive efficiency gains, improved quality and service and increased innovation at scale. During 2022, we continue to make progress on Aon Business Services and driving efficiencies in enhanced services. Particularly through process improvement, automation and the use of artificial intelligence. For instance, our captives business has clients with hundreds of legal entities who each require multiple policies. Previously, the process of checking policies was manual and inefficient. We've now moved to a digital solution that can identify differences quickly and accurately and deliver these to clients much more quickly. Similarly, the use of AI is increasingly enabling us to deliver better solutions to clients. For example, we delivered a new solution for our human capital clients using an AI-powered search engine that provides them with insights on technology talent globally including geography-based pay differentials. This is essential for finding the best technology talent and optimizing within the client's existing workforce, a key area of growth for many firms. As we've said before, these improvements not only improve accuracy and client service delivery, they also help free up our colleagues time for more valuable client activities and drive better outcomes for our clients. Organic growth and margin expansion translated into adjusted EPS of 5% in Q4 and double-digit growth of 12% for the full year. As noted in our earnings materials, FX translation was an unfavorable impact of approximately $0.09 per share in Q4 and $0.44 per share for the full year 2022. If currencies are remained stable at today's rate, we would expect an unfavorable impact of approximately $0.13 per share in the first quarter of 2023 and $0.12 per share for the full year 2023. Turning to free cash flow and capital allocation. We generated over $3 billion in free cash flow in 2022, contributing to our long-term track record of growing free cash flow at 13% CAGR since 2010. Our outlook for free cash flow in 2023 and beyond remains strong and we continue to expect to deliver double-digit free cash flow growth for the full year and over the long term, driven by operating income growth and working capital improvements. I'd note CapEx returned to a more normalized level in 2022 as we made ongoing investments in ABS enabled platforms and technology to drive long-term growth. As we've said before, we manage CapEx like all of our investments, on a disciplined return on capital basis. Given our strong outlook for free cash flow growth in 2023 and beyond, we expect share repurchases to continue to remain our highest ROIC opportunity for capital allocation. We believe we're significantly undervalued in the market today, highlighted by the approximately $675 million of share repurchases in the quarter and $3.2 billion of share repurchase for the full year. We also expect to continue to invest organically and inorganically in content and capabilities that we can scale to address unmet client needs. We've invested in expertise and content to help meet our clients' needs such as our Q4 acquisition of ERM, a Mexico-based leader in risk assessment modeling which expands our catastrophe modeling and consulting capabilities in reinsurance. Our M&A pipeline continues to be focused on our highest priority areas that will bring scalable solutions to our clients' growing and evolving challenges. We will continue to actively manage the portfolio and assess all capital allocation decisions on an ROIC basis. We ended 2022 with an ROIC of 30.6%, an increase of nearly 1,900 basis points over the last 12 years. Now turning to our balance sheet and debt capacity. We remain confident in the strength of our balance sheet and manage liquidity risk through a well-laddered debt maturity profile. We expect to add incremental debt as EBITDA growth over the long term while maintaining our current investment-grade credit ratings. With respect to interest rates, I'd note our term debt is all fixed rate, with a weighted average interest rate of approximately 4% and a weighted average maturity of approximately 12 years. I'd note our pension liability improved as interest rates increase. As a continuation of our pension derisking efforts, I'd highlight that we completed an annuity settlement transaction in the fourth quarter, resulting in approximately $300 million reduction in our pension benefit obligation. This continues to be an incredibly attractive environment for our clients to do pension risk transfers and we continue to see very strong demand from clients. We've done substantial numbers of pension risk transfers in the U.S. and the U.K. and are a leader in the space. In summary, 2022 was another year of strong top and bottom line performance, driven by the strength of our Aon United Strategy and Aon Business Services. We returned over $3.6 billion to shareholders through share repurchase and dividends. The success we achieved this year continues to provide momentum as we head into 2023. While we're seeing signs of economic uncertainty, we remain confident in the strength of our firm and our financial guidance for 2023. Overall, our business is resilient and our Aon United strategy gives us confidence in our ability to deliver results in any economic scenario. Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Elyse Greenspan with Wells Fargo. My first question is on your margins. So if we look in the quarter, it seems like your margin declined excluding the benefit of fiduciary investment income. So I'm just trying to get a sense of the drivers and outlook you see for your margin, excluding the NII benefit in 2023? Yes. Thanks so much for the question, Elyse. That is correct. We saw 40 basis points of margin expansion and 90 basis points of impact from fiduciary investment income. And I would note, we really think about margins over the course of the full year. So 70 basis points of margin expansion in the full year, of which 40 basis points came from fiduciary investment income. And we really think about margin expansion over the long term. Our margin growth has been 1,120 basis points over the last 12 years or 90 basis points a year for 12 years. And it's really driven by revenue growth, the portfolio mix shift to higher margin areas and the productivity benefit we're getting from Aon Business Services. And so we're extremely confident with that track record at least for our financial guidance which is mid-single-digit or greater organic revenue growth, margin expansion for the full year 2023 and double-digit free cash flow growth for the full year 2023. So assuming we continue to get a tailwind from fiduciary investment income, I guess, in '23, you'll probably balance letting that all fall to the bottom line and making some of the investments similar to what you did in the fourth quarter? I think that's fair. We are continuing to drive margin expansion each and every year, overcoming investments we're making in the business because you saw in Q4 we substantially invested in IT. So our IT expense is up. We're investing in platforms and technology to drive innovative solutions for clients. And we'll continue to invest in our colleagues and we'll continue to invest in M&A and we'll continue to invest in a lot of areas to drive long-term growth but we really think about this over the course of a full year which is really what matters to us. And then my second question, we've heard a lot about a lot of strong pricing coming out of the January 1 reinsurance renewals. Can you give us a sense of the outlook for your reinsurance business? I am not sure if you highlighted it in the past but the concentration is in the property lines. But can you give us a sense of just how you think that business should perform in an environment where we're seeing as robust catastrophe reinsurance price increases that we saw at January 1? This is Eric Andersen, why don't I take that one to kick us off. It's great to be with you this morning. The reinsurance business continues to be a very strong performer for us as we go through the year. And I would say certainly, a lot of attention spent on property CAT [ph] for good reason. Certainly, the losses, the interest rate moves, the restructurings of the programs that were happening throughout the season. I would say Property CAT [ph] continues to be a dominant part of the business but it's not the whole business. Certainly, casualty, specialty and others continue to be a big part of it. But so I would say, as I think through the future of what's going to happen over the next 12 months, we continue to see a very robust opportunity for the team. They're spending a lot of time with data analytics, better insight to help our primary clients figure out their positioning. But the endgame, I think when you think through the 1/1 renewals is that there's more risk, more volatility has been pushed to the primary insurers. And the outcome of that for them will be either risk appetite. They're going to have to be very disciplined on the risk that they assume in the property space in particular. They'll use other methods like facultative reinsurance, they'll probably do selective buying throughout the year. And so I would say the 1/1 season, a little different than years past which I think is what you're alluding to. And ultimately, they're going to continue to manage their portfolio as the year progresses. And I might just add to that, at least, the theme was exceptional. I'd tell you, the 1/1 renewals had a unique market dynamic and taking the analytics and capability we have in place and what we're able to do and how we deliver it to the market well before anyone else was truly unique and helped our clients tremendously as they navigated through the marketplace. As Eric highlighted, more risk means more opportunity to demonstrate value added. In your slides, you described the impact on organic revenues from the market as modest positive impact in both commercial risk and reinsurance. Can you give a little more color on that market impact and maybe discuss the issue of commissions versus fees and whether your fees were kind of level year-over-year or whether commissions were driven down in each of those 2 segments? Andrew, maybe I'll start and Eric, you can chime in as well here. First, Andrew, we always come back to the idea we talk about market impact. This is a function of prices you're highlighting but also insured values over time. Obviously, a lot is happening on the insured value front. And this is really broadly beyond this property but really as you think about on the employee side and all aspects of sort of what's driven by changes in those values. And that actually has much more impact than just price per se. As we've highlighted, you step back, it really is a modest impact over time. We saw that in this quarter. We think we'll see that throughout the year. And it really for us is about value. We deliver value for clients and we could benefit from that because they get benefit. And we're very, very clear about that. And as Eric highlighted on Elyse's question, in an environment with greater risk, the opportunity to provide greater value is real and meaningful and we're doing it and we're benefiting from it. So that's what you're seeing overall. But Eric, maybe you want to dive a bit more into the specific pricing. Sure. Listen, I think on the property on the market perspective, certainly property is getting a lot of attention and you continue to see that market be challenging for our primary clients. It is worth noting though that clients use a lot of different tools to manage that market dynamic. They use captives, they use retention. They limits purchase. So it's not a direct line from what a carrier would say about a property market rate versus what a client actually assume. So there's a lot of tools that they have and we spend an awful lot of time, as Greg was saying, trying to add additional value for them using financial modeling and techniques to try and limit that exposure. The other products, casualty, cyber, financial products, etcetera, around the globe, I would say, are more stable. We're a good 3.5, 4 years into a market cycle and I think those products are coming more to an equilibrium. And the last thing I would say about your question on commission fees and ties back to what Greg said is one of the benefits of being a fully transparent broker where we engage our clients in what we get paid for the value that we provide, we don't really care whether it's a commission or whether it's a fee. What we really are driven by is are we providing value to clients and are we being paid fairly for that value. And so whether the cycle is up or down, it doesn't really matter to us. We engage in those conversations in a fully transparent way and I think we have great relationships with our clients because of it. Okay. So maybe just so I can interpret it that the 4%-plus revenue growth in commercial risk, 9%-plus in reinsurance. Both of them were more a function of what Aon was delivering as opposed to inflationary impacts on exposures and kind of a very firm pricing environment. I should think about it as more Aon [ph] and the very little of these market issues played through. Is that right [ph]? If you think about it -- I'll just use reinsurance as an example. It's historically our smallest quarter and it's not treaty driven. It's driven around facultative placements, banking, our technology consulting group. So not really market-driven issues but more value issues in terms of usage of those tools to help clients manage their exposures. Okay. And then just a quick one on the tax rate at 9%. Is that a sustainable tax rate? Or should we be thinking about it kind of drifting up a little bit towards, say, 12% last year in the quarter? So what we would say is we don't give forward guidance on tax. But as I look back historically, exclusive of the impact of discrete items which can be positive or negative in any 1 quarter, our historical underlying rate for the last 5 years was 18%. And that's the result of us being a global company domiciled in Ireland with a global cash management structure and a global capital structure. And so we're really confident about where we are. Again, we don't give guidance going forward on tax rate but I can tell you that as we look back historically, our historical underlying rate for the last 5 years was 18%. So first, just had a question on your -- some of your comments on the reinsurance market. You mentioned a challenging environment for your clients, especially in property reinsurance. Are you expecting a similar trend for midyear renewals as well? Or do you expect any sort of shifts in capacity entering the market? So Jimmy, right now, we have not seen a lot of new capacity enter the marketplace, although there is certainly a lot of whispers and discussion about whether there's opportunity for additional capital to enter. So I would say as we go into the April 1 property renewals which are dominated by Japan and then June which is dominated by Florida. I think as we sit here today, you would have to think that those market dynamics will continue. Okay. And then just similarly, on commercial lines, obviously, pricing has been pretty good for a while. It seems like it's softening a little bit, given the results that some of the carriers have reported. Are you seeing something similar in the market, too? Yes, I would say it depends where you are and it depends on the segment, it depends on the industry. I think we like to say there's a million little markets out there depending on each individual client and the business they're in and the type of exposures that are being covered. But then on macro basis, certainly, property, I think, continues to be the firmest as the primary carriers now deal with the effects of higher retained risk that they were traditionally passing on to reinsurers. But whether it's the casualty lines, general liability, cyber, financial lines, D&O, professional that type of thing, we're definitely seeing a stabilizing of that market. As more capital has come into those areas and clients are being given more choices in what they're doing. And I would also say that the insurers are 4 years into remediating their portfolios. And so they're much more specific as to the areas that they choose to compete in and the kind of business that they want to write which does give clients sort of a more targeted choice of potential insurer partners. Jimmy, in the context of this, if you step back and think about the implications for insurers, as Eric highlighted very well kind of on a product-by-product basis. As I talked, described in my comments and Christa amplified very well, this is really about a client leadership approach for us and fundamental demand is going up. The opportunity to talk to clients about risk out there in the world and how it's connected, it's going up. So irrespective of sort of the individual pricing environment which are prescribed well, the opportunity for us to engage clients and help them how to protect their business and grow is actually continuing to increase. Okay. And just lastly for Christa. On taxes, do you see anything in terms of like a minimum global tax or something that -- based on what's out there right now? And how -- do you have any views on how it would impact your financials? Jimmy, we don't comment on any future legislation. We run a global tax structure and we've had an underlying rate of 18% for the last 5 years and we feel really good about where we are. And first, maybe just a longer-term question. I think in the past, you've talked about getting margins up into the 40% plus area. I know you don't disclose margins by segment. But curious if you can give us some color on which of your businesses have some of the most opportunity there and if commercial risk could ever get to that level? Rob, just take a step back for a second, as we've talked about, it really is about mid-single-digit or greater organic growth improving margins overtime and really driving double-digit free cash flow growth for the firm and all aspects contributed. And as you're hearing in our commentary, more and more are connected. The solutions we are providing, some of the most innovative solutions we're providing really are a function of how our commercial risk business, our reinsurance business, health, wealth and talent business has come together. And so we're confident about continuing to drive margin improvement. As we described, organic revenue growth mid-single digit or greater and free cash flow growth double digit. That's how we want you to think about it. That engine is really what's coming together and we're confident we can achieve that on our and our clients' behalf. Okay, got it. And maybe just switching to the wealth segment. Obviously, strong growth in the quarter. I was wondering if that was more driven by the pension risk transfers or some of the regulatory changes we're seeing, particularly in Europe. And if your outlook considers a continued tailwind from these areas? I just would start overall and Eric, I love to add some additional color here. Look, the teams done a phenomenal job. There's a lot going on out there for our clients in this arena, a lot of complexity as we described before and whether it's on the interest rate side or the overall -- general state of the overall economy and what's happening, the pension risk transfer as you've described. So the team has just done an exceptional job really on a global basis helping our clients kind of navigate across very, very challenging marketplaces. And you saw a drop in the year, you certainly saw a drop in the quarter. Eric, what else would you add to that? Listen, I think the regulatory changes with the global minimum pensions is such a big part of the business in the retirement side. So we saw a lot of growth there, especially out of the U.K. but also decent growth in the U.S. as well. There were some headwinds with the investment business because of AUM being down with the market. But overall, I think we're really well positioned. And I think, Christa, you mentioned in your opening comments about the pension risk transfer piece. Also, I think we're an industry leader in that space and really have a great team to do it. Look, I'll just finish with what we're doing on the Aon side. We're following the same advice we give clients. And over the last 15 years, we've reduced the risk in our pension substantially through steps to close the plants, new entrants, freeze benefit accrual, matchup liabilities and purchased annuities to settle a portion of the pension liabilities. And it's resulted in much less economic risk and much reduced cash contributions. And so our remaining plans are well funded and hedged. And we're really managing on a cash basis and you can see that our cash contributions have come down substantially over time, with only $65 million we're contributing in 2023 in cash, a continued downward trend in cash. And so we're really excited about the progress we continue to make on our own plans in derisking, as you saw in Q4, with the $300 million of pension benefit obligation coming off the balance sheet and in the decreased cash contributions. Sorry about that. I was on mute. My first question is on the margin. I was hoping you could kind of expand on your margin outlook away from fiduciary income. I guess, would you be able to still expand margins in the core business away from the fiduciary income benefit in 2023? And then where could we potentially see that margin improvement? I would assume lower real estate would be a component of that. So Weston, thanks so much for the question. As we think about margin expansion, we think about it holistically over the course of the year at the Aon level. And we've grown margins, as I mentioned, 1,120 basis points over the last 12 years or 90 basis points a year for 12 years. And it's driven by revenue growth a portfolio mix shift as we disproportionately invest in higher revenue growth, higher-margin businesses organically and inorganically and productivity benefit from ABS. So we don't look at it separately from investment income or frankly, the underlying investments we're making in the business each and every year to drive long-term growth and innovation for our clients. Great. My second question, I know you highlighted that you were seeing some signs of economic uncertainty in your prepared remarks. Can you just expand on kind of where you're seeing those signs of weakness? And then what economic backdrop does your guidance assume? Excellent. Listen, I appreciate the question. We are seeing uncertainty or complexity or interconnectivity, however you want to describe it, really everywhere around the world. We do want to emphasize, though, this is not just risk, it's opportunity. It's an opportunity to engage clients in ways to help them understand these risks more effectively. And candidly, our clients want to get on the offensive. They want to understand that risk and then actually deal with how they can actually grow their businesses in the context of it. So for us, this is about more connectivity around a changing environment but we're seeing it really over around the globe, the impact of interest rate changes, inflation, geopolitical challenges, really the fundamental issues I described in the opening comments around things like health and wealth and talent. The evolution from just engagement is now wellness and all things that come without all aspects of that. How you think about managing that sort of using reinsurance analytics and commercial risk analytics in the context of people, all of these things are coming together to create opportunity for us and we're really seeing it everywhere in addition to the challenges you described. Great. And then my last one, a follow-up on tax. I believe you had a tax holiday in Singapore that ran through September of 2022. Was that extended going forward? Look, our operations in Singapore, including our investment center and local business are an essential part of our operations today and we expect that will mean an important part of our global strategy going forward. We did finalize our negotiations with the Economic Development Board in Singapore and we'll provide an updated disclosure on our 10-year arrangement in our 10-K. I had a question on commercial risk. Greg, you mentioned there was a 5-point drag from the lower transaction volume in the quarter's organic growth. I guess I'm wondering is that going to be a similar size drag as we think about first quarter? Or is it going to be lower or higher? I guess, how should we think about that as we progress through the 2023? Yes. And David, thanks for the question. Really, we were underlying our commercial risk colleagues working across the firm has done a tremendous job and drove growth, as I described, really everywhere around the world, including in the U.S. with the exception of the external M&A and IPO environment which created a headwind that we described. But even in the context of that, we've just done a magnificent job. As you know, that's an amazing business and we are incredibly well positioned in the context of it. And we'll see how it plays out. We highlighted, maybe it drags into the first quarter with Q2, what happens on the M&A services front. But overall, it's an exceptionally strong performance in terms of what we've done overall. And this is just one piece and as we described before, this is really about overall global Aon and what we can do to grow the firm and we're very excited and confident about how that's going to proceed in '23. Got it. Okay. And then I think you guys usually give an update on the calling count at the end of every year. So I think it was 50,000 at the end of 2021. Where did that stand at the end of 2022? Does that grow at all? Listen, I'm not sure how much we disclose on a specific people because it isn't about the individuals for us from the standpoint, it's how we help them become more effective, more capable -- greater ability to deliver to the firm. And I would say, as we look at that, we've been incredibly pleased with the progress. When you think about overall Aon United and all the aspects around it. And great progress. But I would say we continue to invest tremendously in our colleagues and bringing colleagues on it and you saw that in '22, you'll see it again in '23 and '24. Got it. And I guess just a follow-up on that, Greg. You mentioned, I guess, it sounded like just productivity enhancement of your existing employee base. Is -- are there any metrics that you guys track that you can help us think about that? David, there are lots of metrics. We have them. We don't disclose them. I do think it's worth on this point, in particular, understanding and maybe taking a minute to step back and say, listen, when you think about our ability to drive organic growth, to drive margin improvement, to drive free cash flow improvement, fundamentally, Christa and I both highlighted the role the Aon United strategy plays in that. And it is fundamental and I think it's worth a couple of minutes here, David, to your question. Look, if you think about it, we've been at this for 10 years plus. We saw back then client need was changing. We saw that we need to help them make better decisions to protect and grow their business. We saw, frankly, this accrued across all aspects of risk, not just commercial risk, all aspects of what we're doing, workforce health, talent, etcetera. We also saw we had great capability. But like everyone around the world, it wasn't joined up and it wasn't driving innovation at scale. And we saw that loud and clear, David, in terms of where we are. We also saw, however, there were pieces and pockets when our colleagues work together. We win more clients, we do more with them. We retain them longer and we also deliver better and faster innovation at scale across the firm. And this fundamental truth, 10 years ago for us, created a great deal of excitement but it also created a real challenge which was, okay, that sounds great. Everybody talks about this. How do you do it? How do you accomplish that? And that's the Aon United strategy. And this is back to your critical question, how do we maintain performance and drive it over time. It is in Aon United. The challenge has been as we've evolved it and the opportunity is this required a fundamental design of organization around serving clients, training, learning, how we think about leadership development. Aon Business Service is fundamental to that and some real, frankly, price of admission to really do this, single brand, single P&L, single leadership team, etcetera and we are really bringing that online. And what you heard from both Christa and I and Eric's comments as well is what we've done with Aon United is fundamentally to put us in a position to not just serve clients by solution lines that really cutting across solution lines to bring better capability to them. And in the current environment, the more difficult it becomes for clients, the more opportunity we have to bring value. And that's frankly what you're seeing which is why we are confident in our ability to, frankly, not just make progress over the last decade as Christa highlighted but why we are so excited about the go forward. Greg, maybe I can give a little bit of color with regard to a client example just to bring it to life because I can't stress how important this is for us and what we do for our clients. We were recently engaged by a global firm and a specialized industry who is looking for just better risk advisory services around the world for their risk strategy, both globally and as well as locally. And to do this, we use resources from all of our solution lines in multiple spots. And on the surface, I would say this is the kind of work that we love to do for clients but just thinking about what you were just saying, Greg, when I dig back to what we used to do, right? When we were operating under these sub brands of Aon Risk services, Aon Benfield, Aon Hewitt and the others, it would have been a pretty disjointed process for us. There would have been all sorts of internal barriers within the firm that would have distracted us from the focus on the client. We had internal P&L issues, like resource allocation, revenue sharing, incentive discussions. I think you all get the point. But today, with the Aon United structure, we have 5 region leaders, 4 global solution line leaders who are focused solely on delivering for that client under the Aon brand. With 1 P&L operating around the world. And it is powered by the Aon Business Services model which allows us to actually deliver that capability in a uniform way globally. And Eric, I would just say that Aon United sets the stage for Aon Business Services to be successful, I agree with everything you both said. And I would add 3 things. The first is innovation at scale is an essential part of our ability to deliver results for clients as we continue to find applications and solutions developed in 1 area and then scale it to clients globally. We can't do that without Aon Business Services enabling seamless connectivity across the globe. Second, Aon United is not a field of story. It's designed to enable our colleagues in every way, deliver better results for clients which translates into stronger top and bottom line performance. And ultimately, that translates into free cash flow growth, as evidenced by our billion in free cash flow and 24% free cash flow margin as we put our highest and best use of the capital which we believe will continue to drive long-term value creation for shareholders. Translating revenue into free cash flow is a scaled operational outcome and it's done at scale globally in over 100 countries, tracking by day, by country with great accuracy. This is not possible without Aon United and the detailed operating model we've got powered by Aon Business services. It makes us all really excited about the 2023 go-forward momentum and how we scale this operation to deliver innovation for our clients. So David, that was way more than you asked for on the initial piece that you asked a very important specific question. What we're trying to convey is the answer to that is key but it really is fundamental to sort of how the integrated approach happens and how it drives performance. And how we're not complete with the journey. There's a lot more opportunity ahead of us. And it also connects with our colleagues because they love driving the solutions that Eric described. It creates engagement. It creates excitement around. If you can wow a client, you've done something that is truly kind of makes the week in the month. So it's a huge opportunity and we stress it here because it's so fundamental to our success with our clients and obviously, with all of our investors as partners as well. So hopefully, that's helpful. This is Charlie [ph] on for Mike. I guess, first, in human capital, organic growth has been really strong for many quarters now. Wondering what the pipeline looks there. Amid macro uncertainty and comps being challenging. And you mentioned tech talent in your opening remarks, is that business benefiting from some of the job market dislocation in tech? So why don't I take the first one. Certainly, human capital has been a very robust business for us over the last 24 months. And it's still -- we still see it. The data sales, the information around comp the competitive talent engagement assessment also very critical to the agendas of our clients. So we feel really good about that business and what it's done over the last 24 months and are confident about it literally over the next 12 to 24 months as well. All right. On the tech talent, we've got one of the most fabulous brands in the tech space, Radford. And that was the example I gave on the opening remarks around using AI to actually be able to match and find the optimal tech talent at the right price, anywhere around the world. And then to be able to also figure out where your tech talent is within your existing organization to be able to optimize your workforce. And so we do see that the tech dislocations being a fabulous time to utilize this AI technology to get -- to make sure that our clients get access to the best talent and optimize it in the right way. Got it. And then you mentioned cyber pricing kind of being more an equilibrium now. Wondering how Aon's role in the marketplace has evolved over time as that market has grown a lot over the last several years? Listen, I think the cyber market is continuing to evolve and we'll continue to do so as the threat actors change over time. I would say we're a leading provider of both risk management. When you think about data security and the strategy to prevent cyber attack, certainly with our Stroz Friedbeg client -- brand, very strong in terms of its work with clients and then obviously, the risk transfer aspect. I would say when you think about the cyber market today and where it's going, I would say the insurers have actually gone back to basics. The way the quality of the underwriting, the in-depth understanding of what the real cyber exposures are have allowed them to price it better to understand the real risk. And frankly, it's allowed us to distinguish and differentiate our clients and the work that they're doing around cyber protection to be able to bring them to market in a way that gives them individual views but it's become quite a market in terms of size, probably approaching about $10 billion of premium and both from an insurance and a reinsurance side, I consider Aon a market leader in the space. So my first question is on buybacks. It looks like buybacks slowed a little bit in the fourth quarter. Was there anything unusual driving that? I was a little surprised just given the strong operating cash flows. No, we would just say that we continue to see across the firm that we deploy cash based on the highest return on capital opportunity. Buyback is top of the list even at today's prices, Derek. And so we -- that's why we bought $3.2 billion back in calendar year 2022. And we expect buyback to remain the highest return on capital opportunity going forward. Got it. That's helpful. And then my second question is on M&A. We've heard chatter about the M&A market kind of cooling a little bit. Are you kind of seeing that in the market? And -- how does that impact your M&A appetite for this? Yes. From our standpoint, we see tremendous opportunity around the marketplace overall. And as there's been some market strategy, it creates more opportunity. As Christa described, our decisions are made around literally with the cash pool. It's a return on those capital, cash-on-cash return and we see lots of opportunity out there. We also see lots of opportunity to invest organically in our business and we've been doing that with great success. And the pipeline we see is as strong as ever before as Christa described, it's got to really add value. For us, it's about content, we can scale effectively. And that really drives sort of a set of outcomes that are very powerful. And we see a lot of opportunities there. Yes. And look, I would just add, we've found some terrific companies and invested in those this year. I mean, Tyche, fantastic capability in the capital modeling and analytics space and ERM in the modeling space in Mexico. And so we continue to invest in areas of high growth and client need which we're really excited about. Great. Just a follow-up on the M&A landscape. Can you remind us -- we know that Aon has moved in some of M&A with cover wallet into the small commercial marketplace. Any ambitions to get into kind of the main street U.S. retail marketplace. I know you just mentioned there were some market stresses. I believe there's some market stresses for some of the private equity roll-ups there. Just curious if that's any ambitions to get into kind of Main Street retail, small mid-commercial? Listen, as we step back, I want to make sure I understand the market segments that you're thinking about them. We love the segments we operate in which is really the large market, the middle sized marketplace and the small commercial market. And you're absolutely right. The bringing in cover wallet has been phenomenal. It is a capability, much like many that we can scale. Scale, not just in the small commercial market but if you think about B2B, 2C in large companies with bringing that capability in the context of that, if you think about kind of distributed businesses, franchises, things like that phenomenal kind of opportunities. So we love the space. We've got great capability in it. We were going to continue to grow it and we've seen great success with it. So that's how we think about overall small commercial. But I want to make sure does that answer your question. Yes. I just wanted to confirm that you -- there is no strategic initiative that kind of operates more kind of in the here I guess, for a marshaling agency or what were the sandbox that they're competing in. The smaller size businesses versus the kind of Fortune 5000, little bigger cover wallet. Yes, we're absolutely active across the board. The question is how and how with content capability that lets us scale in those agreements. And we've been very successful across all of those segment pieces, not necessarily in Novo [ph] because of that size as opposed to more capability. But it really has been -- we love the segments, I see great opportunity in the segments and cover while it was a great addition to the Aon world. Yes, Greg. I would say in our Affinity businesses, we serve specialized groups of small. So we're very active in the small space but really where we can bring distinct value, whether it's in the travel space or museums, that type of thing, where we actually have a product or capability where we're able to provide distinct value to the clients. I would also say with our office -- our 500 offices around the world, we engage with clients across all segments. I mean, there are only 500 Fortune 500 clients. We do an awful lot in the middle market and the small commercial. Our strategy is to bring product solutions using the expertise that we have across all of our capabilities and package them and deliver them in a way where we're providing the real value of using Aon as your adviser, so you get that product expertise but delivered in a way where it's efficient and cost effective for them to be able to use our capabilities. Okay. That's interesting and helpful. And my last follow-up was on fiduciary investment income. And I know there's some nuances and that make it not -- it's tough for us to model exactly but should we be expecting a quarterly step up, a material step-up into '23 based on where the interest rates are now across the globe? Yes. So what I would tell you is what we saw in 2022 was that interest rate stepped up in Q3 and Q4 of 2022. And so if interest rates stay where they are today, you'll see a similar impact to Q4 in Q1 and Q2. And so we would expect that increase in interest rates stay where they are. And then for modeling going forward, every 100 basis point increase in interest rates is approximately $65 million in fiduciary investment income. And there's no delay between interest rate increases and it impacting our fiduciary investment income. I just want to say thanks, everybody, for joining us today. We appreciate it and look forward to the next call.
EarningCall_570	Good day, everyone. Welcome to Selective Insurance Groups Fourth Quarter 2021 Earnings Call. At this time, for opening remarks and introductions, I would like to turn the call over to Senior Vice President, Investor Relations, and Treasurer, Rohan Pai. Sir, you may begin. Thank you and good morning, everyone. We are broadcasting this call on our website, selective.com. The replay is available until March 5. We use three measures to discuss our results and business operations. First, we use GAAP financial measures reported in our annual, quarterly, and current reports filed with the SEC. Second, we use non-GAAP operating measure which we believe make it easier for investors to evaluate our insurance business. Non-GAAP operating income is net income available to common stockholders, excluding the after-tax impact of net realized gains or losses on investments and unrealized gains or losses on equity securities. Non-GAAP operating return on common equity is non-GAAP operating income divided by average common stockholdersâ equity. Adjusted book value per common share defers from book value from common share by the exclusions of total after-tax unrealized gains and losses on investments included and accumulated other comprehensive income. GAAP reconciliations to any reference non-GAAP financial measures are in our supplemental investor package found in the investors page of our website. Third, we make statements and projections about our forward performance. These are forward-looking statements under the Private Securities Litigation Reform Act of 1995. They are not guarantees of future performance and are subject to risks and uncertainties. We discuss these risks and uncertainties details in our annual, quarterly and current reports filed with the SEC, and we undertake no obligation to update or revise any forward-looking statements. Now, Iâll turn the call over to John Marchioni, our Chairman of the Board, President and Chief Executive Officer, who will be followed by Mark Wilcox, our Executive Vice President and Chief Financial Officer. John? Thank you, Rohan and good morning. We're pleased to report strong fourth quarter results capping off another excellent year for Selective, with an operating ROE of 15.6% in the quarter and 12.4% for the full year. 2022 marks our ninth consecutive year of double-digit non-GAAP operating returns on equity. Over that timeframe, our operating ROE average approximately 12%, exceeding our weighted average cost of capital by about 400 basis points. We deliver these results along alongside discipline, net premiums written growth that average 8% annually, nearly doubling the size of the company over that timeframe. Tangible book value per share plus change and accumulated dividends which we view as the best longer-term indicator of value creation in our industry increased 10% annually over the past nine years. And our annualized total shareholder return over that period was 15.9%. Few in our industry can match that track record of consistent growth and profitability. Although, we face several industry wide headwinds, as we look out to 2023, we expect to continue to maintain our performance level well into the future. I'll come back to this point shortly. But first I'll review a few highlights of our performance for the quarter and year. Net premiums written were up 14% in the quarter and 12% for the full year. All three insurance operating segments contributed to this result. Growth for the year was driven by overall renewable pure price increases that averaged 5.1%. Solid renewable retentions, exposure growth and strong new business. Our 95.1% combined ratio for â22 included 4.3 points of net catastrophe losses, partially offset by 2.5 points of net favorable prior year catastrophe reserve development. Our net catastrophe losses for the year were only marginally above our expectation of four points despite Winter Storm Elliott being a significant loss, reflecting our catastrophe risk management efforts. The underlying combined ratio of 93.3% for 2022 reflected elevated non-catastrophe property losses from inflationary cost pressures and our property lines. Underwriting results contributed 5.4 points to our full year ROE. Net investment income after tax was $232 million for the year, we actively managed our fixed income portfolio to optimize risk adjusted returns in a rising interest rate environment. During 2022, we increased the pretax embedded book yield in the fixed income portfolio by approximately 115 basis points, while also moving up in credit quality. The overall investment portfolio generated 9.4 points of ROE for 2022. In addition to delivering excellent financial results, I want to highlight some of our other key accomplishments. We have built the organizational muscle in a decade long track record of effectively managing commercial lines pricing in a dynamic loss trend environment, positioning us favorably coming into 2023. Our long history of underwriting discipline positioned our property portfolio with strong insurance to value ratios, and our underwriters have worked hard to maintain ITV against this backdrop of rapid inflation. Our top line growth was very strong in 2022, a testament to our excellent distribution partner relationships and sophisticated pricing tools. Our unique field underwriting model remains highly valued by our agency partners. Our market max tool which provides our distribution partners with insights in their overall portfolio, and identifies target accounts to grow their business with us has been instrumental in generating high quality new business opportunities. We expanded our commercial lines footprint into three additional states in 2022, opening Vermont, Idaho and Alabama. And we remain on track to open Maine in West Virginia in early 2024. We completed the implementation of our new automation platforms for both standard commercial line small business and E&S both of which dramatically enhance ease of use for our distribution partners. And we appointed 180 new agencies during the year, bringing the total to approximately 1,500 agencies represented by 2,600 storefronts. While please with our overall performance in 2022, our team is steadfast in our focus on addressing the areas in need of improvement. Factoring in our operating leverage, invest in asset leverage and long-term investment return expectations, we target a 95% combined ratio to consistently meet or exceed a 12% operating ROE hurdle over time. Our 2023 combined ratio guidance is 96.5% or 92%, excluding catastrophe losses. Reflected in our combined ratio guidance is an overall loss trend of approximately 6.5%, which is up from 5% a year ago largely due to inflationary impacts in the property lines. For property, we are currently incorporating a loss trend projection of about 7% compared to 4% a year ago, reflecting our increased estimate of inflationary impacts on average claims [inaudible]. We increased our casualty loss trend more modestly to 6% from 5.5%. The 6% trend for casualty reflects our view of economic inflation, but more importantly captures our view of social inflation impacts as well. We will continue to pursue rate changes in line with trends to support our profitability in these lines, along with claims and underwriting initiatives focused on more granular drivers of profitability. And selecting these trends we consider both frequency and severity impacts within the portfolio. Whereas 2022 continue to benefit from favorable frequencies in certain lines, going forward we are assuming generally flat frequency. Therefore the trends I quoted can be considered largely severity driven. We remain comfortable with the quality of our portfolio and therefore review rate and inflationary exposure adjustments as the primary tools to address the higher severity churn. In 2022, the combination of pure rate and exposure generated total average renewal premium change of 12% in commercial property, 12% in commercial auto physical damage, 8% in homeowners and 9% for E&S property. Given our recent success coupled with the state of the property marketplace, we expect this pace to continue in 2023. Our casualty lines overall continue to produce combined ratio in line with our target. As such, our focus remains on achieving renewable pure rate increases that remain in line with our expected loss trend. However, within casualty, commercial and personal, auto liability is producing above target combined ratios. And we have a series of rate and underwriting actions to address these. We believe the pricing environment across all three business segments remains favorable. In standard commercial lines, we achieved strong renewal pricing throughout the year, and third and fourth quarters were strongest with renewal pure price increases averaging 5.8% and 5.6% respectively. We saw an acceleration of pricing in January with renewal pure rate of 6.5%, E&S pricing was also strong throughout the year with four quarter renewal pure rate at 7.9% and the full year at 7.3%. In personal lines, our ongoing transition from the mass market to the mass affluent market caused us to fall behind the market in pricing trends. We expect to close that gap in coming quarters. In the fourth quarter, we filed rate changes in nine of our states averaging 8.8% and plan to continue that pace over the next several months. We expect investment income to positively impact our financial results in 2023. Through active management of our fixed income portfolio, we have optimized for higher investment yields while maintaining conservative credit and duration positions. Based on the projected investment yields and our investments to equity ratio, we anticipate that investment income will contribute over 200 basis points of additional ROE in 2023. Our updated investment income expectations and combined ratio guidance for 2023 translate to an ROE above our 12% target. Our target sets a high bar for our financial performance, challenges us to perform at our best and aligns our incentive compensation structure with shareholder interest. Overall, I'm pleased with our excellent execution, consistent track record of results and plans to generate consistent and profitable growth. Now I'll turn the call over to Mark to review the results for the quarter. Thank you, John, and good morning, I'll review our consolidated results, discuss our segment operating performance and finish with an update on our capital position and initial guidance for 2023. For the fourth quarter, we reported a strong finish to the year with $1.38 of fully diluted EPS, a $1.46 of non-GAAP operating EPS, and a non-GAAP operating ROE of 15.6%. These results are inclusive of a full retention cat loss for Winter Storm Elliott which reduced our EPS by $0.75 and our fourth quarter ROE by full eight percentage points. Our results reflect the strong underlying earnings power of our franchise. For the full year, we reported EPS of $3.54 and non-GAAP operating EPS of $5.03. Our non-GAAP operating ROE of 12.4% for 2022 was particularly strong in light of significant industry catastrophe losses, capital markets volatility and the elevated inflationary environment and put upward pressure on loss costs. Turning to our consolidated underwriting results, for the quarter, we reported a consolidated combined ratio of 94.7% included in the combined ratio of $45.7 million of net catastrophe losses or 5.2 points and $38 million of net favorable prior-year casualty reserve development of 4.4 points. As we pre announced on January 23rd, we reported $46.1 million of pretax net catastrophe losses related to Winter Storm Elliott, $57.8 million inclusive of reinstatement premium. The winter storm produced freezing temperatures and strong winds across the majority of our commercial lines footprint. $135 million of gross losses were predominantly water related, and were driven by the sustained period of freezing temperatures. This cause considerable water damage as a result of burst pipes, largely from pressurized fire suppressant sprinkler systems within commercial properties. While the losses were spread across our footprint, much of the impact was concentrated in our southern region. The net impact of the combined ratio was 6.5 points for the quarter and 1.7 points for the year. So despite Winter Storm Elliott had been a meaningful catastrophe for us. It was manageable and an event of this size is not unexpected. Partially offsetting Winter Storm Elliott was a modest reduction in prior-quarter catastrophe loss estimates included in the reduction in our ultimate loss for Hurricane Ian from $10 million to $5 million. For the year, we reported a 95.1% combined ratio compared to our original guidance for the year of 95% combined ratio. Favorable prior-year casualty reserve development which we don't expect or budget for providing 2.5 points of benefit, but was largely offset by about two points of unfavorable non-cat property losses compared to expectations and slightly higher than expected cat losses. The underlying combined ratio of 93.3% for the year was about 2.3 points above expectations, and again was largely driven by the high and non-cat property losses. Moving to expenses, our expense ratio was 32.1% for the fourth quarter and 32.3% for the year, both modestly improved relative to 2021. As previously discussed, we have several cost containment initiatives in place. But we do expect some modest upward pressure on our expense ratio in 2023 due to higher reinsurance costs, which is reflected in our 2023 combined ratio guidance. Over the medium and longer term, we remain focused on lowering the expense ratio through various initiatives, while ensuring we're investing appropriately to support our longer-term strategic objectives. Corporate expenses which principally include holding company costs and long-term stock compensation totaled $6.7 million in the quarter, and $31.1 million for the year. Turning to our segments. For the fourth quarter, standard commercial lines net premiums written increased 13%, driven by renewal pure price increases averaging 5.6%, solid retention of 86% and new business growth of 22%, inclusive of exposure growth and endorsements, the renewal premium change in the quarter was a healthy 10%. The standard commercial lines combined ratio was a profitable 95.5% for the fourth quarter, and included 5.7 points of net catastrophe losses, which were partially offset by 4.7 points in favorable prior-year casualty reserve development. The impact of Winter Storm Elliott was 6.9 points on the combined ratio, inclusive of the reinstatement premium. The favorable prior-year casualty reserve development was driven by $30 million for the workers compensation line relate to accident years 2020 and prior, and $3 million for the above liability line. Partially offsetting this was a $5 million increase to the commercial auto bodily injury line for the current accident year. The commercial lines underlying combined ratio was 94.5% for the quarter. For the full year, net premiums written growth was a healthy 12%. The combined ratio was a profitable 94.8% and the underlying combined ratio was 94.3%. In our personal lines segment, net premiums written increased 20% in the quarter, reflecting our initiatives to expand our presence of a mass affluent market and favorable competitive dynamics. The combined ratio of the quarter was 99.9% and included 5.3 points of net catastrophe losses. The impact of Winter Storm Elliott was 6.1 points on the combined ratio, inclusive of the reinstatement premium, the underlying combined ratio was 94.6%. For the full year, NPW growth was 9%. The combined ratio was 102.4, and the underlying combined ratio was 88.8%. In our E&S segment, net premiums written grew 14% for the quarter relative to a year ago, renewal pure price increases average 7.9%. Retention remained strong relative to a year ago and new business was up 5%. The combined ratio for this segment was an extremely profitable 84.3% in the quarter, and including 1.6 points in net catastrophe losses and $5 million or 5.6 points of net favorable prior-year casualty reserve development. The impact of Winter Storm Elliott was 3.2 points on the combined ratio inclusive of reinstatement premium. The underlying combined ratio was 88.3%. For the year, NPW growth was 16%, the combined ratio was a very profitable 90.9% and the underlying combined ratio was 89.5%. Overall E&S segment has continued to build on its successes in recent years, and reported its strongest year since the platform's inception just over a decade ago. Moving to investments, our portfolio remains well positioned. As of yearend 92% of our portfolio was in fixed income and short-term investments, with an average credit rating of double AA minus and an effect duration of 4.1 years. Risk assets represented approximately 9.8% of our portfolio as of yearend, down from 11% a year ago as with modestly de-risk the portfolio against a more uncertain macroeconomic backdrop. For the quarter after-tax net investment income was $65.5 million, slightly relative to $64.5 million in 2021 driven by significant growth in investment income from our fixed income portfolio and offset by a reduction in income from alternatives. Alternatives which are reported on a one quarter lag generated $100,000 about in tax gains, compared to $19.6 million of after-tax gains a year ago. The after-tax yield on the total portfolio was 3.4% for the fourth quarter, translate into a healthy 11.5 points of ROE contribution. During 2022, we invested approximately $2.7 million of new money in fixed income, taken advantage of higher investment yields and simultaneously improving credit quality and liquidity. The average pretax new purchase yield for the quarter was up [inaudible] to 6.1% from 2.7% in the year ago period, and was well above the pretax yield on our existing portfolio. Approximately 10% of our fixed income portfolio remains invested in floating rate securities, although that's down from 14% at the end of the third quarter. The floating rate allocation reset at high benchmark rates throughout the year, open increased book yield and investment income. Well, this was a meaningful tailwind in 2022. More recently, we've been lowering our allocation to floating rate securities in anticipation of a potential decline in short term rates later this year. We have been opting instead to lock in current new money rates from longer period of time, we're managing our duration and credit quality targets. During 2022, we increase the pretax book yield of our fixed income portfolio by approximately 115 basis points, which includes approximately 34 basis points of incremental yield in the fourth quarter, every 100 basis points of high yield on our total investment portfolio translates to about 2.7 points of ROE. The total return on the investment portfolio was 1.8% of the quarter but negative 7.2% for the full year, reflecting the rapid rise in interest rates in 2022. Let me turn to our reinsurance program. We successfully renewed our main property catastrophe program which covers both our standard market and E&S business effective January 1. For the 2023 underwriting year, we went to market with $915 million of limit in excess of a $60 million retention to pay it off expiring $835 million of limit in excess of $40 million retention. As a reminder our $40 million retention has been constant since 2006. While net premiums written and capital base of more than doubled in size over that period. The purchase of additional limit at the top of the program was driven by exposure growth, net of co-participation we placed $810 million of up limit for 2023 compared to $776 million in 2022. As of January 1st, a one in 100 or 1% net probable maximum loss of PML for US hurricane, our peak peril is a very manageable 3% of GAAP equity, and one in 250 net PML of 0.4% probability stand at 7% of GAAP equity. These are both well within our risk tolerances. At renewal, we also eliminated our E&S only cover given the modest exposure in that portfolio and our strong capital position. Pricing on our cat program was up on a risk adjusted basis but in line with that of all three accounts in the US. In addition, terms and conditions tightened modestly for the placement. As a reminder, our reinsurance program also includes our [inaudible], which limit the impact to us from large losses to $2 million per occurrence for casualty and $3 million per risk for property. These treaties were due on July 1. Turning to capital, our capital position remains extremely strong, with $2.5 billion of GAAP equity and statutory capital and surplus as of yearend. Book value per share increased 4.4% during the quarter, but declined 16.6% for the year due to the after-tax unrealized losses for fixed income securities. Adjusted book value per share was up 5.2% for the year. Our parent company cash and investment position stand at $484 million, which is well above our longer-term target. Our net premiums written to surplus of 1.44x is in the middle of our target range. Our debt to capital ratio of 16.6% is on the conservative side. These metrics provide us with significant financial flexibility to support our growth and execute on our strategic initiatives. We did not repurchase any shares during the fourth quarter, we have $84.2 million of our remaining capacity under our share repurchase authorization, which we plan to use opportunistically in 2023. Let me finish with some commentary on our initial guidance for 2023. Firstly, we expect the GAAP combined ratio of 96.5% inclusive of 4.5 of catastrophe losses. This assumes no prior accident year reserved development. On an underlying basis, both [inaudible] catastrophe losses of prior- year casualty reserve development, on 2023 combined ratio guidance implies 130 basis points of improvement relative to 2022. The higher cat low reflects the more recent trends in cat losses as well as a slightly higher retention and reinsurance co-participation on our main property cap rate insurance program. After-tax net investment income was $300 million, including $30 million in after-tax gains from alternatives, after-tax net investment income is up $68 million in total or 29% from 2022. An overall effective tax rate of approximately 21%, which includes an effective tax rate of 20% for net investment income and 21% for all other items, and weighted average shares of 61 million on a diluted basis, which does not reflect any share repurchases we may make under our authorization. As John mentioned, this guidance implies healthy ROE output for 2023 and one that is above our 12% target for the year. With that I'd ask the operator to open up the call for questions. Hye, good morning. Thank you. I guess a first question is on loss inflation. You guys have been kind of very, you guys have given very good disclosure over the past year plus or really forever about kind of what you're seeing puts and takes. I'm curious, it looks like from the data you, Selective has seen an uptick in loss inflation a little sooner than some peers that are now talking about loss inflation. Just curious, do you ever analyzed whether you feel that some of the loss inflation you're seeing is just simply due to -- was it specific due to business mix. And that and maybe other the rest of the market -- some of your peers are more immune to inflationary pressures taking into account appreciating there's some different business mixes like your underweight workers comp relative to some but just curious if you feel like Selective is much more unique. Well, so Mike, I would say we're unique in a lot of ways relative to our operating model, and how we interact with our agents and what our underwriting philosophy is. But with regard to loss trend, I would say no, you did say line of business mixes, which could differ and clearly loss trends vary based on the individual line of business. But the trends we've seen, and the trends we've incorporated on a go forward basis, are largely driven by environmental factors. And I think that's both on the frequency and the severity side. And as we've talked about in the past, I think it's always important to have a discussion around loss trends, specifically for casualty, and then for property because there you really have to think about them differently. For casualty, we have been over the last couple of years, moving up our loss trend expected. Part of that is evident in movement in historical loss trends. But remember, your historical loss trends are impacted not just by inflationary considerations impacting severity, but actual changes in frequency and severity. And as we've talked about, in the past, frequencies, generally speaking, have leveled off a little bit below where there would have been pre pandemic. And when you look at your historical loss trends, that provides a little bit of an offset to some of the severity impacts that were more inflationary driven be it economic or social inflationary. We've moved that again, and as we talked about our peer comments have increased our casualty loss trend by about 50 basis points. And we do attribute much of that to our outlook for social inflationary impacts going forward. And again, everybody seems to be talking about social inflation and return to social inflationary trends, we're actually showing you how are specifically belting it in to our loss ratio selections for casualty. But again, there's nothing different in our portfolio. For those others that write standard commercial lines, kind of small mid-market and lower end of the large commercial market. Property is a little bit of a different story property, if you look at where we are, we've got a 7% forward loss trend on property. And looking back, our historical loss trends have also had some of that benefit of lower actual frequencies, and a really high severity year in 2022. And that, along with our forward outlook for inflation going forward, we've got that set at seven. And we feel good about that. So, again, I appreciate your recognizing, we've been transparent about this for a long time. But we also think it's important that we're not just talking about social inflation, we're showing you how we incorporated into our forward view of loss trends and how that's embedded in our loss ratio selections. Okay, that's helpful. My next question is on the return on equity guidance, and I'm asking it in a positive light, appreciative of the volatility of Selective ROE has been much lower than peers too, but just curious, a lot of management teams or maybe a mix of investors too expect your commercial peers to operate or many of your commercial peers to operate at usually higher ROE for thinking about â23 and â24 versus their historical averages for the industry. That's, itâs a bit of a case for Selective, but not as much. So there was just a management team, I know you guys couldn't hear all the conference calls that lifted their ROE guidance by a full 100 basis points attributable mostly to higher interest rates. So just kind of curious, anything structurally that you think that Selective, is this something you're thinking about? Or is it just the opportunity set is to a low double digit ROE is the right way to think about things in order to kind of continue growing and at a faster pace than your peers? Yes, so let me tackle this first, this is John. And I'm sure Mark will want to add some additional commentary. First thing I would say is, our ROE target that we set and provide you every year is not an aspirational target. It's a target we expect to consistently achieve over time. And in fact, we set that as our target for our variable compensation for all of our employees, including the executive team. So that's the important point number one. The other point I would make is, when we see years like we have coming up, where you would expect your investment income and the ROE contribution from your investment income to be higher than your long term expected return on your portfolio, we expect to generate higher than our target ROEs in those years. And that's why this is an important point, we, in my prepared comments, I went through how we get to a target combined ratio of 95 on a long-term basis. So that assumes our operating leverage, it assumes our invested asset leverage, and it assumes a normal GAAP equity environment, essentially adjusting for the impact of either an unrealized gain or loss position, and then how we think about the expected returns on that portfolio. So in a typical year, that 95 would produce the 12% ROE. Our guidance this year of a 96.5 is obviously above that. Now, because of that higher return from our investment portfolio, as we talked about, that will produce a combined ratio in excess of our target ROE of 12% but that 96.5 is still point and a half above our combined ratio target. And therefore we would pay out lower from a variable compensation perspective. So that's how we put it all together. And we do specifically tie that combined ratio target to our compensation plans. And again, it goes into the idea that when you have outsized investment income, you should be delivering higher than average or higher than expected ROE. I am not sure, trying to black out your question here, Mike, but that's how we think about it. And that's how we structure our targets internally and compensate all of our place. Okay. And to your point, we can see in the proxy that some of those peers don't see their bar isn't as high as I guess where use the term aspirational. So they're not comped on that maybe higher ROE. My last question was just curious when I, when we think of one of Selectiveâs competitive advantages, you're closer than many of your competitors to your agents, insurance brokerage agents, in terms of the your model. Now that we're a couple years of the pandemic, is anything changed, are your insurance brokers not in the office as much and you've had to kind of maybe change your kind of your strategy a bit in terms of how you are interacting with your insurance brokers, or is it mostly business as usual now? Ye, great question. There's clearly been some change. Now, also, I'll say this, I would say the significance of agency relationships from our perspective, and from the agents perspective is no different. I think how you build and maintain those has shifted, because like much of the US, our agents have modified in office schedules, and therefore, they're in office on a less regular basis than they used to be. And that just changes the manner in which our field underwriters operate, but a balance of their time was always split between field work and office work from an underwriting perspective. And they just had to shift how they manage that balance. And then I think just the other point of this is having long standing relationships and being able to maintain those in a more heavily virtual environment. I think it's been a huge benefit for us. And I think a lot more of that in person focus, which is more limited than it used to be, is focused on building new relationships whether people within an existing agency relationship or for the newly appointed ones. So definitely a shift in how build and maintain those. But I would say there's also been a significant efficiency gain on the part of our field underwriters, because of the virtual tools, they and our agents have become a lot more comfortable using over the last couple of years. Oh, yes. Good morning. A couple of questions. With respect to the 96.5 combined ratio guide, as Mark pointed out, that's about 130 basis points of improvement relative to this year, I guess what I wanted to do was kind of drill down in terms of thinking about out of that improvement, what portion of that is loss ratio relative to expense ratio. And then similarly, just kind of what are the key levers that are driving your ability to get that improvement relative to last year. So this is Mark, maybe Iâll start and John, I am sure will jump in, there are a couple of different ways to think about the guidance for 2023. One is 130 basis points of improvement from actual in 2022 on an underlying basis, but it is also up about 100 basis points from our expectations a year ago, we'd expected an underlying combined ratio of 91 going into 2022. And then we felt the pressure, particularly as we've talked about all year on the short tail property lines that impacted the non-cat property losses. So that's why we have a target of the 95 versus the guidance of the 96.5, we really feel like there's more work that we need to do to improve the underwriting profitability of the organization. But when you think about the 96.5, we talked about the 4.5 of catastrophe losses. That up a little bit from the four points we expected in 2022. We came in a little bit above that on the back of Elliott late in the year. But when you look at the more recent trend, particularly over the last five years of catastrophe loss activity, we do think there is an elevated level of frequency and severity of catastrophes. And so we raised the cat loss element to that. When you look at the expense ratio, we came in at 32.3 for 2022, I talked a little bit about the upward pressure on that in 2023, on the back of slightly higher reinsurance costs, as well as the impact of inflation. And I would say that the expense ratio, and better than that guidance is called at 32.6, there's the dividend component, which was about 20 basis points in â22, we're expecting that to come down a little bit to 10 basis points in 2023. So that's about 30 basis points of deterioration in the overall expense ratio, including dividends. And that gets you to kind of an underlying loss ratio of about 59.3 for the full year 2023. Now when you think about that 130 basis points of improvement. Another way to look at that is about half of it is really normalizing out the unusual reinstatement premiums we had in 2022. We had the casualty exceeded reinstatement premiums in Q3, and then the Elliot driven cat reinstatement premiums in Q4 to the tune of about $20 million in total between the two and then about the other half really represents a mix of business. So I would kind of put it into those bullet strokes in terms of our consignment from 2022 to 2023. Truly helpful. That pretty much nails it. The second question that I had was related to personal lines in the fourth quarter specifically, the accident year loss ratio was kind of the highest of the year, the expense ratio in the quarter was kind of the lowest for the year nearly, was there anything particular to either of those or is it just kind of the obvious pressure on loss trend on the former any expense saves on the latter? I'd say for personal lines in the quarter, we, personal lines did absorb its share of losses from Elliott and there is the offsetting reinstatement premium and that does put a little bit of a drag on the ratios when you have a lower denominator on the back of the reinstatement premium. We did also see some pretty significant non-cat property losses within personal lines in the first quarter to the tune of 45.7 percentage points. If you look at the run rate on those, it's a meaningful increase. And it's actually if you compare it to our total expectations thatâs a full 10 percentage point above what we would have expected for the quarter and that was really the driver on that underlying loss ratio. And then I think the expense benefit, there's probably a little bit more one income from claims probably related to the fourth quarter storms as a positive item in the personalized commission wise, that would be the only other offsetting item but with regard to casualty movement, either current year or prior year, there was none in personal lines. Great, thanks, good morning. When you look at, I think predominantly the reasonable maybe the mutual competitors that are out there, is there a sense that they're less able to grow? Because of their exposure to the same sort of higher attachment points and higher reinsurance costs that are out there? Yes, I think it's a great question, Meyer. I think, without having full insight into what happened when everybody's one, one renewal, I do think that in many cases, those competitors will be more highly dependent on reinsurance. That's certainly assuming their loss effected. And even if they weren't likely under the same pressures as everybody else in the market to raise the attachment point and meaningfully impact the costs. So I would assume that you're seeing a more outsized impact on that group. Now, and I mentioned this, I think this is indicative of what's happening in the market. Just broadly, it was in my prepared comments, and I want to make sure it didn't get lost is that our January commercial lines pricing was 6.5% up almost a four point from Q4. And my sense is actually more than my sense, it was driven by a pretty meaningful movement in the property line. So I think that's indicative of a shift in the marketplace. And whether that's smaller versus larger or across the board. I couldn't really tell you, but I think your original point is pretty accurate in terms of whether the impact of the reinsurance renewal was felt more than others. Okay, no, that's tremendously helpful. And that also, I guess, answers my next question, which is your willingness to add a little bit more net property risk, given pricing conditions for commercial property? Sounds like you're saying, yes. Yes, I, so that's really not how we manage the business in terms of opportunities. So we're looking line by line, we continue to be a package underwriter, we continue to acquire new business based on the individual risk underwriting and the individual risk pricing guidance we provide to our underwriters, I think they make, do make really good decisions. And our growth will be driven more by that individual decision making in the context of the opportunities that are presented, then it will be opportunistic around our current view of where pricing is or isn't. Okay, no, that's fair. That's more sophisticated than the way I was looking at it. And it's a quick lesson if I can. First is it reasonable to assume that your yearend â22 casualty reserves incorporated the 7% trend that you're looking for â23? So I now, yes, that's a question that's a little challenging to answer. I would say that our casualty reserve position at the end of the quarter continues to reflect our best estimate as it always has. And I think, and we don't plan for this, we don't budget for it. But we have a track record of favorable emergency and casualty that we're proud of. And I think it speaks to the manner in which and this was part of my response to earlier question the manner in which we actually build our forward expectation of loss trend into our casualty loss pick. But that initial casualty loss pick is influenced meaningfully by actual historical loss trends. So the actual changes in frequency severity over the last number of years is your historical loss trend that sets your starting point for a casualty loss pick. We then add that 6.5 for casualty forward loss trend. I'm sorry, 6% for casualty forward loss trend into assumes loss ratio. So it's in there on a go forward basis with the starting point is influenced by your actual historical trends. Okay, no, perfect, that helps. And then Mark, I can be tedious and get the cats by product line for the quarter? Sure, certainly. So going through the different lines of business starting with standard commercial lines for the quarter and commercial order $0.8 million, in commercial property $29.9 million and [inaudible] $9.5 million, that should add up to $40.2 million for standard commercial lines, within personal lines, auto $0.9 million, home $3.2 million. And then property within E&S $1.4 million for a total of $45.7 million for cat losses for Q4. Hi, I'm going back to the loss ratio guidance on an underlying basis, a little bit over 59% for this year, I guess just looking at the non-cap property loss ratio last year trending up a little bit. What sort of expectations for that particular component are y'all thinking for this year just kind of considering the expectations for loss cost trends versus the firm pricing environment? Just trying to I guess, understand how property versus casualty contributes to that improvement? Yes, it's a good question, the way we disclose the non-cap property loss ratio, it's non-cap property losses divided by the total net earned premium. And if you think about â23 expectations versus â22, it's basically flat. So I believe we came in at about 18.4 for the full year across, let me just double check that number 18.3, for the full year across all segments, in 2022. And we'd expect that to be basically that, our expectation for 2023 better than the guidance is that something essentially the same. Okay, thank you. And in personal lines, there is a pretty big uptick in new business this quarter. I guess I'm just curious about what you're seeing in the shopping environment for personal lines in the target mass affluent segment of the market, and just how considering the last cost environment, how you're thinking about any potential new business penalty as you work on that pivot towards the mass affluent segment? Yes, sure. So as we do in our planning across all lines of business, but in personal lines, in particular, to your question, we do plan for a different loss ratio for new than renewal. And that's factored into our loss ratio expectations, segment by segment. And that's no different for personal lines. But I think it's important to keep this in the proper context with regard to our growth, whether a new business or total premium and personal lines. We liked the mass affluent segment, but recognize that we're relatively new into this. So our growth, while it looks big on a percentage basis, in terms of a real dollar basis, these are not big numbers, we grew the segment by $28 million in the year and for $14 million in the quarter and new business was $22 million for personal lines in the quarter. And that was compared to a very low Q4 of â21, where we were really just starting to transition and only wrote $10 million of new business. So I guess my point in saying that is I don't know that that's necessarily indicative of what's happening in our market. But that's a segment of business we like and we're showing some really good results relative to our ability to compete in that space. Now, the other important point here is, when you look at the loss ratio environment broadly, and you're looking at the loss ratio for us, in our personal line segment, I think we acknowledge we've got work to do. And as we've made our way through this meaningful transition from mass market to mass affluent and an update in our rating plans accordingly. That led to us falling a little bit behind the market in terms of pricing trends. And you saw in the prepared comments, and I'll reinforce this point, the impact of our filed rates in the nine states that we took action, and in the fourth quarter was 8.8%. And that'll drive what we start to have on a written and ultimately earned basis, and I would expect that pace to continue. So more work to do from a profitability perspective. But I think the other important point is on the homeowner side, the exposure change we've kept up with. So we've always had a lot of discipline around getting exposure right in our home book. We've automatically fed through the updates in estimated replacement costs and the exposure I feel like we kept pace with it was more in the pricing that we needed to do more catch up on. Great. Well, thank you all for joining us. As always, free feel to follow up for any additional questions and look forward to speaking you, speaking to you in the future.
EarningCall_571	Good morning, ladies and gentlemen and welcome to the GrafTechâs Fourth Quarter 2022 Earnings Conference Call and Webcast. [Operator Instructions] This call is being recorded on Friday, February 03, 2023. I would now like to turn the conference over to Mike Dillon, Vice President, Investor Relations and Corporate Communications. Please go ahead. Thank you. Good morning and welcome to GrafTech International's fourth quarter 2022 earnings call. On with me today are Marcel Kessler, Chief Executive Officer; Jeremy Halford, Chief Operating Officer; and Tim Flanagan, Chief Financial Officer. Marcel will begin with opening comments; Jeremy will then discuss safety, sales and operational matters; Tim will review our quarterly results and other financial details; Marcel will close with comments on our outlook. We will then open the call to questions. Turning to our next slide. As a reminder, some of the matters discussed on this call may include forward-looking statements regarding, among other things, performance, trends and strategies. These statements are based on current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from those indicated by forward-looking statements are shown here. We will also discuss certain non-GAAP financial measures and these slides include the relevant non-GAAP reconciliations. You can find these slides in the Investor Relations section of our website at www.graftech.com. A replay of the call will also be available on our website. Good morning everyone. Thank you for joining GrafTechâs fourth quarter earnings call. 2022 was a challenging year. Geopolitical conflict, high levels of inflation, supply chain pressures and economic uncertainty impacted global markets and the steel industry. This has negatively impacted demand for graphite electrodes and continues to do so. In addition, the temporary suspension of our operations in Monterrey, Mexico in the fourth quarter affected our business. These factors, along with a substantial shift in mix from LTA to non-LTA volume will have a significant impact on our 2023 business performance. However, with a determination and resolve our talents as GrafTech team we are confronting these challenges head on. And we remain optimistic regarding the longer term outlook for the business and our ability to deliver shareholder value. I would like to highlight several points. First, our Monterrey facility has restarted and is running well. We are pleased to have reached an agreement in November that allows for the restart, and we remain confident in our ability to achieve a full resolution of this matter. The impact of the suspension in our sales volume in the first half of 2023 will be significant. However, we will be well positioned to fully meet our customer needs, as well as, as we enter in the second half of the year. And we expect to meet all our remaining LTA commitments throughout 2023. Second, we are taking proactive actions. These include closely managing our operating costs, capital expenditures and working capital levels. Proactively reducing our production volume to align with the near term demand for graphite electrodes and making targeted investments to further improve our strategic positioning and support long-term growth. Third, as the result of our disciplined capital allocation strategy, we have a strong balance sheet and ample liquidity to navigate the near term challenges. Lastly, electric arc furnace steelmaking and demand for graphite electrodes are expected to experience accelerating growth in the medium-to-longer-term. GrafTechâs sustainable competitive advantages remain intact. These include three of the highest capacity electrical manufacturing facilities in the world, and our substantial vertical integration into petroleum needle coke. As such, we are well positioned to capitalize on long-term demand growth. I will now expand on my comments regarding our operations in Monterrey Mexico. As we have previously reported in September of 2022 inspectors from the environmental authorities for the state of Nuevo LeÃ³n, Mexico, visited our facility and issued a temporary suspension notice. In mid-November, we announced that our efforts towards the resolution resulted in an agreement with the authorities that allows for the conditional lifting of the suspension notice and the restart of the facility. The lifting of the suspension of this was subject to a completion of certain degrees upon activity, and we are well on track to accomplish all aspects of the condition. We expect the full resolution of this matter, and we continue to expand our engagement with the authorities in the state of Nuevo LeÃ³n and the community in the area. At the same time, we continue to pursue the risk mitigation activities related to things stock that he discussed on the previous earnings call. These include the full restart of our St. Mary's Pennsylvania operation, as well as other alternatives for production of pin stock. While we are encouraged to be working toward final resolution of the situation, the negative impact of the suspension on our operating performance in the first half of 2023 will be significant. Although production of electrodes, and pin stocks began immediately upon the listing of the suspension the required manufacturing time for our products is generally several months. As such, the rebuilding of our pin stock payment will take time. In addition, on the commercial front, the timing of the suspension coincided with the critical timeframe to secure customer orders for the first half of 2023. As a result of the uncertainty caused by the suspension during this contract negotiation window, our ability to enter into new customer commitments for the first half of 2023 was limited. As a result, we estimates our sales volume for the first six months of this year will be approximately half of the level we reported in 2022 with the largest negative impact materializing in the first quarter of this year. As we move into the second half of 2023 with replenish pin stock inventory, we will be much better positioned. We expect our second half sales volumes to recover as we move past the Monterrey suspension driven uncertainty and that we anticipate a gradual improvement in market conditions. Importantly, we continue to expect to meet all of our remaining LTA commitments throughout 2023. We will provide them more detail. We will provide more detailed comments on our outlook during this call. But first, I want to thank the entire GrafTech team, and in particular, all our employees in Monterrey for their on-going efforts to address this situation, and to continue to focus on moving our business ahead. And I also want to thank our customers for their on-going support and understanding. Thank you, Marcel. And good morning everyone. I'll start my comments with a brief update on health and safety, which is a core value at GrafTech as people are our most important asset. We ended 2022 with a total recordable incident rate that while continuing to place us among the top operators in the broader manufacturing industry did not meet our high standards nor our performance levels of the past two years. Safety is and must be fundamental to everything we do as getting health and safety right leads us to doing business right. For this reason, improvement in our safety metrics will be a key point of emphasis with our internal teams in 2023 as we remain steadfast and working toward our ultimate goal of zero injuries. Let me now turn to the next slide for an update on steel industry trends as additional context for our fourth quarter results in our outlook commentary. During the fourth quarter, we saw further softening of key performance indicators for the steel industry. Global steel production excluding China in the fourth quarter of 2022 was approximately 194 million times representing an 11% decline compared to the same period in the prior year. Global capacity utilization rates declined to 61% commensurate with the lower production. While we continue to see steel industry trends that vary by geographic region, the disparity lessened somewhat during the fourth quarter. Conditions in Europe remained relatively weak although we started to see the stabilization of certain trends in the quarter, which is driving European HRC prices higher, reaching $822 per tonne as of last week. In the U.S. utilization rate softened further in the fourth quarter, hitting a low near 71% late in the quarter, but has since begun to recover, as demand prospects appear firmer due to improved auto production and construction spending, among other factors. U.S. Steel Mill utilization rates have trended higher since the end of the year, and are currently slightly above 73%. Turning to our fourth quarter performance, our production volume was approximately 29,000 metric tons, representing a 36% year-over-year decline and a 22% sequential decline from the third quarter. The suspension of our Monterrey operations was the primary driver of the declines. In addition, toward the end of the fourth quarter, we began to proactively reduce production at our European manufacturing facilities, most notably our facility located in Pamplona, Spain, to better match production volume with graphite electrode demand and to manage high energy costs more efficiently. While the impact on our fourth quarter production levels was modest, we expect to reduce our production volume from our two European facilities to approximately one third of their capacity for the first half of 2023. Turning to sales, our fourth quarter sales volume of approximately 28,000 metric tons, represented a 37% decline from the same period in the prior year, and a 22% sequential decline from the third quarter. The impact of the Monterrey suspension, along with lower demand for electrodes drove the declines. Fourth quarter shipments included 19,000 metric tons sold under our LTAs at a weighted average realized price of $9,400 per metric ton and 9000 metric tons of non-LTA sales at a weighted average realized price of $6,100 per metric ton. This non-LTA pricing represented an increase of 22% compared to the fourth quarter of 2021 and was slightly above the average for the third quarter of 2022. FX had a favorable impact on the sequential price improvement during the quarter, reflecting recent declines of the U.S. dollar, most notably compared to the euro, as a portion of our sales are denominated in foreign currencies. Factoring all of this in, net sales for the fourth quarter of 2022 decreased 32% compared to the fourth quarter of 2021. As we look at the first quarter of 2023, reflecting the headwinds that we discussed, we anticipate our total graphite electrode sales volume will be in the range of 15,000 metric ton to 18,000 metric tons for the quarter. Further, as you know, the terms of most of our LTAs ended in 2022 and our mix shift has shifted more to non-LTA business. Lastly, regarding our top line outlook for the first quarter of 2023, we expect our weighted average non-LTA pricing to remain comparable to the 2022 full year average of approximately $6,000 per metric ton. Thanks Jeremy. Net income totaled $50 million in the fourth quarter for 20% net income margin and resulting in $0.20 of earnings per share. Adjusted EBITDA was $80 million, a decrease from $183 million in the fourth quarter of 2021 reflecting the lower sales volume and higher year-over-year costs. Adjusted EBITDA margin was 32% in the fourth quarter. Let me expand on costs. For the fourth quarter, we experienced a year-over-year increase of 47% in cash COGS per metric ton, which represented a 20% sequential increase compared to the third quarter of 2022. This resulted in a cost per metric ton average of nearly $5,200 for the fourth quarter of 2022. With this metric, excluding depreciation and amortization, as well as the cost of goods associated with by product sales and other non-cash factors. As we've indicated during the fourth quarter, we continue to feel the impact of global inflationary pressures that we experienced throughout the year, most notably for certain raw materials, energy and freight as we sold higher price inventory during the quarter. This inflation accounted for approximately half the 20% year-over-year or sorry 20% quarter-over-quarter increase. The balance of the change was due to the accelerated recognition in the fourth quarter of approximately 11 million of fixed costs related to our Monterrey operations that otherwise would have been inventoried if we were operating at normal production levels. As we look ahead, we project our cash costs per metric ton for the first quarter of 2023, to be flat to up slightly compared to the fourth quarter of 2022. While we expect those two quarters to represent the peak of a recognized cost curve, we anticipate only a slight moderation error cost per ton for the balance of 2023. Therefore, we're projecting a year-over-year increase in our cost per metric ton in the range of 17% to 20%, on a full year basis for 2023, as compared to 2022, which averaged $4,300 per ton. As we look forward, in addition to our on-going focus on cost management, we expect market pricing for certain key elements of our cost structure to decline in the medium to longer term, including but not limited, limited to energy and decant oil. For these reasons, and with sales volumes expected to normalize, return to more normalized levels beginning in the back half of 2023 and for the full year of 2024, we are optimistic that our cost per metric ton will improve significantly as we move beyond the current year. Turning now to cash flow. In the fourth quarter, we generated $50 million of cash from operations and $23 million of adjusted free cash flow, with both measures decreasing compared to the fourth quarter of 2021 reflecting lower net income. Moving now to slide 9, our gross debt-to-adjusted EBITDA ratio was 1.7 times as of December 31, compared to 1.6 times at the end of 2021. On a net debt basis, we ended the year at a ratio of 1.5 times. During the quarter, our total liquidity increased $27 million to approximately $462 million consisted of consisting of $135 million of cash and $327 million available under our revolving credit facility. As we move into 2023, we continue to manage our working capital levels. We expect to be free cash flow positive for the year and do not intend anticipate the need to borrow against our revolver. We remain confident we have ample liquidity between cash on hand and availability under our existing credit facilities. Now turning to slide 10. Maintaining a prudent disciplined capital allocation strategy remains a long-term priority. With the unanticipated suspension of Monterrey, we elected not to pay down debt or repurchase stock in the back half of 2022. However, a significant portion of our cash flow generation in the first half of the year was utilized for those purposes. In 2022, we reduced our term loan balance by $110 million, bringing our cumulative debt repayments to more than $1.2 billion since the start of 2019. During 2022, we also returned $70 million to our stockholders in the form of stock repurchases and dividends. Additionally, we invested $72 million in our capital assets, while also preserving a significant portion of our cash flow generation in the second half of the year to increase our liquidity. For 2023 we're focused on maintaining a disciplined capital allocation strategy, including certain targeted investments such as the restart of our St. Mary's operation, as Marcel referenced earlier. For the full year, we expect our capital expenditures to be in the range of $55 million to $60 million, including investments to support our future growth expectations. Thank you, Tim. We remain confident in our ability to overcome near term headwinds and are optimistic about the longer-term outlook for our business. We have been taking actions to best position GrafTech for the future. These include remaining disciplines at all our operating costs and capital expenditures as well as our working capital. As an example, a reduction in temporary staffing and the implementation of hiring restrictions resulted in a reduction in our workforce during the fourth quarter of 2022. As Jeremy pointed out, we are proactively reducing production at our European electoral manufacturing facilities to approximately one third of our capacity to align our production volume with our near-term outlook for graphite electrode demand. We are making targeted investments to further improve our competitive positioning and to support long-term growth. This includes the full restart of our St. Marys, Pennsylvania operations. With these actions -- with the actions we are taking, we will emerge stronger to benefit from longer-term demand growth. We continue to expect the steel industry's efforts to decarbonize will drive the continued shift to electric arc furnace steelmaking supporting long-term demand growth for graphite electrodes. Factoring an announcement of planned EAF capacity addition by steel producers and estimated production increases at existing EAF plants, this could result in an incremental annual electro -- graphite electrode demand outside of China of 200,000 metric tons by 2030. We also anticipate the demand for petroleum needle coke, the key raw material we use to produce our graphite electrodes to accelerate driven by its use in lithium ion batteries for the growing electric vehicle market. In fact, based on estimates for growth in EV sales and battery pack sizes, this could result in global needle coke demand for use in battery applications increasing at the compound annual growth rate of over 20% through 2030. The huge growing demand for needle coke is another positive long-term trend for our business as higher demand should result in the elevated pricing. Our sustainable competitive advantages, including our substantial vertical integration into petroleum needle coke production through our Seadrift facility are critical differentiators and foundational to our ability to meet our customers' needs. To that point, we are very encouraged by recently having entered into several new multiyear electrode sales agreements. This reflects our customers' confidence in our ability to reliably deliver high-performing products. In closing, our investment thesis remains intact. GrafTech possesses an industry-leading position, a distinct set of capabilities and competitive advantages and a talented and dedicated team that is committed to serving our customers. For these reasons, I remain confident in our ability to deliver shareholder value. Hi, thank you for taking my questions. I just wanted to ask a clarification question to the prepared remarks just now. Was the comment made that St. Maryâs are fully restarting? Is that what I heard? Okay. Can you talk a little bit about the reason why St. Marys is probably your starting at this point? What the CapEx is associated with that restart and what the volume expectations and the timing of that ramp-up in volumes? Yes, sure. The -- I mean, the logic behind it really comes down to establishing a second complete value stream for the production of pins. And so with that, we kicked that project off immediately after the initial suspension in Monterrey, and we've been working to restart those assets and to complete the permitting process. All of this is, in fact, going extremely well for us. The CapEx that it's going to take will be minimal in the -- make sure that it won't be incremental to the CapEx that we've planned for this year. And so it will all be managed within a typical CapEx budget for the year. So it won't be anything extraordinary in that regard. The timing of it is that it is permit dependent, but the State of Pennsylvania has been incredibly responsive to our request in that regard so far. So I would expect that we should be able to say that we're producing there by the time we have our next earnings call. Sorry, I just want to clarify one thing. So all that had previously been communicated. But I thought when you've said -- or when the comment was fully restarting St. Marys, I thought that meant into graphite electrode production again. Is that not correct? We're still just talking about pins, right? Well, we -- what's different from what we've done historically is that we are actually producing the pin stock in St. Mary's. So that will be the complete value stream is being produced there, which could also be used for electrode production if economically feasible to do so. Dave, to your point of your question, our intent is not to bring additional electric capacity to the market right now, right? We're allowing us to have the redundancy and pin stock and also eliminate some of the movement of pin stock from Monterrey to St. Marys, which hopefully longer-term on a cost basis will be beneficial to us. Okay. Great. Thanks for clarifying that part of it. It's still -- the commentary still leaves me a bit with the impression that there's something else to come, i.e., graphite electrode production on the way at some point. Just along those lines, if that decision were to be made and to, again, ramp up volumes of graphite electrode production, what's the lead time associated with that incremental step? And when would one expect to hear an update on that part of it? So obviously, the demand situation will drive that decision. In the current CapEx that we talked about, the $55 million to $60 million for 2023, a capacity expansion of electro production is not excluded. So that will be beyond the 2023 time frame. With regards to the timing it would take, Jeremy, you want to add? Yes. Right if market demand is much, much better here than we expect, how long do you think it would take? Yes. We're probably talking 18 to 24 months type of a time frame to execute an expansion of St. Marys to drive incremental volume. Great. Thanks for taking my question. Good morning. Just wanted to clarify a lot of the guidance items you guys offered. So first off, on the tons that you expect to sell in 2023. Did you say that, that's about half of what you sold in 2022? And so I'm getting to about 155,000 ton number in 2022, so that would put us around 80 for 2023, is that right? Yes. So let me clarify that, Arun. So the guidance was we would be at roughly 50% of the first half of 2022 in the first half of 2023. So we did roughly 85,000 tons in the first half of 2022. Okay. Perfect. So half of that for the first half. And then the second half though, you would be comparable to the second half of 2022. Is that right? Yes. So I mean I think we certainly see our ability via reengagement with our customers and the dialogue we're having with them that the back half of 2023 will start to recover and look much more like a normal year for us. I'm not sure we get all the way to where we were in the back half of 2021, but we certainly will be over where we were in the back half of 2022. Okay. Great. Perfect. And then -- and that 15,000 to 18,000 then, a portion of that would be long-term and a portion of that would be spot. And so we'll use the 27,000 to 32,000 long-term, and then the rest will be made up with spot. Is that correct? Okay. And then -- and then on the pricing side, so I guess needle coke -- or sorry, electrodes, spot electrodes, you're still seeing it around 6,000. What can you offer as far as needle coke? I think last time you said it was $2,500, $2,600, are we still in that range? Could you provide an update on electrode and needle coke pricing? Yes. So I would say, right now in the market, we're seeing kind of on the high end for the super-premium needle cokes you're in that $2,500 to $2,600 range on the top end. Obviously, the lower grades will trade at a little bit of a discount to that. I think previously, we were probably closer to $2,800. So we've seen a little bit of a pullback, but I would probably describe it more as a sideways market right now than anything. And then, thanks for that. And then on the demand side, so last year, definitely in the middle of the year and second half, there was very weak demand in Europe. It sounded like maybe there's been a little bit of pickup in steel utilization rates at that 73. Is that right? And so what's your outlook from here? I mean do you expect steel utilization rates globally to improve may be driven by some restocking, some infrastructure build-out and then definitely China coming back? Or how should we think about how demand evolves from here? Yes. So one thing I just want to clarify is that 73% was a U.S. operating rate, not a European operating rate. So I just didn't want you to get. I didn't want you to get back confused. Yes. And so then the other thing that, I guess, I would say is that the first month of this year is starting to give us some reasons for optimism. We're particularly seeing that on things like HRC pricing and some of the restarts, some of the recent increases in operating rates that we've been seeing in multiple different regions. And so while still meaningfully depressed from where we were a year ago, we're definitely seeing some things that are giving us a degree of confidence that the market is coming back. Okay. And then just lastly, so given that comment, do you expect both needle coke and electrode prices to rise through the year? And the reason I ask is because you noted that the demand environment, like again, there's some potential green shoots and then you noted the 17% increase, I think, in cost per ton for the year. And so would that -- or 17% to 22%, would that be in line with kind of how -- so would the costs evolve with how the pricing evolves? Or what kind of informs some of your cost commentary? And similarly, if you could just elaborate on your thoughts on how pricing for these -- for electrodes and needle coke could play out. So my thoughts here on pricing Arun, it's quite difficult to really forecast short-term pricing both for graphite electrodes and needle coke. I think what's very important, and you're aware of that, right, that there is a strong long-term link between the right pricing of needle coke and spot prices for graphite electrode. And the long-term average spread between these two is of the order of $3,800 to $3,900. So that link has actually held very strongly over probably a 20-year plus period. So if you look at the current spot prices around $6,000, the current needle coke pricing, at least at the high end of about $2,500. We are at the spread of about $3,500 between the two. So not completely out of line between the two. But there might be a bit of upward movement that's possible here if you're wanting to get back to the long-term average. I think longer-term, the key message here on pricing is really we expect the pricing for needle coke to go up as demand for that important raw material accelerates, both for graphite electrodes as well as for battery applications. And as such, we should also expect the price for graphite electrodes to go up if that spread holds into the future. And I think most importantly, from my perspective here, given that we are the only large-scale producer of gratified electrodes outside of China that is integrated into that raw material, it really is an advantage vis-a-vis our competition over time. Hi, thanks for taking my call. I just had a quick question on the 2024 LTAs and the changes there in the revenues expected. The volumes didn't change, but the expected revenues went down. Can you just talk through what happened there? Yes. So as we note in there, the contractual volumes haven't changed and the expected revenue from those contractual volumes haven't changed. But certainly, in that estimate, there's always an assumption around certain customer contracts and associated termination penalties or termination revenue as a result from those contracts. So without getting into the specifics of each of those individuals, our estimate of how much of those termination penalties we collect out in the out years of those contracts has come down. So that's what's driving that kind of weighted average volume or weighted average cost reduction in the 2024 time frame. Okay. And I don't have the info in front of me right now. But I think when I was backing into it this morning, it worked out to about a $40 million reduction versus just what was implied last quarter, which is we weren't assuming that much of a reduction, but I mean, not much of a benefit. But that's a pretty big drop. Is that math right? And is there a little more information that we can get on why such a big drop? Yes. I mean you're definitely in the ballpark. You're pretty close to $40 million. And really, again, it's a driver of, as we work with these customers, the contracts have various provisions that protect our interest and their interest as we continue to reach commercial agreements with our customers going forward. Our predictions of how that may play out and what the requirements on the accounting rules are, and what we should or should not disclose have changed. So we reduced that forward-looking expectation going forward. But I will say the underlying implied kind of revenue per ton is really reflective of these are the tail ends of these contracts as most of these were entered into, again, back in 2017 and 2018. And so we've gotten to the tail end of the blend and extend that I think that we've talked about in the past, where we extended the term of these and increased volumes over time with maybe a little bit of adjustment in price. So we're seeing the tail of these contracts work out in the out years. Okay. Great. Just my last related question on that. On a go-forward basis, are there more potential revisions coming with these contracts that are left? And if so, can you quantify like sort of the assumptions that are made that could change? Yes. No, I guess that's why I added the commentary. I think the implied revenue net rate right now is really reflective of kind of the contractual -- what the volume times the price would otherwise look like. So yes, let me just add, David. So unless you have a situation where a customer is in a situation of non-performance, I don't think those change. Thank you. This concludes our question-and-answer session. I will now hand the call back over to Mr. Kessler for closing comments. Thank you, operator. I would like to thank everyone on this call for your interest in GrafTech, and we look forward to speaking with you next quarter. Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.
EarningCall_572	Good day and thank you for standing by. Welcome to the Q4 2022 Neste Corporation 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. Thank you and good afternoon ladies and gentlemen. Welcome to this conference call to discuss Neste's fourth quarter results published this morning. I am [indiscernible], Head of IR at Neste. And here with me on the call are President and CEO, Matti Lehmus; CFO, Martti Ala-HÃ¤rkÃ¶nen; and the business unit heads Carl Nyberg from Renewables Platform; Marko Covenant of Oil Products; and Panu Kopra of Marketing & Services. We will be referring to the presentation that can be found on our website. As always, please pay attention to the disclaimer since we will be making forward-looking statements in this call. With these remarks I would like to hand over to our President and CEO, Matti Lehmus to start with the presentation. Matti please go ahead. Thank you and a very good afternoon also on my behalf. It's great to have you all participating in the call. Neste's strong performance continued in the fourth quarter. The war in Ukraine continued to have a significant impact on international energy markets leading to volatile oil products and natural gas prices in Europe. In this turbulent market environment, Neste's operational and financial performance was very good in the fourth quarter and I would especially like to thank the Neste personnel for making this happen. Moving now to the page four and the fourth quarter 2022 in brief. We had an excellent year in all our businesses as our strong performance continued in the exceptional fourth quarter markets. The group's comparable EBITDA was EUR894 million compared to EUR591 million last year. Renewable Products performed well and we were able to continue optimizing our sales mix also towards the end of the year, while benefiting simultaneously from somewhat lower feed of costs. Our comparable sales margin averaged $783 per tonne, which was higher than in the corresponding period last year and in line with our fourth quarter guidance. This was a good achievement as margin hedging continues to have a negative impact on the sales margin. Sales volumes again reached a high level of 779 kilo-tonnes approximately at the same level as in the fourth quarter of 2021, despite the scheduled maintenance at the Rotterdam refinery. Rotterdam refinery also had an unplanned shutdown at the end of the quarter which did not impact the fourth quarter sales volumes. The share of waste and residue feedstock remained very high at 96%. The Oil Products strong result was again driven by the exceptionally high Oil Product margins and particularly, diesel margin was high. The use of Russian crude was 3% in the fourth quarter total input with all remaining inventories now used by the end of the quarter. Utility costs decreased towards the end of the year and we continue to optimize the use of propane. Sales volumes increased from the third quarter, but were on a lower level than in the fourth quarter of 2021. Also our Marketing & Services segment performed very well in the fourth quarter and we were able to gain market share and our unit margins remain at a good level. During the fourth quarter, we took many important steps in our strategy execution and I will come back to that later in the presentation. Let me then turn to slide five on safety. Safety performance continues to be the key focus area in Neste. During 2022, we were unable to improve our total recordable incident frequency as it increased from the 2021 level of 1.4 to 2. In process safety, we were able to maintain the performance with a process safety event rate of 1.4. We continue our focused efforts to ensure a continuous improvement in our safety performance. Then turning to the financial targets, I note that our financial position remains solid. We reached an after-tax ROACE of 30.1% on a rolling 12-month basis, while our target is 15% minimum. At the end of December, our leverage ratio was 13.9%, well within the targeted area of below 40%. This solid financial position enables the implementation of our growth strategy going forward. Thank you, Matti. The fourth quarter was indeed performed in very volatile market conditions like the whole year of 2022. So let's now have a little bit closer look into the group figures and I will take some highlights from our fourth quarter and full year 2022 figures. To start with, we delivered another high revenue quarter in the fourth quarter. Our fourth quarter revenue was â¬6.6 billion versus â¬5 billion a year earlier. That's a revenue increasing by about â¬1.6 billion or 32% compared to the previous year. The growth resulted mainly from higher market and sales prices which actually had a positive impact of actually the same amount approximately â¬1.6 billion on the revenue compared to the last year earlier. Like Matti already mentioned, what's more important of course is that we posted a strong comparable EBITDA of â¬894 million in the fourth quarter. This is up by about 51% from the â¬591 million recorded a year earlier. Our renewable products continued to perform strongly with comparable EBITDA at â¬415 million. This was supported by a strong sales performance and an optimized sales mix. Of notice also, that we were able to optimize our sales mix towards the end of the quarter, while benefiting simultaneously from somewhat lower feedstock costs, particularly at the very end of the year. Also our oil products continue to perform strongly, contributing â¬450 million to comparable EBITDA versus â¬168 million a year earlier. Finally, our Marketing & Services continued its good performance with comparable EBITDA at â¬21 million, although impacted by inventory losses in line with falling oil product prices. After the full year results for 2022, Neste's revenue reached â¬25.7 billion versus â¬15.2 billion a year earlier, up by about 70% year-on-year. Higher market and sales prices contributed about â¬7.5 billion of the revenue increase, while higher sales volume of about â¬2.1 billion and a stronger US dollar about â¬1.2 billion. The group's full year comparable EBITDA reached an all-time high of â¬3.54 billion compared to about â¬1.92 billion in 2021. This is an improvement by about 84%. It is worth highlighting that all our businesses improved their performance last year year-on-year and actually all also made an all-time high result. The comparable EBITDA of renewable products reached â¬1.76 billion versus â¬1.46 billion a year. A year earlier, there's an improvement by about 21% in a year of multiple scheduled plant shutdowns. As to Oil Products, the main product margins improved significantly during the year and oil products comparable EBITDA reached â¬1.65 billion. Also, Marketing & Services posted a record year with comparable EBITDA at â¬126 million. And of note also, that the comparable return on net assets was very high in all our businesses. A particular highlight of the fourth quarter was the clear improvement in our cash flow and the reduction in net working capital, compared to the previous quarters of last year. We generated free cash flow of â¬596 million in the fourth quarter, while succeeding well in releasing â¬601 million from net working capital, mainly with the tight optimization of our raw material and product cargoes and inventories towards the end of the year. This is visible in our balance sheet at the lower inventory level compared to the end of the third quarter last year. Of note also, that the turn rate of the group's net working capital in days outstanding was 35.4 days on a rolling 12-month basis at the end of last year. This is also a clear improvement from 43.7 days from the end of the third quarter last year. Finally, our comparable earnings per share, which is the basis for our dividend policy was â¬0.84 per share in the fourth quarter and â¬3.04 for the full year of 2022. This is almost double compared to the â¬1.54 for the full year of 2021. The Board proposes to the Annual General Meeting, a maximum dividend of â¬1.52 per share versus â¬0.82 per share year earlier, consisting of an ordinary dividend of â¬1.2 per share, an extraordinary dividend of â¬0.25 per share and a discretionary second extraordinary dividend of â¬0.25 per share total in a maximum of â¬1.167 million. That is almost â¬1.2 billion versus â¬630 million a year earlier. When we then turn to and look at the fourth quarter comparison bridged by business, we can see that the comparable EBITDA increased year-on-year in the fourth quarter was driven by oil products, which had a â¬283 million positive impact. This was a result of the exceptional refining market. However, as I noted earlier, we are also very pleased with the performance achieved at both our Renewable Products and Marketing & Services businesses. When we on the next page look at the same fourth quarter comparison bridge by profit driver, we note that our sales margin improvement contributed in total â¬310 million to our performance improvement in the fourth quarter. On the renewable products side, we achieved a good sales margin while oil products margins were driven by the high diesel margins during the quarter. Our sales volumes in renewable products were a bit above last year's fourth quarter level at 779,000 tons and clearly above our third quarter sales volume of 698,000 tons as we had guided earlier. In oil products, our sales volume was somewhat lower than the previous year. The stronger US dollar excluding FX hedges had a positive impact of â¬96 million on the comparable EBITDA year-on-year. Our fixed costs were â¬96 million higher in the fourth quarter of last year, mainly due to our growth in capacity projects and ramp-up preparations at the renewables side of our business. And then moving to the next page. When we look at the full year 2022 bridge by driver, it is very much the same story, particularly the sales margin improvement but also FX changes and for the full year with delight also sales volume improvement these factors were all driving the improvement in the group's comparable EBITDA, while on the other hand our growth strategy execution increased our fixed costs. Other items include also the divestment of our base oil business. To summarize and close up from my side, we are overall very pleased with both our financial as well as operational performance in the fourth quarter as well as the full year of 2022. At the same time, we made significant progress in the execution of our growth strategy during the year, thus continuing our successful transformation. Despite the volatile market conditions prevailing into the current year this provides a very interesting starting point into this year 2023. Thank you, Martti. This is Carl. And good morning, good afternoon to everyone on the line. So let me take you through the RP figures. So 2022 was a record year for renewables products as we reached a comparable EBITDA of â¬1.762 billion. I would really like to start by thanking all of our colleagues contributing towards the renewables business in reaching this excellent result. It's my belief that it's the result of our strong values enabling CMS cooperation across the organizations, as well as a very efficient end-to-end steering to drive value. If we then move to -- on to look at the fourth quarter. We again had a strong quarter in RP reaching an EBITDA of â¬450 million, which was roughly the same as one year back and â¬26 million, up from the previous quarter's EBITDA of â¬389 million. The comparable sales margin was very strong at $783 per metric ton, slightly up from the margin one year back and in the upper part of the guided range of $700 to $800 per metric ton. This was achieved through successful feedstock optimization with a high share of waste residue and decreasing feed of market price, as well as a strong sales performance and optimization towards the end of the year. Sales volumes were high at 779 kiloton, which corresponds to the volumes in the fourth quarter one year back, but on the other hand up by more than 80 kilotons quarter-on-quarter despite the long turnaround in Rotterdam. At the end of the quarter on the 22nd of December, we also had a fire at the Rotterdam refinery which resulted in Rotterdam being down for a month. The volume impact of this unplanned shutdown did not impact the fourth quarter, but has an impact on the first quarter volumes. Investments came down quarter-on-quarter, which remain elevated at â¬370 million almost 75% up year-on-year as we continue to invest in growth. Our net assets have grown over the past year by almost â¬1.7 billion as we continue to execute our growth strategy, while RONA remained strong at 26.6%. Our CapEx expenditure will remain high over the coming year as we continue to invest in our production capabilities and product flexibilities in Rotterdam, Singapore and Martinez. If we then move to the next slide let me take you through the EBITDA -- between Q3 2021 and Q3 2022. So as mentioned volumes and margins improved marginally with the combined impact of approximately â¬4 million compared to result one year back as we continue to drive strong margin management. The main changes from the result one year back is coming from the FX where the strong dollar contributed towards roughly â¬70 million stronger results year-on-year. On the other hand our fixed costs grew significantly year-on-year as we continue to scale up our business ahead of the Singapore expansion and Martinez renewables. So year-on-year our quarterly EBITDA ended up â¬3 million below the Q4 EBITDA in 2021 at â¬415 million. If we then turn to the feedstocks, let's look at how the market developed over the quarter. So the big picture is that visible oils have come down substantially from the peaks seen in Q2 and the forward market structure has weakened. The market seems to have found good support at these levels and has been trading range bond. Western residual spreads have softened over the course of the second half as the market stabilized after drop individual to complex. We however expect waste and residual markets to remain tight as demand growth continues to be robust, while spreads though likely will need to stay competitive compared to alternative feedstocks. If we then turn to the next page and have a look at the US credit prices. So here we continue to see a divided story. So while the RFS before in prices remain relatively strong over the course of the quarter the LCFS prices have continued to weaken quarter-on-quarter. If you start by looking at the rent credit prices they reached an almost â¬200 per gallon during the quarter, but dropped deeply then on the back of the announcement from the renewed RVOs by the EPA as the market was disappointed with the change. However, the market then swiftly recovered and came back to â¬1.70 per gallon range. The market seems relatively stable and supported these levels on the back of current been heating oil spreads and is currently trading around â¬160 per gallon. On the other hand LCFS prices continued to weaken quarter-on-quarter and dropped to $66 per metric ton from $86 in Q3. Low carbon credit generation continued to be robust on the back of growing credit generation from renewable, natural gas and electricity as well as growing R&D capacity in the US. The LCFS price seems to have stabilized now and are currently trading around $0.60 per gallon. The carbon intensity target in California bill however continued to grow annually and similar programs are being planned in several states currently underpinning the need for more low carbon solutions. Let's then go to the sales margin before handing over to Markku and Oil Products. So the comparable sales margin average as mentioned at $783 per metric ton slightly up from $779 in the fourth quarter 2021. This was supported by a strong sales performance including an optimized sales mix as well as excellent performance in our feedstock supply. Also production cost has had a positive impact on sales margin as energy costs started trending down towards the end of last year. On the other hand we also faced a significant negative impact in our margin hedging. So while feedstock prices came off, the benefit from the wider spread between [indiscernible] and diesel was balanced by losses in our margin hedges. Our 100% Neste MEUR renewable lease offers were up in the quarter and reached 30% of our RD sales as we continue to build our brand in market to reach our -- reach out towards the end customers. Then finally as previously mentioned the turnaround at our Rotterdam refinery in the early part of the quarter as well as the unplanned shutdown at the Rotterdam refinery due to the fire that occurred in December 22 drove down our utilization year-on-year. This concludes renewables products part. So thanks Carl. Good afternoon all. First, I would like to thank my Oil Products colleagues for making these all-time high annual results possible. Let's look first at the comparable EBITDA development. We had again a strong quarter in the tight refining market. The comparable EBITDA was â¬450 million compared to â¬168 million the year before, and â¬537 million in Q3 2022. Sales volume this quarter was three million tonnes, down from 3.5 million tonnes the year before, and up from 2.9 million tons in Q3. The total refining margin was US$23.5 per barrel up from US$10 per barrel compared to Q4 2021, and down US$4.5 per barrel from the previous quarter. The average Uralsâ share of the feed was 3% in Q4 2022, reflecting our decision to stop making new contracts for Russian origin feedstocks. The last Uralsâ cargo was delivered in July 2022, and we have now consumed all remaining Uralsâ barrels from the inventory and thus the share will be zero from now on. Comparable return on net asset increased from 3.2% to 48% compared to the previous 12-month period. We take the second slide. Now over to the EBITDA bridge. Total refining margin and FX changes contributed to the improved result compared to the Q4 last year, while volume and fixed cost had a negative effect. Moving over to the next slide. On this slide, you will see the development of the main market drivers. The disruption caused by the war in Ukraine and general supply and demand situation continued to drive volatility of all products. Diesel margin peaked in October, after which is declined towards the year-end. Gasoline followed the same pattern with an uptick in December. Heavy fuel oil margin had a positive impact on total refining margin during Q4. Moving over to the next slide. And then about the development of refining margin. After being stable for a good part of 2021 and the first quarter of 2022 at around US$10 per barrel, the margin shot up to US$30 per barrel range in Q2 and stayed there over the summer. Q4 was strong, but somewhat down from Q2, Q3 levels. The average refinery utilization rate was 78% compared to 93% in the fourth quarter of 2021, and 80% in the previous quarter. The utilization rate in the last quarter of 2022 was burdened by the planned unit turnarounds. Refinery production costs were $8.8 per barrel compared to $6.2 per barrel in Q4 2021 and US$7.2 per barrel in comparison to the previous quarter. The volatility of production cost is mainly due to the cost of utilities. Thank you, Markku. Hello this is Panu Kopra. Solid financial performance continued in Marketing & Services in Q4. In spite of rapidly increasing supply prices, we were able to mitigate stock losses quite well and landed all almost a comparable year level. This was mainly due to excellent pricing both in network and B2B pricing segments. â¬126 million EBITDA is our best ever yearly result and return on net assets increased over four projects. Same time our market shares both in diesel and gasoline developed very well in Finland and moderately in Baltic countries as well. However, gasoline demand has been decreasing in second half of the last year, mainly due to high pump prices and high inflation. Especially, in Baltic's demand was decreased due to very high inflation in all three countries. Since day one volumes increased more than 35% compared to year before. LFO and bunker volumes continued healthy development as well. We have expanded net availability at station network in Finland during the last two years. And last year, we expanded also in the Baltics and I'm happy that volumes have increased over 35% compared to last year. Last time, I informed that we have launched new EV charging service for our fleet customers and first results are positive. In addition to it, we also opened in December one public high-power charging station in Mid-Finland and it was warmly welcomed by our private customers. Thank you, Panu. So let's then move on to the current topics. First, a few words on our strategy execution during the fourth quarter, as we continue to make good progress in many important areas. The Singapore renewables capacity expansion project reached mechanical completion by the end of 2022 and continues to be on schedule for start-up at the end of the first quarter 2023. The Rotterdam expansion project is progressing well. And also the SAF optionality project is on track for completion at the end of the year, increasing our SAF capacity by 0.5 million ton in the beginning of 2024. The joint operation with Martinez Renewables is expected to start up its Phase 1 in early 2023, so in the very near-term future with pretreatment capabilities expected for the second half of 2023 and full production capacity of 2.1 million tons per year by the end of 2023. I also note that in the execution of our feedstock strategy, we made an important step by closing the acquisition of sequential in January and thereby strengthening our used cooking oil collection platform in the United States. These are just a few examples of our strategy execution that makes us closer to becoming a global leader in renewable and circular solutions. As an outlook for the first quarter we see the following. First of all, we expect volatility in the oil products and renewable feedstock markets to remain high making the forecasting of margins challenging in both renewable products and oil products. In renewable products, the sales volumes are expected to be lower than in the previous quarter. The waste and residue markets are anticipated to remain tight and volatile. Our renewable sales margin is expected to be within the range of $825 to $925 per ton, supported by attractive waste and residue prices in the beginning of the year. Utilization rates of our renewables production facilities are forecast to remain high, except for the one month downtime in Rotterdam. The Rotterdam downtime is expected to have a negative impact of approximately â¬85 million from the segment's full year comparable EBITDA, based on the estimated production losses and repair costs, mainly affecting the first quarter. The market in oil products remains volatile and impacted by the war in Ukraine. Based on the current forward markets, our first quarter total refining margin is expected to remain solid, but somewhat lower compared to the fourth quarter of 2022. The first quarter sales volumes are forecast to be at approximately the same level as in the previous quarter. In Marketing & Services the sales volumes and unit margins are expected to follow the previous year's seasonality pattern in the first quarter. The slowing economy is expected to have some negative impact on the overall demand. Let me then turn to other topics for 2023. We continue to execute our strategy and to invest in our business growth and we estimate approximately â¬1.8 billion in CapEx. Possible M&A is excluded from this figure, which includes as a main contributor our growth projects in Singapore, in Martinez and in Rotterdam. Thank you. [Operator Instructions] We will take our first question, and the question comes from the line of Erwan Kerouredan from RBC. Please go ahead. Your line is open. Hi. And thanks for taking my question and congratulations on the strong set of results this morning. I got two questions on margins and then one on CapEx, please. So on margins, so on the renewable product sales margin, the first quarter guidance slide in the presentation indicated includes Martinez, can you just clarify the upside or downside coming from the JV with Marathon and the ramp-up. Obviously, there's some impact on the feedstock side but are there other elements at play in this margin assumption from Martinez specifically? And then maybe more broadly what are the biggest drivers of variation within the range of $8.25 to $925 per ton that you provided, does it have to do with feedstock uncertainty, hedging. That would be helpful. And then finally on CapEx â how much is inflation, especially in Singapore in the â¬1.8 billion CapEx figure that you've put forward for next year? These are my questions. Thank you. Okay. Carl here. Thank you for your questions. So I'll start with the margin questions. And â and so if you look at the Q1 margin and the impact from the Martinez, so we are â Martinez will be starting up here in the Q1. But the volumes coming from Martinez are still rather small. So the impact will be quite limited in impacting our margins. As such, as previously communicated as well, during this first phase, we will not have the pretreatment unit available. So we expect the margins to be rather modest compared to our margins and therefore having a diluting impact in this first quarter. Then looking at the different drivers for the margin in Q1. So I would say that it is the traditional element. It's the feedstock pricing Western residue premiums over the veg oils. And of course, the differential between the veg oil complex and the petroleum complex has an impact. And then of course the diesel price in general as well has a significant impact on our margin here. Then I would say over the course of the last few quarters, the production cost and the energy cost as such has been also a significant driver for our margin creator. So I would say that these are really the three main elements. So the feedstocks, the diesel price and then the cost of energy. And I will take the second question, which was on the CapEx outlook for 2023. As a general comment, as you have followed Neste, you know that we have a number of ongoing growth investments. So the majority of that â¬1.8 billion CapEx is related to renewable products and especially the growth investments in that segment. Within that you had a specific question on the Singapore expansion, the CapEx overall CapEx continues to be aligned with what we also disclosed at the previous quarter so â¬1.65 billion. The tail of that is of course one of the CapEx elements in this year's CapEx forecast. I also note two for example, other major projects that are included in this number. We have the Rotterdam capacity expansion which is a significant driver for CapEx in 2023 and also the Martinez Phase II and III which also then are included in this year's CapEx forecast. Of course, you will also find in the overall number than the normal maintenance for both renewable and all products... Thanks very much. So I understand there's no inflation right taking into account in this â¬1.8 billion CapEx figure across all facilities. This is basically our estimate at the moment of the full year's CapEx. It of course takes into account the CapEx forecast for this year. And in some projects, we have of course seen also the inflation. So that is included in the numbers. Thank you. We will take our next question. And the question comes from the line of Pablo Cuadrado from Kepler Cheuvreux. Please go ahead. Your line is open. Yes. Good afternoon everyone. Just three quick questions from my side. The first one would be about -- you can share a little bit your views about the LCFS credits in California. I mean, you were explaining before and we have seen that clearly they have been reaching five-year lows recently. And my question is more link. If you have had an indication, if local authorities there that may be thinking to intervening in the market to limit the credit surplus or what's either be your view there? Second question would be just quickly on the working capital. I reckon that Q4 was better as we were expecting with an inflow, but still overall 2022 was quite a relevant negative impact on working capital, â¬1.3 billion. So the question will be more on your expectation for this year still with ongoing investments on Singapore Martinez. And clearly, assuming that basically the commodity environment remains where we are right now, either your view on the working capital performance for 2023? And the last one, quickly, on the fixed cost you are guiding â¬10 million increase for the renewal product for Q1 versus Q4. So, that will hit some kind of â¬200 million of fixed growth for Q1. My question here, do you think that's let's say a good reference that we should assume for the next quarters look in 2023, assuming Singapore and Martinez, so indicating let's say â¬200 million per quarter fixed cost and â¬800 million on annual basis. Hi Pablo, Carl here. I'll try to take the first question and then I think Martti and Matti will take the follow-on. So, with regards to LCFS credits, as mentioned, it seems for the time being that we might have found some kind of bottom here, but it remains of course to be seen how it develops. I think our understanding is that, there are discussions currently in California about the appropriate level of LCFS credits. We have seen a lot of different ways of generating credits now and impacting the values to a level that maybe had not been expected. So, we do not have any detailed information on that. But we know that there are some kind of discussions ongoing around this team at what is appropriate level for the LCFS credits. But as I said -- commented earlier as well, we see that the program is clear and it has a growing trajection and we are also seeing these other LCFS programs now being developed in other parts of the United States and Canada. Thank you, Pablo for the question. I'll try to answer the net working capital question. First, starting with looking backwards based into 2022 and it's true, in the first half particularly, after the Ukraine War program, as we explained then we had to reinvent our supplies and logistics for the oil products raw material, for the oil product side. And we had to also pile up inventories for the Rotterdam and Singapore shutdowns. And at the same time, we saw a big increase in overall market prices. So those resulted. So at the end of the first half of last year, we were at a negative about â¬2.3 billion. And then we started also -- of course, we knew that this was a fact of the circumstances, but we started a program to try and drive that downwards. And we succeeded quite well. I'm quite happy, 900 a bit north of â¬900 million, â¬948 million [ph], â¬347 million of release in the third quarter and â¬601 million in the fourth quarter. So we ended up nevertheless at a negative of â¬1.36 billion for last year which is a big figure of course. Looking now into this year, and a little bit also to last year. So, a positive thing throughout the endeavor has been that, that's why I also highlighted the turn rates which we are following. So, considering also the volume increase in our sales and so forth, we have been able to keep the turn rates at previous year's level. And now, when I look into this year, we will be very much also following the turn rates. But if I think of the absolute figures, we do forecast an increase in our net working capital, particularly in the early part of the year when we will ramping up our production and we will tie more into the inventories than we can realize yet in all the sales then in the second half, we will be fully ramped up with our new capacities and we have a better possibility to also drive the net working capital forward. So once more to summarize, I do foresee that we will have an increased overall net working capital level this year, just because of our increased levels of production and capacity is coming alive and also some new business models particularly on the aviation side on the SAF side. However, we will try and drive it as carefully as possible optimizing our business models and looking into the turn rates and particularly in the second half of the year after the ramp-up period to stabilize that and possibly also reduce. And then this is Martti. I'll take the third question Pablo, which was on fixed costs. And just in general I'll start with a comment that, obviously, fixed cost is one very big focus area. We have an operational excellence program. We are following very closely the fixed cost development. And at the same time, like, we have observed over 2022 especially in renewables it has been an area where we have built up also our capabilities as we are expecting our major growth projects to start up now also end of Q1 with both Singapore expansion and also the first phase of the Martinez joint operation. So we are, obviously, not giving any exact guidance yet on how that will then pan out in RP. But let's say in general the emphasis on -- after this building up the capabilities also then to stabilize the trend going forward. Thank you. We will take our next question. Please standby. Our next question comes from the line of Artem Beletski from SEB. Please ask your question. Yes, hi. Thank you for taking my question. So the first one would be actually on term agreements and the outcome of negotiations basically I guess, which have been settled towards year-end. Could you maybe comment in general, how satisfied you have been with these new deals, and also whether thereâs any meaningful impact on Q1 margin guidance? Then the second one is relating to staff and basically volume outlook for this year. I guess, you should have quite good visibility on what is happening there. And maybe you could comment how big increase you are anticipating in terms of volumes versus last year? And the final one is just a housekeeping question, what comes to maintenance CapEx for the group. How does it look like as you have basically ramped up, so, say gross investments what comes to Singapore markets and also water ramp during this year? Okay. Thanks Artem. Carl here. So, I'll take the first question on the term agreement. So I would say that we reached our objectives, our targets for the term agreements and we have contracted a bit more than 75%. So very much in line with what we had expected and what we had planned. So we are going into the year with the portfolio that we had planned to have. And then this is Matti. I can perhaps take the second one on the SAS. So, obviously, like I commented earlier, we are now targeting to start up our Singapore expansion end of the first quarter. This is an important milestone then also if you think of the aviation business, because it increases our capabilities then the flexibility to produce larger quantities of SAF. Obviously then it will take time to ramp up the production to also fill the inventories, et cetera. So I would say then it's in particular in the second half of the year where we, of course, will target to grow the SAF sales. That's basically how we are looking at this year. This is Martti. Maybe I try to answer the maintenance CapEx. So, of course, always in our capital allocation, first priority is to take good care of our existing assets. And last year our maintenance investments accounted to â¬249 million. It was down from 2021 of â¬411 million where we have particularly the large overall turnaround in increasing this. If I look into this year, firstly, we haven't provided an exact figure but it will be somewhat higher than last year just for the fact that we will have a new facility for maintenance in Singapore. We are looking also of course into Martinez Phase I and Phase II and the shift in Rotterdam to come live. But on the other hand, we haven't scheduled any larger turnarounds for this year. So that could be taken up. So somewhat higher than last year, put it this way, no exact figure, but no bigger turnarounds. Thank you. [Operator Instructions] We will take our next question and the question comes from the line of Sasikanth Chilukuru from Morgan Stanley. Please go ahead. Your line is open. Hi, good afternoon. Thanks for taking my questions. I had three, please. The first was regarding the sales margin. The last guidance we got from the company on this was at the end of last year where it was highlighted that the comparable sales margin, was at the bottom half of the $700 to $800 per tonne, guidance range. I was wondering, what exactly changed? What was the key element that contributed to achieving this high $783 per tonne margin. Also slightly related to this, I wanted to check if there was anything to be said, regarding the sales margin seen in the US versus those seen in Europe? Are they both comparable to this $783 per tonne level. Again, I wanted to see if one was distinctly different from the other. The second question I had was, related to the UCO prices. It was highlighted in the earnings release that the UCO prices in Europe were impacted negatively by higher imports, from China especially, towards the end of the year. I was just wondering how you're seeing these imports from China into Europe right now especially, with the China reopening. And the last one was, regarding this discretionary dividend. The -- I was just wondering, what the second extraordinary dividend was dependent on -- are there any risks for this dividend at all? Thank you for the questions. This is Matti, because I think I was in the pre-silent call. So, first question that what sort of changed? I think, I told very clearly, in the pre-silent [ph] call nevertheless that outlook is fully still in force. I mean that was the main message. A little bit hypothetized, that it could be somewhat lower than the midpoint. But having said that, I continued also saying that but that can very well also change still, always when we are at the pre-silent call we still have about a of one fixed of the quarter still to go. So what happened, which is also outlined in our text for instance in the CEO, comments? So we were able to optimize our sales mix, very nicely at the very end of the year. And overall, we could nicely benefit from the lower feedstock costs. And also the feedstock spreads, when it comes to hedging move in our favor in the very latter part of December. And also actually the developed the production cost, they also were in our favor. So all these elements together and maybe finally to say, that our sales volume, which also relates to the sales optimization, sales mix was somewhat higher than we anticipated. So all that played to our favor. And partly, that favoring is visible, if I continue now there was an earlier question on the guidance for the first quarter, where we are commenting now on the attractive. So things we are living in volatile markets and these issues do change. So, perhaps, I didn't take the second. I can maybe first build, a little bit, because you also had a question around the sales margins in the US versus Europe. We are of course, continuously optimizing our sales between different regions. And the US or North American market has very different drivers to the European one. But -- but we are not really disclosing any further details on how the different margins are developing. But the European margins remained very attractive in the fourth quarter for us. With regards to the UCO prices, so we are -- I would say that we saw towards the end of last year and also in the beginning of this year we've seen that the waste and residue premiums have been softening across the board. And I would not take a specific view on Chinese UCO impact on the European UCO markets. But we are seeing that these waste and residues -- waste and residue markets are becoming more global in their nature and there are impacts on values in the different regions when we look at the arbitrage opportunities. So, we are seeing that these markets are developing as the markets are growing. And this is Matti, I'll take the third question on the discretionary part of the dividend and perhaps indeed recapping like Martti explained the proposal to the AGM of the dividend indeed has these elements that there is an ordinary dividend of â¬1.02 per share. There is an extraordinary dividend of â¬0.25 per share and there is a discretionary extraordinary dividend of â¬0.25 per share. And I think you will find in the release that sentence that the Board expects that this discretionary spec and the extraordinary dividend will be paid unless there is significant deterioration in the business environment during 2023. And of course following the external environment, it's clear that we have at the moment macroeconomic geopolitical uncertainties for example, so this would be the type of business environment events that need to be then assessed by the Board if this proposal is approved. Thank you. We will take our next question and our next question comes from the line of Matthew Blair from TPH. Please go ahead, your line is open. Hey, good morning. Thank you for taking my questions. The first is on the hedging dynamics in Q1. Could you just provide a little bit more detail here from our modeling, it looks like that there should be a pretty considerable improvement on the hedging from Q1 versus Q4? Second question is on -- just congrats on averting the strike potential strike at Porvoo. Can we expect that plant to run at full rates in Q1? And then the third question is on the D4 RIN pricing in the US. On our modeling, it looks like the pricing is stronger than what it needs to be to keep that marginal biodiesel producer in the money just given the strength of diesel prices. Do you have any opinions on that? And do you expect D4 RINs to continue at these high levels? Thank you. Okay. Thanks Matthew. So, maybe if I take the first one and then also the last one. So, starting with the hedging dynamics. So, indeed in Q4 we had a hedging ratio of approximately 56%. And now going into the Q1, we are approximately at 50%. Having said that, these hedges that we have now for the first quarter have been done in a completely different margin environment as well and they are more reflective of the current value. So, your assumptions are very much correct in that sense. Overall, we have -- as we communicated in the last quarterly call, we have changed our hedging policy towards more rolling hedging where we now currently are at approximately 30% level for the full year. So, the Q1 is around 50% and then it's being lowered quarter-on-quarter as we go further out. Then perhaps if I take quickly the third question about the D4 RIN. So, we see that the current D4 RIN levels seem to be generating relatively attractive biodiesel margins as well currently and -- but seems to be very stable at this kind of level as well. So the market seems to be viewing that this is the appropriate level for the D4 ins as also previously commented. But of course, this is a dynamic environment and might change over time, but that seems to be the picture for the time being. Then there was -- this is Markku. Then there was a question about the potential strike impact on the operations in Porvoo. So I can report that there is an agreement being reached with the main labor union for the contract for the next two years and therefore the strike from that side has been avoided. We did have a production upset 19th of January in one of our hydrogen production units which had an impact on the operations for the moment. But now when the strike rate has gone away we are in a start-up mode and expect to run at normal operating rates until the end of the quarter and beyond. Thank you. We will take our next question. Our next question comes from the line of Joshua Stone from Barclays. Please go ahead. Your line is open. Thanks. Good afternoon and congratulations on the strong results. Two questions please. First is on the cash conversion in the quarter, it looked quite weak particularly on operating cash flow ex lacking capital. Are there any notable one-offs in there that you'd like to highlight? And in particular I looked at the cash tax looked especially high in the fourth quarter. Just tell us, what that relates to and what that should go to going forward? And then second question on the sales volumes. It looks like you released a lot of inventory during the fourth quarter for renewable fuel. You talked about building inventory in the first half of the year. So has that been some levels around how much you think you'll build during the first half? And are you to be a bit more specific on the volume guide? Are we talking 700,000 tonnes higher or lower than that for the first quarter? Thank you. Perhaps I can start on the cash conversion and Martti can comment on the tax question then. So just in general I mean like Martti commented in an earlier question we paid a lot of attention during the entire year and especially second half of the year on working capital management and also we're very happy overall in reaching then our target levels and releasing working capital during the fourth quarter. If you look at it from a business-by-business perspective, it's of course good to note that in renewables in particular, we at the same time need to prepare also for the planned start-up of our major growth projects. So from that angle, we also had the need to for example on the feedstock side prepare some inventories for the upcoming start-ups. So that's sort of the dynamics that you have behind. But in all the businesses, we are of course steering very carefully towards the optimum inventory levels. That's on the tax Martti you can... Yeah. Maybe trace your question is also more into the cash conversion net cash operating activities against the EBITDA sort of. So maybe if you look into the cash flow statement so there is always the other adjustment which is a non-cash item in the cash flow from operations. And that's mainly from the change in derivatives, which we of course eliminate all the non-cash accruals from our EBITDA. And they happen to be quite large in the fourth quarter totaling â¬304 million. And the other topic you mentioned is the income tax is paid â¬298 million. Basically, we paid our advanced taxes in Finland. If you look in the P&L and our effective tax rate, it totaled 17% and that's mainly a factor that most of our earnings before tax came last year a large part of that from Finland where we have tax at 20% and we had earlier in a year not paid full advanced taxes corresponding the higher EBIT from our product side. But we did that at the end of the fourth quarter. So that's why you have a higher payment for income taxes particularly in the fourth quarter in last year's cash flow statement. Joshua, Carl here. So I'll briefly talk about the sales volume. So indeed we had a high sales volume in Q4. It was partly the result of the delayed volumes from the third quarter that we then eventually sold in the fourth quarter. But we also managed to reach very -- or optimize ourselves towards the end of the year and reach the target that we had had for ourselves. Now taking into account the fire in Rotterdam and then lost production of approximately 130 kilotonnes, it is clear that we need to build back some of the inventories now to have more sustainable inventories as well in our system. So this will of course impact then now mainly the Q1 volumes. And at the same time we are also of course preparing them to take on stream Singapore and we will also get the first volumes from Martinez already now in the first quarter. Thank you. We will take our next question. Please standby. Our next question comes from the line of Matt Lofting from JP Morgan. Please go ahead. Your line is open. Yes, afternoon. Thanks for having me on the call. Two quick questions if I could please. First on waste and residue feedstock markets. I think you highlighted in the outlook more favorable pricing dynamics recently and at the same time alluded to an expectation that markets remain tight and those two statements, obviously, appear a bit contradictory at face value. So could you talk a bit more about that? And what investors should look to through the coming weeks and months as indications of how those markets trend going forward? And then secondly, on the US JV side, how quickly do you think or expect to ramp up waste and residue feedstock contributions into that asset once the pretreatment facilities come online in the second half? Thanks. Thanks Matt, Carl here. So, first on the waste and residue, so I said we -- the sentiment was quite negative on the waste and residue spreads towards the end of the year and here in the beginning of the year, they have remained relatively weak. And I think it's a result of a stabilizing veto complex. So we came down with the red prices quite significantly during the second part of last year and the waste and residue spreads were slowly coming after. So we had quite wide spreads. Now looking at the waste and residue markets overall, it remains very constructive. We see increased investments going into the sector and we will have a good demand for waste and residue in the coming months and years. At the same time though, I think, it's important to also reflect that the spreads will need to stay competitive also compared them to other feedstocks. And I think one such element is of course the LCFS values now being relatively low. So that will probably keep some kind of led on the spreads going forward. Then with regards to the JV ramp-up, so we are of course now starting off the first phase here in Q1. And then when we come towards the summer, we will get the pretreatment unit and our expectations are then that during late in the third quarter we would be able to ramp up quite a significant share of waste and residues. We do not know exactly yet how big that share will be. But certainly targeting a significant share of the overall feed to be waste and residue based. And then of course in the third phase in the fourth quarter is when the volume substantially then ramps up and volumes are increasing. Thank you. We will take our next question. Our next question comes from the line of Anish Kapadia from Palissy Advisors. Please go ahead. Your line is open. Hi. Good afternoon. I had a question about the wider market for renewable diesel. There's a lot of planned capacity in North America. We're seeing more in Europe as well conversions of some existing refineries. I just wanted to get your take on how you see the supply-demand balance over the remainder of this year and into next year? And then how that impacts in terms of your thoughts on future expansion projects or growing your renewable diesel portfolio in the future. Thank you. Thanks for the question. Perhaps, I can take this. It's Matti. So indeed thinking of the wider market, I would start from two angles. On one hand, we would expect the demand -- the global demand for renewable diesel and stuff to continue growing, especially in North America, we feel, in 2023 could be a growth driver. So order of magnitude, it could be around 2 million tonnes, that the growth is this year. At the same time, we note, like, we are starting up a number of projects. There is also other projects. So the supply growth will be significant. It will be clearly larger than the 2 million ton during the year. And, of course, it then comes more to, let's say, looking at it, the need also over the coming years. So the supply-demand balance will evolve, as we have this combination of growing demand, but it's a fair observation that the supply growth is significant in 2023. Our strategy perhaps, just -- I mean, obviously, we have a number of growth projects ongoing. They also phased over time, like, you know that the Rotterdam growth project is targeting 2026. For us, an important part of our strategy is that, we work on the feedstock flexibility, growing the feedstock pool and at the same time the flexibility, also, to serve different markets and the buildup of new markets. And we feel that these are important parts of the strategy in a very competitive market. Thank you. [Operator Instructions] We will take our next question. And the question comes from the line of RaphaÃ«l DuBois from Societe Generale. Please, go ahead. Your line is open. Thank you very much. Good afternoon and congratulations for the results. Two quick questions. First one is on hedging. You mentioned that the negative impact was significant in 4Q. The guidance for the sales margin, looking at midpoint, is roughly $100 per ton higher in Q1 2023 versus Q4 2022. Can you help us better understand what is coming from adding no more legacy hedging positions and what comes from the drop in utility and feed costs? That would be my first question. And the second one is on Annex A and B qualifying feedstocks. I understand the European Union has opened a consultation period in December. I wanted to know if you think that would those new feedstocks be added to Annex A and B? How much of an impact it would have on your accessible pool of waste and residue. Thank you, very much. Okay. Thanks -- thank you. Carl here. So let me first talk about the hedging. So I would say that, we would not maybe quantify exactly, but the hedging impact now in Q1 is very different from what we saw in the fourth quarter obviously. I mean, if you look at the bed oil and petroleum market differentials, they have stabilized relatively well at these current levels and we are not foreseeing really the hedging to have a huge impact in Q1. So, I would say, a significant part of the uptick in the margin here is related to the hedging actually. Overall, I would say that, on the energy prices side, so we saw basically the net gas price half between Q3 and Q4. Going into the first quarter, also these prices seem to be a little bit more stabilized. So there is still a potential upside there as well, as we are moving out of the winter season in Europe and nat gas prices might reduce further. But I would like to just echo on the hedging side as it came a second time a question that, if we look back to last year I mean, we -- it's clear we saw unprecedented moves in the prices of diesel gasoline as well as our feedstocks. And we have communicated there has been and there was a negative impact from hedging overall in both the third quarter and the fourth quarter. I can echo from there. We haven't quantified it. If I look into this year, I covered, what Carl was saying. So I think we are in a balanced position and you mentioned earlier are there any more sort of legacy hedging positions. So if you think from that perspective, of course, we are doing it on a continuous basis, but it's a very different balance situation now. And perhaps I can take the second question which was on the Annex IX A and B consultation. And indeed, it's correct the EU Commission published in December a draft delegated act where it proposes some additions to the Annex IX A list and also some move to the Annex IX B list. And perhaps, I mean, our observation on this proposal is that yes there are some additions to the Annex IX A list. But it's also perhaps important to note that it's proposed that some feedstocks are being moved from Annex IX A to IX B like brown grease or there is also now the intermediary, crops there. So it's perhaps -- rather than looking at it as a huge overall impact on the volume. It's also interesting, then just to see that it's a proposal for this reclassification. And that is of course something that now industry players and others are commenting on. Thank you. We will take our next question -- our next question comes from the line of Pasi VÃ¤isÃ¤nen from Nordea. Please go ahead. Your line is open. Great. Thanks. This is Pasi from Nordea. If I hear right you actually said that California will actually dilute your sales margin, when it's up and running before going to used cooking oil from the soybean oil. So could you actually please also comment, what is going to be the case when Singapore is up and running? So is it a positive or negative for the sales margins? Thanks. Thanks Pasi, so Carl here. So I would say that, I would not draw any parallels between Martinez and Singapore now. If you look at Singapore, so we have a pretreatment unit at Singapore from the startup and actually it's a new and enhanced pretreatment technology that we are now taking into use in Singapore. So we expect to have very strong capabilities when it comes to process different western residues and difficult feedstock. So from that perspective, we do not see a dilutive impact on the Singapore expansion. And with regards to the Martinez ramp up now we are talking about the first phase only. So before we are having the capability to process waste and residues the margins will not simply be at the same level as we are currently having in our own production system. Thank you. And thank you for the very good questions and the active participation. As we have discussed, conditions in the energy market have been exceptional. And we are pleased with Neste's performance in the fourth quarter. And while it's likely that the volatility will continue, and there are uncertainties related to the macroeconomic growth outlook, I'm also very confident that we will be able to navigate successfully in this environment and continue creating value for our customers, employees and shareholders.
EarningCall_573	Good morning, and welcome to the AMSC Third Quarter Fiscal Year 2022 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. Thank you, Gerry. Good morning, everyone . And welcome to American Superconductor Corporation's third quarter of fiscal 2022 earnings conference call. I am John Heilshorn of LHA Investor Relations, AMSC's Investor Relations agency of record. With us on today's call are Daniel McGahn, Chairman, President and Chief Executive Officer; and John Kosiba, Senior Vice President, Chief Financial Officer and Treasurer. American Superconductor issued its earnings release for the third quarter of fiscal 2022 yesterday after the market closed. For those of you who have not been able to see the release, a copy is available at the Investors page of the company's website at www.amsc.com. Before starting the call, I'd like to remind you that various remarks that management may make during today's call about American Superconductor's future expectations, including expectations regarding the company's fourth quarter of fiscal 2022 financial performance, plans and prospects, constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including those set forth in the Risk Factors section of American Superconductor's annual report on Form 10-K for the year ended March 31, 2022, which the company filed with the Securities and Exchange Commission on June 1, 2022, and the company's other reports filed with the SEC. These forward-looking statements represent management's expectations only as of today and should not be relied upon as representing management views as of any date subsequent date to today. While the company anticipates that subsequent events and developments may cause the company's views to change, the company specifically disclaims any obligation to update these forward-looking statements. Also on today's call, management will refer to non-GAAP net loss, a non-GAAP financial measure. The company believes that non-GAAP net loss assists management and investors in comparing the company's performance across reporting periods on a consistent basis by excluding these noncash, nonrecurring or other charges that it does not believe are indicative of its core operating performance. The reconciliation of GAAP net loss to non-GAAP net loss can be found in the third quarter of fiscal '22 earnings press release that the company issued and furnished to the SEC last night on Form 8-K. All of American Superconductor's press release and SEC filings can be accessed from the Investors page of its website at www.amsc.com. I'll begin today by providing an update and sharing a few remarks on our business. John Kosiba will then provide a detailed review of our financial results for the third fiscal quarter, which ended December 31, 2022. And we'll provide guidance for the fourth fiscal quarter, which will end March 31, 2022. Separately, John will update our operating models and talk about actions we took that are expected to lower operating expenses. Following our comments, we'll open up the line to questions from our analysts. During our third quarter of fiscal year 2022, we are delivering on our strategic priority of a more diversified business. Total revenues for the third quarter of fiscal year 2022 came in within our guidance range. Our third quarter revenue of nearly $24 billion was driven by new energy power system shipments. Our grid segment revenue for the third quarter of fiscal year 2022 accounted for over 85% of AMSCs total revenue. The remainder of the revenues came from our wind business. During our third quarter, we saw a diverse set of product shipments. We shipped voltage compensators capacitor banks, harmonic filters, transformers rectifiers, volt-var optimizers, ship protection systems and electrical control systems. These products went into renewables and a variety of industrials markets, including semiconductor mining, as well as our navy projects. We ended the third quarter with more than $30 million in cash. And I'm happy to announce that we have met our obligations in the Chicago project. The $5 million of restricted cash for the resilient electric grid project in Chicago are expected to become unrestricted and hit our books during our fourth quarter of this fiscal year 2022. During our third quarter, we booked $43 million of new orders and grew our backlog to over $110 million. Our backlog at the end of the third quarter increased by nearly 40%, when compared to the same quarter, a year ago. We announced our ship protection system contract with Huntington Ingalls to be deployed on the San Antonio Class Amphibious ship LPD-32. The LPD-32 contract marks AMSCs fifth ship protection system for the San Antonio class ship platform. Over the past several years, we've taken a series of very deliberate actions to diversify our business and grow through our grid business. Over a four year period, we doubled our business. Over the same period, we nearly tripled our grid business. Fiscal year 2022 has been a year of transition for the company to a broader product portfolio, pricing and cost changes were possible and aligning our fixed costs better with historical revenues. John Kosiba will provide more color on this today. We have expanded the markets we serve and that has translated into a higher order intake rate. We do not intend to stop here. We have a lot of work ahead of us but our longer term priority is to build a sustainable business that's well positioned to not only take advantage in renewables, but also in semiconductor, mining and materials, as well as in defense. We believe that this sustainable business is not so far off in the future. John is going to update our operating models later in the call. I will provide a deeper review of some of the drivers of our business going forward. For now, I'll turn the call over to John Kosiba to review our financial results for the third quarter of fiscal year 2022 and provide guidance for the fourth quarter of fiscal year 2022 which will end March 31, 2023. John? AMSC generated revenues of $23.9 million for the third quarter of fiscal 2022 compared to $26.8 million in the year ago quarter. Our grid business unit accounted for 87% of total revenues, while our win business unit accounted for 13%. Grid business unit revenues decreased by 17% in the third quarter versus the year ago quarter, while our win business units increased by 76% over the same time period. Looking at the P&L in more detail, gross margin for the third quarter of fiscal 2022 was 2% compared to 13% in the year ago quarter. Gross margin for this quarter was adversely impacted by the continued drag on logins associated with acquired Neeltran backlog. Additionally, one of our larger projects at Neeltran required additional cost to complete than we had originally planned. This required approximately 900,000 of additional unanticipated costs in the quarter. We do not anticipate any of these costs reoccurring in Q4 as that project is now in the final stages of production. To help provide some quantitative reference as a result of several lost contracts associated with our acquired Neeltran backlog which includes the project I just discussed. Our third quarter reported consolidated gross margins have been adversely impacted by approximately 660 basis points. We believe that Q3 fiscal 2022 will be the peak of the drag from Neeltran acquired backlog. We anticipate Neeltran gross margins to improve in Q4 and further strengthen into fiscal 2023 as we begin to execute on the new project sold post production - post acquisition, sorry. Moving on to operating expenses, R&D and SG&A expenses for the third quarter of fiscal 2022 were $9.3 million, compared to $9.4 million in the year-ago quarter. Approximately 15% of R&D and SG&A expenses in the third quarter of fiscal 2022 were non-cash. Our non-GAAP net loss for the third quarter of fiscal 2022 was $7.7 million or $0.27 per share, compared with $4.6 million or $0.17 per share in the year-ago quarter. Our net loss in the third quarter of fiscal 2022 was $9.6 million or $0.34 per share. This compares to a net loss of $4.3 million or $0.16 per share in the year-ago quarter. Please see a press release issued last night for a reconciliation of GAAP to non-GAAP results. We ended the third quarter of fiscal 2022 with $31.4 million in cash, cash equivalents and restricted cash. This compares with $37.4 million on September 30 2022. Our operating cash burn in the third quarter of fiscal 2022 was $5.5 million. Now turning to our financial guidance. For the fourth quarter of fiscal 2022, we expect that our revenues will be in the range of $27 million to $30 million on net losses expected not to exceed $8 million or $0.28 per share. Our non-GAAP net loss is expected not to exceed $6 million or $0.21 per share. We expect operating cash flow to be a burn of $4 million to $6 million in the fourth quarter of fiscal 2022. We expect to end the fourth quarter with greater than $25 million in cash, cash equivalents and restricted cash. Now I'd like to take a few moments to update you on several strategic steps we have undertaken over the past 30 days that are expected to lower our cash flow breakeven revenue targets. Our revenue product mix has evolved as a result of the two acquisitions from what was once heavily dependent on the renewable market to a much more diversified revenue stream. It took some time to integrate both NEPSI and Neeltran to the point that we have now experienced some operating leverage across the Grid segment. As a result, we have taken several steps that are expected to lower both our manufacturing and SG&A overhead costs. These steps ranged from combining positions which were redundant across multiple product lines to leveraging our engineering and SG&A costs across the entire company. This has in part enabled us to undertake an organizational realignment and to reduce our workforce across multiple product lines. We anticipate an annualized savings of $5 million resulting from these actions. Our business outlook for the fourth quarter does not contemplate any severance related costs for the reduction in workforce actions, which are expected to be no more than $1 million. We expect to experience the full impact of these anticipated savings starting in Q1 FY 2023. Now let me further elaborate and how this is expected to impact our cash flow breakeven scenarios moving forward. As we move into the start of FY 2023, we expect short-term cash gross margins to approach the upper teens. As we move further into FY 2023, we see scenarios where cash gross margins could reach 20%, if our revenue approaches $30 million, and we have several scenarios where cash gross margins approach 25%, if revenue approaches $35 million. These cash gross margin scenarios are a result of actions we have taken over the past year to raise our prices, coupled with what we believe is stabilized raw material costs. We will continue to be vigilant in both our pricing models and proactive to any changes in raw material costs as we move into FY 2023. Moving along to our operating expense models, we anticipate our cash operating expenses will be approximately $9 million a quarter, once the full extent of our recent cost reduction steps are realized. When you combine the anticipated gross margin improvement with our updated operating expense profile, we see revenue breakeven scenarios in the $35 million quarterly range. These scenarios are based on current assumptions which are subject to change. Please note this is not financial guidance. This is meant more to help our shareholders understand our current forecast and operating model. We will continue to provide our current quarterly financial guidance when we announced our earnings for the prior quarter. We have macro trends in the market that are starting to drive our business. Our backlog is over $110 million and our pipeline of prospective orders reflects our growing and diversified company. We have doubled our new energy power systems order intake rate. These macro trends are driven by climate and environmental policies, which raised demand for our new energy power systems. More specifically, our diversified pipeline of orders come from investments in renewables, and industrial markets such as semiconductors, and mining, metals, and materials. Our company has transitioned from almost a pure play in wind, to a company that's focusing on grid resiliency. We now have multiple plays at multiple points in the power infrastructure. Our voltage compensators, capacitors, harmonic filters, transformers and rectifiers can power the energy intensive factories of the future without the risk of costly power interruptions. Today, our business is about a quarter based upon renewable energy. We've grown the business that's supporting power management at the substation level for the utility as well as supporting customers in the semiconductor industry. We have a variety of applications for industrial processes, and manufacturing, like mining, metals extraction, metal processing, and chemical plants. The company is moving in a direction where expects to provide more new energy power systems for more industrial users, more than half of our new energy power systems orders during the third quarter of fiscal 2022 come from industrial markets, one fourth is from renewables. In the past, we've talked about sales leverage with our acquisitions. For example, if we get a $5 million order for D-VAR in semiconductor, we have the ability via NEPSI to get an additional 20% or $1 million in this case of additional revenue at similar margin in profit. When we look at the sales leverage in the mining and materials space, if we get a $1 million order from a mining project for NEPSI, we have the ability to get another $5 million from the leverage of Neeltran's product line. This is five times expansion of revenues. I state the example with NEPSI first followed by Neeltran because that was the order in which we acquired the two companies and part of what drove us to like the potential sales leverage of both companies. You can reverse the example and see similar potential leverage for mining when comparing two semiconductor projects. For a mining and materials project that Neeltran would generate, say $5 million, we're able to expand those revenues by another $1 million from NEPSI, we are working to make those also be at similar margin levels. We believe that we are almost through that. We have a handful of Neeltran projects we need to deliver on in our fourth quarter of fiscal 2022 which is part of the guidance. I have been asked about potential operating leverage and synergies between the operations that were acquired, and the historical business. My answer has been no up until now. The team has worked diligently on driving operational leverage between the business lines, we are seeing that now coming to fruition due in part to this leverage. During the fourth quarter, we were able to tremble we expect to be approximately $5 million from our annual operational expenses beginning in fiscal 2023. This is expected to help us get better financial leverage from the business. We believe that this helps put us on a better foot forward financially. We discussed the impact of the Neeltran backlog on our financials. This is something we have largely worked through. And I want to reassure you that going forward, we feel very confident about prospective margins. With that, I'll move on to our ship protection systems. In an age of increasing global tensions, we're helping to move U.S. Navy ships into the future by installing protection systems that help them stay hidden from our enemy's threats. Our ship protection systems or SPS provides a solution that masks the ship from harm's way, when an operation like stuff. We announced our fifth ship protection system contract for LPD-32 which has become the baseline design for the San Antonio Class Amphibious Ship Platform. Right now, we are installing our first ship protection system on the USS Fort Lauderdale. This is something the Navy and our shipyard partner are monitoring closely. We are preparing to deliver on our second ship contract the USS Harrisburg. We currently have orders for the USS Harrisburg, the USS Pittsburgh, the USS Richard McCool and the recently added LPD-32. SPS contributed nearly 10% of revenues in the third quarter of fiscal 2022 and has been a very consistent source of grid revenue for several quarters. Our team is focused on continuing to expand our ship protection systems into other end vessels while we install our initial systems. As I have mentioned in the past, we are working on developing additional content that could be inserted in the future fleet. We hope to have some news very soon on our progress here. On our resilient electric grid or REG system in Chicago, it continues to perform very well. In fact, we received notification from the utility that the system met specify performance requirements, and as a result, we expect to see the return of a $5 million bond which was held until the REG system passed this important accomplishment. The performance bond was structured as a letter of credit. This letter of credit is expected to hit our books during the fourth quarter of fiscal year 2022. We continue to see strong desire from this utility, as well as others to further deploy Reg into the power grid. It is clear at least to us that Reg offers the capability and functionality to solve some of the nation's current critical grid infrastructure problems right now. This initial project has provided tremendous learning and it's clear to me that utilities are thinking about Reg as a viable product. Turning to wind, we are supporting Inox with the initial prototype of a three megawatt class wind turbine and Doosan with the initial wind farm of 5.5 megawatt wind turbines. During the third quarter of fiscal 2022, we shipped two megawatt electrical control systems to our partner in India Inox Wind. You can see that Inox was just over 10% of our revenues this quarter. The design certificate of the three megawatt class wind turbine prototype for the Indian market is complete. We are now working on the type certification and hopefully will report back to you soon on our progress. Type certification means that the three megawatt class wind turbine will be able to connect to the power grid. It's worth noting that towards the end of 2022 Inox did announce the completion of a capital raise of about 15 billion rupee, which translates into something on the order of about $180 million. We believe Inox is closer to expanding its business with the three megawatt class wind turbine this calendar year, which we expect will translate into an expanded order book for us. We hope to be reporting progress in the near future. To conclude, we have built a diversified business that we believe is well positioned to capitalize on future investments in renewables, future investments in semiconductors, future investments in electric vehicles, and the mining of the materials that go into these three markets, as well as the defense business. We are driven by the opportunities that climate change, present to us, as well as the electrification of transportation. Our products provide support to the grid at the power consumption point of the electric vehicle, as well as the operations that provide the metals and materials used to build the vehicles. We evolve from being a very concentrated business with both customer and market concentration to a more diverse business, all at the same time growing revenues. We are focused on improving the financial performance of the business, continuing to deliver a diversified business and making progress towards our longer term priority of building a sustainable business. I think the team has done a terrific job of achieving this. We understand the broader geopolitical environment is mixed with uncertainty surrounding the supply chain constraints, inflation, recession, and stock market volatility. When we look at our prospects, our sales pipeline appears to be strengthening, not weakening. Orders are becoming larger, not smaller. The types of markets we serve are becoming more diverse, less concentrated. So when I look at the near term, say the next year or so, I think our prospects are great. As we look ahead into the fiscal year 2023. I am optimistic that our recently announced backlog will result in a more diversified and financially stronger AMSC. You can see from the backlog, and John's commentary on our operating models, that we are nearly there. We believe that our differentiated solutions and set of capabilities are a significant advantage that will allow us to serve our customers even more efficiently. I want to thank our team for their hard work and support. And I look forward to reporting back to you, at the completion of our fourth fiscal quarter and fiscal year end of 2022. Hi good morning. Maybe just on the Reg milestone if you're able to maybe some details on exactly what that milestone is. And, you know, potential read through to next steps. You know, I recently actually yesterday saw that Chicago and ComEd announced a pretty wide ranging agreement it included a lot of energy initiatives and grid investments. So curious, you know, maybe your confidence level or what type of visibility you might get that for this milestone into the next steps? Yes, I mean, to be blunt, my confidence is very, very high. I think you know, the good news about Reg is and we've designed the business in a way financially, the Reg is not necessary to meet, you know, our margin projections and kind of the near term financial aspects of the business. But looking at the longer term, this is a huge milestone for the company it means the systems performed as advertised. It means that the utility has been able to work with their constituents, specifically regulators and all the local politics they have to deal with, where this is now a permanent part of the grid it has been accepted. The number of people that they brought there that work for the utility, the number of people that they brought there that work for other utilities has been staggering. Their efforts all along have been to look at this first project as a stepping stone to a future with superconductivity. Everything that we see everything that we're told, everything we've been shown, leads us to believe that there's a very bright future for Reg in many, many cities in the country. This is a huge milestone for the company. I think the hardest challenge, though, is to predict or handicap over time, how will this progress? Utilities are notoriously slow. You know, negotiating contracts that we do today for any of our other products take a longer time than many of the markets that we serve. But, you know, I think when we look back about embarking on to this product Reg, we really have met a tremendous milestone we have a system that's in the grid that's been accepted by the utility and expected - and accepted by, you know, all of their constituencies, which I think is huge for the product it means we really have a product we can go and sell going forward. Got it. And I can appreciate the lack of, you know, timing visibility. But if you had to handicap it, I mean, do you think especially given all of the parties that have come in and looked at this deployment? I mean, do you think that that second Chicago project is next or would you expect, you know, as you've talked about diversity and diversity of customer, would you expect it to potentially be another utility? I really can't handicap that - other than saying we're working in parallel with multiple cities right now on projects that solve compelling problems in the grid right now. And we see Reg as really the only solution, if they want to solve these in the near term. Got it, okay. Maybe last one, from me just appreciate the commentary on the breakeven given your backlog pipeline, and you know, the potential for quicker turn business. I mean, when you think about that breakeven number you think that you can get there, you know, on the grid momentum alone, with wind kind of in its current state, or when you get there, do you anticipate that wind would be a meaningful part of it as well? Yes, I think that's probably the question of the day. Eric, you nailed it. I think we have both paths open to us. I think obviously, if there's a rapid rebound, and when we get there much faster, meaning that that rebound comes or really almost there with the backlog today, right? So incrementally growing, the new energy part of the business is happening, if we can continue at the current rate, we've been bumping those orders, we're basically there. We have to deliver on it right, and we have to deliver it on time and on cost. And we've been able to successfully do that throughout the business. And we've improved the Neeltran pretty significantly quarter-on-quarter with our operating efficiency capability. So, I think, when I look at this, I see the backlog. And I see the comments that John made about where the operating leverage comes from. And I think we already have the backlog to get there. I think time will be the, tell. And I think certainly additional win would make it easier might make it faster. But it you know, today as we sit here, I feel better than I ever have, that we're now at the point where we're talking about potentially achieving these milestones, not in the next year, or two or three, but in the next quarters or a year or so. So we have a much brighter future right in front of us right now. Thanks so much, guys. Can you talk a little bit about the raw material impact on your margins? And what you're seeing in terms of the cadence of some of those lower raw materials starting to flow through your, through your COGS line? Yes, I think Colin, that the challenge for the business has is the rate at which we take orders and the rate of weeks we deliver them. So, for some products, we're out, we're booking orders as early as six months, maybe nine months, for many of the products, we're out a year plus at this point. And that compared to where the business was say a couple years ago, certainly has extended by at least a quarter or more for many of the product lines. And that's a bit of the kind of constipation of the backlog. If I use that term so please don't write that, but I don't have a better language, is that we're kind of stuck with this backlog. We're trying to get it out. And the good news is, as we've priced in new orders, a new backlog as John said that those are as we model them going forward, that certainly margins that we - have hoped for and expected. For material prices, specifically in John's commentary, we see a stabilization of those costs, which means now as we've priced in new orders, it's just the time it takes from when we receive that order to when we deliver on it and we're kind of in that cadence now in the coming quarters. Okay and - that's helpful, I may ask some clarifying questions later. But next, I'm just curious about the bid activity. Obviously, there's a lot that's happened from regulatory perspective around capacity building, domestically. And so, I'd love to get a better sense of, how much sales activity there is and what your conversion rate is on what you've seen so far, I guess called over the last six to 12 months? I think, you know, the bid activity has exploded, I think the number of projects that we've looked at, certainly is at the highest point, since I can remember. So the prospects for the - business are greater than they've been, certainly in the past years. When we look at the order intake, we have been announcing today we close more than 40 million of orders last quarter. When we look at the run rate of what we're just doing in new energy over the past three quarters, it's about 30 million, just for new energy, right. So then you got to add in what we're doing with the Navy, you got to add in what we're doing with wind as well. Is there any other commentary you want to talk about John? Is that helped Colin? Well, the hard part we have with the win rate is most projects down [ph] and this is what we've done. You know, even with Neeltran and to some extent with NEPSI. We try never to compete directly. So the way we do it, it's a very early decision if we're going to win or not. And then it depends upon how the project goes forward is, we make things smaller and less complex. And if we're able to design that in with the engineering company, which is usually the engineering procurement construction company, then we really eliminate a lot of competition. I wouldn't say all, but almost all. So we're - today in this version of the business, we're really never in the decision making by purchasing an engineer has made a design that requires our smaller footprint, which means that it's hard to go out and get an alternative. So when we look at direct project win rate is extremely high, right. But to be transparent, there's a lot of work that happens in the quarters before even getting the order. We were trying to get designed and on the print, be it for a ship or for a substation. And really those are the two that we're focused on. And the same techniques we use for the ship we use for the substation, which is how do we make it smaller, more and more energy dense? How do we add more feature function than what the alternatives are? And that's true across everything that we do. Colin, there are two indicators we're looking at is pipeline growth, which is Dan just highlighted. And we do, especially for the last year, as we had to address our prices based on the raw material inputs going up. We have been carefully watching our customers and making sure that we remain competitive and across the board and the businesses, there's no evidence to suggest that the bids we're doing are making us uncompetitive. There's, isolated pockets we're watching and we're concerned about whether there's a more competitive landscape to it. And but as of now, there's no... And that's actually going to happen we're much more focused on margin going forward, right. I mean, that's the thing that people need to hear is we're trying to grow the business, but we're trying to expand margins as well. And that means that and that's I think why Colin's get that the question is, well, now are you running up to a competitive pressure with this current pricing? We haven't seen it for the business that we want to take. And that's really, I think the key point we want to make today Hi Daniel. So I guess the first one here, the $5 million of annual savings that you expect from cost reduction actions, just wondering if you could talk through how much of that is expected to impact your cost of goods sold versus OpEx and maybe what the impact to you know, either R&D or SG&A might be? Yes, so good morning Justin. The vast majority of this is going to be OpEx. We didn't break it down publicly, but what I will say is on the scale call it north of 75% will be OpEx related versus less than 25% will be COGS. I think from a capability standpoint. I'll reiterate paraphrase something I said earlier as we are expecting more content per ship from the Navy, which means that when that happens, that means we've met certain development milestones, which means unless we have something else to develop, those are not cost that we need to continue to carry. I think when we look at the substation type products. We're at a point now I think we've learned a lot about the sales leverage. I think we're now going to demonstrate some operating leverage particularly in the back office. We need to continue to digest what we have, which means the need to go to develop something over the next quarters is very limited. So, but going forward, we still have the capability to be able to service our customers. We still have the capability to be able to make changes or make adjustments. And we still have the capability to develop some new technology, which could translate into future products. But right now on our roadmap really is, we have to focus on the financial leverage that the revenue will bring. And that's the near term focus for the team. And that allowed us to take maybe a very different look at our operating expense. Got you, okay. Thanks - for the color there. I guess then, just on the gross margin here, so it looks like gross margins are expected to improve in Q4. Just wondering is a high single-digit number for the gross margin reasonable there? And then is the improvement primarily due to the Neeltran kind of lower margin backlog rolling off or are there other factors like a change in the product mix are where this Q4, where you're going to start to see some of these pricing actions that you've taken, you know, benefit the margin? So help [ph] with the second question, the first question, we don't guide the gross margin. So I want to be careful not to give too much clarity on that. But what I will tell you is the gross margin improvements in Q4 will be driven by all three of those right we said Neeltran, gross margins are going to improve. We do have a healthy expectation of D-VAR revenue in the fourth quarter. So that's inherently going to help the mix. And then as we continue to ship backlog in particulars so far the NEPSI product line has the quickest lead times. And so the pricing that we've been able to implement at NEPSI will flow through the P&L the quickest. And so you're going to see it in all three areas, you're going to see pricing, improve the margin, you're going to see mix, improve the margin, and you're going to see the impact of Neeltran improve the margin. And that's just isolated its Q4, that's really what we're talking about as - and throughout FY 2023. Got you, okay. And then I guess just lastly, here. I wanted to understand the kind of cash flow, breakeven scenario and the model you're thinking about, I think I heard that it was $35 million in revenue with gross margins, near 20% but correct me if I'm wrong, so it'd be about $7 million in gross profit. And then, cash off exit say $7 million would get you to a breakeven? Is that the right way to think about it or are there different pieces? And I think, I think you might have misheard that part of the script. So what I said was, we see scenarios where gross margin can approach 25%. And we see operating and expense models closer to $9 million. So the breakeven is assuming a 25% gross profit with $9 million of cash on books. Wanted to follow up on the sales leverage potential from NEPSI and Neeltran you did a good job of outlining that again, Daniel, I guess, just curious on that cross selling, how has that progressed but versus expectations better than you expected outlook looking forward? Yes, I think that's exactly what we're trying to get at, as we set an expectation we did this that we thought that these things would happen. Now we're seeing them, right. And we're seeing this specifically in semiconductor. And we're seeing them specifically in this new space for us the metals, mining and material space. The good news is when we look at semi, which is really a combination of D-VAR, and the offerings that we inherit from NEPSI. Those today are at similar margin, which is great and that's what we had expected. When we look at the mining in the metal material space, which is the example we've been using for Neeltran, that's a combination in MC and Neeltran and I tried to do it both ways, depending upon how people think about it. Because as we looked at it, I did - in the prepared remarks, I looked at this we looked at it as a additional expansion of what we already have begun with NEPSI that we saw Neeltran kind of continuing on that theme with even greater lead sales like a trend. But then I brought it back to just kind of compare directly those two markets and just we get $5 million of one, we'll get another 20% or $1 million of another. And we set all these things when we did the deals. And now we have in examples, and it's not one or two, it's quite a few of them in the backlog, the challenge, as I pointed out, and the challenge that everybody, obviously seeing here is, how do we have the backlog that we have on the books with Neeltran. How do we digest that process and move to better priced higher margin our backlog. And that's really why we're confident today, in updating operating models, talking about breakeven, these are things we have not done in a couple of years, right, maybe three years. We want people to understand that John and I are highly confident, based upon our backlog. And based upon how we're usually able to deliver product at a pace, that if those things can both happen, we're not really far away. That's great color, great to hear, Daniel. And maybe another question with that strong backlog, the inventory position just continues to build, any way to think about working capital over the next call 12 months or so? Yes, so the inventory has built over the last year, some of its due just to the backlog growth. And some of it has been kind of some shipments. We do have a fair amount of shipments going out in D-VAR, this quarter, where we had some inventory build up to that. So the expectation is we should leave that project out of whip. And we should start to see that. On the working capital strain - this quarter and assumes we have some working capital. So the guidance I gave you four to six, you know if you look, we got it to non-GAAP up six, you know, there's about a million and a half or so of depreciation. So, in theory would be closer to four and a half, I gave a pretty wide range because of working capital that could impact that up to $6 million or so. But moving forward after that I see working capital, probably in Q1, if it's negative in Q4, it's probably going to be positive in Q1, and it will net out to zero. So I expect working capital to be closer to flat and have no impact just because the way our milestone structure is Q4 and Q1, we may have a little bit of swing from one quarter to the other. But that's already incorporated into guidance. Yes, that's perfect. And there might be that larger D-VAR project that pushed out last quarter, you still expect that to hit in the current quarter? This concludes our question-and-answer session. I would like to turn the conference back over to Daniel McGann for any closing remarks. Thanks, Gary, I just want to wrap up by saying that we're a much broader and more vibrant company today than we were just a few years ago. We've been able to add new pieces of new markets. We've been able to manage pricing. We've positioned ourselves to grow. And we're hoping to see that start to pay off as early as next fiscal year. We think there's a series of tailwinds driven by climate change that are here in to stay and are pushing the business forward. As I mentioned earlier, our pipeline is growing and becoming more diverse. Our order book has gone from delivering at a rate of $20 million in new energy power systems orders per quarter, to now delivering at a rate of over $30 million for the past three quarters. This is just for the new energy power systems. So our ability to convert that potential pipeline into actual orders is really starting to happen. I think it felt great prospects for us as we look at 2023 and we're even looking at quoting products for delivery already in 2024. So we think the next years look very bright for the company. Thanks, everybody.
EarningCall_574	Good day, and welcome to the Broadridge Fiscal Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After todayâs presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note the event is being recorded. Thank you, Allison, and good morning, everybody and welcome to Broadridge's second quarter fiscal year 2023 earnings call. Our earnings release and the slides that accompany this call may be found on the Investor Relations section of broadridge.com. Joining me on the call this morning are Tim Gokey, our CEO; and our CFO, Edmund Reese. Before I turn the call over to Tim, a few standard reminders. One, we will be making forward-looking statements on today's call regarding Broadridge that involve risks. A summary of these risks can be found on the second page of the slides and a more complete description on our annual report on Form 10-K. Two, we'll also be referring to several non-GAAP measures, which we believe provide investors with a more complete understanding of Broadridge's underlying operating results. An explanation of these non-GAAP measures and reconciliations to the comparable GAAP measures can be found in the earnings release and presentation. Thanks, Edings. Good morning, and thank you for joining us. I'm pleased to be here to review our strong second quarter performance. I'll start with a quick summary of our results and key headlines followed by a review of our business. I'll close with some thoughts on why my recent client meetings have given me even more confidence that Broadridge remains well positioned to grow even in an uncertain market. First, on Slide 3, Broadridge delivered another strong quarter. Recurring revenues rose 8% on a constant currency basis, with strong growth across both our segments. Adjusted EPS rose 11%, driven by the combination of strong growth and disciplined expense management. Second, this performance highlights the strength and resilience of our business. Clearly, the market backdrop remains uneven. Equity markets rose slightly in the quarter, capping off a year of strongly negative returns. Rates continue to rise. Volatility remained high. Asset managers pulled back on discretionary expenditures and the dollar remained very strong. In the face of this uncertainty, Broadridge's resilient business model with 93% recurring fee revenues continued to perform. Moreover, our long-term business drivers remain healthy. We're benefiting from a strong sales backlog, robust investor participation and significant demand for our digital solutions, which, along with disciplined cost management are enabling us to drive top and bottom line growth. Third, investor participation in particular remains at very healthy levels. Broadridge benefited from mid to high-single digit position growth across both funds and equities. And we expect to see further growth ahead in the second half. Fourth, we are executing on our long-term growth initiatives. We're innovating in governance, including pass-through voting, tailored shareholder reports and digital communications, and we continued our strong momentum in capital markets. Fifth and finally, we are reaffirming our guidance for the full year. We continue to expect to deliver 6% to 9% recurring revenue growth, constant currency, expanding margins and 7% to 11% adjusted EPS growth. Now let's turn to Slide 4 for a review of our results, beginning with our governance or ICS business, which reported another strong quarter. The biggest driver of our 10% growth in ICS continues to be new sales in our Fund Solutions and Customer Communications businesses. Equity position growth remained strong, driven by double-digit growth in managed accounts and mid-single digit growth in non-managed accounts. On position growth, while still healthy, slowed to 6% as investors rotated away from the traditional active strategies into ETFs and passes. Looking ahead to the seasonally larger second half of the year, we expect further growth across both equities and funds. Demand for our innovative solutions remains strong as evidenced by significant interest amongst our asset manager clients to offer their investors both institutional and retail, choice on how their underlying shares are voted. Just yesterday, we launched a new pilot for individual investors with another leading passive asset manager. And we're in discussions with a number of other fund complexes. We're also continuing to work with our fund clients to develop our future road map for tailored shareholder reports, which will fill a critical need for the industry. Beyond our regulatory products, we're seeing strong demand for digital communications with a second major client signing for our wealth and focused platform during the quarter. This omnichannel product suite offers enhanced investor engagement while delivering near-term cost savings through increased digitization of critical communications. That has proven to be a compelling combination for our customer communications clients. We've been investing steadily in building these capabilities over the past few years, and I'm pleased to see that investment now turning into meaningful revenue with key clients. Turning to capital markets. Recurring revenues rose 12%, driven in part by the continued strong performance of Broadridge trading and Connected Solutions, or BTCS, where our market share gains are driving growth. I was also pleased to see cross-selling start to contribute to new sales as well as we won a new client in the quarter that has long been targeted by BTCS, and that made the decision to switch now based on their trust in Broadridge. Our other capital markets product also performed well as our themes of simplifying globally, front to back, and within the front office are resonating with clients. We also continue to see progress in digital ledger repo with a strong pipeline of discussions with new institutions. Wealth and Investment Management declined year-over-year as positive core growth was offset by lower license revenue. We continue to hit key Wealth Management platform milestones. UBS advisers are transitioning under the latest generation of our workstation with continued very positive feedback. We've now completed development of all 29 platform areas and testing for 26 to 29. We are working closely with the new management at UBS as they refine their approach to rolling out the remainder of the platform and we continue to expect to begin to recognize revenue in mid-calendar '23. Our sales pipeline is strong. And as Edmund will discuss, our investment levels have decreased as we shift into this new phase. Moving to Closed sales. Year-to-date Closed sales were $94 million. Client engagement around our next-generation technology remains high, and our pipeline entering calendar '23 is stronger than it ever has been. As a result, our sales expectations for fiscal '23 are unchanged. I'll close my remarks on Slide 5. Over the past several weeks, I have met with more than 30 CEO and C-suite clients in North America and Europe. The message from them is clear. They are continuing to push our next-generation technology. They are looking for long-term partners that invest in their business, and they like a componentized approach that creates value along the way. These critical needs are strongly aligned with our strategy and direction. And I'm confident that Broadridge is well positioned for growth in a market that remains uncertain. That confidence starts with our strong market positions across all three of our franchises based on mission critical infrastructure we provide that enables corporate governance and power trading and investing and is coupled with our strong track record of innovation and client service. We've invested to bring more value to clients and to meet their need for next-generation technology by building or acquiring critical solutions and adding talent and technology. These investments are playing a key role in driving the strong revenue growth we reported today, and we expect to see over the balance of the year. Importantly, we're innovating. As we talked about today, we're continuing to deliver new governance solutions. Our digital communications capabilities are gaining traction in the market. Our BTCS business is helping to drive the growth of our capital markets franchise, and we continue to progress Wealth and Investment Management. By aligning with the long-term needs of our clients, we're attacking a $60 billion market opportunity, and we're scaling into a global fintech leader. In an uncertain market, our resilient business model driven by recurring revenue, client focus and a long track record of disciplined expense management, gives us the visibility and confidence to deliver for shareholders. As a result, we're reaffirming our full year guidance for 6% to 9% constant currency recurring revenue growth and 7% to 11% adjusted EPS growth. And in turn, we expect to deliver at or above the higher end of our three year objectives. When we do that, it will be the fourth consecutive three year period in which we've delivered on our objectives. Finally, we're past the peak investment period in our platform solutions. Positioning us to begin to return to a more historical strong free cash flow conversion and giving us additional flexibility to drive returns for our shareholders. In sum, Broadridge is delivering on the growth plan we shared at our last Investor Day. I want to close by thanking our associates. The work Broadridge does is important and makes a difference for millions of investors. None of it will be possible without our associates' talent, knowledge and effort which enables us to deliver exceptional products and service at scale for our clients and for our clients' clients. So thank you. Thank you, Tim and good morning, everyone. I'm pleased to share the results from another strong quarter where recurring revenue growth and continued disciplined expense management drove double-digit adjusted EPS growth, even in the challenging macroeconomic environment. We continue to see organic recurring revenue growth from converting our sales backlog to revenue and healthy position growth. This performance in Q2 and the continued execution of our strategy gives us the confidence to reaffirm our fiscal '23 guidance. As you can see from the financial summary on Slide 6, recurring revenues rose to $840 million, up 8% on a constant currency basis, all organic. Adjusted operating income increased 23% as we lapped elevated investment in fiscal '22 and realize the benefit from targeted cost actions that we initiated in Q4 '22, both of which more than offset the impact of the lower event driven revenue. AOI margins of 13.4% expanded 220 basis points, and adjusted EPS rose 11% to $0.91. Finally, we delivered closed sales of $65 million. I'll note that the operating income growth is being offset by lower discrete tax items in Q2 '23 and interest rates. On taxes, we continue to project an overall tax rate of 21% for fiscal '23. And I'll remind you that while higher interest expense partially offsets operating income growth, the interest rate impact at the Broadridge level is fully offset by higher float income in our ICS segment. Letâs get into the details of Q2 results, starting with recurring revenue on Slide 7. Recurring revenue grew 8% to $840 million in Q2 '23, marking a second consecutive quarter near the higher end of our full year guidance range of 6% to 9%. Our recurring revenue growth was all organic, again, keeping us on track to exceed our 5% to 7% three year growth objective. Let's turn now to Slide 8 to look at the growth across our ICS and GTO segments. We continue to see growth in both of our segments. ICS recurring revenues grew 10%, all organic to $467 million, with regulatory at 9% and double-digit growth across all other product lines. The 9% increase to $181 million in regulatory revenue was driven by continued growth in equity and fund positions. Data driven Fund Solutions revenue grew 11% to $96 million, propelled by revenue from sales in our data and analytics products and higher float revenue in our mutual fund trade processing unit. Our issuer business revenue increased 12% to $27 million, led by growth in our registered shareholder solutions. Finally, we continue to benefit from strong demand in our Customer Communications business. Where recurring revenues rose 11% to $163 million, driven by new client wins in print and growth in our higher-margin digital business. Turning to GTO. Recurring revenues grew to $373 million or 6%, driven by new sales and continued strength in our capital markets, including BTCS, Capital Markets revenues grew 12% to $235 million, again propelled by strong growth from BTCS, new sales and higher fixed income trading volumes. Wealth and Investment Management revenues declined by 3% to $138 million. Growth from sales was offset by a decline in license revenue as we grew over a large client renewal from Q2 '22. As a reminder, license revenues can impact quarterly revenue growth, and we expect to grow over impact in Q3 for capital markets and in Q4 for Wealth Management. Looking forward, we expect GTO full year organic growth to be within our targeted 5% to 7% range. Now let's turn to Slide 9 for a closer look at volume trends. We had solid position growth for both equities and funds. As you can see by our results, investor participation in financial markets has remained steady despite market volatility. And we continue to be encouraged by this long-term tailwind. Equity position growth of 9% was driven by continued double-digit growth in managed accounts. Looking to the seasonally larger second half, our testing continues to show mid-single digit growth. And with those results, we continue to expect equity position growth in the mid to high-single digit range for the full year. Mutual fund position growth moderated from Q1 '23 levels, but still grew 6%, largely driven by the growth in passive funds. We expect to see continued mid-single digit growth in the second half. Turning now to trade volumes on the bottom of the slide. Trade volumes grew 5% on a blended basis in Q2 driven by double-digit fixed income volume growth and modest equity volume growth as continued higher trading by institutional investors more than offset the lower activity at our retail wealth management clients. As we lap a strong Q4 '22, we continue to expect full year trading volume growth to be essentially flat for the year. Let's now move to Slide 10, where we summarize the drivers of recurring revenue growth. Recurring revenue growth of 8% was all organic and this organic growth was balanced between net new business and internal growth. Revenue from closed sales and our continued high retention from existing customers contributed 4 points and internal growth primarily positioned growth in trading volumes also contributed 4 points. Foreign exchange impacted recurring revenue by 2 points with the bulk of that impact coming in our GTO business, as you can see in the table on the bottom of the slide. I'll finish the discussion on revenue with a view of total revenue on Slide 11. Total revenue grew 3% in Q2 to $1.3 billion, with recurring revenue being the largest contributor driving 4 points of growth. Event driven revenue was down $27 million from the prior year and was a headwind of 2 points as mutual fund proxy activity slowed to a historically low level, the lower mutual fund proxy activity is driven by the timing of fund in ETF board elections as funds reacted to the combination of weaker markets and record withdrawals. Board elections for these funds may be pushed back from time-to-time, but they are not an optional activity and over the long term, event driven revenue will grow in line with fund and ETF position growth. Looking ahead to the second half of fiscal '23, we expect the combination of higher contest activity and lower mutual fund activity will have us trending towards the low end of the $240 million to $260 million range that we've seen in recent years. Low to no margin distribution revenues increased by 3% and contributed 1 point to total revenue growth, as the higher volumes in customer communications and the impact of the July postal rate increases offset lower event-driven activity. We continue to expect double-digit distribution revenue growth for the full year. And I'll reiterate that the elevated distribution revenue from July and January postal rate increases and higher customer communications volumes have a dilutive impact on our reported adjusted operating income margin. Turning now to margins on Slide 12. Adjusted operating income margin for Q2 '23 was 13.4%, a 220 basis points improvement over Q2 '22, driven by the operating leverage in our business, higher float income, continued disciplined expense management and the impact of targeted cost actions that we initiated at the end of Q4 '22. Our progress through Q2 gives us increased confidence that we will be able to offset inflation and FX impacts and deliver on our margin expansion objective of approximately 50 basis points for fiscal '23. Let's move ahead to Closed sales on Slide 13. Second quarter closed sales of $65 million which brings our year-to-date total to $94 million, that's 16% off of H1 '22. Strong ICS sales in the quarter were powered by the large digital wealth and focused sales that Tim mentioned earlier. As a reminder, closed sales are historically weighted towards the fourth quarter. And given our robust pipeline, we remain on track to achieve our full year closed sales guidance of between $270 million to $310 million. I'll turn now to cash flow and capital allocation on Slide 14. I'll start with a reminder that Broadridge's cash flow generation is typically negative in the fiscal first quarter and strengthens over the course of the year. And we're seeing that trend play out again this year. Q2 '23 free cash flow improved to $104 million, up 276% from $28 million last year. Free cash flow conversion calculated as free cash flow over adjusted net earnings was up 10 points over last year to 51% driven by operating cash flow improvement. This improvement was the product of higher earnings, strong working capital management and most notably, a year-over-year and sequential decline in the level of client platform spend as we expected. Total client platform spent for Q2 '23 was $78 million, a reduction from last year's $154 million and less than half of the Q1 '23 level of $163 million. The wealth platform accounted for the majority of the investment in the quarter and the lower spend is a strong indicator of our progress in completing the development of that project. As we remain on track to recognize revenue on the wealth platform in mid calendar '23, we expect client platform spending to continue to be lower than last year. Keeping us on track to deliver free cash flow conversion that is higher than fiscal '22. We remain confident that we will return to more historical levels of free cash flow conversion in fiscal year '24. On Slide 15, you see that the client platform spend is our most significant use of cash and that we continue to return capital to our shareholders through the dividend. Let's turn now to Slide 16 to review our fiscal year '23 guidance, followed by some final thoughts on the second quarter results. We are reaffirming our full year guidance on all of our key financial metrics. We continue to expect 6% to 9% constant currency recurring revenue growth driven by healthy growth across ICS and GTO approximately 50 basis points of adjusted operating income margin expansion and adjusted EPS growth in the 7% to 11% range and closed sales between $270 million to $310 million. And before I move on from guidance, let me briefly discuss our second half outlook, which is embedded in that full year guidance. We expect Q3 adjusted EPS growth to be in the low to mid-single digit range as the impact of continued recurring revenue growth is partially offset by lower capital markets license revenue. We expect adjusted EPS growth to be higher in the seasonally larger fourth quarter as we recognize the benefit of growth in our proxy business and the timing of investments. Finally, let me reiterate my key messages. Broadridge delivered strong Q2 financial results. Demand for our mission critical technology is strong, and our testing is showing continued equity and fund position growth in a seasonally larger second half of the fiscal year. We are now past the peak period of investment and again, driving strong free cash flow in Q2 '23, and we continue to expect our client platform spend to be lower than last year, resulting in improved free cash flow conversion in fiscal '23 and a return to a more historical conversion level in fiscal '24. We have a resilient business and financial model with a proven track record of performance through the economic cycle, but we are reaffirming our fiscal year '23 guidance. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from David Togut of Evercore ISI. Please go ahead. Good morning. I'll ask my question and follow-up together upfront. First, both Tim and Edmund, you reiterated your view that you'll recognize revenue from the UBS contract in mid-calendar 2023. What does the annualized revenue and profit run rate look like from that contract kind of once you're up and running? That's the first question. The second question is really the guide to decelerating stock record growth in the second half to mid-single digit from 9%. What's behind the deceleration in stock record growth in the back half? Maybe I'll start off with the first question. And good morning, David, and thanks for the question. I mentioned on our last call, in Q1 -- for Q1 '23 in November that we expected the annualized revenue on the existing and in-flight contracts that we're working on to be roughly $100 million and the amortization associated with all of the build and conversion cost to be roughly about $65 million. We continue, as I said in my prepared remarks, to expect to recognize revenue in mid-calendar '23, this will not be at the full annualized amount that I just mentioned and that we shared in November. The fiscal '24 specific amount will be subject to the rollout approach that UBS has and will have a more definitive view of what those near-term economics are when we finalize those plans. And as we've previously mentioned, I'll go on to say that we do expect it to be dilutive to margins, but we can offset that and continue to deliver margin expansion. I think the important thing, as we mentioned -- we both mentioned in our prepared remarks is that we're now past that peak period of investment and expect to return to more historical free cash flow and be able to deliver on our long-term financial objectives. Yeah. And I think just to reiterate, I think Edmund said was right. And David, the really -- for us, this is something we continue to be really excited about in terms of the broader $16 billion opportunity in Wealth Management and how this positions us. And as we look at the components that we've created for UBS and how we are now able to show those to other clients as live software, that makes a real difference in the other sales discussions which is why we're seeing a building sales pipeline, not for other transformational deals, but for a series of components. So we feel good about that. Turning to the second part of your question or the follow-up question on our guide for the second half of the year in terms of stock record growth. I think, clearly, we have been at quite elevated levels of stock record growth over the past couple of years, well above historic sort of mid-single digit norms. And last year, really despite a 20% decline in the market, investor participation remained very healthy with very good growth. So we can't really predict the market. But given its ups and downs, our best indicator is really our forward testing. And that really gives us very good visibility into Q3 and pretty solid visibility into Q4. And really is based on that testing that we expect to see mid to high-single digit growth in the second half of the year. A little bit stronger for equities than for funds, but I think collectively, call it, mid to high-single digits. And we do think the fact that it's not sort of going back to levels of a couple of years ago, sort of not the growth rate, but the overall level really underscores a fundamental lift that has taken place driven by free trading, app based investing, younger investors being involved in the market. And that sort of one-time effect is then building on the continued growth driven by longer-term trends, including growth in managed accounts and more recently, direct indexing. And David, I'd just add to Tim's point. Again, equity position growth of 9% is flat to last year and the testing that Tim just mentioned continues to be in line with what our expectations were in our original guidance and what we have as well at that mid to high-single digit level. So we are reaffirming our guidance and outlook on that. And again, the same thing with the fund position growth as well. You saw a little bit of a deceleration sequentially in that. But again, we said mid to high-single digits, and we still expect that level to play out. Hey. Good morning, everyone. Thanks for taking my question. I wanted to see if you had any thoughts about where we are in the process of moving to direct indexing. It still seems fairly early. But conceptually, could we see managed accounts and direct indexing continue to generate really interesting growth that leads to strong growth in equity positions, but potentially fund positions continuing to slow down and if that could be the case, how do you think about the -- any relative change in economics due to mix shift? Yeah. Thanks, Peter. It's Tim. I do think that this is one of those things, it's the latest in a long series of investment product innovations that have help drive sort of the broad trend that we call the democratization of investors on top of things we're all familiar with, like 401(k)s (ph) and IRAs and ETFs and managed accounts. It's pretty early days. I think it is even too early to really sort of pick it up in the numbers, you sort of begin to see it as a sort of like the barest of breezes if you're trying to sort of talk about tailwinds. And I do think it's one of those things that could gain traction. There's a lot of benefits for investors in it relative to tax efficiency. So not a big driver today. I think of it as not necessarily something that is going to lead to a -- I'd like to be here telling you it's going to lead to some sort of fundamental change in the growth trajectory. I think it is something that just really supports the long-term trends that we've seen. And if we see it begin to begin to have a real measurable effect, and we'll begin to talk about it and break it out. But we're not seeing it really as an independent thing yet, but we are seeing it as one of the things that gives us confidence in the long term. Okay. That's fair. And then just on the Secure 2.0 legislation. Can you just remind us that the portions of the business related to retirement plans at Broadridge and how you see that potentially being a tailwind for continued growth in retirement plan participants. Yeah. I'll let Edmund add on to this, but retirement is not a huge direct part of our business. We do serve all of the retirement record keepers in their client onboarding. And then we serve a lot of the 401(k) market in our mutual fund trade processing. So we have a couple of our smaller businesses that directly serve. And then obviously, it's a big factor for all of our wealth management clients. It's a big portion of wealth management. So we don't see a -- I'm not sure that we're going to be sitting here a year from now saying we have a significant change in growth because of this, but it is something that is going to put more money directly into investing, help our clients, help their ability to invest, and I think will be generally a tailwind for a couple of our smaller businesses. Yeah. And the only thing I'll add to what Tim said is that, we do have in our mutual fund trade processing unit economics driven by assets under administration and retirement accounts. And if this legislation goes through and we see the increase in the amount of retirement accounts and assets, then we should expect to see some uptick in those assets as well. So overall, I think while small right now, this is generally a tailwind for us, and we'll be more specific about the economics as it plays out. Hey, guys. I wanted to touch based on, we always have this seasonal pickup in the second half for bookings for closed sales that we have to like, we have to prepare for, which is honestly sort of to be expected. I think you guys were around 20 to 20% or maybe 21%, 22% of your budgeted bookings in this quarter, which is, again, seasonally normal. So maybe just make sure we get a little more color on what the actual drivers are of your conviction on the pipeline and what parts of the business they're coming from for the second half of the year to meet those targets that you guys have for the full year. And just as a part of that, I mean, how much conviction do you have now? And are you seeing any of those numbers flow through to the wealth side coming out of, again, I know the UBS contract will be up and running and -- but it's not going to be very profitable. So it's really relying on other contracts and other revenues to complement that platform. Are you seeing any evidence of that yet? Thanks, guys. Yeah, Darrin. I'll start and Edmund can add on. I think as you say, where we are right now is seasonally at a very normal place and when we look at our pipeline and then sort of the stages of deals in the pipeline for the second half, it is very similar to previous years in terms of the coverage of deals in 00 for the second half and their stage of maturity. So as we reiterate today, that's really what we're looking at. Specifically on the wealth side, we said in the call last time that our pipeline is up 25% year-over-year. It's not to the stage where we're beginning to see it in the sales numbers as much as it is sort of in the pipeline build. So that's sort of where that stands. But I think the quality of the conversations gives us a lot of good feeling. And then I just want to come back to, I discussed this in my prepared remarks, but the 30 plus meetings that I've had with CEOs and other C-suite executives over the past month. And just in those conversations, there's a continued focus on next-generation technology, a lot of energy around modernization, digitization and at the same time, management teams have a lot on their plates, which is why they like the componentized approach that delivers things and delivers value along the way. And so there's a lot of positivity around us as a partner. And those, I think, are the things that have led to our pipeline being really at an all-time high. And that then combined sort of the stages of where those things are in the pipeline is what allows us to feel confident about the rest of the year. And Tim, I'll add one important point. And Darrin, I know you know this, the closed sales that Tim has just been discussing here, the in-year closed sales have aren't as impactful on our full year recurring revenue. It's the revenue backlog of what we've already closed, which is now 12% of recurring revenue, that's the big driver of our growth. So I think everything Tim said is correct, but the revenue backlog is what gives us the confidence in our ability to be able to hit the guidance this year. And just on the wealth side, just as a quick reminder of where that's -- how much evidence you're seeing that you're going to be able to take advantage of the platform, the UBS platform you built out? Yeah. I think that comes back to the -- anecdotally, when I think about the specific conversations that I'm involved in and enthusiasm as people see those components and see them live. And then numerically, it really comes back to the pipeline and comparing that year-over-year, which there is a substantial increase. So I think this is more of a topic that we don't have the news on the actual sales, but we have the news on the pipeline and there'll be a ongoing topic (ph). We have the news on the pipeline and what we said in Q1 was that we expect incremental sales of $20 million to $30 million in that wealth and all that Tim is saying I think gives us confidence in that number. Which, again, we feel good about and reaffirms our belief in the business case and the overall return for the company here. Guys, just one quick follow-up is on the position side. Obviously, position growth and equity in mutual fund is really out of your control. It's a market dynamic. But there's -- clearly, there's some correlation to what people have in their savings accounts and what they can do in stocks or anything else in that matter in terms of investing. And so I guess just looking forward maybe into '24 and beyond and I know it's early, but if you do see a change in the patterns of position growth rates, I mean, is this company do you feel that the drivers outside of that are strong enough to sustain the medium-term type targets you've been showing? It seems like there's a lot of wood in the fire that provide for sources of growth, but I'd just love to hear your thoughts. Thanks. Yeah. I think, Darrin, when we look sort of at the -- it's true that in past times when there have been significant dislocations like 1999 and 2008. In those extreme times, position growth went to zero, didnât go negative, went to zero. If you look at the growth of our ICS, GTO is clearly just driven by pure technology sales not related to position growth. And then if you look at the growth of our ICS business, it's been about half and half in the past couple of years in terms of revenue from new sales versus internal growth from positions. So clearly, if positions growth were to go all the way to zero, that would reduce our overall growth rate. But that has never -- has not happened for an extended period. So I think we wouldn't have any reason right now to think that our medium-term growth plans wouldn't be the same. Yeah. And again, I'll just add to Tim's point, position growth -- we have a very diversified business. Position growth drives 20% of our overall recurring revenue. So I'll point that out. But I just reiterating a point that Tim made, you won't be surprised. We look six months out and have confidence in that information, and we come and share that with you. You won't be surprised, we won't be surprised and we have the flexibility in our model make adjustments and ensure that we're still online with our growth objectives and guidance that we give if we see anything like that. Thanks very much. Just wanted to follow up on questions around the rollout of the wealth platform with UBS and the leverage that potentially you get with other customers. I think it makes sense that as those start to go live, it should improve sales cycles, et cetera. But what about from an implementation perspective, are there things that you're learning in this process with UBS that should allow you to make commitments to potential customers in terms of their own new implementations even if it's just for specific pieces or modules? And how should we think about that on a go-forward basis in creating that flywheel? And I do think, look, there have been lots of lessons learned in the work with UBS. I think in the future, we would break things like this into smaller pieces and do them a little bit differently. So that's definitely a learning. But moreover, we have built a lot of muscle as we have gone through this in terms of our project management technology tracking, the level of our ability now to look at -- we've converted all to agile. Where we are in the agile sprint. The number of story points left, the velocity and the story points. When you get into the testing, what are the expected defects, what are the defects on the defects when they're retested. How do you model all that out from a capacity standpoint. And we've built a whole platform around that, which we're now using rolling out to the rest of the company. And so it's been a pretty incredible maturation as well as just becoming much, much more mature on leveraging AWS. A lot of this new technology for UBS is all based in the cloud. And our maturation around that and around the development productivity that we're seeing is something that I'm very, very excited about. So we've talked about how this work is really driving the technology transformation of Broadridge to be the true SaaS company in the future. And I think that piece is really playing out well. So thank you for the question. Great. And then just wanted to ask a question related to headlines that we started to get some inquiries from investors on, and that's related to tailored shareholder reports. And given the pending SEC regulation on shareholder reports. Can you provide some color on how Broadridge is becoming involved or the opportunity to be involved in the creation and production of these reports to help offset some of the admittedly small headwinds associated with notice and access fees. Yeah. Absolutely. So tailored shareholder reports, as a reminder to everyone, what for the annual and semiannual reports that people get around fund communications, it's two communications a year instead of getting either a link to or a notice of a very long report that's difficult to read. People will receive, investors will receive a two to three page summary, just like some prospectus years ago. And we think this is very positive for investors all the testing shows that it is much, much clearer for investors to see, is more cost effective for funds in the long-term report is much more digestible to be e-delivered and we're big fans of e-delivery. So a lot of positives all around. For us, as we said on the last call, there is the slight flying that we get paid right now for these notices. I think we said $30 million some and that will go away. In the meantime, as we talk to our fund clients, this change, while it sounds simple, create some real complexities for them. The reports are -- the mandate is the reports come to investors not with a sort of generalized expense table that pertains to many different share classes, but it is tailored specifically to the share class that, that investor has. And so in talking to our fund clients, we talked to one fund complex who today does 200 different reports. In the future, they're going to need to do 1,200 different reports. So the scale of the work on them in terms of even though the reports are short, creating them in a very tailored way specific to each investor, there's a lot of complexity there. And that's all around data management. Converting that data and composing it digitally and being able to send that. That's something that's a real strength of ours. And so we think that there is an opportunity for us to really help the industry. We've had a couple of webinars, one with Ignite, one with Nixa among the best attended webinars for those groups over the past year because there's a lot of interest in the fund industry about how do they meet this mandate, which is, on one hand is sort of -- it sounds like it makes sense from an investor standpoint, but view the one having to actually deliver it, it's tough. And so we are definitely working with fund clients. We definitely think we can help be part of that solution. Hey. Thanks for taking my question. I know like you talked about that the stock record growth can slow down to mid-single digits in the back half of the year. Can you disaggregate that 5% or so growth into benefit from secular tailwinds like zero commission, direct indexing and any potential macro headwinds there? Puneet, it's Tim, and I'll let Edmund add on this. It is, what we have is very specific testing where we're able to measure right now, how many positions are there in these funds, which allows us to say when we and how does that compare to where it was last year, and that's where we get the growth numbers for. We don't have specific data on macro versus tailwinds. What we do know is things like the positions in managed accounts. We're growing at double-digit rate the positions on non-managed accounts. We're growing more mid-single digits. So we can see that differentiation, you could do some math on that. So that's where -- when we talk about the tailwind, we can incrementally measure that, and thatâs may be a point or 2. And then broadly, it's driven by the macro with these additions, but Iâm going to see if Edmund can â cover on that. So the host (ph) is just going to hit on the -- one thing I do first, Puneet, is just to be clear, we were saying mid to high-single digit growth. So that 5% would be sort of at the low end of what we expect here. So I just want to be clear on what's been in our guidance and continues to be what we're reaffirming here. And as Tim said, itâs very hard to desegregate between macro and other, but we've talked previously about broad-based growth in online and full brokers and large accounts in mid-size and small accounts as well and managed accounts and self-directed accounts. And we continue to see solid growth across each of those areas. And that, I think, seeing that broad-based growth is what continues to give us the confidence in the guidance here. Got it. And it was good to know that the pipeline is strong, but are you seeing any changes in client behavior over the last few quarters in terms of maybe delays in decision making or flow deals through the pipeline? And any changes in client preferences for outsourcing versus in sourcing, given some macro pressures that they might be facing right now? Yeah. I would say clients are definitely busy. They are banking clients do have money. And it's an interesting one for us which is, we do best when they have money and sort of just enough money. So if they have too much money, then they like to build it in-house, and you don't have any money that it's hard for them to fund the project. So you have to be sort of just right as a sweet spot for our sales. So I do think that the conversations, there's a lot of thought before people go forward. There's a lot of work to get these over the goal line. And we certainly feel like that feel that, I'm sure you're hearing that from others. At the same time, we're moving in. We got a lot of stuff done in the month of December. As for the preferences for in-house versus third party, I think if I go back 12 months ago, people had a lot of money and you could sort of feel some of the conversations slowing a little bit more toward, well, maybe I should build this, maybe I should build that. And I think when you look at where things are now, I don't know if it's money. I think it's as much all the regulatory change that is coming. There are so many things that people are having to address coming in from the SEC and others that they have a lot on their plate and getting help is very useful. So it's -- and you have to segment that a little bit by size of institution. Certainly, all the Tier 2 institutions are strongly looking for help. At this time, we will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Thank you. This is Tim. I'll just close things off. I want to thank everyone for joining us this morning. I hope that what came through is how pleased we were with our second quarter performance and our outlook for the full year, that our growth drivers remain healthy. Our business is resilient and that with our investment cycle increasingly behind us, our free cash flow is strengthening. So thank you very much. We look forward to continuing the conversation next quarter.
EarningCall_575	Welcome to the Quest Diagnostics Fourth Quarter and Full Year 2002 conference call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question and answer session that will follow are copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution of retransmission of the rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited. Thank you and good morning. Iâm joined by Jim Davis, our Chief Executive Officer and President, and Sam Samad, our Chief Financial Officer. During this call, we may make forward-looking statements and will discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release. Actual results may differ materially from those projected. Risks and uncertainties, including the impact of the COVID-19 pandemic, that may affect Quest Diagnosticsâ future results include but are not limited to those described in our most recent annual report on Form 10-K and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K. For this call, references to reported EPS refer to reported diluted EPS, and references to adjusted EPS refer to adjusted diluted EPS. Any references to base business, testing, revenues or volumes refer to the performance of our business excluding COVID-19 testing. Growth rates associated with our long term outlook projections, including total revenue growth, revenue growth from acquisitions, organic revenue growth, and adjusted earnings growth are compound annual growth rates. Finally, revenue growth rates from acquisitions will be measured against our base business. Quest had a strong year in 2022 with base business revenues growing more than 6% in the fourth quarter and 5% for the full year. As we expected COVID-19 testing revenues declined but still exceeded $1.4 billion in 2022. Our strong performance over the last several years would not have been possible without the commitment and compassion of our nearly 50,000 colleagues who rose to the challenge of COVID-19 while growing our base business. I am incredibly proud of how this team has worked together during an unprecedented period in the lab industry to deliver insights to help create a healthier world. This morning, Iâll discuss our performance for the fourth quarter and full year 2022, then Sam will provide more detail on our financial results and discuss our 2023 guidance. In the fourth quarter, total revenues were $2.3 billion, earnings per share were $0.87 on a reported basis and $1.98 on an adjusted basis, cash from operations was $334 million. For the full year 2022, total revenues were $9.9 billion, including more than $8.4 billion in base business revenue. Earnings per share were $7.97 on a reported basis and $9.95 on an adjusted basis. Cash from operations was $1.7 billion. As you saw this morning, we increased our quarterly dividend approximately 8% to $0.71 per share and increased our share repurchase authorization by $1 billion. Before discussing additional highlights for 2022, Iâd like to share some recent positive regulatory updates. First, Congress delayed Medicare reimbursement cuts under PAMA that were scheduled to take place in 2023, which would have impacted our revenue between approximately $80 million and $85 million. While we are pleased with the delay, we continue to work closely with our trade association to seek a permanent fix to PAMA. Second, CMS increased Medicare reimbursement for specimen collection fees for the first time in nearly 40 years. This could provide Quest with a benefit of approximately $35 million to $40 million this year. Regarding COVID-19 testing revenues, while we did see a steady ramp upward in COVID-19 volumes throughout Q4, our volumes have steadily declined since late December. We expect our COVID-19 revenues to be significantly lower in 2023 compared to 2022. We have lowered our prior COVID-19 volume expectations in 2023 from 10,000 to 15,000 molecular tests per day to 5,000 to 10,000 tests per day. In addition, we continue to negotiate coverage and reimbursement policies with commercial payors following the end of the PHE in May. I will now share some recent highlights in how we are growing this business. In the fourth quarter, we completed our acquisition of the outreach laboratory services business of Suma Health, a large integrated health system serving communities in northeastern Ohio. We also entered into an agreement to acquire select assets of Northern Light Healthâs outreach laboratory services business located in Maine. We will also provide professional laboratory management services for nine of Northern Lightâs hospital laboratories along with its cancer center lab. Our M&A pipeline is strong, including potential deals with health systems, small regional labs, and other capability-building assets. In particular, the funnel of opportunities with health systems, which are facing major margin pressures due to labor challenges and mix shift from inpatient to outpatient care, is very active. Quest can help through lab management, population health analytics, mobile services, and/or by monetizing their outreach business. In health plans, we continue to gain traction with value-based contracts where we see meaningfully higher growth than with traditional contracts. Also, weâve started to benefit from incentives related to these value-based contracts which helps demonstrate the value of these strategic relationships. With CMSâ recent increase in Medicare reimbursement for specimen collections, weâve begun discussions with our health plan customers about getting paid appropriately for the phlebotomy services we provide to their members. Higher specimen collection fees enable us to make continuous investment in patient services so their members continue to have the broadest access to high quality and low cost lab testing. In advanced diagnostics, we generated strong double-digit growth in prenatal genetics and pharma services in 2022. In 2022, we also launched a solid tumor expanded panel as a laboratory-developed test. This 523 gene test relies upon the Illumina TruSight Oncology 500 assay to help oncologists with therapy selection by providing comprehensive genomic profiling of a patientâs tumor. This test extends our capabilities beyond tissue pathology to offer faster turnaround time from cancer diagnosis to therapy selection. Throughout 2022, we continued to make investments to strengthen our bio-informatics capabilities which support some of the faster growing opportunities of our portfolio, like genomic sequencing services, prenatal and hereditary genetic testing, and pharma services. We also invested in our womenâs health sales force which will position us well for continued strong growth in prenatal genetics. We continue to make progress executing our consumer initiated testing strategy. Last year, we recorded approximately $96 million of both base and COVID-19 consumer testing. In the fall of 2022, we launched our new digital platform, QuestHealth.com. Consumers have found this to be a simpler, more intuitive way to order lab tests. Following the launch of our new consumer sight, we began ramping up marketing spend through the fourth quarter. We saw some of the strongest order volumes to date following some Cyber Monday promotional advertising, and we are encouraged by the acceleration of growth in base testing in December. Shifting to operational excellence, in 2022 we approached our goal of 3% productivity improvements and savings through our Invigorate program. Those savings and productivity improvements did not completely offset the inflationary pressures in our business, as well as the impact of a modest unit price decline. Following the pandemic, we like many companies have faced significant inflation and wage pressures. We are increasing our efforts to drive productivity and expand margins in our base business. We continue to drive additional productivity improvements with lab platform consolidation and greater use of automation and artificial intelligence. Last year, we began a new automation conversion project in our Lenexa laboratory. This new project builds on what work weâve done in our Marlborough and Clifton labs. Weâve introduced a new microbiology platform that is highly automated and makes use of artificial intelligence to assist with sample analysis. Finally, weâve begun to realize savings from the urinalysis platform conversion that we announced early last year. Filling and retaining our frontline positions continues to be a key priority for us. Although we have experienced higher than average turnover in some of our job categories, we have taken actions to stabilize our workforce and improve frontline employee engagement and retention. We expect these actions to help enhance our productivity in 2023. We have also taken actions to reduce our SG&A by approximately $100 million in 2023, including workforce reductions of approximately 1.5% primarily in corporate support functions. In the fourth quarter, consolidated revenues were $2.33 billion, down 15% versus the prior year. Base business revenues grew 6.3% to $2.15 billion while COVID-19 testing revenues declined 75% to $184 million. Revenues for diagnostic information services declined 15.3% compared to the prior year, reflecting lower revenue from COVID-19 testing services versus the fourth quarter of 2021, partially offset by strong growth in our base testing revenue. Total volume measured by the number of requisitions declined 11.2% versus the fourth quarter of 2021 with acquisitions contributing 20 basis points to total volume. For the quarter, total base testing volumes declined 0.6% versus the prior year. The year-over-year decline was primarily related to lower employer drug testing volume and adverse weather events during the quarter, which together represented a volume headwind of more than 1.5%. COVID-19 testing volumes contributed to the decline during the fourth quarter. We resulted approximately 1.9 molecular tests in the quarter. This was down 1.2 million tests versus the third quarter and down approximately 5.4 million tests versus Q4 of 2021. After rising modestly throughout the fourth quarter, our COVID-19 molecular volumes declined to an average of roughly 17,000 tests per day in January and currently make up less than 3% of our daily volumes. In the fourth quarter, revenue per requisition declined 5.1% versus the prior year, driven primarily by lower COVID-19 molecular volume. Base business revenue per req was up 6.8%. This strong increase in revenue per req was driven by a number of factors, including test and payor mix, the more favorable pricing environment with health plans, including incentives under our value-based contracts, and lower patient concessions. Unit price reimbursement pressure remained consistent with our expectations at approximately 50 basis points in the quarter. Reported operating income in the fourth quarter was $135 million or 5.8% of revenues compared to $536 million or 19.5% of revenues last year. On an adjusted basis, operating income was $330 million or 14.2% of revenues compared to $579 million or 21.1% of revenues last year. The year-over-year decline in adjusted operating income is related primarily to lower COVID-19 testing revenues and to a lesser extent the negative impact of adverse weather on our volume, as well as higher investments to accelerate growth in our base business. Additionally, in the fourth quarter we experienced a significant increase in employee healthcare costs. Reported EPS was $0.87 in the fourth quarter compared to $3.12 a year ago. Adjusted EPS was $1.98 compared to $3.33 last year. Cash from operations was $1.72 billion for full year 2022 versus $2.23 billion in the prior year period. Turning to our full year 2023 guidance, revenues are expected to be between $8.83 billion and $9.03 billion. Base business revenues are expected to be between $8.65 billion and $8.75 billion. COVID-19 testing revenues are expected to be between $175 million and $275 million. Reported EPS is expected to be in a range of $7.61 to $8.21, and adjusted EPS to be in a range of $8.40 to $9. Cash from operations is expected to be at least $1.3 billion, and capital expenditures are expected to be approximately $400 million. For our 2023 guidance, please consider the following. As Jim highlighted, we are now assuming COVID-19 molecular volumes to average roughly 5,000 to 10,000 tests per day for the full year. We expect volumes to continue to decline through the spring and summer but could see a modest uptick during respiratory season in Q4. We assume average reimbursement for COVID-19 molecular testing to continue near recent levels through the end of the PHE. CMS has indicated that reimbursements will be $51 when the PHE expires in May. We continue to negotiate with health plans regarding coverage policies and reimbursements for COVID-19 testing post-PHE. Note that our COVID-19 testing revenue guidance for 2023 is approximately $150 million lower than the expectations we had back in October. With COVID-19 testing becoming a significantly smaller portion of our overall business, we expect an earnings cadence that is more in line with pre-pandemic seasonality this year, with Q1 typically being the lowest quarter of the year at roughly 22% to 23% of full year earnings. We have also taken actions to reduce our SG&A by approximately $100 million in 2023, including workforce reductions of approximately 1.5% primarily in corporate support functions. The benefit of these actions will be modest in Q1 and will expand in the second quarter. To summarize, we delivered strong growth of 5% in our base business in 2022. COVID testing revenues as expected declined last year and will represent a significantly smaller portion of our business going forward. We are increasing our efforts to drive productivity and expand margins in our base business. We look forward to sharing more of our strategy during our upcoming investor day on March 16 at the New York Stock Exchange. Look for an announcement soon with more details on this event. Maybe if we talk about major assumptions in the low end of guidance versus whatâs embedded in the high end of guidance. Can you also discuss the incremental $115 million to $125 million that is now benefiting 2023 versus when you reiterated that mid-$8 range back in Q3 earnings? How much has fallen to the bottom line, and how much do you expect to reinvest in the business? Thanks. Yes, let me just speak first about the revenue guidance. As we indicated in the remarks, our COVID guidance, which had originally been 10,000 to 15,000 requisitions per day in â23, weâve revised that downward to 5,000 to 10,000 per day, and itâs really just based on the trends weâre seeing. It peaked in December. We averaged roughly 17,000 a day here in January, but thatâs had a downward slope, so we continue to expect COVID volumes to decline and itâs really had about $150 million change in revenue versus what we thought last fall. Again, the guidance weâve suggested - you know, a midpoint of about $225 million in COVID revenue for the year. On the base business, without acquisition help, weâve assumed a 2.5% to 3% revenue growth on the total base business, so really thatâs the explanation on the revenue side. Versus what we shared back when we talked about in Q3 of 2022 around the fact that we were somewhere in that 850 range, obviously some positives that you mentioned, which is I think what you are referring to as the $115 million to $125 million, which includes the PAMA delay, which includes also the reimbursement of the specimen collection fees, which we now benefit from. But there are a couple of things also that have changed to the negative, really the key one being--or just one thing, really, thatâs changed to the negative, I should say, which is COVID. The COVID assumptions that we had back then were, as Jim just said, 10,000 to 15,000 a day. Now weâre seeing volumes, as we mentioned on the prepared remarks, 17,000 a day in January, and January is typically around the peak of the respiratory season and then it starts to come down from there, so our expectations of 10,000 to 15,000 a day for the year are, I would say, realistic. But in terms of the range itself and what differentiates the bottom versus the top, I think itâs going to be really around the COVID assumptions. But again, keep in mind weâve taken COVID down by $150 million in terms of total revenues versus what we really shared back in October, when we expected 10,000 to 15,000. Weâve also--from the benefit itself, you know, the $115 million to $125 million that you referenced, weâve also carved out a small amount for investments in the business, strategic investments that, as we said a couple of months ago, we said we will reserve some of that benefit to invest in the business for long term growth. Sam, maybe one for you. Margins came in a little light of where we were expecting 4Q. Can you just talk about the puts and takes there between DTC growth investments, inflation, pricing; and then going into â23, it seems like the base business margins need to step up - you know, you called out the $100 million SG&A cut. Are you guys changing any plans for DTC investments? Just want to get comfortable with that margin bridge from the lower 4Q number and the moving pieces. Thank you. Sure Patrick, yes, and thank you for the question. Let me talk a little bit about Q4 and the margin rate in Q4, the 14.2%. Here are some of the headwinds, some of which we were seeing throughout the year, but obviously we also had a drop in COVID revenues in Q4 which was significant versus Q3, at least sequentially, which impacted the margin as well. In terms of the margin rate itself, we had inflation, I would say per expectations but still elevated. We had growth investments of roughly about $40 million that impacted Q4, which were fairly in line with Q3, what we had in terms of investments, so not necessarily a sequential driver. One driver in Q4 that impacted our margin rate was higher employee healthcare cost. That was higher than our expectations and some of it driven by higher utilization, especially towards the end of the year after employees have met their deductibles, but also higher cost of healthcare in general. That was about 80 basis points of impact on the quarter in terms of negative rate impact, so that was another thing. I talked about--obviously if youâre looking at things sequentially, you have to factor in that COVID revenues were $184 million roughly versus approximately $313 million in Q3, so a big drop in COVID revenues. Now if you look prospectively in 2023, here are some of the things that obviously give us confidence that we can achieve the rate that we have in our projections and thatâs factored into the guidance that we gave. We have taken $100 million in SG&A reductions, and I would say 90% of those have already been implemented. Now, you wonât see the benefit starting in Q1, youâll probably see it in the latter part of Q1 and really taking effect in Q2 more fully, but thatâs $100 million in SG&A reductions that we expect to see over the course of this year. In terms of investments, you referenced that, we expect investments to be less dilutive in 2023 versus 2022, because we start to see the benefit from some of these investments towards the growth of our business. Then finally, obviously the margin rate is going to benefit from the specimen collection fee reimbursement that we have, and we have a volume growth assumption as well and a revenue growth assumption that at the midpoint of the guidance range is, on base business, approximately 3%, and so thatâs going to drive also additional margin improvement based on the drop-down from those revenues. First, of the $96 million you talked about of sales, is there a breakdown you can share of COVID versus base; then second, on the base sales, how did that ramp after the fall push? Then finally, just what are your expectations for consumer initiated testing revenue and investment for 2023? Yes, so Jack, let me start. On CIT, our consumer initiated testing business, the total $96 million, more of it was COVID than our base business; however, our base business, once we launched the new platform, once we launched the marketing spend actually performed as expected in November and December. We got significant growth year-over-year, over 50% growth in the month of December based on the initiatives we put in place. As weâve said, this year we expect that business to be less dilutive versus 2022. In terms of the total revenue projection for CIT, you know, weâll give you something at investor day. Obviously COVID will significantly ramp down, but we expect our base to significantly ramp up, and weâll give you a better view of that at investor day. Great, and then one follow-up on COVID. If we do a look back on 2022, is it possible to call out how much of the sales came from serology, your CDC contract or anything outside of the core molecular, and just what youâre assuming there for 2023? Hereâs what Iâd say. As we indicated, the volume is coming down, right - we said 10 to 15 last fall, we now expect 5 to 10 for the year. The one thing Iâll say on serology, we had a significant contract with the CDC, it was simply a test add-on seroprevalence study. That contract, as expected, ended in December. The CDC just doesnât need that information anymore. What does remain, in addition to the PCR volume, is weâve got a roughly $25 million contract with the CDC to do continuous sequencing work of the positive cases to help inform the CDC and others about the spread or development of new variants that continue to pop up. Obviously there continues to be a steady pipeline of hospital-related deals. Can you tell us whether--I know your closest peer is announcing transactions too. Do you see any change in the competitive landscape for those deals, on the terms on which those deals are being done? You also mentioned seeing some more activity in small regional labs. What do you attribute that to - is it COVID testing is as running off, are you seeing some of the regional labs express more interest in potentially aligning with you? Yes AJ, thanks for the question. I would tell you no, thereâs no real change in the competitive dynamic in terms of pursuit of these hospital outreach deals or professional lab services types of engagements. What I would tell you is the funnel is as big as itâs ever been. We expect to close several deals here in the first half of the year, so still feel very good about that. In terms of small regional labs that are out there, first Iâd say thereâs not that many left out there that are of significant size. Certainly those that participated in COVID testing, and now that that volume is declining, yes, we are seeing a few raise their hands and put up the retirement flag and potentially sell out, so we look at each and every one of them. If we think it adds to our competitive position in a certain geographic marketplace, weâll look at it. If we donât think we need it from a competitive standpoint, then we take a bye on those. Quest has a very long track record of finding cost efficiencies through Invigorate, so Iâm curious how the SG&A cost cutting of $100 million compares to what Invigorate usually finds in SG&A, or most cost savings via Invigorate usually done and cost of services and fixed cost leverage on volume. Yes, so first, the $100 million cost takeout is incremental to our Invigorate plan for 2023. With our Invigorate plan, we target roughly 3% of our entire cost base for the company, so call that $6.4 billion-ish, 3%, call it $180 million, $190 million a year. We actually got very close to that target in 2022. As weâve said in the prepared remarks, it did not completely offset wage inflation and the slight price headwind that we did see, along with just other non-labor inflationary pressures. Now as we go into 2023, weâve got a full funnel of productivity ideas, productivity initiatives that weâre driving through the company. I would say the other thing that we think will really help us in 2023 is simply the stabilization of our workforce. Attrition has a really major impact on your productivity when youâre constantly churning phlebotomists, logistics and specimen processing, so that has stabilized, itâs coming down. We feel good about it and we feel good about the overall productivity plan in terms of offsetting inflation, which we expect to be slightly softer, easier in 2023, and we expect price all-in across Quest Diagnostics to actually be a positive for 2023. At the risk of being redundant here, Iâm still going to repeat something from what Jim said at the beginning, because itâs really important for all your assumptions. The productivity improvements and the Invigorate actions, which is the 3% that we expect to get, thatâs in addition on top of the $100 million of SG&A reductions that weâve already taken for the most part. Got it, and sorry, two quick follow-ups. You talked about phlebotomists. Just curious where the phlebotomist hourly wage is today and if you think is the right level to compete against retail channels. The second one is the public lab supply companies have been talking about pricing for a while. Just curious as one of the largest labs in the U.S., what you assume for supply inflation for â23, or can you offset that inflation simply by changing vendors and/or leveraging your scale? Yes, so our phlebotomy rates vary by region of the country. What I would tell you is our increase in wages for phlebotomy were certainly in line with the 3% to 4% wage impact that we saw last year. Itâs what weâre planning for 2023, and as I indicated, our retention has improved. Our attrition has certainly stabilized and declined, so we feel good about that. Yes, Iâm sorry, the supply inflation. Again, 70% of what we purchase each year is under contract. When those contracts come up, they generally represent an opportunity for deflation, meaning weâre going to run a competition between the vendors and we look for improvements from a cost, quality and turnaround time perspective. Where the inflation hit us in 2022 is really on some of the non-supplies, the reagents and things like that. Some of that could have been pre-analytical supplies, masks, gowns, things like that, as well as just the normal inflation that you all see in your businesses, which could be hotels, air travel and things like that. Now again, we think thatâs softening here as we get into 2023, and we certainly put guardrails on travel and living expenses and things like that. Hey, good morning guys. Jim, just a quick question on rates from payors. I think in the past, youâve expressed some optimism in seeing a little bit of rate improvement in the commercial side. But I think in your prepared remarks, you called out a little bit of reimbursement pressure at 60 basis points or so, so just curious how do we reconcile that, and maybe just broadly speaking what youâre seeing in terms of payor receptivity to increasing rates on the reimbursement front. Thanks. Yes, I think we said in the prepared remarks that our pricing was down about 50 basis points, which actually represents the best that Iâve seen in my time with Quest Diagnostics, so we feel good about that. Weâve also said that as we renegotiate new contracts, and every one of these contracts is four to five years in length so you can expect that 20% to 25% will renew this year, which they will, and the preponderance of those contracts weâve seen rate increases at a minimum rate--you know, holding rate flat to prior contracts, so we view that as a very positive. What weâve also said is, look - weâve got a $35 million to $40 million rate increase through Medicare draw fee increases, and today we get reimbursed on roughly 25% of the commercial draws that we do. Weâre going to push hard not only to expand that 25% but those that do reimburse us to take those rates up as well, so we are pushing hard at every turn to increase prices across this business. The last thing Iâd say is, look, thereâs a portfolio of $700 million to $800 million of other businesses in Quest Diagnostics - that can be our Exam One business, our employer solutions business, our employee population health business, and weâve pushed for 2% to 3% price increases on that portfolio of business and weâve largely gotten those in place for 2023. Again, this is the most optimistic price outlook that weâve put forward since I joined Quest in 2013. Yes, maybe just to put a couple of points of emphasis around it, in the prepared remarks we talked about a price impact in Q4 of roughly 50 basis points year-over-year of price headwind. As we look towards 2023, whatâs reflected in our guidance right now is actually a positive price impact year-over-year, and obviously thatâs benefited from the reimbursement of the specimen collection fee. Itâs definitely a positive. Weâve managed to really make some good progress in terms of our pricing. The other thing I want to mention is weâve talked about these value-based contracts, and over 30% of our health plan contracts have some type of incentive for us to earn additional value, which we actually donât put into the price equation, but itâs really good payor mix. These incentives could be based on share of spend with Quest Diagnostics, it could be based on leakage, it could be based on the movement of requisitions from high priced hospital labs into laboratories like Quest Diagnostics, so those value-based incentives are an important part of our business, and as we succeed in achieving that value for the health plans, thereâs rewards that come back to us. Brian, this is Shawn. Just one last thing I wanted to add. Most of the price impact that we saw in 2022 was largely driven by some of the client bill, largely with the hospitals. The health plan book was actually pretty good, pretty stable, so. Hi, thanks for taking my question. Iâm really just trying to understand all these puts and takes a little bit. I guess my first one is, is the $100 million of SG&A, itâs incremental. Is that--you know, Invigorate typically offsets some other inflationary pressures, labor costs and the like. Is this $100 million incremental such that it drops to the bottom line, or are there other offsets there? Two, is there any change with the pricing benefit that youâre talking about, better pricing is certainly a tailwind, I would think for â23, so how do we think about that in terms of--or is there an offset there on mix on the margin for, basically, your volume mix, something to that effect? Iâm just trying to understand the puts and takes. Yes, again the $100 million, it is incremental to our Invigorate plan of record, and yes, it drops right to the bottom line. In terms of pricing, no, the improvement drops to the bottom line as well. Weâre not suggesting any other offset at this point. Obviously we had strong [indiscernible] both in Q4 and for the year. That benefit, we would put in three buckets: test mix, which was very positive for the year; we saw a big surge of flu and RSV testing along with COVID, but flu and RSV that came in Q4, that has since moderated; and then our business mix was good in terms of payor mix. Then finally, year-over-year we made nice improvements in patient concessions, so our ability to collect, our ability to reduce denials and get paid for the work we do was certainly a positive tailwind for us in 2022. And if I can just ask one quick follow-up, should we assume in our models the billion dollar buyback gets used in 2023? No, Kevin. The billion dollar share authorization increase, thatâs in addition to the $311 million that we currently have on the previous authorization, but you should not expect that that is whatâs assumed in the guidance. What weâve assumed, actually, is that any share buybacks we do are to offset equity dilution, so essentially the share count is roughly flat with where we are at the end of the year, so donât assume the $1 billion to be built into the projections. Maybe as it relates specifically to COVID test reimbursement with the PHE ending, maybe just give us a little more detail on how those conversations with commercial payors are trending and how we should be thinking about expectations there. Then I guess just related to that, how are you thinking about any permanent changes to your respiratory testing portfolio broadly, now that weâve lived through three years of COVID? Thanks. Yes, so again, CMS--and weâve had direct discussions with them, itâs very clear that once the public health emergency ends, the rate will go to $51. We are certainly expecting and driving those discussions with commercial payors that we expect that rate to be $51 as well. Itâs a new test that should be treated as such. Some may have a slightly different opinion on that, Andrew, so thatâs where we negotiate. In addition to that, thereâs coverage policy decisions that all need to be worked out as well, asymptomatic versus symptomatic testing, so weâre bullish that the country needs these tests, commercial payors need these tests, and weâre going to drive these discussions in the most favorable way that we can. In terms of respiratory panels, obviously with COVID still out there, itâs not going to go away in 2023. When patients presented in the fall, winter and here in January with respiratory symptoms, some physicians ordered three tests, some physicians ordered one and then re-flexed to others, depending on if the first one turned out to be negative, so there were a variety of patterns that were out there. But you know, we donât expect COVID to go away in 2023, so whether RSV and flu tick up like they did in 2022 remains to be seen, and so weâll just have to see how it plays out in the late fall, early winter. One quick housekeeping question and then a follow-up. The housekeeping question, just expectations for net interest expense for the year, and then how should we think--and also then, how should we think about the M&A contribution thatâs embedded in your revenue and your volume growth in the â23 guide, and should we still think about that 2% bogey at the way to look at it for going forward on the revenue contribution? Thanks. Oh, net interest expense - okay. Thatâs roughly flat, Iâd say year-over-year in terms of â222 to â23, Derik, is the assumption to take there. In terms of M&A, what we have assumed in our guide for 2023 is really no material prospective M&A, so essentially whatâs closed already, what was included in â23 in terms of deals that have been made - any outreach, for instance, hospital deals that have already closed in â22, those youâll see a benefit from in â23, but there is no prospective M&A included. When you think about our long term target that we had talked about, around 2% contribution from M&A, we have not assumed any prospective M&A in â23 on top of our base revenue growth. Itâs not significant. Weâre not going to give the exact contribution, but itâs really not that material in terms of what we have this year that carries into next year. Derik, we had one month of Pac Health, because thatâs what closed last year at the end of January, and then the Suma Health and the Northern Light outreach acquisitions, those were pretty small. I had a question about advanced diagnostics and your assumptions for â23, including contribution and then more specifically on the positive impact in pricing, and any kind of incremental investments that you think specifically for 2023 will be necessary to sustain that growth, accelerate it. Yes, so weâve talked about our investments in really three categories. First, consumer initiated testing, which we covered, that business will continue to grow on the base side of our testing in 2023, and as weâve indicated, it will certainly be less dilutive than it was in 2022. The second big area of investments has been in oncology and what we call genomic sequencing services, and really building out what we call our integrated genomics platform. As I mentioned in the prepared remarks, we brought up a new LDT in Q4 using the Illumina platform - itâs referred to as the TSO 500, but it is a Quest LDT, and itâs really important in therapy selection decisions for cancer. Weâre really happy about that. We brought it up at our SJC facility and weâll be expanding that to a second facility here in early 2023, so we certainly expect that business to grow. On this integrated genomics platform, look - the world has moved from micro array testing to whole exome to whole transcriptome, and now moving quickly to whole genome testing, and we expect with this platform to have a really good sample to complete information platform, low cost, high throughput, really good turnaround time, and weâll update you more about that at our upcoming investor day. The final thing is--you know, we referred to it as pharma services, which grew over 15% last year, and this is us participating in companion diagnostics. We participate in phase 1 clinical trials, either from a pharma company or from a CRO, and then we do a lot of testing and validation work for our IVD partners in the industry, and that business continues to grow as well. The last thing Iâd say is, look, we felt really good about our growth in prenatal testing this year and other rare genetic disorders, so itâs a business that continues to grow in the high single, low double digits for Quest Diagnostics. Perfect. Thanks guys for taking the question. First up, weâve previously talked about some of the uneven recoveries by geography. Last quarter, you noted that New York City was still not fully recovered, so can you just give us the latest update on the recovery there in New York? Then my follow-up is just on the analyst day this March, can you walk us through some of the topics that you plan on hitting on, any expectations for that? Thanks. Yes, thank you, Rachel, for the question - this is Sam. In terms of the geography, I think itâs consistent with what we said before, and let me repeat what we said because we havenât seen really a major change in the dynamic yet. We are back to pre-pandemic levels and above across most geographies, the notable exception being the east, where New York City, I think weâve seen roughly 3% to 5% outflow from the city in terms of population, 3% to 5% of the population leaving the city. We havenât seen that fully come back yet, even though the city is much more vibrant and thereâs more activity. But I donât think in terms of people coming back and getting health care in New York City, I donât think itâs back to where it was pre-pandemic by any means. The other thing we look at is ridership on public transportation as an indicator, as a key metric to see how is that also coming back, and itâs still about 35% or so below pre-pandemic levels in terms of ridership, based on the last data points that we got. The punch line here being that the east is still lagging, but everywhere else is above pre-pandemic levels in terms of utilization. Yes, and then Rachel, thanks for the question on investor day. I think thereâs really four broad topics that weâre going to talk about. First around growth, weâll go deep on what weâre doing from an oncology and genomic sequencing standpoint. Weâll give you a lot more color on our consumer initiated testing business, the progress weâre making and why we continue to be excited about that, and then weâll also address the core part of this business, which is serving physicians, serving health systems, and what weâre doing to continue to drive growth in those segments. Finally and as always, weâll address what weâre doing to improve the customer experience and drive productivity in this business. Itâs a never-ending part of what we do and we continue to drive productivity, and weâll give you our plans for â23 and beyond. Finally, just as a reminder, it is March 16, it will be at the New York Stock Exchange, and weâll obviously provide our long term outlook as part of that session. Okay, so I wanted to thank everybody for joining the call today. We look forward to seeing you all on March 16 at the New York Stock Exchange, and have a great afternoon. Thanks everyone. Thank you for participating in the Quest Diagnostics fourth quarter and full year 2022 conference call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnosticsâ website at www.questdiagnostics.com. A replay of the call may be accessed online at www.questdiagnostics.com/investor, or by phone at 203-369-3056 for international callers, or 888-566-0498 for domestic callers. Telephone replays will be available from approximately 10:30 am Eastern time on February 2, 2023 until midnight Eastern time on February 16, 2023.
EarningCall_576	Good day, ladies and gentlemen. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company Fourth Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakersâ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you, Jason, and welcome to Ford Motor Company's fourth quarter 2022 earnings call. With me today are Jim Farley, our President and CEO; and John Lawler, our Chief Financial Officer. Also joining us for Q&A is Marion Harris, CEO of Ford Credit. Today's discussion includes some non-GAAP references. These are reconciled to the most comparable U.S. GAAP measures in the appendix of our earnings deck. You can find the deck along with the rest of our earnings materials and other important content at, shareholder.ford.com. Today's discussion also includes forward-looking statements about our expectations. Actual results may differ from those stated. The most significant factors that could cause actual results to differ are included on Page 24. Unless otherwise noted, all comparisons are year-over-year. Company EBIT, EPS and free cash flow are on an adjusted basis and product mix is volume weighted. I want to call out a few near-term key IR engagements. On February 15, Jim Farley and John Lawler will participate in a fireside chat in New York with Rod Lash at the Wolf Global Auto, Autotech and Mobility Conference. On March 23, at the New York Stock Exchange, we will hold a teach-in about our new Ford+ segment reporting. This event featuring John Lawler and Kathy O'Callaghan, our Controller, will be webcast. And I'm also pleased to share that our next Capital Markets Day will be Monday, May 22, at our headquarters in Dearborn, Michigan. Please save the date. We'll have more information about this over the coming weeks. Thanks, Lynn, and hello, everyone. We appreciate you all joining us. I'll start by addressing the obvious. Our fourth quarter and full year financial performance last year fell short of our potential. And while we generated record cash flow, we left about $2 billion of profit on the table due to cost and especially continued supply chain issues. These are the simple facts and to say I'm frustrated as an understatement because the year could have been so much more for us at Ford. Now I know the question you must be asking, why Ford with that incredible product lineup, and all the restructuring overseas, why aren't you delivering higher profits and more competitive margins? And it's the right question. So [Technical Difficulty] while we're making progress, it's hard work. As with any transformation of this magnitude, certain parts are moving faster than I expected and other parts are taking longer. Now the first part of our transformation is to completely overhaul our industrial system. Product development, manufacturing and supply chain management to deliver better cost and quality, this is critical because it provides the foundation for everything else we do. It funds our future, that's second transformation, which we're aggressively building today. Building new and incredible new growth businesses like Model e and of course, Ford Pro are huge bet on commercial vehicles, which will be high growth, high margin, not just products but software and services business. Now the second transformation, the growth part is going better than I imagined. At this point in our journey, I did not expect to be number two in EV sales in the U.S. I didn't know that Lightning would be completely sold out. And I didn't predict that BlueCruise would be the best hands-free autonomy system in the market or the Ford Pro software sales would be growing off the charts. And that doesn't even touch all the incredible next-generation EVs and software platforms that will soon be entering the market. Bottom line, in a double transformation, we have to significantly improve our cost and our quality, but at the same time, grow to fulfill that huge promise in Ford+. And frankly, the first part of the transformation has not moved fast enough. Now this is what we should be known for. It's our legacy and will show we can do it again. We have deeply entrenched issues in our industrial system that have proven tough to root out. Candidly, the strength of our products and revenue has masked this functionality for a long time. It's not an excuse. But it's our reality, and we're dealing with it urgently. Over the past year, we have made sweeping leadership changes and brought in world-class talent to reenergize and rebuild a leading industrial organization. We've committed company-wide to implement a lean operating system that will scrub billions of dollars of waste out of our company. And we are shining the light on every inch of our legacy business with knowledge that we must do better every day. This has been humbling for both me and our team. That said, I've never been more convinced about our plan. I cannot wait to get into work every day because I'm so optimistic about our plan and what we are creating here at Ford. Now I respect our competition, but I would not trade our places with anyone. Why? Because we have a real strategy to grow. We have incredible products, both on the road and the ones you haven't seen in the pipeline. And I believe we now have a world-class leadership team, made up of new and existing talent ready to compete and win. These strengths will shine through. Ultimately, the proof will be in our results. That's exactly how it should be. We appreciate those who place their faith in Ford, and we are committed to creating value for all of our stakeholders. So with that, let me quickly cover some areas of focus. First, we remain committed to disciplined capital allocation saw this in the actions we took in Brazil and India and most recently in Argo. And now South America and IMG are healthy and generating sustainable profits. This work is never done and will continue to be the focus for us going forward. Our balance sheet, liquidity remains strong and our ability to generate free cash flow has really improved significantly. And this is allowing us to accelerate our investment in growth, of course, electrification, but also Pro and software, while importantly, also returning capital to our shareholders. And we now have created three distinct customer-facing business segments: Blue, e and Pro, which have given us greater clarity and insights into each of these businesses and how we can improve each of them uniquely. So let me cover a couple of highlights. I'm going to start with Pro, my favorite, the not-so-secret weapon at Ford. Ford Pro embodies all of our growth levers, and it capitalizes on our commercial vehicle sales leadership and scale to build a world-class ecosystem that delivers great value to our customers and profitable growth for us at Ford. In North America, our vehicle share is almost twice that of our closest competitor. And in Europe, Ford has been the number one vehicle brand -- commercial vehicle brand for eight years in a row. Let me bring this point home. Here in North America, whole market, Super Duty, our most important Pro vehicle, owns half the mining business. It owns half the emergency response business and have the utility business. And the requirements for all these customers are complex. They're not going to commoditize and they require a partner who deeply understands these unique businesses and is dedicated to providing a mix of vehicles, but also services that can improve uptime and total cost of ownership. And we know these customers will pay for software that will enhance their productivity. Now we're going to future-proof this business by leading the commercial electrification solutions as well, both at E-Transit and F-150 Lightning today. E-Transit is already America's top-selling electric van with 73% market share, 60% of all of our U.S. fleet managers plan to add an electric vehicle within the next two years to their fleet. And that's even before the $7,500 IRA tax credit that was announced and applies irregardless of the location of raw materials of batteries. This year, Pro really gets going. We introduced our most important vehicle gets refreshed, the new Super Duty Pickup. And in Europe, the Super Duty equivalent, we have an all-new 1-ton Transit. And Ford Pro's high-margin software business will continue to grow, especially software for fleet management, telematics and charging. Last year, these subscriptions for software grew over 70%, reflecting new software offerings, better platform for our software and contracts and growth in fleet charging attach rates, which are close to 50% now. We're also increasing our sales of parts and services via network of 1,000 mobile service vehicles on the road in North America and Europe and over 1,400 specialized commercial vehicle dealerships, many of which opened 24/7. In fact, last year, mobile service repair orders increased 85% for us in Pro. And this improves the customer experience while importantly increasing the attach rates of our high-margin parts business. Now moving to Blue. The team is focused and has delivered the freshest and most appealing product lineup in our industry. We know that typically the fresher the ICE portfolio, the greater the pricing power. So, our decision to move away from and commoditized utilities to vehicles like Bronco Sport and the Big Bronco, the Maverick, the Puma in Europe and hybrid powertrains has really paid off. Ford gained nearly one point of market share here in the U.S. last year. And we expect 2023 to be another big, strong year of share growth. Ford Blue is a growth business for the foreseeable future with strong profits and robust free cash flow. An F-Series was America's best-selling truck for 46 consecutive year now, outselling its second-place competitor by more than 140,000 trucks. We're launching even new pickups like the new Ranger here in North America and in South America after we've already launched the new Ranger in Asia and Europe last year. In addition, Blue is going after billions of cost improvements from engineering to manufacturing to our bill of material. And in quality, we have work to do. Ford has been the number one in recalls in the U.S. for the last two years. Clearly, that's not acceptable. We've overhauled our entire enterprise quality operating system. And we are already seeing improvements in initial quality for vehicles coming out of our plants here in North America. And Model e. It's operating with a start-up intensity to build profitable EVs with differentiated industry-leading portfolios that customers are going to love. In the U.S., our EV sales growth is twice the rate of the EV segment and more than 60% of our Model e customers are new to Ford. The F-150 Lightning has been America's best- selling electric pickup since it launched. And the Mustang Mach-E remains a huge hit for our customers. We remain on track to reach our annualized EV production capacity of 50,000 units per month or 600,000 units globally by the end of this year. For reference, in the fourth quarter, our run rate of production was more like 12,000. So 50,000 is a big growth. And by the end of -- and we are on plan for that 2 million units of incremental capacity by the end of 2026. Now to deliver this incredible growth, as we speak, through our facilities in North America, we're adding shifts, expanding our facilities, building out battery capacity and assembly capacity. Construction is in full swing in Tennessee and Kentucky on our BlueOval City and our three BlueOval SK battery plants. And in Europe, we're moving ahead with a new commercial vehicle battery facility in Turkey. Now critical to our plan is securing the necessary raw materials for these batteries to get to that 2 million unit rate, especially lithium and lithium hydroxide and nickel. We expect to have 100% of raw materials we need for the 2 million unit run rate secured by the end of this year. Now we are deep in the development of our second- generation EVs, including our next-generation electric full-size pickup, which, by the way, is awesome. These EVs will be fully software-updatable. That means a brand-new electric architecture, and they're going to be radically simplified. Imagine three body styles, each with volume potential of up to 1 million units and just a handful of orderable combinations. That's what we're doing at Ford for the second generation of products. And that means higher customer sat, better quality, lower bill material and lower manufacturing costs. When are when we start reporting according to these new segments in the fourth quarter, you're going to have complete visibility in the Model e's margin trajectory and understand the key levers to achieve our Model EBIT target of 8%. We're already making the customer buying experience better with less friction. Now this is only going to accelerate when the new Model e dealer program takes effect in January next year. This program has been adopted by nearly 2/3 of our 3,000 U.S. dealers, and it's based on a radical redesign on our customer experience. Next January, we'll be selling EVs at high volume with virtually no inventory, a simple e-commerce platform for our customers, non-negotiated price set by the local dealer and remote pickup and delivery for all customer experiences. We're also expanding BlueOval charging network at all of our dealers and we'll have dealer staff trained not only on software but all the EVs. Now I've said before, software and experiences will be the key differentiator for our industry. I mentioned earlier that BlueCruise, our driver assist hands-free technology, was just tested by consumer ports and judge the best hands-free autonomous system on the market. Let that sink in for a while, the best on the market. Now have you not experienced BlueCruise, I challenge you to go out and do your side-by-side comparison with our two major competitors. And at the end of last year, our customers using BlueCruise have now traveled 42 million hands-free miles. So we're scaling incredibly rapidly. That's a fourfold increase in the millions of miles since the second quarter of last year. And we have incredible software talent, making this system better every day, including those 600 former Argo engineers who are now working full time at Ford on our autonomous systems. Now before I hand it over to John, just a few things. Ford is a different company today. We're all about building a stronger customer-focused business that generates sustainable profitable growth and returns above the cost of capital. While our 2022 results fell short of my expectations, I've never been more excited about our future because we have the right plan, the right structure to succeed, the best team on the field and real strategic clarity. This year is about execution. It's time for us to deliver, and we will with relentless attention to our founding principles, drift and growth, and we are hitting the ground running. Thanks, Jim. As Jim pointed out, our performance in 2022 was below our expectations, and our industrial platform is frankly not where we need it to be. The simple way I measure this is by looking at our cost of goods sold as a percent of revenue and then compare it to our competition. You've all done it. We're much higher. And this speaks to the significant operating deficits we have in product development, manufacturing and procurement. And this is no different from the tough capital allocation choices we made on our geographic footprint and product portfolio. Choice is designed to yield higher quality growth and improved returns. And we are now applying that same level of discipline to our industrial platform with urgency. Now on the positive side, our product portfolio has never been stronger. Our new vehicles are a hit with our customers. Our iconic vehicles remain market leaders, and we continue to make strategic and capital allocation decisions to drive growth, strengthen our competitive position and produce returns above our cost of capital. So turning to the year. We generated a record $9.1 billion in free cash flow, well above our cash conversion target of 50% to 60%. And importantly, most of the free cash flow came from the Automotive business, and this reflects more disciplined capital allocation, including the restructuring of our operations outside of North America, which until recently was a significant source of cash burn. Our balance sheet remains strong, and we ended the year with $32 billion of cash and $48 million of liquidity. This, coupled with the improvement in free cash flow, provides us with ample flexibility to both fund our growth and return capital to our shareholders. In fact, today, we declared our first quarter regular dividend of $0.15 per share as well as a supplemental dividend of $0.65 per share, reflecting our strong free cash flow and the monetization of our Rivian stake, which is now nearly complete. Going forward, we intend to target distribution of 40% to 50% of free cash flow, consistent with our focus on total shareholder return. Now for the year, we delivered $10.4 billion in adjusted EBIT with a margin of 6.6%. And as Jim said, by better executing the things we control, we should have generated as much as $2 more in adjusted EBIT. For example, the instability of our supply chain and production plans caused us to not only deliver lower- than-planned volumes in the fourth quarter but also incur higher costs through premium freight and other supplier charges. Now let me give you a quick overview of how our '22 segments performed recognizing that beginning with our first quarter 2023 results will no longer have the automotive segments with regional breakouts. Now North America delivered $9.2 billion of EBIT, an improvement of $1.8 billion, driven by higher net pricing and increased volume, which was partially offset by higher commodities and other inflation-related cost increases. EBIT margin was 8.4%. We continue to maintain a healthy order bank, and the team is busy preparing the launch of the all-new Super Duty and our seventh generation Mustang later this year, and both of those are incredible products. In South America, we delivered a profit of over $400 million, and the region is now derisked and sustainably profitable. In Europe, we were slightly above breakeven for the year, but as our fourth quarter results showed clearly below our target. Given the changing macroeconomic environment and demand environment in Europe, we will make the changes necessary to deliver a sustainable business that consistently generates returns above our cost of capital. Our core strength in the region continues to be our leading commercial vehicle business. In China, we posted a loss of about $600 million, driven by increased investment in EVs. Lincoln continues to be our profit pillar in the region, but clearly, we have more work to do to ensure our business is growing sustainable and delivering appropriate returns. Our International Markets Group earned more than $600 million, driven by the launch of the Ranger and our decision to exit India. And similar to South America, the region is now primed for sustainable profitability. And finally, Ford Credit had another solid year, delivering EBT of $2.7 billion, which was down $2.1 billion from the prior year, reflecting lower credit loss and lease residual reserve releases, lower financing margin and lower lease return rates. Now given the continued uncertainties in the macro environment, I want to provide some context to how we're thinking about 2023. For the full year, we expect to earn $9 billion to $11 billion in adjusted EBIT, and that assumes a SAR of 15 million units in the U.S. and 13 million units in Europe. We expect to generate adjusted free cash flow of about $6 billion and for capital expenditures to be between $8 billion to $9 billion. Our adjusted EBIT guidance includes various headwinds and tailwinds and that we believe could impact our business in the coming year. And for example, when you think about the headwinds, they include an expected mild recession in the U.S. in moderate recession in Europe, higher industry incentives as supply and demand come back into balance. Ford Credit EBT of about $1.3 billion, and that's about $1.4 billion lower than in 2022, reflecting unfavorable lease residual and credit losses and the nonreoccurrence of derivative games. We expect a continued strong dollar. We also expect about $2 billion lower past service pension income. And we're also going to continue investments in growth, including in customer experience, connected services and CapEx as we build out our growth plan. Now tailwinds include improvements in supply chain and industry volume, launch of our all-new Super Duty and then, of course, lower cost of goods sold, including efficiencies in materials, commodities, logistics and other parts of our industrial platform. Now before taking questions, let me briefly touch on our new financial reporting as well as plans for our next Capital Markets Day. On March 23, we'll hold a teach-in at the New York Stock Exchange. And I'm really excited about this opportunity because it will be our chance to take you through how the new Ford+ segments will alter our financial reporting. The changes will include how revenue, cost products and assets are assigned to each segment. At the teaching, we'll also share our recast financials for both 2021 and 2022, and we hope many of you join us at the New York Stock Exchange in person. But we will also broadcast a webcast live, and will be -- and will post a toolkit and other materials to orient you around all the materials and help you migrate your models. Now the teaching will not be a strategic update. That will come at our Capital Markets Day in Dearborn in May, when we'll update you on our Ford+ strategy. We'll do a deep dive into financial targets and KPIs for each of our new segments as well as for software and services. Now with this new level of transparency, which will be tracked and validated in our earnings materials and SEC filings, we think investors will be better equipped to value how each of our customer-focused segments is contributing to Ford's overall growth and return profile. And as Jim mentioned earlier, 2023 is a pivotal year for Ford. We have the plan, the talent and the product portfolio in place to take the Company to an exciting new level, one that is both differentiated from our past performance and our competitors. And going forward, our new segmentation will provide unprecedented levels of transparency and insight into all aspects of our business, making it easier to hold Ford leadership accountable for delivering superior growth and value for all of our stakeholders. Now that wraps up the prepared remarks, and we'll use the balance of the time to address what's on your mind. So thank you. And operator, please open up the line for questions. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Adam Jonas from Morgan Stanley. Please go ahead. I appreciate the humility and the self-criticism and the spirit of that on the cost and the execution shortfall. It's kind of refreshing to see that. But when you begin the description about it and how frustrated you are, Jim, and how it's not good enough, I was getting all excited to hear some details and there's just not a lot here, okay? I'm just going to say, it's not a lot of details at all about what exactly the problem is and what you're doing about it and how much and get better this year? You can disagree if you want, that is my impression. I want to know what it is and because $2 billion on the table, frankly, that's 130 bps of margin. I mean that's going to go to the consumer anyway. So tell us that's just the beginning, and there's way more to go. Do we have to wait until May for that? Or is there anything else you can tell us to help model the Company in the year ahead and what you're doing about it? Appreciate it. No, there is a lot more to go. And the industrial system at Ford is a huge opportunity for us. And we have spent the last several months really getting deep on where we need to go. So John, maybe you could share or feeling comfortable on sharing, but you're going to hear a drumbeat from Ford on this all during the year. Yes. So Adam, I think if you just step back and look at the three elements of the industrial platform, there's opportunities across each. If you look at our product development system and in our engineering, the level of productivity that we have, so think about $1 of input and what you get out for that $1 of input is probably about 25% to 30% inefficient. So, we should be either getting more products through the pipeline or our cost should be significantly lower. Now we have to be very smart about how we go about doing that because we've got incredible products in the pipeline, and there's a huge opportunity on that front, but we also have to balance the quality as well. And so, when it comes to our engineering, I think you should think about it that way, and that's what we're going after. Our supply chain, there are issues across the supply chain. It cost us, as we talked about last year, at least $1 billion in premiums that we had to pay, increased freight premiums on chips, premiums on disruption that we called our suppliers because our schedule stability was probably worst in class and fixing that and the root cause it gets to that will drive incredible opportunities for us. And let's say that for 2023, it should be at least an incremental $1 billion at least. And then when you look at our manufacturing system and you go through our plants, you look at the level of working capital we have in, you look at our production schedules, you look at the complexity and what it does for time that takes us to build a vehicle. And you understand just how inefficient that is. And then you bring that back through that -- complexity back through the supply chain, and you talked about the number of changeovers that our suppliers have to make to produce the complexity that we have and the time that, that adds to production and the time that it adds the cost and the issues that it drives through. So those are just some of the tip of the iceberg or the things we're going after. And then if you go back and you look at it, as I said in my remarks, just you look at the math and you look at our cost of goods sold relative to our revenue and then compare that to traditional OEMs, let alone the new OEMs, and you see the size of the prize that we're going after. And what's changed, Adam, I think the answer is, is we just have to show you guys. I mean that's where we're at. We have to deliver it. But as Jim said, as we're taking this lean approach and getting into it, there's a very systematic way we're going at it now, and we are very focused. And we know that this is the number one thing that needs to get fixed in the first part of our transformation. And Adam, I'd just like to add as the CEO, there's a lot of choices, they're all very consequential when it comes to the approach to do this. The most important thing for me is sustainable. When you look at Ford, we have cut in the past and it grows back or we have cut everywhere and not really focused on the industrial system. So for me, the approach that we're taking that's very different and very difficult is that it has to be daily work, gaps to competition, countermeasures, action plans for those countermeasures, constant evaluation of the effectiveness of those countermeasures, celebration of those KPIs and our status and daily management. It has to be a more fundamental approach than holding our breath or dealing with the output like people and getting into the real industrial systems efficiency. And that is a cultural change as a leader. It's a behavioral change. It is not just a program. Just kind of wanted to follow up sort of on a similar vein, short term and long term. Just for short term, when we think about the '23 outlook and you look at the $1 billion for decline in Ford Credit and take that as a reasonably given number, something in that direction and then $2 billion of lower past service pension income. That's a $3.4 billion headwind. But sort of at the midpoint of the range, you're talking about EBIT being roughly flat. So that sort of indicates a very significant $3 billion plus improvement in the core business, which is a lot to kind of believe when you're looking at sort of the headwinds and the issues that you just faced. I'm just curious if you can comment on that, maybe kind of walk us to how we get comfortable like we'll see a $3 billion plus improvement in the core business this year? I mean -- and how do you get these supply chain issues fixed when some of that are a bit outside of your control and what we hear from suppliers is volatility and schedules and it's not just specific to Ford, still pretty volatile? Yes. Thanks, John. It's a great question. That's exactly it. The headwinds are $4.5 billion to $5 billion, as we pointed out. And we said we expect on the tailwinds pricing to be about neutral. The market forces, I think, are going to drive average transaction prices down. We think probably around 5%. And that will come some from the dealer margins, but also from higher incentives. And then you step back from it, and we do have the new Super Duty, and we expect that to be a positive and we also have a very strong order bank on our commercial vehicles. So we're looking at pricing being about flattish we said volumes, there's a slight opportunity as industry comes along. So the rest of it falls into cost reductions, and that's exactly right. When you look at those cost reductions, you have to see what's happening relative to the material. And in, there's two phases there. There's one, it's -- we do expect commodity prices to come off a bit to improve a bit, but we also have significant opportunities in our material cost, and we have several initiatives going on to identify those efficiencies. We also have quite a bit of cost when you talk about schedule stability. I don't have the exact data from the competition. But when I look at our scheduled stability, there are significant opportunities through changes that we can take to improve that schedule stability, which will flow straight through to lower surcharges from the supply base because they have to deal with that instability and there's cost that drives as well as the significant premiums we paid in freight for expedite, air freight, et cetera, to just try to keep plants going and keep our suppliers' plans going. So, those are two immediate actions that we can take based on the inefficiencies we saw in '22 that cost us the $2 billion. And then on top of that, we have to build through the core industrial platform just productivity and efficiencies to drive even more improvement. So that's how we're thinking about it, and that's how we're going about it. Okay. That's actually incredibly helpful. And just on the long term, I mean you mentioned, Jim, about scrubbing things foundationally and really getting to some costs there excess, and I appreciate the three areas you've highlighted. But as we look around the world, I mean, Europe is -- had fits and starts of making us all kind of excited that it's going to work and then it doesn't from time to time. And China, you kind of been chasing competition there, and it hasn't really paid out for you. But there are two very important parts of Europe and China that are very strong for you. Commercial vehicle in Europe is incredibly strong. So could we just strip Europe back to pure commercial vehicle and could China just strip back to pure Lincoln? Two places we know you're making money and cut out the other stuff so that you can actually fund the transition that you're talking about? I mean, just -- we kind of all dance around this stuff and you've headed in this direction with the global redesign, but there's real opportunities here to be really profitable. No, you hit on it. And I'm glad we're getting into some of the strategies. I mean I would think of China business similar to what we've done in South America and IMG. Small but profitable, focused. We've been in the past in China kind of small but focused on everything. And Lincoln and our commercial with JMC is very profitable and an important business, but they have to make the EV transition. And I don't think you can be globally successful in the EV business if you don't compete with the Chinese. I mean they're going to come to Europe -- they're already there. They're going to come to the U.S. a powerhouse. Geely, there's so many others. And so we believe China is very strategically important for us. But to win there, we have to make those businesses transition profitably to EV, but I would think of it as kind of small and focused, maybe even more than past. And Europe is definitely -- we have a great CV business, commercial vehicle business that now is getting electrified. So we're like making that transition now. We have a new Ranger, the electric version of one-ton. Transit, and all of them, we have a new manufacturing site in Romania that's really scaling up now in commercial. So we have a really strong business. And the decision really is how much do we need how much -- how many engineers, how many people do we need in Europe and how big of a profile do we need in passenger cars? That's the decision. We've already electrified Cologne and that's really the decision. It's not the right time to talk about where we're going to go, but we know exactly our strength in Europe, and we know what we need to do. So -- and you won't have to wait long to hear from us on these things. I think, John, you said in response to Adam's question that variable costs would come down by at least $1 billion. But at the same time, you're acknowledging that pricing could easily be more than $1 billion negative for $100 billion North American business with 5 points of average transaction price decline. Can you maybe give us a little bit more insight into that? And can you provide a few specific KPIs that would demonstrate progress on structural costs they were up another $2 billion in 2022? Yes. So on the pricing, we do see the broad market coming in at about transaction prices falling about 5%. Some of that's going to come out of the dealer margins, of course. It's not all going to come from us. But we also have upside, Rod, with some of the launch of the new vehicles. We won't see as much of a price compression there. So, we see pricing net-net for us next year being about flattish. And so don't think about it as we're working through '23 as being a negative $1 billion. And then I would say that when it comes to the cost reductions, I think what we've got to start showing is, one, that we're getting leverage out of the business if we're growing the business that our cost of goods sold is growing at a much slower pace. And that as we're coming out with new vehicles, our cost per units are coming down, so our margins are improving. When you look at the design of our vehicles and you compare it to competition, I think if you go through those benchmarks and you go through those teardowns, you can see that there's a tremendous amount of opportunity for us to design out complexity. And you should see that coming through complexity reduction KPIs on our vehicles. I think that will be key. And it not only will be in the order combinations but also in the parts complexity in the number of parts. And what we'll be doing is as we move forward through this year, especially at Capital Markets Day, we'll be providing more details on those KPIs. But it's the key areas you should be seeing how much productivity we're getting out of $1 of engineering, and we should do something around that from a KPI standpoint because these are the areas that we need to improve. Rod, some of the things I think about -- some of the things I think about is a number of complex sequencing centers we have. Our line sight complexity, number of parts sitting on side of the line, our inventory turns inside the plant. And on the supplier side, it's going to be transparency. We had full transparency down to Tier 3 in our supply chain. It's very important to operationalize better quality and cost. On the engineering side, it's also indirect. What's the ratio of indirect to direct engineering that we're spending, i.e., the productive engineering that's resulting in customer-facing products. And increasingly, I know it's going to sound a little bit weird, but it's the software output. We are spending as a management team more and more time on our software platform, and the cost of creating software and the complexity of software. And that's something that -- we have a lot of KPIs. They're increasing quickly and are increasingly important for us. It may not be significant for structural cost, but we have to be careful to add a lot of complexity in software. So just to put a landmark out there, do you think a year from now will be looking at structural costs that are up or down, obviously, ex-pension because you have this $3 billion cost reduction plan? And then I have a second question just on Model e. Rod, I think it's beyond just structural cost. Our biggest cost element is our material cost. We will continue to invest in our growth-related investments, some connected services. The software, as Jim talked about, we're also continuing to invest, as you know, in our build-out of our batteries. So our spending related costs are going to go up. Volume will drive manufacturing cost, which is in our structural cost. So there will be puts and takes on the structural costs. Our biggest opportunity is in our level of material cost that we have. It's the largest cost element on our income statement, and it's where we are most uncompetitive. Yes. I think I got the answer on that. Maybe just to switch gears on Model e, if I can ask Jim a question, you've got this target of 8%. And that 8% margin target presumably has some assumptions for where costs will go, but also where pricing is going to go. And just considering everyone's aspirations for growth in EVs, do you think you can stand by those pricing assumptions and maybe a different way of asking this is, do you think you can sell a $40,000 electric crossover with a 20% gross margin? That is a very important question. The reality is we will -- we are structuring our portfolio to compete in very specific segments. The crossover is turning out to be the core civic of the EV business. And the last thing we want to do is commoditize our products by dropping the price. Just look what happened to Henry Ford in the 20s in the early teens. And that's exactly what we're seeing play out here. We didn't have to touch the pricing in offer Lightning and E-Transit because we pick the right segments. But the real driver of our future profitability on Model e is the second cycle products. We didn't know when we designed these first three products. We didn't know that our wiring harness for Mach-E was 1.6 kilometers longer than it needed to be. We didn't know it's 70 pounds heavier and that that's worth $300 a battery. We didn't know that we underinvested in braking technology to save on the battery size. We didn't know that we needed the world's best aerodynamics to get the size of the battery smaller. And so now we have learned a lot and that second cycle of the product is in the factory right now being developed with a lot of new talent. So I'm very optimistic about our 8% because we are not going to be playing in the two-row commodity SUV market because that's -- because tried that in the ICE business, didn't really work out for us. We want to play our hand, our strength, commercial, truck, larger vehicles on the category side. We do not want to have too many top ads because that costs a lot to engineer. We want to have minimum choice for customers, but we want to design the smallest possible battery for competitive size, and we want to invest differently in our ICE business for radical simplification, 30%, 40%, 50% less fasteners, no brackets in the vehicle. I can go on and on. We'll get into it at Capital Markets Day. I think we should expect all brands to protect growth when it comes to EV. And that for we have to expect negative pricing. And that means software and other items like that becoming even more critical. I can't wait to show you our new electric architecture. To me, that's the most critical strategic investment the Company is making, not our batteries, not the EV platforms, but our new fully updatable electric architecture because what we've learned on Pro is we can make real money on software. Maybe to follow up on that. I heard you say in the prepared remarks that revenue for software services and charging rows 70% year-over-year in 2022. I remember you discussing like a potential $20 billion market opportunity by 2030 with a lot of exciting on Pro at the last Investor Day target for 33 million connected vehicles in 2028. But have you dimensioned how large or profitable this business may be currently? Or are you able to share any more interim goals such as what your expectations are for services revenue or services revenue growth in 2023? Or what the next catalyst might be here for this business, such as I don't know, the number of vehicles launching with Blue intelligence or anything else we should be monitoring? Right. Yes, great question. We're going to see that on Pro first, and this year is a breakout year for Pro because we have brand-new products, both core in Europe and U.S. are most -- the highest volume, highest profit vehicles are all new. So, a very important year for us, I would say we absolutely have a fantastic business plan that's very specific about software and physical services. The biggest opportunity for us in the short term is the after sales business. Only 10% of our Pro customers do business with us, and we hardly do any financing with them. And so between financing and parts and service, we have enormous upside in the short term. And those are very profitable parts of our business. So I would think of it this way, Ryan. It's like software is starting to drive a closed loop where the customer wants to do more physical service with us. We have all those mobile units, more and more dedicated dealers and more of our commercial customers because of the use of the software is coming back and buying parts for us. And then the next level of performance is really going to be prognostics. When we could put predictive failure in all the vehicles, like you see on John Deere and Caterpillar, and then drive that into our physical repair facilities, we're going to see a much larger retention in parts and service. So I think the basics of the business are, these are profitable vehicles. We've got new ones coming out. We're going to grow that. We're -- I mean, we blew through our parts and service profits and revenue for Pro last year. It's almost like we can't even predict as this -- that software starts to really drive a different behavior for our customers, the growth in parts and service. But that's the monetization in the short term for these services in the integrated ecosystem. And then long term, the real game changer kind of like autonomy in the retail space is going to be that prognostics. So the third quarter negative pre-announcement had a narrative around it, right? It was very high mix on wheels inventory that you couldn't ship and the additional $1 billion of supplier costs. I know Adam hit on this in his question, but this quarter is missing that storyline. I know it was mentioned that you have line of sight to $2 billion in profit that you left on the table. But what could really turn around almost immediately in this first quarter in '23 here in terms of like what operational mishaps you know will reverse in the coming months and quarter, whatever the time frame might be? Yes. I think it comes down to the key driver for the in the fourth quarter was the volumes. And the volumes was on availability of key commodities, primarily chips and the fact that many of our suppliers had equipment issues as they were ramping. We think we've worked through a lot of those issues on the ramp in our supply chain. And as far as the rate inflow on the commodities, the chips, it continues to be hand-to-hand comment. But we're putting corrective actions in place. We've got better pipelines from brokers and spot buys, and we're working very closely with our supply chain down to the Tier 2 chip suppliers. So that's execution, it changes that we're putting in place on the rate and flow, and it's being more efficient in our scheduling and the stability of our production to reduce expedited freight, expedited costs at our supply chain, et cetera. So, part of it's operational. Part of it's what we're doing working with our supply chain partners. And part of it is getting through the hump on ramping up run rates, et cetera, throughout the system. Okay. Understood. That's helpful. And then in terms of the earnings bridge for this year, with respect to materials and freight, that $9 billion headwind in '22. I know you mentioned you're baking in commodity prices to come down. But all in relative to that $9 billion this past year, what's assumed in the '23 guide here on this line item? Right. So if you look at that, it's at least $2.5 billion depending on where we fall within the range of the guidance. So I think that would be a start point, and then we would go from there. And of course, we're going to be working to do better than that. But that's what we see so far. Just two questions for me. First, I was hoping you could maybe talk about the regional outlook in your 2023 guidance. I don't know that the segments are about to change but hoping we touch on the regions. And then second, maybe for Jim. When we're thinking about the software opportunity on your new electrical architecture on the consumer side of the business, where do you see the biggest opportunity there from a revenue perspective? Is it automated driving? Is it connected services? Just curious what is most interesting there? Yes. So I think what we would have to say is that given that we're moving to our segments for 2023, we're not going to be reporting the regions. And so we will give more color on 2023 by each of the business unit segments. And so I'm not going to comment on regions anymore going forward, unless there's a specific reason to do that within one of the segments. I think on the demand side, we see the U.S. around the $15 million range, Europe around $13 million. We're going to see more incentives in the U.S. So we can go through the demand side if that's what you're interested in. Yes. I think in Europe, we're going to see continued pressure on the top line. We've got a 13 million unit in the industry. We think we still have such a strong order bank. We not think we know we have a strong order bank on our commercial vehicles that we don't see as much pressure there. More of the pressure will come on the passenger side. But pricing in Europe, incentives continue to be strong throughout this year. So I don't think you'll see as much price compression in Europe, as you've seen in -- you'll see in North America and the U.S. But I think definitely for Europe, it's the call on the industry and where do we think that will be offset by the strength of the order bank we have on our commercial vehicles. Coming back to the U.S., as we said, a 15 million unit industry, we think prices are going to come and the industry are going to fall, transaction prices will fall about 5%. You think about that as about a combination of incentives and lower dealer margins. We're starting to see dealer margins come down now as our demand from the industry is easing a bit. And we're starting to see the inflationary costs come through with the pricing. And so we're starting to see those margins come off. And I think through as we go through the year, particularly in the second half, you'll start to see prices come down through higher incentives by the OEMs. When you look at our International Markets Group, I think it's a little bit different there. Our key product is Ranger, and that's all new, and that's launching, and so there's incredible demand for it. And so we think we have some pricing power there as well. So I think the puts and takes around the region, if you look at it on a macro basis. And I think it will be more insightful as we talk about what's happening in each of the segments and then specifically what's happening in Pro Blue and e in those segments around the world. On the software side, we were guessing before, but now we kind of know what the first three shippable large TAM software revenue sources are for our industry. The first is partial autonomy, the second is safety and security and the third is productivity. And the star people in there, the early leaders definitely ADAS on pricing revenue growth. I mean, the growth we're seeing, the demand we're seeing for BlueCruise and all ADAS features is really driving a lot of software shipment. We're about to ship our second cycle of BlueCruise already, and we are really starting to see -- that is clearly what customers want revenue-wise. And I do believe in this first three, four years of software to the car that ADAS, that Level 2, Level 3 system, is really the most remarkable TAM. However, in the background, for Ford, the productivity software in Pro is really important. It's maybe unique to us, but it is a very important part of our software revenue, which we will lay out in May. You'll see more specifics on it, but it's very profitable. The customers love the data, and they have a higher demand for the data and the software than the retail customer. I think the slow burn, the one in the background that I'm super excited about is the third leg of the stool of safety and security, not like someone stole your car, but it's video content, a lot of it tied to insurance. So this is going to be a really interesting area. Kind of think of your cars and extension of your ring and all the safety and security you have in your house now, all that technology, the cars give me another note on that. It will go for everything from teenage drivers to all sorts of things and that video capture is going to be the essence. Another reason why we think our next electrical architecture is so strategically important for the Company because we want to embed that hardware and software and adaptability in the electric architecture so we can ship the software, better software than our competition on safety and security, even if it's a little fuzzy on what the features are today. This concludes the Ford Motor Company fourth quarter 2022 earnings conference call. Thank you for your participation. You may now disconnect.
EarningCall_577	Good afternoon, ladies and gentlemen. Welcome to the Good Times Restaurants Fiscal 2023 First Quarter Earnings Call. By now, everyone should have access to the companyâs earnings release, which is available in the Investors section of the companyâs website. As a reminder, a part of todayâs discussion will include forward-looking statements within the meaning of federal securities laws. These forward-looking statements are not guarantees of future performance and therefore, you should not put undue reliance on them. These statements involve known and unknown risks, which may cause the companyâs actual results to differ materially from results expressed or implied by the forward-looking statements. Such risks and uncertainties include, among other things, the market price of the companyâs stock prevailing from time-to-time, the nature of other investment opportunities presented to the company, the companyâs financial performance and its cash flows from operations and general economic conditions, which could adversely affect the companyâs results of operations and cash flows. These risks also include such factors as the disruption to our business from the COVID-19 pandemic and the impact of the pandemic on our results of operations, financial condition and prospects, which may vary depending on the duration and extent of the pandemic and the impact of federal, state and local governmental actions and customer behavior in response to the pandemic, the impact and duration of staffing constraints and wage increases for employees at our restaurants, the impact of supply chain constraints and the current inflationary environment, the uncertain nature of current restaurant development plans, and the ability to implement those plans and integrate new restaurants, delays in developing and opening new restaurants because of weather, local permitting or other reasons, increased competition, cost increases or shortages in raw food products and other matters discussed under the Risk Factors section of Good Times Annual Report on Form 10-K for the fiscal year ended September 27, 2022 filed with the SEC and other filings with the SEC. During todayâs call, the company will discuss non-GAAP measures, which they believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP and reconciliation to comparable GAAP measures available in our earnings release. Thank you, Bob and thank you all for joining us on the call today. As mentioned, everyone should now have access to our earnings release and our first quarter 10-Q filing. We are pleased to report another quarter with growth of same-store sales at both brands this quarter. We continue to believe that the long-term success of both of our brands rests in great hospitality, memorable experiences and the highest quality burgers in each of our industry segments as demonstrated by our all-natural platform at Good Times and the unparalleled customization by our customers at Bad Daddyâs, including our many house-made ingredients and hand-cut French fries. While we have been able to manage cost of sales rather effectively at Bad Daddyâs this quarter, the year-over-year increases we have taken on our all-natural beef, our buns and finished potato products, including our signature wild fries and jalapeno potato poppers were more than we were able to pass along to the customer at Good Times. Further, both concepts continue to be challenged by increasing labor costs, particularly in the state of Colorado, where a combination of both market forces and minimum wage legislation have driven up wages also beyond the threshold that we are comfortable completely passing on to the customer. While we appreciate the margin compromise these decisions create, we believe the long-term success of the strategy will be manifest in continued sales growth and strong traffic trends that are favorable to indices tracking these metrics for each of our operating segments. Our restaurant level labor productivity has improved year-over-year, but not sufficiently so to offset increasing wages. We donât believe that decreases in wage rates are in the future. That said, we have been expecting and are starting to see some rationalization in the labor market and though we are not expecting the market to return to anything resembling its pre-pandemic state. We expect recent layoffs by major tech companies to eventually cascade through the labor market and through a waterfall effect to improve the pool of employees ultimately in our industry and to open the doors for more committed, conscientious candidates and employees, the benefits will be borne by improvements in productivity and quality of life for our restaurant managers rather than through decreased labor wage rates. This is a tough industry as it has always been. Just like other concepts in our industry, our managers have dealt with more call-offs and no notice with than ever before. At the same time, the strong culture created by our top-performing managers has driven long-term retention and lower turnover amongst some of our most highly skilled and customer-focused employees. We continue to be bullish on both of our businesses. To that end, we continue to demonstrate our commitment to reinvesting in both businesses, having completed our menu board and lane timer projects at Good Times during the first quarter. Installing our first new building in monument signs at one of our restaurants in the Denver, suburb of Aurora, and having projects underway at several other Good Times restaurants to replace signs that are, in some cases, 10 to 15 years old. Weâre nearing the launch of our loyalty project to complement the mobile apps that launched last year. At Bad Daddyâs â last week, we announced the acquisition of the interest in five Bad Daddyâs restaurants that were previously owned by individuals associated with the original founder. With this acquisition, all of our traditional Bad Daddyâs are now 100% owned by us, plus one licensed restaurant in the Charlotte Airport thatâs operated by an experienced concessionaire. In addition to the cash flow acquired, this purchase removes administrative complexity, is advantageous in terms of managing our credit and reduces non-controlling equity interest to a single partnership within the Good Times business. Further, we continue to make good progress on our new restaurant in the Greater Huntsville area, which we expect to open in late summer 2023. During March, we also expect to begin and complete the remodel of the Greenville Bad Daddyâs restaurant that we purchased from our franchisee last year. I am thrilled about the potential for both concepts, both for the remainder of 2023 and into the future. Thank you, Ryan. Total revenues increased 1.5% to $33.4 million for the quarter. Total restaurant sales increased $0.5 million to $33.2 million for the quarter. Total restaurant sales for Bad Daddyâs restaurants increased $0.6 million to $25.2 million for the quarter. This increase is due to average menu price increases of approximately 5.3% over the same prior year quarter, plus the continued strength of off-premise sales. Same-store sales increased 2.4% during the quarter with 39 Bad Daddyâs in the comp base at the end of the quarter. Cost of sales at Bad Daddyâs, were 31.7% for the quarter. Thatâs a 10 basis point decrease from last yearâs quarter, still showing significantly high food and packaging costs as seen through inflationary and supply chain pressures, but hopefully, we will see continued improvement throughout the year. Bad Daddyâs labor costs increased by 60 basis points compared to the prior year quarter, and thatâs 34.8% for the quarter. This increase as a percentage of sales reflects higher wage rates to attract qualified employees. Occupancy cost at Bad Daddyâs increased 20 basis points to 6.9% due primarily to increased property tax assessments. Bad Daddyâs other operating costs increased by 60 basis points compared to the prior year quarter to 14% for the quarter. This increase was primarily due to higher increased spending on repair and maintenance expenses, restaurant technology costs, utilities and increases in payroll service fees. Overall, restaurant-level operating profit a non-GAAP measure for Bad Daddyâs was approximately $3.2 million for the quarter or 12.7% of sales compared to $3.4 million or 13.9% last year. The decline is primarily due to the increased cost of labor and other restaurant operating costs. Restaurant sales at Good Times were $8 million, a decrease of $0.1 million. The average menu price increase for the quarter was approximately 8.8% over the same prior year quarter, and same-store sales increased 3% for the quarter. Food and packaging costs at Good Times were 32.9% for the quarter, an increase of 300 basis points compared to last yearâs quarter. Again, the result of significant inflationary pressures on food and packaging materials, offset slightly from higher average menu prices. Total labor costs for Good Times increased to 34.9% from 34.1% for the quarter last year due primarily to higher wage rates across the Denver metro area to attract experienced and talented employees. Occupancy costs at Good Times were 9.1%, an increase of 70 basis points from the prior year quarter. Thatâs due primarily to increased property and liability insurance costs. Good Timesâ other operating costs were 12.1% for the quarter, and thatâs an increase of 160 basis points due primarily to additional delivery service charges, accompanying a higher mix of delivery sales and general price inflation and supply cost. Good Times restaurant-level operating profit decreased by $0.5 million for the quarter to $0.9 million. As a percent of sales, restaurant-level operating profit decreased by 600 basis points versus last year to 11.1% due primarily to higher costs previously discussed. Combined general and administrative expenses were $2.4 million during the quarter or 7.1% as a percent of total revenue. This represents a decrease of $0.3 million versus the prior year quarter. G&A expenses decreased versus the prior year due mainly to decreased legal fees, stock-based compensation, insurance, regional and home office payroll and benefit costs, and it was partially offset by increased recruiting and multi-unit supervisory expenses. Our net loss to common shareholders for the quarter was $0.1 million or a loss of $0.01 per share versus income to common shareholders of $0.3 million or $0.03 per share in the first quarter last year. Adjusted EBITDA for the quarter was $0.7 million compared to $1.5 million for the first quarter of 2022, and we finished the quarter with $6.9 million in cash and no long-term debt. Alright, well, thank you. I will close the call then and doing so I do want to reiterate my appreciation for our restaurant management teams. They are in the front line, showcasing our brands to our customers. I am more optimistic about the opportunity to hire employees, his enthusiasm and commitment match the brand. The specifics of executing each of our brands differ from each other, but it is the passion of each of our managers and all of our team members that will result in our ultimate success in delighting our customers and creating loyal guests. With that, we will conclude todayâs call. And thank you all for joining us today. Thank you, Mr. Zink. Again, ladies and gentlemen, that will conclude todayâs Good Times Restaurantsâ fiscal 2023 first quarter earnings call. Again, I would like to thank you all so much for joining us and wish you all a great remainder of your day. Goodbye.
EarningCall_578	Good morning and thank you for joining the Tetra Tech Earnings Call. As a reminder, Tetra Tech is also simulcasting this presentation with slides in the Investors section of its website at tetratech.com. This call is being recorded at the request of Tetra Tech, and this broadcast is the copyrighted property of Tetra Tech. Any rebroadcast of this information, in whole or part, without the prior written permission of Tetra Tech is prohibited. With us today from management are Dan Batrack, Chairman and Chief Executive Officer; Steve Burdick, Chief Financial Officer; and Jill Hudkins, President. They will provide a brief overview of the results, and we'll then open up the call for questions. I would like to direct your attention to the safe harbor statement in today's presentation. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in Tetra Tech's periodic reports filed with the SEC. Except as required by law, Tetra Tech undertakes no obligation to update its forward-looking statements. In addition, since management will be presenting some non-GAAP financial measures as references, their appropriate GAAP financial reconciliations are posted in the Investors section of Tetra Tech's website. At this time, Iâd like to inform you that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. Great. Thank you very much, Darryl. And good morning, and welcome to our fiscal year 2023 first quarter's earnings conference call. We had an excellent first quarter and start to our 2023 fiscal year, setting new records for net revenue, our operating income and earnings per share. In the quarter, our EBITDA margin exceeded 14% for the first time in our history. Backlog, the best indicator of future growth for us, achieved an all-time high of $3.81 billion, up 11% from last year. And just as the first quarter closed, we announced the acquisition of Amyx, bringing 500 high-end security cleared staff to our US federal IT practice. And more recent, back just 10 days ago, we completed our acquisition of the RPS Group that adds 5,000 staff and provides new growth opportunities, especially in international water and energy consulting business. I'll begin today's presentation with an overview of our first quarter results and the business outlook, while Steve Burdick, our Chief Financial Officer, will provide additional details of our financial performance and capital allocation. Jill Hudkins, our President will also provide additional insight into our strategic growth opportunities that we see together with RPS. We had a very strong first quarter, setting new records for net revenue, operating income, adjusted earnings per share and backlog. Our net revenue was $737 million in the quarter, up 8% from the prior year, a new all-time high for any quarter in the company's history. We also had a record 14% adjusted EBITDA margin, which is 90 basis points increase from the prior year. As a result of this increased margin, we generated an operating income of $97 million for the company, up 17% year-over-year. Earnings per share from operations were a record $1.34 for the quarter. First time we've ever ceded $1.30, up 20% from last year on an equivalent tax basis. And in fact, we were well over $2 on a GAAP basis of earnings per share in the quarter. I'd now like to provide an overview of our performance by our end customer. In the first quarter, our growth was driven by strong performance across all four of our key client sectors. Our US Commercial net revenue was the fastest-growing sector in the company with net revenue up 22% year-over-year and comprised about a quarter of our overall business. The commercial growth was driven by strong performance in high-performance buildings, environmental restoration and a very fast-growing area in renewable energy services. Work for our US Federal clients was up 10% year-over-year and represented 28% of our net revenue in the quarter. The increase in our US Federal work was driven by a very broad-based increases across all of our key government clients, but it was especially driven by civilian agencies for the US Federal government such as the Environmental Protection Agency, US State Department and the US Agency for International Development. Our state and local revenues for municipal, water, infrastructure and planning services grew at a 10% rate year-over-year this quarter with continued strong demand for our best-in-class water supply and watershed management solutions. This 10% growth builds on our seven consecutive years of double-digit growth in the state and local markets here in the United States. Our International net revenue was up 13% year-on-year on a constant currency basis, driven by growth in water, environmental and sustainable infrastructure work, primarily in the countries of Canada, Australia and the United Kingdom. I'd now like to present our performance by our two segments. Our GSG and our CIG segments, both grew in the first quarter as a result of broad-based demand for our high-end services. I'll start with the GSG segment or the Government Services Group segment, which was up 8% and year-over-year with the growth in water and environmental programs. Our GSG segment delivered a record 17.1% margin, up 240 basis points from last year. This record margin was a result of really three different things. First, continued business shift in our mix to higher-margin services. Second, favorable project close-outs and really project performance. And third, higher utilization in the quarter. We had especially strong utilization for US Federal work and our disaster recovery services for responding to Hurricane Ian, which impacted Florida really just coming into the quarter during the month of October and extending through November and December. Without the extraordinary margin contributions from these project close-outs and episodic disaster work, we really would have seen about a 15% margin in the GSG segment for the quarter and it's probably more representative of an ongoing margin for that particular segment. The CIG segment grew by 9% year-on-year and delivered a 13.1% margin in the quarter, up 60 basis points from last year in line with our expectations. This is the fifth consecutive quarter with a year-on-year margin expansions for the CIG segment. The margin expansion in the first quarter was driven by strong utilization in high-performance buildings, environmental programs and renewable energy services across our global operations. Backlog at the end of the quarter was up 11% year-on-year, resulting in an all-time high ending value of $3.81 billion for the company. In the first quarter, we won many new programs and task orders with both our commercial and government clients here in the United States and internationally. We leveraged our $25 billion value in contract capacity with the US federal government, and our existing master service agreements, to generate almost $1 billion in new orders just in the quarter. We were also awarded new programs such as the $42 million in additional contract capacity by USA for Energy Transformation Services in Moldova, and a new $95 million contract with the United States Navy to support their environmental restoration needs. This broad-based backlog provides us with excellent visibility, through the remainder of fiscal year 2023. Now, just 10 days ago on January 23, we closed the acquisition of the RPS Group, and we're rapidly moving forward on shared opportunities, collaboration, and actually aligning their systems with ours. And I'm very pleased to welcome everyone at the RPS Group to Tetra Tech. The RPS Group brings to Tetra Tech over 5,000 staff that are highly aligned with our approach to projects and high-end consulting services in key geographic regions that we've been targeting for future growth for some time. RPS doubles our staff in the United Kingdom and Australia broadening our services and client relationships in both of these regions. RPS also extends our operations by adding 1,200 employees in Europe, across the countries of Norway, Netherlands and the Republic of Ireland giving us for the first time, a significant presence in that region. When we actually combine Tetra Tech and the RPS Group, we now have an organization collectively with 27,000 employees, working from 550 offices worldwide, servicing 22,000 clients and we collectively deliver 100,000 projects a year with an annualized revenue of approximately $4.5 billion. Together, Tetra Tech and RPS, this team is leading the science and driving growth by addressing our clients increasing needs for water, environment and sustainable infrastructure services. At this point, I'd like to turn the presentation over to our Chief Financial Officer, Steve Burdick, to go through more details of our financial performance in the quarter. Steve? Thank you, Dan. So I'd like to now review the financial results for the first quarter of fiscal 2023. Overall, as Dan mentioned, we had record revenue and earnings and the strong performance from our operations is marked by quarterly revenue of $895 million and net revenue amounting to $737 million, which is a quarterly record for us. Now when adjusting for the FX change from last fiscal year, revenue was up 7% and net revenue was up 12% over the last year on a constant currency basis. We experienced a strong revenue growth from all the end markets, including US commercial, international, federal government, and our state and local clients. Our profitability for the first quarter was also very strong. Our adjusted EBITDA came in at $103 million, which was up 16% over last year, and our EBITDA margin increased 90 basis points to 14%. This improvement came from both segments as you heard from Dan about three-quarters of this increase, was driven by our growth in the GSG segment, and an improvement in GSG's operating margin, which was up 240 basis points over last year and about one-quarter of the increase was in operating income coming out of CIG where the margins were up 60 basis points over last year. Now, our GAAP EPS came in at $2.18. This was an increase of 74% from last year. As noted in our reconciliation summary as provided in the appendix to this presentation, we entered into a hedge for the purpose of locking in the RPS price in US dollars at the time we signed the agreement back in September. Now for the first quarter of fiscal 2023, we had an FX hedge gain of $68 million that contributed $0.94 to the GAAP EPS. We entered into this hedge when the British pound was trading at a 30-year load to the US dollar. And ultimately at the time the acquisition closed in late January just 10 days ago, the cumulative effect or the cumulative gain on our FX hedge amounted to about $110 million and this effectively reduced our purchase price by almost 15% and will save over $6 million of interest expense per year going forward. In addition to the hedge gain, we incurred costs related to the RPS acquisition for bridge debt financing fee of about $2.7 million recorded in our net interest and for legal fees of about $3.8 million recorded in operating income. Now excluding these acquisition gains and losses, our quarterly EPS came in at an all-time record high of $1.34. This was an increase of 13% compared to the adjusted EPS last year. I also want to point out that our tax rate in the quarter was 25% versus 19% a year ago. And the tax rate differential had an impact on our EPS and that -- if we were at the similar lower tax rate our EPS would have been even higher by another 20%. Cash flows generated from operations for the first quarter totaled $25 million. Historically, the first quarter is seasonally our lowest period relative to cash generated from operations. Our focus on working capital and cash flows has resulted in our DSO maintaining the leading industry standard of 61 days. This is a sustainable improvement from prior years and this lower DSO trend continues to reflect the outstanding work that our project managers lead relative to higher-quality projects and highly satisfied clients in our broad portfolio across really all of our end markets and geographies. Our net debt amounts to $82 million and the net debt to EBITDA was at a leverage of 0.2 times with a total cash position of about $164 million. Now regarding our dividend program, we paid out $12 million in dividends in the first quarter. And I want to announce that our Board of Directors approved a $0.23 dividend to be paid this quarter, and this is our 35th consecutive quarterly dividend and our seventh consecutive year of double-digit year-over-year increases in the dividends paid. As we presented here today, the continued high-quality operating and financial results with improved EBITDA margins, positive cash flows and lower leverage has provided the opportunity for Tetra Tech to comfortably take on greater leverage through our banking relationships to fund the RPS acquisition, which I will speak to next. So for those following the presentation, I'd like to present our financial plan for the integration of RPS, which is a significant opportunity for Tetra Tech. And when looking out over the next three years, we expect to; first, increase the actual EBITDA margins of RPS from the lower historical levels to be more in line with Tetra Tech generating margins well over 13%. This will be accomplished in a similar manner as what we had done for our two previous public company acquisitions both Coffey in 2016 and WYG in 2019. By focusing on high-end differentiated services and revenues, while integrating the business into our ERP platform and our corporate systems for greater cost synergies, we had increased the margins in those businesses from breakeven to the current Tetra Tech double-digit levels. And secondly, through improved RPS profit margins and cash flows, along with Tetra Tech's strong positive cash flows from operations, we expect to delever our balance sheet to a level to be more in line with our long-term net debt-to-EBITDA goal of one times to two times. And we would expect to have a net debt leverage of about 1.5 times by the end of this year. So as you can tell, I'm very pleased to share these quarterly results with you for the start of our fiscal 2023. I want to thank you for your support and I will now hand the call over to Jill to discuss just a few of the many business opportunities of bringing Tetra Tech and RPS together. Thank you, Steve. RPS is an excellent strategic fit for Tetra Tech, expanding both our global water and renewable energy opportunities. Tetra Tech has a leadership position in water, as demonstrated by our number one water ranking by engineering news record for 19 consecutive years. Tetra Tech is working worldwide to provide our clients with sustainable water supplies and innovative water treatment solutions. Our rapidly growing digital water practice is advancing water utilities programs by providing remote automation, monitoring and data analytics. The addition of RPS expands Tetra Tech's addressable market by providing us with access to a Â£10 billion per year UK water market. RPS brings long-term relationships and consulting contracts with all of the major UK water agency clients. These same clients utilize RPS Group's Water net Pro software platform on a subscription basis, a cloud-based decision-making system that provides predictive analytics and visualization for water quality, hydraulics and asset management. The addition of RPS also advances Tetra Tech's global energy strategy by giving Tetra Tech access to a Â£15 billion per year offshore wind market in the United Kingdom and Europe, significantly increasing Tetra Tech's renewable energy opportunities. Tetra Tech holds top rankings with engineering news record in renewable energy for hydropower, wind power and solar power. Tetra Tech has long-term relationships with energy utilities, having provided high-end siting and permitting consulting for more than 1000 projects in the US. For the US offshore wind market, Tetra Tech provided all of the front-end planning and permitting services for the only two operational projects, the Block Island Wind project and the Coastal Virginia Wind project. RPS also brings an impressive resume for offshore wind in the UK and Europe, having worked for over a decade on the development of the [indiscernible] one, two and three wind projects, and providing specialized services in the areas of marine investigation and geophysical analytics. Together, we are ideally suited to support our clients in the expected 260 gigawatts of offshore wind development in the North Sea, representing a fivefold increase in current wind generation with offices in Ireland, the United Kingdom, Norway and the Netherlands, RPS is well positioned to put Tetra Tech on the map in the North Sea. Great. Thank you, very much, Jill. I'd now like to present our guidance for the second quarter and for all of fiscal year 2023. And I'd like to do that in two parts this morning. First, I'll be presenting Tetra Tech's guidance without RPS. And I'll remind the collective group here they've been with us for just 10 days now. And second, I'd like to provide the outlook for the RPS Group's financial contributions for both the second quarter and for all of the fiscal year of 2023 for the amount post-acquisition or post January 23. I'd like to begin with our guidance as follows for Tetra Tech excluding RPS. For the quarter, for the second quarter of 2023, our net revenue guidance is a range of $685 million to $735 million, with an associated earnings per share of $1.03 to $1.08. For the entire year of fiscal year 2023, we are increasing our net revenue guidance range to a level of $3 billion to $3.15 billion of net revenue, with an associated earnings per share guidance of $4.90 to $5.05. This guidance for Tetra Tech excluding RPS has the following assumptions. It assumes within this guidance we will take an expense of $0.21 per share, or $15 million for intangible amortizations, we'll have an effective tax rate for the year of 26% for the remainder of the year. We have approximately 54 million diluted shares outstanding and this guidance does exclude any other contributions that would take place after the RPS acquisition. With respect to the contributions, the financial contributions for RPS for the second quarter, we have estimated that they will contribute approximately $100 million of net revenue to Tetra Tech, with an associated earnings per share of minus $0.10 in the second quarter. For the entire fiscal year of 2023, the eight months that they will be with us in total, we expect that they will contribute approximately $400 million of net revenue and be neutral to our earnings per share on an adjusted basis, excluding transaction and integration costs. In summary, we had an excellent first quarter and just a fantastic start to fiscal year 2023 setting first quarter records and frankly any quarter records for net revenue income and earnings per share. Our backlog reached another all-time high comprised of services that are aligned with our long-term growth strategy that provide us excellent visibility for the remainder of 2023 and frankly even further into the future. As we begin the year, we're seeing increased opportunities and demand for our Leading with Science approach and advanced analytics solutions reaffirming our strategy to focus on the high-end services in water, environmental programs and sustainable infrastructure. The question-and-answer session will begin now. [Operator Instructions] Our first questions come from the line of Noelle Dilts with Stifel. Please proceed with your question. Hi. Thanks everyone. So I was hoping that you could just expand a bit on your expectations around RPS margins for fiscal 2023. I think when RPS had -- before the acquisition, had been talking about kind of getting to a double-digit EBITDA margin in the near term. So could you just, expand upon sort of how you're thinking about the margin profile this year, and how the cost savings that you've laid out rollout over the next basically 2.5 years? Thanks. Absolutely, Noelle. Thanks for the question. Steve, actually put together a slide that was included in his prepared remarks, that graphically depict our expanding margin expectations for the RPS Group. Now in 2022, which has been completed let's call that the trailing 12 months, RPS Group was around 4%, just slightly over 4%. We expect that under Tetra Tech that number will double and we expect as an average for the year, that that will increase to approximately 8%. In fact, we'll be exiting fiscal year 2023, at a run rate closer to 10%. But for the average, that they'll contribute for 2023, it would be approximately 8% for the year, with it beginning at approximately 4% now, and expanding to a run rate at about 10% at the end of the year. We expect in 2024, that number to move into a double-digit level approximately 11% and that level it will enter at about 11x at about 12 with an annual average right there in the middle, at about 11 and that would be for 2024. And then finally, in the following 12 months, we expect that to be up at Tetra Tech level, which would be a 13% plus. Now, in one respect, I would say that 2024 sounds like a long way away. But since, we're on the US federal government calendar, that's less than eight months away. So, it's actually quite close. With respect to savings, I did make a comment on the adjustments with respect to our forecast for contributions from RPS to Tetra Tech. We do expect that on a cost synergies basis, moving to common platforms and aligning our systems, we will see -- once fully implemented, we will have approximately a $25 million contribution from reduced cost or it will contribute to their EBITDA. That is embedded in helping assist to get to the margins that I had just indicated. We expect that it will cost us about 10 -- I'm sorry, it will cost us about $20 million, in order to achieve the $25 million in savings per year. We expect we'll get about half of that cost synergies this year, in fiscal year 2023. So of the $25 million we'd expect, we get about $10 million, a year savings here in this current fiscal year. The cost for that will be about $15 million. So of our total $20 million that we'll spend to achieve the $25 million, we'll incur about half of that this fiscal year. That will leave about $5 million for fiscal year 2024. We expect the annual yield to be up to about $20 million, a year for 2024, and then beyond that 25 on an ongoing and future basis. I know I ran through those numbers, pretty fast. So, there's some questions on that I'd be happy to get into those details or have Steve, provide some of the underlying support. Sure. I think, I commit â so, I think I guess, just while we're on the RPS topic. I know that sales synergies have been discussed, as a key reason for the acquisition. Could you expand upon how you're thinking about some of those opportunities, and really the growth potential of the combined sort of Tetra Tech-RPS entity again as you look out over the next couple of years? I'm really excited about that. I know that our financial folks and certainly I take great satisfaction on the accretion. I know we've talked about -- expect the RPS accretion to Tetra Tech once they've joined us for a year and we've actually had them integrated to be in the mid- to upper teens on a financial basis. I still believe that's easily achievable. In fact we look to perhaps do even better than that. But what actually is the most exciting is the revenue synergies. And I think that Tetra Tech combined with RPS gives us new geography and new capability that -- and I won't use these terms very often is unmatched in permitting for some of the most innovative renewable energy programs out around the world. And offshore wind is of course one of the very biggest. I know Jill spoke a bit to it. But RPS would not have the ability to have access to the US markets that Tetra Tech brings and Tetra Tech would not have any meaningful participation in the largest new growth areas for offshore wind that go through the North Sea and other areas. So, I do think this is an example that's one plus one is not slightly more. I think it's one plus one is four or five. The other item we've been very anxious to participate we think we can bring enormous value to the UK water markets. Tetra Tech has been doing water quality programs. We've been doing impacts of agriculture and livestock loading into water quality streams with respect to things like total maximum daily loads for chemical loading. This is the new priority for the AMP programs or the asset management programs for the water utilities in the United Kingdom and that's what Tetra Tech's been doing for the US EPA and the US local state and governments here for the past 30 to 40 years and it's just new advent as a priority in the UK. So, I think what we have plus the position that RPS has a holding framework or master service agreement contracts with every one of the major water utilities in the UK is another area where it's not just plus one is slightly more than two I think it's a big move. And while RPS currently is number five or number six ranking as far as revenues for the UK water utilities, I think with the advent of Tetra Tech we're going to move up that rank pretty fast by providing much better value that the water utilities have never seen before. And they can do it on the back of the investments that was made by the US government measured in the hundreds of millions of dollars if not billions. They don't have to invest that. They can get that by Tetra Tech bringing that technology capability to the UK and actually building on the backs of the investments done here in the United States. Great. Thanks for taking my questions everyone. Dan I was just hoping maybe to just get a good sense of the quarter and how it relates to the guidance here. So, I guess I asked the question this way. You mentioned the GSG segment kind of had some items that artificially -- I don't artificially certainly earned them but the margins were a little bit higher than you expected and shouldn't be viewed as a continuing benefit. In fact you said 15% is kind of more like what the underlying performance was. So like if you just do the difference of that margin difference -- it's probably about $0.10 which means you beat the quarter and beat your guidance but not as much. It looks like basically most of the guidance raise not all of it but the majority of the guidance raise is due to that GSG segment margin performance. So, I guess the first question is, is that the right way to think about your guidance and the implication is that the balance of the year outlook is still good and supported, but maybe it's not terribly changed. Is that the right way of thinking about it? Yeah. I think that is primarily the right way to think about it. We had a great first quarter. The reason I made the comment that the extraordinary contributions and of course, I would say that we had -- we mobilized an additional 1,500 staff during the months of October through December to respond to Hurricane Ian, all across Florida. We were really busy. We mobilized staff from across the rest of our operations to go down there and to accelerate the response, to minimize the impacts, to the residents of Florida in the surrounding area. But I do consider that, an extraordinary with climate change and the impact of storms, I'm hesitant to say one-time event, because it's certainly not really become that. But the 17% if you model that out, it would have our guidance going up way up. Now, we did flow through every bit of the beat in the quarter for our annual guidance and more. So we do expect things will be a little bit stronger. But we came into the year with actually a very high forecast for EPS. And we had actually embedded in our forecast for 2023 another 50 basis points increase in our margin across the company. And so to actually maintain that and increase it a bit, while actually absorbing and flowing through all of the beat that we had in Q1 I would say that, yes when you say, does it leave intact primarily the guidance we had coming into the year? I would say, yes, although, we did increase it even more than the beat. So we do have optimism coming in. And of course, in order to -- with only 10 days with RPS with us was really -- we struggled with, how can we communicate? What they're going to contribute, while trying to have perfect insight after 10 days. And that's why we really presented this in two components. What is the base company doing, which you just highlighted we flow through all, the beat and more a little bit more. So yes, it remains intact plus -- and then, I think as we go through the year with RPS, we'll look to actually begin merging that into Tetra Tech, as we integrate the company. And you're going to see one collective number. And it doesn't take much to add these together to do a calculation on your and our collective parts to see the top line is growing well over 20% with these individuals. And I'll be really excited to present what is going to contribute to the bottom-line both on valuable cost synergies and revenue. But yes, I think your characterization of our maintaining and improving our outlook through the year even with the beat is accurate Andy. Okay. And then, I guess, the follow-on question to that is -- obviously only 10 days with RPS here, but going forward can you just talk about how you're going to talk about EPS guidance there's going to be an intangible amortization hit which you don't know yet obviously. And so you gave us I think a very realistic way of looking at it with this kind of two pieces. But going forward do you think that -- is 2023 going to have like an adjustment for some of this intangible amortization? And then maybe as you go to the future 2024 something that you kind of get back to just closing it more like you've done historically which is really founded in GAAP principles, or how are you talking and thinking about that internally? I think that's a great question. That's a great question. That -- for those that have followed Tetra Tech's guidance you would know that we're on a GAAP. In fact, I think we're the only company not just in our industry but any industry that actually does adjustments and moves our actual performance down. And you can see that we adjusted from over $2 a share of earnings per share down to our $1.34. You would have seen each of the quarters last year. We took any type of extraordinary contribution and adjusted our EPS down. So I don't know who does that other than Tetra Tech. And we do present the GAAP and we continue -- and we look to revert to that once we've actually incorporated RPS and understand what the one-time transaction, which we actually know those costs with the integration cost and the intangible amortization. I expect those will be on an adjusted basis. We'll be quite transparent as to what those are. But as we move into 2024, I expect us to be returning to where we've historically been. In fact even this quarter where we've been, which is the cleanest, most direct reporting of our results, which are on a GAAP basis. And if there are extraordinary contributions we've even taken those out to reflect our increases that are well into the double digits. So yes I'm not looking to change Tetra Tech's reporting off into the future. But there are so many one-time items associated with RPS joining us. It would only be appropriate to provide a clear accurate understanding of their contributions by adjusting for those because they are one-time and in the case of intangible amortization, we don't even know that number yet. So we'll put that into place this next quarter. We'll probably have adjustments through 2023 and then we'll return at appropriate timing to GAAP reporting for the company. Hi guys. Can you talk about the IIJA? It sounds like the expectation is still for a minimal contribution later this year? Has anything changed here since the last update maybe in terms of customers moving forward with projects or more funding coming through the pipeline? I'm just trying to get a sense of what's currently baked into the guidance could ultimately prove conservative this year? Well, a good question. It's probably one we get quite frequently. It's ever since both the IIJAs passed into law I would say when the CHIPS Act and even the Inflation Reduction Act and then some combination of the special legislation this past we get different varying comments. We do believe it will have a contribution, primarily late in the year. We have it been quite de minimis overall. The growth rates that we've had in our state and local, which we expect one area to be contributed to the funding. We've seen our clients begin to get some of the funds or grants provided to them but they haven't necessarily flowed at any material level to us yet. I expect in late Q2 but really Q3 and Q4 these projects to start. It's mostly going to be on the very upfront planning, the initial outline even conceptual design. And so I expect many projects to start in the second half of fiscal year 2023. But what's exciting for us about it is not the financial contribution in 2023, but it's when you start a program they start at a small level and they begin to build up like a bell curve. And these are projects that start with small conceptual tasks and assignments. They move into permitting the detailed design. And so they'll build and really contribute over many years. So these programs that will start in the second half of this year are going to build for multiple years and they'll contribute for three to five years or more. And then, of course, owners engineer and oversight during implementation by the constructors. So it's a de minimis contribution during 2023. Really had no contribution in our first quarter and is not included in any material way in the second quarter. You'll see it begin to build in the second half. And I've not seen anything that would cause it to be delayed or pushed out to the right. And we're now seeing what's appropriate the funds go to our clients, which will then trigger their ability to procure and you'll begin to see it in backlog. But I'd also say not only did it not contribute to the revenue in the quarter, I do want to make the note IIJA and the other funding sources did not contribute to our backlog growth in the first quarter. That was excluding anything that I expect â and really will come later in the year for backlog. So the sequence, of course, is -- it goes into contract capacity then it goes to backlog which we report in detail then converts to revenue. So we're still a few quarters out from seeing that contribute to the revenue side. Got it. And second question you guys raised the margin target ranges for both of the segments last quarter. And this quarter was interesting with the GSG margin coming in well above the high end of the range even when you back out those three items you called out in the prepared remarks. I was just wondering, if there was the latest message on the timing of CIG margins potentially catching up with GSG margins. If this is still the case or what the time line could be? That's a great question. It's a great question. Every time I speak with our CIG leads and executives, and they say, they're going to close the gap GSG widens the gap by additional performance like you saw this last quarter. I will say that we expect that GSG as an overall range for the year to be between an EBITDA margin between 13.5% and 14.5%. GSG thought they were beginning to close that gap by being 13.1% in the first quarter. I keep saying, I expect that to close and then GSG puts in a 17% margin and what they would say to me and have said to me is we can do better. So, I guess, what I'll say at this time is I expect both the GSG and CIG margins to expand. We included a 50 basis point increase in 2023 over 2022. And I do think GSG was a bit of an outlier because of the disaster and a few other items. And I do still think CIG will catch and surpass GSG. The only thing I can tell you is, is it going to be in one of the quarters this year. But if they miss it it's not because CIG has underperformed it's because GSG has outperformed. So for our investors and shareholders and analysts who track this, if CIG doesn't catch or surpass GSG, it's good for our performance because that means we're going to be over the top of any of our estimates as you saw this last quarter. Hello. Thank you and good morning. Again you mentioned renewable energy great growth in US commercial and used the term I haven't heard before renewable energy services being a fast-growing business. Is that is the majority of that already the offshore wind projects that you work on before adding RPS? That has been the fastest-growing area. I will say onshore wind has still continued to be strong. Solar has actually been strong. Of course, hydro is really the largest single component right now between both what we're doing in Canada and the US. But I would say that as of well pre-RPS -- I don't want to say as of today. As of 10 days ago and earlier, it would have been almost exclusively what we're doing in Canada and the US. But now with RPS joining us we think the opportunities will actually be substantially greater and add the new renewable energy work in Australia and UK, Europe, which I commented on. But the areas that have been -- that helped grow and drive our commercial 22% growth year-over-year, renewable energies was a big part and permitting for offshore wind was a big aspect of that. And one thing, I don't want to understate what Jill said, the only two operationally productive that are actually producing energy offshore wind projects in all of the United States, all of the permitting and upfront study work and support was done by Tetra Tech and in fact most of the offshore leases that came from the New York bite, which was the big lease auctions that were completed here over the past many months, we're supporting most of those. And right, when we feel that things are great here in the US like having the only two operational programs that we did and having most of the new offshore leases that we're supporting, what are we told by RPS, that's small and puny, and I hope you guys can pick it up, because we did the Hornsea 1, 2 and 3 which is the world's largest offshore wind generation facilities and we're beginning others that are actually larger than it. So I think when you take Tetra Tech programs and RPS', it really looks very favorable for us going into this year and on into future. And bringing what you have done in offshore wind to RPS is it similar capabilities, or is there some work that you can â so should this be cross-sell the RPS and offshore wind and the opportunity in the UK? We can â one thing that's interesting is the work that RPS has been doing to support the offshore wind is different than what we've been doing. Now, they're both under the buoy's or under the general topic of permitting or offshore studies. But RPS brings new technologies that we've just not seen or utilized here in the United States. So an example would be they have offshore automated autonomous buoys. And these are very large buoys. They're almost like small vessels and they have LiDAR systems on them. They have Radar systems. They have self regenerating power supplies through solar panels. They measure all of the different attributes necessary for modeling in case of a discharge of oils or some aspect of environmental impact from the offshore wind or the vessels that are actually servicing them. So if you have a vessel out there and there's an oil spill, you can do real-time monitoring for oil spill, trajectories state, transport all the rest of it real-time on-site with these buoys. And we haven't used those here in the United States. On the other hand, the work that we have here in the US with the offshore very high resolution green biology divers impacts to Benthic studies, which are underground critters in the water. Fisheries, avian flyways, the very high radar systems that we have to monitor all types of avian species, birds others we have here in the US. We have a small fleet of offshore high-resolution surveys bathymetric surveys, hydro survey, sub-bottom profiling and real-time evaluation of marine mammals, we can bring to them. So they'll bring to us technologies we've never seen in the US and we'll bring to them technologies that haven't yet been used in Europe or other locations. So I think it really is very complementary and synergistic. So â that's why again, I love the financial model that will come out with mid to high-teens accretion no doubt that's fantastic. But on the revenue side, what we can bring to the industry is just really exciting to us. And then I mean one thing on RPS, I was â and maybe it depends on transitioning it to the GAAP accounting the higher subcontracting costs to get from revenue to net revenue. And then to bring up RPS' margins does that imply some divestitures perhaps â do they do some lower-margin construction management work â or is that â? Yeah. There â well, the gross to net is actually smaller than Tetra Tech. So they actually have less of a difference from gross to net. So on a full annualized basis, a 12-month basis, there are about $700 million on gross revenue or total revenue, and we expect on an annualized or 12-month basis to be around $600 million on net revenue. So that about 15% difference between gross and net is actually less than that at Tetra Tech. Tetra Tech, here we do more government work than they do and we have more requirements for using small disadvantaged participation on execution of federal work. And so we naturally have contractual obligations to meet the subcontracting requirements. As far as, do they have some work that is lower margin, yes. We're not necessarily see divestiture. But as we had implemented in both Coffey and WYG, we are going to change the model and move it decidively to one direction which is more high-end, which is reflected with less competition, higher margin and technically differentiated services that are just not offered in the marketplace or have a much different competitive landscape in the marketplace. So the efforts will be not to be bigger, but our absolute focus is to be better with RPS. And where that can be reflected. That is going to be reflected in margin. Okay. So yeah, moving -- continuing on the thoughts on RPS. I know it's only been 10 days and such, but maybe you could share a little bit about your expectations relative to managing the new employees retention expectations? Are there any significant senior people that need around the -- or joining the team? And relative to that and the margin question you just touched on before, have these margins in more Tetra Tech expertise and value proposition adds to the -- through the contract base of RPS, or are there things RPS can do better to extract those better margins amongst their -- especially their government clients? Well, so two questions there. One retention, the second is increasing the margins or project execution. With respect to retention, it is new. We do have retention programs here in Tetra Tech. We have equity positions that we will provide access to Tetra Tech stock, as we do with Tetra Tech staff that actually is a component of retention. We actually want every employee to be an owner of the company and have same alignment as our outside shareholders. So we are putting that in place. We certainly have selected a retention of stock awards that vest over multi-years for select areas across the top to make sure that they own a piece of the rock and they're part of the organization and that vests over multi-years as does for every Tetra Tech employee and the existing management of Tetra Tech here. I will say RPS's turnover currently or I shouldn't say currently, prior to our acquisition is higher than Tetra Tech, quite a bit higher. And Tetra Tech's overall turnover rate is right around 10% slightly below that. But the turnover rate of Tetra Tech when you've been here more than five years at the company is in the order of sort of circa 1% is quite low. And what I'm looking to achieve is actually to put that type of career stickiness with the people at RPS. This is not a next step in their career. This is the next landing spot where they will continue their career all the way through retirement for those that want to be high-end technical engineers and scientists. I expect they have a home here forever and that they'll help make Tetra Tech better than we were before they joined us, and it provides our clients extraordinary levels of institutional knowledge consistency. Tetra Tech is not going anywhere. The next recession is not impacting our business. And in fact if you look at 2008, we grew through that. If you look at the pandemic we were up through that. And so the tougher things get the better home this is for those employees. Now with respect to can they run better? I do think that they have been hampered and they have been restricted with respect to a lack of a single ERP system in their back office. I think that the ability for their project management and technical staff to have real-time understanding of where they are decisions-making to be made immediately with respect to immediate access of percent complete accessing of knowledge systems across the entire organization is substantially higher at Tetra Tech. We've just been -- we're -- I don't know one to two decades ahead of where RPS is on that journey and we're going to move what was another five or 10-year journey for them. We're going to move that into 12 to 24-month period, and they'll be on our systems. And so I think that will help provide new solutions for their clients and which then will result into better performance by ourselves, and better delivery and value propositions for all of our collective clients and the 100,000 projects. So with respect to efficiency and how are we going to drive the higher margins not just on cost, it's going to be giving them the tools that they can even do their existing jobs better than what they had done prior to joining Tetra Tech. Thank you. This will conclude the Q&A session. I will now turn the conference back over to Dan Batrack to conclude. Thank you very much Darryl, and thank every one of you for being on this call. Thank you very much for your patience with us, as we look to have more clarity with respect to the very specific contributions on both revenue and earnings and really the outcome of the revenue synergies that we have with more projects for our end clients. I know that, again, gives us probably too many times during this call, but the first 10 days with us have actually been exceptional. I had the great pleasure to be in the UK last Monday when we closed and had a chance to spend the entire week with many of their operations across the UK, Norway, Netherlands, and I left more excited than I went even going over there. I think it's going to be a great contribution. I'm going to have the great opportunity to do the same across our Australian and Asian markets. And it's not just me going in a ceremonial visit, it's actually going on the front line with our operations staff that are initiating the collaboration for new project wins. And I will say in the first day, we've already had wins together that we otherwise wouldn't have had. So I hope you can tell from today's presentation, I'm really looking forward to sharing with you the more details and progress that we're making, and that will be as soon as this next quarter only 90 days away. And I hope you have a great rest of the week. And I look forward to talking to you on next quarter's call. Thank you. Ladies and gentlemen, this concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.
EarningCall_579	Hello and welcome to the Medicenna Therapeutics Fiscal Third Quarter Earnings Call. All participants are now in a listen-only mode. There will be a Q&A session at the end of the prepared remarks. Please be advised, that this call is being recorded at the companyâs request. Thank you, operator. And thank you all for participating in todayâs conference call. This morning Medicenna issued a press release providing financial results and corporate updates for the quarter ended December 31, 2022. If you have not seen the press release, it is available on the Investor page of Medicennaâs website. Before we begin, I would like to remind you that certain statements and information shared during this call constitute forward-looking information within the meaning of applicable securities laws. All statements other than statements of historical facts shared during this call, and that relate to the future operations of the company, and other statements that are not historical facts, including statements related to the clinical potential, development and tolerability and safety profiles, MDNA11, preliminary clinical data, the clinical potential and development of MDNA55, partnering efforts, cash runway, the presentation of additional data and other milestones and patent protection are forward-looking statements that are subject to risks and uncertainties. There can be no assurance that such statements were proved to be accurate, and actual results and future events could differ materially from those anticipated in such events. Important factors that may cause the actual results to differ materially from the companyâs expectations, include the risks detailed in the Annual Information Form and 20-F of the company and in other filings made by the company with applicable securities regulators from time to time in Canada and the United States. Listeners are cautioned that assumptions used in the preparation of any forward-looking information may prove to be incorrect. Events or circumstances may cause actual results to differ materially from those predicted as a result of numerous known and unknown risks, uncertainties and other factors, many of which are beyond the control of the company. You are cautioned not to place undue reliance on any forward-looking information. Such information although considered reasonable by management may prove to be incorrect and actual results may differ materially from those anticipated. Forward-looking statements contained in this conference call are expressly qualified by this cautionary statement. Except as required by law, the company does not intend and do not assume any obligation to update or revise publicly any of the included forward-looking statements only as expressly required by Canadian and the United Statesâ securities law. Speaking on todayâs call will be Medicennaâs President and Chief Executive Officer, Dr. Fahar Merchant; and Chief Financial Officer, Liz Williams. Thanks, Dan. And good morning, everyone. Iâll begin by discussing the most recent news out of our Phase 1/2 ABILITY study of MDNA11, our beta-only long-acting IL-2 super-agonist. Earlier this morning, we announced that the Phase 1 portion of the ABILITY trial advanced to a sixth dose escalation cohort, where patients will receive a target dose of 120 micrograms per kilogram every two weeks. This is encouraging, as it reflects that MDNA11 has a suitable tolerability profile in the end-stage cancer patients that have enrolled in the Phase 1 study to-date. The decision to advance to the sixth cohort was based on a review of the cohort five safety and preliminary pharmacodynamic data by our Safety Review Committee, which consists of study investigators, key opinion leaders and external devices. With regards to safety, we are pleased to say that MDNA11 has been well tolerated, with no dose-limiting toxicities, dose interruptions, dose de-escalations, or treatment discontinuations due to safety issues. With regards to pharmacodynamics, we observed further increase in lymphocyte expansion in cohort five when compared to cohort four, which indicates that MDNA11âs ability to stimulate an anticancer immune response had not yet plateaued. Collectively, these data suggests that we may be able to safely administer higher doses of MDNA11, which in turn could further enhance anticancer effects. To begin testing this hypothesis, cohort sixâs dosing regimen includes 30, 60 and 90 micrograms per kilogram priming doses of MDNA11 followed by a further step up to the fixed 120 microgram per kilogram target dose I had mentioned earlier. For comparison, participants in the fifth cohort received two 30 microgram per kilogram priming doses before stepping up to a fixed 90 microgram per kilogram dose. All doses are administered intravenously every other week. In addition to evaluating a higher fixed dose of MDNA11, the dosing regimen in cohort six has the advantage of getting participants to the 60 microgram per kilogram dose after only two weeks, as opposed to after four weeks, this was the case of cohorts five and four. This is important, as the 60 microgram [technical difficulty] dose of MDNA11 has already led to tumor response as presented last quarter at the SITC Annual Meeting. The data presented at SITC showed tumor control in 5 of 14, or 36% of evaluable patients treated with MDNA11 monotherapy. This included a confirmed partial response in a fourth-line metastatic pancreatic cancer patient treated at 60 micrograms per kilogram, demonstrating MDNA11âs single-agent potential in a notoriously difficult-to-treat cancer. We also observed encouraging signs of MDNA11âs potential to drive durable clinical benefit as the patient achieving the partial response for further deepening of tumor response on each of the two consecutive scans, while another patient with metastatic melanoma has maintained stable disease for more than a year and remains on study. These promising antitumor activity data were notably achieved in an extremely challenging patient population, with nearly 80% of patients having failed prior immunotherapy, including the pancreatic cancer patient achieving a partial response. The data are supported by PD results that showed dose-dependent and multi-fold increases in anticancer immune cells with MDNA11 treatment, but not stimulation of Tregs or eosinophils. This is important, as Tregs are associated with pro-tumor immune pathways, while eosinophils are associated with vascular leak syndrome, a serious life-threatening side effect of the only approved IL-2 therapy, Proleukin. Presented alongside these PD data, were results demonstrating MDNA11âs tolerability at [technical difficulty] doses as well as PK data that showed dose-dependent increases in exposure that remain consistent with repeat dosing, suggesting a lack of an anti-drug-antibody response. Those interested in reviewing any of these data in detail, can find both SITC presentations on the Events section of our IR website. Collectively, we believe ABILITYâs early results demonstrate how MDNA11âs carefully engineered design positions the Superkine as a potentially best-in-class, long-acting beta only IL-2 therapy. We believe the key design features of MDNA11 can provide cancer patients with clinical benefit by avoiding the PK and safety shortcomings thatâs like Proleukin. ABILITYâs data to-date supports this hypothesis, which we plan to continue exploring with several important readouts from ABILITY expected over the coming months. The first of these readouts is anticipated later this quarter, and will include initial antitumor activity data and high level PD findings from ABILITYâs fifth dose escalation cohort, alongside updated data from cohorts one through four. As in earlier cohorts, cohort five enrolled difficult-to-treat patients unresponsive to prior treatments. The same will be true for cohort six, as each dose escalation cohort utilizes similar inclusion criteria. We do however, plan to take a different approach to enrollment for the Phase 2 expansion portion of the trial, where the objective will be to not only demonstrate safety in approximately 40 patients, but importantly, evaluate the efficacy of MDNA11 in patients with less advanced cancer and tumor types that are most likely to benefit from our IL-2 Superkine. Therefore, rather than enrolling patients with a dozen or more disparate tumor types, which has been the case with the Phase 1 portion of the ABILITY study, the Phase 2 portion will only focus on two or three different cancer populations that better reflect MDNA11âs target addressable population. As we look towards the identification of MDNA11âs optimal regimen and ABILITYâs Phase 2 expansion phase, we are optimistic on the trialâs outlook. Having shown an ability to achieve enduring tumor control in a challenging patient population, we expect that MDNA11âs demonstrable durability of response, which is a major challenge with approved immunotherapies could be further enhanced with optimal dosing regimen, and in a population of patients with better initial prognosis. Our current projections have us reporting data from ABILITYâs six and potentially the final dose escalation cohort, together with early antitumor activity data on the Phase 2 dose expansion cohort in the third quarter of this calendar year. In addition, we anticipate reporting early data from the trialâs combination arm evaluating MDNA11 plus Keytruda in the fourth quarter of this calendar year, providing us with multiple near-term opportunities to derisk MDNA11 and demonstrate its potential as a vital component of cancer immunotherapy. Shifting gears, I would like to provide a brief update on MDNA55. The top line results from the single-arm Phase 2b clinical trial of MDNA55 in patients with recurrent unresectable glioblastoma, a uniformly fatal form of brain cancer, have been published in the peer reviewed journal, Neuro-Oncology, which is the official publication of the Society for Neuro-Oncology. These results showed that the trial met its primary endpoint, with median overall survival in the primary and supportive analysis populations exceeding pre-defined success criteria and key historical benchmarks. These promising results helped us to align with the FDA on an innovative, open-label hybrid design for a potential pivotal trial. Iâm also happy to mention that the World Health Organization has approved the international nonproprietary name for MDNA55, which will now be referred to as Bizaxofusp. Looking forward, we continue to pursue Bizaxofuspâs further development and potential commercialization to external partnership, as we have stated consistently in the past. This will allow us to enable Bizaxoâs advancement, while maintaining our internal focus and resources on MDNA11 in our BiSKITs program, which was the subject of a key patent issued earlier this year. This new issued patent extends protection into at least [technical difficulty] with an IL-2 Superkine in combination with checkpoint inhibitors, such as an anti-PD1 inhibitor, which is being advanced in the combination arm of the ABILITY study. And for BiSKITs, such as MDNA223, which comprises an IL-2 Superkine linked to an anti-PD1 antibody. With checkpoint inhibitor patents, due to start expiring in 2028, we believe the data from ABILITYâs combination study as well as MDNA223âs IP could be an important tool to facilitate collaborations or partnerships with leaders in the space. Thanks, Fahar. Iâll begin today by reminding those listening, that all references made during this section of the call are in Canadian dollars, unless otherwise stated. As of December 31st 2022, Medicenna had cash and cash equivalents of CAD36.2 million. Based on our projections, our current cash resources are sufficient to fund our operations through the second quarter of calendar year 2024. This cash runway is expected to take us through several important clinical readouts and the completion of the ABILITY study, including both the monotherapy and combination expansion phases designed to assess MDNA11âs efficacy in relevant patient populations. Net loss for the quarter ended December 31st, 2022 was CAD1.1 million or CAD0.02 per share, compared to a loss of CAD4.8 million or CAD0.09 per share for the quarter ended December 31st, 2021. The significant decrease in net loss for the quarter ended December 31st, 2022 compared with the quarter ended December 31st, 2021, was primarily a result of a non-cash gain of CAD3.7 million related to the change in valuation of a non-cash warrant liability associated with the August 2022 financing. Research and development expenses of CAD2.9 million were incurred during the quarter ended December 31st, 2022, compared with CAD2.9 million incurred in the quarter ended December 31st, 2021. Research and development expenses were consistent quarter-over-quarter. General and administrative expenses also remain consistent quarter-over-quarter, with CAD2 million incurred during the quarter ended December 31st, 2022 as well as during the quarter ended December 31st, 2021. For further details on our financials, please refer to our Financial Statements and Managementâs Discussion and Analysis, which will be available on SEDAR and EDGAR, respectively. Thanks, Liz. Before opening up the call for Q&A, Iâd like to first thank all those who have supported the progress we spoke about today, including our employees, partners, investigators, shareholders, and clinical trial participants. Iâd like to also emphasize how our recent progress has us set up for an exciting calendar year ahead with crucial milestones anticipated throughout 2023. The first of these milestones is expected later this quarter, which is when we anticipate reporting high level PD findings from ABILITYâs first five dose escalation cohorts and an update on antitumor activity. In cohorts one through four, MDNA11 displayed promising signs of monotherapy activity, as well as safety, PK and PD profiles that position it as a potentially best-in-class IL-2 therapy. The key objectives of cohorts five and six are to confirm if MDNA11âs immunologic activity can be enhanced with higher doses, and whether these higher doses will be adequately tolerated. Based on what weâll see in additional readouts from ABILITYâs dose-escalation phase, we will select the optimal dose and schedule for the trials Phase 2 monotherapy expansion and combination arms. The Phase 2 component of the study will be specifically designed to assess MDNA11âs efficacy in patients that are similar to its target populations. We therefore believe that the readouts anticipated from the Phase 2 portion of the trial which are expected in the third and fourth quarter of calendar 2023 may represent significant derisking events for the MDNA11 program. With encouraging signals of efficacy already observed in the extremely difficult-to-treat patients during the trialâs dose escalation. We are optimistic about the ABILITYâs studies outlook. We look forward to its continued progress and to providing periodic updates along the way. Thank you. The floor is now open for questions. [Operator Instructions] The first question today is coming from Charles Zhu of Guggenheim. Please go ahead. Good morning, everyone. Thanks for hosting the call and for taking the questions. First one from me, if I recall dose cohort five, was also the first when you instituted the new requirements around baseline lymphocytes. To what degree might the enhanced lymphocyte stimulation or PD markers youâre observing be influenced by this higher baseline? And how do you think about that relative, you know due to the higher doses of MDNA11 youâre evaluating? Thanks. Thank you, Charles. Thatâs a good question. Certainly, as you know, we set a threshold for lymphocyte counts in this particular study. And we clearly are seeing that and weâve seen mostly from previous studies with Proleukin, where a high baseline lymphocyte count generally results in better patient outcomes. The key thing here is, although thatâs something thatâs been demonstrated historically, we certainly do not have as much data with our therapy and our therapeutic regimen that we use with MDNA11. Needless to say, we have, I think, if you recall, between the first three cohorts where the doses were below 60 micrograms per kilogram, we still saw patients with stable disease, including a patient that continues to be treated in cohort two, who started at 10 micrograms per kilogram where the lymphocyte count or the baseline lymphocyte count was not necessarily set at 1,000 per microliter. So it may be a sort of a threshold thatâs maybe more relevant for Proleukin or other IL-2 based agents. But certainly, as far as we are concerned, although we feel that you can get to the threshold lymphocyte count or a higher lymphocyte count or expansion to occur, we certainly havenât seen any consistency in the data that we have so far. Nevertheless, we expect that as we entered into sort of the Phase 2 portion of the study where we have patients with higher or sort of less heavily pre-treated healthier patients more likely that we have patients with higher lymphocyte count. So itâs a bit premature right now to come to any conclusions based on the data we have, only 14 patients so far. But we are encouraged to see that even a patient who started at less than 1,000 lymphocytes per microliter continues to be on study for now 15 months. So thatâs quite encouraging. Hey, guys. Thanks for the update. Iâm curious Fahar based on the preclinical data. Do we expect to plateau out on lymphocyte count in cohort six or I guess another way to ask the question is, how do we know when weâre at the recommended Phase 2 dose? And I have a follow-up. Right. Thanks, Matthew thatâs a good question again. And I must say that youâre right on spot when you talk about the data from preclinical studies. So, certainly what we have. The way we have projected dosing regimens and selecting the different doses and different cohorts is given mostly by extrapolating from data we have from non-human primate studies. And based on the safety windows that we saw in non-human primates, as well as where we saw the threshold occurring in non-human primates, I would say that the current dosing regimen that we are enrolling patients in which is the cohort six at 120 micrograms per kilogram is pretty much close to where weâre expecting this to plateau. As you know, we saw pretty impressive results at studying at cohort four and for 60 micrograms per kilogram dose so far weâve had, as you know, the data we have shared of just seven patients that have received more than 60 or 60 micrograms per kilogram or higher. And based on the data we have so far, it seems like we are seeing pretty impressive clinical activity. Add to that, the fact that we are continuing to see increases in lymphocyte count at 90 micrograms per kilogram as we reported today, we believe that when we get to 120 micrograms per kilogram, we should be pretty much on par with the upper limits of dosing where we had from non-human primates. So, so far, the trends from non-human primate data are predictive of what weâre seeing with the lymphocyte counts with other expansion of CD8+ T cells, NK cells. So being consistent, and we believe that we are pretty much close to that upper limit. And we do not expect that we will necessarily have to go to sort of next higher dose. But we already have a promising data from the 60 micrograms, we have data from 90 and 120. So we have three sets of data or dosing to pick from, in view of the fact that weâve met the safety burden with both the 60 and 90 micrograms, and see if we meet the same safety burden at the 120. But generally, across the board, we feel pretty comfortable that above 60 onwards, we should be having a therapeutic activity thatâs more than adequate for MDNA11, obviously, we want to make sure that before we enter the Phase 2 portion of the trial, we need to make sure that we can confirm that by testing the higher doses as well. Right, right. That makes sense. Okay. And then maybe just a quick follow-up on, Iâm sure youâre aware of Proleukin was effectively sold to Iovance few weeks ago. Iâm just kind of curious on your view of that transaction, and kind of what that means for the field. And if, you know, in the future thereâs any opportunities to combine with other therapeutic modalities outside of checkpoint inhibitors? Thanks. Right. Again, really good question, Matt. That really was an indication as to how large the potential opportunity is for molecules such as MDNA11. I think if you recall the data from Iovance that presented at SITC, clearly indicated that in the Phase 3 setting, where they were using Proleukin, the toxicities were clearly there, they were obviously not desirable. And itâs not surprising that Iovance is also looking to develop a much safer version of IL-2. So, I believe about that the potential for IL-2, particularly MDNA11, where we have the selectivity for boosting NK cells and CD8+ T cells and not Tregs, becomes really important, because after going through a sort of a long process of isolating your T cells from the patient, and then having to expand them through ex-vivo manufacturing, and then re-infusing the T cells. That itself, I think, as you know, is a long process and you want to make sure that you have the best quality of T cells that youâre infusing into the patient. The good thing about a molecule such as and doing a good job of stimulating your immunosuppressive Tregs, and this is exactly what we want, this is from a manufacturing perspective, make sure that youâre able to boost the population of CD8 + T cells and NK cells, not Tregs, which unfortunately is not the case with Proleukin, because it will boost the population of Tregs. And then when you insert or re-infuse the T cells, you want to continue to expand those T cells selectively, not expand your Tregs. And this is again where MDNA11 has its distinct selectivity and therefore distinct advantage. So we believe that this particular Iovance transaction sets the stage clearly for all other T cell-based processes or car-T-based processes, et cetera, where not only what a drug such as MDNA11 be ideal for manufacturing purposes, but more importantly, is to then stimulate those T cells in the patient without boosting your Treg population. So thatâs, I think, an important industry or important opportunity to exploit and I think MDNA11 is really well suited for the purpose. Good morning. I got a couple of questions. The first one is just a clarification. When you were speaking, Fahar, I think you said that we get PK/PD and initial efficacy results for cohort five in the first calendar quarter. In the press release, it kind of indicates only PK/PD and the efficacy will be an update for cohorts one through four. Just confirming, are we getting efficacy data for cohort five in Q1? I did not realize. Thanks, David for that particular question. But yes, let me sort of correct that. If the press release did not mention that, then apologies. But yes, the intent is for us to release the PK/PD, but also the tumor activity data from cohort five before the end of this quarter. Okay. Another clarification. So, with the patients with higher baseline lymphocyte counts in cohort five and six, you had anticipated that by using that inclusion criteria that you would get healthier patients. And yet, youâre saying that cohort five, cohort six are still very sick patients, and youâll only start getting healthier patients in the dose expansion. So is that correct by selecting based on the higher baseline lymphocytes, you didnât get healthier patients in five and six? Well, itâs not as you know, healthier patients is based on the healthier immune system, certainly, in cohorts five and six, you end up with patients with sort of a baseline lymphocyte count that is higher than what we enrolled in cohorts one, two and three. So, from that perspective, certainly, what we want to try and simulate is, obtain or realize that in cohorts â in the expansion cohorts, we will be looking at patients that have gone through fewer lines of therapy. And therefore, we expect that those patients enroll in that expansion cohort will likely have higher lymphocyte counts. So itâs in a sense for us to provide that information to gather that informations, we are better able to foresee what to expect going down the road. But remember one thing about patients that have gone through multiple lines of therapy, itâs their lymphocyte count primarily from their immune health perspective. But then again, there are a host of other issues that we need to take care of or worry about, because remember, in the dose-escalation portion of [technical difficulty] where we are is really treating about a dozen different types of tumors in this particular portion of the trial. So trying to sort of come up with some kind of homogeneity or minimizing the variability [technical difficulty] here with sort of trying to stabilize and using 1,000 lymphocyte counts per se. But nevertheless, patients would have, as you know, gone through so many different type of therapies, some focused on immunotherapies others with different kinds of chemotherapies as well. So we have a very diverse patient population in the dose-escalation phase, where not only are we dealing with different tumor types, but also different therapies that patients have received. And patientâs health is not only determined by the immune count, but also from other prognostic factors, age is a good example for instance. So that also, we cannot obviously restrict from that perspective. But there is a host of variations that we take into account. But the focus really now is planning for the dose expansion phase of the study, and identifying two or three different tumor types that are most likely to be beneficial to the patients, these patients certainly will not be onstage patients. And therefore, we expect the patients to be more homogeneous than we were in the Phase 1 dose-escalation part, where even if you have lymphocyte counts standardized, we still are dealing with 12 to 15 different tumor types. So itâs a set of a combination of different, far too many parameters in the dose-escalation portion that we cannot really predict what would happen. But nevertheless â Okay. Just one last quick question. With a new priming schedule, you say you get to the 60 dose faster. Can you remind me when your dose cohort that dosed at 60? Did you go right to 60 or did you start at 30 and went to 60? No, we started at 30 and there were two doses of 30 in the cohort four, and then went to 60. So, it took four weeks before we got to 60. In this case, weâll get to 60 in two weeks. Thank you. Good morning, Fahar. And a lot of my questions have been answered. When you get to Phase 2, I was just wondering, you know, among the four indications that seem to be the ones that youâre looking at during the stage of development, you know, how would you order them? Or would you consider just taking the pancreatic and the melanoma as indications to go forward? Yeah, we havenât decided specifically on the tumor types so far. And I think we continue to review the data. We certainly will be collecting more data from cohort five, cohort six as well as historical data that weâve seen so far from the first four cohorts. So we are working closely as to what indications to pursue it in the dose expansion, and we will provide an update as soon as we have had received feedback and guidance from our clinical advisors, KOLs, et cetera based on the growing body of evidence from the current study that we are conducting. So nothingâs been etched in stone at this moment. Yes, so the BiSKIT program, since our last set of data we presented at our conference late last year, we continue to advance that particular program, we certainly are continuing to optimize the design of the molecule and generating more in vitro, in vivo studies and characterizing that molecule further. So we will, as we get an opportunity to present data at additional conferences, or submit a publication, we will be providing more evidence and more data at that time. Hi, good morning. Thanks for taking my question. Just a couple from me. One, you know, in terms of the Phase 2 cohort data or Phase 2 data in the third quarter of â23. Iâm curious, does that mean that you know youâve settled on a Phase 2 dose given that I imagine that you all have to start enrolling that before the 120 micrograms per kilogram dose cohort has finished reading out, you know, or do you anticipate you know further dose finding work in the expansion phase? No, we will not be doing any further dose finding studies during expansion phase. So, we will establish what we call is a provisional recommended Phase 2 dose that will be executed and implemented in the dose expansion phase of the study. So thatâs the plan. And we expect that weâll have some early data by the end of third quarter this year. Okay. And then can you give any additional color maybe on the kind of efficacy data weâll see from cohort five, you know, how many patients? What kind of follow-up? And then have you gotten any additional paired biopsies in this quarter or in this cohort? Yeah, so we will be providing more data. As we plan to do that at the end of this quarter. This will allow us to share with you all the patients that have been enrolled in cohort five, the type of tumors they had, the number of lines of therapy they had, as well as their PK/PD, and, of course, tumor response data. So we will be presenting all that together as a complete set of data, including data from patients in earlier cohorts that are still under study. Okay. And then, in terms of patients that are still on the study, I believe that the last update there were three still on study. Any update on that? Yeah. So that will be when we present that update at the end of this quarter on those three patients plus the patients in cohort five. So we will be able to share all that information, including the data from more recent scans from not only the cohort five, but also from the earlier cohorts as well. Hey, good morning, everyone. Yeah, Fahar, Iâm curious why you arenât restricting the patients for cohort six to certain tumor types. I understand you havenât decided exactly what youâre going to look at in the Phase 2 expansion cohort. But Iâm curious why you arenât limiting it to even the ones that youâre considering for Phase 2? Well, I think the key thing here is, of course, the range of tumor types weâve already treated is, as I said, about a dozen or so, trying to generate data on three different tumor types in a cohort of maybe three or six patients is unlikely to provide you with certainly any trending data. But obviously, what weâre trying to do is, try and enroll more patients that would potentially fit the profile for the dose expansion. But weâre not sort of change the protocol right now, either have we instructed the sites to only limit it to one or two or three different tumor types. Itâs too early. I would say that the purpose of dose expansion is to do that exact same as â the idea in the dose expansion is to really have adequate number of patients in those two or three different types of tumors, rather than having to make a decision based on three or six patients. Okay, that makes sense. And then real quick, when you present this updated data later on this quarter, will that be at a scientific conference? Or is that going to be through just a press release? Well we â as you said, the data from cohort five will be presented at the end of this quarter with additional data that comes through, itâs likely that weâll present at a scientific conference. So we will at that point, depending on when the scientific conference takes place, we should have more data on cohort six potentially even early data on the dose expansion, but that remains to be seen. Thank you, thank you very much all of you for joining the call today. Really appreciate the support the patients that have participated in the clinical trials, as well as the families and the investigators that have been patient with the clinical study itself. And, of course, all our shareholders, employees, et cetera, that have been supporting Medicennaâs progress. We look forward to providing with all of you some additional updates, as we say it, at the end of this quarter, as well as at the end of Q3. And in between, hopefully at a time when there is a conference before the end of third quarter, we will provide additional updates. So look forward to providing those additional data in the coming weeks and months. And thank you all for joining todayâs call. Ladies and gentlemen, thank you for your participation. This concludes todayâs event. You may disconnect your lines at this time or log off the webcast and enjoy the rest of your day.
EarningCall_580	Greetings, and welcome to the Simpson Manufacturing Co. Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Orlando with ADDO Investor Relations. Thank you, Kim. You may begin. Any statements made on this call that are not statements of historical fact are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in the company's public filings and reports, which are available on the SEC's or the company's corporate website. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of forward-looking statements that we may make here today, whether as a result of new information, future events or otherwise. Please note that the company's earnings press release was issued today at approximately 04:15 PM Eastern Time. Earnings press release is available on the Investor Relations page of the company's website at ir.simpsonmfg.com. Today's call is being webcast and a replay will also be available on the Investor Relations page of the company's website. Thanks, Kim. Good afternoon, everyone, and thank you for joining today's call. With me today is Brian Magstadt, our Chief Financial Officer. 2022 marked a year of strong financial and operational performance for Simpson despite a challenging operating environment. I'd like to thank our team for their dedication towards our mission of building safer, stronger structures and their commitment to executing on our growth strategy. I'd also like to acknowledge Karen Colonias for her immense contributions to Simpson during her time as CEO and throughout her 38-year tenure with the company, including laying the foundation for this next chapter of growth. I assumed the role of Simpson's Chief Executive Officer at the start of the year, and I am humbled and excited to lead the team as we continue to focus on our company ambitions. I worked closely alongside the Simpson management team as we put together these ambitions, which we unveiled in the spring of 2021, and remain committed to achieving these goals. As a reminder, our ambitions are to: first, strengthen our values-based culture; second, be the partner of choice; third, be an innovation leader in the markets we operate; fourth, continue above-market growth relative to U.S. housing starts; and fifth, continue expanding our operating income margin and return on invested capital within the top quartile of our proxy peer group. Almost two years in, we are making solid advancements. We remain dedicated to being the partner of choice by maintaining our focus on customer service, which included a 97% product fulfillment rate in North America in 2022. This helped us earn business with new customers in several of our market segments. Our commitment to providing innovative solutions included the rollout of many new products, and in line with the ambition number four, I am pleased to report that we grew our North American volumes above U.S. housing starts in 2022. Our progress has been fueled by our key ambitions and has been made possible by our strong business model, which is built on five key foundational elements: first, our longstanding reputation, relationships and engagement with building code committees, engineers and architects to improve construction practices and [specify] (ph) Simpson solutions; second, our commitment to innovation, exceptional service and education for engineers, builders and contractors; third, our rapid delivery standards on a very broad product line across multiple channels with delivery to our distribution partners or job sites in typically 24 to 48 hours; fourth, our extensive product engineering and testing capabilities at our state-of-the-art labs; and fifth, our increasing diverse portfolio of solutions and products resulting in a one-stop shop for our customers. I'll now turn to an overview of our financial results, key growth initiatives and capital allocation priorities. Brian will then walk you through our Q4 financials and fiscal 2023 business outlook in greater detail. For the full year of 2022, Simpson generated net sales of $2.1 billion and earnings of $7.76 per diluted share. Our sales results reflect new customer wins, the impact of product price increases implemented throughout 2021 to offset rising material costs and $212.6 million contribution from ETANCO Group. We are pleased to have delivered these results, which reflect strong execution despite ongoing macroeconomic uncertainty, inflationary pressures and political unrest in Europe. In North America, our net sales of $368.1 million decreased 1.4% year-over-year. And as a reminder, during the fourth quarter, we fully lapped the impact of our product price increases implemented throughout 2021. In addition, volume in North America was down compared to the prior year quarter due to ongoing macroeconomic challenges. Looking at our distribution channels in greater detail. Volume for our contractor distributor and dealer distributor customers was down due to primarily moderating housing starts, which was partially offset by a slight year-over-year improvement in volumes from our home center channel. This includes both our home center and co-op customers, and is where we see much of our repair, remodel and DIY business. Turning to Europe. Fourth quarter sales totaled $103.7 million, which include a $64.9 million contribution from ETANCO and a negative impact of the strengthening U.S. dollar. The balance of our European operations experienced higher selling prices, partially offset by lower volumes resulting from the uncertain macroeconomic climate. Returning to ETANCO, we are pleased with the team's 2022 financial performance, which was in line with our expectations. We continue with our integration efforts, which remain mostly on track, and we look forward to continuing to benefit from our shared learnings in the coming year. We believe we remain well positioned to capture meaningful future gains from our previously identified synergies, however, the persistent macroeconomic climate in Europe will delay some of our offensive synergy opportunities. Despite macroeconomic headwinds, we are still confident our European business will continue to progress given how we now offer a broader solution set to our customers, along with the ongoing transition to wood construction and regulatory requirements that encourage new construction solutions. Our consolidated gross margin for the fourth quarter was 42.2% compared to 47. 4% in the prior-year period. Compared to prior-year quarter and before considering the addition of ETANCO, our gross margin declined, as expected, as our average raw material costs increased and also partly due to higher factory, overhead and labor costs. Brian will further elaborate on the key drivers of our margin performance as well as our margin expectations for the upcoming year. I'd now like to turn to a discussion on our end use markets, which encompass our key growth initiatives. We made solid traction throughout the fourth quarter in a challenging economic environment. Beginning with our commercial market. We are awarded a structural steel opportunity for a healthcare center in which our products will provide a means for bolted attachment of glass facades and temporary guard railings. As we had mentioned in the past, we anticipate our structural steel initiative will take longer to manifest versus our other initiatives as we continue to build the market. As part of our progress on this front, we held three large scale educational webinars during the quarter, which reached over 2,300 industry professionals to help increase awareness of our structural steel solutions among the specifying community. In the OEM market, one of our focus areas is mass timber. We are pleased to have been awarded a project in Connecticut for a four-storey mixed use building for apartments and retail space. The building will feature cross-laminated timber walls and floors, utilizing Simpson's Strong-Tie mass timber fasteners and connectors. Within the national retail space, as part of our commitment to continuous improvement, we worked to replace slow-moving SKUs with innovative new and existing products in stores, as well as make great strides in our-e commerce initiative. In building technology, we've made a couple of strategic investments focused on creating solutions to help our customers be more efficient. These investments are strong additions to our existing portfolio of technology solutions and reinforce our ambition to be the partner of choice by providing solution sets to our customers that help both reduce construction timelines and address skilled labor shortages. Now, turning to capital allocation. In 2022, we invested in the growth of our business, including $62.4 million in capital expenditures and returned 36.2% of our free cash flow to stockholders through the payment of $43.9 million in dividends and a repurchase of $78.6 million of common stock. In 2023, our capital allocation priorities will remain unchanged. We remain focused on organic growth opportunities, returning value to our stockholders via quarterly dividends and opportunistic share repurchases, and paying down the debt we incurred to finance the acquisition of the ETANCO. In regard to organic growth, we are focused on key investments to strengthen our business model, including our growth initiatives and the integration of ETANCO. We are also continuing to evaluate expansion opportunities, such as our previously announced Ohio manufacturing and distribution facility, as well as equipment investments to drive productivity and maintain our best-in-class customer service. As it pertains to M&A, while the continued integration of ETANCO remains our priority, we remain open to potential M&A opportunities that would accelerate our key growth initiatives and strengthen our business model. In summary, we are pleased with our strong fourth quarter and full year financial and operational performance. Looking ahead to 2023, in North America, the combination of increasing interest rates, ongoing inflation, labor shortages and macroeconomic uncertainty has resulted in softer market forecasts for housing. In addition, while we benefited from the impact of product price increases in fiscal 2022, based on current pricing conditions, we enacted a price decrease on the majority of our products in North America earlier this year. At the same time, we continue to operate in a higher cost environment, including factory, labor and overhead expenses. As Brian will discuss in more detail, these factors, as well as ongoing integration costs for ETANCO, will continue to pressure our operating margins in the year ahead, [though] (ph) we are expecting our margins will be ahead of the pre-COVID run rate. Nevertheless, we are committed to ongoing expense management and executing the areas of business that we can control. While the operating environment will prove challenging, we continue to believe that Simpson remains well positioned for success given our ongoing focus on expansion into new markets, the majority of which is not directly tied to U.S. housing starts, along with our strong balance sheet, solid market position and culture of Simpson colleagues who remain deeply passionate about our mission of providing solutions to help people design and build safer, stronger structures. We are confident in our ability to continue to achieve our company ambitions, including our goal to grow above-market relative to U.S. housing starts with profitability in the top quartile of our proxy peer group. Now, I'd like to turn the call over to Brian, who will discuss our fourth quarter financial results and 2023 outlook in greater detail. Before I begin, I'd like to mention that unless otherwise stated, all financial measures discussed in my prepared remarks today refer to the fourth quarter of 2022 and all comparisons will be year-over-year comparisons versus the fourth quarter of 2021. Within the North America segment, net sales decreased 1.4% to $368.1 million, primarily due to lower sales volumes, partly offset by prior year product price increases. In Europe, net sales increased 150.3% to $103.7 million, primarily from ETANCO, which contributed $64.9 million in net sales, along with product price increases, partly offset by lower volumes and the negative effect of approximately $5.6 million in foreign currency translation. Wood Construction products represented 85% of our total fourth quarter sales, down slightly from 87%, and Concrete Construction products were 15% of total sales, up slightly from 13% Consolidated gross profit increased 1.2% to $200.7 million due to ETANCO and our gross margin was 42.2% compared to 47.4% last year. On a segment basis, our gross margin in North America decreased to 45% compared to 49.3%, primarily from higher raw material costs, factory and overhead and labor as a percentage of net sales, partly offset by prior year product price increases. Our gross profit dollars in Europe totaled $33.9 million and included $20.9 million from ETANCO, which is net of the $1.4 million fair value adjustments for inventory costs as a result of purchase accounting. From a product perspective, our fourth quarter gross margin on Wood products was 41.9% compared to 47.5% in the prior year quarter, partly due to the addition of ETANCO and was 42.3% for Concrete Products compared to 42.7% in the prior-year quarter. Now turning to our fourth quarter costs and operating expenses. Total operating expenses were $119.3 million, an increase of $17.9 million or approximately 17.7%. Operating expenses included $18 million attributable to ETANCO and another $2.7 million for integration costs. As a percentage of net sales, total operating expenses were 25.1%, a slight increase of approximately 90 basis points compared to 24.2%. Our fourth quarter research and development and engineering expenses increased 15% to $18.5 million, primarily due to increased personnel costs and professional fees. Selling expenses increased 25% to $44.9 million, primarily due to $6.7 million from ETANCO as well as advertising and trade show, personnel and travel-related expenses. General and administrative expenses increased 13.3% to $56 million, primarily due to $10.5 million from ETANCO, which includes $4.4 million in amortization, of the acquired intangible assets, partly offset by lower North America operating expenses, including stock-based compensation and professional fees. As a result, our consolidated income from operations totaled $78.7 million, a decrease of 18.9% from $97.1 million due to higher operating expenses. In North America, income from operations decreased 16.6% to $85.6 million, primarily due to lower gross profit, partly offset by lower operating expenses, including cash profit sharing, sales commissions and stock-based compensation. In Europe, income from operations was $0.8 million compared to a loss of $1.5 million, which includes ETANCO's operating income of $0.3 million, which is net of the aforementioned $1.4 million in inventory adjustments, $4.4 million of amortization expense on acquired intangible assets and $2.7 million for integration costs for a total of $8.4 million. On a consolidated basis, our operating income margin was 16.6%, a decrease of approximately 660 basis points from 23.2%. I will discuss our operating margin outlook for fiscal 2023 shortly. Accordingly, net income totaled $57.6 million or $1.35 per fully diluted share, which is inclusive of $2.7 million of net interest expense. This compares to $69.8million or $1.61 per fully diluted share. Now, turning to our balance sheet and cash flow. Our balance sheet remained healthy. At December 31, 2022, cash and cash equivalents totaled $300.7 million, down $8.5 million from our balance as of September 30. Our inventory position at December 31 was $556.8 million, which was up $16.8 million compared to our balance at September 30, 2022. We'll continue to focus on effective inventory management to ensure we retain our strong levels of customer service and on-time delivery standards, especially given the rapidly changing economic environment. During the fourth quarter, we generated cash flow from operations of approximately $137 million. As Mike highlighted earlier, our primary uses of cash will be utilized to support the growth of our business while simultaneously repaying the debt we incurred to finance the acquisition of ETANCO, as well as returning value to our stockholders through dividends and share repurchases. Given our solid balance sheet position, and in line with our capital allocation priorities, during the fourth quarter, we repaid $100 million worth of the $250 million drawn on our revolving credit facility. At year-end, our debt balance was approximately $577 million and $300 million remained available for borrowing on our primary line of credit. During the fourth quarter, we invested approximately $20.8 million for capital expenditures, paid $11.1 million in dividends to our stockholders and repurchased approximately 47,800 shares of our common stock in an average price of $84.95 per share for a total of $4.1 million. In 2022, we repurchased $78.6 million of our common stock under our $100 million share repurchase authorization, which expired at the end of 2022. Further, our Board of Directors authorized the repurchase of up to $100 million of our common stock, which went into effect at the start of the year through the end of December 2023. Additionally, on January 24, our Board of Directors declared a quarterly cash dividend of $0.26 per share, which will be payable on April 27, 2023 to stockholders of record on April 06, 2023. Next, I'd like to discuss our 2023 financial outlook. Based on business trends and conditions as of today, February 6, we are initiating guidance for the full year ending December 31, 2023 as follows. We expect our operating income margin to be in the range of 18% to 20%. Key assumptions include: some anticipated softness in our top-line given slowing housing starts in the U.S.; the aforementioned price decrease on the majority of our connector products in the U.S. to most of our customers; cost of goods sold, which reflect steel costs coming down moderately from our weighted average peak in Q3 2022; increased operating expenses, we believe, are needed to continue to position the company to make meaningful share gains in our markets and growth initiatives not associated with U.S. housing; and a slightly lower ETANCO operating margin profile than the rest of the company, including intangible amortization, as well as $6 million to $8 million in expected ETANCO integration costs. Next, we expect interest expense on the outstanding $150 million revolving credit facility and $433.1 million outstanding term loan to be approximately $9.7 million, including the benefit from interest rate and cross-currency swaps, mitigating substantially all the volatility from changes in interest rates. Our 2023 effective tax rate is expected to be in the range of 25% to 26%, including both federal and state income tax rates, and assuming no tax law changes are enacted. Lastly, we expect capital expenditures to be in the range of $90 million to $95 million, including approximately $22 million to $25 million to be utilized for the previously discussed Columbus, Ohio facility expansion. In summary, we were pleased with our strong finish to the year as we continue to integrate ETANCO and make progress on our key growth initiatives to position Simpson for long-term sustainable growth and to increase stockholder value. While 2023 will have its challenges, we remain dedicated to our long-term strategy and strategic plan. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question is from Daniel Moore with CJS. Please proceed with your question. Thank you. I'll start with North America. Maybe just talk about the volume trends through the quarter, what you saw in terms of sequential cadence thus far into Q1 and maybe the magnitude -- some sense of the magnitude of the price decline or decrease you implemented in North America earlier in January? So, starting with the -- so, total volume in North America down about 7%. And as we look at how that quarter ended, it was trailing -- give me just a second as I get my note on my right number. So, pricing was about a 5% offset to that 7% decline. And as we look at January, Dan, the -- compared to January of '23 versus 2022, it's got a little bit of price, a little bit of volume in there, down in North America approximately 10%. The specific breakdown on volume versus price, I don't have that yet. But as we look at our price that we -- that price decrease that we implemented kind of mid-single digit percentage range on an annual basis, about $30 million. Very helpful. I appreciate that. And maybe talk about your outlook for gross margin and operating income margin, and the cadence for the year embedded both for Q1 as well as any [gains] (ph) in there that sort of embedded in the fiscal '22 -- '23 guide of 18% to 20%? Yes, definitely getting better back half of the year on operating margin as we look at that range. So, Q1 continuing to work through that higher price steel that we indicated, we think, peaked in Q3 of last year. So, we'll see a little bit of impact there. But as we go through the balance of the year, we get the typical seasonality of a Q1 and Q4. I would expect that it's -- gross margins, like we typically see in Q2, Q3, definitely better. And then, from an operating margin perspective, that 18% to 20% guide, of course, will tighten that up as we go through the year. Also anticipate some of that ETANCO integration spend that range on -- that we gave in the prepared remarks of $6 million to $8 million gets us into that 18% to 20% range. But as we, again, looking through the year, we would expect operating margin to improve sequentially quarter-over-quarter as we're wrapping up the year. Makes sense. Switching to Europe, the organic revenue, if you look at it, ex ETANCO, it was only down about 6% compared to a more -- bigger -- significant decline last quarter. Just talk about what you're seeing in commercial construction markets in Europe as a whole as well as specific geographies that are significant for ETANCO, Italy, France, et cetera? Yes. So, Dan, it's Mike. Similar to what we see in the U.S., it's very much a mixed market. So, we still believe that some of the macro trends around regulatory requirements related to thermal efficiency gains are going to be a nice tailwind for us going forward. But right now, we are seeing a little bit more headwind in the Nordic area. We are seeing definitely more headwind in Eastern Europe. In our Western European business, so Germany and France, where we've got a nice sized business, is doing okay. And by that, I mean, really less negative. The market forecast for Europe are flattish this year, so we are optimistic that things are going to start to pick up. You guys -- hey, you talked about the price decrease on the connector side. Could you talk a little bit about pricing trajectory on fasteners a bit? And then, what kind of gives you confidence you won't see or need to take another step lower on the connector side just given the moderation in steel? Yes. So, Kurt, may -- as you know, the steel price at one point more than tripled, then came back to half and then started to bounce back up again. And we continue to watch that closely because we need to -- we believe our products deserve a premium and we believe that we need to watch that premium closely though. So, when we look going forward, we are actively watching the market, but we are also very much emphasizing innovation. We're emphasizing service. We're emphasizing generating for our demand partners. And so, we're watching that whole equation closely as we go forward. Okay, great. And then, Brian, in terms of the operating margin outlook, you kind of alluded to the expectation for some softening in U.S. housing starts. Is there any way to kind of ballpark what the underlying assumption is there? Well, we still aspire to -- one of our ambitions is to grow above that housing market like we had mentioned in the prepared remarks for 2022. But just thinking how we will perform against what is looking like the prognosticators are thinking is going to be a pretty choppy 2023 from a housing perspective. I'm not going to give revenue guidance, but we would expect to continue to see a bit of noise in this year's top-line impact on housing-related business. Okay. All right. Fair enough. And then, in terms of the ETANCO, is backlog something you track and/or is kind of significant there? And if so, what type of visibility does that give you into 2023 for that business? Kurt, so ETANCO's business model is very similar to Simpson and that we try to get orders out the same day or next day to the majority of our customers. So, we are ongoing working with the contractors and all the people that are installing the facades and the water grouping systems just to get a general sense of how the business is developing, but we're not getting really longer-term orders and we don't really have an open order book or backlog for that business. Got it. So, even though the commercial side is kind of a longer, I guess, construction process, you don't necessarily have kind of the visibility at the front end? Not in a way where you could put a KPI around it. No. I mean, we're getting a general sense because we're talking with those guys quite a bit, but not in a hardcore KPI to track. No. Okay. Makes sense. And then, my last one, just on EstiFrame. I know it wasn't a big deal, but can you maybe talk a bit about that business and how you're thinking about leveraging that with dealers and component manufacturers? Yes. So, they are really a combination of a saw and a printer combined. And it's a relatively small system that can go to a job site or it can go to a component manufacturer. And the big thing here, Kurt, is that it cuts the lumber to the correct length and then it basically prints directions on the lumber. So, the thought process behind that what we've seen with EstiFrame is that it improves the efficiency of the construction site. They can just be faster or less -- they need less skilled labor, because it makes it a little bit more plug and play. And then, it also ensures that our products are used correctly, i.e., put the connector here, or put the fastener here, or put the anchor here. Just -- if you could talk about what you're seeing on the demand side in North America? I think, recently there's been some cautious optimism from new housing in January, just given the step down in mortgage rates, are you hearing any change in sentiment from your customers at all? Julio, we were at the Builders' Show last week and I will say the high level, big picture we got from our customers in January was more optimistic than it was in the fourth quarter, but it's still very much again a mixed picture. So, customers that are in the West, they're seeing a significant headwind. Customers that are around the Florida area, they're seeing some -- actually, I think flattish to positive growth. We've got some areas around multifamily, we're feeling pretty strong about it. Some of our customers are doing build to rent, they're also feeling strong about it. So again, mixed picture -- and the upper end of mixed picture really is less negative to flattish type of growth, which is better than what we've seen and heard in the fourth quarter. Okay. That's very helpful. And on the cost side, just talk through how costs other than steel are trending in terms of other materials, freight, labor, et cetera? Moderating maybe a little bit, but it's still pretty challenging from those particular categories. Labor still continues to be a challenge. The availability of things like freight are getting better. I think cost have potentially softened there a little bit. Yes, the [indiscernible] story is a little bit earlier, and, Julio, we have ongoing productivity improvement plans where we're working hard to try to offset those inflationary pressures as much as we can. Thank you again. Thanks for the CapEx guide. What are your expectations for working capital and free cash flow this year, especially after a really strong cash flow quarter in Q4 as you start to sort of unwind a little bit of that inventory? Yes, we would expect as we're looking at -- free cash flow ought to be a bit less due to the additional CapEx that we're looking at. Don't -- wouldn't expect any significant trends in other working capital items moving the needle significantly from, say, inventory turn perspective, DSO or DPO perspective. So, other than increased CapEx, I think, the rest of the other elements of free cash flow would move with the general cyclicality and operations of the business. Nothing unusual to call out. Okay. And maybe the last one. Similar to last quarter, you said you wouldn't be opposed to M&A opportunities should they arise. Are you seeing more or less or sort of no change in terms of the opportunity set in this environment? No real change at this point. Again, we're in a very specialized business. So, these are pretty unique assets that we'd be considering and there's been really no major change. As there are no further questions at this time, this will conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
EarningCall_581	Good day and thank you for standing by. Welcome to the BEP, Brookfield Renewableâs Fourth Quarter Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today Connor Teskey, Chief Executive Officer. Please go ahead. Before we begin, we would like to remind you that a copy of our news release, investor supplement and letter to unitholders can be found on our website. We also want to remind you that we may make forward-looking statements on this call. These statements are subject to known and unknown risks and our future results may differ materially. For more information, you are encouraged to review our regulatory filings available on SEDAR, EDGAR and on our website. On todayâs call, we will provide a review of our 2022 performance and growth initiatives. Then Julian Thomas, who heads up strategic initiatives within our group, will discuss how we are harnessing our partnership with institutional capital to accelerate our growth. And lastly, Wyatt will conclude the call by discussing our operating results and financial position. Following our remarks, we look forward to taking any of your questions. We have had another successful year, continuing our track record of double-digit average annual FFO growth for over a decade. We generated funds from operations of over $1 billion or $1.56 per unit, an 8% increase over last year as a result of the stability of our high-quality cash flows, organic growth in commercial initiatives and contributions from acquisitions. We agreed to deploy capital well ahead of our targets growing in every market we operate, while dramatically expanding our renewables operations and making our first transition investments. We also delivered record performance from our development activities with 19,000 megawatts of capacity either under construction or in advanced stages as well as we increased our global development pipeline to almost 110,000 megawatts. We are now in the early days of more of these high returning development dollars beginning to flow through our income statement, a trend that we expect to continue as more and more of our projects reach commercialization. As it relates to capital deployment, 2022 has been our strongest year to-date. We closed or agreed to invest up to $12 billion or close to $3 billion net to Brookfield Renewable, which will be deployed over the next 5 years. This represents almost half of our growth target for that period. The investment environment for renewables remains highly compelling. Renewables low cost energy profile, combined with the themes of corporate clean energy demand, electrification and energy independence, continue to be key trends accelerating renewable deployment. Our disciplined approach to investing and long history of owning and operating renewables enables us to capture some of the most attractive opportunities going forward. And as Wyatt and Julian will discuss later, we maintain a best-in-class balance sheet, robust levels of liquidity, and access to diverse and deep pools of capital, including our ability to invest alongside large scale institutional capital, which enables us to execute on sizable transactions that generate strong risk adjusted returns. During the year, we agreed to invest up to $4.6 billion or $1.4 billion net to Brookfield Renewable of capital into our renewable development initiatives through both organic growth within our existing business and by acquiring new complementary platforms that enhance our current offering. This includes our investment in three large renewable development businesses in the United States: urban grid, standard solar and scope clean energy. These investments enhance our position in whatever our largest market, bringing our total size to 74,000 megawatts of operating in development capacity in the US. Since acquiring these businesses, we have worked quickly to integrate them into our overall U.S. platform and have begun executing on the business plans we set out. We are already seeing strong performance from these new investments. They are all benefiting from the Inflation Reduction Act in strong corporate demand, which is enabling us to accelerate the development pipelines and grow these businesses beyond our original underwriting expectations. Turning to nuclear power, as many are aware, we formed a strategic partnership with Cameco to acquire Westinghouse, one of the worldâs largest nuclear services businesses and a critical player in the energy transition. We are moving forward with obtaining the required approvals for this investment and are on track to close the transaction in the second half of 2023. The business is performing well and we are already seeing benefits of the investment beyond our underwriting as nuclear is increasingly recognized as a provider of clean dispatchable baseload power generation. As an example, the Polish government announced that it has selected Westinghouseâs AP1000 technology for the build-out of the first three of its planned large scale nuclear reactors. This is the key step towards the country achieving its decarbonization targets and greater energy independence. We are also progressing our transition asset investments, including most recently, our investment in California Bioenergy, a leading California based developer, operator and owner of RNG assets, where we have the ability to invest up to $500 million or $100 million net to Brookfield Renewable in downside protected convertible structures that support the development of new agriculture renewable natural gas assets. This investment is another in the continuation of our strategy of entering into high growth transition asset classes that are complementary to our core renewables business. Similar to carbon capture and storage, recycling and renewable natural gas, we have invested through small upfront capital deployments with experienced partners through investment structures that provide us with downside protection, discretion over future investments, and significant potential upside returns on our capital. As we enter 2023, our business has tremendous momentum. As a leading global clean energy company with deep access to capital, we are uniquely positioned to execute on the most attractive clean energy and decarbonization investment opportunities around the world. Given our strong financial and operating performance, robust liquidity and positive outlook for the business, we are pleased to announce a 5.5% increase to our distributions to $1.35 per unit on an annualized basis. This is the 12th consecutive year of at least 5% annual distribution growth since 2011, when Brookfield Renewable was publicly listed. With that, we will now turn it over to Julian to discuss the importance of our capital sources in supporting our growth. Thank you, Connor and good morning everyone. We have said for many years that the strength of our balance sheet and our ability to invest alongside large scale institutional capital represents a significant competitive advantage. We have always prioritized capitalizing the business with a strong investment grade balance sheet, utilizing long duration non-recourse debt and maintaining high levels of liquidity. This allows us to maintain a low risk financial profile and focus on financial strength and flexibility so we can invest throughout the cycle. We believe this is critical to our long-term success as it contributes meaningfully to the compounding of our cash flows and the total returns delivered to our unitholders. In addition to this approach is our structure of investing alongside Brookfieldâs private funds, which provides access to scale, long-term institutional capital, enabling us to target sizable deals, where there is often limited competition. At Brookfield, we manage capital for more than 2,000 institutional clients that collectively have trillions of dollars of capital under management to invest. This means we have the ability to target multibillion dollar transactions, instead of smaller investments that are in many cases far more competitive. We believe this structure is often underappreciated by the market. However, we think it represents a very meaning meaningful competitive advantage for our business, particularly in this economic environment. Combined with our platform capabilities, this means that on a recurring basis, we can generate strong risk-adjusted returns by executing some of the most attractive, large scale decarbonization opportunities. Investor appetite for energy transition remains very strong. We have significant institutional demand to invest alongside experienced owners, operators and investors like us. The success of Brookfieldâs first transition fund demonstrates this. We raised $15 billion, establishing the worldâs largest private fund dedicated to facilitating the global transition to a net-zero economy. The Fund features some of the largest commitments in Brookfieldâs history, with around 30% coming from new clients, illustrating investor desire to allocate meaningful capital towards energy transition. A key part of Brookfieldâs private fund strategy is developing relationships with large pools of long-term private capital who seek the opportunity to invest alongside us both by investing in our private funds and also directly in our investments as co-investors. The program both enhances our access to capital and provides another source of liquidity. Our Westinghouse investment, given its size, is a great example of our co-investment program in practice. We have had strong interest from our LPs to co-invest with us in Westinghouse and the process is moving along well. Today, access to capital is limited for some market participants. So accessing this funding source represents an even more meaningful competitive advantage. Institutional capital supports our ability to invest in great businesses and achieve strong results that maximize long-term returns for our investors. The scale of our transition fund and the institutional relationships and capital it brings is another meaningful step change in our funding strategy that we will continue to employ as we grow our business and seek large-scale attractive investment opportunities. Thank you, Julian. As Connor mentioned in his earlier remarks, we had strong results in the quarter as our operations benefited from strong global power prices and continued growth both through development and acquisitions. We generated FFO of over $1 billion or $1.56 per unit, reflecting solid performance and an increase of 8% versus the same period last year. Our business is backed by high-quality cash flows in large part from our perpetual hydro portfolio, which has become an increasingly valuable source of clean, baseload power, as more intermittent renewables come online. With over 5,000 gigawatt hours of generation available for recontracting across our portfolio over the next 5 years and the positive pricing environment for our hydro portfolio, we have significant capacity across our fleet to execute on accretive contracts that we expect to contribute additional FFO and generate a low-cost funding source for our growth. Our financial position remains excellent and our available liquidity is robust, providing significant flexibility to fund our growth. Julian already touched on the importance of our access to capital and maintaining a strong balance sheet. We are resilient to the rising interest rates globally, with over 90% of our borrowings being project level, fixed rate non-recourse debt, with an average remaining term of 12 years, no material near-term maturities and only 3% exposure to floating rate debt. Despite market volatility, our access to deep and varied pools of capital continues to be differentiated. We have approximately $3.7 billion of available liquidity, giving us significant financial flexibility during periods of capital scarcity. During the year, we secured approximately $10 billion of non-recourse financings across the business, resulting in approximately $1.2 billion in financing proceeds to Brookfield Renewable. We are also accelerating our capital recycling activities, which are both in accretive funding lever and a critical part of our full cycle investment strategy. We continue to see a very constructive environment for selling de-risked appropriately sized mature renewable assets to lower cost of capital buyers and we are advancing numerous capital recycling opportunities in this regard. We have initiated several processes, where we have successfully completed our business plan and executed on our investment thesis. These assets could generate up to $4 billion in aggregate, approximately $1.5 billion net to Brookfield Renewable of proceeds when closed and provides significant incremental liquidity in the coming quarters. In closing, we remain focused on delivering 12% to 15% long-term total returns for our investors. To do this, we will continue to be disciplined allocators of capital by leveraging our deep funding sources and operational capabilities to enhance value and derisk our business. On behalf of the Board and management, we thank all our unitholders and shareholders for the ongoing support. We are excited about Brookfield Renewableâs future and look forward to updating you on our progress throughout 2023. That concludes our formal remarks for todayâs call. Thank you for joining us this morning. And with that, I will pass it back to our operator for questions. Thank you. Good morning. Couple of questions. With respect to the broader asset recycling plan that that you laid out, Wyatt, beyond the Mexican solar portfolio, can you give us any context on the regional or technology focus for that asset sale program? And further to that any guidance on returns you expect you will be able to crystallize through those initiatives? Sure. Sean, itâs Connor. Perhaps Iâll take that. We probably donât want to comment on any of the live sales processes that we have going. But we are certainly happy to provide some incremental color. The background to this is during the second half of 2022, we saw significant inbounds from potential buyers for a number of our businesses. And what we are finding is those inbounds are particularly coming on businesses that we feel we have largely de-risked and we have largely executed our initial investment thesis and our initial business plan and thatâs when we like to sell assets when we have an interested buyer and we have completed the de-risking and value creation process that we initially set off to do. What I would say in terms of locations, itâs what we would probably say is the vast majority of capital recycling that we see the potential for in the next few quarters is largely in the Americas, both North and South America for us. And then in terms of IRR, we are very â we absolutely recognize that underlying rates have gone up, but we have not seen much if at all any widening in terms of target investor returns on a total IRR basis in the inbound price indications that we have seen. So we continue to monitor that, but we do still see a very, very constructive bid for de-risked high quality renewables assets and those are the types of things that we would look to sell as part of this program. Thanks, Connor. Thatâs useful detail. Second question, in your supplemental information, the buildup of your advanced stage development pipeline for 2023, it looks like there is quite a bit added to your Asia platform at least compared to the guidance you gave a quarter ago. Can you give us any detail on whatâs been added to that particular piece of the development platform? Yes, certainly. So I will start and Wyatt if I miss anything, please donât hesitate to jump in. There is two things in particular that have been added that jump to mind. One is in India, in the latter part of last year, we have pursued this strategy of building out renewable energy parks in India. And that is a somewhat unique strategy within India, where you buy large plots of lands that have strong grid connection and you can build out renewables over multiple phases and sell the power from those projects to multiple off-takes. We have done a number of those transactions in the latter part of the year and that would certainly be inflating that number. The other thing that I would highlight is our previously announced arrangement with BASF, where we are looking to build renewables for them in China that will be directly contracted to a new large chemical production facility that BASF is building in the region that they want to be supported by green power. That is a very sizable arrangement we have with them. We are talking gigawatts. And that is another thing that would support the pipeline in Asia. Wyatt, I am sure that covers most of it, but anything else you would add there? Only other thing Connor, I would add is, we had in past highlighted our rooftop solar business in China, where the business or the momentum for that business continues to build. And so we are seeing a little bit more activity of that business, but you highlighted the majority of them, Connor. Good morning, everyone. Maybe hoping you could comment on what your investment pipeline looks moving forward in terms of we will call it asset acquisitions or maybe larger platforms, any geographies or assets that are looking the best? And you mentioned that inbound indications for pricing hasnât changed on your end, but what about assets that would require maybe a little bit more work in the financing or contracting side? Thank you. Thanks, Rob. No doubt the pipeline remains strong and there is probably two key things that we would highlight. Clearly in 2022 and we will make a comment here that weâve made previously. If we go all the way back to 2021, we looked at buying a lot of renewable development platforms in our core markets around the world. We did a lot of due diligence processes. We analyzed a lot of opportunities. But we found the market was very, very frothy and we struggled to see things where we were comfortable with the value entry point. As we moved into 2022, there were a number of things in the market, a little bit of macro uncertainty, rising rates, some supply chain pressures that perhaps other market participants arenât as well suited to manage through. We saw tremendous opportunities in 2022, sorry, to buy renewables developers, high-quality renewables developers in our core markets at entry points that, quite frankly, we would have fallen out of our chair to execute on in 2021. One big theme as we enter 2023 is we see that dynamic continuing. We do see that dynamic continuing in the early part of the year. And we are seeing the ability â we believe to acquire renewable development platforms, where we can obviously use our corporate capabilities to enhance those businesses. We are still seeing attractive value entry points there and hope to execute some of those transactions in the near-term. If thatâs point one, the other thing that we would highlight is with the rise in rates in some of the market uncertainty and perhaps capital scarcity in the market, we do believe that we are going to see more opportunities in 2023 to buy operating assets than perhaps we saw in last year or the year before that. So that continues to be an increasing portion of our pipeline, something we are obviously excited to see begin come back in the strike zone. Alright. I appreciate the color. And then maybe a follow-up there, if we take a look at your development pipeline you have accelerated some investment into 2023. How are you looking at the supply chain? Are most of the issues behind us as well as inflation, do you have a good handle on that to give you the confidence to further accelerate development into 2023? Yes. So well perhaps split that into two chunks. The one thing I would say about our 2023 pipeline, and as referenced in the supplemental, we see 2022 was our biggest year of development on record. We brought 3.5 gigawatts of new projects online. As we look to 2023 that number is sitting today, we expect to bring about 5 gigawatts online. The first thing we would highlight is of these 2023 projects, a large portion about 5 gigawatts in our minds is very largely de-risked at this point. Itâs â a lot of itâs either under construction or itâs already fully contracted. And we often make the comment that funding is secured in a lot of these projects all the funding is already in the ground. We donât need to contribute any incremental equity to get those projects across the line. So, our confidence on delivery in 2023 is very strong. When you speak about the supply chain issues for us, we think about that probably beyond 2023, because our 2023 is very well wrapped up. And I think there is probably two dynamics to consider there. One is on a global basis we are really seeing the costs of solar modules drop significantly. In the past year or so we have seen them quoted as high as call it $0.40. Now, we are largely seeing that prices in the low $0.20, so not all the way back to where they were in 2019, but the majority of the way back. The one place where there continues to be some uncertainty in management of the supply chain required continues to be the United States. But the good news is there is with the benefits of IRA and the things we can do with our central procurement system, putting orders in ahead of time working with our key suppliers we definitely see the supply chain in total getting much easier to manage than where we were 6 or 12 months ago. So itâs definitely a good news story from both an execution and an economics perspective. Hi, good morning. Just following up on the U.S. solar development question, can you talk a little about how the availability of grid interconnections is evolving and are you seeing increasing competition for interconnection spots? Thanks, Rupert. Itâs â appreciate you asking it, because itâs one of our favorite questions. The focus on grid connection and interconnection availability is certainly something that has grabbed much more headlines across the industry, I would say in the last 6 or 12 months. And as it should, as part of any development process you need to secure land, you need to secure grid connection and you need to secure permitting from there, you need to get equipment and EPC and a contract, but you need those first three. And with the amount of renewables going on to grids around the world, there is probably very few grids around the world that the value of high-quality interconnection hasnât gone up in recent years. The reason why we really liked this question is, this is something that we have been focused on probably now for 4 or 5 years. And when we assess developers in the quality of their pipelines, we have always been taking into account what grid connections they have and where do they fit within the interconnection queue, when valuing those pipelines and the likelihood and the economics at which they can be built out. A great example of this is urban grid, which we bought last year. One of the reasons why we felt we saw value in that platform where maybe perhaps didnât â is we feel that urban grid has an incredibly strong portfolio of positions in the PGM interconnection queue that most would recognize PGM is a very high value market for renewables development. So this will continue to be a focus, but we feel itâs something that we have well in hand, not because of our work in the last 6 or 12 months, but because of our work over the last 4 or 5 years. Not at all, in fact, when we lay out our expected pipeline in the projects that we want to bring online, that already takes into account our views of when we will get those grid connections. Thanks. And a follow-up on the asset recycling question, would you consider recycling any of your hydro assets in North America? And if you, how do you assess the value of those today versus the value of a solar and a wind asset given some of the storage potential? Yes, certainly. We will always do what is in the best interest of ourselves and our unit holders in terms of capital recycling, where will we allocate capital, where will we seek to recycle some assets. We do believe that our portions of our hydro portfolio around the world are truly irreplaceable assets. And they have a long runway of continued value growth, given their ability to not only provide base load clean, dispatchable power, but also the ability for them to provide grid stabilizing ancillary services to electricity grids that increasingly are going to have more intermittent renewable wind and solar connected. So, would we sell those assets at the appropriate price, absolutely, but only at a price that we feel takes into account that extremely robust outlook for those assets that we are seeing from our vantage point. Alright. Thanks. Also a question on the U.S. market, and I am wondering, how do you see your U.S. initiatives shaken out the next couple of years, is that I know you mentioned the star rating some of the projects there, but do you think itâs development backlogs can increase some M&A around the corner? And then maybe share a little bit, I know you mentioned a decentralized purchasing competitive advantage. But anything else you could share in terms of how you position yourself in the U.S.? Certainly. So, itâs a good question, Ben. I think the thing to recognize about our U.S. platform is, there are two things that differentiate us in the U.S. at a level that is very, very tough for almost any other platform to match. And those two things are, one, the scale of our platform, and two, the fact that we have a very diverse set of renewable technologies at a scale in the U.S. And thatâs really driving our business in two different ways. One, we are seeing increasing opportunities to provide unique contract solutions in the U.S. And when I say unique, they could be unique in a multiple of different ways. But I will give the first example. We have over 70,000 megawatts of operating and development capacity there. We can provide green power on a scale in the U.S. that a very few others can. So, when you are thinking of the largest corporate procures of green energy in that market, we can satisfy not only their existing needs, but their growing needs in the future in a meaningful way. The other thing that we are increasingly seeing, in particular in the U.S., given not only the size, but the breadth of our portfolio, is to use our different asset classes together to provide unique solutions to our customers. That might be pairing one of our hydro assets with wind and solar projects in the regions to provide 24/7 green power solutions to a customer that wants 100% clean energy. So, the U.S., itâs our biggest market today. But itâs also the market that we saw the most amount of M&A deployed into last year and the most amount of development progress last year. Different years might have been slow, but the U.S. is always going to be one of our most active markets for at least the foreseeable future. Yes. So, I think itâs important to recognize we see solar as the fastest growing technology in terms of megawatts that will be added to the grid on a global basis, because it is the cheapest form of bulk electricity production in most markets. And it is on a relative basis, less operationally intensive to one, build and two, maintain. So today, I would say that, as we look at grids in major markets around the world, we would probably expect solar to be the fastest growing renewable technology. In terms of where we will invest our capital, we are completely in different. We will go wherever we see the most attractive risk adjusted returns, and we are seeing things across all technologies in the current environment. Okay. And maybe one last question on the countries, is there a country that are reaching that you are maybe initially looking right now that you want to be in potentially in 5 years? Yes, sure. So, we have said for many years now that we are in all the regions around the world where we feel the need to be there. Obviously, last year, we made our first investments in Australia. We set up a team there. In fact, in this last quarter, we brought our first project online. Thatâs a market that we will continue to look at opportunities in. And I would say, we will continue to expand in Europe. We are not a large player in all the European markets, and they do have slightly different electricity grids. And we are seeing very, very strong moves by many regulatory bodies and governments in Europe to enable the faster build out of renewables, as that continent, if you will, tries to establish a greater form of energy security. So, I would say we are not talking any major changes beyond our historic geographical footprint, but probably just deepening our positions in what we already consider to be our core markets. Good morning. Brookfield Infrastructure said yesterday, itâs taken some model still positions in publicly traded stocks. When you think about adding or acquiring operating assets to your portfolio, is the opportunity more weighted towards corporate carve outs right now? Are you also seeing good opportunities to forum for take private transactions? Yes. I would definitely say itâs both. In the last call it 12 months to 18 months, as demonstrated by the transactions that we have done, we have really focused on a lot of businesses that are what you would call pure play developers. We felt like a lot of those â the pipelines in those businesses were very far advanced. There were projects that were either under construction or about to come online. So, a very few of them had operating assets. Even when you look at something like Scout Energy that we did at the end of last year, you could already see the market moving in that direction as when we bought Scout, it comes with not only a very large pipeline of future development opportunities, but a large portfolio of operating assets as well. So, we are seeing opportunities on the private side as well. But no doubt, the current economic environment and some of the down wins throughout Q4 across public markets have certainly increased the opportunities we see in the public take private space as well. So, what I would say is we take to hold positions almost on an ongoing basis throughout the cycle. I wouldnât say our activities in that regard have gone up or down, in particular over the last couple of quarters. But itâs something we do on an ongoing basis and something we will continue to do. Itâs been a useful way to help us source transactions over the last 5 years to 10 years. Okay, cool. Thatâs helpful. Last one for me, of the 19 gigawatt of advanced stage and construction ready projects that you highlighted, how much of that will be commissioned this year versus next year and the following years? Thank you. Oh, sorry. I jumped. Itâs about 5 gigawatts for this year. And a little bit more, closer to 5.5 gigawatts the next year. But I would say 5 gigawatts, probably a pretty healthy run rate of where we are at right now. Hi. Good morning. I just wanted to go back to the funding picture. So, $1.5 billion of targeted asset sales for this year, a large part of I think your overall targets for proceeds from asset sales for the next few years. How much of this pulling forward of capital recycling as a function of near-term funding needs versus just the strong valuations on the assets as you previously mentioned? Yes. So, I will answer that question in two ways, I would say the asset sales that we are planning, I would say those will happen throughout 2023. And some may stretch into 2024. So, we wouldnât want to give anyone the impression that that itâs all coming in the next 11 months. Some of these processes are for large businesses and may take time, so certainly could extend into next year. To answer your second point, whatâs driving this, I would say, itâs almost the entirely the latter part of your question. Itâs the robust demand we are seeing for our assets. And the simple fact I would almost say itâs coincidental that we are at a point where we are completing the business plans, and believe that we have extracted the value add opportunity that we saw in a number of businesses around this time. The timing of when those business plans and those operations complete is going to ebb and flow over the wide variety of businesses we have, but we have had a number complete throughout 2022. And that just creates the opportunity for a very attractive and accretive capital recycling this year, really bringing together call it, the full cycle value creation approach we like to deploy. Okay. Thatâs helpful. Thank you. And just one last question on offshore wind â two part question. One, if you can just discuss the latest auction in the Netherlands. And if you are thinking strange around participating in that market going forward. And then if you also see the potential to participate in the sort of the launch or the beginning of the offshore wind industry in Colombia? Thank you. Certainly. So, we werenât successful in our bid in the most recent Dutch auction. We continued to believe that is a very compelling market. I would say we monitor all the major offshore wind markets around the world. And there are certain attributes about market that that we thought were very interesting to us, in particular, the ability to leverage our power marketing capabilities in an outsized way. And therefore, we will continue to look at opportunities in that market. We would not hesitate to go back there in the future. Apologies, a trolley just went by outside the meeting room here. The second thing I would say is, we do look at offshore in many markets around the world. When you are talking about a market like Colombia, we continue to believe that that is a long way in the future. So, we will monitor it, but itâs not something on â high on our radar right now. One thing I would say, however, is our existing offshore pipeline in Poland continues to move forward in a really constructive way. The adjustments the governments has made in the region around inflation indexation and the ability for those contracts to be priced in euros are both very, very helpful to our investment thesis and underwriting for that business. Thanks. Good morning. Maybe a big picture question, we saw a lot of tech companies have a lot of appetite for effectively renewable PPAs. A number of those companies kind of got over their skis with data center build out, their house build out are now pulling back a bit. What are you really seeing from that customer base as far as appetite for PPAs on a go forward basis? Was there a little bit of a pause, or is it still, full throttle ahead? Absolutely, full throttle. Well, we say that without hesitation. The demand we continued to see from the tech sector, particularly in our biggest markets, North America, Europe is tremendous. They continued to be many of our largest clients. And simply, given the size and scale of their business, they are trying to go 100% green over the next 4 years or 9 years, I am sorry, 3 years or 8 years. And that is a huge undertaking given the size of their businesses today. And that undertaking, it becomes even more monumental when you consider the growth of those businesses going forward. Even if that growth trajectory comes off just the shade. So, the amount of demand coming out of that sector continues to be tremendous. And we continue to feel that there is very few that can supply on the scale that those types of customers desire. Okay. Thatâs very helpful. And then maybe just another way to think about Brookfieldâs optionality with providing solutions. You have got, like the infrastructure funds, which you participate in, there is the energy transition fund now, is there an opportunity to have like a super core renewable fund in the broader Brookfield product shelf that you would participate in? Certainly, we wouldnât rule anything out. We obviously have had significant success recently with the launch of the transition fund. And that has seen not only tremendous interest from investors, but itâs also seen tremendous opportunities for deployment. And therefore, if the market continues to be constructive, which we expect it will, we could see that that product easily back in the market in the next 12 months. So, not only are we seeing scaling of our existing products, absolutely as the industry continues to get bigger, and we see more opportunities both across the capital stack and across the risk reward spectrum. We wouldnât rule out different products, if thatâs one what our customers were looking for. And two, we saw a significant opportunity to put that capital work at attractive risk adjusted returns. Given the way the market is going, absolutely wouldnât rule it out. Okay. Thank you for that. And maybe just one final extension on that as your comments earlier on solar, it would seem that stabilized solar would marry up really well with like a super core product for some clients. Is that kind of how you are conceptually thinking about that? Well, the way we probably see it most â itâs a great question, Andrew. The way we would probably see it most today is you think about things like stabilized solar. Those are the types of assets that that work really well into an asset-recycling program right now. And that once we built them out, once we have de-risked them, once they are under a long-term PPA with long-term financing and a long-term O&M contract, that is a very, very direct attractive inflation linked cash flow stream. Those are the types of opportunities we are seeing for asset recycling. And given how many dollars we have put in the ground in recent years, and how many projects we are bringing online, thatâs the type of opportunity that lends itself to some of the asset recycling initiatives that we have kicked off. Great. Well, we very much appreciate everyone dialing in. We always appreciate the support and interest in Brookfield Renewable and we look forward to providing an update all in the next quarter and throughout 2023. Thank you everyone and have a good day.
EarningCall_582	Good day, and thank you for standing by. Welcome to the onsemi Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Parag Agarwal, Vice President of Investor Relations and Corporate Development. Please go ahead. Thank you, Christa. Good morning, and thank you for joining onsemi's fourth quarter 2022 quarter results conference call. I'm joined today by Hassane El-Khoury, our President and CEO; and Thad Trent, our CFO. This call is being webcast on the Investor Relations section of our website at www.onsemi.com. A replay of this webcast, along with our 2022 fourth quarter earnings release, will be available on our website approximately one hour following this conference call, and the recorded webcast will be available for approximately 30 days following this conference call. Additional information is posted on the Investor Relations section of our website. Our earnings release and this presentation include certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures and the GAAP financial measures are included in our earnings release, which is posted separately on our website in the Investor Relations section. During the course of this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially from projections. Important factors that can affect our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our most recent Form 10-K and Form 10-Qs in our filings with the Securities and Exchange Commission and in our earnings release for the fourth quarter of 2022. Our estimates or other forward-looking statements may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions or other events that may occur except as required by law. Thank you, Parag, and thank you all for joining us today. 2022 has been an excellent year for onsemi, and nothing makes me prouder than to share our latest progress after closing the second year of our transformation. Our worldwide teams have yet again delivered outstanding results, allowing us to deliver the most successful year in the company's history, with record revenue of $8.3 billion in 2022, an increase of 24% year-over-year, with earnings growing 3x faster than revenue. Our gross margin of 49.2% increased 880 basis points for the full year and 1,650 basis points since we began our transformation journey. From our manufacturing footprint to our product portfolio and go-to-market strategy, we have transformed all facets of our business and set ourselves up to win in the fastest-growing megatrends of the automotive and industrial markets. We earned ourselves a position in the S&P 500 this past year, and we created more value for our shareholders than ever before. The uncertainty in the macro environment has impacted demand, and we have seen a slowdown in some areas of our business, which include consumer, computing and parts of industrial. Demand for our automotive business remains healthy as automakers have been catching up on production levels. In Q4, our automotive business grew 54% year-over-year, 13% quarter-over-quarter and accounted for 47% of our total revenue as compared to 35% in the quarter a year ago. Our industrial business grew 6% year-over-year in Q4 and accounted for 26% of our total revenue. While we saw softness in parts of our industrial business in Q4, demand for energy infrastructure and medical applications, such as continuous glucose monitors and hearing aids, remain strong. We continue to extend our leadership in silicon carbide with our customers who value the leading performance of our silicon carbide modules and our end-to-end supply chain capabilities. In 2022, we shipped more than $200 million in silicon carbide revenue. We remain on track to deliver $1 billion in 2023 based on committed revenue from LTSAs, and we now have more than $4.5 billion of committed silicon carbide revenue between 2023 and 2025. By focusing on the areas where we provide the most value to our customers, we have positioned ourselves with the market leaders in the fastest-growing segments in automotive and industrial. The top automotive OEMs are not only choosing onsemi for silicon carbide, but for our worldwide class intelligent power and sensing solution. In automotive, we have seen tremendous momentum with silicon carbide, and we believe that vehicle electrification will be a long-term driver for our business. We expect to remain supply constrained for the next several years even as we aggressively add capacity to our Hudson, Czech Republic and South Korea manufacturing sites. As we recently announced, Volkswagen Group has selected onsemi as a corporate strategic supplier to provide the silicon carbide modules that enable a complete traction inverter solution for its entire fleet of next-generation electric vehicles. onsemi will deliver its EliteSiC 1200-volt traction inverter power modules. These modules facilitate a small footprint and full weight system solution, which will support the front and rear axle inverters in a large range of VW models. We already shipped more than 500 different devices to Volkswagen Group, including IGBTs, MOSFETs, image sensors and power management integrated circuits and this expanded engagement to include our silicon carbide further strengthens our partnership with one of the largest carmakers leading the charge in vehicle electrification. In 2022, we began to recognize revenue at Tesla from silicon carbide shipments and expect revenue to see a continued ramp in 2023. We have also expanded our partnership beyond silicon carbide and image sensor to numerous power and analog solutions, totaling over 300 different part numbers. Jaguar Land Rover signed a seven-year long-term supply agreement to adopt onsemi's silicon carbide for their next- generation platforms and other solutions for their 11-kilowatt onboard chargers and other xEV application. This LTSA also provides Jaguar Land Rover with the supply assurance for their current production model across onsemi's broad portfolio of power solutions. In addition, Hyundai Motor Group selected onsemi's EliteSiC family of silicon carbide power modules for their high-performance electric vehicles. Onsemi's EliteSIC silicon carbide modules increase the efficiency and lower the weight of the traction inverters extending electric vehicle range and improving performance. Our high-power density SiC modules deliver the most innovative package technology to reduce power losses associated with DC to AC conversion, along with reduced size and weight of the traction inverter to extend EV range and increase performance. We remain just as focused on our engagement with Tier 1s, where we are seeing a steep increase in onsemi content for upcoming EV select platforms and advanced safety applications. We recently secured a win with a major Tier 1 for a marquee European platform that includes more than $1,800 of content across our portfolio of silicon carbide and other intelligent power solutions for traction inverters. These are just a few of our recent wins in the fastest-growing automotive applications, giving us confidence in our outlook for this business and our $1 billion revenue year for silicon carbide. As the leading automakers accelerate the transition towards vehicle electrification, increased autonomy and advanced safety, they are choosing onsemi as their preferred partner for the performance of our silicon carbide solutions and vertical integration from substrates to state-of-the-art modules, for our world-class image sensors and for the breadth of our complementary intelligent power intensive portfolio, and for our manufacturing excellence and supply assurance. In industrial, while fourth quarter revenue declined 10% over Q3, we expect our traction in energy infrastructure and medical applications to offset the softness we are seeing in the legacy parts of this business. The global energy crisis is triggering an acceleration in alternative energy deployment with solar as the most installed renewable power capacity by 2027, tripling from 2021. This accelerated deployment trend is reflected in our revenue for energy infrastructure, which increased 75% year-over-year, above our forecast of 60% growth. Our newest 200-kilowatt wins with leading energy storage system suppliers contained nearly $370 of content per system in silicon carbide and other power solutions. Last month, we announced our partnership with Ampt, the world's #1 DC optimizer company for large-scale solar and energy storage systems. Ampt uses our EliteSiC silicon carbide critical power switching application. Customers like Ampt expect leading-edge technology, and our silicon carbide solution meets the high performance and reliability standards required for these renewable energy applications. In addition to our alternative energy opportunities, our customer LTSAs are providing demand visibility into the broader industrial market where we expect our growth to come from over-the-counter hearing aid and emerging requirements in factory automation. We are at the beginning of a transition cycle where our award-winning inductive position sensors and new generation image sensors engineered for robotics and scanning provide better performance and lower power. We have spent the last two years making structural changes in all areas of the company to improve the resiliency of our business. We are a different company today. We have rationalized our product portfolio and manufacturing footprint, we are leading in the fastest-growing markets, and we are now getting the true value for our products with multiyear commitments from our customers. We will not be distracted with the current market environment and remain focused on our execution against our near-term objectives and our long-term strategy. Our customers are planning well beyond 2023, and they are investing with onsemi to deliver leading-edge technologies that address complex intelligent power and sensing requirements in automotive, industrial and cloud power markets. We will grow faster than the markets we plan. And our traction in silicon carbide, coupled with the demand visibility that long-term supply agreements support us, leave me confident that with a disciplined approach in 2023, we will continue to meet our customers' expectations and deliver on our commitments to our shareholders. Thanks, Hassane. Let me first start by going through our full year's performance, followed by results for the quarter and wrap up with guidance for the first quarter. As Hassane mentioned, our results have only been possible because of incredible effort of our worldwide teams. I want to thank our employees for embracing our fast-paced transformation and going above and beyond for our customers. A year where the macro environment and geopolitical uncertainties were front and center, we remained steadfast in our execution to achieve a record financial year for onsemi. Our 2022 revenue closed at $8.3 billion, an increase of 24% year-over-year, primarily driven by strength in our automotive and industrial businesses. Our non-GAAP gross margin of 49.2% increased 880 basis points year- over-year, achieving our target model of 48% to 50% for the full year. Our non-GAAP earnings per share was $5.33 compared to $2.95 in 2021, growing 3x faster than revenue. We just closed the eighth quarter since the beginning of our transformation, and our continued success is a direct result of the structural changes we've made to improve the resiliency of our business. The company's transformation has taken shape by optimizing three key areas of our business: our manufacturing footprint, our product portfolio and our go-to-market strategy. In 2022, we divested four subscale fabs to improve our cost structure. We completed the acquisition of East Fishkill fab in New York, which became part of our manufacturing network on December 31. We further reduced price-to-value discrepancies to maximize value for our technology investments. We exited volatile and highly competitive businesses, allowing us to walk away from $294 million of noncore revenue to date at an average gross margin of 26%. We've pivoted our portfolio to high-margin products and end markets with auto and industrial exiting the year at 73% of total revenue versus 59% in Q4 of 2020. We exited the year with $16.6 billion of signed LTSAs across our entire portfolio. We increased our new product revenue by 34%, and we increased the design win funnel by 38% year-over-year. These structural changes have yielded a threefold increase in free cash flow since the start of our transformation, growing approximately 4x as fast as revenue, with 2022 coming at a 20% free cash flow margin. Our strategy has driven radical improvements in the performance of our business units, and these businesses are now best-in-class among their immediate and broader peer group. For example, our Intelligent Sensing Group's transformation has yielded a high growth, high operating margin business. ISG is now comparable to peers who typically command valuation multiples at premiums of more than 2x the industry average. ISG exited Q4 with record gross margin of more than 49%. By rationalizing the portfolio and exiting low-margin consumer- facing markets, ISG's gross margin has improved by more than 1,600 basis points since the start of our transformation and the revenue mix is now more than 90% high-margin automotive and industrial. ISG revenue of $1.28 billion in 2022 increased 73% over 2020, driven by the transition to higher-resolution sensors at elevated ASPs. As I mentioned earlier, we assumed ownership of our 300-millimeter fab in East Fishkill on December 31. This fab is a key enabler of our brownfield manufacturing strategy by providing incremental capacity for our silicon power products that we are transitioning from our fab in Korea to create capacity for our silicon carbide ramp. In addition, the EFK fab provides us with the capabilities to support long-term growth for our intelligent sensor business. Since the acquisition closed on the last day of the year, there is no P&L impact in Q4, but the acquired assets are now reflected on our balance sheet. Turning to results for the fourth quarter. As I mentioned, Q4 was another quarter of strong results. Total revenue was $2.1 billion, an increase of 14% over the fourth quarter of 2021 and a 4% decline in quarter-over-quarter. Record automotive revenue of $989 million increased 13% quarter-over-quarter and 54% year-over-year to 47% of our total revenue as compared to 35% in the quarter a year ago. Industrial revenue grew by 6% year-over-year, but declined by 10% quarter-over-quarter, primarily due to macroeconomic factors. As Hassane mentioned, our energy infrastructure and medical businesses continue to grow despite macroeconomic headwinds. Revenue from intelligent power and intelligent sensing accounted for 69% of our total revenue in Q4. Intelligent power grew 18% year-over-year and intelligent sensing grew by 47% year-over-year, both driven by continued growth in the automotive and industrial markets. Revenue for the Power Solutions Group, or PSG, was $1 billion, an increase of 10% year-over-year. Revenue for the Advanced Solutions Group, or ASG, was $701 million, an increase of 8% year-over-year and revenue for the Intelligent Sensing Group, or ISG, was a record $354 million, an impressive increase of 44% year-over-year. GAAP gross margin for the fourth quarter was 48.5% and non-GAAP gross margin was 48.4% and above the midpoint of our guidance. Our non-GAAP gross margin declined by 90 basis points quarter-over-quarter, with our planned ramp in silicon carbide and lower factory utilization at 74% as we proactively slowed wafer starts from the beginning of the year. We also exited an additional $17 million of revenue in the quarter at an average gross margin of 40% bringing the total to date to $294 million of noncore business exits. GAAP operating margin for the quarter was 33.5% and non-GAAP operating margin was 34.1%, an increase of 550 basis points year-over-year and a decrease of 130 basis points quarter-over-quarter. GAAP earnings per diluted share for the fourth quarter was $1.35 as compared to $0.96 in the quarter a year ago. Non-GAAP earnings per share was $1.32 as compared to $1.09 in the fourth quarter of 2021. We remain confident in the sustainability of our long-term gross margin model of 48% to 50% despite near-term headwinds from silicon carbide start-up costs and our ramp at EFK. As we enter 2023, we are maintaining tight control of our wafer starts, managing inventory levels, and we remain disciplined in our spending. We expect continued favorability as we plan to exit more than $400 million of low-margin business. And starting in 2024, we'll start recognizing $160 million of gross margin benefit as we transition our wafer supply from the divested fab. Now let me give you some additional numbers for your models. GAAP operating expenses for the fourth quarter were $316 million as compared to $352 million in the fourth quarter of 2021. Non-GAAP operating expenses were $300 million as compared to $306 million in the quarter a year ago. Non-GAAP operating expenses were below the midpoint of our guidance as we proactively manage spend across the company. For the fourth quarter, our non-GAAP tax rate was [15.9%], our GAAP diluted share count was 448 million shares, and our non-GAAP diluted share count was 440 million shares. We repurchased 1.3 million shares for $90 million in the fourth quarter. For the full year, we repurchased 4 million shares for a total of $260 million at an average price of $65.13 per share, which was 16% of 2022 free cash flow. Turning to the balance sheet. Cash and cash equivalents increased 19% sequentially to $2.9 billion, and we had $1.5 billion undrawn on our revolver. Cash from operations was $731 million and free cash flow was $380 million or 18.5% of revenue. Capital expenditures during the fourth quarter were $340 million, which equates to a capital intensity of 16% for the quarter and 12% for the full year. As we indicated previously, we are directing a significant portion of our capital expenditures towards silicon carbide and enabling our 300-millimeter capabilities at the East Fishkill fab and expect our capital intensity to be in the mid- to high teens percentage range for the next several quarters. Accounts receivable of $842 million declined by $15 million and DSO of 37 days increased by 1 day. Inventory increased by $41 million sequentially and days of inventory increased by 7 days to 136 days. This includes approximately 26 days of bridge inventory to support fab transition and the impending silicon carbide ramp. We continue to proactively manage distribution inventory, decreasing inventory in the channel by $10 million sequentially and at historically low levels with weeks of inventory at 7.3 weeks compared to 6.9 weeks in Q3. Total debt was $3.2 billion and net leverage is approaching zero. We accrued $15.7 million on our balance sheet under property, plant and equipment related to the 25% investment tax credit for investments in our U.S. factories. This will eventually flow through our income statement as lower depreciation, and we will receive the associated cash benefit in the future. Let me now provide you key elements of our non-GAAP guidance for the first quarter. A table detailing our GAAP and non-GAAP guidance is provided in the press release related to our fourth quarter results. We continue to see strong demand from our automotive end market, driven by electrification and ADAS and accelerating ramp of our silicon carbide business. We continue to see softening in certain industrial applications, and we expect increased weakness in our nonstrategic end markets that we plan to exit. Given the macro uncertainty, we are taking a cautious stance on our guidance. Despite a slowing macroeconomic environment, our business continues to strengthen with total committed revenue under LTSAs of $16.6 billion, an increase of $2.5 billion quarter-over-quarter. We expect to recognize more than $5 billion of revenue from our committed LTSAs in 2023 in addition to our non-cancelable nonreturnable orders. We anticipate Q1 revenue will be in the range of $1.87 billion to $1.97 billion, with continued strength in automotive amid softness in all other end markets. We expect non-GAAP gross margin to decline, to be between 45.7% and 47.7% due to lower factory utilization and the dilutive impact of ramping silicon carbide and EFK, which is within our expected range of 100 basis points to 200 basis points and 50 basis points to 70 basis points, respectively. This also includes share-based compensation of $3.4 million. We expect 2023 to be a transition year for our gross margins as we manage the temporary headwinds. We expect non-GAAP operating expenses of $298 million to $313 million, including share-based compensation of $23 million. We anticipate our non-GAAP OIE to be $21 million to $25 million. We expect our non-GAAP tax rate to be in the range of 15.5% to 16.5% and our non-GAAP diluted share count for the first quarter is expected to be approximately 441 million shares. This results in non-GAAP earnings per share to be in the range of $1.02 to $1.14. We expect capital expenditures of $340 million to $380 million, primarily in brownfield investments, which are a more efficient use of capital and the greenfield alternative of building a fab from the ground up. As a company, we become much more agile, controlled and purposeful in our execution, and we'll benefit from our disciplined approach in 2023 and beyond. Given our confidence in our strategy to invest for long-term profitable growth, we remain committed to a balanced capital allocation strategy to drive shareholder value. With a threefold increase in free cash flow, a strong balance sheet and our net leverage approaching zero, we have increased flexibility into one capital towards our shareholder return program. Today, we announced that our Board of Directors has approved a new program authorizing up to $3 billion of share repurchases through 2025, representing twice that of the last authorization, which expired at the end of last year. This is aligned with our stated strategy of returning 50% of free cash flow to shareholders over the long term. And finally, we hope you're saving the date for our Analyst Day in New York on May 16. We look forward to sharing more of our long-term vision at that time. First question for either of you guys. In the first quarter, guiding down about 9% sequentially. I know you said auto is staying strong and everything else is kind of softening. Can you give a little bit more color on the puts and takes with exits, et cetera? And then perhaps more importantly, how those trend throughout the year between the end segments within that $5 billion of LTSAs you plan to represent? Yes, Ross, this is Thad. So if you look at the planned exits that we have for Q1, we think we'll exit up to another $75 million in the first quarter. As we've always said, this will be market-dependent, but we do kind of see that in the cards here. In terms of overall what we're seeing for Q1, we're looking at automotive continuing to be strong. Think about it as kind of low single digits. We think industrial is down kind of low single digits. And the rest, consumer, compute, other, being down pretty significantly to make up that -- the rest of it to be down approximately 9% for the quarter. I think for the year, it's hard to tell at this point. I think we see auto remains strong. I think industrial kind of being potentially flat year-on-year and the rest of the business being down slightly or down, but it's obviously too early to tell what's going to happen long term. And then on the gross margin side of things, it seems like that's holding in well despite the utilization dropping and all the other headwinds. It doesn't seem like there's any surprises. Any sort of linearity about how the buckets work throughout the year, the exits being a positive, the silicon carbide side and the East Fishkill being negative? Is that something that peaks out in the headwinds in the beginning of the year and then lessen? Or is the shape a little more back-end loaded? Anything you could provide on color on that would be helpful. Yes. Look, you know that, right? I mean there's no surprises here on where margins are coming in. We're really happy with where we're performing. All of the ramps in silicon carbide and EFK are playing out just as we would expect. We think these headwinds kind of peaked probably Q2, Q3. We think by the end of this year, we've got silicon carbide, the headwinds there have gotten to parity and the margins for average at that point after all these headwinds are behind us. But we're pretty happy with the performance and the tracking of gross margin at this point, right on track with what we've been telegraphing for a couple of quarters ago. I just wanted to dig into the silicon carbide comments. It seemed like you are reaffirming the $1 billion commitment for this year. And I think you raised the longer-term outlook by $0.5 billion to $4.5 billion. I was wondering, Hassane, if you could give us some more color on what's helping to drive that upside? And as kind of part B of that question, how should we think about any incremental headwinds on the cost or the gross margin side as you bring on more internal material supply? Are you getting the yields? Are you getting the performance? Are you getting what you need from your internal supply? Or will you have to rely more on external wafers that could change the profitability of your silicon carbide business? Yes. So, Vivek, two parts of your question. So first, yes, we're reconfirming the $1 billion revenue for '23. The increase of $0.5 billion in the same timeframe, the '23 to '25, obviously, we've always said we continue to engage with customers. Customer continue to value the performance of our products and the end-to-end capability, as I mentioned in my prepared remarks. So that obviously has maintained the strength of our business where customers are committing to long-term supply agreements, even in what I would call a shorter- term horizon, which is '23 to '25. So that's again a testament of where we stand with the technology and the supply. Now as far as your comments on internal substrate, we remain committed to our internal substrates. So of course, we have been -- through '22, we have ramped our capabilities for internal substrates. That ramp is going to keep increasing. And that ramp is as a plan to support our growth in the LTSA that we have from '23 to '25 and even beyond. And as far as yields are concerned, I know there's conversations about yield, none of which have been made by the company. So I'll use the opportunity to set the record straight. Any commentary about yields from unreliable sources, I'm not going to comment on. What I will tell you is our yields are coming in per plan. Our ramp is coming in per plan. And as shown in our margin in the fourth quarter and our guide in the first quarter, which all have come between that 100 basis points to 200 basis points. So our business is healthy, our ramp is on track, and we will continue to invest in browfield to support our customers. Very helpful, Hassane. And then just as a quick follow-up. I was hoping you could give us some color on your automotive business, excluding silicon carbide. Sales have now grown in your auto business for, I believe, 10 quarters, and you're guiding to another quarter of sequential growth. How undersupplied is the automotive market right now? And is your non-silicon carbide business you think can it grow in line or above the market this year? Yes. Look, I think we're going to outgrow the market in automotive. We said that goal even back in our Analyst Day, and we've been outperforming our own goal. Outside of silicon carbide, the breadth of our portfolio is what is really highlighting the strength of that business. We've always said that our growth is going more pact content versus unit sold. Thad talked about the transformation we've had in our image sensing -- our Intelligent Sensing Group. That is content, both in number per vehicle, but also the ASPs with the higher resolution. That's driving growth in our business. A lot of the power, whether it's IGBT or support other medium and high-voltage fabs outside of silicon carbide, that's more content, both content and share gains. I can tell you, I am -- we are winning more share as others can't supply, and we're locking in that share gain in LTSAs to sustain the long term. So all of that is what is giving us the confidence in our ramp. And look, we still are oversubscribed as far as demand is concerned, which puts us in a very good buffer as far as whatever demand does and the macro does. We feel very strongly about the position in our automotive. And of course, other segments from ASG is the LED driver, ultrasonic sensing. All of these are macro trends that are happening in automotive driving our content in that business. Last quarter, you gave us an update on the shortage situation and lead times. I think you talked about lead times being 45 weeks, where they're normally 15. How have the shortage situation and lead times changed over the last three months? Yes. So the lead times are relatively bottom and think they are down a couple of weeks on average. But when you're out at 45 weeks, that really isn't material. So I would say things have been very consistent throughout the quarter in terms of the lead times as well as just the shortages and the number of escalations that we've seen. Sure. And then any comment on the Q2 outlook? It's been sort of flat, slightly up, slightly down over the last several years. How's Q2 looking? Can we expect this to spread into Q2? Hassane, I was hoping you could talk a little bit about your philosophy around LTSAs with the macro softening. I guess one of the common questions we get from investors is how does the company? How do you guys manage any requests around pushouts and things of that sort? I think in the past, you've talked about not being flexible on the pricing side because that's a committed contract, if you will. But how are you managing the volume side of things as it relates to LTSAs? Yes. Look, obviously, our philosophy has not changed. The pricing is firm. The backdrop is the LTSAs are legally binding. We will engage with customers for the right reasons. Obviously, it's not in anybody's benefit to have inventory on their shelf or even inventory in the channel. So we've been managing the inventory in the channel. You've seen that consistently in our performance. So that philosophy is holding, and we will maintain that. Engagement with customers, it's not about price, but we will have a win-win situation with the customer, and that remains our philosophy. Got it. And then as a quick follow-up for Thad. I guess what kind of utilization rates are you assuming for the current quarter? That's a quick clarification. Then my question is in terms of long-term gross margins, at the '21 Analyst Day, I think you gave a range of 48% to 50%. It sounds like your strategy -- the execution to your strategy has been really good in terms of your portfolio, your manufacturing footprint, et cetera. Is 48% to 50% still the right range? Or do you feel like there could be upside given the $160 million benefit you spoke to in your prepared remarks? Yes. So on the utilization rates, we expect that we'll be kind of in this range, maybe it's flat to down slightly in Q1. I think just given kind of the macro softness we're seeing here in the first half of the year, it's probably going to be -- remain in that range. And we'll see how the second half shapes up later. And what's the second part of the question? What was it? Can you repeat the second part? Yes, long-term gross margins, you gave a 48% to 50% range. I don't expect you to give us a preview on the May Analyst Day, but how are you thinking about the puts and takes? And I think you gave a number in terms of the benefit from transitioning manufacturing from your divested fabs. Any potential upside to that 48% to 50% long term? Yes. Look, we remain confident in that 48% to 50%. I said that in my prepared remarks. We've also said that target is a milestone, not a destination, right? We're confident in our business. We have a lot of tailwinds after we get through '23. So stay tuned on that, but we remain committed to the 48% to 50%. And believe that is a milestone. First of all, some great color on Tesla, Volkswagen, JLR, particularly the traction inverter win at Volkswagen. I think that's huge. I had a question on gross margins. You're basically guiding gross margin 400 basis points, but you are saying that the headwind from silicon carbide is between 100 and 200. Should we assume that it's closer to 200 at the beginning of the year? And could you give us some color on how that number will trend? Do you expect it to be gone by the end of this year? Will it continue into next year? And then any color on Fishkill that 50 bps to 70 bps of headwind as well would be helpful. Yes. So let me start with the latter. The East Fishkill is 50 basis points to 70 basis points. You can think about that as being linear throughout the year and very consistent. That's where the foundry services that we'll be providing to GLOBALFOUNDRIES at kind of a low margin, low single-digit type margin. In terms of the silicon carbide, as I said earlier, we're really happy with the execution there. We're in that range of 100 basis points to 200 basis points. We think that starts to peak kind of in midyear. We think that based on what we can see now with the $1 billion run rate or the $1 billion number that we're going to hit in '23, we think we'll exit the year with that headwind behind us. So that's why I've said that 2023 is really a transition year for us. Okay. So it will be gone by the end of '23? And just curious about the softness in March. Have you seen any kind of noise cancellations in core industrial just outside of the consumer industrial? And a couple of the other companies have talked about cancellations in the auto business. I was curious if you've seen anything kind of strange over here in your auto business with increasing cancellations? No, no. This is Hassane. We haven't seen any of that in automotive. Like I said earlier, we still remain oversubscribed in auto. So it's not really a demand for us, it's more of a supply. So as we get more supply, we're going to be able to cover more of the demand. But cancellations have not been an issue in automotive. Obviously, we've seen cancellations. If I look at a trend, actually Q4 was slightly down as far as cancellations on the non-auto. So I think it's too soon to call it a trend. But it looks like it's getting better. But like I said, with our LTSAs, we're able to engage with customers for a win-win. So we don't see that impact beyond what we guided. Just a follow-up question on some of the industrial weakness that you saw. And recognize for you, the industrial market is very broad. And it sounds like you've seen some different trends there. Perhaps you could just give some more color on what you're seeing and how that looks like it's trending into midyear? Yes. Look, I think even last quarter, when we talked about the third quarter even, we talked about how some of the industrial markets that are closer to the consumer, like power tools and so on, those remain soft. We've seen softness in the broader market. Again, we believe this is more consumer and macro-driven, where we have been investing in industrial and alternative energy, that has actually been up, as I said, 75%, even ahead of our 60% growth target that we had. So that exceeded our expectation. That gives you the strength of the market that will continue through '23. And then pockets in the medical business that we focus on have seen a lot of growth, and we see that continuing in '23, obviously, offset by softness in other broader pockets of industrial. So no real change in the performance of that business or the outlook as we get into '23. Just a follow-up on pricing. And I think you've been clear on a number of aspects of pricing. It sounds, like principally in auto, this is covered by the LTSAs in some of the noncore segments where pricing is declining, that's where you're exiting. But what about industrial, which I imagine probably more NCNR orders? Are you seeing any changes as the NCNRs tail off and you're signing new orders for these customers? Or is that pricing remaining resilient as well? No, the pricing is holding up because -- just to clarify one thing. Our industrial business, where I highlighted the growth and where we have been focusing and where we want to keep investing, those are -- those remain under LTSA. So the LTSAs are not only for automotive, but they are for growth areas where we have been putting investments and we want that return on the investments to be solid. So that carved out a big portion of the growth in industrial and puts it on high confidence. Obviously, the NCNR, we are getting the renewed backlog in these, and the backlog comes in at the same rate as far as pricing is concerned. So we don't see any softness there as far as pricing, even on the NCNR. For my first question, I wanted to follow up on the last topic there that Chris brought up that you guys now have $16.5 billion something like that in LTSAs, only maybe 1/4 of that is from the silicon carbide business that gets a lot of attention. I wonder guys if you might spend a little bit more time on the rest of the business, LTSAs, where they're concentrated? I took note of the increase of $2.5 billion that you just announced from where the number was that you reported previously. So just where are you? Maybe a little bit more detail on the last answer of where you're seeing the strength in the market in order for a customer to be willing to sign up for those long-term agreements and other segments outside of silicon carbide? Sure. This is Hassane. So look, the LTSAs are broad in nature. I highlighted some examples where we have hundreds of parts for LTSA, and that goes back to the strength of our portfolio and the breadth of our portfolio as we target applications like electric vehicle electrification or autonomous driving or even parts of the industrial where we provide, for example, the sensing part of it as well as the motor control in the areas of factory automation, as an example. So all of these is really the strength of our portfolio. If I look at it, majority is automotive just because, obviously, it ties to the total market. Total market in automotive is larger. Therefore, our LTSAs are larger. And like you said, 1/4 of it is silicon carbide. So the rest is really the broad portfolio that we have. Image sensing, for example, remains a constrained technology. And given that is a very key enabler for autonomous driving in the future of mobility, that has customers really locking in supply in order to ensure that they have what they need as they start converting their vehicles to more ADAS or Level 2+ with more content. That's the breadth that I can talk about across all applications that we target. Yes. And let me just add that the $4.5 billion of silicon carbide LTSA is through '25. So it's actually a much larger number that's included in the in $16.6 billion of total LTSAs. But as Hassane said, it's broad. The place that we are not doing LTSA, obviously, is the noncore business that we're trying to exit. So we are intentionally trying to get out of that business. Got it. That was helpful. As my follow-up, I wanted to ask on silicon carbide on a little bit of a different angle. There's acute focus for obvious reasons on materials and yields and whatnot. But Hassane, I wanted to know if you could talk a little bit about the work that the company is doing and potentially the differentiation of your products in areas like using depreciated fabs to do silicon carbide rather than building new facilities or packaging, heat dissipation, size of modules, everything downstream from the raw materials and just how your company is positioned there? I see lots of conversation around the materials and not as much around the rest of the supply chain. Yes. Look, that's a great question. So we've been obviously investing in brownfield. We've been very upfront about it. Given our manufacturing footprint and the optimization that we've been undergoing in the last couple of years, we're very well positioned to grow in there as we want. So let me give you some color. We have a large-scale manufacturing site in South Korea in Bucheon. That is an existing highly capable, high output power fab that today manufactures IGBT. What we've been able to do over the last few years is transfer that IGBT technology to East Fishkill converted to 12-inch. So there's benefit from that by itself, and then use an existing power fab with slightly fewer GAAP tools in order for us to run silicon carbide and start running silicon carbide in that fab. So that's what allowed us to ramp so quickly and with the CapEx efficiency that you've seen from us. That, for example, is on the front end. The same thing with the back-end. We have a very robust back-end footprint that is already leading in power and packaging for power semiconductors and modules. We've been able to retool those back-end factories in order to support our world-class modules that I mentioned in my prepared remarks for silicon carbide. So that's on the front-end and the back-end. Now right after the material that we've been talking about, there is, of course, capabilities of wafering and epi, and that's where we do it in the Czech Republic. We've been able to increase that capacity to match the output from our Hudson facility for substrates and to match the capabilities that our fab has been able to ramp to. So all of these three sites are what is increasing proportionately in order to support our not only the $1 billion, but you can imagine, we're investing in the '24 ramp and the '25 ramp based on those LTSAs. Those are coming in on track. Those are coming in on time. Obviously, equipment has been a challenge over the last few years, but we've been able to stay ahead of it given that we're utilizing our existing manufacturing footprint. So I'm very proud with what the team has done because it's not an easy task, but they have been able to do it, and that's obviously a testament of the capabilities of the team to run such a complex manufacturing. And we'll continue to invest in brownfield in order to support our long-term strategy. Hassane, great guide here, given all the concerns. On the inventory side, just a quick question. Your inventories were up only 3% sequentially, which is probably the lowest among all the analog guys. Just wondering if you can give us some color on how inventories look in the channel and at the OEM level? Yes. Look, we're -- if you look at our inventory on our balance sheet, in terms of days that went up, as I mentioned, there are 26 days of bridge inventory for the fab transition in the silicon carbide ramp. If you look at that quarter-over-quarter, our base inventory, not the strategic portion of what the transition, the bridge is actually down. So you can see, we've talked about reducing wafer starts from earlier in the year, starting in Q2, and you can see that coming through our inventory. So this is just that our tight management of inventory. At the same time, in the channel, we've been managing it very tight as well. So we took inventory in the channel down by $10 million sequentially. It's at 7.3 weeks. We plan on running that really tight as well. We've been in that range for quite a while here, and we continue to go through the softness we'll manage both internal inventory and channel inventory very tight and just be cautious in terms of what we're seeing out there. Yes. I know the silicon carbide side, just wondering what is -- if you can give us some color on what's driving the wins? Obviously, you compete with a lot of well-established suppliers on the silicon carbide side. What's driving the events and how defensible is it? Well, we're an established supplier too for silicon carbide. So that puts us in that bucket. But look, I remain consistent in why we're winning. A lot of people focus on technology as, call it, the silicon carbide wafer technology or something before that like substrates. I always couple the competitive advantage we have on technology as encompasses the wafer technology, but also the packaging technology. Any power semiconductor for us to be competitive and really win in the market, you have to have both. The best power silicon or silicon carbide die, if you can't get the heat off of it in a very light and efficient manner, then it's not going to work in the whole system. So we're able to do the best, highest power highest density power in a very light and cost-effective package using our road map and our innovation. Customers have validated that and customers have signed up for us. So the combination of the power, call it, semiconductor or silicon carbide plus the packaging co-developed is what puts us in the lead and customers are obviously seeing that benefit and signing up with us for those long-term agreements. So you have to have both, and we have the best of both. Thanks you for all the clarity on the silicon carbide customers. I guess when you look at some of those that have also been announced by competitors or associated with competitors. How is that business being split? Is it one vendor? Does the onboard charger, another uses traction inverter? Are there cases where people are multi-sourcing within those individual components? Yes. Look, I mean, in all fairness, let me just give you a little bit of a time-based questions. A lot of the ramps that are happening today are ramps that have been on, call it, three, maybe four years ago. Before onsemi was, call it, a credible and a focused player in silicon carbide, we talked about our strategy of doubling down on silicon carbide in 2021. So my focus and our strategy and a lot of the wins that we have are forward-looking. Obviously, they already started. They are ramping our -- for -- against that $1 billion we have in '23, but forward- looking. So how it's split, like I said, most of the platforms are single sourced. So I can tell you because the packaging is not like it's swappable. So most of them are single source. There are a few cases where we may share a platform, but majority of them are single sourced. And those will be ramping. Think about what we're winning now is in the '25, '26 and beyond. What we are ramping now has already been won a few years ago. So that gives you a little bit on the timing of what others have been disclosing, which is not a surprise to me, by the way. Great. And then in terms of the forward-looking outlook, you guys talked about maybe exiting a higher amount of business than you have the last couple of quarters of $75 million. So how much of the cautious guidance is sort of the factors that you've talked about in the nonautomotive markets versus the ability to maybe at a less tight supply environment to exit some of those businesses more quickly? Well, it's really a combination of both, right? In Q4, we exited $17 million. It was below our expectations than what we thought we would exit. In Q1, we're looking at $75 million. So I think it's a combination of that. We're definitely seeing slowness in the other noncore markets, right? Consumer and compute has been down. It continues to be down. As I said, our automotive, we expect to be up sequentially in Q1. And we think industrial has got some headwinds as well. But so -- I would look at it as a cautious guide, but it's kind of taken into account the exits as well as just the overall softness that we're seeing right now. Congrats on the silicon carbide ramp. Just a follow-up on the long-term supply agreements. I was wondering if you could maybe talk about any changes that you're seeing within those agreements? I know a couple of quarters ago, you talked about certain customers requesting more volume near term, some customers extending the agreements, some customers requesting higher volumes. So any kind of positive specific changes within those LTSAs that you would like to call out or noticeable? Yes. Look, it's been the same. When we -- we've done a lot of amendments -- what we call amendment where customers came in and wanting more volume, and obviously, in the areas where we have been able to release volume because of the decline in the other markets and our ability to convert. We have been able to sign up for more volume for the customer, still, unfortunately, less than what their demand natural demand would be. But we have been able to increase that. So customers always engage with us on kind of almost what about now? What about now? Are we able to get that? Some of the technology or medium voltage bets remain constrained. Our IGBT remain constrained. Silicon carbide, obviously, we maintain our constraint. Image sensor, constraints. So we do have technologies across the company that remain constrained. So any opportunity we have where we were able to gain efficiency in our manufacturing footprint or convert from nonstrategic or non-core to core technology in our fab. We actually will either proactively, go and talk to our customers that we know we're not supporting 100% or they come to us with some mix. Some of it is, again, our sockets that we want to get to 100%. And lately, it's been where others cannot support and customers have come to us and those were -- have been share gains. So we're able to solidify those in an LTSA to sustain five to sometimes seven years length. So it's still -- the environment is positive as far as the LTSAs because it's more on a long term. It's not anything about what we can do in '23. Appreciate that color. Just one follow-up in terms of the overall pricing environment. I know as part of your strategy, you talked about reducing the price to value discrepancy you after obviously have prices kind of locked in regarding the LTSAs. How do you think about the pricing environment, overall blended pricing this year as you see the benefits of those strategies, but then kind of offset by maybe the nonstrategic? So just kind of maybe Look, I think we expect the pricing environment to be stable this year. Our approach to pricing has been strategic where you mentioned, we're looking at price to value discrepancy we've done a lot of that. So that's all behind us. Right now, it's really focusing on supporting our customers with supply. So we don't see any, call it, pricing that we do. Obviously, we're always sensitive to costs, and we keep an eye up on cost. So if we do get cost increases that are not part of already our LTSA or cost increases that are new that we haven't gotten yet from some of the vendors, we are -- of course, we'll pass those on. But as far as the pricing environment, net of that, we do see it as stable. This does conclude the question-and-answer session for today's conference. I'd now like to turn the call back over to Hassane El-Khoury, President and CEO, for any closing remarks. Thank you again for joining our call, and thank you for the thousands of onsemi employees who have had a direct impact on our exceptional results. As we enter this new year, amid a dynamic macro environment, I'm confident that we will maintain our momentum and navigate this market better than we ever have as a company. Thank you.
EarningCall_583	Good afternoon, and welcome to the NewMarket Corporation Conference Call and Webcast to review Fourth Quarter and Full-Year Financial Results. At this time, all participants are placed on a listen-only mode. It is now my pleasure to turn the floor over to your host, Mr. Bill Skrobacz. Sir, the floor is yours. Thank you, Ali, and thanks to everyone for joining me this afternoon. Let me apologize in advance if I need to mute the audio for a few seconds during the call, as I'm recovering from a cough. As a reminder, some of the statements made during the conference call may be forward looking. Relevant factors that could cause actual results to differ materially from those forward-looking statements are contained in our earnings release and in our SEC filings, including our most recent Form 10-K. During the call, we will also discuss the non-GAAP financial measures included in our earnings release. The earnings release, which can be found on our website, includes a reconciliation of the non-GAAP financial measures to the comparable GAAP financial measures. We intend to file our 2022 10-K towards the end of February. It will contain significantly more details on the operations and performance of our company. Please review it. I will be referring to the data that was included in last night's release. Net income for the fourth quarter of 2022 was $91 million or $9.26 per share. Net income for the year was $280 million or $27.77 per share compared to net income of $191 million or $17.71 per share for the full year 2021. Petroleum additives sales for the fourth quarter were $680 million and reached $2.8 billion for 2022 compared to $2.3 billion for 2021. Petroleum additives operating profit for the quarter was $117 million. And for 2022, it was $378 million compared to $281 million for 2021. For the year, the operating profit increase was mainly due to increased selling prices, partially offset by higher raw material and operating costs. Shipments decreased 2.9% between full periods, primarily due to decreases in lubricant additives shipments. Supply chain disruptions and new sanctions introduced during 2022 as a result of the Russia-Ukraine war were the primary contributors to the decline in shipment. During the year, working capital increased $204 million. We funded capital expenditures of $56 million and returned $292 million to our shareholders through dividends of $84 million and share repurchases of $208 million. We ended the year with a healthy balance sheet and with a net debt to EBITDA at 2 times. As we have stated before, we are comfortable maintaining the net debt-to-EBITDA in the 1.5 times to 2 times range. And at times, we may go outside that range. In 2023, we expect to see capital investment in the $70 million to $80 million range. The last three years have been characterized by unprecedented factors, including the impact of the COVID-19 pandemic, worldwide supply chain disruptions, inflation and war. Accordingly, we believe that it is useful to compare our '22 results to 2019, the last full year before these factors. Petroleum additives sales in 2022 were $578 million higher than in 2019, an increase of 26%. Petroleum additives operating profit in 2022 was $19 million higher, an increase of 5% over 2019, and shipments in 2022 were 2.8% higher than 2019. Petroleum additives operating margin for '22 was 13.7% versus 16.5% in 2019. We're pleased by the performance of our petroleum additives business in 2022 and the work done by our team to navigate through the many challenges of the past three years. While our efforts to resolve supply chain issues to better meet our customers' growing needs have shown improvement, we are still challenged by the inflationary environment and rising operating costs that we expect to continue into 2023. Margin recovery and cost control will remain priorities throughout 2023. We want to thank our dedicated employees for their commitment to our business and to serving our customers. We continue to make decisions to promote long-term value for our shareholders and customers, and we remain focused on our long-term objectives. We believe the fundamentals in how we run our business, a long term view, safety first culture, customer focused solutions, technology driven product offerings and world class supply chain capability will continue to be beneficial for all our stakeholders. Ali, that concludes our planned comments. We are available for questions via e-mail or by phone. So please feel free to contact me directly. Thank you all again, and we will talk to you the next quarter. Thank you. This does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation.
EarningCall_584	Welcome to the Liquidity Services, Inc. First Quarter of Fiscal Year 2023 Financial Results Conference Call. My name is Gigi and I will be your operator for today's call. Please note that this conference call is being recorded. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. On the call today are Bill Angrick, Liquidity Services' Chairman and Chief Executive Officer; and Jorge Celaya, its Executive Vice President and Chief Financial Officer. They will be available for questions after their prepared remarks. The following discussion and responses to your questions reflect Liquidity Services management's view as of today, February 2, 2023 and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact the financial results is included in today's press release and in filings with the SEC, including the most recent Annual Report on Form 10-K. As you listen to today's call, please have the press release in front of you, which includes Liquidity Services' financial results as well as metrics and commentary on the quarter. During this call, Liquidity Services management will discuss certain non-GAAP financial measures in its press release and in filings with the SEC, each of which is posted on its website. You will find additional disclosures regarding these non-GAAP measures, including the reconciliations of these measures with the comparable GAAP measures as available. Liquidity Services management also uses certain supplemental operating data as a measure of certain components of operating performance, which they also believe is useful for management and investors. This supplemental operating data includes gross merchandise volume and should not be considered as substitute for or superior to GAAP results. Good morning, and welcome to our Q1 earnings call. I'll review our Q1 performance and the progress of our business segments, and next, Jorge Celaya will provide more details on the quarter. We delivered strong EPS and adjusted EBITDA results during the quarter despite macro challenges, which limited the volume of vehicles and real estate transacted in our marketplace. We estimate that softness in the vehicle category alone reduced our GMV by approximately $10 million during Q1. This combined with abnormally low conversion rates on share of sales in our government real estate vertical resulted in lower-than-expected GMV during Q1. While these are currently headwinds, we expect these trends to normalize and boost our business as we move through 2023. Our solid Q1 financial results reflect the resilience of our business when challenged with macroeconomic headwinds, including cautious consumer and business behavior. Our strategic priority remains investing in market share expansion, diversification and longer-term growth. Our expertise in diverse categories, strong buyer base and global reach are continuing to provide advantages for our clients as they navigate the current volatile macro environment. With our strong business pipeline, trusted marketplace solutions and financial strength, we are well positioned to gain additional market share across our segments and create long-term value for our shareholders. Let's take a closer look at the progress of each of our segments and how they are driving market share expansion. Our GovDeals segment is making good progress in expanding the growth and activity of customers on its marketplace. However, this progress is currently being masked by headwinds in the used vehicle market where prices are 10% to 20% lower versus the prior year. We estimate that lower pricing combined with reduced vehicle supply will impact GovDeals GMV by $10 million to $15 million in the current quarter. Our acquired Bid4Assets marketplace has been successful winning new contracts and driving digital adoption. However, the pace of rolling out these new programs and the volume of tax and judicial foreclosed real estate sales has been below expectations, in part due to uncertainty associated with higher interest rates and the slowing economy. Our continued market share expansion is reflected in the ongoing growth in the number of new accounts and number of assets sold each quarter by GovDeals. During Q1, we set new GovDeals records for the number of active sellers and number of assets sold, reflecting the strength of our marketplace. During Q1, we signed several notable new accounts, including the state of Nebraska Real Estate division, Philadelphia School District, Boston Public Schools, City of Reno, Nevada and the Sacramento, California Regional Transit Authority. Additionally, we continue to make progress penetrating our GovDeals customers as the one-stop solution for all asset sales including their highest value assets. For example, during the quarter, we sold a helicopter for the Polk County, Florida shares office for $2.2 million. We also continue to make progress with the beta version of our new GovDeals marketplace and expect the rollout of this new functionality later this year. We expect our modernized GovDeals platform will increase our recovery rates and lift GovDeals GMV materially over time. In summary, as client vehicle replenishment and real estate cycles normalize, federal infrastructure spending takes hold, and we continue our pace of account acquisition, we see the opportunity to significantly grow the size of our GovDeals business over the next three to five years. In our Retail segment, our flexible service offerings have been well received by the marketplace and helped us grow GMV and direct profit by 22% and 12% year-over-year, respectively. Margins in this segment have been pressured as customers have traded down to lower value merchandise to save money in an inflationary environment versus the prior year period. Our new business development remains strong with notable interest in the housewares and pharmacy verticals. Current results reflect that we have yet to fully leverage the investments we have made in three new distribution center facilities. We expect Retail segment margins to improve as we further leverage this additional operational capacity and drive productivity gains. Our Capital Asset Group segment or CAG segment was below plan for Q1, but we delivered on plan for direct profit as we successfully executed numerous high-value transactions during the quarter for our clients across the globe. Indeed, we remain the most trusted market maker for industrial capital assets and our inbound sales leads grew 60% in Q1 versus the prior year period, with strong interest in several sectors, including automotive, biopharma and semiconductor manufacturing. Conversion of leads to executed transactions has been slower than normal, as many of our enterprise clients continue to assess their operational plans amidst changes in the global economic climate. Our ability to support global capital asset transactions has been increasingly valued, given the broad application of the industrial assets we sell and the variation of supply and demand in different regions in the global economy. For example, during Q1, we completed the sale of an unused high-pressure hydrocracker reactor, fabricated by Kobe Steel Japan. The asset was located in South Korea and sold to a European buyer for renewable biodiesel applications and highlights the unique ability of our marketplace to create commerce across the globe. Our CAG solutions are well positioned to help industrial manufacturers who are in a cost savings mode manage through the current recessionary environment. As COVID restrictions loosen in China, we continue to have attractive growth opportunities in the Asia Pacific region, which have been limited recently. Our CAG heavy equipment fleet category also continues to make progress growing signed contracts, new sellers, transacted opportunities and net new revenue. Recent wins include several national accounts with strong upside potential. Finally, our Machinio segment continues to grow its revenue and direct profit with enhanced traffic and more equipment categories, the introduction of self-directed listings, financing services and market maker transaction services. We believe our Machinio digital advertising and online storefront solution offers business customers, cost, savings and convenience that are well suited to the current macro environment. In conclusion, we are focused on executing multiple drivers to create value for our shareholders over time. We've continued to grow awareness of our solutions in the marketplace and plan to double our core business over the next three to five years, which will be aided by the normalization of supply chains and our leverage of the fixed investments we have made in sales, marketing, technology and operational capacity. Our capital-efficient business, with strong operating cash flow, $79 million in cash and zero debt, provides us ample financial flexibility to execute our plans. We will continue to deploy our capital on organic growth initiatives, share buybacks and tuck-in acquisitions. In closing, we thank our team members across Liquidity Services for their dedication to our mission, to power the circular economy to benefit sellers, buyers and the planet. Thank you, Bill, and good morning, everyone. As Bill has said, despite the macroeconomic challenges impacting key categories, we have continued to focus on expanding market share, while completing the first quarter of fiscal year 2023 with $270.8 million in GMV, up 4% and $72.3 million in revenue or up 8% from $260.2 million and $66.7 million in the same quarter last year, respectively. The uncertain economic climate and global supply chain disruptions can affect volume, timing and type of assets and inventory available for sale in any given period. Specifically, comparing segment results, for this first quarter to the same quarter last year, our GovDeals segment was up 3% on GMV and down 3% on revenue and segment direct profit, mainly impacted by the supply of vehicles. Our retail or RSCG segment was up 22% on GMV, up 19% on revenue and up 12% of segment direct profit that reflects current market-driven increases in the mix to lower-value products. Our CAG segment was down 10% on GMV and down 16% on revenue, while down 2%, and on segment direct profit due to favorable margins on international transactions. Machinio revenue was up 15% and segment direct profit was up 16%. GAAP net income for the fiscal first quarter was $4 million, resulting in diluted GAAP earnings per share of $0.12, up from $0.10 in the same quarter last year. Non-GAAP adjusted earnings per share for this first quarter was $0.19, up from $0.18 in the same quarter last year. Non-GAAP adjusted EBITDA was $9.8 million, up from $9.4 million the same quarter last year, mainly reflecting the higher GMV and revenue, partially offset by the planned year-over-year investments in operations and technology and higher sales and marketing expenses to support market share expansion, diversification and longer-term growth. We hold $79.9 million in cash, cash equivalents and short-term investments and performed $7.2 million of share repurchases during the quarter. We have zero debt and $25 million of available borrowing capacity under our credit facility. Our fiscal second quarter guidance range for GMV is consistent with the same period last year and reflects the headwinds being experienced currently across the global economy. As our business is impacted by the macro supply and pricing of vehicles and macro conditions in real estate, we would expect to see growth as these trends subside. The usual seasonality trends for the GovDeals and Retail segments are expected, with retail beginning the uptick in the post-holiday returns activity. We, therefore, expect higher volume of retail returns, yet combined with the current higher mix of lower value products in the long term from customer behavior in response to inflation and macroeconomic uncertainty. Our current GMV mix expectations are reflected in a slightly lower total of segment direct profit as a percent of total revenue in the short term, contributing to the overall profit guidance range from the upcoming fiscal second quarter. We currently anticipate our consolidated revenue as a percent of GMV in the mid to high 20% range in the short term, reflecting our mix of business and products sold. While the macroeconomic headwinds remain, we are looking to stay positioned for market share gains and stronger longer-term growth through continued emphasis on sales and marketing and in our operations and technology investing. Management's guidance for the second quarter of fiscal year 2023 is as follows. We expect GMV to range from $260 million to $285 million. GAAP net income is expected in the range of $1 million to $3.5 million with a corresponding GAAP diluted earnings per share ranging from $0.03 to $0.10 per share. We estimate non-GAAP adjusted EBITDA to range from $6.5 million to $9 million. Non-GAAP adjusted diluted earnings per share is estimated in the range of $0.09 to $0.16 per share. The GAAP and non-GAAP earnings per share guidance assumes that we have between $33.5 million and $34 million fully diluted weighted average shares outstanding for the second quarter of fiscal year 2023. Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of George Sutton from Craig Hallum. Thank you. Bill, I wondered if you could explain in a little bit more detail what you believe will be the normalization and the boost that you see for the business later in the year. What are the drivers for that that you see? I think those relate to fleet supply reaching what I would call backlog demand in the government market and to some extent in the commercial market. We know that there is budget and intent to buy a variety of operational assets across our government and enterprise customers describe that as vehicle fleets, truck fleets, life safety, electronic parts and other components have limited that supply. So as that refresh unfolds. The owned assets will make their way through our asset disposition cycle, and that will help normalize what we think has been a longer hold period for many of our clients. I think that also affects certain other segments such as the construction market, utility, bucket truck market, other things that would normally feed into our marketplace. I think the real estate business has had aberrationally low conversion rates. Some of that has related to public policy by certain cities and jurisdictions and counties on delaying the normal sale of judicial and real estate. And I think perhaps that's going to normalize as we look at how borrower behavior changes with higher interest rates. I think you're going to see a reversion of a lot of what we've seen is below average sales to average sales that snapback, we'll have more real estate sales. What are we doing to backfill that shortfall, which is, frankly, as I mentioned, cost us 10 to -- at the low end 10 million to the high 30 million of quarterly GMV and a few million dollars of EBITDA. We're backfilling it with new markets and diversification and market share growth. I mean we're making great progress with the heavy equipment fleet business in commercial markets. National leasing companies are now looking at our marketplace, as a viable solution. We continue to expand our CAG reach. And as I said, 60% growth in inbound leads is pretty good. These are Fortune 1000 companies with intent to transact and this is a question of the exact timing of that. So we'd like to see that on a sustained basis as a imperature of where we can take that business. And I think the global market making is very relevant as you have different pockets of demand for different assets and we can create that marketplace like no one else to generate liquidity. We continue to block and tackle in our core retail segment. 20% plus GMV growth is not too shabby. Yes, consumers have traded down and they're not buying the Uber high-end furniture and fitness equipment that they did. And the prior year period, but there's still a lot of utilization of our services, and we are gaining market share there. And I think across all of our segments, we have stronger relative strength than other service providers. And so we continue to expand the market share, I think we'll overcome the short-term headwind that has dogged GMV in the last quarter that we're announcing today. You mentioned in the CAG group, your inbound leads up pretty significantly. But by the same token, your conversion of those leads slower, what -- can you give us some sense of what you are doing to improve that conversion? And what sort of time frame would we anticipate to see some improvement? Well, I think what we're doing is making sure that we provide flexible services, real-time data to allow our clients to see what value they can achieve in the marketplace. And a lot of these are multimillion dollar transactions and may affect facilities and clients' decisions to stay in a market or exit the market. So a lot of that is CFO and operational decision-making on what is the strategy of the company selling the asset. And when you have cross currents in the market, but we haven't seen in a while, that's delayed decision-making. And frankly, that's outside of our control. But what we can do is cement our role as the trusted solution of choice to make the market when they're ready. Take the semicon market, semiconductor manufacturing has been boiled. There's a lot of movement, reshoring activity, and that's an opportunity for us. And so we're covering that really well. A lot of inbound leads and then when you actually think about selling manufacturing lines, those are very profound decisions by these companies. So what we want to be doing like a lot of advisory businesses were in the boardroom, making that data available, providing precedent transactions so clients understand what they can realize in the secondary market. And so it's not a question of whether these transactions will happen, just a matter of when, and of course, George, is an auction marketplace. We give you the real-time guidance we have at a point in time. We're earlier in the quarter. So, we can only tell you what we can see and have visibility around. But as I look at 2023, 2024, the fact that we're able to increase awareness, increase the new business development pipeline gives us a really strong conviction that we have a growth business on our hands in the CAG segment. And that's the best I can give you now. One final question for me relative to Machinio. It's kind of an optical little superstar, but very small. You're building a lot of functionality and certainly with the number of participants, looks like it could be a much bigger business. Can you just discuss your effectively an overcapitalized business today, has there been real discussion on trying to grow that business fairly dramatically and provide--? We have a very good team and plan to double the Machinio business in the next two to three years and that's always going to be a good growth trajectory. While it may be small relative to the whole, we've more than doubled it since we've began investing in Machinio and see a glide path to continue to build that business. That's a business that has global reach. We have opened an office in China. We see the broker-dealer market for equipment categories is very inefficient there. We think that has opportunity for us. We see opportunities to play the role of a market maker and introduce transactions to the advertising platform because we have a number of buyers. We averaged four or five unique bidders for every asset that we sell. That means there's one successful bidder in four unhappy bidders that told us exactly what they're interested in and have financial capability to perform. So, matching that buyer demand from our auction platform with available inventory and Machinio is a natural adjacency that we're beginning to attack. In addition, a lot of our buyers do need equipment financing and so we are standing up initially partnerships to reduce friction and get those financing needs met. And that would be accretive to do something more there. We've had the ability to improve the tech platform to allow people to list directly on Machinio without really any interaction from our team, which is a positive. So, there are a lot of drivers that will allow Machinio to double again. This is a rule of 40 high-margin business. So, even though its revenue might be lower relative to the whole, it's a high-margin business. So, as we get traction there and double that business, I think it starts to become material to the overall bottom-line of the company. Hey, good morning Bill and Jorge. Bill, a couple of questions here. I would assume that the issue with Gov deals on the vehicle side is really more a supply issue. I mean you did mention pricing a little bit, but it really stems from the fact that there's a lack of supply out there because there was a lack of new car build last year and the fleets couldn't re-fleet. Is that kind of a correct assumption? That's -- Barry spot on because when you think about it, the dealers, their highest margin is taking whatever supply is available and selling at retail. The last demand to get fulfilled is the fleet buyer and in the rental market, too. So, we know that we're sort of last in line to at least our customers, I should say, are last in line to get there. Their needs fulfilled. But there's just a ton of money that's been approved and allotted for more efficient bus fleets, fire, medical, police, energy utility fleets that is waiting patiently to get their needs fulfilled. And the industry is working hard, increasing chip, supply capacity to fill component needs in the automotive supply chain. And I think that, ultimately is going to bear out in the second half of 2023, 2024, and we'll be there, and we'll have a lot of supply that free up to come into the marketplace. So that's how we see it. That's the data that we observe and track, like you all probably in different sectors, with different service providers. So â we know that, that is a headwind that will normalize and eventually become a tailwind. Yeah. All right. Is it your opinion that or the knowledge base here that these local, municipal governments, state governments, whatever, they're not going to be as sensitive to pricing interest rates. If they have the money allocated on a budget basis, they're going to buy the cars if the cars are available? That's sort of a correct assumption? Okay. Great. A couple of more questions here. Maybe could you go into a little bit more detail on what's going on in the GovDeals on the real estate side? There should be â given the environment, I don't know, if you're dealing with repossessions or whatever, there should be more real estate out there to sell, but you're saying, the conversions are coming down. So what happens to that real estate if the conversions come down? So when the taxing event takes place, the owner has the ability to recover the properties they pay their back to mortgage or tax payments. And so we've seen a lower-than-normal rate of going through to final sale as some borrowers and some entities have subsidized borrowers to get those properties off of their delinquency rules. We don't see that as sustainable. There's a lot of, let's say, support and subsidization happening in 2021 and 2022 lot of relief programs, sort of kind of held up that market, probably artificially. And that's part of a larger effort to put â put a lot of payments on hold. Institute loan debt was another example, where you had deferrals and so forth. I think that all comes to normalize in 2023, because those aren't sustainable policy decisions. I think at some point, you go back to sort of your normal cycle of meeting your obligations. And that means that instead of a 0.1% rate of assets going to â through the foreclosure process, they're probably normally some more like 2%, and so what does that mean for us? It means that, items that were queued up for sale that were listed in the marketplace, instead of closing an auction, they've been pulled well, so I think more of those assets will go through to completion and will be sold, and that will affect positively our GMV. And it's not like, we have â we're not rooting from one side or the other, which driving the longitudinal data that says, if you have 100 properties in a county every quarter that goes to the sale process as directed by the share, when you normalize that, we're going to sell a lot more property than what we've seen in the last few quarters and what we currently have visibility on for our Q2 March quarter. The other thing I would say is I think interest rates have had some impact on whether these borrowers are willing to carry the property. Interest rate payments are much higher now. And there's a couple of pieces in the Journal this week around the fact that consumers are feeling a little bit of a squeeze. So we think that's probably going to influence more real estate. Thus lastly, the broader secular trend and mission of liquidity services is to drive digital adoption of online sales methods by government entities, and that includes the accountings that administer these sales, and we have been successful in winning new contracts. And in some cases, those contracts have just taken a little bit of a bureaucratic kind of slow rollout phenomena. And to some extent, people may resist change. So these sales have occurred in an off-line way for 100 years, and you're moving to online and certain people a local buyer might say, "No, I don't want that competition. I'm going to call my local mayor or city council and say, "This isn't good. And so then there's a little bit of a lobbying process that goes on and delays rollouts. But we've won some top 50 metro contracts that have not bared any fruit for us in the current year because of that type of a political process. Now that's going to go through and ultimately be operationalized, and we will have the benefit of those awards because these are competitively bid contracts and the data is on the side of the decision to go online. But that's just part of what you deal with when you're pioneering a market is dealing with significant change, and that sometimes makes certain incumbents resist. Okay. Thank you. And then just two more quick questions. Number one, it looks like the cash was down fairly substantially sequentially. I know you bought back some stock, but what accounts for the rest of that cash balance going down, Jorge? So we did have a little timing difference at the very, very end of the quarter on our financial settlements with customers, where we normally would have had that happen in the last few days of December, but with the holidays and frankly, with the change in our banking, it just as falling into January. So that's actually a part of it that you don't see, but it also explains on the balance sheet, why their some of the payables to customers ended up â the net ended up a little different. And then -- yes, and then there's the buyback, right, which is 7.5 million or 7, whatever, right? So -- those are the two biggest things, I'd say. But nothing otherwise unusual. Okay. And then lastly, it looks like your G&A expense was down about 10%. I would assume that, that is something dealing with the reversal of accruals for bonuses or something like that? And is that correct? And is that $7.4 million to $8 million, is that a good number for run rate throughout the rest of the year to finance if the EBITDA generation continues to be where it was in Q1 in that range. So to the first part, no, there's nothing unusual in bonus accruals or anything. So there's -- I think on just the G&A in general, it's well-managed G&A, and I would expect the rest of the year to be similar. I think even our tech and ops to be quite similar to the first fiscal quarter. It all goes up a little bit as you go, right? But the only thing that will dollar-wise go up more than the others and â but still be steady on a year-over-year percentage growth is the more variable sales and marketing.
EarningCall_585	Good afternoon, ladies and gentlemen, and welcome to the conference call of Intesa Sanpaolo for the presentation of the full year 2022 results, hosted today by Mr. Carlo Messina, Chief Executive Officer. My name is Raziel, and I will be your coordinator for today's conference. At the end of the presentation, there will be a question-and-answer session. [Operator Instructions] I remind you that today's conference is being recorded. So, thank you very much. Welcome to our 2022 results conference call. This is Carlo Messina, Chief Executive Officer. And with me are Stefano Del Punta, our CFO; and Marco Delfrate and Andrea Tamagnini, Investor Relations Officers. Today, I'm going to walk you through a very high-quality set of results. We are delivering on our commitments. And for 2022, we will distribute cash dividends of â¬3 billion, and this is equal to a 70% payout ratio as promised. In the next few days, we will launch the second tranche of the share buyback, bringing the total additional distribution to â¬3.4 billion. Full year net income was â¬5.5 billion when excluding provisions for Russia de-risking. This is well above our 2022 business plan target. Even including Russia de-risking, net income was â¬4.4 billion, the best result in 15 years and well above the guidance we gave following the invasion of Ukraine. Looking ahead to 2025, the final year of our business plan, we expect to comfortably exceed our â¬6.5 billion net income target. This is thanks to the boost from interest rates. Our resilience has a zero-NPL and a zero-Russia exposure bank and our flexibility in cost management and our leadership position in wealth management, protection and advisory. As we have proven again and again, we will over-deliver on our promises. Now, let me turn back to 2022. Despite the difficult macro environment, we delivered the best-ever year for operating income, operating margin and gross income. Q4 was the best quarter ever for revenues with a strong acceleration in net interest income, and we paved the way for this year with very conservative provisions, setting aside â¬1 billion as overlays and to favor de-risking. I also want to draw your attention to the 110 basis point increase in our capital position in just one quarter. When we reduced risk-weighted assets by rationalizing positions no longer EVA positive and disposed of assets that were no longer efficient capital-wise. This is one-off exercise, does not affect future profitability and gives us a strong buffer [indiscernible] regulatory headwinds. No additional risk-weighted assets reduction is needed. Our common equity ratio is up 13.5%, including the impact of the [transaction] (ph) of share buyback. It is almost 15%, including DTA absorption. [indiscernible] is close to 13% this year and above 13.5% in 2025 and above 13% post Basel IV and 14% considering DTA absorption. This does not take into account any additional distribution that will be evaluated year-by-year. We confirm our business plan target at Common Equity Tier 1 ratio above 12%. Rewarding shareholders while maintaining a solid capital position is embedded in our DNA [and remains our] (ph) priority. De-risking continued with a â¬4.6 billion reduction in gross NPL and a massive decline in Russia exposure that is now below 0.3% of group exposure, and we will continue to work to further reduce the limited remaining exposure. This confirms our commitment to being a zero-Russia bank and a zero-NPL bank. And in this respect, I want to say that the asset quality picture remains being with the lowest ever NPL inflows and the lowest ever NPL stock and ratio. I'm proud of our results and thank our people for their hard work. Execution of the 2022 business plan is proceeding at full speed with all initiatives well underway. We continue to invest strongly in technology and innovation. And despite these investments and very high inflation, we still managed to reduce costs. Let me also say a few words on the overall macro situation that has recently improved. I remain positive for two reasons. First of all, the Italian economy will quickly recover already in 2024, even if there is a slowdown this year. And secondly, our bank is fully equipped to face challenging environments for multiple reasons. We are delivering excellent operating performance, and we have a best-in-class risk profile with the NPL stock that is a fraction of the past and a rock-solid capital position. Of course, we are very sensitive to the fact that many families and businesses are struggling, and we remain committed to supporting them. As ISP, we are providing â¬400 billion in lending to the real economy and not to mention our many social and climate initiatives, which we are stepping up. And because we take care of our people, we provided a one-off contribution of nearly â¬80 million to mitigate the impact of inflation for our people. Now, let me provide the highlights of the full year results. Slide Number 1: In 2022, we delivered high-quality earnings, with net income of â¬5.5 billion when excluding Russia de-risking, exceeding the business plan target. We achieved the best-ever year for operating income, operating margin and gross income, and Q4 was the best-ever quarter for operating income. Net interest income is accelerating, and we reduced costs. We reached one of the lowest NPL stock and ratios in Europe, and we massively reduced our exposure to Russia. Capital position is and will remain rock solid, and we are paying â¬3 billion in cash dividends and the second tranche of the share buyback will be launched in the next few days. Slide Number 2: In this slide, you can see the evolution of net income. And in 2022, we delivered the best net income of the past 15 years. Slide Number 3: While delivering a record-high net income, we set aside â¬2.6 billion pre-tax to become a zero-Russia exposure bank and to succeed in the future by further strengthening buffers. Slide Number 4: On top of that, in Q4, we put in place managerial actions to reduce risk-weighted assets to enhance value creation, further reinforcing capital to absorb any regulatory headwinds. This one-off reduction refers to positions EVA-negative or no longer justified in relation to absorbed capital and does not affect future profitability since the asset disposed can be easily replaced in the new interest rate environment with higher-yielding assets with low or zero risk-weighted asset absorption. In fact, we have already started. Capital ratio will remain well above the 12% business plan target, which we confirm, not considering any additional distribution that will be evaluated year-by-year. We clearly have an excess capital. Slide Number 5: In this slide, you can see that, once again, we are delivering on our commitment with a tailwind from interest rate increases, providing a clear and strong upside to the â¬6.5 billion net income target for 2025. And let me take you to Slide 7 to provide some color on the P&L. Slide 7: In 2022, net interest income grew by 20%. Commissions were resilient and the declining is due to negative market performance. Insurance income reached a record high, also thanks to strong growth in non-motor P&C revenues. Operating costs decreased. We have been conservative in provisioning, allocating â¬1.4 billion for Russia and â¬1.2 billion as overlays and to favor de-risking. Net income was more than â¬6 billion when excluding costs concerning the banking industry and provision for Russia, Ukraine. Slide Number 8: Looking at Q4, we delivered high-quality operating performance. Net interest income was up almost 60% year-on-year, and commissions were up 3% on a quarterly basis despite the absence of performance fees. The total contribution from net interest income, commission and insurance income was up 16.5% on a yearly basis and over 14% quarterly, demonstrating the resilience of our business model. Also, in light of strong core revenue performance, we didn't push on profits from financial assets that were also affected by the disposal of low-yielding capital inefficient assets. Revenues were up [indiscernible] best quarter ever. We booked a one-off contribution of â¬36 million for ISP People in addition to the over â¬40 million in Q2 to mitigate the impact from inflation. We have been very conservative in provisions and booked â¬1 million as overlays and to favor de-risking. Q4 net income was â¬1.1 billion. Slide Number 9: In this slide, you can see the strong acceleration of net interest income up â¬700 million in one quarter and â¬1.1 billion compared to the fourth quarter of last year. Rate increases are a strong upside for us. And net interest income will grow by â¬2.5 billion this year, assuming one-month Euribor reaching an average of 2.5%. Slide Number 10: In this slide, you can see that net interest income growth on a quarterly basis and yearly basis was driven by the commercial component. Slide Number 11: Customer financial assets were â¬1.2 trillion, with a â¬26 billion increase in Q4. We had a â¬4 billion positive net inflows in assets under management on a yearly basis, and wealth management will continue to be an important driver for growth in the future and our well balance sheet and efficient business model give us a clear competitive advantage. Slide 12: We continue to be very effective at managing costs, down 0.4% in 2022 despite very high inflation. Depreciation is up as we keep investing for growth, especially in technology. Slide Number 13: Thanks to massive deleveraging, the net NPL ratio is the lowest ever at 1%, already achieving the business plan target. We reduced NPL stock by â¬4.6 billion on a yearly basis, and we had the lowest ever NPL inflows. Let me remind you that we have reduced the NPL stock by â¬54 billion since the peak in 2015. Slide Number 15: Our underlying cost of risks [indiscernible] 30 basis points, in line with being a zero-NPL bank. We have been conservative with provisions. And in Q4 alone, we booked â¬1 billion as overlays and to favor de-risking paving the way for the future. Slide Number 17: We achieved an impressive Russia de-risking. This exposure decreased further in Q4 and is now very limited and high quality. Let me take you to Slide 18 to give you some color on the capital position. Fully phased-in Common Equity Tier 1 ratio is 13.5%, up 110 basis points in Q4 when we reduced the risk-weighted asset by rationalizing position no longer EVA positive. Let me be clear, this one-off exercise in terms of size does not affect profitability and gives us a strong buffer against any regulatory headwinds. The capital ratio already takes into account â¬3 billion in dividend and a 60 basis points impact from the second tranche of the buyback. It does not include the 125 basis points of additional benefit from DTA. Slide 19: Shareholders are not the only one benefiting from our performance, Intesa Sanpaolo has contributed broadly to society and our excellent performance allow us to create sustainable benefits for all stakeholders. Slide Number 21: In addition to delivering excellent results, the people of Intesa Sanpaolo are working at full speed across all the industrial initiatives of the business plan. In the past 12 months, we have launched all the business plan initiatives, of which 70% are ahead of schedule when compared to our '22 targets. This year, we will launch Isybank, our digital bank to serve about 4 million existing clients who already choose not to use our branches. You can go through the details of the ongoing initiatives in the next 11 slides. And on Slide 30, you can see our leading ESG position in the main sustainability indexes and rankings. But for the sake of time, let's move to Slide 35 to see why ISP is well equipped to succeed in a challenging environment. Slide 35, Italian economy: The Italian economy is strong, thanks to solid fundamentals world-leading household wealth and resilient SMEs. Lower energy and commodity prices will help ease inflationary pressures and as inflation slows the economy is set to reaccelerate. Slide Number 36: As you can see, this slide, ISP is far better equipped than European peers, thanks to our best-in-class rock -- best-in-class risk profile, rock-solid capital position and the resilient efficient business model. Slide 37: Let me now recap the key points demonstrating how ISP is well equipped to further succeed in the future, our resilient, diversified and profitable business model [indiscernible]. We remain a wealth management protection and advisory leader with fully-owned product factories and â¬1.2 trillion in customer financial assets, that can succeed in any interest rate environment. Our capital position is and will remain strong. We cut our exposure to Russia to below 0.3% of group customer loans, and we will continue to reduce it. Zero NPL bank status already achieved. Net interest income provides a strong tailwind. And in Q4, we paved the way for the future with very conservative provisions. Costs are down despite inflection, demonstrated our -- demonstrating our high strategic flexibility in managing costs and the execution of the business plan is proceeding at full speed. Slide Number 38: To finish, let me turn to the outlook. In 2023, we foresee significant operating margin growth, which will be driven by solid growth in revenues, thanks in particular to net interest income, together with a continued focus on cost management. This, coupled with a strong decline in loan loss provisions will enable a growth in net income well above the â¬5.5 billion reached in 2022 when excluding Russia. These forecasts are based on conservative assumptions. We confirmed the 70% payout ratio. And in the next few days, we will launch the second tranche of the buyback. The outlook for this year means that we will continue to reward our shareholders, [indiscernible] for ISP and me personally, while maintaining a rock-solid capital position. This year, subject to shareholders approval [indiscernible] at least â¬5.3 billion, taking into account the dividend we will pay in May, the second tranche of buyback and the interim dividend as usual we pay in November based on the net income guidance for the full year. Common Equity ratio is expected to be close to 13% this year, taking into account regulatory headwinds and with no additional actions to reduce risk-weighted assets, and above 13% in 2025 post Basel IV, 14% taking into account the benefits from DTA absorption. All these levels of capital ratio does not consider any additional distribution that will be evaluated year-by-year. It is clear that we have a significant excess capital not only in the short term, but also in the medium and long term. As already said, the â¬6.5 billion net income target in 2025 will be comfortably exceeded. It has proven again and again Intesa Sanpaolo is an unstoppable delivery machine, and this thanks to all our people into a strong, long-standing and cohesive management team. So, thank you for your attention, and I'm now happy to answer your questions. Thank you, sir. [Operator Instructions] And the question comes from the line of Giovanni Razzoli from Deutsche Bank. Please ask your question. Your line is open. Good afternoon. Thank you for taking my questions. I have two basically. Can you share with us what are the regulatory headwinds that you expect in 2023? In the last conference call, you mentioned 45 basis points, then there has been a little bit of noise in the market. So, if you can share with us what is an updated figures out there and to what they are related? And my second question is on the guidance for 2023, whereby you target net income well above â¬5.5 billion, which is basically the same level of 2022, excluding Russia, but then you have a â¬2.5 billion of higher NII. So, my reading is that 2023 could be well above the â¬6 billion rather than well above â¬4.5 billion. I think, I'm conservative. So, I was wondering whether I'm missing some points or whether my understanding isn't correct? Thank you. So, do you want me to answer [indiscernible] to the presentation for the first quarter results of 2023 [indiscernible] that's reality. But I have to tell you that starting from -- because if we want to deliver a surprise, you are just firing the surprise, but I understood the market. Now, we need to have more compression on our outlook. That's the new style of the European CEO to give a super bullish guidance in order to [indiscernible] share price. So, I will give you the view line by line, so you can create your view on what can happen there. Remaining with my statement in the presentation that was also driven by the fact that if we accelerate [indiscernible] and formally figures on 2023 that are close level of the 2025 business plan, we will have to change the business plan. And believe me, I think that there will be a timing [indiscernible] of net interest income. We will have to give the market the new figures because the increase is so massive that we will have to disclose to the market. But the real point is that we need to have a clear and stable view on the expectation of the Central Bank. And today, there is a trend of increase of interest rate, but with some not completely clear view from the ECB. But the real point for me is 2025. So, 2023, when I will give you all the details line by line, you will have your [indiscernible] probably your expectation, not giving from me, but your expectation confirmed. But the real point for me is the need to update the 2025 figures, because today are really too much conservative in consideration of the new scenario. So, let me give you some color, so just to avoid all the next 20 questions on the outlook. So, I want to enter line by line and as usual, I will give a transparent view on all the figures. Then I will elaborate on the regulatory headwinds and our expectation on risk-weighted assets. So, starting from net interest income, we think to be in a position to have a strong increase in net interest income, â¬2.5 billion, is absolutely the figures that are in the end of the group is already embedded [indiscernible] of Madame Lagarde of yesterday. So that's the starting point of the 2023 conservative assumption, because I'm thinking that interest rate can increase also on average during 2023. And so that's the first point, there will be strong growth in terms of net interest income. Then, in commissions. Commissions, we do not have significant commissions. We have only â¬30 million of commission related to liquidity -- so-called liquidity accounts and are mainly concentrated in corporate clients. So, we will reduce this â¬30 million, but no more than this in terms of reduction of commission. Then net inflows will be related to wealth management, will be a positive and an increase in comparison to net inflows of 2022. So, our expectation also [indiscernible] is to have between flattish and increase in terms of commission. Then we will see what would be the market dynamic, the reason why I prefer to wait until first quarter of the year to give a more detailed view on the final net income, but also commissions and the combination of commissions and insurance income will be from flattish to slight positive in our view. That's what we see, especially in insurance business, we [indiscernible] strong momentum for property and casualty business. So that will be another driver of growth in our revenues based. On trading income, we think that we can have a reduction in trading income in comparison to 2022. So that's our expectation. The indication to my people is not to accelerate on a yearly basis. This does not mean that we can have some quarter with very positive results. But on a yearly basis, my expectation is to have reduction in terms of trading income on a yearly basis. Then, moving to the -- so at the end, the revenues will have strong boost from all of these items. Moving to the cost side. The results in 2022 allowed us to have some contingency that we placed in 2022 in terms of cost base. So, the expectation for 2023 is that the cost base could be from flattish to slight increase depending on the level of inflection during in 2023. Then in 2024, and in 2025, again, we will have a significant reduction in terms of cost base. In the dynamics of the cost, we will have personal costs depending on the renegotiation with trade unions. Our expectation in any case is to have a reduction in terms of personnel cost on an annual basis. And moving into the depreciation, depreciation will increase, because we will accelerate investment in [indiscernible] Isybank. So that's fundamental. And in this quarter, we decided not to make any kind of specific presentation on technology of Isybank, because as it happens today, all the attention is on capital [indiscernible] share buyback comparison with other peers. So, it's only a way of not giving what I consider in reality, strategic for the group that is the technological upgrading of Isybank and the investment for the group, but depreciation will increase. Administrative expenses, we placed a portion in 2022 of this cost that we can have in 2023, then we will see what would be the real dynamic of inflation. The expectation today is to have a slight increase, but with the capital budget that is above â¬1.6 billion in 2023. So, it's an amount that it would be difficult to spend because it's really a massive amount of money. And in any case, we maintain a significant contingency plan in order to reduce for [hundred and hundred millions] (ph) the amount of cost also during 2023, if needed. So that's the position on the cost base. Also, in 2022, on personnel cost, we had an increase in cost related with incentive schemes. So that's the reason why costs increased in the personnel cost. But at the end, all the dynamics for 2023 is for a potential reduction of cost. Looking at provisions, the run rate of our cost of risk is 30 basis points. So, related to the net inflows that we expect for 2023. Then we have considered 10 basis points for further disposal of non-performing loans. So, our target is to try to remain, in any case, at 1% NPL ratio, net NPL ratio. But again, it's not a compulsory target in the sense that 1% is the level that is going to reach in 2025. So, we have flexibility also in terms of cost of risk without using overlays during 2023. So, again, moving into gross income, making your own calculation, I will give you -- I would not give you the final results, but the expectation is well above â¬5.5 billion. That's the -- well above is a figure that you can decide by yourself. I will give the more precise figures during 2023. And we need also to have this consistency with the business plan, so maintaining the level of net income of the business plan because we decided to give full transparency on our capital ratio. And the only way to give the capital ratio that is consistent also with the information of the Board of Directors. Because Intesa Sanpaolo, we used to give a significant role also to the Board of Directors. And so, if they approve the business plan, they have figures on business plan, we do not change on a quarterly basis the dynamics of our figures. And the estimates that we made on capital ratio are based on the figures of the original business plan. And that's for outlook and profitability. So, I'm completely assure that our outlook is an outlook that is really conservative. And in the first quarter, we will have -- you will have all the evidence of our delivery during 2023. But I don't like this approach of giving fantastic outlook and then creating expectations just for the sake of short-term increase in the share price. We are only looking at the medium long-term value of Intesa Sanpaolo as usual. But our estimates -- so the estimates that I gave to you are absolutely more than feasible. So, moving into the regulatory headwinds, the point of our risk-weighted assets. So, we gave to the market 45 basis points as the impact related to regulatory headwinds. In reality, the after -- the work that we made with the [indiscernible] the final results of this analysis on our internal model will bring to an impact that could be close to 70 basis points. That will be an impact that we will take in a significant portion in the first quarter of this year and other part in the second quarter, but that should be the final impact for us of all the regulatory headwinds related with our internal model. It is a large corporate model. So, it's the area of large corporate, mainly investment grade, large corporate, but that's the impact that we will have in 2023. Then in 2023, we will have another 20 basis points impact related to IFRS 17 [indiscernible] through the analysis that we made and will be applied in the first quarter, because through the analysis that we made, we have the possibility to increase net income of the insurance business. And with deduction from net equity, we will have increase in net income in the next years [indiscernible]. So, due to this strong capital position, we decided to place in the first quarter of 2023 also this impact. So, these are all the figures related on the negative. Then we will have a growth in terms of risk-weighted assets related to business. They could be in the range of 30 basis points, 40 basis points, depending on the kind of growth that we would be possible to have during 2023. And on the other side, we will have net retained income and the recovery of DTAs. So that's leading more or less 13% during 2023. I have, also, to add that we had, in any case, further room to reduce risk-weighted assets during the business plan. So that's our expectation. In terms of the next regulatory headwinds, we think that with 2023, we should end the impact for us because there is not an impact coming from the so-called return to compliance through the negotiation with [JST] (ph), but this is really the results of the inspection of the ECB in the company. So, it's the final end of the regulatory headwind process with the ECB. At the same time, on Basel IV, our estimate today is to have an impact between 60 basis points and 65 basis points. And this is confirmed with further analysis that we made this year and this quarter. So, we can confirm that also looking at Basel IV, we will be in absolute condition to have a capital ratio above 13% in 2025 post Basel IV remaining with roughly 100 basis points of DTAs that can be recorded in the next three years after the entering of Basel IV. So that's the capital position. So, this means that we have a clear and strong excess capital not only in 2023, but in the medium term. And these -- all these estimates are conservative. So, we decided to have a very conservative approach in all the estimates. We are now going to proceed with our next question. And the questions come from the line of Antonio Reale from Bank of America. Please ask your question. Your line is open. Hi. Good afternoon, everyone. It's Antonio from Bank of America. I have two questions, please. One on capital returns and one on deposit betas, please. On capital returns, you have the largest dividend payout in Europe at 70% of earnings. I don't think you had budgeted any additional buybacks in the business plan other than the one you're doing. But then, I think also you don't have any rate hikes and as you've vented the business plan was really from a different world in this context. So, my question is where do you stand? You said you would assess this additional distribution on an annual basis. That's very clear. But how are you thinking about your payout and the mix between dividends and buybacks going forward from here? That's my first question. Secondly, on deposit betas, your market leader in Italy and I'd like to understand what you've assumed for deposit beta in your â¬12 billion NII figure for this year? And what are you seeing from competition from your client base when it comes to deposit pricing? And what would you expect for the rest of the year? I've seen some of the banks are starting to lower current account fees, which I guess is the first natural step. So, I'd like to hear your thoughts on the moving parts. Thank you. So, thank you, Antonio. So, moving from -- starting from the beta, so we can move in this. It is clear that we are the market leader in Italy. So, there's no other bank in a position of Intesa Sanpaolo. So, our beta is completely different from the one that other players have in the market. But in any case, we decided to have a very conservative stance in our approach for us that is to have a beta between 35% and 40%. I consider that the beta for the families today is close to 3%. So, we are talking about something that is absolutely negligible. Then during 2023, it is clear that if you want to make forecast and give an indication much better to be conservative, but it is different. We have a market share of 10% -- a market share of 30% in the country. And at the same time, also the kind of correlation that we have between deposits, asset under management, insurance products and mortgages is unique in Europe. So, it is clear that we have a position with our clients that's maintaining the attitude of moving into the interest of the clients, but this allows us to propose a mix of different products that can maximize also the value for the bank. So -- but in any case, on net interest income. But if you look at the past, so if you look at the period in which the interest rates were so negative, we were able -- we had such a significant negative impact because we had such a strong deposit base. But at the same time, being a wealth management and protection company is also a point of strength in this phase, because you are able to manage in a better way the position of the client and also the different attitude of the clients. I have to tell you that I'm talking about the, obviously, retail and private banking clients. Corporate clients from this perspective are not so strategic [indiscernible] of net interest income generation from -- on the markdown side. Looking at capital. So, the position of the -- capital position of the bank and the implication of this new environment is absolutely one of the point that I was mentioning in the better understanding of structural change in the market, because with structural change in the market, we had such a boost in profitability -- such a real boost in profitability that we will have to consider the redefinition of the net income generation for the future for the [indiscernible], also the capital ratio embedded in our future estimates. The one that we gave to the market is the minimum. So, it's a very conservative approach. We have considered a 70% payout ratio. And in terms of excess capital redeployment, I think that it is absolutely fair to wait until the end of the year, not to give before the end of the year any kind of indication. It is clear that we have excess capital. We confirm. And due to the fact that we reached the 1% net NPL ratio in advance, because at the end of 2022, we are already at 1%, there's no other European bank in the same position. And at the same time, we have very low level 2, very low level 3, and we have still reduced also in this quarter, a portion of our exposure to [indiscernible] we are in a unique position to have real and substantial excess capital also in comparison with 12%. So, 12% is really a level of capital in which already we have embedded in excess of capital in comparison with our risk-embedded portfolio of activity. So, we will have all the timing to decide on this excess capital. It is also clear that price to book will be another way of looking of what you can do with the excess capital. Because from a financial point of view, until the 1% price to book, you can have positive from a financial point of view in realizing and delivering a share buyback exceeding one, there could be other ways of giving back the capital through distribution of reserves and other instruments. But for the time being, the decision on this will be taken at the end of 2023. My expectation is to be in a position to give a very good satisfaction to our shareholders. But the demonstration of this action -- and also the fact that I decided to give the clear trend 2023, 2024, 2025. There's no other player in Italy -- in Europe, sorry, no other bank in Europe giving such a disclosure because the majority of the bank will have the impact of regulatory headwinds, the real regulatory headwinds, not the one that they are declaring as what they have transmitted to the ECB, but the real impact that we will have in 2024. And then the real impact of Basel IV in which a majority of European banks are telling, we are calculating. We will be below the average. So, we decided to have a clear position also in the medium, long term, and no other player made this clear and transparent demonstration of excess capital also for the future. Then we will decide at the end of 2023. I think that what we will give in 2023 is really such a significant amount in terms of remuneration, the cash dividend that we will pay in May, the share buyback, the cash dividend that we will pay as an interim dividend in November. So, we do not need and we are not making any kind of competition with other European bank in terms of payment to shareholders. We think to have reached such an amount in which our shareholders can be happy of their remuneration. So, that's all. We are going to proceed with our next question. And the question comes from the line of Azzurra Guelfi from Citi. Please ask your question. Hi, good afternoon. Two questions for me. One is on the capital trajectory that you have given. What is the rate assumption that you are including in that? And is it based on your â¬6.5 billion net profit in 2025? So, just to understand how much conservatism the results in that. And I know that you have a 70% payout, but over the year, that could add up. The other question is on the asset quality. You talked about something around 30 basis points of cost of risk and -- for 2023. What the area of the loan book that you are, if any, a bit concerned about that you are monitoring more closely? I saw the flows. I know the level of NPLs. Just to understand, what are you seeing on the ground, especially on the corporate and SME space? Thank you. Thank you, Azzurra, and your title in -- and your analysts are always very smart. So, the capital -- of the capital position, so the -- as I told in making a clear view on what is my outlook, my outlook is a statement in which I want to make clear to the market that we have a significant upside, but we want to remain close in terms of communication, what we have in the business plan. And what we have considered in the assumption embedded in the capital plan is absolutely the business plan. So, for 2025, we have â¬6.5 billion. That is completely out of any kind of expectation that you can make today due to the fact that if you consider 2.5% Euribor is absolutely conservative. But if you consider 3% Euribor, they will be in 1-month, what Madame Lagarde told to the market. There will be another upside of another â¬500 million in comparison to that we have around 2.5%. So, we have -- we are in a clear conservative position. And you know that we are used to give guidance and information on the market only if we are pretty sure to exceed the guidance and the information. So, this is really conservative from our side. Looking at the cost of risk, so the running 30 basis points cost of risk is more or less considering an amount of inflows that would be in line of 2022 with a limited growth in comparison, because asset quality, today in Italy, is absolutely under control. All the sectors are delivering in very good performance. It is clear that we are increasing the monitoring on the commercial real estate area, that's an area in which, as in all Europe, there's a specific attention, but also a significant portion of overlays are placed on commercial real estate and on energy sector. So that's the area in which we can consider to have an attention -- particular attention during 2023. And as I told, we maintain also a buffer for increasing coverage in order to make disposal of non-performing loans in case of need during 2023. We are now going to proceed with our next question. And the question comes from the line of Delphine Lee from J.P. Morgan. Please ask you question. Your line is open. Yes, good afternoon. Thanks for taking my questions. My first question is on the risk-weighted asset reduction that you've had in Q4, which is massive. Would you mind just elaborating a little bit? Because we understand it's not affecting profitability, but -- just wondering if there is some impact on trading that you have already front-loaded or anything that has been included in your NII guidance, anything that you could quantify, just so we get understanding of how that works, because it's quite a big amount. The second question is on the overlays of â¬900 million. It's an amount that you have continuously increased to be on the conservative side. Should we expect more to come in 2022? Or is that embedded in your sort of 40 basis points cost of risk? Or is that â¬1 billion kind of the maximum and you feel comfortable with that level? Thank you. Thank you, Delphine. So, looking at the risk-weighted asset, so I will give you all the details on what we had as an impact in the last quarter of 2022 and the impact that we will have in 2023. So, looking at the trading income, we had a negative impact in Q4 [indiscernible] â¬70 million related to the disposal of the portfolio that was -- that is mentioned in our slide. So, this is the negative one-off in a quarter related to this. Then, we lost also â¬20 million and â¬30 million of [net income] (ph) in the last quarter of 2022. So that's the majority of the impacts related on this deleveraging that we realized during the last quarter of 2022. Then you can have some another â¬10 million, â¬20 million, but no more than this. So, let's put it this way, it could be â¬120 million, â¬130 million of revenues. The run rate, so during 2023, it is without the trading income, but is multiplied by four, the net interest income. So you are, again, in a range of [â¬125 million]. At the same time, we started and we are close to complete next tranche, in which we are increasing the government bond portfolios placing in all to collect for an amount of â¬10 billion is with a diversification in this portfolio. So, we will have 50% of the portfolio should be to AA and AAA. And the other portion is 30% Italy and 20% Spain. So, there could be a mixed portfolio. And this will give us â¬125 million, â¬130 million of revenue. So, we compensated in terms of revenues through a zero risk-weighted asset and also zero impact on capital in terms of actions. So, at the end, the impact of profitability is really zero on our figures in 2023. And looking at the overlays, we don't think to be in a position to have the need to increase overlays also because our expectation is that the GDP in 2024 should increase in comparison to 2023. So, the need to have an overlay is more related with some uncertainty also connected with the macro environment. So, the specific situation should lead us not to have the need to increase the overlays. In our figures, so in the 30 basis points, we have considered not to use these overlays. And as I told you, as I told also in previous answers, we decided also to have in our budget some room, 10 basis points in order to accelerate further de-risking, but no more increase [indiscernible]. We are now going to proceed with our next question. And the questions come from the line of Christian Carrese from Intermonte. Please ask you question. Your line is open. Hi, thank you for taking my question. The first one, a clarification on the cost of risk. So, you said 30 basis points, plus 10 basis points, but you already reached 1% net NPL ratio. I was wondering, look at your slide of your presentation, maybe you are discounting the Bank of Italy scenario with a plus 0.6% GDP 2023. I was thinking about if there will be a mild recession in 2023, how your number on cost of risk could change? The second question is on fees. You gave a guidance similar to other players of flattish fees for [2022] (ph) or slightly up. On this point, I saw -- we saw the recent press articles on a potential wide ban on inducement for investment advice that could be proposed in April. If you can share with us your thoughts on that, what kind of impact could have on your P&L, if any, so it will be useful. Thank you. So, I will start from the inducement. This regulation is mainly related to the counterparties that use third-party products. So, it is not majority of the case of Intesa Sanpaolo because our point of strength is absolutely to have our own [factory] (ph) in asset under management, insurance business and all the different areas. We have a limited portion in private banking. Obviously, there is not only the product of our group, but the impact on us is really negligible. So, the impact could be massive for other players that are using not their own factory, but for us, it's absolutely negligible. Looking at the cost of risk, it is clear, depending on the degree of recession, because if we are talking about minus 3%, 4%, we will have to enter into a completely different story and attitudes towards not only the cost of risk, but also overlays and other areas in terms of cost of risk. So, we will enter more in Russia, approach in the Russian management crisis approach. So, we will have to assess the problem and place the needed provisions also for the future. In case of not a significant recession, we see only limited increase in cost of risk would be 10 basis points, 20 basis points, but not more than this. In that case, we will -- probably we will not complete another reduction in terms of non-performing loans, and we will use the provisions that we have considered in budget in order to cover increasing inflows in terms of inflows generation for the future. That's all. We are now going to proceed with our next question. And the questions come from a Benjie Creelan-Sandford from Jefferies. Please ask your question. Yes. Good afternoon, everyone. Thank you for taking the question. I just had a question on net interest income. I mean, you've been very clear on the guidance for the outlook just in terms of understanding the dynamics a little bit better in 2022. Is it possible to share with us your average loan yield and your average deposit cost at the end of '22? And how that compares to the same time in the previous year? Or I guess on the deposit side, what I'm really asking is, what's your current beta versus your expectation going forward? And also what the TLTRO contribution was to 4Q NII? And then just one quick clarification, apologies if I missed it earlier. I think just on the regulatory capital headwinds, you guided to 70 basis points on model updates. Was there an additional impact on IFRS 17 on top of that? And if so, what was the number? Thank you. So, on the regulatory headwinds, we will have 70 basis points that is already including the 45 basis points. So that's all related to the internal model. It's mainly concentrated in large corporate internal model. And on IFRS 17, we will have 20 basis points, and that will be all the regulatory headwinds that we will have for the next year. So, there will be no more regulatory headwinds in our figures. The -- as I told, we will have also an increase in terms of risk-weighted asset coming from the business. And at the same time, we will have contribution from recovery of DTAs and net retained earnings. I don't know if I have understood your question on the regulatory headwinds. Then, I will answer on net interest income. The client rates in our cost base has moved from the end of 2021 to the end of 2022 from 0.14 to 0.20. That's the movement in terms of the cost base. And sorry, on the average side -- you have asked also the average side. We move -- no, that's -- on the total amount, considering also the medium term, also the wholesale is from 0.38 to 0.4. So, it's absolutely negligible, the movement on the cost of funding. At the same time, on the asset side, we moved from a total of 1.6 to a total above -- well above 2.24. That will be the figures. Then you can elaborate, sorry, on this point with Marco Delfrate and Andrea Tamagnini, they will give you all the figures and all the details that you want to share with them. We are now going to proceed with our next question. And the question comes from the line of Britta Schmidt from Autonomous. Please ask you question. Yes. Hi. Thanks for taking my questions. My first one would be on the â¬29 billion RWA decline. What drove the thinking to undertake such a significant reduction now? And could you perhaps also explain as to whether the regulatory headwinds might have been higher had you still had these assets on balance sheet? And my second question will be coming back to the potential inducement fee ban. I understand that as a largely captive business, you're a little bit isolated from that. But do you think that the impacts on other players could lead to a margin contraction in the asset management market overall that could potentially impact you? Thank you. Sorry, I didn't understand very well your question, because the line was -- there was a noise in the line. So, I didn't understand very well. Could you repeat, please, the two questions? Okay. The first question was just on the â¬29 billion RWA decrease in the quarter, which is very substantial. What drove the timing of that to undertake this now? And would these assets have potentially increased the regulatory headwinds going forward, if you still had them on balance sheet? And the second question was regarding coming back to the potential inducement fee ban. I understand you're captive business and you're differently impacted there. But if, let's say, led to a decline in overall asset management margins in the sector for some of your peers, do you think there could also be an impact at Intesa coming just from the pricing of these products? Thank you. Okay, thank you. So, looking at the â¬29 billion reduction in risk-weighted assets, only a portion of this is connected with our activity in large corporate. So, we are talking about more or less between â¬5 billion and â¬7 billion risk-weighted assets. And so that portion could have been affected in case of remaining in our figures by the increase in terms of the model. The other portion is efficiency. And considering that we have already, as you know, a potential impact of 45 basis points, we originally planned to reduce in the first quarter for an amount in line with the management of 45 basis points. When we understood working with the ECB that the impact could have been higher than this, we decided to accelerate other actions that could have been taken during the three years of the business plan. But in any case, for us, it is business as usual. So, it is only the dimension and concentration of action, but not something so complex to realize. In terms of assets under management and the potential impact on the yield, I have to tell you that looking at the kind of products and especially the kind of strong franchise that we have with our clients, it is difficult to say that we can have a significant impact coming from some reduction in terms of commissions due to the fact that market is changing conditions. So, it is clear that if all the markets will have a reduction of 1 percentage point. So, it is unbelievable that we will have no impact. But if the impact would be 10 basis points, 20 basis points, 30 basis points, I have to tell you that our leadership is so strong that I don't see a significant impact for us. We are now going to proceed with our next question. And the questions come from the line of Andrea Filtri from Mediobanca. Please ask you question. Yes, good afternoon. I have a question on insurance and one on DTA. On insurance, could you please remind us of the level of life traditional reserves at Intesa Sanpaolo Vita and the amount of unrealized capital gains or losses it has today possibly before and after policyholders' interest? And linked to that, what is the lapse rate in Q4 '22 versus Q4 '21? So, for insurance, Andrea, I will -- so we are -- you are so interested in our insurance business that I will suggest to you that we can fix a meeting not only with the Delfrate, but also with Nicola Fioravanti that is the head of our insurance division. So, you can have all the figures and the details that you need in order to make your analysis, and we will set also next week, if you want. So, you can have all that the position of the insurance business made with our people and in complete transparency with all the people that are managing the business. We remain with a significant amount of potential capital gain and strong reduction with the past. This is obvious, but this remains an area in which we will have positive results. But in any case, to give you all the detail, you can have clear access to my people within the organization. Looking at DTA, we maintain another tranche of these DTAs related with the UBI acquisitions that are in the range of â¬300 million, â¬350 million, and we will decide the timing in which we will have this contribution to net income. It is not included in our outlook. We are now going to proceed with our next question. And the question comes from the line of Hugo Cruz from KBW. Please ask you question. Hi, thank you. I'd like to ask about the costs. Can you tell us -- you said flattish to up in 2023, and there were some contingencies built in 2022. So first of all, I'd like to understand what kind of inflation assumption and ideally staff cost inflation you assumed for 2023? I think there's discussions with the trade unions and obviously, you as the biggest bank, perhaps might have a better insight into those discussions than the other banks in Italy. And then in terms of the contingencies, perhaps, I was wondering if they are related to Isybank. So, it would be great if you could give us some insight into how much you've already invested into Isybank, and how much you expect to do as well in 2023. So, I just wanted to understand if there are any kind of CapEx that was spent in 2022, that's not going to be there anymore in 2023? That's it. Thank you. On the cost base, you have to consider that in our budget, we have considered an amount of cost coming from inflation, and inflation has been considered on the average from [indiscernible] that could be between â¬500 million and â¬600 million. So, it is the initial impact coming from the inflation. And then we made a number of actions in order to mitigate the impact, reducing close to zero, the dynamics of the total cost. On the personnel cost, we have embedded some figures, but due to the fact that we are in a process of negotiation with trade union, I prefer not to give any kind of indication. So, allow me to be on this point, just talking about the total cost of personnel that should be in reduction in 2023 in comparison with 2022. The contingency [indiscernible] for an amount that would be in a range between â¬200 million and â¬300 million. So, moving the total dynamic of cost in negative territory -- in case of need, obvious, but in case of such an increase in revenues, our cost income ratio will be so positive in terms of dynamics that we will analyze if needed, contingency plan. On Isybank, we made an investments in -- during 2022 above â¬100 million, and the expectation in 2023 would be in a range of â¬150 million, just for Isybank. Then, we have all the technological infrastructure that we move into the bank because our project is then to transform the platform into the IT system of the majority of the retail activity of the group. We are now going to proceed with our next question. And the questions come from Andrea Lisi from Equita. Please ask your question. Andrea Lisi, your line is open. Sorry, I was on mute. Thank you for taking my question. The first one is on what do we expect also based on what are observing on the evolution of the economy on -- in terms of loan growth going on in particular for 2023? And also, the deposit trajectory, considering on the one hand, your strength that you have with [indiscernible] but also on the other hand at that there is competition from others and also investment in short-term liquidity can be remunerative in some way. So, what do you expect on the deposit trajectory? And the second question is on overlays. You accumulated overlays in the quarter. In case you do not use overlays in 2023, do you expect to lease them? Or do you think it is more safe to wait and see also what will happen for the following years? Thank you. On overlays, we will see. It will depend on the assumption related, in particular, on the commercial real estate activity and the [indiscernible] sectors. So that will be the main reason to maintain these overlays. At the end of 2023, we will make all the analysis that we need in order to understand if there is room to maintain or not. Looking at the economy, the loan growth is reducing the speed. So, it is clear that in the market, there is a lower demand in terms of loans. Company, corporate clients are using their own deposits. So that's what's happening in the country. We see a strong position in any case, strong financial position of the Italian corporate sector. So, we remain very positive on the corporate sector in our countries. And looking at deposits, the only area is, as I told, is the corporate sector that is reducing some portion the amount of deposits. Families depend on the financial position, but remain an area in which families continue to maintain a significant portion of the savings. We have no further questions at this time. I will now hand the call back to Mr. Carlo Messina for closing remarks. Please go ahead. In the first quarter results, we will analyze all the areas and the more precise figures on the real outlook and not the estimate outlook for 2023. And at the timing, we will be in a position also to give you more detailed information on the trajectory also for [2024] (ph). We hope to have all the information coming from the Central Bank on the future view on the real economy and the monetary policy of the ECB, and at the timing, we'll be in a position to give full disclosure on -- for the future and the significant upside that we have for the future.
EarningCall_586	Hello, and welcome to the Adtalem Global Education Second Quarter Fiscal Year 2023 Earnings Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. Thank you. I'd like to remind you that this conference call will contain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995 with respect to the future performance and financial condition of Adtalem Global Education that involve risks and uncertainties. Actual results may differ materially from those projected or implied by these forward-looking statements. Potential risks, uncertainties and other factors that could cause results to differ are described more fully in Item 1A Risk Factors of our most recent annual report on Form 10-K filed with the SEC and our other filings with the SEC. Any forward-looking statement made by us is based only on the information currently available to us and speaks only as of the date on which it was made. We undertake no obligation to publicly update any forward-looking statement, whether written or verbal that may be made from time to time, whether as a result of new information, future developments or otherwise, except as required by law. During today's call, our commentary will refer to non-GAAP financial measures, which are intended to supplement, do not substitute for our most direct comparable GAAP measures. Our press release, which contains the GAAP financial and other quantitative information to be discussed today as well as reconciliation of GAAP to non-GAAP measures is available on our website. Please note that all financial results and comparisons made during today's call are on a continuing operations basis, exclude special items and are in comparison to the prior year period unless otherwise stated. Telephone and webcast replays of today's call are available for 30 days. To access the replays, please refer to today's press release. We'll begin today's presentation with prepared remarks from Steve Beard, Adtalem's President and Chief Executive Officer; and then hear from Bob Phelan, Senior Vice President and Chief Financial Officer. Following the prepared remarks, we will have a question-and-answer session. Thank you, Chandrika. Good afternoon, everyone, and thank you for taking time to join our second quarter fiscal year 2023 earnings call. Our teams delivered another solid quarter. For the fiscal second quarter, we delivered revenue of $363 million and adjusted earnings per share of $1.17, with adjusted EBITDA margins of 25.4%, reflecting a 220 basis point improvement over the prior year. These results demonstrate our commitment to serving our students and driving operational discipline across the organization, supporting long-term profitable growth as we continue to position Adtalem as a leading provider of professional talent to the health care industry. In the second quarter, we continued to maximize operational effectiveness across our institutions through a range of initiatives. To enhance the student experience, we continue to deploy new capabilities focused on driving improved persistence. We have introduced new affirmative registration tools to aid our students in the process of curating the courses for the upcoming term, providing selections that can be tailored to their individual interests as well as other criteria. This proactive approach also helps our teams prioritize students that might be at risk for not registering for the next term. As a result of these efforts, we're seeing a trend of improving persistence rates across each of our institutions. On the marketing side of the house, we continue to scale our capabilities in branding, paid media and web experience with a goal of further optimizing our marketing spend. In addition, we're adopting an approach to deploying that spend that is better balanced across the top and bottom of the marketing funnel, allowing us to build brand equity even as we drive improved enrollments. These efforts are occurring in the context of a broad range of transformational initiatives aimed at accelerating performance across the critical value-creating activities to drive sustained profitable growth. Moving on to results by segment. Our performance in the second quarter was largely supported by strength in Chamberlain and Med/Vet, partially offset by enrollment headwinds at Walden. Importantly, the margin expansion we delivered during the quarter was a direct result of our focus on cost discipline, coupled with solid execution on capturing synergies in what remains of the Walden integration. Looking at our segments, total enrollment at Chamberlain continued to show modest improvement during the quarter, supported by the success of campus-based BSN programs along with the growth of BSN Online. Qualified medical staff are now needed more than ever due to the national shortage in nurses as evidenced by the recent strike we saw in several New York City-based hospitals. As the leading U.S. nursing educator, we expect Chamberlain to continue to play a key role in filling these gaps and empowering students to make meaningful contributions to the profession. Within Med/Vet, while the second quarter was not an intake period for the segment, we continue to drive our efforts towards improving student enrollment and persistence rates. Now turning to Walden. Walden remains an important catalyst for Adtalem's transformation. We are making consistent progress in our integration efforts and expect to fully realize the benefit of Walden's unique capabilities, breadth of programs and the attractive synergy opportunities the combination affords. We remain confident in our ability to deliver improved enrollments and expect to see improving trends in the latter part of the year. In the meantime, we continue to invest in strengthening the capabilities of our student-facing teams across the segment. While our primary focus has shifted from integration to growth, synergy capture remains on track, and we expect to deliver the anticipated $30 million of cost synergies in year two of the acquisition. Our confidence in the near-term prospects for Walden remain high. We expect the investment to deliver its intended results. And just as importantly, we expect it to play a critical role in helping us realize our ambition of being a category of one in health care education. Moving on to academic highlights. Our commitment to expanding access to quality education and driving superior outcomes for students remains at the core of what we do. This is underscored by several achievements in the quarter. We're pleased to note that Walden continues to rank first in granting research doctoral degrees in health sciences, psychology, social sciences, business, education, and other non-science and engineering degrees. At Chamberlain, we announced the launch of a home health specialty initiative with funds from a $1.2 million grant from the American Nurses Foundation. As part of this initiative, Chamberlain is developing an online didactic course for using these nursing programs in partnership with the country's leading home care and medical staffing franchise BrightStar Care. This course will provide nursing students broader access to home health and other specialties, which are in critical need of staffing. At Walden, weâre quite excited about the Believe & Achieve Scholarship program, which recently launched as a tool to enhance persistence for students enrolling starting in the February 2023 session. The program rewards persistence through the student journey and underscores our commitment to empowering students and ensuring that they realize their academic and professional goals. With that, Iâll address our guidance for the year. We are reaffirming our fiscal 2023 guidance for revenue to be in the range of $1.38 billion to $1.45 billion and adjusted earnings per share of $3.95 to $4.20. For the balance of the year, we remain optimistic that the demand environment will continue to improve modestly. Most critically, we are confident that our strategic investments in brand and student experience coupled with our disciplined operational focus will support maximized value creation for our shareholders. We are optimistic about the future and the foundation we are building for the students we serve. Weâre executing on a number of transformational initiatives that will position Adtalem to be a key player in the evolving healthcare industry. These efforts are core to our recently launched Growth with Purpose program, which weâre excited to tell you more about over the coming months. With hundreds of thousands of medical professionals having exited the space in recent years, along with growing demand for better working conditions, we believe that the programs we provide to address critical shortages in healthcare talent are more important than ever. Our initiatives are centered on supporting enrollment, while enhancing student outcomes and propelling our graduates toward gainful employment. This is what drives Adtalemâs impact on our communities, which is central to our Growth with Purpose. We remain enthusiastic about what lies ahead. Thanks, Steve and hello everyone. Today, Iâll review our financial results and key drivers for our performance in the second quarter. Later in my remarks, Iâll discuss our expectations and assumptions for the fiscal year 2023. Iâll begin with a summary of our financial performance starting with the top line. Revenue in the second quarter decreased 2.1% to $363.3 million compared with the prior year. Consolidated adjusted operating income for the quarter was $79.5 million, and adjusted EBITDA was $92.1 million, an increase of 13.2% and 7% respectively. Adjusted EBITDA margin was 25.4% or 220 basis points higher than the prior year. This continued year-over-year margin expansion was driven primarily by operational efficiencies and a realization of cost synergies. Adjusted net income for the quarter was $54.2 million and adjusted earnings per share was $1.17 or 56% higher than the prior year. Next, Iâll discuss financial highlights by segment. The Chamberlain segment reported second quarter revenue of $141.4 million up 1.6% when compared with the prior year. Adjusted EBITDA was $37.7 million, an increase of 17% from $32.2 million in the prior year. The 360 basis point expansion in adjusted EBITDA margins was primarily the result of value capture initiatives and lower labor costs. Total student enrollment during the quarter decreased modestly by less than 1% compared with the prior year due to headwinds experience and post-licensure nursing, partially offset by continued improvement in enrollment and pre-licensure programs. Additionally, improvement in overall persistence across the segment continues to progress as a direct result of our concentrated efforts on the student experience and persistence initiatives. Turning to Walden. Revenue in the second quarter was $131.9 million, down 6.2% from $140.6 million in the prior year. Adjusted EBITDA was $31.6 million or 11.5% lower year-over-year. Total student enrollment decreased 7.8% year-over-year due to downward pressure in our post-licensure nursing programs, which is partially offset by year-over-year improvement in overall student persistence. In the Med Vet segment, revenue in the second quarter decreased 1.6% compared with the prior year to $90 million, while adjusted EBITDA was $26.3 million or 8% higher than the prior year, primarily driven by continued benefit from cost management and synergy realization. Now turning to cash flow, balance sheet and capital structure. Net cash provided by continuing operations year-to-date was $42.3 million and capital expenditures totalled $9.8 million. As a result, free cash flow year-to-date is $32.5 million an increase of $66.3 million compared with the prior year. As a reminder, we define free cash flow as cash provided by continuing operations, less capital expenditures. During the quarter, we continue to progress on our financial strategy by deploying capital to strengthen the balance sheet. We repurchased $50 million of our Term Loan B resulting in gross debt of $708 million and net leverage of 1.4x as of December 31, 2022, remaining well within our targeted range. We have now reduced our outstanding debt by 57% from the same time last year, a reduction of over $940 million. Looking ahead, we intend to continue to strengthen our balance sheet and deploy capital to maximize returns for our shareholders, while also focusing on reinvesting in organic growth opportunities for our businesses. Moving on to our outlook. As Steve mentioned, we are reaffirming our guidance revenue to be within the range of $1.38 billion to $1.45 billion and adjusted diluted earnings per share of $3.95 to $4.20. We also remain on track to deliver $30 million of cost synergies during fiscal year 2023. With respect to our guidance, Iâd like to remind you that our guidance is for the full year only and we did not provide specific quarterly guidance. Our results of operations can vary from quarter-to-quarter based on the timing of certain expenses, which are more variable in nature. In Q3, we anticipate a higher level of expenses than in the current quarter as certain costs originally forecasted for Q2 will be recognized in subsequent quarters this year. As such, while we are affirming our guidance range for the full year, we anticipate our mix of earnings by quarter will change due to the shift of certain expenses out of Q2 and into the second half of the year. In closing, Iâm pleased with the results we delivered this quarter. Look forward to driving further progress on our goal of leveraging both operational discipline and financial strength to position Adtalem for long-term growth. Yes. Thank you. What expenses got pushed back to Q3? And I guess what Iâm wondering is was marketing expense pushed back and should we read anything into that in terms of the demand environment taking longer to improve or not? So to answer the question, marketing was a big piece of that. And no, you shouldnât read into that. What I would say is it was more around the branding campaign that weâre launching and that is happening more January, February timeframe, originally anticipated to be slightly earlier in the second quarter. Yes. Jeff, what I would add to that is, as you heard us say, weâre rebalancing our investments across the top and the bottom of the funnel making incrementally more investment in brand. Thereâs just â with production and some of the other things weâre working on, there have been timing shifts that moved that into the second half of the year. Got it. And then maybe this is just me miss modeling because you donât give this level of guidance. But Chamberlain and Walden revenue was better than at least I was expecting. Is that the persistence gains are increasing relative to the rate that you were seeing last quarter or a couple of quarters ago? Or are you starting to see any sort of improvement in new enrollment trends? So total enrollment improved sequentially at Chamberlain and also at Walden. Persistence is a big piece of that. And as you know, weâve been focused quite a bit on driving improved persistence because a lot of that is within our control. There is some new enrollment elements of that particularly at Chamberlain when you think about our pre-licensure programs, both campus based BSN and BSN online. But to be fair, persistence â gains in persistence have been really attractive for us and weâre quite excited about that. Thatâs great. And then just last med vet, the year-over-year revenue trend I think was worse this quarter. It wasnât an intake period. Was there any shifting in the timing of the academic calendar relative to last year? Or just any comment on med vet revenue? No. The intake cycle is the same as itâs been in prior years. So we are obviously focused on our upcoming enrollment cycle at med vet. But enrollment sequentially at med vet obviously year-over-year has been a good story for us. And weâre working hard to ensure that continues. Yes. I guess Iâm asking less about intake. I donât know if thereâs like a different number of academic days that fell into the fiscal quarter this year versus last year that youâre recognizing revenue on. I thought the year-over-year revenue trend was several points worse this quarter than it was last quarter, and it wasnât clear to me why that would be the case. Right. Okay. Now what youâre asking is the enrollments were up at the 3.4% I believe that weâve reported, but the revenue was slightly down and thatâs really due to just we had a little bit higher scholarship cost this quarter. Thanks so much. Wanted to go back to Chamberlain. In your comments you talked about pre-licensure enrollment going up, post-licensure enrollment still going down. Can we talk about the rate of change between this last quarter and the second quarter that you just reported. Are pre-licensure enrollments increasing at a faster, slower rate and our post-licensure enrollment decreasing at a faster or slower rate? Any color would be great. Sure. So as we've suggested before, we're anticipating a sequence of recovery in enrollments across our program mix. As we've said, we believe post-licensure nursing is going to be the last of those elements to recover from an enrollment perspective because of some of the unique attributes of that prospective student population. We have said that we expected recovery at the Med/Vet segment first to be followed by pre-licensure nursing among our large categories with post-licensure nursing lagging behind. So I think what you're seeing is that sequence play out in real-time. So it's not so much that post-licensure nursing is worsening, it's just that sequentially, we're seeing pre-licensure nursing enrollments come back before post-licensure consistent with our expectations. Well, as you know, Jeff, we don't report new enrollments. But obviously, the total enrollment number is a mix of new enrollment and persistent. All right. Let me shift over to Walden then. You talked about the weakness in post-licensure nursing. Again, the same kind of question, is it getting less worse or still kind of stable where it was beforehand? So if you look at what we've reported from a total enrollment perspective at Walden, what you see is a â I don't love this term but a deworsening of the trend there. And as you know, Walden is all post-licensure nursing. So we're encouraged that on a year-over-year basis, that trend is improving. And again, I think that's consistent with the narrative that we've taken to market about the timing of recovery across our large categories of product. All right. And then just sticking with Walden, I'm sorry, just one more. I know you don't give specific segment guidance, I understand that. But just from a theoretical perspective, with all the synergies that you're going to be gaining or you have been gaining, should Walden margins expand on a year-over-year basis without actually seeing total enrollment growth? Or do we have to wait for total enrollment growth for that to happen? I think importantly, the synergies are not just with the Walden segment. So when we're talking about that, we're really talking about it across the entire organization. So we're seeing benefits from cost reductions and the synergies throughout Chamberlain, Met/Vet as well as Walden, all three. Yes. The important thing to remember, Jeff, is that we used the Walden transaction as a catalyst along with the divestiture of the Financial Services segment to really integrate the remaining postsecondary institutions because they're lifetime businesses. And what you're seeing, obviously, is the elimination of redundancies between Walden and Chamberlain and other institutions, but also the benefit that comes from running all of these like-kind businesses on similar platforms. So part of it, obviously, is cost that comes out of Walden, but there are also costs we can take out of the legacy Adtalem institutions as we run a similar play because we've got similar business models in the portfolio. Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments. Thank you, everyone. Really appreciate the time and attention this evening. Again, a solid quarter for us. We're excited about the trends that we're seeing in the business. We're excited about our ability to expand margins and take advantage of some really attractive operating leverage, and we look forward to checking in with you a quarter from now. Thank you so much. Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
EarningCall_587	Good morning, ladies and gentlemen, and welcome to the Sally Beauty Holdings conference call to discuss the company's fiscal 2023 first quarter results. [Operator Instructions]. Now I would like to turn the call over to Jeff Harkins, Vice President of Investor Relations and Treasurer for Sally Beauty Holdings. Thank you. Good morning, everyone, and thank you for joining us. With me on the call today are Denise Paulonis, President and Chief Executive Officer; and Marlo Cormier, Chief Financial Officer. Before we begin, I would like to remind everyone that management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent annual report on Form 10-K and other filings with the SEC. Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligation to update them. The company has provided a detailed explanation and reconciliations of its adjusting items and non-GAAP financial measures in its earnings press release and on its website. Thank you, Jeff, and good morning, everyone. We're pleased that fiscal 2023 is off to a solid start as our teams remained focused on serving our customers and made excellent progress on our new strategic initiatives to drive long-term growth and profitability. First quarter net sales came in at $957 million. Comparable sales increased 1% versus last year and 7% on a 2-year stack basis. Adjusted gross margin remained strong at 51%. Adjusted EBITDA was $126 million, and we generated positive free cash flow of $30 million. Our business remains resilient as we delivered strong performance in the first quarter against the backdrop of persistent inflationary pressures. Purchasing behavior among both our Sally customers and BSG stylists remain fairly consistent with the trends we've seen in recent quarters. At both Sally and BSG, average ticket increased, driven primarily by average unit retail, while transactions were down slightly compared to the prior year. Promotional activity was up modestly at both Sally and BSG in the quarter as our customers responded to value messaging. Of note, this increased promotional activity was funded by support from our vendors, enabling us to maintain our strong gross margin profile. During the quarter, we successfully implemented our distribution center consolidation and store optimization plan, which strengthens our supply chain network and positions us to maximize the value of our large store portfolio going forward. Inventory from our Oregon and Pennsylvania DCs has been successfully transferred to larger facilities, and the majority of our 350 planned store closures were completed with minimal disruption. Early reads on sales recapture are trending in line with our expectations, and we look forward to sharing a broader update next quarter. In the first quarter, e-commerce sales increased 14% and comprises 9.5% of total sales, driven by the strength of our convenient fulfillment options, including 2-hour delivery and Buy Online / Pickup In-Store. On our last earnings call in November, we shared our vision for the Sally Beauty Holdings of the future and outlined that the three new strategic initiatives we'll be advancing in the coming years. As a reminder, these include: enhancing our customer centricity, growing high-margin owned brands at Sally Beauty and amplifying innovation and increasing the efficiency of operations and optimizing our capabilities. Let me update you on our progress across each of these. First, enhancing our customer centricity. As an organization, we're focused on our loyal customers as well as acquiring new customers through our marketing programs, differentiated product offerings and professional color and care and our strategic initiatives. Our goal is to provide our customers with an unparalleled experience whenever and however they engage with us. We have 17 million active loyalty members at Sally U.S. and Canada, representing 77% of our sales in Q1. And our rewards credit card at BSG comprised 9% of sales for the quarter. Additionally, our Net Promoter Scores continued to remain at all-time highs, with Sally at the low 80s and BSG in the high 60s. We know who our customers are, we understand their needs, and we're building on this strength to drive increased engagement and lifetime value. At BSG, the launch of our strategic partnership with SalonHQ is meeting with positive response as we get to onboard stylists, help them create their digital storefront and provide them with marketing tools to engage with their customers. This new platform was created for our stylist community as a means to empower them to build more value-added and profitable businesses, and we're pleased with the initial traction we're seeing. Turning now to Sally, where inspiration, education and advice are key tenets of the business. Our associates and certified color consultants take tremendous pride in serving our customers in store, and we're expanding upon this core competency by increasing our virtual color experts and piloting our studio by Sally stores. Our virtual color experts are accessible through live video calls conducted on-site in our stores, bringing our customers this higher level of touch and professional advice ensures they are set up for success across every step of their hair color journey and further elevates Sally as the leader in professional hair color and care. Following a successful pilot, we brought this to 45 locations in fiscal 2022 and added another 30 stores in Q1 for a total of 75 at quarter end. Next, we'll be piloting this service on our Sally website, offering those scheduled appointments and on-demand consultation beginning in the second half of fiscal 2023. Turning to our new studio by Sally concept stores. We're on track to launch our first pilot location in Dallas during the second quarter and plan to open an additional six studio stores this fiscal year. As a reminder, these stores will include a DIY-centric salon where customers will receive education and training on how to achieve their desired results. Studio by Sally will allow us to leverage our competitive advantages and omnichannel infrastructure to engage, educate and empower our customers utilizing a digital first focus. We believe there's an opportunity to grow this concept to 100 locations throughout the U.S. over the next 3 to 4 years and look forward to keeping you updated on our progress in year one. Moving on to our second strategic initiative, growing our high-margin owned brand penetration in Sally and amplifying product innovation in Sally and BSG. We're staying at the forefront of innovation and have demonstrated good progress towards our goal to grow our high-margin owned brands in Sally. In the first quarter, we completed the initial rollout of bondbar, our new line of pro-quality bonding products at accessible price points and expect to be fully launched with all SKUs by the end of Q2. Also notable during the quarter was the strong performance of our Wunderbar, hair care brand, and XP-100 color brands in Europe. Owned brand sales penetration for the Sally segment reached 34% of sales in the first quarter, up from 33% of sales at year-end, and we believe we can grow that to 50% penetration over the next 4 to 5 years, while growing our overall sales low to mid-single digits. We're also bringing units to key categories through store reset. For example, we're seeing positive customer response to our nail reset at both Sally and BSG. Additionally, we're leaning into textured hair space with the recent introduction of five new brands in our CosmoProf stores supported by a broad-based marketing campaign that will kick off this month. Turning now to our third strategic initiative, increasing the efficiency of our operations and optimizing our capabilities. This encompasses three areas of focus, including optimizing our store base, consolidating and leveraging our enhanced supply chain and capturing efficiencies by rethinking the way we work. As I outlined earlier in the call, our teams have largely completed the DC and store optimization plan with minimal disruption and the successful transfer of product to our larger facilities. I'm also pleased to note that a significant portion of our workforce in the affected stores have accepted positions in other locations. Additionally, the integration of our expanded Regis partnership is complete, and we are on track to double our sales volume in fiscal 2023. Lastly, the work under our Fuel for Growth initiative continues to be underway as we focus on ways to more efficiently steward the business as we seek to maximize profitability and increase shareholder value over the long term. We feel good about how we're positioned and the way we're advancing the business through our new strategic initiatives. We have incredibly talented associates across the organization who are passionate about delighting our customers and inspiring a more colorful, confident and welcoming world. We are confident that our new strategies in concert with our core capabilities and infrastructure provide us a significant runway for growth in the coming years. Over the long term, we believe the business is positioned to generate low to new single-digit net sales growth, gross margins over 50% and low double-digit operating margin. Thank you, Denise, and good morning, everyone. We're pleased to begin fiscal 2023 on strong footing, delivering first quarter results in line with our expectations and making consistent progress against our strategic initiatives. First quarter net sales of $957 million declined 2.4%, reflecting the combination of 395 fewer stores and 150 basis points of unfavorable foreign currency impact. Comparable sales were up 1% versus a year ago and up 7% on a 2-year stack. We continue to see strong digital performance with global e-commerce sales increasing 14% to $91 million on a constant currency basis and representing 9.5% of total net sales. We maintained strong adjusted gross margins, which came in at 50.8%, down 20 basis points for last year. Increased product margin at Sally Beauty driven by pricing leverage and higher owned brand penetration was offset by lower margin at BSG due to a channel mix shift between stores and our expanded Regis business. Turning now to operating expenses. Adjusted SG&A totaled $391 million, an increase of $7 million versus a year ago and reflects higher labor and personnel costs. Looking at the full year, we are on track to achieve the expected expense savings we announced last quarter under our DC consolidation and store optimization plan. Total anticipated savings of approximately $50 million is expected to serve as a partial offset to increasing pressure from labor costs as we move through fiscal 2023. We expect SG&A levels for the second quarter to remain similar to the first quarter, reflecting the timing of our wage investments and benefits from our optimization efforts. The combination of our healthy gross margins and prudent cost control enabled us to invest in our new strategic initiatives, while also delivering on the bottom line. First quarter adjusted operating margin was 10%. Adjusted EBITDA margin was 13.1% and adjusted diluted earnings per share came in at $0.52. Looking at segment results. First quarter comparable sales increased 3% at Sally Beauty and were up 7% on a 2-year stack. Let sales declined 2.1%, driven primarily by 210 basis points of unfavorable foreign currency impact and reflects the fact that we had 383 fewer stores in operation versus a year ago. At constant currency, segment e-commerce sales increased 13% to $35 million or 6.4% of segment net sales for the quarter. For the global Sally segment, color was up 3% and care declined 4%, including the impact from store closures. At Sally U.S. and Canada, color increased by 5%, while gray coverage was up 10% and comprised 77% of the color categories. Gross margin at Sally expanded 50 basis points to 58.9%, and reflecting solid product margins, driven primarily by pricing leverage and higher owned brand penetration. Segment operating margin increased to 18%. Moving to the BSG segment. Comparable sales declined 1.5% as BSG was lapping last year's strong demand from stylists, who were restocking their salons during the reopening. On a 2-year stack basis, BSG comps were up 7%. Net sales declined 2.7%, which reflects 60 basis points of unfavorable foreign currency impact and 12 fewer stores versus a year ago. On a constant currency basis, segment e-commerce sales increased 14% to $55 million or 13.6% of segment net sales for the quarter. The colored category was down 3% and care declined 2% at BSG as our stylists continue purchasing closer to need. During the quarter, we did continue to see strong momentum with express coloring products. Adjusted gross margin at BSG decreased 130 basis points to 39.8%, primarily driven by product -- lower product margins due to the sales channel mix shift between the segment stores and expanded Regis partnership. Segment operating margin came in at 12.2%. Moving to the balance sheet and cash flow. We ended the quarter with $99 million of cash and cash equivalents and $65 million outstanding under our asset-based revolving line of credit. Our net debt leverage ratio stood at 2.2x. Inventories have continued to normalize as the supply chain disruptions we experienced in 2022 have mostly subsided, notwithstanding some choppiness with inventory receipts in certain SKUs. Quarter-end inventories were $987 million, down 1.9% from a year ago. We generated strong free cash flow of $30 million in the first quarter. For the full year, we continue to expect to return to free cash flow generation in the range of $175 million to $200 million, providing us with the financial flexibility to invest in our new strategic initiatives to drive long-term growth. Turning now to guidance. We are reiterating our full year expectations as follows: comparable sales, notwithstanding a notable change in consumer behavior are expected to increase by low single digits compared to the prior year, driven by growth in some categories, sales transfer from store closures, our expanded Regis distribution and our new strategic initiatives. Net sales are expected to decline by low single digits compared to the prior year. This reflects approximately 150 to 200 basis points of unfavorable impact of store closures, net of expected sales recapture from our optimization efforts as well as approximately 150 basis points of anticipated impact from FX headwinds. At the end of fiscal 2023, store count is expected to be down 6% to 7% compared to the end of 2022 due to our store optimization plan and a small number of new store openings. Gross margin is expected to remain above 50% and adjusted operating margin is expected to be in the range of 8.5% to 9.5%. This reflects increased investments in store labor, partially offset by an expected benefit to operating earnings of approximately $10 million related to our distribution center consolidation and store optimization plan. From a cadence perspective, keep in mind that the second quarter is historically our lightest sales quarter. And as I outlined earlier, we anticipate that further investment in wages will begin ramping up this quarter. As a result, adjusted operating margin is expected to decline sequentially from the first quarter to the second quarter. Looking further ahead, we remain confident that our initiatives to drive top line growth build scale and further optimize our operating model, will enable us to return to double-digit operating margin in fiscal 2024 and beyond. Denise and Marlo, regarding what you're seeing out there in the market, I would love your thoughts on the color trends relative to restocking. And Denise, as everybody thinks a bit about inflation. Is that still impacting traffic and customer behavior? The second question I had is on customer lifetime value and engagement. You mentioned opportunities there as well as your loyalty program. Would love you to elaborate on what you see as lower hanging fruit. And then Marlo, on the store progress in terms of store optimization, how have the recapture rates been looking relative to your expectations? Good morning, Oliver. I hope you're well. Let me start with the beginning of those questions, and then I'll throw it over to Marlo to help on store optimization. So first of all, we're seeing color, a very healthy in both of our businesses in both BSG and in Sally. In Sally, we were up 10% in gray coverage and 5% overall in Sally U.S. And interestingly, similar to some things I think folks are reading in the news, great trends around brunette colors, great trends around more copper colors. So people going a little darker right now, but seeing the efficiency of the offering versus what bonding might be, which could be more expensive. But thrilled to see people resonating and coming in and shopping with us, in particular we have an always on buy 4 and save 20% on some of our brands. And we've seen that nicely have frequency, be consistent for our customers, where earlier last year, we did not have that promotion and we saw people trending back the frequency with which they colored. So we're really thinking that, that's helping them keep their pantry loaded and pantry stock. On the BSG side, I think the important note to remember, color is still very healthy for us. But this time last year, so Q1 last year, stylists were heavily restocking as the end of the COVID restrictions were really coming to bear, and we are seeing supply chain disruptions. So customers bought what they could when it was available. I think this year, what we're seeing is they have been working through that inventory. They continue to buy closer to need. But color remains healthy in the business. More broadly on the inflation front and customer behavior. We haven't seen a meaningful change in trend. Like I said, I think the change in trend we've seen a little bit more is people going a little darker color in their hair. But that same level of conservatism about extra items in the basket remains both for our stylists and for our customers coming in. But that said, we're pleased in our nail category with the reset. But when we can bring out some newness. We are able to get customers thinking about that category, maybe a little bit more than they were a few quarters ago. On the customer lifetime value, we're very realistic that we don't capture all of the wallet share of our customers. And so our focus with our loyalty program are focused on education and expertise, our focus on convenience with 2-hour delivery and BOPIS are the things we're really pushing on to drive more of that share of wallet with our customers. And you'll see us continue to do that as we go forward, inclusive of things around our customer-centricity initiatives. So our Sally studio stores and focusing more on education, our virtual color expert making it that much more of a reason to come to value to get your expertise and advice that you need. Thanks, Denise. Yes, in terms of our store optimization, just as a reminder, we spent the good part of a year really piloting and studying our closure model. And so as we analyze customer behavior, monitored recapture rates, we are pretty confident as we went into this closure plan. And so we did do our significant closures in the early part of December. So it is early days, but so far, it's tracking. According to plan, we are recapturing at rates consistent with what we planned. It's early days. But we are pleased with those initial results and very pleased with the smooth execution of the program. That was really limited disruption and a good delivering everything that we expected so far. First, I wanted to ask you on your long-term growth outlook. If you could remind us what gets you from close single-digit comp to low to mid-single-digit sales, particularly -- and sort of timing around that, particularly after part and parcel with that, the store closures. Could you just talk a little bit about some of the timing and cadence of store closures for the year where you think you need to go to longer term? Sure. Let me start there. So when we think about the store closures for this year, they are largely complete. As Marlo indicated, 350 stores were in the closure plan and the vast majority of those were completed late in December. So that is, for the most part, behind us, and we're moving forward and excited about the recapture rate that we're seeing with our customers there. When we think about the broader path and what we're working on with our newer initiatives, and as we're going to build to our long-term algorithm, let me talk a little bit about it broken out into the years and how we see it evolving. So when we're talking about 2023, we've been focused on growing our own brands, which includes Ion, Strawberry Leopard, and bondbar, our newest launch, just to name a few of those, rebuilding our nail category and our care category, driving growth there as well. Doubling our Regis business, we were very excited to pick up that business last year. It is fully onboarded at this point. And as we wrap around from last year, the opportunity we have there to double the business as well as take us as a learning to see where we have opportunity with additional chain customers. Finally, with the store organization and DC consolidation complete, that's going to improve our operating profit performance. As we move later into 2023, we've talked about our stylist platform with SalonHQ and our virtual color expert experience. Both of those, we expect late in the year to start to ramp in terms of impact. And the stylist platform right now is in pilot in only one region today. So early on, but we're encouraged by our stylist response and continuing to grow that out. When you look into 2024, we do anticipate acceleration on a number of fronts. That includes own brands. It includes the stylist platform, which we hope will be in the process of expanding in the U.S. and then tailwinds from our e-commerce channel and the virtual color expert. Our Studio by Sally initiative, we're excited that we're on track to get about updated this year to that new format, including a store here in the Dallas area later in Q2. And that -- but that's really going to impact us longer term. So we expect that to be a pilot this year into next year. And the hope would be if it's looking positive, we'd expand that to support later in 2024 and into 2025. So hopefully, that gives you a shape of what we're working on. It all comes back to customer centricity, driving the business through innovation as well as own brands to really respond to what our customers want and need. And we're pleased that they continue to reward us with high NPS scores on both the Sally and BSG side as we are kind of on this journey with them. That's very helpful kind of sit well for my second question around your new own brands like bondbar, the ones you mentioned. But longer term, I mean, actually, right now, where is the contribution of own brands stands now? And where do you expect it to go longer term? And as you think about further penetration of your own brands, can you talk about like where you think it goes from here? Absolutely. This quarter, owned brands represented about 34% of the Sally segment. That's up about 1% from last quarter. but a nice steady growth through last year as we continue to roll out Strawberry Leopard and then just recently introduced bondbar. We're targeting that number for the Sally segment specifically to become about 50% of the business. We think it will take four or five years to get there in the path of getting there. This quarter, we'll fully roll out the rest of the bondbar line. We only had the first four SKUs in market through the holidays. But had good customer reaction, good performance out of those as they were starting to come to market. So we're excited to see that come to fruition with the rest of those SKUs coming online in Q2. And we'll continue to build around that in future years and as well as the strength of owned brands in our European businesses. So that will be a source of growth for us for the time to come. And importantly, as we move up that penetration curve with owned brands, it's a nice tailwind into our gross margin. We think that there's a nice complement between continuing to drive our owned brands and growing brands with our external vendors to have a great complement of product over time for our customers coming into their stores. And while owned brands is really a focus on the Sally segment, we are also excited about the innovation and continued growth that we can drive in our BSG business with a number of our pro-vendor partners, and we continue to see more innovation in the pipeline in that space as well. Two parts on SBS. I think, Denise, you mentioned that store closures largely done. I wanted to get maybe the U.S. store count where it is and then where that will eventually land. It sounds like similar to where it is now. And then in terms of the drivers of the comp, can you talk about product initiative versus price? And then you said recapture rate was in line, but could you quantify how much of the comp could have been helped by some store closures? Sure. Let me work through this in order. So in SBS, the closures are largely done. So as I mentioned, 350 stores was the plan, vast majority completed in Q4. Sally U.S., that leaves our store count at the end of this quarter at about 2,430 to 2,440. And broadly in SBS, it's about 3,150. Those are down pretty notably from a year ago, and we'll finish the year, as Marlo said, as an entity, inclusive of BSG down 6% to 7%. We think that this is about the right place to be. I think the piece I'd reemphasize is, all of the stores were 4-Wall EBITDA positive. The strength of the store optimization opportunity really came from such a positive reaction and ability to capture the sales transfer in the stores and into e-commerce. And we were very pleased with that in the test that we did, which enabled us to go after this incremental set of stores that we closed. So in our plan, we're targeting a 40% recapture rate. As Marlo mentioned, we're feeling good about where we are now. We're trending well, and we'll have more updates as we get beyond 3 to 4 weeks of those closures to be able to report out some numbers to you guys. But overall, a good place to be. We will continue to watch and understand the store recapture and see if there would be any incremental opportunity. But right now, we're -- we think that this is the right spot to be in. When you think about contribution to comp in the quarter, we actually -- it was late in December that we closed the stores. So in the first quarter, would not have been a meaningful count -- would not have been a meaningful contribution. Got it. Okay. One follow-up on BSG. Can you talk about the competitive landscape. Promotionality, any brand changes that could positively or negatively impact your business? And then I don't know -- you don't guide by business segment, but I think the comp should flip back to positive for the remainder of the year. Is that a fair assumption? Yes. So in reverse order, yes, we would expect a positive trend in BSG comps for the remainder of the year. Give or take, we lap some certain small events here and there. But the nation of the business is this quarter having a negative comp was really about comping a really strong number last year as salons were reopening. When we think about the competitive intensity, I mean, this business is a competitive business. Have we seen that strengthen or materially change? And not materially, right? We watch everyone at this point with stylists being a bit more conservative, continue to fight for every dollar of sales that we can get. We did see our vendors more willing to lean into some spot promotions that they fully funded to try to understand what might move their businesses, and we appreciated that support from the vendors as we went through the quarter. So overall, we're out there. All of our brands have new innovation coming in one sense or another as we work our way through the year, feel great about the relationships that we have with our key vendors. And just look forward to growing that business with them through the rest of the year. It's Blake on for Ashley. On the continued shift to own brands, it sounds like a lot of impact there from innovation, do you expect any trade-down impact as well if inflation were to continue? And then you mentioned launching some new products with marketing campaigns starting this month. What type of products or trends are you focusing right now for innovation? Yes. So first of all, on own brands, interestingly, many of our own brands are actually not the value brand in the store. So they could be priced at a midpoint price point compared to what else is available in our store The differentiator that we have with many of our own brands is the efficacy of the product. That's true with our Ion products. It's true with Strawberry Leopard and the vivid color space and newly launched bondbar, which is really a bonding offering at a great value price point compared to other offerings that are out there. So when we think about our owned brands, we call them owned brands for a reason because we do really focus on getting that right level of quality and cost of balance to be great value to the consumer, but pretty high-end products. In general, have we seen consumers looking for sources of value? Absolutely. I mentioned to Simeon, that our BSG business, our vendors had supported some additional promotional activity. That's true on the Sally side as well. In aggregate, promotions are not up meaningfully but a little bit more lean in where we can get value to customers is something that they're certainly looking for and certainly taking advantage of when that comes to life. That's super helpful. And then on the supply chain optimization, it sounds like you're going to be saving $50 million there and you've talked about a $10 million benefit to operating income this year. I was wondering if you -- should we think about you reinvesting the savings that the rest of that $40 million -- or is that just a timing benefit where that $10 million should grow over time? Yes, a little bit. So that's our optimization program, which includes both the DC consolidation as well as our store closures. And so the bulk of that work was done towards the end of Q1. So from a year-over-year perspective, you do get a little bit of wrap around. So what we described was a $50 million savings in SG&A, and that translates to $10 million of improvement on the operating earnings line. So we get a little bit of lift of that when you look at it on an annualized basis with a little bit of wrap around next year. In terms of looking at it from what is offsetting that, that program is designed to help us offset much of the cost pressures that we've seen. And most of those have been coming in terms of labor. And so what also is happening this year is our increased investment in our wages, which also goes into effect at the beginning of the calendar year. So there are times fairly close to each other so that you do see that offset as we progress through the year. We have made a conscious decision to invest in our labor. It's important. Our associates are a very important part of our differentiator. They are an important element of driving our growth initiatives. So we believe that's a very important investment to make, and that will step up as well as we have this current quarter in Q2. And I would just add the important part of getting from $50 million to $10 million this year that we've talked about on our call is -- the difference between that is really the sales loss. So while we'd love to recapture every dollar of sales, the difference between there reflects the fact that we believe we'll recapture 40% of the sales from the closed stores. So that's really the differential we're getting from the $50 million to the $10 million. This is Mike on for Carla. Just wanted to ask, have you guys thought about how you think about addressing the 2024 term loan maturity. Sure. Yes. So we've reported in the past, we're continuing to monitor the market for opportunistic refinancing opportunities. We are a strong cash flow generator, and that gives us the flexibility to continue to watch those markets. So we're continuing to do that. Great. And then this is a second one from us. Any difference in terms of kind of trade-down activity you're seeing on the Sally side or the BSG side? Yes, not materially different in terms of trade down. I think when you think about the BSG side, people are stickier to their brands. So they're just much more focused on getting value when value opportunities present themselves. But for the most part, stylists are pretty loyal particularly in color to what they know and what they use. So that's been pretty steady. And on the Sally side, it becomes a little bit more on the frugality side of just not adding the extra items to the basket. So color sales have definitely remained strong as people are continuing to take care of themselves and that natural part of their hair that they want to maintain. It's the incremental -- inclusive of higher ticket items like styling tools that over the last few years had actually been quite strong. And then as inflation started to tick up mid last year, those higher ticket items became more -- people became more conservative in their choice around purchasing those. So I'd say it's much more of the basket adds have gone down rather than necessarily seeing people trade down in terms of price point to this point. Great. Well, thank you all for joining this morning. We are very pleased with the start of our new fiscal year and excited about the strategy that we have in front of us, those to deliver this year and in future years to come and drive long-term shareholder value. As a final point, as I always do, I would like to thank all of our associates around the globe for serving our customers, taking care of each other and really helping us drive a successful business and a happy business. Thank you. And ladies and gentlemen, this conference will be available for a replay after 9:30 this morning and running through February 16 at midnight. You can access the AT&T replay system at any time by dialing 1866-207-1041 and entering the access code 723-2209. International parties may dial 402-970-0847. Those numbers again, 1866-207-1041. For international parties, 402-970-0847 with the access code 723-2209. That does conclude our call for today. Thanks for your participation and for using AT&T Teleconference. You may now disconnect.
EarningCall_588	Good afternoon, and welcome to the Fourth Quarter and Full Year 2022 Earnings Discussion for PennyMac Mortgage Investment Trust. The slides that accompany this discussion are available on PennyMac Mortgage Investment Trustâs website at pmt.pennymac.com. Before we begin, let me remind you that our discussion contains forward-looking statements that are subject to the risks identified on slide 2 that could cause our actual results to differ materially. Now, Iâd like to introduce David Spector, PMTâs Chairman and Chief Executive Officer, who will discuss the Companyâs fourth quarter and full year 2022 results. Thank you, Isaac. For the fourth quarter 2022, PMT reported a net loss attributable to common shareholders of $5.8 million, or $0.07 per common share, as solid income excluding the impacts of market driven fair value changes was more than offset by fair value declines in PMTâs interest rate and credit sensitive strategies. PMT paid a common dividend of $0.40 per share. Book value per share decreased to $15.78 from $16.18 at the end of the prior quarter. Dan Perotti, Senior Managing Director and Chief Financial Officer will review additional details of PMTâs financial performance later on in this discussion. During the quarter, PMT repurchased 1.2 million shares of common stock for $14 million at an average price of $11.80, significantly below current book value per share; and through January 31st, PMT repurchased an additional 22,000 shares, for an approximate cost of $278,000 at $12.63 per share. One of PMTâs greatest strengths is its ability to organically generate investments through our high-quality loan production sourced from correspondent sellers across the country. This quarter, $6.8 billion in UPB of PMT conventional correspondent production led to the creation of $127 million in high-quality mortgage servicing rights. With mortgage interest rates currently still above 6%, the most recent third-party forecasts for 2023 originations range from $1.6 trillion to $1.9 trillion, down meaningfully from 2022. While many industry participants have taken the appropriate steps to reduce capacity, it has been happening slowly and we believe overcapacity still remains. It is our expectation that mortgage REITs with diversified investment portfolios, efficient cost structures and strong risk management practices such as PMT are best positioned to manage through the volatility presented by the current market environment. Although returns in PMTâs credit sensitive strategies were impacted by wider market credit spreads in 2022, we have seen a material improvement in early 2023, which has driven improvements in structured product markets, and which may generate additional attractive investment opportunities over time. The underlying fundamentals of our lender risk share investments remained strong, consisting of seasoned loans with a weighted average current loan to value of 53%, benefiting from the strong home price appreciation we have seen in recent years. With delinquency rates at pre-COVID levels and current strong employment data, recent realized losses on our CRT investments have been limited. In our interest rate sensitive strategies, the fair value of PMTâs MSRs increased as interest rates increased and prepayment speeds have fallen significantly. With increased visibility with respect to the Federal Reserveâs projected terminal rate, we expect reduced volatility going forward for the segment. Additionally, higher short-term rates are expected to continue contributing to earnings from custodial balances and deposits in the coming quarters. Over the long-term, we believe the underlying performance of PMTâs MSR portfolio will be strong, supported by PFSIâs industry leading servicing capabilities, workflows and proprietary technology. Turning to correspondent production, though we expect volumes to remain constrained in the near-term given the reduced forecasts for originations, our customers are increasingly selling loans to stable capital partners like PennyMac as they seek to manage profitability and enhance liquidity. And with the exit of Wells Fargo from the channel, we expect to see additional opportunities for market share growth, largely driven by the smaller bank and community credit union sector of the market where Wells Fargo previously had a strong presence. With a strong capital base and consistent commitment to the channel, we believe PMT is well-positioned to continue leading as we provide our partners the stability and support they need to successfully navigate the current challenging mortgage market. We stand ready and able to absorb the volumes left by Wells Fargoâs exit and remain committed to being a strong capital partner for independent mortgage companies throughout the country. Now, I'd like to turn the call over to Vandy Fartaj, Senior Managing Director and Chief Investment Officer, who will talk about the outlook for PMT and its fourth quarter investment performance. Thank you, David. Letâs now take a look at our potential returns across the investment portfolio. On slide 7 of our fourth quarter earnings presentation, we illustrate the run-rate return potential from PMTâs investment strategies, which represents the average annualized return and quarterly earnings potential that PMT expects over the next four quarters. In total, we expect the quarterly run-rate return for PMTâs strategies to average $0.40 per share or a 10% annualized return on common equity. This run-rate potential reflects performance expectations in the current mortgage market. In our credit sensitive strategies, the potential return from PMTâs organically created CRT investments increased from last quarter, reflecting credit spreads that continued to widen in the fourth quarter. In the interest rate sensitive strategies, we expect increased returns on MSRs due to low levels of expected prepayment speeds, offset by increased financing costs and decreasing MBS returns. In correspondent production, our expectations are similar to the prior quarter due to the competitive production environment. This analysis excludes potential contributions from additional opportunistic investments and opportunities under exploration, such as new credit sensitive investments or the introduction of new products. Now, letâs discuss the drivers of fourth quarter results in our Correspondent Production segment. Total correspondent loan acquisition volume was $20.8 billion in the fourth quarter. 51%, or $10.7 billion were conventional loans and 49%, or $10.1 billion were government loans. As we mentioned last quarter, PMT began selling certain of its conventional correspondent loan production to PFSI, which totaled $3.9 billion in UPB. Purchase volume was 93% of total acquisitions, up from 90% last quarter. Conventional lock volume in the fourth quarter was $12.3 billion, up 15% from the prior quarter. $4.8 billion of these locks were for PFSIâs account. In the first quarter, PMT will continue selling certain of its conventional correspondent loans to PFSI at cost plus a sourcing fee of one to two basis points. PMTâs correspondent production segment pretax income as a percentage of interest rate lock commitments was 9 basis points, up from 6 basis points in the prior quarter and the weighted average fulfillment fee rate was 18 basis points, unchanged from the prior quarter. Acquisition volumes in January are estimated to be $6.8 billion, and locks are estimated to be $6.1 billion. PMTâs Interest Rate Sensitive strategies consist of our investments in MSRs sourced from our correspondent production, and investments in Agency MBS, non-Agency senior MBS and interest rate derivatives with offsetting interest rate exposure. The fair value of PMTâs MSR investments at the end of the fourth quarter was $4 billion, up slightly from $3.9 billion at the end of the prior quarter. The increase reflects both newly originated MSRs resulting from conventional production volumes and fair value gains. The UPB of loans underlying PMTâs MSR investments also continued to grow as new production more than offset runoff from pre-payments. While delinquency rates for borrowers underlying PMTâs MSR portfolio increased marginally from the prior quarter, they remain consistent with seasonal trends and our expectations for a conventional loan portfolio. Servicing advances outstanding for PMTâs MSR portfolio increased to $178 million at year end from $61 million at September 30th due to seasonal property tax payments. No principal and interest advances are currently outstanding, as pre-payment activity continues to sufficiently cover remittance obligations. Now, I would like to discuss PMTâs Credit Sensitive Strategies, which primarily consist of investments in organically-created CRT from PMTâs production, investments in non-Agency subordinate bonds from private-label securitizations of PMTâs production, and opportunistic investments in GSE CRT. The fair value of PMTâs organically created CRT investments as of December 31st was $1.1 billion, down slightly from $1.2 billion at September 30th, primarily due to prepayments. The outlook for our current investments in organically created CRT remains favorable as David mentioned, with a current weighted average loan-to-value ratio of 53%. The 60-plus day delinquency rate underlying these organically created GSE CRT investments increased slightly to 1.25% at December 31st from 1.14% at September 30th. We will continue to evaluate investments across the mortgage landscape and be prudent in the deployment of capital given current market conditions. Thank you, Vandy. PMT reports results through four segments: Credit Sensitive Strategies, which contributed $10.8 million in pre-tax income; Interest Rate Sensitive Strategies, which contributed $9.3 million in pre-tax loss; Correspondent Production, which contributed $7.1 million in pre-tax income; and the Corporate segment, which had a pre-tax loss of $14.1 million. Income from PMTâs organically created CRT investments this quarter totaled $4.7 million. This amount included $8.1 million in market driven fair value losses, reflecting the impact of wider credit spreads in the fourth quarter. Gains on PMTâs organically created CRT investments also included $17.8 million in realized gains and carry, $1.2 million of net realized losses recognized during the period, $11.7 million in interest income on cash deposits, and $15.5 million of financing expenses. PMTâs interest rate sensitive strategies contributed a loss of $9.3 million in the quarter. MSR fair value increased $44 million as prepayment speeds were lower than expected during the quarter and due to expectations for lower prepayment activity in the future. These fair value gains were more than offset by net interest rate hedge fair value declines, which drove a tax benefit of $10 million. The net fair value of Agency MBS, interest rate hedges and related tax impacts declined by $74 million. PMTâs Correspondent Production segment contributed $7.1 million of pre-tax income for the quarter. PMTâs Corporate segment includes interest income from cash and short-term investments, management fees and corporate expenses. The segmentâs contribution for the quarter was a pre-tax loss of $14.1 million. Excluding market driven value changes, and the related tax impact, PMT reported $39 million of net income across its strategies. We have maintained strong financing structures related to our MSR and CRT investments. With respect to PMTâs $450 million of MSR term notes maturing in April 2023, PMT has the option to extend the maturity for two years at its own discretion and is likely to do so given current market conditions. Our first three CRT transactions, representing 7% of the total fair value are currently financed by securities repurchase agreements. As we discussed last quarter, the CRT term notes financing a portion of our sixth CRT transaction that originally matured in December 2022 were settled and the underlying investment has also been financed by securities repurchase agreements with multiple banks. For our CRT investments financed by repurchase agreements, PMT holds an appropriate level of associated reserves for potential margin calls. Additionally, the maturity for the CRT term notes originally due in March of this year has been extended two years. The remainder of PMTâs CRT investments are financed with term notes that do not contain mark-to-market, or margin call provisions. This has served us extraordinarily well, as we are not obligated to post collateral for the majority of our CRT investments if fair values decline. All CRT term notes contain the option to extend the maturity for two years at PMTâs discretion, except $54 million of term notes due in October 2024. Thanks, Dan. While performance in recent periods has not met our expectations, relative performance over the long-term remains strong as PMTâs shareholder returns remain well-above comparable indices and its peer group. Additionally, we've seen a material improvement in credit markets in early 2023, as well as increased interest rate stability. With PMTâs current portfolio of seasoned investments in credit risk transfer and hedged mortgage servicing rights, we remain confident in its ability to deliver attractive returns to its shareholders over the long-term. This concludes PennyMac Mortgage Investment Trustâs fourth quarter earnings discussion. For any questions, please visit our website at pmt.pennymac.com, or call our Investor Relations department at 818-224-7028. Thank you.
EarningCall_589	Greetings. Welcome to WisdomTree's Fourth Quarter 2022 Earnings Call. At this time, all participants will be in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. At this time, I will turn the conference over to Jessica Zaloom, Head of Corporate Communications. Jessica, you may now begin. Good morning. Before we begin, I would like to reference our legal disclaimer available in today's presentation. This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. A number of factors could cause actual results to differ materially from the results discussed in forward-looking statements, including, but not limited to, the risks set forth in this presentation and in the Risk Factors section of WisdomTree's annual report, on Form 10-K for the year ended December 31, 2021, as amended, and quarterly report on Form 10-Q for the quarter ended June 30, 2022. WisdomTree assumes no duty and does not undertake to update any forward-looking statements. Thank you, Jessica, and welcome, everyone. I'll begin by reviewing the results of the fourth quarter, and we'll then turn the call over to Jarrett and Jono for additional updates on our business. Fourth quarter caps what's been a very successful year for WisdomTree. We generated net flows totaling $5.3 billion, with positive flows in both our U.S. listed and European-listed products. This was our strongest flowing quarter since 2015, and we closed out the year with $82 billion of AUM, our highest quarter end on record. Flows of $3.4 billion into our Floating Rate Treasury product, USFR, was the primary contributor. That was followed by flows across most other product categories, including our U.S. equity products with about $1 billion of flows as well as our commodity suite having turned a corner with $800 million of flows mostly into oil. We have overcome an incredibly challenging market backdrop, with negative market movement, impacting our AUM by almost $8 billion for the year. Notwithstanding the market declines, our revenues were essentially flat year-over-year as we generated over $12 billion of net flows, our strongest flowing year since 2015, representing annualized organic flow growth of 16%. USFR was a shining star, but not the only story. Our U.S. equity product flows have been consistently strong with positive net flows for 30 of the last 31 months and over $3 billion of flows during the year and annualized organic flow growth rate of 14%. We ended the year with sustained momentum as evidenced by nine consecutive positive flowing quarters. Our AUM currently stands at a record level, $87.2 billion, an increase of 6% from the end of December as our momentum continues, having generated almost $1.7 billion of flows in January and having benefited from positive market movement. Next Slide. Revenues were $73.3 million, essentially unchanged from the third quarter as our higher average AUM was offset by a 2 basis point decline in our average advisory fee due to changes in our AUM mix. Adjusted net income was $7 million or $0.04 a share. Our non-GAAP results exclude a non-cash after-tax loss of $35 million for our future gold commitment payments due to an update to the discount rate used to compute the present value of the annual payment obligations. Next Slide. Our operating expenses were up 7% for the quarter. This increase was largely due to higher incentive compensation accruals as well as higher seasonal marketing and sales-related expenses. We ended the year with compensation expense of about $98 million for the middle of our previously disclosed guidance and with discretionary spending of $49.4 million, the low end of our guidance range. Next Slide. Now a few comments on our 2023 expense guidance. This upcoming year will include a reinvestment into future growth initiatives, taking into consideration our anticipated national launch of WisdomTree Prime and continued focus on organic growth. We are forecasting our compensation expense to range from $96 million to $106 million. This guidance includes hires, both in sales and digital assets as well as year-end compensation adjustments and annualization of hires made in 2022. The range considers variability in incentive compensation with drivers, including the magnitude of our flows, our share price performance in relation to our peers as well as revenue, operating income and operating margin performance. Also, just a reminder that we experienced elevated seasonality in the amount of compensation we report in the first quarter as we recognized payroll taxes, benefits and other items in connection with the payment of year-end compensation. We estimate first quarter compensation expense to be approximately $27 million to $28 million. Discretionary spending ranges from $56 million to $59 million as compared to the $49.4 million recognized in 2022. This guidance includes a modest uplift for WisdomTree Prime marketing and other related costs. Our gross margin is anticipated to be 78% at current AUM levels. We would anticipate margin expansion, assuming continued organic flow growth. Our contractual gold payment expense is forecasted to be $18 million, assuming gold prices remain flat at current levels. As a reminder, this expense is based on us paying 9,500 ounces of gold on an annual basis and is measured based upon monthly average gold prices. Third-party distribution expense is forecasted to be approximately $8 million to $9 million and is dependent upon AUM growth on our respective platforms. Our adjusted tax rate is expected to be about 23%, taking into consideration a change in U.K. corporate income tax rate from 19% to 25%, which is effective in 2023. As a reminder, the UK rate increase is something that will impact all companies with the footprint in the United Kingdom. And in June of this year, $175 million of our convertible notes are coming due. While not setting stone, we're currently planning to reduce our debt by approximately $50 million and refinancing the remainder. Our interest cost is estimated to temporarily rise in 2023 to about $16 million as any debt reduction will occur midway through the year, coupled with a higher interest rate associated with our refinancing. Our normalized interest expense exiting 2023 is estimated to be about $14 million or $1 million lower versus what was recognized this past year. That's all I have. Thanks, Bryan and good morning, everyone. While many other asset managers struggled with the challenging markets, WisdomTree delivered its best year of net inflows since 2015 and exited 2022 with record AUM. Our 16% organic growth rate was best-in-class versus our publicly traded peers. Our product performance was and is outstanding with over 80% of our U.S. AUM beating benchmarks. Our managed models business continues to grow in significance with platform partners such as Merrill Lynch and Morgan Stanley and with RIA and independent broker-dealer partners through our WisdomTree portfolio and growth solutions offering. We continue to increase our efficiency and scalability in our global ETP and models business now delivers incremental margins well north of 50%. And we have staked out a first-mover advantage in digital assets and blockchain-enabled finance, now with a suite of 10 blockchain-enabled funds effective with the SEC in addition to our gold and dollar tokens. And this all sums up a highly successful 2022, but it also highlights why 2023 and beyond will continue to be strong. We have the products and solutions. We have the fund positioning and performance. We have the first mover positioning in digital assets and blockchain-enabled finance. And we have multiple years of momentum with global inflows for the past nine consecutive quarters, 30 of the past 31 months in the U.S. and then seven of eight of our major product categories over the past year. All in all, 2022 was another successful year, and we are confident and excited about 2023 and beyond. Thank you, Jarrett. The momentum in our ETF franchise is incredible. WisdomTree was one of the only asset managers with net inflows in 2022. And as Jarrett said, best-in-class 16% organic growth. We exited the year with over $5 billion of inflows in the fourth quarter, our best quarter in nearly seven years. We expect our momentum to continue in 2023, and we are off to a strong start with year-to-date inflows of almost $1.7 billion. We expect strong and steady organic growth based on our strong fund performance, a shift in sentiment to value and our ever-expanding model franchise. 2023 looks to be even more exciting. In digital assets and blockchain-enabled finance, the pace of our progress is sped up. After years of engagement with the SEC around our process and protections, our first blockchain-enabled fund was declared effective in late September. Then roughly 2.5 months later, nine additional blockchain-enabled funds went effective with the SEC. We now have a broad investment suite of digital funds that span both fixed income and equities plus our gold and dollar tokens. These are the building blocks investors or consumers need to build holistic portfolios or to facilitate financial services inside WisdomTree Prime. As we refine our launch plans, our goal now is to launch WisdomTree Prime in the app stores in Q2. That's the significant go-live event. Investors and consumers should be looking forward to. We are on the precipice of a major shift in financial services into digital blockchain realm, and WisdomTree is well positioned to meet that opportunity. The beauty of our digital wallet is that it can be many things to various types of users and with a nimble blockchain-based tech backbone, WisdomTree Prime has the ability to evolve quickly to meet future use cases. I'm excited for all of you to try our platform later this year, and we look forward to sharing our successes in product development and feature enhancements with you throughout the year. And finally, the operations and strategy committee concluded at the end of last year. The committee dug deep into WisdomTree and generated a report for the Board. I'm pleased to report that the Board unanimously voted in support of both the executive management team and with the strategy of the firm. WisdomTree remains on track with incredible momentum and a tremendous opportunity ahead in ETFs, model solutions, digital assets and blockchain-enabled finance. I look forward to sharing our ongoing progress with you in coming quarters. With that, operator, can you turn the call over to our Head of Investor Relations, Jeremy Campbell, to take some questions from our shareholders. Hello, and good morning, everybody. Similar to prior quarters, we're going to do some Q&A from the retail shareholders via the Say platform. The first question goes to Will Peck, Head of Digital Assets for WisdomTree. And the question is, who do you view as the major competitors to WisdomTree Prime? And what is the go-to-market strategy and competitive dynamics in digital assets given all the messy news flow over the past year? Thanks a lot, Jeremy, and good morning, everyone. I'll start to answer this question a bit more broadly. Digital assets at WisdomTree is about â one term could be real-world asset tokenization that's certainly been a more topical term for a lot of people and bringing the benefits of blockchain technology to traditional real-world assets, right? And in that space, I'd highlight two firms as kind of competitors or peer firms or whatever you want to call them. That would be Circle and Paxos who's kind of a [indiscernible] and gold token issuer in the space, and engage in other aspects here. Specifically, within digital assets, obviously, WisdomTree Prime is a huge key component of it. WisdomTree Prime, like Jono said, it's an app that allows you to save, spend, invest using this new digital asset technology. Aspirationally, I'd highlight someone like Revolut as a competitor here. They've done a good job kind of combining those pieces together, I think. For us, it will take some time to kind of build out the full functionality of that. Whereas initially, we're going to have a very curated and user-friendly investor experience, combined with good cash management functionality is what we're striving for. And that kind of leads into the second part of the question in terms of our go-to-market strategy. It's really going to be articulating those areas where we're adding value for customers, we're laser focused on acquiring them and a high ROI way. Cost-effective acquisition where we have a hook. And in terms of the last part of the question on messy news flow, it's only a positive for WisdomTree. We think how we're different, how we can be a good counterparty for people both on the retail and institutional side. So no concerns there at all. And ultimately, our strategy and position is going to be about customers not but its on blockchain. So no concern there whatsoever. All right. We'll move on to the next question. This one is going to be to Jeremy Schwartz, our Chief Investment Officer. We had a few questions kind of along the same line, so just kind of combining them here into this one. The question is, what do you think will be the biggest driver of flow growth in 2023 for both the ETF industry overall and for WisdomTree in particular? And will the rotation from growth to value hold up? Well, thanks for those questions, everyone. For the industry at large, we continue to see ETFs taking market share from legacy structures. And you'll have active managers who like to equip that ETF and indexing do well riding bull markets but bear markets where their nimbleness and activeness can add alpha but flows really show the reverse. Investors use bear markets to liquidate their legacy positions. And that's basically exactly what happened across the globe last year. We saw ETF gaining market share really in most asset classes, we continue to see the long-term trend and structural advantages of ETFs remaining firmly in place for as far as we can see, yet we continue to innovate as well as just talking about in future structures. And so we're doing both continuing with ETFs for a long time and investing in the future. Now for us, in particular, in flows for WisdomTree, obviously, there are so many places, we're excited about in both the U.S. and Europe due to just such broad strength we have within the product set. I think on the major theme we're talking is that there's income back in fixed income, and we're having so many more consultations with clients about how they're managing cash and short duration exposures. Certainly, that floating rate treasury product we've talked about continues to remain attractive as they're essentially the highest yielding treasuries in the market because of the shape of the yield curve that looks to continue to be the case for some time, and we're going to continue to expand the scope of those discussions but we're broadening fixed income discussion to high-yield bonds, core bonds, our fixed income model portfolios and even digital funds of those models that are income based to capitalize on the yields we see at the short end of the curve. So all that has the potential to expand our fixed income AUM momentum this year, all very exciting trends. Within equities, there's a number of different styles, but I'd emphasize as a firm we have more diversification globally across varying styles than we've ever had before. If you took Europe, we have a very robust thematic lineup for the growth style, and that's complemented, of course, by our quality dividend value approaches. But what's exciting is, we're seeing traction on all those sides in the usage range across the style box there. Of course, we believe in value and dividends over the long run. That was our original launch, but we think there's some really compelling opportunities in high dividend stocks globally and that strong performance from last year with dividend funds with 15-year track record, that should be a very useful catalyst going forward. 2022 was the best year for many of our U.S. dividend ETFs in their history for flows and even performance. So we expect that to continue catalyst B flows for this year. The flagship equity was Quality Dividend Growth is now our largest ETF. It's coming up on 10-year history in a few months and had a great long-term track record, a great 2022, that is traveling globally to the European business and clients there, and we see that driving existing and future innovation for Europe as well. And finally, I have to talk about commodities. It's benefiting cyclically from China's reopening. You can see that in Q4 and continuing with a very strong January, that market leadership position we have with now the world's largest oil ETP as well as five of the six largest inflows to industrial metals, which are part of the energy transition story coming to our product set. I mean we're very excited about the single commodities but also broad-based commodities. We think there's opportunities to gain market share both for that asset class and within that asset class with our recent innovation. Just in short, you could hear, we believe our asset mix is very well positioned for this current macro. And then you can add model portfolios that are packaging all these solutions together, gaining more traction. We believe that's all stackable on top of the current product set, which is more stickier, more recurring. We're very excited about that managed model franchise growing in proportion to the business and helping flow growth pick up and be more resilient than it was in the past. Great. Thanks, Jeremy. And then the final question, we're taking from the Say platform from shareholders is going to go to our Chief Financial Officer, Bryan Edmiston. The question is, WisdomTree's revenues have been remarkably stable between $72 million and $78 million over the last four quarters. Why haven't you achieved consistent profitability? Thanks, Jeremy. Yes, I would agree with the characterization that our revenues have been remarkably stable, especially taking into consideration the market environment this past year. Our AUM was negatively impacted by about $8 billion from market move this year, but we were able to overcome this headwind on strong and steady flows. As mentioned in our prepared remarks, we generated over $12 billion of flows this year, 16% annualized organic growth rate, best-in-class amongst our traditional asset manager peer group, and this is our strongest flowing year since 2015 and the momentum continued into 2023. Flows are the reason why our revenues are flat versus last year and not down. We estimate that negative market move impacted our revenue by over $20 million this past year. As it relates to the question of consistent profitability, I think this is referring to the fluctuations in our GAAP net income. The primary reason for the fluctuation is due to the deferred consideration we're carrying on our balance sheet and it relates to our contractual gold payments. When we acquired our European business back in 2018, we inherited this obligation and it requires that we make annual payments of 9,500 ounces of gold through the year 2058 and two-thirds of this amount, almost 6,400 ounces into perpetuity. So for accounting purposes, we have a large liability on our balance sheet, representing an obligation to make these payments essentially forever. As gold prices change, this impacts the value of this liability. Changes in the discount rate we used to present value. This obligation, will also change the value of this liability. That change in value is reported in our income statement as a gain loss on revaluation of deferred consideration, and it's a non-cash item. Over the last four quarters, we've had gains and losses ranging from $2 million to $78 million due to changes in value of this obligation. That's the main reason for the volatility observed in our P&L. It's essentially accounting noise, and we exclude this from our results when reporting our earnings per share on a non-GAAP basis. Great. Thanks, Bryan. And operator, I'll turn it over to you to field some questions from the sell-side community that are dialed in. Yes. Thank you. Our first question will be coming from the line of Dan Fannon with Jefferies. Please proceed with your questions. Thanks. Good morning. I guess I wanted to follow-up a bit on that last point around profitability. You talked about record AUM. Even on an adjusted basis, you're putting up a $0.04 EPS number. So as we think about and understanding that there's some seasonality and your exit rate is going to be higher given the averaging effect with AUM. But broadly speaking, as you think about profitability going forward, are there things in the expense base that â or how we should think about incremental margin that can really get you to, frankly, where you were even a few years ago as we think about the margin and the kind of ongoing earnings profile? Hey, Dan. Thanks for the question. Let's focus on our expenses generally for 2023. This upcoming year includes a reinvestment into our future growth initiatives, taking into consideration our launch for WisdomTree Prime and continued focus on our organic growth. We're coming off a year, again, where we had 16% annualized flow growth, and we want to build on that momentum. So when we're thinking about expenses for 2023, we are earmarking spend for planned hires in sales and distribution. We have a number of product launches in the pipeline and marketing dollars that we're allocating to WisdomTree Prime. But when you look through it, our discretionary spending guidance reflects a modest uplift versus where we finished the year. And the primary reason for that is from WisdomTree Prime marketing spend. Our compensation has a wide range to account for variability in incentive compensation. What we've shared is our current guidance, and we'll either reinforce it or refresh it every quarter. We came in towards the low end of our range this past year on discretionary spending as we took steps to control our spend given the volatility in the markets. We think of ourselves as being disciplined when it comes to spend, and we have various levers to pull where necessary. And we also have incremental margins north of 50%. So any meaningful margin expansion as our business continues to scale, whether it's through continued organic growth or a more favorable market environment will result in margin expansion. We're controlling costs where we can. We're not looking to sacrifice growth. Our spending is targeted towards maintaining and accelerating our momentum off the back of what we achieved in this past year. Yes. So just then to follow up, thinking about mix and kind of the growth you're seeing, fixed income being somewhat lower fee. And so generally, I wanted to get a sense of your outlook for fees within the product sets where you're growing. You generally haven't led with price. You've been a premium product. So I assume that still continues. But as you think about demand trends and where you're seeing the most interest, the overall fee rate just given what mix is we should â it still seems like it's skewed lower but wanted to get some color there. Thank you, Dan. So I'll take it. This is Jono. Entirety of our fee rate decline last year really came from just a mix in shift. We haven't been cutting fees. So the growth in floating-rate treasuries, which went from $2 billion in AUM to $13 billion of AUM at 15 basis points had an effect on our revenue capture. But that's still a big win for growth and revenue, although it is a drag on the fee rate. So I just would say that the way it's been going â it's just really a very successful outlook. And we're not undercutting with USFR. It's in line with the other participants. So market sentiment will shift. So more equities, higher fee rates. We have other things that would have higher fee rates as well. We'll just have to see how it is. We don't really predict for you how it will â the fee rates will play out or what market segments will, how they'll be affected. What we do, do, though, on a daily basis is to update our AUM and give you our daily revenue capture, so you can track us in real time. But really, we consider fees to be some â one of our strengths actually at WisdomTree. And if I could just add a couple of things. This is Jarrett. USFR, as Jono said, because it was such a great flowing fund, it did drag down the average capture rate, but what a success. And you really have to look at USFR. For some clients, it was the best fixed income holding in their portfolios. For others, it was the best cash holding you could have in your portfolio. And what's great about it for us is not only did it bring us revenue and great flows but it puts us right there for great conversations with our clients as the environment changes to possibly other fixed income products or as JR said earlier, there's income back not only in fixed income, but we've got our dividend paying funds with fantastic yields. So there can also be pivots as the environment changes to our other equity products. And also as people put cash to work, it puts us in line for great discussions. So USFR was a great success for 2022, and we expect it to lead to greater successes in 2023 as well. Hey, good morning. Thanks for taking the question. I wanted to circle back on WisdomTree Prime. It sounds like the launch may have been pushed out maybe a month or two. Just curious where in second quarter, you guys are looking for that to launch, kind of what's led to a little bit of an extension. I think previously, you guys were thinking about March. And then just on the WisdomTree product itself on the Prime side, when you launch that, can you maybe you can expand upon what the product set and functionality will have at the time of launch? And how you see that extending, expanding over the next 12 months? Yes. And hopefully, everyone can hear me all right. Thanks for the question. Yes, I think a slight extension in terms of the date of going in the App Store, some of that's just in terms of our beta testing process, technology build. So just a slight extension there, no kind of significant changes by any means. The other thing I'd add is, this is a regulated product. We're dealing with state-by-state money transmitter regulators and they've certainly had their hands full with some of the news flow last year, which may just cause a slight delay in terms of their ability to grant us licenses and things like that. So that's the answer on the slight delay side. In terms of the functionality side, so we've got nine funds launched, digital funds launched today as well as the dollar and gold token. And we've also filed for some other funds that you can check on the prospectuses that have been filed with the SEC, which should hopefully give you a sense of kind of the breadth of this curated investor experience that we're going to be offering through the app. So very curated, user-friendly investing experience covering all asset classes, whether that's U.S. equities, whether that's commodities like gold or whether that's crypto as well and certainly a strength in fixed income which gets into the second point of where we think we're really adding value, which, especially with rates are where they are today, cash management being something that people can really use this for and using this investments fund style of investing [indiscernible] Sorry for the background noise. And so in order to get a great cash management experience. So that's where we're adding value, and it's something that we're quite excited for. Great. And just a follow-up on that, if I could, on WisdomTree Prime. Could you maybe just expand on how much of the expenses in 2022 or the run rate, how much of that was coming from or related to WisdomTree Prime. And when you think about your outlook for expenses in 2023, how much of that or the growth is related to WisdomTree Prime? Just trying to get a sense of how much of it's adding to the expense base. Michael, I'll take that one. It's Bryan. Yes. Look, our digital spend is embedded in our comp and discretionary spending guidance. From recollection, our guidance last year, it was about $11 million to $12 million. We'd say it's high teens this year. And the primary reason for that difference is just the planned uplift in spend for marketing. We've been disciplined in our spending and if we were to see a significant uptick in the future, it should be because of success that we're seeing on the platform. Good morning. Thanks for taking my question. I know there's a lot of focus on Prime understandably, but I'd actually like to jump in the DeLorean and go back to the future today. We've seen Japanese and European markets really perform well in the year-end and then so far year-to-date. And that's been coupled with some weakness emerging in U.S. in U.S. dollar. So is it a better market for your currency-hedged products, the international ones, hedge and DXJ. It seems like the flows are negative and have been negative. But have you considered ramping marketing for those products? Are you beginning to see more interest? And there are a lot of firms that are advocating for the continued outperformance of those international markets. So is there an opportunity maybe to partner with some of those firms? Thanks for that, Brennan. We are definitely seeing strong performance across the board. And last year was a very strong performance for all those international strategies you talked about. Europe, we've seen some interest in Japan this year. The U.S. investor base has interestingly pivoted to this view of a weak dollar. Now so much for the last 90 days was the dollar was rolling over as rates were dropping. Today, you have this big move back in the dollar because of a very strong employment report. So the currencies move around. We continue to talk about solutions for managing risk, whether it's fully hedged solutions or dynamically hedged solutions. They're smaller funds in the dynamics of the hedge space, but we did see some nice growth in those last year. And so we continue to be well positioned for both sides of that trade, whether it's a weaker dollar or a stronger dollar. We continue to have that opportunity. And what you're seeing year-to-date is, if you look at the â just in January, our flows have actually been coming from some of the other funds that you probably talked about in the past, emerging markets, high dividends are leading. International high dividends are doing incredibly well this year to start the year. So we are talking a lot more about the valuation opportunities. I mentioned that in my first comments that we're excited about high dividends globally. We see them as compelling opportunities for asset allocation, and we have a robust lineup, whether it's hedged or not hedged. And just adding that too on a sort of back to the future comment. If you went back to the sort of go-go years with hedge and DXJ, the company was much different. There were a much smaller number of funds, and we were much more concentrated. So I agree with you. There is a great opportunity in those funds. But what's really exciting about now is the breadth and depth our product suite. And so it doesn't have to be hedge and DXJ. If those run, that's fantastic. But again, we have unbelievable performance across the products. We're really well positioned for this market, and we have any number of funds that can take in flows. So it's a much, much stronger story than it was back in those days. Sure. And thanks for humoring my bad joke. Switching to Prime, you've been beta testing for a while. What have been the big lessons learned from the beta testing process? And how has that informed your plans for the rollout? Yes. I mean no, huge lessons learned. It's really just a matter of making sure that our operations and processes are working right, whether that's ACH onboarding, connectivity through PLAT, customer CIP, customer identification, customer service, things like that. It's really just making sure that as we've designed it, it's working as expected. And that when there inevitably comes up, things you need to tweak or fix that we're able to do that in kind of a controlled beta testing environment. So in terms of the experience, I think it's confirmed everything we hypothesize about it, and it's really just a matter of us kind of making sure that we're trying at all the operations and doing it with live money. Thank you. [Operator Instructions] The next question is a follow-up from Michael Cyprys with Morgan Stanley. Please proceed with your question. Hey, thanks for taking the follow-up. Just on WisdomTree Prime, with the marketing strategy and approach this year, maybe you could expand upon what we can expect to see from WisdomTree with respect to marketing, advertising. How you think about the strategy there? It seems like that's a meaningful component of the expense uplift. And then as you think about WisdomTree Prime looking out over the next 12 months, what does success look like for you? Sure. I'll start [indiscernible] on marketing. We're trying to embrace lean marketing principles. So making sure, like I said, that we've got a high ROI on the channels that we're using. So that could be things like digital marketing. Certainly we've also had success with TV advertising in the past. And that's something that hopefully you'll be seeing a social presence for sure as well. That will allow us to really tap into the users that we're identifying [indiscernible] directed investors, bold bugs is another category of people who are certainly resonating with so far. So that's in terms of the marketing strategy. And sorry, can you remind me of the second part of the question â it was in terms of success, six to 12 months down the road, I mean it's really just about acquiring this initial phase of users and then really having great product sets and features. So we're not disclosing any KPIs or metrics today on that, but it's certainly [indiscernible] confident we can adjust the marketing spend we have today and the product build that we've got right now. And last, we want to be getting metrics [indiscernible] and attrition as well, and that's something that we can certainly look to refine our assumptions on, make sure that those are being borne out and give more data on later this year. And Michael, this is Jono. The only other thing I would just add to Will's answer is, and it ties to your first question about being in beta. When we launch in the App Store, we'll start getting reviews, and it's important that it's a â that we could get good reviews so that there's a potential for sort of a viral campaign that's possible that â from the app store. So and that's really why we have been testing it and making sure that it works so well when we launch it initially. But those reviews will be an important piece of our story going forward. Great. Thank you. And just one more, if I could. Just on the model franchise. You guys were alluding to that, supporting some of the strengths in terms of flows. Maybe you could just update us on some of the initiatives. And if you're able to quantify what the contribution is across the models? Thanks. Sure. It's main â well, the initiatives are pretty simple. Again, it's a two-pronged approach. We're going after the large platforms such as Merrill and Morgan Stanley, and we'll look to add other large platforms. And I hope we'll be able to announce those shortly. With existing platforms, like we've seen with Merrill, it's about further penetration, both in getting to more advisers, which we've been successful in doing but also in getting more models on the platform, which we've been successful in doing. And then on the RIA and IBD side, there, its models, again, but it's a slightly different approach there. It's replicating the wirehouses, click to implement ability or that sort of easy button we're providing that for RAAs and IBDs and that's going quite well with a really nice pipeline where we're adding new groups to that pipeline weekly and bringing on more AUM there. Definitely, the models business is growing, but so is the rest of the business and the models business is generally keeping that same pace, about 12% of flows are going into the models. And I'd add another really good thing, it makes sense, but I've mentioned a couple of times today about the performance in our product suite. It's also, as you'd imagine, it's showing up in our model suite as well. And that just adds to the momentum. So at this point, the foundation is there and now it's just focus, blocking and tackling and execution and continuing the momentum that we've got in the business. Thank you. We have reached the end of the question-and-answer session. I will now turn the call over to Jonathan Steinberg for closing remarks. Just wanted to thank all of you for your time today and for your interest in WisdomTree, and we'll speak to you next quarter. Thank you, everybody.
EarningCall_590	Ladies and gentlemen, welcome to the Cognizant Technology Solutions Fourth Quarter 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. I would now like to turn the conference over to Mr. Tyler Scott, Vice President, Investor Relations. Please go ahead, sir. Thank you, operator, and good afternoon, everyone. By now, you should have received a copy of the earnings release and investor supplement for the company's fourth quarter and full year 2022 results. If you have not, copies are available on our website, cognizant.com. The speakers we have on today's call are Steve Rohleder, Chair of Cognizant's Board of Directors; Ravi Kumar, Chief Executive Officer; and Jan Siegmund, Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's earnings release and other filings with the SEC. Additionally, during our call today, we will reference certain non-GAAP financial measures that we believe provide useful information for our investors. Reconciliations of non-GAAP financial measures or appropriate to the corresponding GAAP measures can be found in the company's earnings release and other filings with the SEC. Thank you, Tyler, and thank you all for joining us today. Given the recent news, I wanted to join the call for this quarter to introduce myself and explain the changes we've recently announced. For those of you that don't know me, I'm Steve Rohleder, and I joined the Board as an Independent Director in March of 2022. Last month, I became Chair of Cognizant's Board of Directors. I previously spent 35 years at Accenture, where I served as Group Chief Executive of Health and Public Services, Chief Executive of North America and Chief Operating Officer. Today, I'd like to briefly discuss our recent CEO transition and the Board changes announced this afternoon supporting our ongoing Board refreshment process. I also want to explain why we're excited for Cognizant's next chapter. Ravi will then introduce himself and share his thoughts before Jan discusses our fourth quarter results in detail. We'll then proceed to Q&A. Regarding our CEO transition, as we announced a few weeks ago, the Board appointed Ravi Kumar to succeed Brian Humphries as CEO. Brian was a resilient leader providing a steady hand as he steered the company through various challenges, including the global pandemic. On behalf of the Board, management and all of our associates, I want to thank Brian for his contributions, which have helped to position Cognizant to capture a large growing market and fuel profitable revenue growth beyond our short-term challenges. We also appreciate that Brian will remain with the company as a special adviser until March to ensure a seamless transition. As part of the Board's strategy to help Cognizant achieve long-term sustainable growth, we also announced today a new Board appointment. Eric Branderiz, a proven financial executive and public company director with demonstrated experience supporting growth in technology and in the energy industries, has been appointed to serve as an Independent Director on the Board. Eric brings significant experience in finance, accounting, M&A execution, risk management and ESG and corporate governance to Cognizant, and we welcome him to the Board. The appointment comes as our Board continues to strive towards optimizing its balance of director skills and tenures as part of its ongoing refreshment program. With Eric's appointment, the Board has appointed five new independent directors over the last four years. Maureen Breakiron-Evans, a member of the Board since 2009, has also advised the Board that she will not stand for reelection at Cognizant's 2023 Annual Meeting of Stockholders. On behalf of the entire Board, we thank her for her more than a decade of astute guidance, exceptional leadership and dedicated service to Cognizant. Given these changes to the Board, our Governance Committee, our committee chairs and myself will perform a comprehensive evaluation of committee composition with an aim toward balancing representation of Board tenure and appropriate key skills and qualifications on our committees. These were topics that I, along with other members of the Board, had the pleasure of discussing with several of our largest investors during our annual governance road show in the fourth quarter. Now before I turn the call over to Ravi, let me share a little bit about our enthusiasm for his leadership. Over the past few years, Cognizant has navigated a dynamic uncertain market while strengthening its operational and financial fundamentals. Heading into 2023, the Board believes that Cognizant has established a solid operational foundation and now needs to move toward accelerating growth. This agenda requires a focused growth mindset driven from the C-Suite. Ravi has this mindset. He brings a passion for building teams and driving growth in our industry, and we're confident that he is the right leader to take Cognizant into our next phase with a goal of ultimately delivering significant returns to our shareholders. Ravi also brings to Cognizant best-in-class operations, transformation and leadership expertise at a global scale from a stellar 20-year track record of emphasis. During his tenure, he oversaw the company's global services organization and drove growth across its global industry segments. Ravi is a proven strategist who secured significant IT services deals. He led international business operations in India, Latin America, Japan and China, and he pioneered the creation of digital talent pools in the U.S., Europe and Australia. Importantly, during his time at Infosys, Ravi earned a reputation as a people-focused leader with a deep rooted commitment to teams and associates. Since he joined us a few weeks ago, Ravi has proven out this reputation as Cognizant associates have warmly welcomed into the team and are deeply enthusiastic about his leadership. We're confident that Ravi will help us further our efforts to support engagement and trust internally and drive retention amongst our high-performing leaders and associates. As we look forward under Ravi's leadership, Cognizant will have a sharp focus on two key priorities. First, we'll be focused on meaningful acceleration of revenue growth. Our second key priority will be ensuring that Cognizant is the employer of choice in our industry. Ravi is the right leader to achieve this vision, and the Board looks forward to partnering with him. Thank you, Steve, for that very warm introduction. Good afternoon, everyone. My appointment as CEO is one of the proudest moments of my life. I'm excited as well as humbled by this opportunity to lead Cognizant, a company I've long admired, closely watched and competed against. As I've experienced, Cognizant has a diverse, highly skilled and a fully engaged Board. I'm grateful for the Board's trust and support and for their efforts to lay the groundwork for me and the company to flourish. I'm also very grateful to my predecessor, Brian Humphries, who led the evolution of Cognizant's business. He refreshed and broadened the strategy, extended the company's portfolio and drove the implementation of more rigorous systems and processes. With a very strong foundation in place, I'm not going back to the drawing board. Instead, I plan to move forward by building on and refining what already exists, which will include calibrating a thinking to a growth mindset. I want to see us offer the full breadth of our industry-specific solutions, whether developed organically or acquired through targeted acquisitions to a large installed base of clients and investor growth. A few days after my appointment, I participated in Cognizant's annual sales kickoff, which was held in Abu Dhabi. At the summit, 1,000 of our client-facing associates came together from around the world to take stock of all of what we have and what we need to accelerate growth. I was so deeply moved by the warmth and the enthusiasm I was greeted with. We set ourselves a goal to be an employer of choice, which we believe will be a pivot for growth. I plan to spend the next several months meeting with so many associates, clients, partners and shareholders as much as I can. I will listen carefully with an open mind, build trust and learn all I can about how best to unlock more value for clients, make progress in accelerating top line growth and drive long-term shareholder value. Because I like to be highly visible with clients and associates, my plan is to meet with 100 clients over 100 days whether in person or virtually and to visit with as many of our global teams as I can. Later this quarter, I'm spending several weeks in India and visiting associates at many of our locations across the country. Having joined Cognizant just three weeks ago, I'm early in my learning curve and need time to get my hands on the pulse of the business. That said, I â while already identified several areas that are tied to operating with a growth mindset to focus on immediately. Today, I will look to talk about three of those important areas: first, making Cognizant an employer of choice in its industry; second, strengthening our ability to win large deals; and third, enhancing our operating discipline. A quick word on each starting with employer of choice. Spent time in the IT services industry, and you quickly realize that sustained success hinges on the quality, dedication and scale of our talent. The value we create for clients comes from the knowledge of the skills of our associates. Because the client experience and the employee experience are so tightly linked, we have the opportunity to create a self-reinforcing cycle. Highly engaged client â talent with a passion for clients and a growth mindset attract the best clients. These clients in turn, attract more of the best people, keeping the flywheel turning faster. That's why one of our goals and one of my specific important roles as the CEO is creating conditions for all our associates to excel. I'm committed to investing heavily in providing associates with continuous learning, upscaling and leadership development, all aimed at increasing the professional relevance. I believe the number one factor that will define success for Cognizant is to become the employer of choice in our industry. Everything else must be based on that foundation, especially the ability to consistently deliver industry-leading growth, which is the absolute focus of the entire management team. Let's turn to large deals, which are another top priority given how essential they are to building commercial momentum and enhancing our station as a provider of business outcomes aligned by industry. Accelerating large deal bookings that will align with our risk appetite requires the client centricity and competitive self-confidence to work the corridors of our clients, cultivating and mining existing relationships, while hunting for new ones and always showing up with an informed point of view. Over the last year or so, Cognizant business has advanced its solutioning capabilities along with its project and program management processes. We have become better equipped to solution and manage large deals and have planned to build on this foundation to reenergize our efforts. In particular, I want to instill a greater sense of pride and empowerment among our client partners and delivery teams to encourage a faster, more agile response to client needs. I have a weekly standing meeting during which I review 10 large deals and do everything I can to help our teams to drive these deals over the finish line. Last week, we were pleased to announce the signing of a 10-year $1 billion renewal contract with a long-standing client, CoreLogic, demonstrating our capabilities and the confidence our clients place in us. The third area of focus is ensuring operational excellence across the company, including our approach to large deals and fulfillment in general. We are building out an organizational structure designed to bring together a continuum of activities such as industrialized delivery with high productivity rates, market competitive cost takeout initiatives, contract life cycle and risk management, consortium led deals and more. As one Cognizant team, we are also working on internal simplification as a team. We will carry forward to help achieve the company's full potential. With the market for tech talent showing some early signs of improvement, we are working to optimize fulfillment of existing engagements, unleash our entrepreneur spirit and rejuvenate the growth mindset. Switching gears for a moment, I would like to offer a few perspectives. On the long-term demand environment for technology services I believe we are in a golden era of technology and that software is the new alchemy for every business and industry. As the world prepares for a post-pandemic reset of the way we work and live our lives, we see more organizations accelerating their embrace of digital technologies. Industry is at lower levels of digital maturity like health care, life sciences and manufacturing are stepping up their tech intensity. While those that are more digitally mature like financial services, retail and communications are staying invested in digitizing the landscapes. We also interestingly see workplaces rapidly adapt digital technologies as employees get comfortable with continuously toggling between hybrid and physical workplaces. In an era of globalization that has spanned several decades, enterprises have turned to tech services companies to enable their businesses to scale and globalize. Today, every industry is a tech industry. Technology will be deeply embedded in the core of every business, every product and every service. Therefore, the use of deep software engineering capabilities to transform the core of businesses will be a big player for tech services firms like Cognizant. So too will be the market opportunity that comes from born-digital companies that outsource the technology core and operations. The cloud, needless to say, will continue to remain the biggest general purpose technology we have seen in decades, and be deeply embedded as a digital pillar in every business. Cloud migration, modernization, application services will continue to create significant market momentum. Growth will also be driven by new cloud services like data on the cloud, data exchanges, new SaaS services and cloud security services. Clients are aware of our deep alliances with the hyperscalers and new best-in-class SaaS companies as well as our ability to co-innovate with these partners. We truly believe clients will continue to turn to us to help orchestrate those cloud capabilities. The shift to the cloud and 5G have also accelerated IoT adoption as use cases grow with better connectivity and proliferating devices and that's core. Last week, we further bolstered our IoT embedded software engineering capabilities with our agreement to acquire Mobica, an IoT software engineering provider. Mobica also strengthens our near-shoring capabilities in Eastern Europe, which is home to nearly 8,000 of our associates. We see a strong push now to bring AI into business landscape with the expectation that AI will reengineer enterprises as completely as enterprise software did three decades ago. Of course, as clients navigate a challenging macro environment now, they need to fund their investments in digital transformation by executing cost and efficiency agendas. These same clients are now asking how we can help them achieve their cost reduction ambitions and underwrite savings for their digital initiatives. Given our broad capabilities, we can help clients, whether they need to drive efficiency gains, innovation or an end-to-end transformation of the business. I quickly want to turn for a moment to India, home to about three quarters of Cognizant's workforce. India is likely to be the world's technology talent hub for the next decade. India's population has a demographic profile and digital talent pool unmatched by any other country. And NASSCOM forecasts some two million IT professionals will be added to India's talent pool over the next three years. We'll continue to capitalize on this surge in the IT talent in India as we intensify efforts to recruit from India's Tier 2 cities as well. Our large associate base in India is an ongoing source of strength and differentiation for Cognizant and one in which we will continue to invest. As confident as I am in Cognizant's prospects, I'm fully aware, as we have signaled with our guidance for Q1, for quarter one, that we have a great deal of work ahead of us. It will take time to rebuild the pipeline and go after larger opportunities. Please know we put a lot of thought into our decision to hold off on providing full year guidance. But before making commitments I can stand behind, I really need to spend more time digging into the business and talking to associates and clients. Keep in mind that we are building on a strong foundation. We have a long-standing client relationships, a broad portfolio of industry-specific solutions, a robust and resilient global delivery network, a significant opportunity for international expansion and most important, a reenergized and highly motivated team. I intend to catalyze Cognizant's heritage culture of bold ambitions, our entrepreneur spirit that emphasizes being fast, agile and adaptable and of course, our camaraderie and teamwork. I'm super energized to lead Cognizant into the next era of growth, and I'll put everything I have into making this happen. As I've shared with all our associates, our mantra right now is to bring back growth and be the employer of choice. Now it's my pleasure to turn the call over to Jan, who will take you through the financial details of the quarter before we take over questions. Jan, over to you. Thank you, Ravi. And good evening, everyone. Fourth quarter and full year 2022 revenue were above the high end of the guidance range we provided on our third quarter earnings call in November and in line with the revised expectations we provided on January 12. Operating margin was negatively impacted by the previously disclosed noncash charge in the quarter, which I will cover in more detail later. [Indiscernible] of this charge, we were pleased with the continued progress towards our operating margin goals driven by commercial discipline, the depreciation of the Indian rupee and SG&A leverage. During the quarter, we made progress improving fulfillment, driven in part by a meaningful reduction in voluntary attrition, which declined to 19% on a quarterly annualized basis from 29% last quarter. This has allowed us to further decrease subcontracted usage and will enable us to put greater focus on driving improved commercial momentum in the quarters ahead. That said, the macro environment remains uncertain, and we continue to see pockets of weakness across several key verticals. Now moving on to the details for the quarter, fourth quarter revenue was $4.8 billion, representing an increase of 1.3% year-over-year or 4.1% in constant currency. Year-over-year growth includes approximately 40 basis points of growth from our acquisitions and a negative 60 basis points impact from the sale of Samlink completed at the beginning of 2022. Full year 2022 revenue was $19.4 billion, representing an increase of 5% year-over-year or 7.5% in constant currency. Year-over-year growth includes approximately 100 basis points of growth from acquisitions and a negative 60 basis points impact from the sale of Samlink. In Q4, digital revenue grew 4% year-over-year or 7% in constant currency. This resulted in full year 2022 digital revenue growth of 11% or 13% in constant currency. Digital mix was unchanged from last quarter at 51%, up two points from the prior year period. Q4 bookings increased 12% year-over-year, including the large agreement with CoreLogic that we announced last week. This opportunity is primarily a renewal of existing work with some modest increase in scope during the latter years of the contract. For the full year, we recorded bookings of $24.1 billion and a book-to-bill of approximately 1.2 times, unchanged from the trailing 12-month book-to-bill we reported last quarter. Outside the large renewal, bookings momentum remains muted exiting this year. This has put pressure on our Q1 outlook, which I will cover shortly. Moving on now to segment results in the fourth quarter, where all growth rates provided will be year-over-year in constant currency. Within Financial Services, revenue declined 1% reflecting a negative impact of 180 basis points related to the previously disclosed sale of our Samlink subsidiary. This was partially offset by growth among public sector clients in the UK and insurance clients. The revenue weakness is being driven by our banking and financial services practice, which we expect will remain under pressure for the next several quarters. Ravi, the entire team and I are laser-focused on reevaluating our go-to-market strategy, enhancing the strength of this portfolio and have initiated a series of actions, including certain leadership changes, that we believe will give us the best opportunity to improve our performance. We are seeing early signs of success with select global banking relationships where we have successfully shifted our portfolio mix towards higher growth in strategic areas. This gives us confidence that we are moving in the right direction. However, more meaningful improvements will take time to implement. Health Services revenue grew 5%, consistent with last quarter. We experienced similar growth among both Healthcare and Life Sciences clients, which partially reflects some normalization of demand that had been driven by COVID. As we discussed last quarter, we have seen some pockets of softness within the segment, driven by the macro environment and regulatory complexity. Despite these challenges, we continue to review our Health Sciences capability as industry-leading and remain excited about the growth opportunities over the medium term. Products and Resources revenue grew 7%, a modest deceleration from last quarter. Revenue was negatively impacted by slower growth among manufacturing, retail and consumer goods customers, which we believe primarily, reflected the softening of the macro environment. This was offset by continued strength among consumer goods, automotive, logistics and utility customers. Communications, Media and Technology revenue grew 9%. Growth again was led by our technology business, where our work with digital-native clients has driven growth in our core portfolio. Our growth has moderated somewhat as growth among some of our largest clients have slowed, but remains positive. We are closely monitoring trends and developments affecting the tech industry. Continuing with year-over-year growth in constant currency from a geographic perspective in Q4. North American revenue grew 3%. Growth was led by CMT and Health Sciences. Our global growth markets, or GGM, which includes all revenue outside of North America grew approximately 8%. It also included a negative 220 basis points impact from the sale of Samlink. Growth was again led by the UK, which grew 16% and included double-digit growth in Financial Services including public sector clients. Now moving on to margins. In Q4, our GAAP and adjusted operating margins were 14.2% as there were no non-GAAP adjustments in the quarter. On a year-over-year basis, both GAAP and adjusted operating margins declined by 110 basis points. This includes the previously disclosed negative 120 basis point impact from a noncash impairment of capitalized costs related to a large volume-based contract with a Health Sciences customer. Our operating margin benefited from SG&A leverage, while gross margin pressure from increased compensation costs was partially offset by delivery efficiencies and disciplined pricing. We also experienced a meaningful tailwind from the depreciation of the Indian rupee, which represented an approximate 110 basis point benefit net of hedges year-over-year. Our GAAP tax rate in the quarter was 27%. Adjusted tax rate in the quarter was 26.8%. Q4 diluted GAAP EPS was $1.02 and Q4 adjusted EPS was $1.01, down 7% and 8%, respectively. GAAP and adjusted earnings per share were each negatively impacted by $0.08 in connection with the impairment of capitalized costs related to a large volume-based contract with the Health Sciences customer. Now turning to the balance sheet. We ended the quarter with cash and short-term investments of $2.5 billion or net cash of $1.9 billion. DSO of 74 days was flat sequentially and increased by five days year-over-year. Free cash flow in Q4 was $612 million, representing approximately 115% of net income. This brings full year free cash flow to $2.2 billion, representing approximately 100% of net income, in line with our expectations. We are pleased with our performance in 2022. However, a change in U.S. tax law that became effective last year now requires companies to capitalize rather than currently deduct R&D expenses. As a result, like many other companies, this will impact our free cash flow in 2023. We expect capitalization of R&D costs for tax purposes to negatively impact free cash flow by $600 million, which includes deferred payments for the 2022 tax year as well as increased payments for 2023. With this change, we expect our cash conversion ratio to be below our target of 100% of net income in 2023. Moving on to capital deployment. During the quarter, we repurchased approximately 5 million shares for $300 million under our share repurchase program and returned $139 million to shareholders through our regular dividend. This brings total capital return to shareholders through share repurchases and dividends to $2 billion for the full year. In the quarter, we also completed two acquisitions: Austin CSI and Utegration for a total purchase price of approximately $370 million. In addition, we announced the acquisitions of Mobica and the professional services and management practices of OneSource Virtual. These acquisitions are expected to improve our digital revenue mix, enhance our consulting capabilities. Our capital allocation framework remains unchanged. Over the longer term, we continue to expect to deploy a balanced capital allocation policy, returning to an aggregate of approximately 50% of free cash flow to shareholders in form of dividends and share repurchases and allocating the remaining 50% to inorganic investments. Turning to our forward outlook. As Ravi mentioned, and you will see in our earnings materials, we are only providing revenue guidance for the first quarter of 2023. Given our bookings momentum in 2022 and the uncertain macroeconomic environment, we expect our full year 2023 performance to be below the multiyear goals we provided in late 2021. We intend to provide an update on the full year 2023 expectations for revenue and adjusted operating margin next quarter. For the first quarter, we expect revenue in the range of $4.71 billion to $4.76 billion, representing a year-over-year decline of minus 2.5% to minus 1.5% or a decline of minus 1% to flat in constant currency. Our guidance assumes currency will have a negative 150 basis points impact as well as an inorganic contribution of approximately 100 basis points. We look forward to sharing more as Ravi continues to get up to speed. As he discussed, we remain very excited about the medium-term market opportunity. We also believe that while the current macroeconomic uncertainty has led to some pockets of slowdown, it also presents an opportunity for Cognizant to help our clients operate more efficiently while continuing to invest in new digital capabilities. Thank you. [Operator Instructions] Our first question comes from the line of Ashwin Shirvaikar with Citi. Please proceed with your question. Thank you and congratulations and welcome Ravi and Steve as well, congratulations to you. Itâs good to reconnect. I think my first question is growth mindset, I get that, what are some of the explicit steps you might need to take incrementally to return to that growth mindset, if you can speak to your early view on whatâs needed for sales investments, capability investments, just the G&A investment to chase large contract, things like that? Thank you, Ashwin, for that question. Good to connect with you. Having spent a significant time in this industry. I would say to build a growth mindset. There are a number of things we need to do. But I would probably highlight three of them as I talked to today, the most important priorities. First and foremost, Cognizant has to be an employer of choice in this industry. What I mean by that is spending time in the IT industry, IT service industry, what I mean by that is, you create a self-reinforcing cycle with employees and clients. Sustained success is based on quality, dedication and scale of the talent, but client experience and employee experience are so tightly linked. We have the opportunity to build a self-reinforcing cycle with engaged talent with a passion for clients and the growth mindset, which attracts the best clients. So that whole flywheel has to be self-reinforcing. It means a lot of things, all the way from retention to upscaling to leadership development to infusing the project and program leaders. Remember, we are a company of projects and programs, which essentially means as they walk the corridors, they mine our clients, these project leaders. And equally, they talk to our associates every day. So that is a starting point of where you try to build a trust with that player and continue to create that self-reinforcing virtual [ph] cycle does they call it. I think you talked about large deals. I think large deals has investments on both sides, investments on dealmakers, deal influencers, ability to create that momentum by supporting our client initiatives in various transformational initiatives of theirs. But equally, at the back end, you have to start to work on solutioning capabilities and the ability to build a continuum all the way from addressing cost takeout initiatives to manage services initiatives to large deals will come with people take over opportunities. And of course, productivity improvements. So thereâs a lot of tooling and infrastructure. I think Cognizant already has some of it, you have to build on it, and then go behind this opportunity. Itâs equally important that we build operational discipline, which also helps us to create the growth mindset all the way from fulfilling those deals to building market competitiveness on cost takeout initiatives to contract life cycle and risk management to consortium like deals and partnerships and a whole bunch of things. Well, do we have all of this in place? Yes. I think a lot of these things have already been set and I would say in the last few years at Cognizant. I have to orient this to a growth mindset and start to double down on the opportunities, which are there in the market. In the short run, some of this will mean additional investments, but in the medium to long run, you have to create that pool of investments inside by taking out costs so that you can then sustain that momentum for the future. Got it. Thank you for the obvious thought you put into that answer. The second question is on the health care contract that was a problem in the quarter. Any granularity on sort of separating out the top and bottom line impact? And is it link-fenced now? In other words, at least the margin impact taking into account entirely in 4Q? Or is there a forward-looking impact? Whatâs the forward-looking revenue impact as well? Yes. Maybe I'll take this. The Health Sciences clients that we have is a volume-based contract-based on the performance of that healthcare client. And so as the outlook of our client has changed, we had to adjust our revenue expectations going forward, which led then to a charge that we had to take for the expected lower volumes of incoming business to us in essence. And so the revenue impact is really going to be baked into our natural revenue guidance and forecast. So the charge that we have been taking is a discrete charge of $60 million. And that is a non-cash charge of prior capitalized implementation costs that we are now taken out of the contract. So future volume changes of this client could impact our calculation on these capitalized implementation costs as well. So there's still outlook. We obviously work very hard with our clients to drive great revenue growth as our interest and the clients' interest, but there is still a possibility of depending on the revenue development and the market performance of the client that we could be impacted in the future as well. Hey thanks so much guys. Steve, nice to hear from you upfront. It's been a while. So I want to ask similar to Ashwin to Ravi here, just the goal of being the employer of choice and having a growth mindset makes a lot of sense. How long do you think it would take for â to change the culture to get to that level? I'm imagining it can't be a quick fix, but maybe you feel differently? Yes, that's a good question. I'm just three weeks into the job, so I'm continuing to assess what we have, what we need to do. It's a virtuous self-reinforcing cycle. As I said, as much as it looks easy, it's â if you're on it it's easy, if you're not on it it's not. I'm going to be on a listening tour for the next few weeks and months, meeting clients, meeting associates, meeting partners and I'll come back with assessment. I think we have built enough both on client and employee infrastructure â organizational infrastructure. Now I have to refine it and reset it for growth; that's how I see it. I want to build on it. We're not going to go back to the drawing board. We want to build on what we have and refine it, and as we refine it, we'll make some changes and get there. With related to employees, a lot of our â two-thirds of our employees work out of India. So India is an integral part of our strategy to differentiate and I'm going to spend the next few weeks in India as well, later part of February. And I'm meeting 100 clients in 100 days, and this is a goal which I've set for my own self, so that you get to know the pulse, you get stay focused on large deals. In fact, I'm doing a monitoring of 10 large deals every week, and we are continuing to keep the focus on commercial momentum. So it's in flight transformation, as I call it. We'll continue to do this, but we will continue to look for the medium- to long-term sustained momentum, how you create it. That's how I see it. It's still a question I will probably like to answer once I spend a few more weeks going through the listening part. Maybe I'll give Ravi also a tiny breather here and talk about the improved attrition, which is certainly one. First step into the right direction of becoming a more attractive employer and seeing it reflected. So clearly the dynamic in the labor markets have shifted also, but we also believe that the investments that we have made not only in regular and competitive merit cycles. You may remember we announced in the last quarter that we had accelerated our â this year's merit cycle to the second quarter, which is also important for the modeling of you guys into the second quarter. And that we have made huge progress on internal promotions, career pathing and learning and development and education, et cetera, as we have increased the number of our college graduates into our permit. So I think we have seen now a year of this permit from a nuts and bolts piece to stabilize, and we were very pleased with this relatively steep drop in nutrition in just one quarter. So we feel we are off to a good start here and then I think Ravi is focus on management, on enthusiasm, on growth and aligning will help. And then we'll kind of continue to refine those investments as we â as we need it. But I think we have already ended the year actually on that side with a big step forward. And also the talent supply chain, we've been able to streamline it, strengthen it, and be ready for fulfillment and opportunities, which our clients are looking forward to. Yes. Then if it's okay, if I can ask my follow-up then with â given that 10-point drop in attrition and you've still hired a little bit, the utilization rates did drop. So from a modeling perspective, not to bore people, but anything to guide us to in the short-term on some of those KPIs because they are moving quite a bit here? We're obviously on this utilization metric also a very detailed answer. In this quarter, the slight decrease in utilization is actually more driven by the relative higher percentage of Gen Z hires into our pyramid, which are not as utilized in the young age and actually a return to normalized location taking compared to the COVID years of where we had abnormally low vacation period. So those were the biggest factors. So I wouldn't model too much into the utilization. Obviously, we need to drive growth and as we now have better fulfillment opportunities. But in this quarter, actually, some of the utilization, both were the 2 biggest factors, Tien-Tsin. Okay. Perfect. Thank you Jan and Ravi. Appreciate that and look forward to get to the updates and safe and healthy travels. Thanks. Great. Thank you so much. I want to follow-up a little bit on Tien-Tsin's question as well as Jan and Ravi's comment is. If we look at Ravi, your initial stages of evaluating and listening to customers and what you're seeing in the business? And if I put that together with Jan's comments around investment that seems to be helping in attrition, et cetera. I'm wondering if the two of you can give some perspective on if there's anything that stands out right now as maybe points or places where there could have been under investment that you'd like to direct resources, and how does that impact the way that you're thinking about â you and the Board are thinking about the right objectives from a cost and profitability standpoint? Ravi will chime in after I give you a more technical thing. I think as we mostly developing these plans, so we're clearly not at the end of the job, otherwise, we would give guidance today. But when you think large deals and calculate [indiscernible] of volume, I think deal characteristics of large deals have impact us on to our margin profile. And when we think about that, we need to build kind of our culture to leverage the relative margin strength if you exclude our health care charge and our pricing discipline and our delivery discipline, so that it allows us to be competitive for these larger deals that may cause dilution initially and then ramp up their full margin potential. So I think the biggest impact practically would be to figure out for us, assuming the success in our large deal focus of what that would mean for the overall P&L structure. I think that's going to be the biggest one. There's going to be other investments that Ravi is going is going to be proposing, but I think we're going to be managing those a little bit more within the framework of an SG&A volume that we have already not to take that away from you, Ravi, but I think... Jan, I think you've covered it so nicely. The one thing I would probably add is, I think in the last one to two years, Cognizant has invested heavily on organizational infrastructure to take large deals on a continuum, all the way from managed services to transaction-based pricing to cost takeout initiatives to digital transformation on that continuum. Now is the time to leverage those investments and take those large deals and be competitive on those large deals. So in a way, I would say a large part of it is done. We have now strengthened it, and we have oriented to the market for the opportunity, which is going to be presented to us. So that's broadly how I see it. As I keep saying, it isn't going back to the drawing board, but I'm going to build on what we have. We're going to refine it. As we refine it, we have to make some changes. We're going to make those changes, but we'll be agile enough in the market to seize the opportunities we have. Appreciate that. And then just as a follow-up, Ravi, how are you thinking about and what's your perception of the current economic environment? Obviously, as you go to listen and engage with customers, et cetera. It seems like a big part of the challenge for you will be to parse out feedback that is specific to Cognizant and has impact on how you should move the business going forward on a sustained basis versus maybe some things that are happening near-term. So just wanted to hear how you're thinking about the current economic environment and the lens that you're looking at, at some of these comments or listening to these â some of these comments through? Yes. That's a good question, and I'm going to leave it to Jan as well to chime in. Over the years, IT Services has gone from a homogeneous landscape to a heterogeneous landscape, they're different swim lanes. In an uncertain economic environment, if you're going to see discrete study spend being a little softer. Large digital transformation engagements will start to become moderate in nature. But equally, you're going to see cost takeout initiatives, vendor consolidation initiatives happening on the other hand, I would say that's a different swim lane. But enterprises are continuing to invest because not only are they investing on the consumer side of digital. We're also investing on the employee side of digital because employees today are interacting with their organizations on a digital platform because of the hybridness of how work and what places are. So I would say it's a duality of sorts. On one side, you would see softness. On the other side, you would see cost takeout and vendor consolidation kind of happening. Depending on the industry you look for, there are industries which have lesser tech and digital intensity and the industries which have higher tech and digital intensity. And some of them are using the digital platform to transform and deliver. In fact, I would say, digital technologies is almost like a deflationary force in an inflationary economy. So some of our clients are using digital technologies to do so. So it's a mixed bag. It's â because of the heterogeneity, I would say it's a mixed bag; each swim lane has its own characteristics. Jan, do you want to chime in? Yes. Like I'll give you a little bit more background maybe about our bookings performance and what â where we have seen the softness and geographically and by digital. We actually did have a relatively solid bookings growth in digital this last year, and I'm giving you full year numbers. It's about I'm doing to 16%,18% or something growth in the digital bookings world. And then we saw actually the weakness by sector really concentrated, as you would expect in our Financial Services Group, where we saw the biggest decline in bookings volume for us. And as Ravi illustrated in his comments, it's kind of almost in every industry where we're trying to sort out, are we having some industries stronger and others, but we do have success stories by industry sector, and we have declines in industry. So it seems to be a little bit client specific of what we need to watch out. You have talked obviously, now looking forward; we entered the year with one of our largest pipelines ever, basically. And now a lot of work, which is for Ravi and the market teams to achieve, is to convert that pipeline into qualifications and into bookings numbers. So there seems to be a lot of opportunity still out in the thing. Obviously, the mix of that business is shifting a little bit. We hope we want to drive a higher participation and higher bookings number for larger deals, which we haven't had in the past, and that's the true revenue â incremental revenue opportunity that we're aiming to capture. And but there is still a very solid market out there. Even though the demand on a sequential basis has gotten a little bit softer, if that makes some sense. So we're going to be laser focused, obviously on converting this opportunity into bookings and then to revenues. But the underlying market remains attractive from my perspective. Thanks so much. Congratulations, Ravi and Steve, it's really good to hear your voice again. Could you, Jan, give us some guardrails around gross margins in 2023? Not looking for anything precise, but maybe just help us think through some of the headwinds and tailwinds. You had a number of wage increases in 2022. Obviously, attrition coming down helps a little bit, but could you help us think about, what the gross margin range might be this year? Well, that I cannot do. But I think I can give you a few, David. Good to hear your words as well. And I give you a few pointers that I think are kind of important for the modeling that we had prior disclosed. So the usual merit increase that puts negative pressure on our gross margin in the fourth quarter will now occur in the second quarter. So that will disturb a little bit our pattern of regular margin development throughout the year. If anything, I think, that second and third quarter traditionally our strongest margin patterns, and then we have the fourth quarter due to the marathon this will shift a little bit. But other than that, we are not really thinking that the general dynamic of our pattern of the year is going to shift in a very meaningful way. So I think it's like even our past performance, there's no guarantee for future performance. But like when I think about our year, I think that the principal dynamics remain unchanged. We have seen â maybe at this one point I'm getting into 12 years I look at Tyler, but we have seen actually moderate to good success with our pricing initiatives. And so the contribution of our pricing initiative to gross margin in the fourth quarter was the highest. So we have really built quarter-after-quarter momentum, and it was 50% higher than all other quarters together. And so we're entering with a little bit of pricing momentum, and then we have â that's going to be partially offset or offset by our wage increases in the second quarter. And then, as you said, coming up with some sort of metric, which of how attrition is going to help us in revenue or fulfillment and some efficiencies is going to be then for the modeling. That's what we also undergo right now, David. So I really don't have those numbers yet for you, and we're planning to do the update in the second quarter then. Hey guys thanks for taking my call. Congrats to Steve and Ravi. Ravi, maybe just to start with you. I know you obviously need time to study the organization, develop your plan. But just at a high level, is your initial sense that Cognizant has more room to improve in terms of strategy or in terms of execution? I think it's how I will see it. And of course, I need more time to assess, as I said, it's listening to with both clients and my associates. But the way I see it is the opportunity ahead of us. I think we have an extraordinary set of client relationships, extraordinary talent pool. Looking from outside, I've always been impressed by the entrepreneurs spirit, the bold ambitions and some very good teamwork at Cognizant. The one trend I've always been excited about at Cognizant is the confluence of industry vertical experience with technology expertise, a very unique spot. It's a very, very unique spot. So I could almost see this as a way forward strength and look for opportunities, which will fit the bill. And I do believe that we have been necessary organizational infrastructure to attract employees, retail employees, attract clients, retail clients and also win large deals. That is how I see it. The opportunity in front of us is what I'm kind of configuring and calibrating the firm to instead of actually looking back and looking forward and trying to gear up for that opportunity with what we have and what we need to build. So that's broadly what I can say. How I'm actually trying to approach my way forward direction. Very helpful. And just as a follow-up, this might be more for Jan. But how close are we do you think to fully remediating the fulfillment issues? And then just any at least directional commentary you can give us on first quarter operating margins? Thanks guys. Yes. The fulfillment in the fourth quarter really improved very meaningfully. And it gives us part, I think, is part of the optimism we have that we can go to clients and fulfill their needs, which as we have talked in the third and fourth quarter. In the third quarter was hampered at times by our resource constraints. So I think the improvement in fulfillment will translate into accelerated and enhanced sales activity. That's at least part of our thesis that we have. And it should obviously lower our need for recruiting and have efficiencies and the support for all of this will make clients happier and so forth. So the underlying engine running a smoother is really a shift compared to where we were throughout last fiscal year. So I think that's really â that gives us hope and gives us optimism for it. Yes, we're not giving a first quarter margins, unfortunately, so I can't help you with any direction there. Yes. So just to add to what Jan said, I think my initial few weeks, one of the observations is I think our talent supply chain is grinding well or it's kind of moving very, very well. Some of the clients I've spoken to in the last few weeks have started to tell us that we can start to get some of the demand moved to Cognizant with the fulfillment starting to look good. So I'm actually very excited about the progress we've made on fulfillment. I think we are ready to take more, and we're ready to continuously sharpen the talent supply chain for the opportunity with our clients. Our clients are starting to see that traction with us. Ladies and gentlemen, that is all the time we have for questions. I'd like to hand the call back to management for closing remarks. Great. Thank you all for joining us. We look forward to catching up with you in a couple of months on our first quarter earnings call. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.
EarningCall_591	Good afternoon and thank you for standing by. Welcome to the Deckers Brands Third Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. Hello, and thank you, everyone for joining us today. On the call is Dave Powers, President and Chief Executive Officer; and Steve Fasching, Chief Financial Officer. Before we begin, I would like to remind everyone of the companyâs Safe Harbor policy. Please note that certain statements made on this call are forward-looking statements within the meaning of the Federal Securities laws, which are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements made on this call today other than statements of historical fact are forward-looking statements, and include statements regarding our current and long-term strategic objectives, changes in consumer behavior, strength of our brands, demand for our products, product distribution strategies, marketing plans and strategies, disruptions to our supply chain and logistics, our anticipated revenues, brand performance, product mix, margins, expenses, inventory level, and promotional activity, and the impacts of the macroeconomic environment on our operations and performance, including fluctuations in foreign currency exchange rates. Forward-looking statements made on this call represent managementâs current expectations and are based on information available at the time such statements are made. Forward-looking statements involve numerous known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any results predicted, assumed or implied by the forward-looking statements. The company has explained some of these risks and uncertainties in its SEC filings, including in the Risk Factors section of its annual report on Form 10-K and quarterly reports on Form 10-Q. Except as required by law or the listing rules of the New York Stock Exchange, the company expressly disclaims any intent or obligation to update any forward-looking statements. On this call, management may refer to financial measures that were not prepared in accordance with Generally Accepted Accounting Principles in the United States, including constant currency. In addition, the company reports comparable direct to consumer sales on a constant currency basis, for operations that were opened throughout the current and prior reporting periods. The company believes that these non-GAAP financial measures are important indicators of its operating performance because they exclude items that are unrelated to, and may not be indicative of, its core operating results. Thanks, Erinn. Good afternoon, everyone and thank you for joining todayâs call. Iâm pleased to be here today highlighting another record quarter for Deckers Brands, as our teams were once again have able to successfully execute against our long-term strategic objectives to deliver standout results in a dynamic consumer environment. Our fiscal third quarter record setting results include, $1.35 billion in consolidated revenue, reflecting a reported 13% increase versus the prior year, and diluted earnings per share of $10.48. here as a progress during the third quarter included HOKA delivering record revenue of $352 million as a brand more than doubled its DTC business, while demonstrating momentum across the product line and significantly increased wholesale through both market share gains and select new strategic access points. UGG increasing its mix of business in DTC to 60%, up from 54% last year as the brand drove an 8% increase in the channel. Total portfolio DTC increasing 19% versus last year, to represent 52% of volume with both HOKA and UGG contributing to this mix shift, an all-time-high for the third quarter, and our international revenue increasing 12% on a reported basis, and growing 25% on a constant currency basis, when adjusting for the significant FX headwinds. Deckers delivered exceptional performance in the quarter and continued progress with respect to our long-term objectives. Notably, our brands commanded strong full-price selling despite a highly promotional marketplace during the holiday season. While our brands did experience more normalized promotions relative to extremely low levels in the past few years, we were able to avoid significant discounting due to the strength of consumer demand for our products, as well as disciplined marketplace management through our omnichannel approach. Iâm thankful for the leaders throughout our organization who continue to prioritize long-term brand health and remain committed to our strategic pillars, allowing Deckers to maintain top-tier profitability. Our brands are well positioned for calendar 2023 as we end our fiscal year 2024 in April. Steve will provide further details in our updated guidance for this fiscal year, as well as how weâre thinking about the arduous macroeconomic environment. For now, letâs get into the brand highlights for the third quarter, starting with UGG. Global UGG revenue in the third quarter was $930 million, down 2% versus last year on a reported basis, but up low single digits on a constant currency basis. Overall, consumer demand for UGG was strong in the quarter as the brand delivered global gains in DTC across genders and categories, driven by a 21% increase in acquired consumers and a 17% increase in retained consumers. The UGG brandsâ healthy DTC performance was offset by unfavorable foreign currency exchange rate impacts across all channels, as well as lower wholesale revenue. This wholesale decline resulted from the unique shipment timing dynamics discussed at the outset of this fiscal year, which included an expectation that the third quarter would be impacted. Specifically, these earlier shipments drove temporarily elevated levels of inventory in the channel. As a result, and in line with our marketplace management strategies, the UGG brandsâ attention shifted to selling through product already in the channel, to strategically reduce marketplace inventory, allowing DTC to capture demand upside, and limiting the need for excess promotional activity. From a style and franchise perspective, UGG continues to find success with fresh updates of iconic styles. Throughout the year, consumers have continued to migrate to fashions that are uniquely UGG, such as the Classic Mini and Tasman, as well as more versatile derivatives of these products. The consumer demand for these products was quiet strong, and certain style color combinations even led to out of stocks. Our measured approach to buying aimed at driving improved inventory levels, combined with the high level of demand for these products, led to some scarcity in the marketplace. We see this approach as an effective tool to fuel demand and weâll continue to optimize our pull model to bounce future supply. With respect to how these styles are performed, weâre encouraged to see the continued strength of adoption from the brandsâ target segment of 18 to 34 year olds. Among this segment in the US, the Classic Short remain the top seller, but the strongest growth came from the Classic Mini and Ultra Mini styles which ranked second and third, respectively. Platform Classics were also extremely popular with this age group, likely resulting from the brand heat generated through unpaid product gifting to A list celebrities which helped drive the hashtag, Platform UGGs as the brandsâ number one social trending topic in the quarter. Among 18 to 34 year old males in the US, UGG brand consideration reached an all-time-high in the third quarter, UGG has increasingly seen this segment of consumers adopt versatile slipper hybrids like the Tasman and Classic Slip-On as consumers continue broadening their wearing occasions of iconic styles. Beyond these hybrids, male consumers gravitated towards heritage winter boots such as [Fluff Yeah] [ph] as well as weatherized versions of iconic styles like the [inaudible]. Brand heat remains at an all-time-high based on the exciting new products designed for the brands target audience. Supplementing these fantastic inline products, our teams developed heat season, UGG continues to build fashion credibility through collaborations. The most recent of which was with designer Shayne Oliver, the founder of Hood by Air, Shayneâs futuristic take on UGG Classics was covered by several high profile outlets, including Vogue, Complex and Hypebeast. These aspirational style continue to drive excitement in the line and bringing awareness to a new audience of consumers. From an international standpoint, UGG showed growth on a constant currency basis, despite revenue being down versus last year on a reported basis. This was led by DTC as acquired and retained consumers in the channel each grew 38% versus the prior year. International wholesale was down versus last year, as UGG lapped the supply chain disruption which pushed additional shipments into the prior yearsâ third quarter. Strength in the UGG brands international regions is largely attributed to the successful ongoing marketplace reset activities completed over the last few years, which included a revamped approach to product and marketing, helping drive greater synergies in product adoption across the globe. Overall, weâre very pleased with the performance UGG this fall. The brand continues to attract new consumers and drive more business through direct to consumer with a loyalty program that now has massed over 7 million members worldwide. We feel great about the brandsâ ability that offset more normalized promotional activity through a strategic shift in channel mix, which also helped reduce marketplace inventories heading into the spring 2023 season. We expect UGG to finish the fiscal year in a position of strength as demand for the brandsâ compelling products that are resonating with consumers globally has never been stronger. Shifting to HOKA. Global revenue for the third was $352 million, representing an increase of 91% versus last year on a reported basis. Another quarterly revenue record for HOKA. Just two quarters ago, we celebrated HOKA achieving $1 billion of revenue on a trailing 12-month basis, and with the quarter just delivered, the brand has now eclipsed $1 billion of revenue over the last nine months, ended December 2022. HOKA growth in the third quarter was driven by share gains with one specialty account in the wholesale channel as product flow improved this year relatively to last, allowing HOKA to increase sell through, added points of distribution with select strategic accounts as the brand has been slowly expanding throughout the year, global DTC revenue more than doubling versus last year, as consumer acquisition and retention increased 95% and 109%, respectively. And a favorable comparable period as wholesale shipments were disrupted in the prior year due primarily to port congestion. We believe the Fly Human Fly marketing campaign has been a key catalyst for the HOKA brandsâ DTC strength throughout the year which has driven a higher growth rate than wholesale on each quarter thus far this fiscal year. During the third quarter, targeted marketing activations in Chicago and New York City helped drive a 22% increase in brand awareness, a 27% in consideration and a 33% increase on purchase intent in these markets over the next six months. We also believe these markets have seen a halo effect from the additional brand visibility created by popup stores which have continued to perform well for HOKA. In particular, we saw a significant gains among 18 to 34 year old consumers, who in the US and EMEA drove the largest year-over-year increase of any age group during the third quarter. We have been increasingly encouraged by the broad product adoption from females in this coveted demographic, who appeared to be actively searching hoka.com for what is new and exciting on a regular basis. Giving us confidence and the investments weâre making to build brand awareness globally. The all new [Solimar] [ph], our cross trainer is the perfect example of this trend. The Solimar launched earlier this fall without significant marketing dedicated to the shoe, but still landed in a top five of styles purchased by females aged 18 to 34 years old in this quarter. HOKA is also resonating well with males in this demographic, but we see a great deal of more opportunity to further expose the brandsâ product depths by testing access points to specialize and serving this target consumer. Importantly, even with the expansion beyond run specialty distribution, the brand has hyper-focused on delivering in that core channel as well. According to aggregated US run specialty store data, during December, HOKA increased market share by 5 percentage points versus last year, delivered the highest average product turns and maintain a gross margin well above the channel average. In terms of our wholesale partner access points in the third quarter, we are extremely proud of the HOKA brandsâ performance as that continued to build market share in a highly competitive marketplace. With the strength of consumer demand for the brand, HOKA was able to maintain its high percentage of full-price business even with the incremental access points with strategic accounts. Though early days in some of the brandsâ new doors, the feedback on HOKA performance has been exceptional. On the product side, HOKA has continued to introduce award-winning footwear, in October, HOKA was featured in the 2022 Menâs Health Sneaker Awards with Bondi 8 being chosen for the most comfortable cushion, and the Kaha 2 GORE-TEX noted as the best hiking sneaker boot. In addition, Outside Magazine published its Winter Gear Guide for 2023, selecting the Mafate Speed 4 as the best shoe for fast in rugged trail runs. All of us at Deckers are excited for what is to come for the HOKA brand, starting with a couple of innovative product launches planned for the fourth quarter and more to come in fiscal year 2024 and beyond. In terms of consolidated channel performance in the third quarter, we saw strong growth in both global DTC and wholesale, but the majority of revenue growth was driven by global DTC which increased 19% versus last year on a reported basis, and 22% on a DTC comparable basis. DTCâs strength was driven by impressive global consumer acquisition and retention across the entire portfolio, which increased 44% and 38%, respectively. From a dollar growth perspective, global HOKA DTC volume more than doubled and UGG DTC increased 8% on a reported basis versus the prior year, driving over $100 million of combined incremental revenue. On the wholesale side, consolidated global revenue increased 8% on a reported basis versus last year. Growth was driven by HOKA brand market share gains and existing points of distribution as well as incremental business from added doors with select strategic accounts. For the total portfolio, the increased HOKA volume was partially offset by lower wholesale shipments for UGG, where the brand focused on selling through existing inventory to reduce the need for promotional activity. Evidencing this success and illustrating the underlying brand heat during the season, UGG wholesale units sell through in the US increased mid-single-digits in fall â22 as compared to fall 2021. With the exceptional demand our brands were able to capture through DTC combined with a strategic actions taken on the UGG wholesale front, our third quarter DTC mix increased from 50% last year to 52% this year. In the third quarter, our brands achieved the highest DTC mix ever for our historically largest quarter, which represents great progress towards our long-term objective of a 50% mix of DTC business to the entire fiscal year across the portfolio. Alongside our disciplined omnichannel approach, I would like to share out our amazing design teams that continually bring compelling new products to market. The combination of these talented teams create the exceptional experience with our products that consumers have come to love and expect from our brands. With that, Iâll turn the call over to Steve to provide further details on the third quarter performance and an update on our fiscal year 2023 guidance. Thanks, Dave and good afternoon, everyone. Adding to Daveâs remarks, I would like to express how encouraged we are with the performance of our brands as we continue to operate in a very dynamic consumer environment. We are fortunate that our two largest brands are very healthy and proving resilience in a highly competitive marketplace, due primarily to their differentiated and compelling product offering. While HOKA continues to drive incredible growth as again shown in this quarter, UGG was able to deliver relatively flat reported revenue, as compared to last yearâs record revenue in a much more difficult consumer and macroeconomic environment that included a significant foreign exchange rate impact. In constant currency, the UGG brand delivered growth of low-single-digits in the quarter. Our organizationâs continued commitment to long-term strategic decision-making and disciplined approach to spending in an unchartered environment propelled Deckers to yet another record quarter. Now, letâs get to the specifics of the third quarter financial performance. Third quarter fiscal 2023 revenue was $1.346 billion, representing an increase of 13% versus prior year. On a constant currency basis, revenue grew 17.5% versus last year. Growth in the quarter was driven by continued expansion of HOKA, which more than doubled its global DTC business through impressive increases in consumer acquisition and online retention, and increased wholesale revenue by 83% versus last year due to market share gains and select increased points of distribution with strategic partners. HOKA also benefited from an easier comparison to last yearâs third quarter when wholesale shipments were disrupted by inventory delays that resulted from port congestion. Gross margin for the third quarter was 53%, which is up 70 basis points from last yearâs 52.3%. The most material drivers of gross margin in the quarter were a significant benefit from reduced freight costs, which was partially offset by unfavorable foreign currency exchange rates as compared to the prior year period. Additional gross margin impacts in the quarter included benefits from favorable channel mix with DTC growing faster than wholesale, favorable brand mix as the sales of our HOKA brand increased and price increases implemented at the end of last year. These were partially offset from more normalized promotions and closeout activity for UGG relative to minimal discounting last year. SG&A dollar spent in the third quarter was $350 million, up 7% versus last yearâs $328 million. As a percent of revenue, SG&A was 160 basis points lower than last year, primarily due to benefits in the quarter from foreign currency remeasurement. But it still remains a headwind in the fiscal year-to-date through December, and a lower ratio of marketing to sales as we shifted the timing of HOKA campaign spent into the fourth quarter to align with the launch of spring 2023. Our tax rate was 23.7%, which is higher than last yearâs 20.5% primarily due to jurisdictional mix of business. These results combined with favorable interest income relative to last year, and a lower share count drove earnings per share to $10.48, which is more than $2 and 24% higher than last yearâs $8.42 per share. Turning to our balance sheet. At December 31st, 2022, we ended this fiscal third quarter with $1.058 billion of cash and equivalents. Inventory was $723 million, up 31% versus the same point in time last year, primarily to support the continued growth of the HOKA brand, which was light on inventory in the prior year due to factory delays, with some offset from UGG inventory being down year-over-year, and during the period we had no outstanding borrowings. During the third quarter, we repurchased approximately $45 million worth of shares at an average price of $350.25. As of December 31st, 2022, the company had approximately $1.46 billion of remaining authorized for share repurchases. Now, moving to our updated outlook for full fiscal year 2023. We are increasing our full year revenue guidance to be up 11% to 12% from our previous range of up 10% to 11%. This increase now equates to a full year revenue range of $3.50 billion to $3.53 billion. This is being driven by HOKA upside as the brand continues to exceed expectations in DTC and build market share across global wholesale access points. Reflecting this update, HOKA growth is now expected to increase in the low 50% range for the fiscal year 2023 as compared to fiscal year 2022, implying more than $450 million of incremental revenue versus last year. The HOKA brands increased fiscal year revenue guide now implies a second half growth rate in the high 40% to low 50% range, with total dollar volume that is slightly greater than the first half, reflecting the brandsâ balanced revenue across the year. Due to last yearâs supply chain disruption that impacted quarterly wholesale revenue timing, the HOKA brandsâ growth rate in the fourth quarter will be lower than the brandsâ typical run rate. With that said, we expect to see continued robust DTC demand from consumers driving strong growth in that channel. UGG revenue is still expected to be down mid-single-digits on a reported basis, implying a year-over-year decline in the fourth quarter as the brand laps abnormal events in the prior year. As a reminder, in the fourth quarter of last year, UGG had late arriving fall inventory, which wholesale customers would historically cancel, but instead they kept their orders preferring to procure inventory on the earlier side for the future seasons. This resulted in additional growth in the prior year fourth quarter that is not expected to be repeated. Additionally, UGG DTC benefited from backorder product that shipped in January last year. Further, of all our brands, UGG is the most globally exposed brand, and as a result, continues to face the most significant headwinds from an unfavorable foreign currency exchange rates as compared to last year. Beyond our increased revenue outlook for full fiscal year 2023, gross margin is still expected to be approximately 50.5%, SG&A as a percentage of sales is still expected to be approximately 33%; operating margin is still expected to be in the range of 17.5% to 18%. Our effective tax rate is still expected to be approximately 22%. And our increased diluted earnings per share is now expected to be in the range of $18 to $18.50. As a reminder, due to the disruptive nature of how the second half of last year played out, the company pushed hard to improve the availability of our products earlier this year, and that strategy has served us well, and due to this push, more products shipped earlier this year, and that, combined with currency headwinds have placed pressure on the reported percentage growth in the fourth quarter. With that said, we believe viewing our increased expectation for the full fiscal year more holistically is a better measure of the progress our brands are making. In this context, we are delivering on what we said and have continued to increase our full fiscal year outlook, despite a harsher impact from foreign currency fluctuations, as compared to initial expectations at the outset of this year. Please note, this guidance excludes any charges that may be considered one-time in nature, and does not contemplate any impact from additional share repurchases. Additionally, our guidance assumes no meaningful deterioration of current risks and uncertainties, which include, but are not limited to, further supply chain disruptions, constraints and related expenses, labor shortages, inflationary pressure, changes in consumer confidence and recessionary pressures, further strengthening of the US dollar and geopolitical tensions. As we approach the end of our fiscal year, I wanted to provide further context around the state of our business. On Logistics, the level of disruption, delays and corresponding freight costs relative to the same point in time last year has continued to improve, though they remain elevated versus pre-pandemic levels. While the ongoing outbreak in China is not currently impacting footwear production or transit times in a material way. We are experiencing some minimal operational hurdles, and weâll continue to watch this situation closely. In terms of inventory, weâve continued to see improvement in the ratio of inventory growth to sales growth over the last few quarters, as was signaled in our expectations throughout this year. While still working to optimize levels, we feel good about our current inventory position, which is up over last year to satisfy increased HOKA demand. We still anticipate unique year-over-year comparisons based on disruption in the supply chain, as well as the dynamics of the HOKA brandsâ increasing mix of both revenue and inventory, especially as itâs more even quarterly revenue cadence compared to UGG. Regarding promotional activity, as we have discussed over the last few quarters, the marketplace has become increasingly influenced by higher levels of markdown activity. While our brands have maintained a high percentage of full price business, there has been a return to more normalized levels of promotion experienced prior to the pandemic, particularly with the UGG brand. HOKA has largely avoided additional discounting beyond the historical model update flow. Given the dynamics of the marketplace, which is dealing with higher channel inventory, we are well positioned having managed inventory into the wholesale channel, while leveraging our DTC capabilities, selling earlier and at higher margins, gaining share and exceeding our original expectations on the year. On currency, weâve continued to experience impacts on our results from unfavorable foreign currency exchange rates. In the fourth quarter, we are expecting an approximate impact of $20 million to revenue, and our expected headwind for the full fiscal year 2023 remains at approximately $100 million. Finally, as we finish out our fiscal year 2023 and look to deliver another exceptional year, we are also reflecting on the actions we took to manage our expense base and the tradeoffs made to deliver these results. While we are not yet providing guidance for fiscal year 2024, and as our business expands, we will continue to review and invest in those areas that will drive the organization forward, especially as we start to see gross margin expansion. In this highly competitive environment, those further investments will support talent, innovation, technology, and enterprise infrastructure, which are all critical to our continued success. Thanks, everyone. Thanks, Steve. We are proud of our strong results and ability to navigate a challenged consumer landscape through our marketplace managing strategies tailored to each of our unique brands. Exiting the holiday season, we are encouraged by and have great confidence in the strength of our brands and the exciting future ahead. With the brand heat weâre seeing on HOKA and UGG in particular, we feel Deckers is well positioned. Both brands operate on a pull model, and we believe the strong relationships our brands have built with key wholesale partners will serve us well. Deckersâ strategic brand marketplace management, omnichannel capabilities and flexible operating model continue to be the driving forces behind our companyâs sustained success. But Deckersâ success is ultimately made possible by the hardworking employees who go above and beyond to deliver consistent results aligned with our long-term strategic goals. Thank you, everyone for joining us on the call today. And thanks to all of our stakeholders for your continued support. We look forward to sharing more as we continue to build towards Deckersâ exciting future. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from Laurent Vasilescu with Exane BNP Paribas. Please go ahead. All right, thanks for taking our questions. Wanted to start on the wholesale side, up 8% in the quarter, I think last quarter you talked about the channel being down slightly in 2H. Maybe just talk about what youâre seeing in that channel, how itâs progressed versus 90 days ago? The wholesale up 8% in the quarter. But I think you spoke to wholesale being down slightly in 2H on the last call. Just any you know color you can give on whether thatâs still the view or if somethingâs changed? Yeah, I let Steve get into specifics. But I think you know, a lot of this and he will explain this in more detail as the call goes on. But itâs just the timing of deliveries versus last year. So thatâs the big part of the dynamic and then shifts between Q3 and Q4. But Steve I donât know if you have more color on that. Yeah. I think you know, when we get into the quarterly discussion, itâs a little bit about what we alluded to at the beginning of the year. We knew that given â coming out again, Q4, just to remind everyone, where we shipped product last year in Q4, that was going to impact Q3 and Q4 of this year in terms of wholesale growth. So we took the opportunity to sell products in. We had wholesale customers participating and wanting to hold some of that product that they didnât sell in Q4, which we knew would impact Q3 and Q4 of this year. So I think, as we see Q3 and Q4 play out, itâs much to our expectation and a little bit better, which is why we are increasing our full year outlook. We knew kind of between quarters, there would be some disruption in the current year, again, why we didnât guide quarterly. But I think continuing to see strong demand with our wholesalers. This is a bit of you know impact from pandemic and supply chain disruption experienced last year, still playing through this year. It is impacting how we see wholesale growth in the current year, but we knew that, right and it goes a little bit back to the point I made in the prepared remarks, which was, we were going to take every opportunity to get products in early in the year to make sure that we have an opportunity for strong sell through during the season, which is exactly what weâve seen. And our brands continue to perform well and resonate with customers. So both on the UGG side, and especially as you can see in the numbers on the HOKA side. So, again, really pleased with our performance, again, donât want to get hung up on quarterly percentage changes, because really, weâre measuring the health of the business on the year and thatâs our outlook on the race for the year. Yeah, and I think just as a reminder, you know, Q3 last year, we were in some cases starved for inventory. And we, you know, brought inventory that we could have sold in Q3 brought in in Q4 for both UGG and HOKA, and the wholesalers were happy to take it at that time, and particularly for UGG, they were happy to fill up on kind of core styles, knowing that they would carry it into Q3 this year, and that dynamic has played out. But now weâre comping, you know, those increased shipments in Q4 last year. But overall, as Steve said, the brands are very healthy, full price sales throughout our wholesale partners is strong and the demand from them is still there. But keep in mind, theyâre also working through you know, inventory situation, a lot of promotional activity in the marketplace, and then working through their own inventory. So theyâre careful about who they bring in for brands. And fortunately, our brands are very, very strong. So theyâre prioritizing us, but they still have a lot of inventory from other brands to work through in this environment. Hey, got it. Very clear. And then on HOKA, if I can just ask a follow-up. You mentioned expanding through strategic access points on wholesale. Can you maybe just give a little more detail on that? Would the opportunity looks like there to expand? HOKA in the wholesale channel outside of specialty running? And kind of what the strategy is there? Thanks. Yeah, Iâm happy to talk about that. And this is, you know, I would say on a global scale, we are very selective of who we sell HOKA to in wholesale. Weâre always prioritizing the run specialty channel, thatâs our bread and butter and the authenticity of the brand. But you know, weâre strong in places like REI, weâve expanded doors index in the third quarter. And as we mentioned in the call thatâs growing very well. Weâre in a handful of footlocker doors, but right now weâre not really looking to expand too many more doors in wholesale, weâre focused on healthy sell through and expanding categories. And then, you know, as we saw in Q3, DTC is exceptionally strong. And we want to continue to you know, drive the growth strategically in wholesale, create awareness, get in front of the right consumers, but ultimately drive as much business as we can through DTC, because for all the right reasons, margin, consumer data, lifetime value. So itâs a healthy balance and this is a good reflection of our strategy towards ultimately being a 50% DTC company, you can see how this is working in this quarter. Yeah, hi. Good afternoon. I want to ask first just about the UGG brand. It looks like youâve had some incredible heat for a few of the styles that were hard to get from the consumer side. So Iâm curious just how you view availability and your plans for things like the platforms in the Ultra? And then what type of response are you seeing from wholesalers who maybe didnât have much of that product, but presumably would want some at some point looking forward? Yeah, I can share with you my inbox of emails of people looking for those styles. So you know, I think to take it up to a higher level as weâre managing through our inventory in the UGG brand you know, we pulled back a little bit on how much we invested in some of these new styles, not anticipating how strong the consumer demand for them would be. So you know, the platform styles, the Tas, the Ultra Mini, those styles, you know, in many cases sold out to the piece. And so, we missed some opportunity there. The good news is that wholesalers want more, the consumer wants more. And weâve realized that these extended Classics, you know, in more iterations of core classics would keep our brand DNA intact, are resonating very, very well with particularly younger consumers. But I would say all consumers, and then on a global scale. So you know, you can feel confident that weâre going to continue on that path and developing these styles, take advantage of the platform trends, et cetera as we continue through the year and beyond. So, good news is that you know core classics remain strong and healthy. But some of these new iterations were better than we expected. Which is great news. And you know, thereâs demand on the table and the consumer is hungry for. Thatâs great. Then maybe a follow-up, a set of questions on the HOKA. A little bit of a similar question, could you just maybe elaborate on the strength of the 18 to 34 year old demographic, you know, whatâs changed there and maybe accelerated adoption? And then just Steve, when I look at the HOKA revenue, typically, the fourth quarter is a little higher than the third quarter in dollars. So I understand that year ago comparison looks different, but any reason why the fourth quarter dollars would be down from the third quarter? Thanks again. Yep. Thanks, Jon. So yeah, on the HOKA side, you know, weâre very happy with these results. I think, in the early days of HOKA, you know, we were selling obviously to core runners and beyond, and then some people were using it for, you know, comfort and longevity reasons. And the younger consumers werenât really adopting it as part of their own yet, but weâve seen that shift â change dramatically in the last year or so, you know, in the 18 to 34 year old category was our fastest growing consumer segment. So itâs working as, you know, as we planned, probably a little better than we planned, tapping a little faster than we planned. But some of the activities weâre doing, the collabs with folks like free people, et cetera, marketing, but youâre seeing, you know, teenage girls and boys trading from traditional athletic brands into HOKA, and raving about it. So itâs very exciting. And it just expands the breadth of our brand from ages, you know, 18 to 80. And I think that marketing and the product teams are doing an exceptional job of creating right product for that consumer, putting it in the right place, and showcasing it the right way. And some of the extended work weâre doing on the lifestyle side, taking core styles, but you know, different treatments, different materials, different colors that are more kind of lifestyle focused, thatâs working extremely well, too. So we think that this is a big unlock for the brand long-term. We want to be healthy and meaningful and important to this younger consumer. And weâre seeing that play out, which is really great. Yeah, and Jon, this is Steve. On the Q3, Q4 HOKA dynamic. Again, it goes back to a little bit, you know, weâre dealing with disruptive supply chain last year, right. So thereâs a dynamic on the year-over-year comparison in Q3 and Q4. Then to your point on kind of Q4 versus Q3 this year. As weâve had more inventory availability, weâve been putting that into the marketplace. At the same time you know, we know as Dave said, there is more product in the marketplace. So we want to control the marketplace. You know, weâll look and see how the brand continues to grow, itâs going to continue to grow a little bit disproportionate in percentage terms, again, because of how weâre making those comparisons to last year. But this is a little bit to our marketplace management. We also have new models that are being introduced in Q4. So thereâs some change in some of the wholesale deliveries in the quarter. But again, this is a brand thatâs continuing to grow overall solid growth plan for the year, a little bit choppy between quarters, you know, and strong demand that we continue to see, that wholesalers are demanding product. So, managing the DTC business, managing the wholesale business, managing the marketplace, recognizing whatâs going on there. I wouldnât get too concerned over the Q3, Q4 dynamic. You know, weâve just got choppy quarters going on in this year. Yeah, and I think you know, from a consumer perspective, you know, they donât know the quarterly ins and outs, but theyâre seeing the product itâs selling through very well at full price and the demand is certainly there. You know, and I think you have to pull back and look at the full year results of this brand, and especially the way both of our brands and Q3 performed in a very challenging environment, FX pressures, promotional environment, and to come out with this rate of high level â high price, full price sell through, healthy margins, and still momentum and demand in the marketplace. You know, thatâs what weâre focused on. And so, we see this continuing and the brands as I said before, Iâve never been in a better place the brand heat that we see. And UGG and HOKA are exceptional and weâre going to continue to build on that. And, you know, invest in these brands for the long-term. And then I think just the last thing and weâll move on, but, you know, I think the demand that weâre seeing for HOKA is highlighted in again, our raise for our full year outlook. So that raise is being driven by the increased demand that weâre seeing from HOKA. You know, again, just speaking to the strength we continue to see with HOKA and how itâs resonating in the marketplace. Hey, thanks, guys. Iâm just curious maybe on HOKA, if you can talk about a little bit more detail in terms of how much of the growth is being driven by existing accounts versus your new distribution partners? Any more color you can give around that? And then second, just curious how much has pricing been a driver in the sales change at each brand? And maybe whether that looks different within DTC versus wholesale? Thanks. Yeah, good questions. I would say for HOKA, the majority of the growth is coming from existing accounts, you know, outside of, you know, some expansion in Q3 in Dickâs stores, there really wasnât a lot of expansion in new doors globally. So, you know, weâre continuing to gain market share, you saw that in their pre-recorded comments. And thatâs happening, you know, across the board. Itâs not just a run specialty. So, strong full price sell through, healthy margins for the retailers, great presentations in wholesale. But weâre getting better at it as we go and the wholesale accounts are realizing the power of this brand. And so the majority of that is coming from existing accounts at this point, which again, goes back to the brand marketplace management and just, you know, speaking to the right consumer. What was the other question, sorry? The pricing. Yes, sorry. You know, we have raised prices in both brands this past Q3 and coming into the fall period, and we didnât see any, really any resistance to that, you know, obviously evidenced by the sellout of some of these UGG styles and some of the price increases in HOKA, we havenât really seen a slowdown in sell through. And so I think the product is worth it. The brand is, you know, meaningful and important to these consumers. And they were willing to pay full price even though some of the prices were higher. We raised price on certain select styles but todayâs point that was called around 8% of the styles. And it wasnât all at the beginning of the year. It was some styles on HOKA at the beginning of the year, and then it was some products in UGG on the fall season. And is that an even higher number when you adjusted for mix you were introducing higher price styles into the assortment generally? No. In UGG when weâre also doing, you know more slippers and Tasmans that a little bit lower priced than the Classic and some of the Minis you know, it may affect the total average price across the board. But you know, I think weâre providing excellent value and quality for the price and I think the consumer sees that and itâs resonating strongly with them and willing to pay it. Hey, everybody. Thanks for taking my question. I just want to ask about UGG. So obviously the last couple of years have been you know fairly wonky you know between COVID stuff and supply chain and the dynamics around wholesale. But I mean when we â when you kind of think about UGG on a more you know normal basis or a long-term basis like how should we think about the growth of that brand? I mean, what â is it â you know, this thing a mid-single-digit grower or is it a high-single-digit grower under normal times, like just, I think you know given how wonky things have been the last year, I think itâs hard to sort of wrap your head around what the sort of normal algorithm is for this brand? Yeah, I mean certainly weâre still dealing with normalization of the business, you know, from COVID and some of that is related to refilling the marketplace of inventory coming off the peak, balancing that out. And so you know, right now, where we sit right now, weâre probably looking at low-single-digits, just to be prudent and as we reset the marketplace. You know, I am very excited about the product pipeline and the new leadership under Anne and the way the design teams and the marketing teams are collaborating globally for this brand, you know, weâre getting better at this every day. And so I think the opportunity is there, but weâre still trying to navigate and make sure we set the marketplace correctly. Right now, itâs extremely well managed globally. The inventories are clean and healthy. We have some inventory a little bit to work through here and there. But the long-term outlook for this brand, I think is exciting. But I would say where we sit now in the shorter-term, itâs you know weâre looking at low-single-digits, knowing that the environment and the global macroeconomic situation is still a little bit challenged. Different than HOKA, because thatâs, you know, more of a hyper growth. And so a lot of people havenât heard of the brand yet across the globe or UGG is obviously a household name. And itâs about fine-tuning the product assortment being meaningful to each of the consumer segments, and managing the marketplace globally, while driving a healthy DTC business to improve margins. Understood. And if I could just follow-up on margins real quick. So you know I think you did talk a bit about normalizing promos, but or normalizing discounts or whatever. But on the gross margins, it would seem like there would be you know some kind of good guys over the next 12 months as well, you know, kind of freight rolling off and FX, I guess, turns from a bad guy to a good guy and channel mix and brand mix, et cetera. So, definitely seems like thereâs a fairly bright gross margin outlook like, you know, how should we think about the drop through to EBIT margins? And I know you want to invest in the growth of the brands, but you know can we see EBIT margins creep higher over time? Yeah, Tom this is Steve, Iâll take that one. And you know, weâre not giving guidance yet. And it going a little bit to what I said in the prepared remarks. And so, we are experiencing improvements in gross margin, youâve seen it in Q3 as you model it in, youâll see it in Q4, where thatâs largely coming from the freight. So you are right, weâre seeing freight rates come down. In the current quarter, Q4, weâre going to benefit from that, weâre seeing that increase. Overall, there still is, you know, an FX headwind. So for the year, as you can see in our guidance, we are lower on a gross margin basis, weâll continue to see some improvement with ocean freight, but itâs going to be at lower levels than what youâre seeing come through in the current quarter. So there will be to your point a little bit of a tailwind, weâll see what happens with currency, right. Currencies turned more beneficial to us. Itâs in kind of mid-to-late Q3. Weâre seeing some of that, but itâs still down from a year ago. So to your point, weâll see what happens. There is a potential there, you know, for some improvements that could contribute to the gross margin. But as I also said, you know, weâve tightened our belt this year to deliver on what we guided, weâve held off on some investments within the business to continue to deliver within that range of guidance, and so weâre evaluating it. And while we havenât given guidance on next year, we do expect there will be some gross margin expansion. And weâre going to use that to invest in the business, especially in the competitive nature of where this business is and what weâre doing with our brands. And so that investment is critical to keeping us relevant and leading in this space. So that is clearly something we are going to do with some of that gross margin expansion. Now, as Iâve said before, right, when thereâs an opportunity, we see strong businesses their opportunity to reflect some of that upside. Yeah, and we did do that a couple of years ago. But first, weâre going to make sure that weâre looking at some of this gross margin expansion, investing it in the business because itâs proving well, weâre delivering exceptional results. Weâre well above many of our peers in terms of operating profit. So we got to keep continuing to invest in this business. So, yeah, there is, but you know, thereâs also investments that we have to make them in business. Hi, this is Krista Zuber on for John. Just wanted to circle back on the inventory question in terms of kind of where you see or how â what your level of comfort is on the inventory levels by channel, DTC and wholesale? Thank you. Yeah, I think the â so speaking to our inventory, we, you know, this is something we indicated at the beginning of the year, that it was something that we would be working through this year. And I think weâve demonstrated that, inventory levels have improved. As weâve said in the prepared remarks, again, inventory level on UGG actually decreased, again, signaling some of the work that weâve been doing and the improvement efforts that weâve been making. You know, what weâre also doing is increasing our HOKA inventory. So when you got a quarter thatâs growing 90%, you got to have inventory to service those sales. So we have been increasing inventory. You know, I think in terms of as we look out further, thereâs still opportunity to optimize inventory levels. But when we look at the relationship of inventory to sales growth itâs coming much more in line, we feel comfortable about our inventory, thereâs always room for a little bit of improvement, weâll continue to work on that improvement, as things begin to normalize, especially with the supply chain. But where we sit today with everything thatâs going on with the growth of our brands, we feel comfortable about our inventory positions, and weâll continue to work to optimize those levels. Yeah, and I would say from a channel perspective, you know, I think the channel is in good place with the inventory. You know, we were able to fill the bucket, so to speak in UGG last year, and weâre getting back inventory in key styles in HOKA. So I think itâs in a very healthy place and thatâs reflected in, you know, how DTC exceeded wholesale growth in the quarter. Still healthy sell throughs globally. So again, credit to the teams you know managing the marketplace in this environment. But I would say, you know, from a brand health and a marketplace and a market channel perspective, things are in good shape. And, you know, in addition to what Steve said about how weâre managing and our number on levels. Good afternoon. Erinn, I know and thank you guys for giving part of what I always ask, but Erinn, can you give us the whole thing, please for wholesale or DTC? Hi, Sam, sure thing. So for the quarter global wholesale, including distributor by brand is what Iâll give you. So for UGG, that will be $374 million, for HOKA, $224 million, for Teva, $25 million, for Sanuk, $3 million. And then that gives you other which is predominantly Koolaburra, $20 million. Thank you. And Steve, I want to commend you, I think you should run for President given your answer to John Kompâs question. So Iâm going to ask it again. Could you give â if you look at the DTC business, and if you look at wholesale business historically, Q4 for HOKA has accelerated from Q3. So the question is, do you anticipate that Q4 HOKA revenue will be higher than Q3? And I think John answered that question, right. So when you take the numbers in, given what we sold in as well as what we sold through our DTC, weâre not expecting that on â growth on Q3. Again, weâve got dynamics that are underlying between quarters, right. And thatâs why I want to be careful that people arenât so focused on Q3, Q4, as I said, weâre managing this business for the year. Itâs why we have not this year, given quarterly guidance. We know weâve got dynamics within quarters this year, where weâre trying to get more products in early. And that, as I said before, has worked well for us, right. So we want to make sure we have you know the right perspective of how the business is trending. Now, when you then look at mix, right. Thatâs going to play an impact on revenue reported. So when weâre looking at volumes, right volumes are a little bit different due to the channels that weâre selling in. Our guide equates to similar volume levels. But again, I want to be careful that people arenât so focused on a Q3, Q4 dynamics. Itâs the full year right and you know, weâre coming out of a quarter where we grew the brand 90%, there is demand out there. So, again, weâre going to get product in, weâre going to get it in there, we want to make sure it has an opportunity to sell through, and then weâll see what happens. And then again, we have tremendous confidence in HOKA. And â but at the same time, weâre managing the marketplace. We know that there are a lot of competitors that have a lot of inventory within the wholesale channel, we donât need to contribute to that confusion, weâve got a brand thatâs red hot that continues to perform well, this goes to our marketplace management. So brand is in great shape. I donât want people to get worked up about a Q3, Q4 dynamic. Thatâs not what weâre talking about. But I understand. And Iâm not trying to get worked up as weâre trying to model this properly. The question, though, is, as you talked about, I think Dave, you spoke of one more after this, which is related to UGG, but with HOKA, you spoke about some new, you know, shoe you sounded pretty excited about that are launching in Q4. And now is this situation because of the scenario that Steve just mentioned that you would launch it in direct to consumer first, maybe in Q4 and then launch it to wholesale in Q1? I mean, so is that what youâre thinking about? I mean, as far as manage â you know, how you bring things to market? Where, you know, I mean, Iâm just trying to understand it, because youâre bringing in brand new products and the demand real high than those retailers want your product then it really will probably take away from some other brand not necessarily from you and theoretically not make things worse. Yeah, I think you know, what youâre looking at a little bit is some of those launches in Q4 had to ship in Q3 to be in the marketplace that, you know, in time and no. And then also, I talked about the Solimar. And also the new transit that just launched today, those are small buys and small volume drivers in a first introduction, so heavily weighted on DTC, you know, wholesalers, you know, want to see performance in your own channels before they invest heavily. So, yes, theyâre exciting. Yes, theyâre new. Yes, theyâll steal some market share from competitors. But the scale of those on the business at this point are still small. And then some of that inventory has also shipped in Q3, which is why you see the 90% increase. Got you. And then on UGG given the guidance, I would assume you know that youâre going to have a big swing on wholesale in the fourth quarter, which is really about the big increase that happened in Q1 â sorry in Q4 last year. But can you just and since it is not you know on a relative basis, itâs your second smallest quarter. Can you give us some direction on how to think about the wholesale for â in the fourth quarter? I mean, does it have a negative â is it a negative 20 handle negative 30 handle negative? You know, give us something there that can, because it sounds like the wholesale is going to be down much more than the DTC though the DTC is probably going to be down a bit. Yeah, I mean, I think DTC, you know, there was exceptional results in DTC in Q3, you know, as we said, some of those you know really hot styles have sold out and we are selling fumes, the golden stars with a new introduction in Q4 that is already selling out. So thereâs hot demand for some of these styles. But as weâve been managing our inventory levels, we didnât buy as heavily into some of these new styles yet, not anticipating that kind of sell through. On the wholesale side, you know, yeah, they still have inventory leftover from what they purchased throughout the year. More than kind of the core classics, theyâre still struggling with the hot new styles, you know just like we are in DTC, what youâre going to see it down, you know, in the 20%, 30% range for the quarter. But again, if you look at the market sell through and the health of the brand in the marketplace, thatâs what weâre focused on and you know itâs tough. I understand youâre trying to model quarters, but itâs a funky dynamic wonky as one person already said, and but I think we got to go back to like, what is the health of this brand and how are things selling through? Well, again, I mean, the UGG costs of being down in Q4, you have so much that shifted from Q3 to Q4 last year, and you brought more of it in Q3 this year. And so thatâs not really â thatâs a different scenario than health. Thatâs not expected. Itâs just more a matter of trying to triangulate where it is. Hey, guys, good afternoon. Can you talk a little bit about what youâre seeing on the ground in China for both your UGG and HOKA businesses? And if you can elaborate maybe on your specific expansion strategy for HOKA, and then if thereâs any way to quantify, you know, the potential build back, you can see in the UGG business, given the lockdowns over the last, you know, two to three years? Thank you. Yeah, sure. You know, itâs hard to comment on things right now in this quarter. But you know, I think coming out of the year-to-date so far in China, listen, I give our teams over there, the leadership and management team, the way they have managed the last three years in that marketplace with all the challenges from COVID and lockdowns, and you know, consumers not being able to spend, I think weâre in you know, exceptional shape and our brands as considering the marketplace. So the brands, you know, are strong, theyâre healthy, theyâre in demand, the marketing tactics that weâre employing for both brands over there being more locally relevant, the collabs that weâre doing in UGG, the fashion partnerships, reaching in younger consumer, those are all checking boxes and performing extremely well. You know, I think what youâll start to see, and I was talking to the China team the other night, youâre going to start to see consumers come back out. And we feel really good about our chances, you know, for the finish of this year and heading into next year. Keep in mind that, you know, China isnât a massive business for us yet, we do have long-term aspirations. But I think weâre going to see that consumer come back not only domestically but globally. And thatâll be an interesting dynamic for us and other brands. But we like the way weâre set up the like, we like the way weâre managing the marketplace, the way weâre resourcing it, and then specifically to HOKA you know, so far so good. Weâve invested in our own stores, weâre working with partners on door expansion, creating awareness in the marketplace in an authentic way. And weâre going to continue on that path because we see just tremendous opportunity for HOKA in the long-term. And so far, weâre seeing good signs from our partners and our retail stores and gives us a lot of confidence that this can be a big success over time. Ladies and gentlemen, this concludes our question-and-answer session. And that concludes todayâs call. We thank you so much for joining Deckers Brands third quarter fiscal 2023 earnings conference call. And you may now disconnect. Take care.
EarningCall_592	Good afternoon. I am Hee Jun Chung [ph], IRO of SK Telecom. Thank you for joining SK Telecom's Earnings Conference Call. We are providing consecutive interpretation for the call which will consist of a presentation on fiscal year 2022 earnings highlights, future business plans, and strategic directions as well as the Q&A session. The call is attended by our executives from relevant business divisions including Jin-won Kim, CFO and Head of Corporate Planning of SK Telecom. Before we begin I would like to remind you that all forward-looking statements are subject to change depending on market situation. Good afternoon. This is Jin-won Kim, CFO of SK Telecom. As it is my first time greeting you in the new year, I would like to wish all of you a Happy New Year. Around the world, much attention has been paid to artificial intelligence and mobility technology and these future-oriented innovative technologies are expected to be part of our daily lives in the near future. Against this backdrop, SK Telecom announced the vision of becoming a differentiated AI company in November last year. This year will be the first year to achieve our AI company vision in earnest through company-wide transformation and innovation. For more specific strategies and road maps on AI company we plan to share them with the market as soon as possible. Now, let me report on the consolidated financial results for fiscal year 2022. Consolidated revenue reported KRW17,305 billion, up 3.3% year-on-year and the operating income posted KRW1,612.1 billion, up 16.2% year-on-year. 5G subscriber growth and solid growth of new businesses including B2B business resulted in strong revenue growth, while market stability contributed to improved earnings for 2022. Net income recorded KRW947.8 billion on the back of decrease in equity method gains following the spinoff in 2021. On a non-consolidated basis revenue grew 2.6% year-on-year to KRW12,414.6 billion. Operating income and net income reported KRW1,321.1 billion and KRW869.5 billion respectively. Supported by such solid earnings, we will actively pursue transformation into an AI company that I mentioned earlier and lay a strong foundation for future growth businesses to bear tangible and fruitful results. SK Telecom has been focusing our capabilities on AI technology for the past several years. Based on these efforts, we are securing points of contact with customers, providing innovative services of cost time and space and leading changes in diverse industries, through which we are preparing ourselves to play a key role in the global AI era. Furthermore, we're making investments in and forge partnerships with leading domestic and global AI companies to ensure that everyone can benefit from this era-defining technology of AI. Launched as an open data version last year A. is the world's first GPT-3 model in Korean applied for B2C services. We're working to enhance the essential service functions of A. such as conversation and UX and planning for an official launch of A. within this year. Also, we are making continuous efforts to transform A. into a daily digital mate to first achieve the next Internet gateway of our customers. A. is an in-house development based on GPT-3 technology to provide generative language services. We will continue to enhance our own GPT-3 technology in response to the global trend of rapid advancement in AI language. In addition, incorporating diverse third-party conversation generation models, including the new AI technologies is being considered. Through these activities, we aim to lead the super large AI service market in Korea. We will advance A.'s conversation and service levels by applying long-term memory technology that can remember old information and use it for conversations and multimodal technology that can comprehensively infer and communicate like humans based on multiple data types, such as voice, image, gesture and biosignals in addition to text. Next, with the goal of servicing Korea's first commercial UAM in 2025, SK Telecom is focusing on the UAM business as its key innovative future service to gain leadership in this area. We have formed the K-UAM Dream Team Consortium and participated in UAM demonstration projects in Korea. For the success of the pilot program in 2025, a target year for UAM commercialization, we will make earnest efforts to secure differentiated competitiveness, including developing a framework for hyper collaboration with Joby Aviation, a global leader in UAM aircraft with which SK Telecom has formed an exclusive partnership. [Foreign Language] With global expansion started in November last year ifland recorded 21.27 million cumulative downloads as of the end of 2022 and more than 10% of the total MAU in December came from overseas, an encouraging achievement. This year we plan to strengthen ifland economic system by introducing in-app transactions, which serve as a foundation for building a profit model. We strive to create a global success story through selection and concentration. [Foreign Language] T Universe became Korea's leading subscription service with the average MAU of more than 1 million and annual GMV of approximately KRW570 billion in 2022. Going forward T Universe aims to evolve as an AI based subscription commerce platform and build a virtual cycle of the platform by expanding market dominance through securing critical mass and attracting more sellers through the creation of an open market. [Foreign Language] Moving on to our data center business. Thanks to the increase in the utilization rates of Gasan and Siksa data centers, revenue for 2022 saw more than 30% growth year-over-year. We are preparing for additional data centers while closely monitoring macroeconomic situations and changes in market demand. [Foreign Language] Our cloud business enjoyed a twofold revenue growth year-on-year on the back of growing demand for cloud migration centered on MSP and traffic growth in 2022. We aim to sustain the revenue growth trend through aggressive MSP scale-up and expansion of added value in 2023. [Foreign Language] As for the enterprise business, we are supporting our clients' AI transformation using a diverse array of AI technologies and solutions such as robotics and vision AI and reaching out to new customers in the distribution and manufacturing sectors to pursue opportunities for additional growth. [Foreign Language] Let me now present the performance of the fixed and mobile business, which serve as a foundation for our transformation into an AI company. As of the end of 2022, the number of 5G subscribers reached 13.39 million accounting for more than 50% of the total subscribers, an indication that we now have the 5G mass market. As the share of 5G subscribers is expected to reach 80% by 2025, we will focus on acquiring quality subscribers through AI-based digital transformation, which will drive sustained earnings improvement. [Foreign Language] The Pay TV subscribers reached 9.32 million as of the end of 2022. On the back of the strong Pay TV subscriber base supported by the synergies between SK Telecom and SK Broadband, efforts to supply a wide range of content including newly released films are expected to result in revenue growth. [Foreign Language] In addition, three IPTV providers including SK Broadband decided to make joint investments last year in content worth KRW 300 billion for the next three years to compete with global OTT service providers and strengthen content competitiveness. This year, we will effectively link our diverse media assets including SK Stoa, Media S and TEAM Studio, and strengthen our portfolio to secure more synergies. [Foreign Language] The amount of dividend for 2022 was determined by the Board at KRW 3320 including KRW 2,490 that was already paid out and KRW 830 for Q4. It is subject to the approval at the General Meeting of Shareholders in March. [Foreign Language] Meanwhile, the Board of SK Broadband resolved to pay cash dividend for 2022 based on outstanding growth of business performance and earnings, which is expected to deliver approximately KRW 150 billion of dividend income to SK Telecom. [Foreign Language] Finally, let me share with you our management guidance for 2023. We project our consolidated revenue to be KRW 17,800 billion up approximately 3% year-on-year supported by overall growth in both new growth businesses and fixed and mobile business through AI-based digital transformation. We will do our best to exceed the guidance. [Foreign Language] SK Telecom will continue to accelerate transformation into an AI company that benefits customers with technology and services. We will strive to ensure that such transformation and innovation of SK Telecom will contribute to earnings improvement and tangible results from the new growth businesses to maximize corporate value and shareholder value. [Foreign Language] Now Q&A session will begin. [Operator Instructions] [Foreign Language] The first question will be provided by Sun Jung Lee from Bank of America. Please go ahead with your question. [Foreign Language] I am Lee Sun Jung from Bank of America. Thank you very much for this opportunity to ask you questions. I do have two questions. The first question is about your MNO business. As you mentioned, the 5G subscribers has reached about 50% of the total subscribers. So there are some concerns that, there will be a slowdown in the revenue growth trend for MNO business. And as your MNO business takes up a large portion of your earnings, I'd like to know, overall outlook for MNO revenue going forward for 2023. In addition, I understand that there was a decreasing trend of marketing expenses which led to improved earnings. And I wonder, if this trend will continue in 2023? The second question has to do with the shareholder return policy. You announced that, the 2022 dividend payout level is similar to that of the previous year. And what is your outlook for dividend payout for 2023? And I would also like to know, if you are considering other options for shareholder return including share buyback? Thank you. [Foreign Language] Thank you for your question. You have asked two questions. The first question was concerned with our dividend guidance and our plans for shareholder buyback and the second question had to do with outlook on MNO revenue and marketing expenses. Let me answer your question regarding the dividend policy first. As for the dividend payout level for 2023, this is something that is subject to the quarterly performance, as well as the year-end performance of our businesses which is also subject to the discussion and resolution by the Board. Therefore, I'm not in a position to give you any specific number as to the 2023 dividend guidance. However, what I can say is that, as you know, very well SK Telecom has been dedicated to shareholder returns and the size of the shareholder return has never decreased in the past. So, I would like to assure you that, we will like to maintain that level. Moving on to our plans â future plans for share buyback or treasury shares, I would like to say that, SK Telecom has been implementing shareholder return policies on par with global standards. And in the process of the spinoff, we canceled treasury shares worth KRW 2 trillion in the past, and we have introduced a quarterly dividend payout and a stock split as well. And we have maintained the overall dividend size after the spin-off. As a result, we were able to increase the dividend per share from KRW 2000 to KRW 3300, which is about 65% increase. So in terms of the dividend payout ratio and the dividend yield, you can say that our dividend return policy is the best in the industry. But considering that our earnings continue to improve and our cash flow continues to improve, we believe that we need to return more to the shareholders. When we take a look at the overall situations in the financial market, we can see that there's still a lot of macroeconomic uncertainty and we're no longer in the low interest rate environment as interest rates have been continuing to increase. Therefore, it is true that dividend income is not as appealing as in the past to the shareholders. And we see that the current stock price of SK Telecom is way undervalued considering the potential value that we're aiming for. So against this backdrop, when it comes to our shareholder policy, we can consider seriously the option of shareholder -- the option of share buyback. Our performance continues to improve. Our cash flow continues to improve. And starting from this year, we have been enjoying the new dividend income coming from SK Broadband. In addition Hana Financial Holding, with which we swapped shares have been continuing to pay out dividends on a yearly basis. So we can consider using these resources and these gains as financial resources for share buyback. But once again, we are now considering various options for shareholder return policies for 2023, including share buybacks, so I cannot give you any definite answer. But we will continue to consider and deliberate on various options for shareholder returns and we will go through the internal processes including the deliberation at the Board. And as soon as we have a specific idea, we will share them with you. Moving on to your question on the MNO outlook, as we mentioned, the portion of 5G subscribers has reached more than 50%. So, we now have the 5G mass market. However, we still see a lot of potential for growth in the MNO business, because there are more price options available for customers and there's increasing trend from migration from LTE to 5G going forward. In addition, as restrictions related to COVID-19 are being lifted, we see recovery of the roaming revenue as well. So given these various positive factors, we will do our best to maintain the growth trend of MNO business in the future as well. Now regarding your question on the marketing expense outlook Mr. Keun-joo Hwang [ph] Head of Integrated Marketing Strategy Office will answer this question. Hello I'm Keun-joo Hwang in charge of Integrated Marketing Strategy. Recently the market has been quite stable. Currently in the entire market we have more than 30 million 5G subscribers. So the 5G market has become more mature and there's an increasing number of subscribers switching from one 5G to another 5G. So we do not see any high potential for subscriber acquisition competition. While we'll continue to make sure that the market will stay stable we will employ various options to increase cost efficiency including the strengthening of online distribution competitiveness. Thank you. I'm Kim Soojin from Mirae Asset. Thank you for this opportunity. I have two questions. The first question is related to the MVNO market. Recently even a financial institution and entered the MVNO market and the MVNO market size continues to grow. So I would like to know how you are going to respond to the potential decline in the market share in the MNO business? The second question has to do with ChatGPT and your A. business. Globally and also in Korea there is a growing attention and interest in ChatGPT and we are saying that â they're saying that there will be a new era of generative AI. SK Telecom already has A., which as far as I know is based on GPT-3. So how are you going to utilize A. and how are you going to pursue the growth of A. going forward? Regarding your first question there has been some media reports on the increasing market share of MVNO businesses. And I understand that there are some concerns over MNO businesses in the market. So regarding this question Mr. Keun-joo Hwang, Head of Integrated Marketing Strategy Office will explain the current market situation and our responses. First of all, I would like to mention that the market share that was mentioned in the media reports include IoT lines and auto control lines as well. And starting from 2020, the IoT lines for auto control have been recognized as part of MVNO. That is why there was an increase in the market share for them. However, the handset accounts cater to the earnings or profitability of the MNO business. And as of the end of December last year, our market share is 42%. And since 2018, the change in our market share has been less than 1%. Also our 5G market share was 48% as of the end of last year. So since the launch of 5G, our market share has been continuing to increase. To respond to competition from MVNO, we will continue to strengthen services and products that cater to specific needs of our customers and we're going to continue to offer new and additional benefits including subscription that SK Telecom has and we're going to strengthen trending membership benefits for our customers. And in doing so, we will be able to offer differentiated customer experiences and benefits that cannot be provided by MVNO providers. And at the same time, we will continue to make efforts to find a good and fine balance between the retention of MNO subscribers and co-growth with those smaller MVNO players. Thank you. And your second question regarding ChatGPT, as we all know there has been a flood of news reports on ChatGPT recently and there has been a report that the number of subscribers to ChatGPT has exceeded more than 100 million very quickly. So -- and even this morning, there was a news about MS, one of the big tech companies announcing a new approach to ChatGPT for their Bing search engine and there was also a report about a new initiative using ChatGPT by Google. So you can see that there are many news reports about ChatGPT. SK Telecom launched A. last year and I believe it is very meaningful for us to share with you how we're going about A. development and what kinds of characteristics we have for A. technology. So for that we have Mr. Son Yun Heok [ph] and Mr. Kim Yong Jon [ph] who are in charge of the A. project and they're going to give you some more details. Hello. I am Son Yun Heok, Head of Project Management Office. As was announced before SK Telecom was able to launch the first the world's first commercial B2C services using Korean GPT-3 which is a super large language model that we developed in our own and this was faster than other global big-tech companies because it was released in May last year. And SK Telecom was able to launch an AI conversation service much faster than ChatGPT, which has been receiving a lot of attention these days. It's thanks to our long-term commitment to AI and the AI technologies and platforms and data base that we have been accumulating for many years. Since the launch of A. in May last year, we have been implementing a total of nine updates in order to identify and offer the necessary services that are demanded by our customers. So we have been quickly expanding the domain of services including A.game A.photo and A.tv. Furthermore, currently we're in the process of strengthening, not only the services, but also AI technology itself, in order to gain fundamental competitiveness of the A.service. So in this regard we will continue to improve our UX to be more customer-friendly based on user feedback and we're going to expand to AI-based daily services and telco services. And through partnerships with external partners, we're going to build a relevant ecosystem by using various characters and in collaboration with technology and services. So in line with this A., will continue to add new and meaningful functions based on AI so that A. can become a daily mate for our customers. And we're planning to launch A. as an official service and no longer an open data version and we will consider various monetization business models. Next, I would like to invite Mr. Kim Yong Joon [ph] Head of A. conversation to share with you some details about AI technology and conversation technology. I'm Kim Yong Joon [ph], Head of A. Conversation. In February, so this month, we're going to apply the long-term memory technology, which is able to store customer information in a separate memory. In addition, we're planning to adopt the multimodal technology so that A. can understand not only text but also photos and voice and other types of information. And in doing so A. will be able to offer an interface that is more natural and more friendly for users. And moving on to ChatGPT, we already have the GPT-3 in A.service. So we have accumulated a large amount of customer data. So by using this data we are advancing the ChatGPT-type technology. So there is fierce competition with big tech companies globally. So in order to ensure rapid upgrades and improvement of A. we are considering various options and solutions including those from the overseas. And the direction of advancing our technology will be in line with the kinds of services that we want to offer to our customers. So, the adoption of long-term memory technology, and the multimodal technology are very much in line with this direction. In doing so, we will be able to offer differentiated services to our customers, based on a differentiated conversation and AI technology. Thank you. I'm Park Seyon, from Morgan Stanley. I also have a question related to GPT. It's not directly related to A. per se, but it has to do with the demand outlook for data center. According to some analyst reports, it seems that ChatGPT requires much more computing, than other engines so it may incur more costs. And so if we assume that in the future there will be more utilization of GPT and other AI engines and solutions, then it may lead to higher demand for data centers. So what is your view, on the potential increase of data center demand going forward? And also, as you are already using GPT engine for your A., I wonder if it has any specific technical requirements compared to other regular Internet services including any need for a specific server or more CPU. So I wonder it has to do with your CapEx requirement as well. Okay. Thank you, very much Mr. Park Seyon, for your question. And when it comes to the link between the use of ChatGPT and demand for data center, as you know, ChatGPT has been recently receiving attention -- only recently. So, we don't have any specific information as to how such utilization of ChatGPT, will lead to demand for our data center services in the short-term or medium or long term. [Foreign Language] And I also heard from a seminar this morning that ChatGPT will have a direct impact on the business performance of companies like NVIDIA, because it will lead to more demand for CPU. So that is going to be the first line of impact. But going forward as we get to use more AI engines and AI services, it is definitely going to increase demand for cloud services, which will have a positive impact on the demand for data centers. And as you mentioned the demand outlook for data centers in generally speaking cloud market is rapidly growing and there is a requirement for platform companies to increase redundancy and backup for data centers as well as in the case of the incident of Kakao. So, overall, I can say that there will be increase in the demand for data centers going forward. Now I would like to invite Mr. Kim Yong Joon [ph], Head of A.Conversation to discuss the potential impact of ChatGPT utilization and demand for data centers. [Foreign Language] As you mentioned GPT-3 and ChatGPT they require specific GPU servers and other technological environment for development. So I can say that SK Telecom has a large-scale high-performing computing service that may be equivalent to those possessed by other porter companies or other big tech companies. And of course in the future if there is growing demand for more computing resources we may need to increase our CapEx, but I would like to say that with more utilization of technology and popularization of such technologies, there will be cost reduction drives in the market which will lead to lower costs for these developments. [Foreign Language] I'm Kim Joonsop from KB Securities. Thank you for this opportunity. I can see that your data center business growth and the cloud business growth are quite impressive. And I would like to know more about your target customers for data centers and cloud businesses and your overall outlook for the revenue growth for these businesses. Thank you for the question. When you look at our enterprise business as was in the case of last year, it can be broken down into lease lines, IoT lines, and data center business, and cloud business. So, as for the entire enterprise business, growth has been driven by data center business and cloud business. As for data center, the utilization rates of data centers increased which led to higher revenue. And for cloud, traffic increase led to higher revenue from the cloud business. So, on a quarterly basis, the enterprise business division's revenue was KRW400 billion, which is a 10% growth Y-o-Y. And the -- for the entire year, the enterprise business division revenue is KRW1.5 trillion, which represents 12.5% growth year-over-year. As for the guidance for revenue for enterprise business, we will do our best to make sure that our revenue growth is on par with that of last year. Thank you. I'm Kim Hoi-Jae from Daishin Securities. I have one question. I can see that SK Telecom is dedicated to pursuing the UAM business with a target of commercializing the UAM service in 2025. So, when it comes to a business model, I can see that there will be income coming from network usage fee, but you can also consider other business models. So, I wonder what kind of business models you have in mind for the UAM business? Thank you. [Foreign Language] Thank you for your question. We have been communicating with the analysts about the progress and plans for the UAM business. So I'm sure you're well aware of what we have been doing. And as for more details, I'd like to invite Mr. Han Mi Nyong [ph], Head of Corporate Development for more information. [Foreign Language] Your question was about a potential business model for UAM. Currently, we are in the process of carrying out demonstration projects in line with the time line of the Ministry of Land, Transport and Infrastructure. And we will be able to have some more specific ideas about business models, as we have more networks and communications with the ground control centers and securing of further reports. And we will have conversations and consultations with various partners in order to decide on specific routes for UAM services and the pricing plans these are components of the business model. So after such reviews, we will be able to share with you more details in the future. Thank you.
EarningCall_593	Good afternoon and welcome to the FLEETCOR Technologies, Inc. Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After todayâs presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Jim Eglseder, Senior Vice President of Investor Relations. Please go ahead. Good afternoon, everyone. And thank you for joining us today for our fourth quarter and full year 2022 earnings call. With me today are; Ron Clarke, our Chairman and CEO; and Alissa Vickery, our Interim CFO. Following the prepared comments, the operator will announce that the queue will open for the Q&A session. It is only then that you can get in line for questions. Please note, our earnings release and supplement can be found under the Investor Relations section of our website at fleetcor.com. Now throughout this call, we will be covering organic revenue growth. And as a reminder, this metric neutralizes the impact of the year-over-year changes in foreign exchange rates, fuel prices and fuel spreads. It also includes pro forma results for acquisitions closed during the two years being compared. We will also be covering non-GAAP financial metrics, including revenues, net income, and net income per diluted share all on an adjusted basis. These measures are not calculated in accordance with GAAP and may be calculated differently than that at other companies. Reconciliations of the historical non-GAAP to the most directly comparable GAAP information can be found in todayâs press release and on our website. I do need to remind everyone that part of our discussion today may include forward-looking statements. These statements reflect the best information we have as of today. All statements about our outlook, new products and expectations regarding business development and future acquisitions are based on that information. They are not guarantees of future performance and you should not put undue reliance upon them. We undertake no obligation to update any of these statements. These expected results are subject to numerous uncertainties and risks which could cause actual results to differ materially from what we expect. Some of those risks are mentioned in todayâs press release on Form 8-K, and on our annual report on Form 10-K, both filed with the Securities Exchange Commission. These documents are available on our website and at sec.gov. So now with that out of the way, I will turn the call over to Ron Clarke, our Chairman and CEO. Ron? Okay, Jim, thanks. Good afternoon, everyone and appreciate you joining our Q4 2022 earnings call. At the top here, Iâll plan to cover four subjects. So first, Iâll provide my take on our Q4 results. Second, Iâll recap our full year 2022 performance. Third, Iâll share our initial 2023 guidance. And then lastly, Iâll update you on a few of the key priorities that weâre working. Okay, let me make the turn to our Q4 results, which exceeded the top end of our guidance range. So better than we expected. We reported revenue of $884 million, thatâs up 10% and cash EPS of $4.04, thatâs up 9%. Our cash EPS was helped in the quarter by our Brazil Tax-Happy, which did lower our Q4 overall tax rate. Organic revenue growth coming in at 7% overall, inside of that our Corporate Payments business super good, growing 20% in the quarter. Against the prior year, our Q4 organic revenue growth was negatively impacted by about you know $20 million to $25 million of one-time revenues sitting in Q4 of â21. So that reduced organic revenue growth by about 2% to 3% in Q4. We do expect Q1 2023 organic growth to return to the 9% to 10% range. On cash EPS in the quarter pressured by both higher bad debts, and significantly higher interest expense. And as a result of the rising delinquencies weâre seeing in our US Fuel business, we did make the decision in Q4 to slow what we call our new micro digital sales. So our very smallest account. We also began tightening terms of our existing SMB account. Both of those things really a cautionary move to try to control bad debt expense here in 2023. Fortunately, our credit risk is really narrowly concentrated and what we call these very small micro accounts and also in our newest vintages, you know think 12 months to 24 months. So really impacts a pretty small portion of our overall business. Turning to the trends fundamentals in the quarter are quite good. Same stores finished plus 2 for the quarter, our retention remaining steady at 92%. And sales grew 19% in the quarter, despite our decision to, again to slow the micro sales in fuel. So look, all in all, you know a bit better finish than we had expected and continuing strong trends helping us here as we roll into â23. Okay, let me turn to our full year 2022 performance, along with the progress that we made to better position the company for the mid-term. So for the full year 2022, we reported revenue of $3.4 billion, thatâs up 21% and up almost $600 million over 2021. Our cash EPS is $16.10, thatâs up 22% versus prior year, and a full $0.85 ahead of our initial 2022 guidance. Our full year organic revenue growth of 13%. Full year sales or new bookings growth of 21%. And we closed five capability acquisitions if you include the GRG deal on January 1. So, really good, really outstanding performance against the primary objectives that we set. So in addition to the financial goals, we really did advance pretty meaningfully are beyond our strategy in â22, in which we extend either or both the product set of the business or the customer segment that we serve. This is helpful, obviously, because it grows the TAM, and obviously better positions the business for long-term growth. So just a few of our beyond highlights for 2022. So in global fleet, significant progress on our EV capabilities, you know, we acquired, you know, our European public charging network. Weâve got mapping and payment applications, weâve got at home charging software. And weâve integrated all that to our ICE Fueling Solutions. So great progress there. In Corporate Payments, we added an AP Automation Software front end to our whole AP Payment Execution business, which is the companyâs fastest growing business. So super delighted with that. In Lodging, weâve gone beyond our workforce, core workforce business to two new verticals, the airline vertical and the insurance vertical, each of those reaching almost $100 million in revenue in â22. And then finally, in Brazil, we keep expanding our tag Fueling Solution. Weâve gone to even more accepting sites now and more users. And I think exiting Q4 reached about $10 million annualized transactions. So of the combo in â22 have really good financial performance, and what Iâd call significant strategic progress. So, weâre quite pleased. All right, let me shift gears and make the turn to our 2023 outlook. Weâve worked hard to build a plan to meet our most important objectives, and what is a challenging environment. So here is our 2023 guidance at the midpoint. So revenue of $3,825,000 billion that would be up 12% or approximately $400 million, EBITDA of $2,000,025 billion that reflects up 15% or up about $260 million. And then cash EPS of $17 at the midpoint that will reflect up 6%. Weâre certainly outlooking a pretty unfavorable macro environment this year with a smidge lower fuel price and significantly higher interest rates. So those two things are expected to reduce our 2023 cash EPS by about $1.75. Implying, weâll be giving a $18.75 cash EPS guide in kind of an apples-to-apples environments. Our â23 plan does set out a number of pretty important objectives to deliver organic growth 10% plus, to grow new sales 15% plus in the diet or control our operating expenses with a plan to expand margins about 150 basis points for the full year, and 200 basis points, exiting 2023. Our major assumptions underlying our 2023 guidance, our first that are â22 acquisitions will add about 2% to 3% to our 2023 print revenue growth. This â23 guidance does include Russia, and will and so we have certainty of the divestiture. Guidance assumes that we can manage bad debt equal to the 2022 level, although we do think itâll be more elevated in the first half and second half. And then finally, we have not assumed a US or global recession, but rather builds our â23 plan and volumes, really just based on what we can see and project it from there. Our confidence in this â23 plan or outlook is bolstered by a few things. You know, first, weâve now seen our â22 finish. Good, you know better than we thought. We closed the Global Reach, cross-border deal. So thatâs in our numbers. Weâve made expense cuts already. So those are behind us. Weâre seeing some recent improvement, slight but improvement in both fuel price and FX trends. We just recently implemented two interest rate swaps that will lower our 2023 interest expense and obviously fix rates. And then lastly, we qualified for Brazil Tax-Happy that will slightly lower our 2023 consolidated tax rates, a bit better than our earlier expectations. Okay, let me transition to my last subject, which is an update on some of our important priorities. So Russia, let me start out with Russia. So making good progress. On the sale of our Russia business, weâve had lots of interest, a number of parties that have bid for the asset. And weâve recently moved a select group of buyers, potential buyers into the diligence phase. Timing is probably somewhere late Q2. And at this point, our plan would be to use the Russia sale proceeds to buyback FLT stock. If we did that with kind of a mid-year close, weâre looking at about $0.30 to $0.35 of any year cash EPS dilution. Okay, let me turn next to the FTC matter, appears to be finally in the homestretch. Weâre at a point now where we do expect the court to issue an order, likely here sometime in Q1, detailing incremental processes and disclosures that weâll need to implement. So obviously, once clear weâll move quickly to implement those things. Although we will require some time. I mean, just as a reminder, the disclosure, enhancements and process changes that we have voluntarily made over the last few years have not had a material impact on our financial performance. Nor do we believe that this Court order will have a material impact on our financial performance going forward. So last up, EV, again, you know, really good progress on that initiative. So in the UK, weâre now in market with what we call our three and one EV solution for commercial fleet clients. So in this case, it includes a UK public EV charging network, at home charging software, and, of course, traditional ICE Fueling, all of those integrated into one. And I think weâve got about 1,000 of our UK commercial fleet clients using the solution. So, doing well there. Additionally, weâre in the market in Continental Europe with an EV solution really for new customer segments. So beyond commercial fleet, so the new segments would include EV car manufacturers, charge-point operators, you know, even EV drivers. And fortunately, we are seeing adoption by all three of those customer segments, which for us is clearly all incremental to our Fleet Payment business. So, look, the goal again is to be a big â a major player in this EV transition and I do want to report you know we are officially out of the blocks. Okay, so in closing, again, we finished 2022 pretty well, again, positive sales and retention trends, that obviously helps the setup for this year. â22 full year financial performance, you know, super good, 21% and 22% top and bottom line, you know, way ahead of the initial guide. Again, weâve advanced last year a number of important beyond ideas that supports the future growth of the company. Our outlook for â23 we think positive. Outlooking double-digit revenue expectations, you know, improving operating margins and EBITDA, although our absolute profits for sure will be weighed down by the interest rate spike. We do expect to clear our Russia and FTC overhang here in the first half. The same time weâre going to continue to stake out our position in the new EV world. Again, big opportunity for us. And lastly, our mid-term objectives remain intact. We want to grow cash EPS in the 15% to 20% range once we lap the 2023 interest expense headwinds. So with that, let me turn the call back over to Alissa to provide a bit more detail on the quarter. Alissa? Thanks, Ron. First, the financial details. As mentioned, we posted 10% growth in revenue in the quarter, driven by 7% organic growth or $57 million, which Iâll delve into in a moment. The remaining percentages came from $20 million of macro tailwinds and $4 million from acquisitions made over the past year. Organic revenue growth was negatively affected by the impact of one-off items not expected to repeat from the fourth quarter of 2021, including breakage, backlog to card orders, accounting true ups in the normal course and acquisition accruals. We expect 2023 organic revenue growth to meet our double-digit targets. Corporate Paymentsâ average revenue growth was 20%, driven by continued strong new sales across both direct and cross border. Specifically, our Direct Corporate Payments business grew 27% and continues to demonstrate very robust growth. Cross-Border was up 24% another very good quarter, as new sales remained strong. Activity levels were robust across nearly all geographies, and we completed the full tech integration of AFEX into our Cross-Border platforms. Lodging continued to perform well, up 14%. While weâve largely lapped the airline COVID recovery benefit, the airline business was still up 38% in the quarter. The suite of services weâve bought into this business substantially enlarged as the TAM and durability of our Lodging growth profile over the medium-term. Fuel was up organically 2% with growth in International Fuel largely offset by softness in our US Micro SMB Customer segment. And by Micro, we mean companies with less than five vehicles. So the smallest of the small. The economic cost of higher fuel prices, inflation, and in the case of micro SMB trucking, lower spot rates have negatively affected their ability to manage expenses, including their fuel bills, which has resulted in higher bad debt. Weâve also seen some negative mix shift among that micro trucking segment. As higher margin independent trucking volume is moving to lower margin volume as those drivers move to the larger contract carriers. This micro segment generated more than 75% of our US fuel bad debt losses in both the fourth quarter and full year 2022, fully filling the brunt of these economic headwinds. Given the higher loss rates of the micro client segment that we are experiencing, we have significantly tightened credit approval standards in a purposefully targeted and narrow way. In order to get ahead of any further stress and this micro segment, the result was a drag on organic fuel growth in the quarter. We are taking a balanced approach to new customer demand gen activities, prioritizing customer segments and industries that are healthier to drive fuel growth in 2023. All while limiting our bad debt exposure. We will continue to feel the residual effect of tighter credit and higher losses in that micro segment in the first half of 2023. But would expect to clear this overhang and return to normalized fuel growth rates in the back half of the year. This will likely cause 2023 fuel organic growth to be at the low end of our normal range. Tolls was up 6% compared with last year, as the impact of strong new sales was masked by almost $5 million of non-recurring revenue in the fourth quarter of last year. Toll sales were strong in the current quarter, recovering from software sales mid-year and helping offset some of the prior year one-time benefit impact. We expect tolls to return to its low-to-mid-teens growth rate in 2023. Weâve made great progress building out the Beyond Toll network and now have over 5,400 Beyond Toll locations, including 2,200 fueling stations, 2,300 parking lots, 750 drive thrus and 150 car washes that accept our tag. As an additional service to our customers, we are a reseller of insurance from other companies to our more than 6 million tag holders in Brazil, for whom we have negotiated preferential pricing. This insurance offering is growing quite fast. We sold more than 38,000 insurance policies in the quarter. We also signed up Santander as a total distribution partner, which is the fifth largest bank in the country. All in all, weâre very bullish on the outlook for our Brazil business. Gift organic growth in Q4 was down 11% over prior year Q4, as the current orders that pulled forward in the last few quarters, and in Q4 prior year did not repeat. Due to the lumpy nature of card orders between quarters, it is best to look at full year gift organic growth, which was 11% as the newer online card sales programs and the B2B program have improved the growth of that business. Looking further down the income statement, operating expenses of $514 million represented an increase over prior Q4, primarily due to recent acquisitions, higher bad debt and volume-related increases. We did recognize $5 million in expense associated with reductions to staffing levels, and the termination of office space leases. As we adjusted our expense base for the current challenging environment. We will continue to manage our expenses with a very close eye on our outlook. Bad debt expense was $41 million or 9 basis points, consistent with the third quarter 2022 level. Iâve already talked about what weâre doing to manage this, but suffice it to say, weâre very focused on it. Moving below the line, interest expense was $74 million for the quarter, up 168% over the prior Q4 and $165 million for the full year up 45%. These increases were driven by higher reference rates on our floating rate debt, as well as incremental borrowings for share repurchases and acquisitions. Our effective tax rate for the quarter was 24.2% versus 25.6% last year, and lower than our guidance. The primary driver was the impact of a pandemic-related tax benefit election in Brazil realized for 2022 in the quarter. Now turning to the balance sheet. We ended the quarter with over $1.4 billion an unrestricted cash and approximately $600 million available on our revolver. There was $5.7 billion outstanding on our credit facilities, and we had $1.3 billion borrowed on our securitization facility. As a reminder, earlier in the year, we upsized and extended our credit facility by approximately $500 million and extended the maturity through June 2027 at quite attractive rates. As of December 30th, our leverage ratio was 2.8 times trailing 12-month adjusted EBITDA as calculated in accordance with our credit agreement. Our capital allocation was once again balanced in 2022. In the quarter, we repurchased roughly 600,000 shares at an average price of $188 per share. In total, weâve repurchased about 6.2 million shares during 2022 for $1.4 billion. Our guidance for share count for 2023 is 5 million shares lower than what we guided to a year ago. In total, weâve bought back 11.7 million shares over the last two years. We still have over $1.2 billion authorized for future repurchases. In 2022, we spent $217 million on acquisitions and minority investments, excluding global reach on January 1st, 2023, solidifying our positions in EV, Corporate Payments and Lodging. Now, let me share some thoughts on our Q1 outlook and our full year assumptions. Looking ahead, weâre expecting Q1 2023 revenue to be between $875 million and $890 million. And adjusted net income per share to be between $3.55 and $3.75. This is largely due to revenue seasonality for certain businesses, such as Fuel, Lodging and Tolls tend to have lighter first quarters due to weather and holidays. As such, the first quarter tends to be the lowest in terms of both revenue and profit for our company. We have a bit of a preview for the first few weeks of the year and we are tracking to the guidance we are providing. Of note for the full year 2023, we anticipate managing bad debt flat to the 2022 levels, expecting it will be higher in the first half of the year and then improve into the second half. We expect 2023 net interest expense to be between $312 million and $332 million based on the forward curve as of February 1st, 2023, which implies reference rates will peak sometime during the third quarter of 2023. As we disclosed in the earnings release, and you can see on Slides 21 and 22 of our supplement, we entered into a series of interest rate swap agreements to fix rates on approximately $1.5 billion of our floating rate debt. These spots will provide some relief on our 2023 rate, and helps limit the downside risk from further rising interest rates. The inverted forward rate curve enabled us to reduce 2023 interest expense by locking in lower future rates over a three-year period. With these new swaps along with our previous outstanding swaps, we now have fixed interest rates on a total of $2 billion of our variable rate debt for most of 2023. Last week, we also entered into a euro cross-currency swap to benefit from the lower euro interest rates, with an implied interest savings of 1.96% on $500 million of notional debt. With these various swaps, we have now managed interest rate and FX risk on $2.5 billion or 47% of our debt, excluding the securitization. We believe these actions will help mitigate the risks associated with continued increasing interest rates in 2023. We estimate these swaps to reduce interest expense by approximately $35 million in 2023. And finally, our tax rate in 2023 is expected to be slightly higher between 26% and 27%. As the continued benefit from the Brazil tax holiday is more than offset by higher tax rates in the UK. As the UK statutory tax rate increases from 19% to 25% in April of 2023. The rest of our assumptions can be found in our press release and supplement. As I complete my prepared remarks, I would like to extend our gratitude to our more than 10,000 employees around the world who helped us deliver such a strong finish to a great year, and who will be the driving force to even greater heights throughout â23. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from Sanjay Sakhrani with KBW. Please go ahead. Thank you. Ron, you talked a little bit about this rising delinquencies among the micro SMEs. Iâm just curious was that fairly contained inside of fuel or the fleet business? Or were there any other weakness â was there any other weakness among the SMEs? And Iâm just curious if you think that this might be a leading indicator of more things to come. If you go up market, I know you guys havenât assumed any additional macro pressures and such. Yeah, itâs a good question, Sanjay. And yes is the short answer. The fuel business and really the US fuel business, because the terms and the way we collect money and bill internationally is fundamentally different. The terms we pull all the money, et cetera. So yeah, the only place that weâve seen the micro and again, weâre talking super-duper small, mostly one and two card accounts and super-duper new on the books, again, a year or two, that portion of the overall sells about 75% of the credit losses. So although the credit losses from that group are sizable, the amount of business from that group is not super sizable. So yeah, thatâs the only place weâre seeing it. In fact, when we study the cohorts, you know, theyâre a bit larger or more mature longer on the books. Itâs super ratable with the trailing you know 12 months to 24 months. So itâs super-duper pocketed for some reason. Yeah, I mean, look you guys get this as good as mine. Weâve been talking about you know macro recession for six months now. And we study and look everywhere and we just donât see it. We donât see it in volumes. We donât see it in sales. This is the one place where it showed up and it started, I donât know call it maybe six months ago, kind of September, October, we saw the delinquency start to step up. So, my personal view is that, you know, these are quasi consumer businesses. You know, and as the funds ran out, and as the savings got depleted, thereâs just more pressure, you know, on these kinds of businesses than others. And so, which is what [inaudible], right. When we saw that we said, okay, you know you guys always ask me, hey, Corporate Payments faster so we get it up and go and move sales dollars and implementation dollars away from our tiny fuel business over there until we see how that plays out. Okay, great. Just one quick follow-up for Alissa on, you know some of these impacts that happened to the growth rate in the fourth quarter. As I look across the different segments, you know, thereâs been a lot of variability in the growth rate. Iâm just curious, did that affect multiple lines, those items as one-off items? It did. I mean so we thought a decent amount in our Tolls business as well as a little bit in our Fuel business. And I would just add, you know, this is all normal course of business stuff, it just seemed to be a collection. Yeah you want to point out Sanjay, itâs Ron again, that you know, we view it kind of this more of a bump than a trend. I did try to call out you know in the opening basically they were outlooking, this quarter weâre sitting in the thing back at 9 or 10. So really in our minds, itâs a compsâ issue, not a run rate issue. Thank you. Good afternoon. Appreciate the question. So I mean, your â Ron, the Corporate Payments business, you know, very strong, within that you talked about AP being the strong, but maybe just maybe a little more color on what the stronger areas were in the quarter. And did you see any deceleration significant deceleration in any areas? You know, a lot of what type of focus on the SMB market? Yeah, hey, Bob, itâs good â always good to hear you and hear youâre doing well. So you know, we posted 20% organic for the quarter for the category. And thatâs probably our number for â23. You havenât asked me yet. But I say inside of our overall 10% weâre looking really about 20% now. So more than more than AP is. So really inside of it, everything did well, except the channel a partner thing. You know, weâve said it before, that some of the partners that go at this four or five years move some volume to other people to get different rates. So that business has been flat and going backwards, which means the direct businesses are growing probably 25%. And itâs, I think you know the full AP, where we have every modality is the fastest growing, I think that particular line of business is probably up 40% to 50% in the quarter, and now weâve started some software on the front end. So even our lead volume is up. So Iâd say, the whole business is doing well. Again, the Cross-Border sales were rock and Iâm looking at the page in front of me they were up 60% the sales in Q4, weâve honestly just eaten or the process of eating, you know, another piece of business which deepens us in the geography. And so, Iâd say other than the partner thing, itâs firing literally on all cylinders. Thank you. And then your investments in EV, appreciate your continued you know forward looking moves there, if you would. Can you give any more color? And we get this question a lot. Iâm sure everybody else does is, you know, the economics as you have more experience you know, especially in Europe, I guess where you have â can you give any color on the economics of EV versus gas and your competence in that? Yeah. Another super good question. So the best place for us to look really kind of the only place to look for us is the UK, right. Weâve got a big right commercial fleet business there and theyâve been out of the blocks pretty early. So weâve got I think about 1,200 when I looked active clients that use both our, you know, traditional fueling and some amount of EV I think the average is about 50% penetration of the EV among those accounts. What I know for sure is that the enterprise, the bigger accounts, the economics are super favorable to us as they move to EV. The reason is probably pretty obvious that you get less fees generally from big accounts right then and negotiate. But they need these new EV things and so the ability to get fees from enterprise customers. So the report that I looked at the sample, I donât know 10 or 20 accounts itâs up something like 50% are revenues among the enterprise. Iâm guessing that probably wonât be exactly the same story with a super small account. So, weâll agree to do. I told our guys just come back probably in 90 days and report out provide some actual data on this question, because itâs the million-dollar question right to the commercial fleet business is the stuff comes across, you know, are we indifferent based in the economics? Iâd say early on, it looks like yes, we are. But more to follow. You know not really. I mean, again, itâs the new sales are obviously right, the mix of every 100 new vehicles, the percent EV is growing, but the base is, you know, like in the United States, I think thereâs I donât know about 300 million registered vehicles, and the new car sales are $18 million a year. So half of them were EV, itâs 9 on 300. So itâs super hard Bob to move the base is what I say, which is again, the other things, you know, is the EV adoption is happening more in consumer and lighter vehicles, right, versus like 18 wheelers, which is the other motivation for us to chase these, you know, EV car manufacturers and EV consumers, because thereâs going to be way more of those in the coming years and there going to be, you know, heavy trucks on EV. Hey, guys, thanks. Ron, can we go back to the Corporate Payments segment for a minute again? Just because, you know, thereâs obviously been a lot of data points in the industry around SMBs having some challenges and B2B activity being a little bit more, you know, having decelerated. You donât seem like youâre seeing that as much. So, maybe a little color on what you are seeing in the marketplace? And then more importantly, just medium-to-long-term. You know, thatâs obviously an area that weâve talked a lot about in terms of convergence of some of the assets to really offer a more holistic solution on the account payables side and combine that with payments, you know, whether itâs invoice pay, and some of the other assets youâve acquired. How has that been progressing? Just maybe a little update there as well? Yeah. Hey, Darrin, itâs a good question. So the good news for us is that, our Corporate Payments business is a middle market business. So our average, you know, account there would look like $200 million to $300 million in revenue for the clients. So you know, a decent you know sized company, you know, creditworthy kind of company. So Iâd say 95% of our Corporate Payments business is what we all would call a middle market client. So the SMB move that we made, whatever a year and a half ago was really trying to be upside thatâs trying to extend kind of down market. So given whatâs going on with some of our friends and as itâd be maybe weâre lucky we, you know, we havenât made as much progress there. So thatâs the headline, weâre seeing nothing, you know, volumes are up, spend is up as you can see in the numbers, the revenue is, again, if you kick out the partner piece is compounding at 25%. And weâre outlooking at same kind of number on the direct business, you know, here at â23. On your second question, which is also a super good one is, we got all the stuff now I feel like itâs you know, making a Thanksgiving dinner is 8 million ingredients to come and get and all of a sudden, someday thereâs a plate and there is that you know the six items on the plate. Weâre kind of I donât want to say, done, but close to done, we got all the stuff, we got smartcards, we got frontend AP automation software, we pay every modality, we got a global, you know, international payment capability, we got networks. So we kind of have the stuff, Darrin to offer the whole package now to these middle market clients. And weâre getting more and more of the clients to buy both our smartcards and our AP stuff, because weâre in the CFL office. And as you know, we moved the branding so it makes more sense now, one company is coming in with a full line so I would say that itâs the marketing challenge in front of us. We got the stuff to have an integrated pack and now between the brand and educating sales guys in the market, I think weâre going to sell way more of the package stuff as we move forward here. Okay, okay. Timing-wise, Ron, and then just I actually do have a quick follow-up for Alissa if thatâs okay, on the revenue growth rate. Maybe Iâll just throw it in now, which is when we look at the cadence on revenue growth trends, I know thereâs some seasonality to it. But, you know, again, youâre coming off of this 7% rate, obviously, there were those one-time items that you called out last yearâs quarter. Just to make sure thereâs no â do you see any other kind of impediments to that growth rate this year beyond macro in terms of one-time items that we have to grow over or anything else? Or is that â do you see that being pretty clean for a macro adjusted basis? Yeah, I mean, I would expect that short of the macro adjustments, we make always organic revenue growth, which neutralizes those items, that we wouldnât expect anything meaningful. Other than as weâd perhaps call out in the same quarter prior year. So I would encourage you to look back at those notes. But no, I mean, I think that we, other than as weâve spoken to the micro SMB customer segment, our fuel business. Yeah I think thatâs going to be the only item to speak of. You know, the guide there today, itâs Ron again. The guide is, you know, 10% and 12%, right, weâre guiding kind of 10% organic at the midpoint and add a couple of points for the role of the acquisition. So the print at 12%. Thatâs what weâre chasing. Thatâs the number. Thank you so much. Good to chat. I wanted to ask on the margin outlook. I think youâd mentioned that 150 bps fund. So thatâs like 90 days ago, you previewed 200 bps to 300 bps. So curious whatâs changed in the last 90 days? Is it more about investing or changes in thinking around costs things like that or mix? Yeah, good question, Tien-Tsin. So yeah, the plan that weâve landed is, I guess, 150, full year and Q4 200. And the short answer is, we I just decided to spend more money on the acquired businesses. So if you look at our core OpEx, so kick out all the 22 acquisitions we did, itâs below 5%, I think itâs only 3% or 4%. But the pile of acquisitions, weâre spending another, I donât know, $70 million or $80 million incremental, year-over-year. And so a bunch of those are diluted things, theyâre easy things, theyâre, you know, one-time things to integrate like a Global Reach, their sales investments and stuff. And so that was the call. The call was really to make sure that we gave enough oxygen to the sets of new assets that we just got so that we can get a return on it. And since we could kind of make all the numbers work, you know, we start with a design, we start with you know, whatâs the goal and then work our way around it. So I felt like we kind of, you know, made the number we want kind of 10% and 12% on the top, you know, sales in the high teens, profit kind of where we guided to, EBITDA growth of 15%. So growing obviously, you know, operating earnings faster, so it kind of fit into the envelope, so we made the call to do it. Got you. No, thatâs the right investment to make. Then just as my quick follow-up then on the â your appetite to do deals. I know I always ask you this, Ron, but just from a deals perspective, how does the pipeline look? I know you have a lot going on, youâre spending more on the acquired assets including NAVs are more to do in the short run or can we see a little bit of a pause from a deal making standpoint? Yeah, you certainly know as well, Tien-Tsin. We are never without some kind of pipeline so yeah, we had deals. Iâd say thereâs kind of in my mind a little bit of good and bad on the deal for I think the good is I really am seeing some reset on the valuation side, right. Prices have been down longer I think people that were waiting you know, have waited longer than I see in the bids people arenât hitting the you know, the bids are looking for the answer looking for the bad is obviously the cost to capital. So it raises you know, your confidence and your thesis, right to pull the trigger to make sure weâre generating the right kind of returns. So Iâd say thereâs you know, a little bit of tension between those. So, better maybe valuation outlook but a bit higher cost to capital. So, but look weâve always as you know have not been a financial buyer of things where we just buy it and absorb it. Weâve always had some view of how to double profits. So again, we have, you know, things in the pipeline that we like that we think we can make returns on and if we can, we will. Weâll trigger off. Iâd say weâre probably back to capital allocation you know, less excited about buybacks sitting here again given the, you know the cost to capital the [appreciatively] [ph] short-term maybe long-term is okay, but short-term isnât quite as attractive. And de-levering, frankly, is a bit crazy, more attractive, you know, given the spreads are wider right between deposit rates and borrowing rates. So Iâd say that the kind of some of these changes is affecting a bit how weâre thinking about was a $1.3 billion, Alissa? $1.3 billion is the plan, Tien-Tsin. So, Iâd say my first and foremost is always deals that we can make go, make returns on. Thanks so much for taking my question. I wanted to follow-up on your response to Darrinâs question earlier about having all the ingredients in place within Corporate Payments to kind of you know realize that sort of power. My question is actually broader across the entire enterprise, and maybe all the segments within the segments. Are you now kind of organizationally technologically well positioned for cross selling? Or are there still initiatives and capabilities and linkages that need to be made in order to kind of unlock the synergy potential in the broader enterprise? Yeah. Hey, Ramsey, itâs Ron. Itâs a super-duper. A good question, Iâd say weâre out ahead on the synergy and relatedness in Corporate Payments, and the primary reason is, itâs a middle market business. So whenever you go to a client, thatâs got $200 million to $300 million of revenue, it has more needs, right. It does more things, obviously, itâs got a lot of AP, right if itâs got $200 million to $300 million of revenue, itâs obviously got a lot of employees probably running around, you know, in vehicles. And so, youâll see us selling fleet cards, for example to our Corporate Payments clients. And fuel runs 10% to 12% of all the spend volume among our middle market corporate payment clients, which I guess you know, wouldnât be shocking. So in that area, I would say for sure, there will be a broad package of services that will all be sold into the same client. As you move into the SMB thing, I think weâre going to move organizationally towards a more integrated model like youâre saying, because the tech I think frankly is ahead of our org. And so weâre looking at starting to consolidate the vehicle-related purchases. So if youâre sitting in a car, and you buy fuel or you recharge on EV or you pay for a toll, when you go into a parking spot, whatever, all of those, even 92% of our Lodging clients drive a company vehicle, you know, the tree cutting truck to the to the actual hotel. So weâre in the business, mostly of vehicles, company vehicles running around and us helping make the payments. And so though, itâs a way more super-related thing than what weâve talked about before as though theyâre discrete things. And so, youâll see us start to move organizationally, more to looking at that set of solutions as vehicle, you know, related payments, and then the Corporate Payments again, as the thing for the middle market. That was super helpful. It makes a ton of sense. A quick follow-up for me. I think on the 2023 guidance, you were able to call out in the course of the call a segment-specific expectations for Corporate Payments. And I think Alissa mentioned something for tolls and fuel. Would you mind rounding that out and just giving us your expectations for Lodging and if applicable gifts for the year so we for sort of modeling purposes? Yeah, sure. So again, itâs that the midpoint would be 10. Overall, so fleet kind of mid-single, but weaker first half, stronger second half. Lodging in Brazil, mid-teens, maybe a smidge below 50 and a smidge above and Corporate Payments, even with the channel and Iâm going to give another probably 20 you know, maybe north of 20 and obviously way north of 20 if you kick out the channel. So thatâs the mix that rounds to 10. And again, you guys have heard this before, you know, weâre super thoughtful on the design when we saw the super micro segment weaken we just literally reallocated I just said okay, Iâm going to pour in terms of marketing and sales investment more into the middle market. You know, that Darrin brought up earlier that has you know, not many, certainly not as many macro kind of risks and basically just kind of, you know, tread water a little bit until we see more about how this you know micro and SMB segment plays out this year. So weâre kind of de-risking the plan a bit, I tell you. Hey, thanks a lot for taking my question. I have a question on the 2023 outlook, especially on the share count, it says $75 million for the full year. Does that assume any sort of buybacks throughout the year? Or it does not? And if it does not, then would there be more upside to the EPS assuming that you accelerate the buyback throughout the year? Hey, Sheriq itâs Alissa. Thatâs a good question. You know on share count, Iâll first say in our guidance, we never include the impact of potential buyback, because we see it similar to our capital allocation decision like acquisition or divestiture, weâre going to hold those decisions until they make sense. And so we do not build that into guidance. And then I guess in terms of the share count, as we run in, the number you see that we presented in our assumptions is consistent with what we expect for the rest of the year. Yeah. And fairly aligned with where you saw us coming out of Q3 and what you can now see in the Q4 number. Yeah, Sheriq itâs Ron. Our default is always just de-levering, right. We plan to generate $1.3 billion of free cash flow in our models assume that we just you know reduce debt you know as we run through the year, and then to the extent that we take money to do a buyback in Q2, weâll update the guidance to reflect that different use of capital. Hey, thanks and congrats on the results. Ron you know this is a follow-up on Darrinâs question earlier. In your prepared remarks, you said that in 2022, you added an AP automation software front end to your whole you know, AP execution business. And we all know what that is â what youâve been doing there. So my question is you know, what does that mean that your execution there on the front end going forward would impact others that youâve been partnering with over the years in any way? Does that mean that youâre trying to capture those volumes on the front end? Can you just help us understand the strategy there and how to think about that going forward? Thanks. Yeah, so weâve been you know watching what you did, Ron, and, of course, A. And we know that you have Comdata as well. So weâre trying to figure out if thereâs some you know competitive angle to what youâre doing on the front end, as you start to bring that into you know the picture with how youâre going to market with SMBs? Okay. Yeah, that thereâs clearly a competitive angle. I think you know, historically, AP, standalone AP automation software companies sold AP automation software, knock-knock, Iâve got software that simplifies your processes, you know, automates approvals, digitize and stuff, so you donât lose it, hey, thatâs what we do. And then knock-knock a bank said, hi, I can help you actually execute you know electronic payments for you or Cross-Border Payments. And so you know the idea weâve been at a long time is, letâs do both, which weâve connected them already, obviously. So hey, knock-knock, we can help you, you know make the process work better in your company and save you time and reduce risk and B will pay you know all the different ways every modality will execute it all, you donât need to call your bank or FX specialist or your printing company to print out paper checks weâll do the whole thing. So we think that itâs a huge advantage to have that package to provide you know more value to clients and itâs seemingly early on generates more leads, because historically people have been interested you know on both sides of that thing, and I think you know, weâre not the biggest we got to be one of the biggest non-bank you know a full AP payers already. So I think it is a pretty big advantage for us going forward. Got it. Okay, great. And just one of the follow-up. Just found an unboxed question earlier you know on EV. And you know, I guess the question that is, just the payment for you is, you know, youâre a $16 billion market cap company and youâre generating the ratio of $3.8 billion of an annual revenue is coming here. So can you just remind us â can you cite that revenue opportunity present in EV got, you know, two, three, five years out. Weâre obviously trying to pick up this substitution effect, and you know, incremental revenue impacts, et cetera, et cetera. So how would you frame that as we think about our models? Thanks. Yeah, thatâs another super good question. So first off, itâs obviously a long time out. But the first thing Iâd say is, you know on the defensive side, so on the commercial fleet side, the opportunities, the size of our whole business, right, if you went 40 years into the future, and weâve got a what a $1.5 billion revenue, global fleet business, the hope is, we replace the business 50 years so that everything was easy, weâd have a $1.5 billion business plus however weâd grow between now and then. But for us, I think the bigger opportunity itâs nearer in, is this consumer lighter vehicle thing that weâre going to get to through the EV carmakers, and through the new gas station operators that are called, you know, charge-point operators. So the big part of our strategy that weâre spending money on is going offensive and chasing two new segments that are any part of our business, excuse me, today that we think are going to show up sooner, because the vehicles work better, right, the light vehicles. So thatâs, I mean, again itâs just a function of adoption. Thatâs a massive, obviously, right. Itâs every, right, every vehicle is not a commercial fleet, youâre into there in terms of the TAM. So itâs a massive, massive business. And I think I said repeatedly, our strategy and the thing is to be the network guy. You know, our company is built on proprietary networks that have unique data that we pick up and then the volume that we have, that creates better economics. And our idea is the same. Weâre going to put together EV acceptance networks where we collect data thatâs interesting to clients like what kind of charges are there, is the charger open out if I drive there. And we think that providing that in some simple way is going to be you know super interesting. And we got five or 10 already big EV carmakers using our software in our network to try to reduce you know charge anxiety, right of new buyers. So itâs massive. The question is just when, how long, right before either side, either the commercial side or the consumer side you know gets big. Okay. Sorry about that. I didnât hear the intro. Hey, thanks for the question. I appreciate that. Itâs a clean up here. I just want to dig into the fuel card business a little bit, you know, given some of the pockets of weakness that you called out on the credit side, Ron, are you going to sell any differently in 23s? How are you augmenting your sales strategy there? And then as a follow-up on the partner side of the fuel card business, just wondering if you could shed any color on like RFP activity? Or if thereâs any major contract renewals coming up? Any help would be great there. Thanks. You got to tell. So on the first part of the question, hey, what do we do in for selling in 2023? The answer is, yes. Thereâll be some different things. So the first thing weâve done, which weâre about 90 days into is, weâre repointing our digital machine and algorithm to larger accounts. So the guy that runs our digital sales business, tweaked the models effectively to point at what I would call a larger and more creditworthy accounts. So youâll see that for sure our sales, size of new accounts will go up starting here in Q1 versus Q4. So thatâs point one, will modify the targeting of our digital engine. And then number two is. Iâve moved dollars, weâve reallocated dollars into the Corporate Payments business. So I just said okay, Iâm not going to grow sales investment or sales as much in a space that has potentially more macro risk, weâre going to earmark it at least here in 2023. And in the middle market that we have, you know, thereâs more stability, if you will, in the macro. So those are really the two things weâre doing selling-wise. And again, itâs pretty small, but the pile of bad debt, this micro super-duper, new thing, but itâs not big, per se, right against the total business, right, the total revenue. So thatâs a fair point. On the second one, thereâs not much Iâd say, itâs pretty quiet us and the other people to play the game have a lot of long-term contracts, both here and in Europe. So thereâs really nothing on the radar, Iâd say significant that weâre looking at in 2023. Hey, good afternoon. Thanks for taking my question. I just wanted to touch back on the Fuel segment first. How did the same-store sales come in across the various parts of that business in the quarter? And just looking to 2023, what parts of your business gives you confidence? The segment can reaccelerate in the back half, given the deceleration weâve seen in the last few quarters? Thanks. Yeah, so hey, Nick, itâs Alissa. Itâs a good question. Iâll make sure I got all your question. I think youâre asking what is â how the same-store sales look, and how are we outlooking? Okay. So again so for same-store sales, I would say you know, we always say that same-store sales short of a massive, easy comp is usually in the minus 1 to plus 1 range. And I would say that yeah we did see it soften just a little bit more than that in the fourth quarter to minus 2. But as we look into reacceleration, it really is a re-tweaking the engine as we head into â23 repointing that digital engine to higher credit quality customers, and then just refocusing the entire sales engine across the board to target those healthier customer bases in segments. Yeah, let me make sure, Nik, youâre clear that you know, we pull this trigger, like weâre super conscious that the health of the super-duper small accounts was deteriorating. So we said okay, letâs stop selling to them. So stop, and then repoint the thing and then second, because their delinquency was up, it creates more involuntary attrition, so a great volume softness too, so basically both of those things happen, right. You â weâre not going to keep the spigot open. Weâre tightening terms if you look, you know, shaky. And so we did it to make sure that a small little tiny part of our business didnât turn into a bigger problem. So we went right with our eyes wide open doing this thing. And so the answer is, weâve been for 90 days, repointing the thing to bigger fuel accounts and then moving money to the mid-market. So weâre happy where thereâs nothing wrong. Weâre not worried about the thing. Again, our plans to have more of in the second half. I think that itâs 5%. Itâll be 2% and 7% or something, right first half, second half. But I want you to hear it, we made the decisions to do both of these things for cautionary reasons and not going to run over later. Hey, guys. Thanks for taking the question. This is [Julian] [ph] on for Andrew. So I have a quick modeling one and then kind of more general one. So is the Lodging business, like normalized growth rates, how we think about that like 18% to 20%? Is that the right way to think about that? 15% to 20%. Okay, got it. Thank you very much. And then you know I know you said that youâre off the block on EV. Obviously airline did really well, this quarter 38% up. Is there anything there kind of maybe I know that you had an in-house prior option. Any updates there? Like is that something in the pipeline in terms of deals that youâre seeing? Like, are you looking to expand there? Kind of elaborate on that a little bit. Yeah, just really a couple of comments, I think on the airline growth. So one of it is just you know, continued recovery, right. Airline was super down. So I think thereâs still some you know long tail COVID recovery and still sitting here today we still got in Asia back, thereâs still more to come if the Asia you know volume picks back up. But I think the new things that weâve done it, we bought a company a year ago that is really working. Like I mentioned, we, you know, one a couple of accounts that we had where we put this app in the speed, you know, distress people right to their hotels, instead of queuing up at the line. Well, now weâve added, we sold the first contract, which youâll see in the forward numbers for basically rebooking simultaneously with the logic. So your plain gets canceled, you know, here in Atlanta tonight. First, you got to find a place to sleep. And then you got to figure out how to go well, letâs say youâre on, you know, Air Canada, and it doesnât have any flights or any flights available. Our tech basically looks and books you on other airlines literally as youâre walking off the plane, youâre getting to hotel and getting rebooked. So the customer sat that the airlines are getting from having less unhappy people when they get off a plane. I think this is going to become table stakes for the couple airlines see the couple that are picking this thing from us early, that this thing we could literally run the table on this. So, this is an example of bringing kind of syntactic kind of an old-fashioned problem and itâs working. Got it, thank you. I now want to sneak one more in. Can you talk maybe a little bit about your digital marketing? How thatâs coming along? Maybe any recent examples thatâs there? Yeah I mean other than the micro thing, I think the answer is, itâs representing obviously, in every business, a larger and larger piece, for example, Lodging, which we just talked about, I think itâs up now about 15% of the sales in that line of business, it was probably 5% two or three years ago, is taking a way bigger chunk of the marketing leads, we used to do old-fashioned, you know, trade shows for middle markets and things like that. So Iâd say that not only are digital sales that we close on, you know, compounding a good rate. But I think the lead sources from digital are also way up. Again, a lot of this is the world, right, weâre just chasing along with the world making sure that weâre in the right places. Great, thanks. Good afternoon, I guess with Global Reach now closed, just wanted to see if you can give us an update on the revenue mix within Corporate Payments between FX, Cross-Border, virtual card, full AP, and then within the 20% growth outlook for the year just any sense for which of those buckets you expect to be the primary contributors I know this is a really good FX year with elevated currency vol, so just kind of how youâre thinking of the moving pieces within the segment for â23? Thanks. Yeah, Trevor. This is Jim. I mean the best way to think about it you know that Cross-Border is probably going to be closer to 65% now I call it 25% direct and then 10% - 60? Yeah, so all in Cross-Border 60 about corporate payments is 40%. So theyâre going to move around a little bit. I mean, your question is a good one, Trevor in terms of the growth thing having you know, markets that are pacing interest rate moves differently, right like Brazil cut out super early and then I guess we, the US cut out and now Europe is chasing so having you know different timing and differential the rates obviously you know, creates FX volatility. So that obviously is helpful run in here into the beginning of â23. But all the reasons are working, right to get to an aggregate number weâre giving you hey look, weâre looking at just a year from today 20% revenue growth organic plus obviously the print would be way higher because weâre adding the deal. Clearly almost everything for a recipe working Iâm telling you that the channel which is a pretty small piece less than 10% probably has gone backwards so everything else has got to be somewhere in the low-to-mid 20s to get the entire thing to be 20%. So I donât want to sound too cocky on it, but kind of itâs like all working. Weâre just selling a lot. Retention is super great you know with those types of businesses. Obviously spend is growing in the middle market, right thatâs small companies fault or obviously bigger companies to be like in trucking and other areas are picking it up. So I think the message to you guys is, and our product line is better and more complete. I just think that this business is kind of coming into â it really coming into its own now for us. And itâs big finally, right. Itâs going to surpass $1 billion. And it was I donât know what it was, but $1 billion a few years ago. So itâs become a sizable thing now for the company. Yeah, thatâs great. And just one more on corporate pay. Corpay One I think last year, you know any update you can give us? There I think last year, you were talking about taking more of a measured approach with some of the migrations, but just any update on progress there or overall strategic thinking on your plan for it for the next couple of years and the cross sell opportunity? Thanks. Yeah, so that one is really still a work-in-process, because the core business is middle market. Itâll say this is a core but thereâs a pretty small part. And so when we took a swing and miss at the cross sell, I did, we did not a super smart thing. Weâve really said okay, how do we get the product to be right for the scene? And how do we get the distribution to be right for the scene so what weâve concluded is, weâre not going to chase super-duper small accounts that donât have much AP you know that are at the very bottom and so weâre really kind of retooling the product and distribution to be up market a bit, so still below middle market, but kind of off of the floor and particularly given you know, what weâre seeing and hearing in the marketplace that seems like the right call who have rushed into like you know, super micro kind of AP accounts. So weâll report wise it hasnât been our biggest priority since we did this way of the mess you know on the cross sell but we are continuing to work it. And weâve reached the allotted time for questions today. So weâd like to thank you for attending todayâs presentation. This will conclude the question-and-answer session You may now disconnect your lines at this time.
EarningCall_594	Good day and welcome to the Iteris Fiscal Third Quarter 2023 Financial Results Conference Call. At this time, all participants have been placed on a listen-only mode. And we will open the floor for your questions and comments after the presentation. Please note, this event is being recorded. Thank you, operator. Good afternoon, everyone and thank you for participating in today's conference call to discuss Iteris's financial results for its fiscal 2023 third quarter ended December 31, 2022. Joining us today are Iteris's President and CEO, Mr. Joe Bergera and the company's CFO, Mr. Doug Groves. Following their remarks, we'll open the call for questions from the company's covering sell-side analysts. Before we continue, we'd like to remind all participants that during the course of this call, we may make forward-looking statements regarding future events or the future performance of the company, which are statements based on current information are subject to change and are not guarantees of future performance. Iteris is not undertaking an obligation to provide updates to these forward-looking statements in the future. Actual results may differ materially from what is discussed today and no one should assume that at a later date the company's comments from today will still be valid. Iteris refers you to the documents that the company files from time-to-time with the SEC, specifically the company's most recent forms 10-K, 10-Q and 8-K, which contain and identify important risk factors that could cause actual results to differ materially from those that are contained in any of the forward-looking statements. As always, you will find the webcast replay of today's call on the Investors section of the company's website at www.iteris.com. Superb. Thank you, Todd and good afternoon to everyone. I appreciate you joining us today. Before we begin our regular earnings commentary, I want to make some remarks about today's announcement that Kerry Shiba will be joining Iteris as SVP and Chief Financial Officer effective February 3, 2023. Kerry brings significant, highly relevant experience that we believe will be particularly valuable with Iteris having achieved a critical inflection point and now poised for its next stage of growth. I look forward to Kerry joining our team tomorrow and working with him to execute our business strategy and, of course, to increase shareholder value. Unfortunately, with Kerryâs arrival weâll be saying goodbye to Doug Groves. Doug has made a huge contribution to Iteris over the past three years, which have been extremely challenging due to unanticipated global events largely outside our control. And I cannot imagine a better partner than Doug to navigate the complexities of COVID-19 and the associated global supply chain crisis. To ensure an orderly transition, Doug has committed to serve as a senior adviser for four months, which will allow him to contribute to the preparation of our 10-K and other critical projects. Of course, I wish Doug the very best in his future endeavors. Now let's turn our attention to our third quarter results. For the fiscal 2023 third quarter, Iteris reported record total revenue of $40.7 million, representing a 27% increase year-over-year. The growth was due to strong demand for our products and services and the progress of our supply chain improvement program, which began to normalize the underlying economics of our Vantage sensor product lines. More specifically, our product gross margins improved 2,640 basis points on a sequential basis as we began shipping products with the alternative circuit boards that were released to production in our second quarter. In a few minutes, I'll provide more color on our supply chain initiatives. Despite concerns about a potential slowdown in the broader economy, customer adoption of the ClearMobility platform remains very positive. In the third quarter, we reported strong total net bookings of $41.1 million, representing a slight increase over the prior year. We were pleased with the results given the combination of an unusual prior period comparison and the impact of seasonal holidays, which tend to cause procurement delays. This is the fifth quarter in a row that we reported bookings of more than $40 million. Although not included in our third quarter bookings results, I'm pleased to share that Iteris has received a Notice of Intent to Award a multi-year, multi-element contract from a public agency in Southern California. We do not normally comment on notices to award. However, this award is unique for two reasons. First, it includes a healthy mix of both products and services, demonstrating the progress of our cross-sell efforts. And second, we expect at least a portion of this project to be funded by the Infrastructure Investment and Jobs Act, making this our first notable award to include IIJA funding. It is likely to take a couple of quarters before this opportunity progresses from Notice of Award to sign contracts, at which time we'll provide additional information. Due to our sustained strong sales pipeline velocity and total net bookings, we ended the December 31 period with a record total ending backlog of $112.2 million, representing a 22% increase year-over-year. As always, our reported total net bookings and ending backlog figures reflect firm customer orders. The total value of customer contracts, which varies from quarter-to-quarter, averages on a historical basis, about 200% of our total lending backlog. In the fiscal 2023 third quarter, product revenue increased 44% and year-over-year to a record $22.9 million, demonstrating continued market share gains. We believe our sensor portfolio continues to take market share due to excellent sales execution, and superior product performance. And in the third quarter, we extended our product performance lead with further enhancements to our AI-based object classification, detection system scalability and security framework. Due to our strong market position, we continue to win virtually every large competitively sourced detection sensor, fixed travel time sensor and cellular CV2X sensor initiatives across the country. For example, in the third quarter, our sensors were selected for the following representative smart mobility initiatives, full high-definition AI-based detection for Phase 2 of the Coachella Valley Smart Region Program with an order value of $4.5 million. This is likely the largest single deployment of this form of detection technology in the nation to-date. Cellular V2X or CV2X sensors to extend coverage on the I-4 between Tampa and Orlando as part of the Florida Regional Advanced Mobility Elements or FRAME program. This is another in a series of Iteris sensor purchases related to the I-4 FRAME program. Travel time and CV2X sensors will be deployed as part of an I-275 design build project near Tampa, Florida, video-based sensors for intersection detection to replace in-ground wired lubes throughout the city of Meridian, Mississippi and video-based sensors for intersection detection to replace prior implementation of our competitors' video sensors across the traffic corridor in Richmond, Virginia. These representative third quarter orders demonstrate Iteris' ability, as we've discussed previously, to successfully execute on the following five dimensions to expand our market footprint. First, we are executing on our strategy to maximize our win rate of large scale modernization initiatives like CVAG [ph] that drive region-wide standardization of our sensor portfolio. Second, we are leveraging our leadership in intersection detection to penetrate adjacent categories, including the emerging C-V2X category as we did with the I-4 FRAME and I-275 deals in Florida. Third, we're attaching annual recurring revenue to each new Vantage Apex system and sense Spectra CV sensor has occurred with the CVAG and Florida orders. Fourth, we're capturing a disproportionate share of migration revenue as customers similar to Meridian continue to replace legacy in-ground detection with advanced sensors; and fifth, we continue to display above-ground detection vendors, such as we did in Richmond due to our superior product performance, total cost of ownership and customer success model. Since our last earnings call, we released to production four more alternative circuit boards that will enable further reductions in our aftermarket component purchases, better optimization of our component inventory, additional improvements in our manufacturing linearity and enhanced purchasing power with traditional supply sources. This brings us to a total of six alternative circuit boards released to production from the inception of our supply chain improvement program. In a moment, Doug will comment on the implications of these new alternative circuit boards on our fourth quarter purchase price variance and product gross margins going forward. Now I want to review the performance of our service lines of business. Fiscal 2023 third quarter total service revenue was $17.8 million, representing a 10.5% increase year-over-year. In addition, we recorded $16.1 million in net service bookings, of which 41% will be recognized in the future as annual recurring revenue. Notable new customer agreements include a combined $1.8 million in orders to extend our managed services activities for the Virginia Department of Transportation, a $1.3 million subscription agreement for clear data from the Utah Department of Transportation, a $1.3 million task order for the second phase of a project to develop and support a smart county plan for the San Bernardino County Transportation Authority, $1 million task order from the Florida Department of Transportation District 7 for arterial performance monitoring and management activities, $1 million combined -- a series of awards worth a combined $1 million for a subscription agreement for ClearGuide, including ClearGuide SPM from various agencies in the US and Canada and a clear data subscription for a non-disclosed value from a confidential commercial customer. Additionally, we saw an acceleration in the attach rate of connected services or annual recurring revenue to our infrastructure sensors. At this time, we have over 3,000 intersections in 2,000 travel time and C-V2X sensors, which are either connected or in process of being connected to our ClearMobility Cloud. To sustain market share growth, we continued in the third quarter to enhance our Software-as-a-Service, Data-as-a-Service and cloud-enabled managed service solutions. For example, we introduced a new safety-related data set that customers can access on a subscription basis, through our clear data application programming interface and we integrated this new data set into our mobility intelligence software ClearGuide to address new Vision Zero and State Streets for all use cases. Given the strength of our value proposition, we also began to introduce strategic price increases on certain of our Software as a Service offers. So in summary, we are pleased with our third quarter record total revenue and record total ending backlog, as well as the progress we made on our supply chain improvement program and the associated sequential improvement in cost of goods sold and adjusted EBITDA. With various financial metrics trending in a favorable direction, we believe Iteris achieved an important financial inflection point in the third quarter, consistent with our prior expectations. On that note, I'd like to turn the call over to Doug to provide more color on our third quarter financials, after which I will further discuss our fourth quarter expectations. Thanks, Joe. Good afternoon, everyone. As a reminder, please see the company's 10-Q filing and press release, which are posted on our IR website for a further description of matters under discussion during the call today. As Joe mentioned and as we expected, the third quarter was an inflection point in our hardware business, as we began to see the benefits of our supply chain management improvement plan really take hold. We continue to face supply chain challenges on certain components again this quarter, but the impact on the top and bottom line were not as severe as the last several quarters. To that point, we only spent approximately $970,000 in inventory purchases from the secondary markets, i.e., brokers, which was down from $8.4 million in Q2. The impact from previously purchased broker parts in prior quarters was an increase in cost of goods sold of $3.9 million in this quarter, but was down significantly from $7.8 million in the prior quarter. From a revenue standpoint, the amount of unshipped backlog decreased from $900,000 at the end of Q2 to $100,000 in Q3. The orders that didn't ship in the current quarter are expected to ship in Q4. As Joe mentioned, our ongoing supply chain initiatives are improving the situation, which is why we expect the fourth quarter hardware gross margins to be back to the low 40% range compared to only 20.6% in the first three quarters of this year. Demand for our products and services continues to be strong as evidenced by a record backlog of $112.2 million, which was up 22% over the prior year third quarter. Now, I'll move on to the details of the third quarter results. Total revenue for the fiscal 2023 third quarter increased 27.1% to $40.7 million compared to $32 million in the same quarter a year ago. Our gross margins in the third quarter decreased 560 basis points to 29.1% compared to 34.7% from the same quarter last year. Adjusting for the net increase in component costs of approximately $2.4 million quarter-over-quarter, the gross margins would have been 35% or up 30 basis points compared to the same prior year quarter. Turning to our revenue mix. The product revenues increased 44% to $22.9 million compared to $15.9 million in the same quarter last year. This strong demand underscores our market-leading position in the sensor market. And as Joe noted, we continue to win on all large sensor deals. Product gross margins decreased 440 basis points and were 30.1% compared to 34.5% for the same quarter last year. However, the product gross margins did increase 2,640 basis points over the second quarter, as our supply chain improvement program continued to make great progress, and we continue to deplete the high-cost inventory on our balance sheet from previous quarters. Our service revenues increased 10.5% to $17.8 million compared to $16.1 million in the prior year quarter, primarily driven by stronger software and managed services revenue. In the third quarter, 23% of total revenue was annual recurring revenue. This was down from prior quarters as the revenue mix changed with product revenue outpacing the services revenue. And as a reminder, our annual recurring revenues are comprised of our software and managed services revenues. Service gross margins decreased 700 basis points to 27.8% compared to 34.8% from the same quarter last year. This was primarily due to a change in our licensing fee structure for third-party data providers on our SaaS platforms and more than usual subcontractor content on our professional services revenue, which tends to be at very low margins. Operating expenses in the third quarter were up $900,000, at $14 million in the current quarter. General and administrative expenses were down $400,000, or 7.4%, while R&D was up $100,000, driven primarily by the circuit board redesign efforts. Sales and marketing costs increased $1.2 million, which was related to increases in our sales and product support headcount to support the higher sales this year and going forward. We reported a GAAP operating loss in the third quarter of $2.2 million compared with a GAAP operating loss of $2 million in the same quarter a year ago. The operating loss was solely attributable to the higher component costs, as previously mentioned. With progress being made on the circuit board redesigns, we're anticipating spending less than $600,000 in broker market components in Q4, which is down 38% when compared to Q3. The GAAP net loss from continuing operations in the third quarter was $2 million or a loss of $0.05 per share, which compares to a net loss from continuing operations of $2.4 million, or $0.06 per share in the same quarter a year ago. Adjusted EBITDA for the third quarter was a loss of $400,000 or 1% of revenue, which compares to EBITDA of approximately $100,000 or 0.3% of revenue in the third quarter of last year. The GAAP operating loss, GAAP net loss and adjusted EBITDA loss were driven by the supply chain issues, as previously noted. With the supply chain improvement plans outlined by Joe, we anticipate a continued improvement in our supply chain position in the coming quarters, since it will take additional time for the redesign of the key circuit boards to ship through to our customers. With six alternative circuit boards released to production inception to date, this has largely mitigated our need to procure components in the broker markets as previously mentioned. These key redesign activities should return the product gross margins to about 40% in the fourth quarter of this year and improved progressively as the hardware sales volumes increase and additional new circuit boards are introduced. Turning to liquidity and capital resources. Cash was $10.2 million at the end of the third quarter, and working capital was approximately $24.7 million. The $2.2 million increase in cash from the second quarter was a result of the improved profitability due to the lower component costs. With the expectation that fourth quarter parts purchased in the broker market will continue to decrease, this will further improve our working capital, and we would expect our ending cash balance this fiscal year to be in the range of $12 million to $14 million, as the profitability improves -- continues to improve and improve -- and our circuit board redesigns continue to progress. Lastly, we spent $134,000 in purchases of property and equipment in the third quarter, and we still expect the full year CapEx to be less than 1% of revenues, reflecting our asset-light business model. In summary, we continue to be laser-focused on our supply chain challenges and our multipoint supply chain recovery plan is progressing well, which will return our Vantage sensor gross margins back to historical levels. Lastly, as Joe mentioned, at the beginning of the call, this will be my last earnings call with Iteris. I want to thank all of our investors and sell-side analysts for all the support I've received over the last three years. I certainly hope I cross paths with many of you in the future, in my yet to be finalized next endeavor. Great. Thank you, Doug. The smart mobility infrastructure management market represents significant long-term opportunities due to favorable secular trends and historic new investment from the IIJA and despite the challenges of COVID and the subsequent supply chain constraints, we've continued to strengthen Iteris' position in this dynamic market over the last several quarters. Therefore, given the strength of our position, this large dynamic market, we remain extremely optimistic about the growth opportunity in front of Iteris despite potential challenges in the broader economy. To realize this opportunity, Iteris will continue to deliver on an aggressive solutions road map that includes the following fourth quarter planned releases. A new connected vehicle safety alert for our Spectra CV sensor that is targeted at both public and private sector markets. New safety features for our Vantage Apex sensors will further enhance our safe street for all value proposition. New scalability features for Vantage Apex that will enable us to better price differentiate based on certain intersection characteristics. New safety analytics and connected vehicle reporting features for ClearGuide, our mobility intelligence application and new features to enhance the connected vehicle-based transit signal priority solution that we are scheduled to pilot in Florida this spring. We believe these new releases will drive the further adoption of our ClearMobility platform, enhance the cross-sell of our ClearMobility offerings and improve the monetization of our mobility data sets. In addition, we'll continue to execute against our supply chain improvement program with the release to production of four more alternative circuit boards in the fourth quarter. Upon the release of those boards, we will have achieved all of the objectives of the fiscal 2023 supply chain improvement program to be reviewed on our June 1, 2022 earnings call. More importantly, the release of these boards will further reduce our dependence on broker purchase parts, which, as Doug mentioned, we estimate will be less than $600,000 in our fourth quarter. Given these dynamics for the fiscal 2023 fourth quarter, we anticipate revenue to increase approximately 18% year-over-year, EBITDA margins to improve more than 900 basis points on a sequential basis and net cash flow to be in the range of $1.5 million to $3.5 million. As a result, we're raising the low end of our full year fiscal 2023 revenue guidance with the new range being $152 million to $155 million. And we're lowering the high end of our full year adjusted EBITDA guidance with the new range being negative 2% to negative 3%, and full year fiscal 2023 revenue, reflecting the impact of global supply chain constraints on our fiscal 2023 year-to-date results. In closing, the last several quarters have been difficult due to COVID and subsequent global supply chain constraints. However, we continue to execute against our platform-centric business strategy and extended our leadership position in the smart mobility and structure management market. Additionally, our global supply chain improvement program is not only generating significant near-term benefits but lasting value for the company. Therefore, we believe Iteris remains poised to create significant shareholder value as outlined by our Vision 2027 operating plan. With that, we'll -- we'd be delighted to respond to any questions or comments. Operator, are there any questions from our covering analysts? Absolutely. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Your first question is coming from Jeff Van Sinderen from B. Riley. Your line is live. Hi everyone and let me first say, Doug, we'll miss you and wish you the best in whatever you're doing going forward. My first question for you guys is really sort of around the service revenue growth. I think it came in around 10%. Just wondering what your expectations are for growth in that segment of the business over the next few quarters. What do you think that should be? And maybe just talk about some of the drivers that could potentially accelerate that growth rate. And then sort of I apologize, this is kind of a multipart question here, but I know you said service was down. I think you said service was down 700 bps in terms of margin and then you had the change in the license fee structure, I think, on SaaS and more sub-content included. So, maybe you can touch a little bit on that. And then I think you did say how much was recurring in Q3, but wondering how much of that was actual SaaS? And then what are your thoughts on getting kind of the -- I guess, going forward with the level of concentration of recurring that you expect over the next few quarters? I apologize, there's a lot in there, but-- Feel free to pipe in if we miss anything. So, I'll start off and then let Doug add to it. So, yes, I think that the first thing you noted is that the service revenue at 10.5% was not the same rate of growth that we saw with the hardware coming in at 44%. And -- so to provide some context there, there's obviously just a ton of market demand for our traditional detection sensors as well as the new forms of sensors that we've introduced over the last few quarters. And so that is what drove the tremendous growth, and we expect very strong continued sensor growth going forward. With respect to the service revenue, remember that's made up of a couple of different components, both professional services and then annual recurring revenue and to your point, Jeff, annual recurring revenue is further made up of two parts, managed services and SaaS. During the third quarter, our professional services revenue came in relatively soft, not due to a lack of demand, but this is historically a difficult quarter for us. Most of our professional services revenue is directly tied to the number of billable hours that we have in the quarter. And due to the holidays, we have a lot of employees that are taking PTO and therefore, they're not billing to our various consulting projects. And so that's always throttled our professional services in the December 31 period, and it continued to have an impact in the current quarter. Our annual recurring revenue and specifically our SaaS revenue grew at substantially higher rates than our professional services revenue. With respect to Q4, I would expect that our services revenue growth will rebound and will come in at a higher rate than the 10.5% that we had in the third quarter. With respect to the decrease in the gross margins on the services revenue, and Doug's referenced to the new contracts that we have in place with some of our data providers. Over the long-term, the new agreements are actually a good thing, but in the short-term, it did have a negative impact on our gross margins. Essentially, the prior structure that we had with our various suppliers was that we were paying, essentially like an incremental fee on each customer deployment for the associated data that we were processing for that particular customer. And so our costs for the data, we're continuing to grow in relation to the amount of SaaS and Data as a Service revenue from our various customers. We've renegotiated those contracts, so we basically have an all-you-can-eat type of licensing arrangement with our various data providers. As you would expect in order to get that all-you-can-eat agreement, we needed to raise the floor. So we now currently have a higher floor than we had. But as our revenue continues to increase, we won't have to pay any incremental royalty for that data going forward. So over the long-term, this is going to actually benefit our gross margins. But until we reach it back threshold, you will see a little bit of impact on our gross margin line. The bigger impact was actually due to the high percent of subcontract revenue. Like of the professional services revenue that we did recognize in the period, a substantial portion of it was subcontractor-based and we don't get the same kind of gross margin on subcontractor revenue that we do on direct labor revenue. Let me stop there and see if Doug you have anything you want to add to any of those points. I think you hit them all. I was writing them down as Jeff was rattling them off. But Jeff, did we get them all? No, no, no, you did. You guys are great. I appreciate that. I just had sort of a follow-up along those. And I know you said long-term benefit, short-term a little bit of pain in the margin. But I guess sort of any color you can give us on where that threshold is that will have you inflect to getting that long-term benefit? Do you think that it's a quarter out, three quarters out? Any color or metrics you can give us around that? Yeah. I think it's hard for us to give you that, that the -- we have multiple data suppliers, and that's because different data suppliers are better at different things than others. And as result of that, there's kind of an implication for the attach rate that we see on certain software products and certain data-as-a-service products, which will impact our ability to hit that critical threshold for these various contracts, each of which have different terms. So the actual makeup of the orders that we see over the next couple of quarters will impact how quickly we reach that inflection point. So it's a very complicated optimization problem and it's difficult at this point for us to give you a lot of guidance. But I would generally say that, this is not like going to take years to get there. I think that it is probably on balance a matter of quarters, at which point, we should start to hit that inflection point. Again, the several hundred basis point decrease, again, was, I believe, more attributable to the subcontractor content and the professional services revenue than these new agreements. So again, I just want to make sure that you understand that. Okay. That's helpful. And then if we could shift for a minute. I know, you mentioned the SoCal project that is soon to be a contract. Any sense you can give us kind of the size of that project for you in dollars in the time frame when you can realize that? Yeah. So we don't want to negotiate against ourselves by making any sort of specific comments about any of the financial aspects of the contract. But I would say this is a relatively large contract for us. And I think other than that, I need to leave it at that. And then further with respect to the time line, as I said, we were anticipating that it would probably be a couple of quarters, like probably about six months before this progresses from award to contract. But I have to like â I always get in trouble when I put out a time line, because it's amazing how long it can pay for â in certain circumstances for awards to convert to contract, we actually have seen it be in excess of a year. But this seems to be moving along pretty quickly, and I would anticipate approximately six months. Okay. That's helpful. And I guess I'll also see a welcome forward to Carrie, and I guess he's joining tomorrow to take a while for them to get up to speed. Yes, but I know he'll be interested in meeting all of our analysts and any interested investors as well. So I'd encourage you and any investors who would like the option to speak with them to just reach out to Todd or me, and we'll make sure that we make those introductions happen Okay. Terrific. And then just one more, if you don't mind. I think you've got a couple more months here to your fiscal year. You got a pretty solid backlog. Backlog continues to grow â and I'm not asking you to guide here, but any early thoughts on â And any â well, I guess what I'm trying to get at â and this really isn't a quantitative guidance. I'm just trying to get a sense if you think that you can sustain sort of an above-market revenue growth rate in fiscal 2024, or we have a little bit of a kind of rebound or a pent-up effect, I guess, you would say at this moment. How are you thinking about that? How are you sort of thinking about revenue growth normalizing over the next several quarters? So in other words, what's your guidance? So as you know, we've really tried to make a practice we're a pretty small. We're a small public company for sure, right? And so like small variances make like in percentage terms can be pretty sizable, right? So we really don't want to get ahead of ourselves. And as a normal practice on our â when we do our fourth quarter earnings will provide full year guidance. But just I think you're basically saying like â but still, like how strong does the market seem, what kind of â what â how does your pipeline velocity look? Do you think that overall sort of demand signals are they like -- like strong or weak? Are you seeing like a change one way or the other? And so to try to answer that kind of a qualitative question, the environment still seems very positive. And I think that that's true really across the broader sector. But I do feel that our product strategy is really resonating well in the marketplace. And our sense that we're going to continue to take market share I can't say exactly for how long, but obviously, we're going to continue to move the ball forward, take a leadership position, try to define their competitive landscape. And as I said in my remarks on today's call and I said in the past, I think that we've got the most productive channel in the industry, and we'll continue to invest in that and improve on it. I guess just a basic question here. From an OpEx standpoint, should we think about OpEx as sort of remaining stable here from this point for a while? Absolutely. I mean if you look particularly at the G&A line, you've done a pretty good job of keeping that really flat for quite some time. And the sales and marketing was up a little bit this year, but that was a conscious decision to invest in that part of the organization, bringing on new salespeople and product support people. And R&D, I think we'll continue to probably hover around that sort of 5% to 5.5% of revenue. So I think with the increase in the revenue, we will start to really see some leverage in the P&L with the hardware business now getting back on its feet. Okay. Great. In terms of the roadside unit product category, do you have a rough range of what that contributed to the quarter? That's a good question. Look, I would guess because we don't actually break it out that way, but I would guess it would be in the range like even $2 million to $4 million? All right. Got it. And remember, we only started talking about that on our -- that segment, that whole product strategy a year ago, December. And this is a very early stage market. We think that the total addressable market in North America right now is probably $30 million to $50 million. But our expectation -- I think most people's expectation is it over probably a five-year time frame, that could look like a potential $1 billion TAM. Yes. Yes. Great. And then you talked about winning pretty much all large sensor deals. Is there sort of a consistent message from these customers as to why they're choosing you? Is it the core center itself? Is this a software strategy to get attached to the sensor or something else? Any kind of consistent message? I think it's really all of the above. But the way that people express it is that the technology just works. It addresses their business priorities. And that's a function of a lot of things. It's the fact that -- I think that we have unique domain expertise, and that's because we benefit from the traffic engineering capability, it's part of our DNA because of the -- our leadership in the consulting sector. And so understanding how people operate these sensors and what kinds of information they need out of it has allowed us to build product that meets the needs of the customers. And then we supplement that with, we think, the best field support in the industry. So I think, again, I mean, just generally, people are like, wow, this does exactly what I need, whereas I don't see this from other vendors. But there's a lot that goes into that, right? I mean it sounds easy, but there's a lot of work on the back end. Yes. And then you talked about sort of the data providers to use. Are there a couple that are just clearly the largest data provider to your ecosystem? Yes. Well, so we've put out some announcements about some of those relationships. For a long time, we've talked about our relationship with HERE Technologies. We've had a number of announcements with HERE. We both utilize hers map within ClearMobility Cloud because a lot of the data is presented in a map format, but we also ingest data from HERE. And then also, we recently put out announcements about agreements with Wejo and Otonomo. We do have agreements with various other parties. Some of them right now are confidential, so I can't comment on those. But we receive -- we get data from multiple third-party commercial suppliers. And then additionally, because of our relationships with agencies, we have unique access to a lot of agency data. Like there are certain states where we have access to virtually all of the state's IoT devices deployed across like State's entire highway system and that's a function of our relationship with the agencies. Now that's not exclusive arrangement. Of course, like agencies aren't going to enter into exclusive relationship with anybody about their data because they would view it as either proprietary or a public asset. But we're -- because of our relationships, we're in a unique position. We have know-how known the relationships to understand how to get access to that data. So the answer is we get the data from multiple sources. It's uniquely curated. But in terms of the commercial arrangements, I'm able to discuss publicly our primary ones at this point would be HERE, Wejo and Otonomo. Good afternoon guys. Just one for us. And you maybe alluded to this a little bit earlier, but I want to ask it more directly. So you raised the revenue guidance, qualitative commentary all seems quite positive. But yet you lowered the EBITDA for the year. So what, I guess, is causing the additional margin pressure relative to your expectations a couple of months ago? I think it's mostly that costs developing the alternative circuit boards, some of which we incurred in the third quarter and some in the fourth. And Doug, maybe you could explain that we have a dependency on some third parties to develop some of the prototypes and rights, some of the firmware. And there are a lot of other companies in the same position as we are and so we're seeing the availability of those resources getting way scarce. Yeah. No, that's exactly right, Joe. So it's just really the cost to get those additional circuit boards into production, so we're competing with a lot of other companies that are using the same resources. And it's just -- it's costing us a little bit more than we had anticipated. And so Ryan, that's a temporary issue. As I said, we expect by the end of the fourth quarter, we will have delivered or released to production all of the alternative circuit boards that we originally identified as critical as part of the supply chain improvement program, so that will be behind us. It's not to say that we won't continue to develop alternative circuit boards, but we won't be under the same time pressure. And that should change the pricing scenario, because especially when we're asking people to do things quickly in order to meet our timeframe, we're incurring various markups in this environment. Thanks and congratulations on the strong sales growth in the quarter. I am curious when you compete for attached software services in a bid do those types of negotiations and bidding take a few extra months longer than less bundled services? I'm just trying to think of the training or a higher price point as a bundled package triggers a longer lead time to close the award. Yeah, Tim, that's an extremely good observation. That's an analysis that we do on virtually every opportunity, right? I mean, our desire is to attach annual recurring revenue or cloud revenue to every sensor sale, every professional services engagement that we have. But you're exactly right. In some cases, you introduce complexity, and it can occasionally slow things down. There are certain actions that we're taking, which we don't want to discuss right now. So I think we've we think we have a pretty smart approach to try to thread-the-needle, which we don't want to share with competitors at this point. But we think that there's a way around that. I mean not to say that it's going to go away, but that we can get better at that. And we're going to start implementing some of these sales techniques. Actually, we're -- in fact, we're in the process of introducing some of those sales techniques right now. That does -- isn't going to completely eliminate the issue. But we do think that we have an interesting way to thread-the-needle. And I would say that the good news on the flip side is that when we're able to attach that recurring revenue, right, then the outcome for us on so many levels is so much better than having just sold like a piece of hardware on a transactional basis. And then the next time we're selling to that customer, it's like another transaction sale, right? So to the extent that we're able to attach recurring revenue to these units, it's going to be great over the long-term, which obviously you know, but again, it can create complexity upfront, and we think we have a way to mitigate it. That's very helpful. I appreciate the color on that. For your AI-powered Vantage Apex offering, are most of those features now available and activated for customers since December? I know it was launched a little over a year ago. I'm just trying to maybe wrap my head around the Vantage Apex acceleration, sales growth potential and all the other launches you mentioned earlier on the call, as they maybe gain more momentum, is that attracted more customers now that the features are more activeâ¦ Yes. That's another really astute question. So we have three, four generations actually of sensors, detection sensors in the market right now. We have our Edge product, which we're in the middle of end of lighting. But for the -- through the December 31 period, we were still selling it. We have our next product, which today represents by far the largest portion of our detection product sales. And then we have Apex and Fusion, which were -- in our industry, which moves pretty slowly because it's very risk-averse. They were introduced just very recently. And -- so at this point, I think that we have sold like our bookings, our Apex bookings probably represent maybe a 1,000 to 2,000 units. And remember there could be multiple units. Like can you talk about in terms of systems, it'd be hundreds of systems, thousand, a couple of thousand sensors and yes, and then our biggest deal-to-date is actually that Seabag [ph] deal, the Coachella Valley deal that I just -- that I mentioned on today's call, that represents, I think, about 125 to 150 intersections. And that will be the largest -- that will be the largest point in the nation of high-definition AI-based detection. But anyway, the point is it's still â we're still in the early innings with respect to that product. And then Fusion is we've sold even fewer units of that to date. I want to make sure that everybody understands that, that was our expectation because we found that this market moves very slowly. It took us about three years before our next product really became mainstream in the marketplace and so we're right on track with both our Apex and our Fusion products. But to your point, Tim, we sold relatively few Apex units so far. No, that's helpful. I'm sure as more features can activate it, customers like it more on word spreads. Just to my next question. I know, your fiscal year ends next month, and you'll probably give guidance on the call for that call. But when I'm looking back on this fiscal year, I'm just trying to ballpark in my head, the headwinds that you're going to be lapping on the cost project, it seems like you had not only the development costs of the circuit board and you have maybe at least 70 basis points of drag from the supplemental broker costs. Were there any other big one-off costs that you incurred this fiscal year that probably won't repeat next year? No, I think those are the big ones. I mean if you look at the -- just the purchase price variance numbers we've been talking about, I mean the full impact this year is almost $15 million. So -- that's a big number for a company our size. So, -- and the development costs, as we work through this, will come down because, as Joe mentioned, the majority of the ones that are really going to drive the continued cost improvement will be done this year. I mean, there will always be circuit board redesigns as part of just the evolution of the supply chain and the availability. But I think those are the two biggest like one-off that wouldn't be recurring next year items. Thanks. That's really helpful. And my last question is around your acquisition appetite. And I'm just wondering, has there been an improved sellers' willingness to founder-owned or family-owned businesses lately, maybe as the market turns south between the summer in December, or have you guys just been so busy with organic growth that you really haven't spent much time recently on acquisitions? Well, yes, I mean it's -- unfortunately, it's -- we've been so busy trying to resolve our own supply chain issues. We've been very internally focused on getting that right. And not only has it taken management attention to work through those issues, but we've also consumed a lot of cash and also because of the impact on our profitability, we've seen a negative impact on our share price. So for all those reasons, it wasn't practical time for us to be focused on acquisitions. But we do feel like we've achieved critical inflection point, and our circumstances are going to change, and I think we'll be in a much better position to first start again to pursue acquisitions as we progress through, our new fiscal year FY 2024 starts on April 1. In terms of the overall market conditions, I would say that we probably don't want to buy a business that is like financially nonviable. So we probably wouldn't be looking at anything that's a distressed asset anyway. With respect to the businesses that are more viable, I don't -- like these are -- it's a very fragmented market made up of a lot of really small companies, which are not necessarily that sophisticated. So they're not a ton of pro forma processes that are going on. But I would say that the few processes that have occurred and then some of the people that have like kind of sniffers out to see if there's a potential buyer, I think that they've experienced a lot of reticence given the current market conditions. And so I think that people have decided to just keep their heads down and work through their problems the same way that we have, so I don't think we've lost a lot of deals. I would expect that the activity will pick up. I'm not sure exactly when, but I think generally in the next six to 12 months, which I think aligns pretty well with our own time line. Thank you. [Operator Instructions] Thank you. That concludes our Q&A session. I will now hand the conference back to Joe Bergera for closing remarks. Please go ahead. Super. Thanks, Matt. I appreciate it. So as always, I appreciate everybody's support and your thoughtful questions. On the Investor Relations front, I wanted to reiterate, we plan to host the first in a series of short investor updates this quarter. Specifically, we're looking at March. The first update will focus on various aspects of the IIJA, such is a breakdown of budget line items and the status of new programs will be created as a result of the legislation. Additionally, we're participating in various investor outreach events. And as always, we're always available to speak with investors should you have any follow-up questions. So please feel free to reach out to us. In the meantime, we look forward to updating you again on our continued progress when we report on our fiscal 2023 fourth quarter and our full year results. Thank you. That concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.
EarningCall_595	Good afternoon, and welcome to Hologic's First Quarter Fiscal 2023 Earnings Conference Call. My name is Justin, and I am your operator for today's call. Today's conference is being recorded. All lines have been placed on mute. With me today are Steve McMillan, the company's Chairman, President and Chief Executive Officer; and Karleen Oberton, our Chief Financial Officer. Our first quarter press release is available now on the Investors section of our website. We will also post our prepared remarks to our website shortly after we deliver them, as well as an updated corporate presentation. And a replay of this call will be available for the next 30 days. Before we begin, we would like to inform you that certain statements we make today will be forward-looking. These statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Such factors include those referenced in the safe harbor statement included in our earnings release and SEC filings. During this call, we will discuss certain non-GAAP financial measures. A reconciliation to GAAP can be found in our earnings release. Two of these non-GAAP measures are: one, organic revenue, which we define as constant currency revenue excluding the divested Blood Screening business and revenue from acquired businesses owned by Hologic for less than one year. And two, organic revenue, excluding COVID-19, which excludes COVID-19 assay revenue, revenue related to COVID-19 and sales from discontinued product in Diagnostics. Finally, any percentage change we discuss will be on a year-over-year basis and revenue growth rates will be in constant currency unless otherwise noted. Thank you, Ryan, and good afternoon, everyone. We're pleased to discuss our financial results for the first quarter of fiscal 2023. Our results highlight the strength of our three divisions, the power of our commercial channels and the increasing impact of our transformative growth drivers from R&D and acquisitions. For the quarter, total revenue was $1.07 billion and non-GAAP earnings per share was $1.07, both above the high end of our guidance. We also repurchased 1.5 million shares of our stock for $100 million in the quarter. To recap our pre-release, while we did have the benefit of three extra selling days, our top line performance was strong. Diagnostics grew 15.8%, powered by molecular diagnostics, which grew 24.5%. Both figures are organic and exclude COVID. Surgical also delivered an impressive quarter, growing 14.7% organically. And Breast Health finished the quarter down only 5.2%, a signal that our recovery from chip-related supply chain headwinds is indeed underway. While the extra days contributed approximately 250 basis points of growth net, even without the extra days, Diagnostics and Surgical both grew double digits and Breast Health exceeded prior guidance. All in, we are well positioned to achieve our full year guidance of low double-digit organic growth ex-COVID in all three of our franchises, well above our 5% to 7% long-term growth rate. Our balance sheet and cash flow are exceptionally strong and we continue to create value for our stakeholders. Today, we'd like to cover two main topics. First, we'll build on the thesis from our JPMorgan presentation three weeks ago, a theme that encapsulates how we improve women's health globally, drive our commercial success and elevate Hologic's reputation at the same time. Second, we'll highlight the transformation of our business and showcase the growth we are driving in each division, which we hope is now becoming much more evident in recent quarters. We are incredibly excited about today and confident about our future. Jumping right in, purpose driven, results driven. These four words comprise the theme of our JPMorgan presentation this year and these four words underpin the success of our entire business. At Hologic, we have an unparalleled commitment to women's health. When we speak purpose driven, results driven, nothing symbolizes these words better than our virtuous circle, which we feature in our corporate presentation. It is simple and powerful at the same time. Most importantly, it unifies and inspires our thousands of employees around the world and points our talented workforce in one singular direction, to elevate women's health, where we have leadership positions in each segment in which we operate. Our business starts with innovative, clinically differentiated, life changing, lifesaving technologies. Whether through R&D or by M&A, it all starts with innovation. As we bring these new innovative products to market, they grow our sales and profits. And here is the key to our success. What we believe sets us apart and allows us to thrive, we then invest these profits into championing women's health on a global scale. We are expanding policy and access, which then allows our products to reach more women and have an even greater impact on the world. And as our business grows, this cycle continues, simple and powerful. Two weeks ago for the second straight year, we had the opportunity to engage with global leaders at the World Economic Forum in Davos, Switzerland. This is an incredible platform that was not available to us just three years ago. We've earned our access through our leadership in women's health, our pioneering Hologic Global Women's Health Index and our outstanding response to COVID that continues today. As we've grown our business, we have significantly elevated the Hologic brand around the world. With our engagement at Davos, making powerful connections and building strong relationships, combined with recognition from our global partnership with the Women's Tennis Association. Hologic and what we stand for is more recognized globally than ever before, which in turn helps us attract the best and the brightest to the Hologic team, an important advantage in today's labor market. Quite frankly, the best thing we can do for the world and also for our business is to raise awareness and opportunities for women's health globally. For a sense of scale, there are approximately 170 million women in the U.S., our largest market. This is only a fraction of the nearly 4 billion women in the world. We have a long way to go. And as the importance of women's health is elevated and these markets grow, Hologic will be there at each step along the way. Shifting gears to our second topic, understanding the growth that is driving our business. With our strong performance for the quarter, the number one question we are asked is, how are we growing our top line? To answer this question, we will first reflect on our business transformation, a powerful mix of organic innovation, and strategic tuck-in acquisitions. Second, we will discuss each division and highlight examples of our growth engines and the multitude of market strategies deployed across each division. Reflecting on our transformation, it really started well before COVID. Three years ago, we were ready to show the world how we had diligently and thoughtfully strengthened our business for growth. Then, the pandemic hit. And when it did, we established three goals. One, take care of our employees, which we have done; two, meet the world's needs for highly accurate molecular diagnostic COVID testing, which we continue today; and three, emerge as a fundamentally stronger company, which is happening now. Under the cloud of COVID, while successfully deploying Panthers and producing our COVID assays, we strengthened Hologic for the long-term, to a level higher than even we had imagined prior to the pandemic. We achieved this through the combination of innovative internal R&D efforts, plus a series of tuck-in acquisitions. As a result, we've had continuous new product releases that have fundamentally transformed our business and boosted our growth profile. Now as the COVID cloud begins to clear, it is increasingly more evident that we are geared for success, geared for growth and geared to sustained performance over the long-term. Next, to fully appreciate our growth potential is to understand the transformation and diversification of our portfolio and growth strategies. Across all divisions, we are innovating, acquiring and building new markets, entering underdeveloped markets and penetrating existing segments. All while continuing to defend and even grow share in the markets we lead. Our growth in each division is grounded in strong and durable core products. These resilient core franchises are backed by long established clinical needs and commercial relationships, which provide a rock solid foundation to leverage into our newer growth drivers. We leverage our installed bases and customer relationships to advance our newer products, which we expect to both diversify the portfolio and accelerate growth. Moving on to the divisions. In Diagnostics, we have leading positions in core women's health product lines, such as STIs, and cervical cancer. Our women's health molecular diagnostics and psychology base drives steady growth and supports positive relationships with top laboratories and key opinion leaders, which opens the door for additional new products. Today, Diagnostics has grown from primarily a US women's health business to a global diagnostic franchise with many more growth drivers. For example, we now have over 3,250 Panthers worldwide. A number beyond what we had even imagined, along with 19 assays and the Fusion system that enables even further menu expansion. We also have a vastly expanded footprint with three acquisitions: Biotheranostics, Diagenode and Mobidiag that are contributing today and will even more so in the future. More specifically, driving future growth for Diagnostics means leveraging our expanded Panther installed base. These customers are adopters of our newer assays, including BV/CV/TV, and M.gen. We add menu, promote guidelines and drive adoption through our women's health clinical channel. Likewise, we also leverage our Panther installed base to enter established categories such as virology, and respiratory testing. Focusing on our Diagnostics acquisitions, with Biotheranostics we are already seeing solid contributions as we build a new market that is currently minimally penetrated. And with Mobidiag, the Mobidiag platform allows for significant future contributions as we prepare to enter the large and emerging syndromic panel market that is adjacent to our core molecular diagnostics franchise. In Breast Health, revenue from our 3D Mammography equipment and related service represents the core revenue foundation of the division. While our fiscal 2023 growth is primarily driven by the return of chip supply and gantry availability. The division is primed for future growth via a further portfolio expansion. The Breast Health business now spans the Breast Continuum of Care with more recurring growth drivers than ever before. We have expanded from what was once a capital intensive business by growing service revenue and adding more recurring disposable revenue. In doing so, we are creating new markets as with our Brevera breast biopsy system, while also entering existing markets where we compete with clinically differentiated products. And while we are leaders in the screening space, our R&D teams are poised to keep us ahead of the pack. In surgical, the business has changed dramatically, evolving from essentially a two product division, to one which is now much more robust and diverse. Last quarter, revenue outside of NovaSure and core MyoSure represented approximately 25% of the division's total compared to only approximately 10% in fiscal 2019. While NovaSure and core MyoSure still formed a strong durable base of the division, the business is far more dynamic than pre-pandemic. We now have meaningful growth drivers outside of these two core product lines from acquisitions, new in-house products and also improvements to existing products. Going a level deeper, the growth in surgical is driven by products like Fluent as well as NovaSure V5, both from our internal R&D efforts. With Fluent, we created an elegant solution to hysteroscopic fluid management that stands alone. And with our NovaSure V5 line extension, we have proven that even the best can get better and that we are never satisfied and never done innovating. By acquisition, the assessor procedure and the bolder advanced vessel sealing portfolio also diversify and elevate the division's growth trajectory. These are both laparoscopic tools that we've moved swiftly to acquire during COVID times and have added to our prior hysteroscopic only offering. Acessa is a unique radio frequency fibroid removal solution where we are building a new market and improving payer coverage. In Boulder, we are entering an underdeveloped market by deploying our large surgical sales force to introduce our advanced sealing portfolio to the OB/GYN market. Finally, our international business is so much stronger and poised for exceptional future growth post pandemic. Bolstering the individual product growth drivers in each division, we continue to penetrate our markets internationally. For example, in the quarter our Diagnostics business ex-COVID and surgical businesses each grew more than 20%. As we've stated before, we expect international growth rates to be accretive to our overall growth rate for years to come. In summary, our commitment to our purpose has paved the way for our success during the pandemic and is a beacon for our future. We are now a transformed, much stronger Hologic with more diverse growth drivers across each business and a much larger, more capable international presence. And through our innovative R&D and effective tuck in acquisition strategy, we are well positioned to continue to drive strong sustainable growth for years to come. Thank you, Steve, and good afternoon everyone. We are pleased to share first quarter results that exceeded our guidance on both the top line and bottom line. Our strong performance was once again driven by our diagnostics and surgical businesses with each growing mid-teens organically in the period, excluding COVID-19 revenue. And in Breast Health, we are encouraged by results that show the chip supplies moving in the right direction and that our mammography business is recovering. Before moving into our divisional results, it is important to highlight our balance sheet. Our leverage ratio of 0.2 times shows the capital structure that is strong as it has ever been, providing our business a tremendous amount of flexibility for internal investment and capital deployment opportunities. Moving on, I will now provide more color on our financial results. In the first quarter, revenue and profitability once again meaningfully surpassed our estimates, with the balance sheet split between our base business and COVID. Total revenue came in at $1.074 billion, a result more than $100 million higher than the midpoint of our guidance. And non GAAP EPS was $1.07, more than $0.20 higher than the midpoint of our prior guide. Turning to our business results. In Diagnostics, total revenue of $559.3 million declined 41.2% compared to the prior year. It is important to remember that COVID testing revenue was elevated in our fiscal first quarter of 2022 given the surge in infections from the Omicron variant. Thus, a more accurate representation of the diagnostics business is to exclude COVID assay revenue, related ancillaries and a small amount of revenue from discontinued products. When making this normalization, we see that organic diagnostics revenue increased 15.8% in the quarter. Within Diagnostics, we continue to see momentum in molecular. For the third quarter in a row, we delivered healthy double digit growth. Specifically, molecular diagnostics grew nearly 25% in our first quarter excluding the impact of COVID. This outstanding result demonstrates strong utilization across our significantly larger Panther installed base. Performance was driven by a mix of our legacy portfolio and newer assays. For example, the collective revenue of our core STI menu was well above pre pandemic levels in the quarter. In addition, BV/CV/TV had another strong quarter, more than doubling compared to the prior year as our progress continues growing the IVD vaginitis market. Further, our non COVID respiratory portfolio delivered revenue ahead of expectations in the period. As we saw uptake and testing for flu and RSV given heightened prevalence in public awareness of these pathogens. Finally, the Biotheranostics contribution to our base molecular performance continues to increase with accretive revenue growth in the quarter. Moving to our COVID results, we generated $127 million of COVID assay revenue in the quarter, exceeding our previous guidance of $75 million. In terms of the COVID assay revenue split by geography, domestic sales led most of our upside and represented nearly 80% of COVID assay revenue in the period. The demand for our COVID assay remains primarily COVID only. However, we did see above trend demand for our COVID flu multiplex test. Rounding out Diagnostics, our Cytology and Perinatal businesses increased 1.6% compared to the prior year. In Brest Health, total revenue of $334.2 million was down 5.2%, better than expected. These results were driven by strong demand for our Mammography equipment and improving semiconductor chip supply. We remain cautiously optimistic that Q1 revenue performance in our breast imaging segment being down only 4.5% highlights that the worst of the chip supply headwinds are likely behind us. We would remind everyone, we are still on allocation and that the macro backdrop could change quickly. As it relates to our interventional business, revenue was down 8% in the period, driven by lingering supply chain issues outside of chip availability. We expect these headwinds to subside for the balance of the year and the segment to resume a cadence of strong growth starting in fiscal Q2. In surgical, first quarter revenue of $154.1 million grew more than 17%. And excluding the Boulder acquisition, the business grew nearly 15%. These results underscore a more diverse surgical business with more growth drivers than in the past. In addition to strong performance from MyoSure and better than expected results from NovaSure, the quarter showcased increasing contributions from Fluent and our laparoscopic portfolio of Asessa and Boulder. Lastly, in our Skeletal business, revenue of $26.6 million increased slightly, less than 1% compared to the prior year period. Now let's move on to the rest of the non GAAP P&L for the first quarter. Gross margin of 62.7% was driven by higher than expected COVID-19 testing revenues and strong performance in our base business in the period. Total operating expenses of $339.4 million in the first quarter increased 1.6%, but were up less than 1% when excluding expenses from Boulder, which closed at the end of November 2021. The increase was led by higher marketing spend given the timing of certain initiatives. We expect marketing expense to move lower starting in our fiscal second quarter of 2023. Below operating income other expense was less than anticipated primarily due to higher interest income from investing our elevated cash balances at higher interest rates. Finally, our tax rate in Q1 was 19% as expected. Putting these pieces together, operating margin for Q1 came in at 31.1% and net margin was 24.9%, both ahead of our previous estimates. Non GAAP net income finished at $267.9 million and non GAAP EPS was $1.07. Moving on from the P&L. Cash flow from operations was $253.4 million in the first quarter. We had $2.4 billion of cash on our balance sheet and our leverage ratio remained at 0.2 times. Although it may appear to the outside our eye that we are letting our cash balance build, rest assured, our M&A teams in each division are incredibly active. Our capital allocation strategy remains unchanged. Our first priority remains pursuing growth accretive tuck in deals that align with our divisions and leverage our core strengths and strong commercial channels. More recently, given the stability of our balance sheet and the strength of our business, we have widened our aperture to consider slightly larger EBITDA of generating deals. That said, it is important to make clear that we expect any transaction we pursue will be complementary to our core strengths and not represent a completely new or unrelated vertical. Our second priority will continue to be share repurchases. And as Steve highlighted, in the first quarter we repurchased 1.5 million shares for $100 million. Now let's move on to our updated non GAAP financial guidance for the second quarter and full year fiscal 2023. As a reminder, our organic guidance excludes acquisition revenue until each deal annualizes. Therefore, all deals are part of our organic base starting in Q2, 2023. In the second quarter of fiscal 2023, we again expect strong financial results with total revenue in the range of $930 million to $980 million. For all of fiscal 2023, we are increasing our full year guidance and expect total revenue in the range of $3.85 billion to $4 billion, reflecting low double digit organic growth ex-COVID across each of our divisions. To help with constant currency modeling, we are assuming foreign currency exchange headwinds of slightly less than $20 million in the second quarter of 2023 and approximately $50 million for the full year. These headwinds have improved compared to our previous guidance as the U.S. dollar has depreciated over the past several months. Turning to our divisions, we are thrilled with the outlook for each business as we continue to anticipate that core diagnostics excluding COVID, Breast Health and Surgical will organically grow low double digits for our fiscal 2023. In diagnostics, molecular should continue to lead the way. We expect our assays to drive growth as non COVID utilization improves and customers add additional menu to their Panther system. As a reminder, our molecular diagnostic growth is not predicated on placing more Panther instruments, but rather helping our existing customers grow their business. As we have said consistently, even though Panther placements are likely to slow in the near term, given the huge pull forward during the pandemic, additional placements do not influence the trajectory of our molecular outlook. Closing out on diagnostics, we expect blood revenue of slightly less than $25 million for the year. Moving to Breast Health, we see an improving environment for chip supply and our position is unchanged from last quarter. Our expectation is that for a gradual improvement in our breast imaging business throughout 2023. We maintain our view that the business should exit fiscal 2023 at or near normal level. However, we'd like to make clear that you should not expect an outsized revenue catch up in any particular quarter. Instead, our plan is to incrementally work down our backlog over time as we look to efficiently manage the resources of our outstanding field service team. Finally in surgical, as evidenced by our first quarter's results, the business has quietly transformed into a dynamic franchise, moving beyond what was once a two product division. Low double digit organic growth for fiscal 2023 will be driven by a combination of MyoSure, the related FluentFluid Management System and our laparoscopic portfolio of Acessa and Boulder. In terms of COVID sales, we expect COVID assay sales to be approximately $50 million in the second quarter of 2023 and $225 million for the full year. COVID related items inclusive of a small amount of discontinued product revenue are expected to be approximately $35 million in the second quarter and $130 million for the full year. Moving down the P&L. For the full year, we continue to expect our non GAAP gross margin percentage to be in the low 60s and our non GAAP operating margin percentage to be approximately 30%. Within this operating margin profile, we have again incorporated elevated inflationary pressures into our guidance of approximately 200 basis points to 250 basis points, which we anticipate will persist throughout our fiscal 2023. In terms of operating expenses, we expect spending to step down starting in our second quarter, given the timing of marketing expenses primarily associated with our WTA partnership. Further, we foresee operating expense dollars as fairly flat sequentially from Q2 through Q4. Below operating income, we expect other income net to be an expense of around $50 million for the rest of the year. Our guidance is based on an annual effective tax rate of approximately 19% and diluted shares outstanding are expected to be approximately $25 million for the full year. All this nets out to expected non GAAP EPS of $0.80 to $0.90 in the second quarter and $3.55 to $3.85 for the year. To conclude, let me wrap up by repeating that our strong first quarter results exceeded our guidance despite a persistent macro uncertain. Performance was driven by tremendous growth in our molecular diagnostics and surgical businesses. Combined with a better than expected progress in Breast Health. As we look forward to the remainder of our fiscal 2023, we are excited to showcase our transformed business. With our updated guidance reinforcing our expectations of low double digit growth in each division for the remainder of the year. Hologic is a much stronger company than prior to the pandemic and we believe our 2023 performance will further prove this out. Hey, guys. Thank you for taking the questions. Karleen, maybe just picking up on the margin side there, obviously, pretty good performance in the quarter. Still talking about, obviously, some of the headwinds throughout the year. Can you just talk about the cadence? I know previously you were talking kind of 30% -ish every quarter. Can you just walk us through, I guess, obviously, the tailwinds we saw in 1Q and what the rest of the year looks like in terms of headwinds versus tailwinds and how that cadence works? Yes, sure. So I think the outlook would say that each quarter is roughly 30% operating margin and what you see happening is, you have the marketing expenses coming down from Q1. You have lower COVID revenue, which is a headwind, but then you have higher Breast Health revenue, which is a tailwind. So they kind of offset those headwinds or the tailwinds offset over the course of the year. And we maintain at that 30%, again, a little lower than pre-pandemic, because we have the higher inflationary costs still anticipated. Okay. It's understood. And then Steve, maybe just on molecular diagnostics, really strong core performance there. Can you just flush out a little bit more on the drivers you saw? I guess, sustainability, again, obviously, some pretty big numbers you guys have put up there. Just trying to get a sense for the drivers and what we could expect going forward on that front? Yes. You probably got it in multiple buckets, Patrick. Part is just a return of the Panther is being used for the core STI, most of our women's health business. You've got increasing growth in our new product launches, especially BV/CV, which is off to a tremendous start and we said we think will be a major driver of growth. And you really have -- what we kept saying over the last couple of years and it wasn't as obvious is so many of our customers around the world that we're running COVID are now putting the menu onto the Panthers. And it's really that simple and a huge part of it. And there's just a little bit of Africa and some viral stuff. But... Yes. The only thing I would add to that, Patrick, because we had some nice contribution from our respiratory assays, which will be seasonal as we move forward. Thank you. Hi. You're going to get the formalities out of the way, go birds. It feels like [indiscernible], but I say that every year. Excellent. So I had a couple of 10-Q derived questions that I personally thought were kind of interesting and I want to get your thoughts on. The first is, so you report international molecular sales of $97 million. Karleen, based on your COVID assay disclosures, I think it's like $25 million of international COVID. So it implies about $72 million of base molecular international. Prior to the pandemic, it was like $30 million a quarter. So I was just wondering like could this be an interesting gauge of what the international installed base could look like in terms of the stickiness of Panther? Just any thoughts on that would be helpful. Yes. So we have, as you said, that number includes the COVID assay revenues. So I think you've attempted to take some of that up. We also have the ancillaries, which are part of that, that are elevated because of COVID. But I think certainly, we're seeing the uptake, again, with newer customers in more than COVID. As well as our initiatives like in Africa, what Steve talked about the viral picking up some nice traction there as well. I think we -- as we think about international molecular, we would think that that is going to grow a little faster than U.S. given the commercial investments that we've made there and the Panther placements. Yes, Jack, just to interpolate on that point that you've noticed. We placed a lot of Panthers with so many, especially in the European countries as we responded with COVID and every one of those was coming with trailing shift over to the STI business. So I think that's a big piece of it. Interesting. Okay. Then my second question is on breast imaging. So the U.S. sales in the quarter were $212 million. I think that's actually like the largest first quarter you've had, at least several years. International still seeing some pressure, but I'm just trying to juxtapose this versus your comment about you're still seeing ongoing semiconductor pressure. What was going on in the U.S. in the quarter? Was there any flush of some sort as chips came in and just what does 2Q assume? Yes, there was absolutely no flush we can tell you. We did get a little bit more supply that we weâre able to install. And candidly, Jack, we had the extra week. We got a little bit of service revenue in there, because of that extra week in the quarter. So that kind of pushed us into the growth without that extra week that would have been slightly down a bit. But we like where we're coming and we were able to kind of refurb a few more chips, got a few more chips in and we're able to get a little more product out, but we're feeling really good about where we're headed this quarter and for the rest of the year in Breast Health. Great. Thanks for taking the question. First one on operating margins. So it looks like the COVID testing and related items were about 15% of the organic revenues. So just based on your expectations for global COVID testing revenues this year and as we near the end of the U.S. government's DAG program, does COVID testing and reimbursement remain the big needle mover for 2023 operating margins? Or is the operating margin expansion opportunity now more dependent on the Breast Health rebounds and/or continued strength in non COVID molecular DX? Yes, I would say that the margin accretion from COVID is less and less dependent on COVID as we move throughout the year and it's going to be more driven by the Breast Health recovery and certainly Q1 to Q2 lower operating expenses, which will persist throughout the year. Okay. Got it. And then just in terms of M&A, I think if you look at your free cash flow deployment, about 28% over the past five years. I think it's been for share buybacks in any sense? I would just be curious to hear about the potential size of any M&A deal you'd be willing to pursue. Any recent conversations amongst the biz dev team in terms of what types of companies fit best with the Hologic of today? And just a general update on capital deployment would be great? Thanks. Sure, Max. To reiterate what Karleen said, our primary goal is still tuck in acquisitions followed by share buybacks. We certainly have been opportunistic on the buybacks because we generated a whole bunch of more cash during that time and thought that made a lot sense. Going forward, we're looking across the businesses, all being led by the divisions. We're not going to get into particular scale or targets for obvious reasons. But I think what we would say is, we might go a little bit bigger on scale if it brought more EBITDA. So it will be a proportionate thought process there. But I think we're -- the biggest takeaway frankly is, we're in a position of strength where our base businesses are very strong. We don't have to go do anything. And candidly, when I think there's a lot of folks around trying to figure out what they want to be when they grow up right now. We know exactly where we're going and what we want to be and that is championing women's health and having every business going well. So it gives us the luxury of being patient and smart on the business development front. Yes. Hi, Steve. Thanks for taking the question. So maybe for you, given the low double digit growth rate that you're highlighting here, obviously, the business, all three segments are doing great. So what's holding you back on the long term guide of 5% to 7%? Why couldn't that be higher now in your long term outlook? Because we're running the business for the long term. And fundamentally, let's look at it. We're still bouncing off of some comps from last year where things were a little depressed from COVID everything else. We are a company that delivers and plans for the long haul and everything we've done to move up to the 5% to 7% has been very smart and we're going to continue to be prudent. Okay, great. And then just on capital deployment, maybe Karleen. What's your ability to lever up? What ratio are you comfortable with, just given the sort of the interest rates that are there right now and potential for those to continue to ramp up a bit higher? Yes. I mean, I think we have indicated that we'd be comfortable in a 2 times to 3 times leverage ratio that's something we talked to and supported by our credit agency. But to your point, we would continue to evaluate based on interest rate environment. But certainly, at this point we have plenty of cash and we have a credit line that we can fully deploy. So we feel like we've got good flexibility to do what we want in that event. Hey, guys. Congratulations on a solid Q here, and thanks for taking my question. Steve, I wanted to ask one on this guidance update here. It looks like you beat the quarter versus your midpoint of your prior guidance by about $120 million, the annual guide was raised by about $125 million. It looks like most of that's coming from FX and change in code assumptions. When I look at Q1 print here, your underlying organic came in better. So why wouldn't some of that underlying strength we saw in Q1 flow through -- flows through the rest of the year? Is there any kinding impact of revenue recognition or is this just a conservatism? It's -- we continue to deliver, I can promise you, it has nothing to do with timing of revenue recognition, Vijay. The underlying business is very strong, weâre one quarter in. Think about where we were a year ago at this time. Suddenly Russia invaded Ukraine, nobody saw that coming. I've lived through the downturn of 2008-2009. We've watched the world go up and down and over the first quarter of the year. So we're going to continue to be very prudent, do not underestimate our confidence in our ability to run the business. Understood. And then maybe another way to ask this question Steve is Diagnostic. Clearly it was a highlight, 16% and organic. So what is driving this? Is this like reagents? What kind of testing is driving this? Or was this easy code comp? When I look at Q1, overall underlying organic was 6%, they hit double digits for the year, the base has to do clean stroke at the back half. How should we think about this diagnostic which was 15% in Q1 ramping up in back half or is the back half being carried by normalization of breast imaging revenues? Look, clearly the comps on molecular and diagnostics will get harder in the back half. But fundamentally, what's driving it, we sort of answered this I think earlier. We placed a whole bunch of Panthers, almost 1,500 Panthers in COVID time over the last three years. We've got more customers adopting our core menu. We have our new products being launched doing very well. And those are really the main drivers, as well as a little bit of flu and a little bit of viral stuff as we've been penetrating a little more Africa. Yes. I mean, I think it is the Panther placements and new customers as well. I think we've talked about in our corporate presentation that of newly acquired customers, 85% are running at least one other assay and over 55% are running at least two other assays. So I think that is the value of the Panther in the menu that we have driving that growth. Great. So Steve, I love the comments on some parties out there trying to figure out who they want to be when they grow up. And just running with that, we've seen a lot of players in molecular diagnostics seem to be adding menu in women's health arena. So given your legacy foothold there, how can you think about the current competitive environment? Are you worried about any price pressures, maybe from new entrants trying to gain share via that lever? Yes, just kind of the sensible stance here and kind of what you would answer as to any questions around that? Yes, we worry all the time. But at the end of the day, we've also built an incredible sales force that has partnered both with the labs, but also with the clinicians. And our assays have proven themselves over time as well as do not underestimate the workflow advantages of our Panther system. And so, there's a lot of people that can talk a good game and especially let's face it. There were so many startups that all were working on stuff and then they got money in COVID time and they start talking about all their women's health assays. And it's an interesting little landscape right now. So we never take anybody for granted. We face some very formidable competitors, but we always have and we will continue to and we frankly think we continue to innovate things like BB/CV. We continue to bring new assays and new tests and new education to our customers. And that continues to provide strength for us. All right. And I appreciate that. And then one for Karleen. So Surgical, great to hear about the performance outside of the legacy products and appreciate the detail on the growth drivers this year. But could you kind of give us a bit more quantified detail about growth ranges here across the various buckets, so kind of the legacy products versus the new in house developed versus kind of the recent acquisitions, any additional kind of above below ranges or anything like that you could provide? And thank you. Yes. What I would say is dollar contribution is probably evenly split between the legacy platform and affluent our new innovative and then the acquisitions. But certainly, the percentage growth rate is much higher than the acquisitions building off a smaller base. But at the end of the day, I think the key takeaway is, there's not just one growth driver, there's multiple growth drivers that are driving the success of that business. Hey, guys. Good evening and thanks for the time here. Maybe I'll start with a couple on some of the recent deals for you, Steve. On Mobidiag, can you just remind us again where things stand in terms of -- I think you had said there's an entry buildup underway ahead of the launch. How big do you think the revenue opportunity could be in fiscal 2023? And then similarly, you highlighted Biotheranostics a couple of times today and obviously, they've got into guidelines. They have the recent data from December as well. How big do you see this opportunity becoming for you, perhaps not this year, but a couple of years out? Sure. I think on Mobi, Mobi will still be pretty small this year. Mobi will hit its stride ultimately when bring it to the U.S. which is still several years away. But we love the platform we have there. On Biotheranostics, it's still very small penetration. So the reality is, clearly, it's going to be probably potentially a few hundred million, we're not sure at this point, never great at. When you're creating new markets, it's always really hard because when you go back eight years ago, people ask me, could MyoSure someday be the size of NovaSure. And at that point in time, it was hard to picture that. And today, MyoSure is way bigger than NovaSure. So I think this magic that we have where we really are creating and building markets, it's sometimes hard to fully put a number on it other than to see, we think there's a lot of runway here, a lot. Got it. That's helpful. And then a couple of follow-ups here. One on, just the hospital CapEx environment and any sort of change in either sort of decision timelines or perhaps cancellation rates here a month into the new calendar year? And China, I know it's small for you guys. I think it's less than 3% of sales. But is there anything going on there in terms of the COVID case surge that we should be factoring in at least in the fiscal second quarter here? I think on the -- first on CapEx, we continue to stay really close to our sales teams on it. And seeing very tiny, nothing outside of historical cancellation rates, which is de minimis. On China, I think what you will see is, probably most of the hospitals in China over the last 60-ish days and probably here for a little period four are probably cutting down on normal procedures as they've been treating the COVID patients. But I think for our business, again, pretty small, but I think that's the kind of macro way I'd be thinking about China right now. And my hunch is, after the Chinese New Year and everything else, they're going to largely come back online and that will start to pick back up probably later this actual calendar quarter. I think they're going to get through it fine. Hey. A question, you're talking about 30-ish percent adjusted operating margin for this year. I'm looking at the consensus for 2024, it's about 30.5%. You're talking about 200 basis point to 250 basis points of inflationary pressures that are sort of in there. So like can you walk us through how you're thinking about operating margins as you sort of invest in the business and some of these inflationary pressures normalize, just sort of trying to get a sense of where we go from here? Yes, Derek, it's Karleen. So I'll take this one. So if you think about prior to the pandemic, what I would say is, our normal operating margin was roughly 30%, 31.5%, very rich margins for our industry. I see us probably over time getting back to that level. But what I would say is, think about our 5% to 7% top line long term growth rate. We will grow EPS faster than that, so likely low double digits and that EPS growth comes from more than just operating margin expansion. It comes from higher revenue growth, as well as some things that we can do below the line. So that's how we think about our long term outlook for earnings growing faster than revenue and again anchored on that 5% to 7%. And Derek, Iâll put a little point on it too. I've been around this business long enough to watch either divisions or big companies or companies themselves trying to push that operating margin so far that they cut into R&D and you don't see it immediately, but over time your innovation falls. And so, we know a lot of folks want to just keep saying all -- every number go up like that. We're thinking very much as Karleen said about driving the EPS number, but continuing to invest in R&D and not try to drive the operating margin as high as humanly possible. Well, thanks for setting me up Steve. That's exactly where I was going next. So I appreciate that. When you think -- you've got Biotheranostics, which is your entry in sort of like the oncology world. I mean there were some dabbling in the past with some things with like -- I think with PCA3 or some of this like stuff. How do you sort of think about oncology market? I mean there's obviously a lot of real estate out there, but I think pointed out that you don't want to do anything that's super dilutive in those areas. Can you just sort of -- but clearly there's a lot that's going on that market and opportunities for Hologic. Can you sort of like flesh out where you sort of think your genomics focus is, where this is going, how it is? Thanks. Sure, Derik. You're probably the only person who remembers PCA3. So I think we're comfortable continuing to be fairly patient. If I look at this overall, right? So I go back seven or eight years, liquid biopsy, it's going to be the greatest thing ever and everybody thought by 2018, 2020 this massive thing, we kept saying, look, we just don't know that there's going to be a lot of money made. So we continue and particularly in our acquisitions, everything we look at is thinking about what is the long term value creation from an earnings standpoint, not just a revenue and let's face it. As you well know in this industry as well there's a whole bunch of companies that generate a lot of top line, but no bottom line and they get great valuations when they're standalones. You try to drop those into a healthy company and where suddenly the EPS starts to get looked at, you never get that same expansion on the multiple. So I also think for all of the promise, the promise never comes as quickly as everybody thinks it's going to do. I'm still waiting for gain sharing in orthopedics to take over the full world 20 years later. And I just think as we continue to watch the space, we believe there will be winners that will emerge, but we're still letting some of those play out candidly and try to see it's not just a revenue gain or a number of boxes sold or a number of kits sold or whatever else. It really is, okay, what's our long term trajectory is how we're trying to think about these things? Thank you for asking that. Hey, this is Dustin on the line for Andrew. Going back to a comment you made earlier on Mobidiag and the entry in the roaming testing market. Can you be more specific on the timelines and how you plan to leverage your tampered relationships to drive that forward? Yes. We're clearly entering in Europe right now on a smaller scale. The U.S. clearance will be ultimately the bigger part. And as we said, that's probably at least a 2025-ish event at this point. So we're still a few years away as we prepare for it. And we'll certainly be able to leverage a lot of the strength that we have in the labs, especially the medium sized labs as we go into that point at that point. Okay. And I recognize that you talked a lot about M&A already, but Iâm wondering if you can be more specific and speak to how you're thinking about valuations both in the public and private space? We're always looking -- at the end of the day, we're thinking about the long term top and bottom line growth. We're very focused on ROIC, a key part of our senior leadership team comp is tied on ROIC, so we look at it on every deal. And we've watched a whole bunch of things that even if come down 80% or 90% and some of them we still don't necessarily like. So again, I think we've got the luxury of time on our side given the strength of underlying business and the strength of our balance sheet, which gives us the chance to be relatively picky around what might be out there. Hi. Thanks for taking my question. On women's health, so I believe vaginitis drove Q1 growth ex-COVID. Should it continue to drive growth for the rest of the year? And longer term, could you discuss your women's health focus being potentially a competitive advantage versus your non focused peers? Thank you. Yes. I think we continue to see growth certainly in our women's health assays that's been -- and it kind of got me to your second point of view. If you think about something like BB/CV/TV that we've launched, we discovered and realized about that because we're so tapped into to the key opinion leaders and starting to realize that there are other tests that may be able to be developed that we can bring to the market to bring greater levels of certainty and specificity. And I think when we have that knowledge because we surround those customers, our focused approach certainly benefits as well and I think helps us on the innovation side, the same in 3D mammography and how that's led to better biopsy stuff. And then the same in our surgical business where understanding fibroids better than anybody else and being able to innovate endometrial ablation. So we kind of surround these, call them, large niches, but it's really the insights that we have more with the KOLs that I think does provide us a level of competitive advantage. Thank you. Thanks. And staying at women's health, you mentioned future portfolio expansion in Breast Health. So are you able to tell us more about any Breast Health innovation? Any Breast Health innovation. I think the way to think about that is, we just continue to innovate. We've always been -- we've brought enhanced detectors, enhanced workflow solutions and enhanced imaging along the way and we'll continue that. Yes, I think we focus -- one of the important focus on innovation is patient experience, focus on that as well as machine learning, what we can do to make radiologists more efficient and certainly that's a big issue outside the U.S. where there's much fewer radiologists.
EarningCall_596	Good afternoon, ladies and gentlemen. Thank you for joining today's M/I Homes' Fourth Quarter and Year Ending Earnings Conference Call. My name is Tia, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions]. Thank you. And thanks for joining us today on the call. In Columbus is Bob Schottenstein, our CEO and President; Susan Krohne, our SVP and Chief Legal Officer; Derek Klutch, President of our Mortgage Company; Ann Marie Hunker, VP, Chief Accounting Officer and Controller; and Mark Kirkendall, VP and Treasurer. First, to address Regulation Fair Disclosure, we encourage you to ask any questions regarding issues that you consider material during this call because we are prohibited from discussing significant non-public items with you directly. And as to forward-looking statements, I want to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call. Also be advised that the company undertakes no obligation to update any forward-looking statements made during that call. Thanks, Phil. Good afternoon, and thank you for joining our call. We are pleased to report our fourth quarter and full year 2022 results highlighted by record revenue, record income and very strong returns. We increased our revenue by 10% to a record $4.1 billion, increased pre-tax income by 25% to a record $635 million and improved our operating margin by 160 basis points to 15.4%. In addition, we ended the year in the best financial condition in our 46-year history with the cash balance over $300 million, zero borrowings under our $650 million credit facility, and a debt to capital ratio of 25%. We were particularly pleased to deliver such strong operating and financial results in the face of challenging market conditions. As has been well documented, the rapid rise in interest rates over the past nine months has materially impacted demand for new homes and demand for existing homes. On the other hand, the demand for homes has not vanished. Instead, the higher rates have resulted in potential buyers taking a pause and moving to the sidelines. There remains very tangible homebuyer demographics, particularly among millennials and Gen Z individuals, and the prolonged undersupply of homes that has persisted for years, all gives us great confidence in the long-term outlook for the housing market and our industry. Our new contracts for the full year 2022 decreased by 27% compared to the record sales we posted in 2021. For the fourth quarter, our new contracts were down 44% compared to a year ago. However, as Phil will outline in a few minutes, we saw our sales and demand begin to improve during the latter part of the fourth quarter despite the higher rate environment. Moreover, and importantly, the improvement and strength in buyer demand, traffic and sales has continued into 2023. Specifically, with noticeably stronger levels of traffic both in our models and online, we sold 633 homes in January. This is our best sales month since April of last year. And though down 18% from a year ago, this represents an approximate 60% sequential improvement over the average monthly sales we recorded during the last half of 2022. Clearly, we are encouraged by this recent material improvement in our traffic and sales and similar commentary from select other builders adds to this encouragement. While there remains much uncertainty in the market and no one really knows whether this recent strengthening and improvement in demand and sales will continue, we do believe it underscores and confirms the underlying homebuyer demographics and desire for a new home. Now I'd like to provide some comments on our specific markets. We experienced strong performance from our divisions in 2022 with substantial income contributions across the board, led by Dallas, Tampa, Columbus, Orlando, Raleigh and Charlotte. In our Southern region, which consists of 11 markets in Texas, Florida, North Carolina and Tennessee, our deliveries increased 4% over last year's fourth quarter, comprising 1,413 deliveries, or 59% of the total. Northern region, which consists of our other six markets located in Ohio, Indiana, Illinois, Michigan, and Minnesota, contributed 971 deliveries, which was an increase of 2% over last year's fourth quarter. For the year, homes delivered decreased 5% in the Southern region and were flat in the Northern region. Our fourth quarter new contracts in the Southern region decreased by 41% and decreased by 48% in the Northern region. For the year, new contracts decreased 28% in the Southern region, 25% in the Northern region. Our owned and controlled lot position in the Southern region decreased by 8% compared to a year ago and increased by 3% in the Northern region when compared to 2021. Companywide, we now own approximately 25,000 single family lots or lot equivalents. Of this total, 32% are in the Northern region, 68% in the Southern region. This equates to roughly a three-year supply of owned lots. On top of the own lots, we control pursuant to option contracts, an additional 17,100 lots. So in total, we own and control roughly 42,000 single family lots, which is down 4% from a year ago and equates to about a five-year supply. Most importantly, about 41% of our lots are controlled under option contracts, thereby giving us significant and important flexibility to react to changes in market conditions. Before I turn the call over to Phil, let me just close with a few additional comments. We are very excited about our business as we look ahead to 2023. The new communities that we opened in 2022 are performing well. And the planned new community openings for 2023 should further contribute to the strength of our operation. Building upon the long-term success of our Orlando, Tampa and Sarasota operations, we recently announced our entry into the Fort Myers/Naples market. This will allow us to continue our growth along the southwest coast of Florida. As I mentioned at the beginning of my remarks, our financial condition is excellent, as strong as it's ever been, with low debt levels, significant cash and a well balanced land position. The operating strategy we have employed is very well suited to respond to current macroeconomic conditions. For all these reasons, we believe M/I Homes is very well positioned for 2023 and beyond. Thanks, Bob. Our new contracts were down 45% in October, down 51% in November and down 35% in December for a 44% decline in the quarter compared to last year's fourth quarter. And our sales pace was 1.8 in the fourth quarter compared to 3.3 in last year's fourth quarter. And our cancelation rate for the quarter was 30%. As to our buyer profile, about 58% of our fourth quarter sales were to first-time buyers compared to 53% a year ago, and 64% of our fourth quarter sales were inventory homes compared to 45% in last year's fourth quarter. Our community count was 196 at the end of 2022 compared to 175 a year ago. During the quarter, we opened 25 new communities while closing seven. For the year, we opened 101 new communities compared to opening 72 in 2021. We currently estimate we will end 2023 with about 225 communities. We delivered an all-time quarterly record 2,384 homes in the fourth quarter, delivering 53% of our backlog compared to 43% a year ago. And revenue increased 16% in the fourth quarter of this year, reaching an all-time quarterly record 1.2 billion. Our average closing price for the fourth quarter was 492,000, an 11% increase when compared to last year's fourth quarter average closing price of 443,000. And our backlog average sale price is 541,000, up 11% from a year ago. In the fourth quarter, we recorded a pre-tax charge of 18.4 million for impairments, or $0.50 per diluted share. This charge consisted of 10.2 million of pre- acquisition land costs and 8.2 million of inventory valuation charges. Our gross margin, exclusive of the impairment charge, was 24.1 for the quarter, up 90 basis points year-over-year. And for the full year, our gross margins improved 140 basis points to 25.7, exclusive of the impairment charge. Our fourth quarter and full year SG&A expenses as a percent of revenue were 9.1% and 9.8% of revenue, a 70 and 60 basis point improvement compared to the prior year, reflecting greater operating leverage and our lowest percentage ever. We constantly review our cost structure and due primarily to our lower year-end backlog, we reduced our headcount by 8% in January of 2023. Interest expense decreased 400,000 for the quarter and increased slightly for the year. Interest incurred for the quarter was 9.2 million compared to 9.4 million a year ago. And for the year, interest incurred was 38 million versus 39 million last year. We are pleased with our improved returns for the year. Our pre-tax income was 15.4% versus 13.6% last year, and our return on equity remained a strong 27%. During the fourth quarter, we generated 196 million of EBITDA compared to 155 million in last year's fourth quarter. And for the full year 2022, we generated 705 million of EBITDA, up 24% over the prior year. We generated 184 million of cash flow from operations in 2022 compared to using 17 million in 2021. Our effective tax rate was 21% in the fourth quarter compared to 20% in last year's fourth quarter. Our annual effective rate for 2022 was 23% compared to 22% the year before. We expect 2023's effective tax rate to be around 24%. Our earnings per diluted share for the quarter increased 21% to $4.65 per share from $3.83 per share in last year's fourth quarter and increased 30% for the year to $17.24 per share from $13.28 per share last year. During 2022, we repurchased 1.2 million of our outstanding common shares for 55 million, leaving 93 million available under our current repurchase authorization. We did not repurchase any shares in the fourth quarter. Thanks, Phil. In the fourth quarter, our mortgage and title operations achieved pre-tax income of $9.7 million, down $1.1 million from 2021 and revenue of $22.6 million, down 1% over last year. It was primarily a result of lower pricing margins and fewer loans closed and sold. For the year, pre-tax income was $39.3 million and revenue was $86.2 million. Loan to value on our first mortgages for the quarter was 82%, the same as 2021's fourth quarter. 79% of the loans closed in the fourth quarter were conventional and 21% were FHA or VA compared to 81% and 19%, respectively, for 2021's same period. Our average mortgage amount increased to $392,000 in 2022's fourth quarter compared to $360,000 in 2021. Loans originated in the quarter decreased 12% from 1,692 to 1,497, and the volume of loans sold decreased by 4%. Our borrower profile remains solid, with an average down payment of over 18%. And for the quarter, the average borrower credit score on mortgages originated by M/I Financial was 7.46. Our mortgage operation captured 77% of our business in the quarter, a decrease from 83% in 2021's fourth quarter. Finally, we maintain two separate mortgage warehouse facilities that provide us with funding for our mortgage originations prior to the sale to investors. At December 31, we had a total of 246 million outstanding under these facilities, which expire in May and October this year. Both facilities are typical 364-day mortgage warehouse lines that we extend annually. Thanks, Derek. As far as the balance sheet, we ended the fourth quarter with no borrowings under our unsecured revolving credit facility. Our total homebuilding inventory at year end was 2.8 billion, an increase of 400 million above prior levels. And we had 4,700 homes under construction at year end, which includes our backlog and inventory homes. That is down 12% from 12/31/21's 5,300 houses. During 2022, we spent 341 million on land purchases and 496 million on land development for a total land spend of 837 million. This was down from 1.1 billion in 2021. In 2022, we purchased 8,000 lots compared to 2021's 17,000 lots. At 12/31/22, we had 625 million of raw land and land under development and 684 million of finished unsold lots. We own 8,500 unsold finished lots with an average cost of 80,000 per lot, and this average lot cost is 15% of our 541,000 backlog average sale price. And at the end of the year, we had 485 completed inventory homes and 1,827 total inventory homes. Of the total inventory, 890 are in the North region and 937 are in the Southern region. And at 12/31/21, we had 99 completed inventory homes and 1,266 total inventory homes. We will now begin the Q&A session. [Operator Instructions]. The first question comes from the line of Jesse Lederman with Zelman & Associates. Please proceed. Hi. Thanks for taking my questions and congrats on the strong results. And I appreciate all the color you provided in your prepared remarks. My first question pertains to the pricing side of the equation. You gave some good color on demand thus far into January and the step up from December. Can you talk a little bit about how your pricing philosophy is reacting to that demand, or is the demand surging relative to December because of the pricing initiative you've taken? In other words, has pricing firmed up at all? First of all, I think there's no one thing. I think it's a combination of a number of things. I do think that there could be some group of buyers that are beginning to settle in with rates now hovering in that low to mid 6s. Having said that, we have aggressively tried to generate traffic by selectively promoting bought-down interest rates not in every community or in every market but in enough divisions that we can headline advertise it on our Web site. That has helped draw traffic and gotten people into the models. We do expect our margins to come down this year. We've historically said that this is a 21%, 22% business. And, of course, we were running at 25% or 26% across the board for quite some time. This is strictly intuition. It feels like things might be leveling off somewhat. Every market is different. There appears to be more strength in certain of the Texas and Florida and Carolina markets than perhaps in some of the others. But as I said in my comments, even though four weeks does not a season make, it is a strong start to the year. We had averaged during the last six months of last year, you can do the math, about 390 sales a month from July through December. And we sold 633 in January. And some of our Midwestern markets posted very strong sales. And we saw a noticeable uptick in traffic, both Web site and foot traffic, beginning during the latter part, really the second or so week of December through the rest of the month, and then it's picked up even more so in January, and seems to be leveling off now at a level that produced 633 sales. It was down 18% from January of a year ago, but that was a runaway month in many respects where we were limiting sales in virtually every one of our communities. You all remember those days. And now across our near 200 or so communities, I am happy to report that we're limiting sales in a couple of spots, but 90% plus of our communities, there's no limitation of any type. But it could be a little bit of a leveling off. But it's too soon to really know for sure. There's so much uncertainty. You know more about it probably than most. You follow all the macro data. And I think we'll know when we know. But I do know this. We have got a great land position. We've had great communities. Our new communities that we opened in 2022 are performing very well. The strict underwriting I think has served us well and will continue to. The diversity of our product is an important ingredient in our company. We don't have all of our eggs in any one basket, nor will we ever unless we have to. And we don't have to. We've got a very strong entry level line of homes that we've talked about for many years called our Smart Series that continues to perform well. We've introduced some more affordable smart product in many of our markets. And we think we're getting better with managing online leads. We thought we were good a year ago. We're better today. And there's a lot of operational initiatives that are in place for this year from reducing cycle time, getting houses to the closing quicker, which could all help make this year look a little better than we might all have thought it was going to look here just even a month ago. That's all extremely helpful. Thank you. Just a quick follow up. When you said demand has kind of leveled off here, albeit at still high levels, especially relative to the second half of last year, how are you kind of reacting to that? Do you plan on continuing to push price because you want orders to continue to accelerate through the spring selling season to push price lower that is, or are you kind of content with the pace --? Yes, Alan used to ask that question a lot. And the answer is, it's a lot more art than science. Look, we try to get two to three on average. First of all, it's a subdivision business. Some communities you want more pace than two to three. But whatever the desired pace is based upon the underwriting, we try to find that price point where we think we can hit that pace. And we come into this year maybe a little bit more aggressive with our pricing to try to see if we can hit that. But I will tell you we're very pleased with how January has ended up. Phil, you want to add something? Yes. One of the things also, as I said, we opened 100 new stores last year, with about half of those opening in the second half when things started getting difficult. So not having to deal with any kind of big backlog and so forth, and we did focus on what's the right product? What's the right specification level? Let's get to the best price point we can to be competitive and get decent pace in margin. So with as many new stores as we had last year plus opening a number of new stores this year, we think that gives us a pretty good opportunity also. So we're pretty excited about where we are. I appreciate that color. One more just on, you mentioned 64% kind of your spec breakdown and 64% are inventory homes versus 45% last year. Is that a conscious effort of yours to start specs maybe given the preference of the homebuyer and wanting a quicker close? And if so, can you talk about your plans for that moving forward? And do you see that moving even higher in the months ahead? Look, this goes back to what I said a minute ago. We're not an all spec builder and we're not an all to be built builder. We never have been. We've always tried to have a mix. During -- as the demand ramped up at such a torrid pace through the better part through all of 2021 frankly and the first parts of '22, we increased our spec levels in every community to try to help us better manage deliveries and all of the subcontractor trade, pricing issues and so forth. On a go-forward basis, I think that percentage could move a little bit. My guess is that throughout the year, we'll be a little bit higher than 50% on the spec side and a little bit below 50% on the to be built side. There may be some intra-quarter volatility there. Where we were successful in buying up bought-down rates, the value of those bought-down rates was not only in drawing traffic, but those rates were only available with relatively quick closing. In other words, only on specs, we couldn't hold those rates for six or seven or eight months. So most of those bought-down rates had to close within 30, 60, maybe 90 days. So those were particularly suitable for specs. Phil, I don't know if you want to add anything. Yes. The last couple of years, we were kind of running specs in the five, six per community with maybe one or two finished. And it happened for different reasons. With all the supply chain issues, it kind of got to the point where you kind of had to get the house in the field by March or April to get it closed. Now we have seen a slight improvement in cycle time. And we're thinking we should get further improvement this year, which should help us, but it still takes a fair amount of time to get houses finished. Also, we're doing a few more attached townhouse communities. And by its nature, you get a few more specs there. And in general, the Smart Series, our most affordable offerings, we put a few more specs on the ground. But interestingly, if you look at the last couple of quarters, margins really have not been very different at closing between specs and to be built. So we do want a good mix of business. And some customers do want to go through the selection process and go to our design center and personalize the home. Some people want to do that. So we tried to have diversity in our price points. Our product offering, we think that really helps us. But having a few more specs right now, I think that's really beneficial. We're managing it very closely. But like Bob said, I think you'll see us continue to have seven, eight, nine specs per community as long as that's working. Good. Thank you. So with the cycle time, what -- on your build to order right now, where's that looking for a completion time versus where it might have been a year ago? Great question. We expect to see cycle time improvement in almost all of our markets in 2023 versus 2022. We have started to see a little bit of that during the last part of 2022. It's different in every market, because frankly some need to improve more than others. But my guess is that we'll see anywhere from one week to four weeks in all of our markets this year. And if the average is two or three, that's -- we're going to try to get more. We're trying to get back to the pre-pandemic levels. And there's a lot of landmines, some are on the land -- on the municipal side, some are on the supply chain side, although a lot of that's really gotten -- it's not completely behind us, but a lot of it is. It's good to hear. What about any benefit from lumber prices coming in? And as part of that, is it likely that the gross margin in the front half of the year is going to be probably at the low end of that range that you talked about just because you're having to resell some of these cancelled homes? Just couple of things, Jay. When you look at the fourth quarter compared to the year ago from that, our fourth quarter sticks and bricks were down a couple of percent overall. We are expecting -- don't have in our numbers or anything, but we are expecting costs to come down a little bit this year. When you look at lumber coming down, we really won't be getting any benefit of that until like second and third type quarter. As far as margins, our margins did come down from the fourth quarter versus the third. Bob mentioned before, we kind of believe the way the business kind of is, is 2021-'22. We kind of expect margins to be under pressure this year. But having said that, we still expect to have decent margins, but we do expect margins to be more under pressure. And then in terms of getting those cancellations resold, has that -- any issues with that or has that been a pretty orderly process? It's actually been a pretty orderly process. We manage the whole thing as far as what we have in the field. I said in my remarks, we had 4,700 homes in the field at the end of the year, down 12% from a year ago. Depending on the product, price point, we may need to get the house in the field by April to get it closed this year, some products are June, July. So that's just a process you manage overall, and every subdivision is a little bit different. Like Bob said, being able to improve cycle time by a couple of weeks really, really helps us. But we think we're doing a pretty good job at managing the whole flow of sales, construction. We do keep, in every division, a certain amount of permit ready specs. So if we do have an uptick in sales, we can put a few more specs out there. That's just part of managing the business. Right. And then on the land side, are you seeing any -- maybe a little softer pricing, or is pricing in any areas retreated? Just wondering if some of the lots you may have walked away from, you're getting to look at them at potentially a little bit better price? That's very market and submarket dependent. What you're seeing -- let me start with this. When things get tough, a lot gets revealed, as they say in life. And one thing that gets particularly revealed in our business is whether or not A locations are really A locations. Because when things get difficult, you really find out what your A locations are, because they still perform at a pretty darn good level. All those other deals that you thought were As or A minuses are probably Cs. So what you've seen, and you've seen this with us and I suspect from others, most of the stuff that people are walking away from are deals that really don't pencil well, or at least it's perceived will not pencil well under current conditions. I think you may see a little relief on those, because no one's going to buy it. And there's an anecdotal -- there's a small example here or there of some moderation or more terms. You don't have to close in -- you don't have to take it down over three years. You can take it down over five years. And there's no escalator. That to me is a relaxation of terms. So we're starting to see a few examples of that. But for the sites that we believe and our competitors believe raise, I think there'll be very competitive. But for the stuff that's the more normally B kind of locations, I think that there may be some advantages there. But we'll just have to see how that plays out. We have a great land position. We don't need to buy a whole lot. We're very well positioned this year, next and the following year. The vintage of almost everything we have on our books is a good vintage. By that I mean I like when we bought it. But we'll watch and wait. And we've always been able to get a -- to generate a good return paying retail, as they say. And so we don't have to go out and buy a whole lot now. But we're looking at things and if there's bargains out there, we're going to jump all over them. Our financial condition is the strongest it's ever been. Our debt levels, we have zero borrowings on our bank line. And we're sitting on a lot of cash. We own 25,000 lots. And we always talk about, we like to own a two to three-year supply based on current run rate. And right now, we're a little bit above that. But we feel really good about those 25,000 lots. Of course, we have 17,000 behind that. We did the last half of last year dramatically cut back what we purchased. We were careful on how many developed lots we put on the ground. We did have, as I said, about $10 million of walkaway costs. A number of those deals wasn't a contract issue. It's just we don't think those deals are going to work under current terms. So we are renegotiating certain things. But we're really in good shape. We don't have any land banking, a lot of difficult agreements to work through. When you look at the 17,000 lots we have off the books, the risk dollars are like $75 million. So that's not a big number. So we very much like the land position that we have. We don't feel like we need to do much of anything. But certain markets we are looking, there's always issues here and there. But we feel really good about our land position. Got it. And then my last question is on Smart Series. Just maybe talk about where that is as a percentage of orders or closings now and what the goal might be for the next couple of years? Yes, for sure. A year ago, I think we were in the low 40s. The most recent quarter, I think our Smart Series was in the low 50s. So it jumped up quite a bit. During these difficult times, we disproportionately sold even more than we thought Smart Series homes. My guess is for this year, it will settle in at that 50% to 55%. And we're very comfortable with it being there. We've put out some new Smart Series plans. We've got some new community openings this year that will be -- that are fresh off the shelf that we're really excited to get open during the first few months of the year in a number of our markets. We've got some narrower lots Smart Series stuff coming on in select markets. So yes, it's a big part of our strategy on a go-forward basis. It's not the only thing we do. But it's something that we think we've -- even though we were a little -- we wish we had started it earlier, we launched it in 2016 and it's been a huge plus for the company. Thank you. [Operator Instructions]. There are no additional questions at this time. I will pass it back to the management team for any further remarks.
EarningCall_597	Thank you very much for waiting. We will now begin the financial results briefing of KDDI Corporation for the Third Quarter of fiscal year ending March 2023. Thank you very much for taking time out of your busy schedule to join us today. I am Hongou of Investor Relations Department and will serve as the moderator today. This briefing will be broadcast live on the internet with simultaneous Japanese to English interpretation. The presentation will be available on demand on our IR website at a later date. Thank you for your understanding in advance. Let me introduce the participants today Muramoto, Executive Vice President and Executive Director of Corporate Sector; Mori, Executive Vice President and Executive Director of Solutions Business Sector; Amamiya, Executive Vice President and Executive Director of Personal Business Sector; Yoshimura, Senior Managing Executive Officer and Executive Director of Technology Sector. Lastly, Aketa, Executive Officer and General Manager of Corporate Management Division. Three financial results related materials. One, presentation material, [indiscernible] quarterly report and detailed material are posted on our IR website. Please refer to the disclaimer in the material regarding statements made in these documents, performance targets and projected subscriber numbers, et cetera explained in the Q&A session today. Thank you for joining us in the meeting on KDDI business results out of your busy schedules. Before the questions-and-answers session, let me share with you the summary of the business results of the third quarter of the fiscal year ending in March, 2023 and forecast for this fiscal year, next fiscal year and beyond. First of all, the summary of the third quarter business results. Despite the impacts of fuel price hikes and energy business, we are aiming to increase profit for full year and promote Digital Twin and other future initiatives. First on consolidated financial results. Q3 cumulative results were generally in line with expectations, excluding the impact of fuel price hikes, et cetera, aimed to increase profit for full year by promoting focus areas and cost efficiency in the fourth quarter. Negative impacts of fuel price hikes, et cetera is expected to ease in the next fiscal year and beyond. Next on progress towards rebound in communications ARPU revenues gradually easing the impact of price reduction and data usage growth gains momentum with 5G penetration. We are aiming further to increase data usage by making medium and large capacity plans more attractive. Lastly, on sustainability management and focus areas. Business services segment and financial business performed steadily. Digital Twin Starlink, renewable energy generation, promoting future initiatives that provide new values to society. Next, concerns forecast for this fiscal year ending in March, 2023 and beyond. There are major positive and negative factors. The left shows a strong performance with a small reduction of roaming revenues against the initial forecast. And communications ARPU revenue has been steady. Moving to the left, regarding negative factors for this term. Energy business was lower than the initial forecast. As for the unexpected minus Â¥20 billion for the impact of fuel price hikes and minus Â¥15 billion for communication failure are factored in. As for the forecast, concerning the next term and beyond, moving to the right for the positive factors for the next term and beyond communications ARPU revenue and energy business performance stabilization is reflected. Regarding the negative factors, while the impact of the fuel cost hikes continues, the adverse impact is likely to ease. Now we would like to take questions. To receive as many questions as possible, we would like to limit the number of questions to two per person, and please ask the first question followed by the response, and then your second question please. We will first take questions from those of you who are pre-registered and are connected to the system. So, let me explain the process. If you have questions, please click the raise hand icon in the Zoom app on your device. When you are appointed after the MC announces the company name and your name, you will see a pop-up on your screen saying the host is asking you to unmute. So, please click the unmute button and ask the question. We will take questions until the scheduled time. Two questions. March, 2023 and March, 2024 forecast, page seven, please. March, 2024 and beyond the turning point, multi-brand communications ARPU revenues increase was mentioned. So, first, I would like to clarify, the second quarter was a bit sluggish about the net edition of subscribers. Are you confident about the recovery? Also in terms of ARPU, concerning the sustainability what about the support discount impact or decrease of the downgrade. What about the impact of upgrade? In the third quarter I think some factors are manifested. Going forward, what is your outlook? Concerning ARPU, what's the possibility of the increase? If you could share with us the overview, please. Ando, thank you for your question. Communications ARPU revenues and ID and ARPU currently and also going forward your question was concerning the outlook. Amamiya from Personal Business, please. IDs and ARPUs, two questions have been raised. First of all, about the IDs, as you understood, concerning the second quarter, slightly sluggish. But in the third quarter where momentum is recovering, especially concerning the IDs, UQ Mobile is enjoying a pretty good momentum. It's likely to continue we believe, and we do have some expectations. We have multi-brand. So, other than this, we have povo. We are targeting Z generation and it's been also stable. Concerning au, how to reduce this negative amount. That's the issue. More recently, from au to UQ, the migration is decreasing. And we believe that there's going to be a favorable movement going forward. Concerning ARPU, based on 5G, we'll be promoting this. Traffic has been going up steadily in the case of au or in the case of KDDI, the risk of MAX plan still has room for more growth. So the ARPU increase, it's something we really would like to focus on. And in the first half of the next fiscal year communications ARPU, the revenues should be stabilized. Ando-san, did we answer your question? Ando-san, we can't hear you Ando-san. Please, if you see the unmute please dialogue box. Could you unmute yourself? When the connection is recovered, we'd like to discuss this. Now, we would like to move on to the next one. Nomura Securities, Masuno-san. Yes. Thank you. I have two questions. First is about communications ARPU revenue. I think we have a clear direction in the capital markets. They may not be believing this yet. So, you mentioned that by the end -- middle of next year, the telecommunications ARPU will rebound. So, on the natural course, if MAX plan increases or the support discount impact goes away, will this be viable or I'm sure there are many measures going forward. So, new measures, effective measures are in mind. If you could share with us your plan, please. Yes. About the rebound of ARPU, as I mentioned earlier, our customers will use 5G and the plan will shift to MAX, MAX plan. So, organically we are moving in the direction of the rebound of ARPU, but we want to accelerate this and achieve this as early as possible. And so, there are various measures we have in our plan. We want our customers to use the smartphone without stress and with comfort and enjoy 5G. So, it's not just about ARPU increase measures, but also the improvement of the quality of 5G. Thank you very much. Yes. A follow up question. The 5G ratio was 49% at the end of December. This includes UQ and povo. So, what is bell au 5G ratio? And I think that will be the basis of MAX. So, what do you plan au 5G ratio to be next year? It is not a disclosed number, I cannot quantify, but three brand 49%. So, of course, au will be lower ratio. Currently, new subscriber, 60% more or plus is already MAX. So, at this pace we can have a clear view of next year's level. Thank you very much. My second question is about your midterm EPS target. From the capital markets the consensus EPS is lower than your plan and there is quite a gap. That's the capital markets view. So, on the EPS basis, you had the communication failure and the fuel cost hike, all these unexpected events. But in two years, on that basis, in order to achieve the midterm EPS target, what pace at the operating profit and buyback do you think you need to conduct and proceed? Let me answer that question. It's our first year still, but as you rightly mentioned, there were some unexpected events and things are not easy. Things are difficult. Our medium term plan is a rolling plan, and we are continuing our discussions. Originally, our midterm strategy, the third year level target was Â¥100 billion increase in profit and cost enhancement of 500 billion -- Â¥100 billion and ARPU revenue increase at the same level as last year or above. Among the three focus areas, energy business was unexpected. The profit growth is a bit difficult. So, how to recover this area is our focus now in our plan, the rolling plan as the entire company. But we're not thinking of changing the target yet. So, the growth investment that we have mentioned will be utilized effectively and if possible, ARPU revenue, we want to increase in the frontloaded fashion as soon as possible to come close to the target. So, another follow-up question. So, the medium term EPS target will remain unchanged. I understand. In energy deviation, it's maybe Â¥10 billion profit difference. And so, I do not think it's a big impact. But other than energy, in the next two years, how much core operating profit, core operating income, excluding business investment, what kind of growth pace are you anticipating in the core operating income? So, to repeat myself in the focus area, uh, profit growth of over Â¥100 billion is anticipated. So, energy is a bit weak and may follow slightly short, but in other areas we will catch up. Kikuchi speaking. Thank you. I have three questions. First about KPI churn rate. Year-on-year, it's still high. Q-on-Q, it's still going up. You do have a net addition. The momentum is recovering. So, for acquisition, perhaps you need some cost as I understand. The large scale discount is continuing according to some people. So, contract cost on your business performance. I don't have to worry about the possible impact on the business performance and the current competition environment and towards March, April, what's going to be the competitive landscape and what kind of cost will be incurred? If you could give us any comment, I would appreciate it. Thank you. First of all, churn rate. If you look at the numbers year-on-year and Q-on-Q, there's a slight increase concerning this so far, MIC, The ministry, has been making efforts lowering the switching cost and that's penetrating in the market. And the fluidity I think has increased for that part. But that doesn't mean the trend has changed from before. No major impact is reflected and that higher fluidity ratio is an opportunity for us. We would like to take this as an opportunity to increase the number of IDs. About the acquisition cost that we raised again, there are various regulations imposed on this, and we can't use things in unlimited manner showed exercising certain control. And within the scope of plants we've like to spend the acquisition cost and increase the number of IDs. That's the kind of management we would like to do. Regarding a contract cost. Balance is going up, but at a certain level, the write-off and making them as assets, we would like to strike a good balance. Again, looking at the entire profitability and earnings, we would like to exercise control. Thank you. Thank you. My second question, focus areas. I have two questions. First, Business Services segment. Profit is increasing steadily. The both revenues and profits increased. Regarding the factors, the third quarter, I would like you to again teach us again. Thank you for your question. First of all, Next Core. Core -- Next Core. Let me approach this question in these ways. In the presentation as I touched upon -- as we touched upon Next Core business, the right hand side, corporate DX business, DX business infrastructure, these three. In terms of revenues and the operating income, the double-digit growth has been enjoyed. So, these are major drivers. Together, as you can see on the left hand side, this is a top line of the revenue, 17.4% year-on-year increase. So, these three areas. If you move on to the right hand side, as I said, double-digit growth has been enjoyed. Regarding the factors. First, what we call corporate DX smart work, the way you work, this is utilized for such purposes. It started during the COVID-19, smart work and security. When we call this managed services, on the part of companies, the remote environment that's typically used in the smart work. The infrastructure management or the operation, that's something that we can provide as a service and that has enjoyed increase. Business DX, there are various variety of services, IoT and other new areas. We have been very active and I hope you come up with high expectations in this regard. Additionally, about the Core business, communications ARPU revenues, in the case of mobile, not such a high growth like Next Core, but we have been able to increase it somewhat. And just as we try to increase number of IDs on top of communications using smartphone, there are various services, and they are also enjoying growth. And needs for fixed service, it's not decreasing, it's been increasing steadily. Thank you. Which means you have focused on those areas and they are all enjoying growth and that's trend likely to continue. You didn't have any temporary incidents, am I correct? Well, no temporary incidents or factors put differently. Three years ago, when the COVID started, there was a temporary increase for some, but now it has come back to almost normal times. So, including the smart work, the new smart work, the demand has been brisk and capitalizing on that. Are they enjoying growth? That's what it is. Thank you. My third question about finance. As Masuno-san asked towards the midterm objective, Business Services segment finance, they have room for growth and you need to focus on improving there. But for us, it's rather difficult to see the structure for earnings. Page six, please. In the appendix, page six in the details materials, banking business and other businesses and operating and earnings and cost. If I do the subtraction, I might be able to see this, but I like to check this once again. This term banking business, the recurring profit, the second quarter it increased, on the third quarter it's lower than that in the second quarter, but compared with the previous year -- compared with the last year -- compared with the first year -- first quarter, it's up and cost also, or expenses increased as well. But what are the events behind this? Housing loans have seen some changes. The greatest interest hike you have Jibun Bank. What's the impact on Jibun Bank? Likely impact on Jibun Bank regarding the rate hike and other businesses, they're also enjoying good, but cost has also increased under ordinary expenses. Also increased. Credit card, au you pay, they are enjoying growth. What's the impact on the numbers and what about the revenues and expenses? What kind of curve and how are you going to increase the profit? How is it going to contribute to the EPS of your company? If I could see that the next business term and will be beyond that, I think there'll be higher expectations for your profit. Thank you. About the detailed explanation might be rather difficult for us to provide you with them, but to give you a kind of a overview about housing loans, credit, the profit growth going forward, Amamiya-san, could you touch up on that please? Third quarter profit didn't enjoy much growth. I think you mentioned that. Interest rate had some impact. Let me explain. Housing loans, fixed rate loans. There are some of those fixed interest rate loans. The fixed rate loans and the reviewing and the future values has been conducted, and there is a slight negative part and that has a negative result and that has an impact to a certain extent. But regarding Jibun Bank, as overall business, fixed rate mortgage loans about 5% of the total, unlikely to have a major impact. Going forward, interest rates, if they go up, it will likely to have a positive effect on the total. Now financial business as a total. Total regarding the bulk of the profits, the bank, credit card, they are the drivers of the profitability. We are trying to expand the scope of the business. So, in terms of cost, yes, the cost has been incurred. So, in terms of profit, profit growth at this moment may not seem so big, but as the scope of the business expands in two years or three years time, we would like to increase the profits. About the bank, there's impact. I think the mainly they are housing loans, but what about the other businesses in the finance? The difference between the recovering profit and the recurring expenses in the next term and beyond, is it going to go up, meaning that you will not be enjoying higher profit, or are you going to enjoy better profit? Of course, we are going to increase profits. But the rate of increase compared with the current one or two years, three years and four years time, that's likely to be wider. Thank you very much. This is Chiba from JP Morgan Securities. I have two questions. First is about numbers. Page six, you talk about DX in our focus areas, and the progress of profit. In the earlier Q&A, I understood that it is growing steadily. Now to achieve this year's target, four quarter DX, I think, is expected to grow significantly, is my understanding correct? And along with the pipeline, if you could elaborate please. Yes. As you rightly mentioned, in the fourth quarter, we plan to grow significantly. So, the pipeline, the business to achieve that, we have the KPI. So, the status up to the third quarter is exceeding the plan. So, by keeping this pace, it is a high goal, but we plan to achieve this full year target. Understood. Thank you very much. So, just to follow up. In Q4, do you have any particularly large projects or deals, businesses? It's the year end. So, there are I thing businesses that have higher sales towards the end of the year. Our original core business continues â continuously. But in the Next Core business, of course there are businesses that continue, but on the other hand, there are businesses where we build and charge the fee for that. And the things businesses we build will come into us, will be paid as one time payment. But this will continue into next year and the payment will come on top of that. Thank you. Another medium to long-term question. Page 23 of the material says renewable. You said that you are thinking of the direct supply. With the fuel cost hike, by taking this measure, what is the cost impact in the medium to long-term? Can this expect cost efficiency? What is your thinking behind this? Thank you. So, as we made a release in January, we will start this business in April. The first primary purpose is the contribution to zero carbon. On a non-consolidated basis, we are aiming for zero carbon in 2030. The electricity we use in-house is large and so switching to renewable energy is now accelerated. So, for the own use, the renewable energy generation will be accelerated. And cost in the medium term, depends on the cost level around the world, but we think we can procure at a relatively low cost. So, we will have this medium to long-term perspective and enjoy the cost benefit along with the carbon neutrality. Thank you. Two questions. One by one. First Business Services segment profits. I've heard that they have been steady, but three months, the third quarter rate of increased profit, 4% and the margin seems to be deteriorating year-on-year because the revenue increase rate was higher, so margin is deteriorating, I think. What are the factors behind this? In relation to this, unexpected the impact from the higher fuel cost, Â¥20 billion year. Now Personal and Business Services segment and what about the quarter movement in the quarter, I think that it might be relevant, if I may add fourth quarter and beyond. You are talking about accumulating projects or undertakings, but existing business, core business is the bulky part. So, there was a cost due to the communication failure. So, my impression is the hurdle is high. What do you think? First about income profitability, you mentioned the growth in the previous year. For each term, quarter-on-quarter versus previous year, first quarter, second quarter, third quarter, it's been going up. And concerning the third quarter revenues 8.9%, income 8.4%. In terms of profit, there was this communication failure. And excluding communication failure and fuel cost hikes. So, by doing this sequentially, we can improve this further. Regarding the fourth quarter target, hurdle has been raised. As for the accumulation, the monthly -- what we have in KPI is what we can acquire monthly and that's higher than the plan. So, by continuing this pace, the target as a kind of an area we would like to achieve the plan. The target has been raised, but currently what we are doing is higher than the plan, especially the new areas in the Next Core. They are enjoying good growth. Rather than Q-on-Q, it's a simple thing. October to December, three months rate of increase in terms of profitability, that's 4%. In the first half, there is a communication failure cost on the 3G closure had an impact, but the growth rate is not so brisk. I think there is a perhaps impact from the few or cost hikes. Am I correct in assuming those? The personal business, how much was that and in Q3, what was it like? That would really clarify my questions. Muramoto speaking. Cumulatively, until the third quarter, communication failure, the fuel cost hikes are excluded Â¥150.9 billion. That's support the Business Services segment year-on-year plus Â¥8.4 billion, 5.9% growth until the third quarter cumulatively. Now third quarter, single quarter Y-on-Y year-on-year as Mori mentioned, a little more than 8% growth has been achieved. Profitability, excluding the fuel cost hikes cumulatively into the third quarter, almost comparable to the previous year, 18.7%. Understood. Thank you. My second question value added ARPU. Page 12 please. Page 12. Thank you so much for this information. Electricity ARPU. Thank you ARPU. Thank you for giving us this information. Of course, it's in the positive territory, which is good, but what's the breakdown? I would like to know the breakdown and about the payment or settlement, the amount of settlement or the transaction volume in terms of growth rate it's become -- it's losing momentum. What about the out outlook going forward, please? Value added ARPU, as you pointed out, concerning commerce, slight decrease, but other than that they enjoyed growth. It's kind of a universal growth, first product support ARPU, ARPU fee increased and also other support. We are doing many things. They increased revenues and finance and that the settlement, the revenues increased, also smart, fast premium numbers -- members increased. They all have a positive impact and we enjoy this much growth going forward as well. We've like increase them steadily. Thank you. So, in terms of in terms of momentum settlement. In terms of momentum, what about the content on settlement? So, I have two questions. For this fiscal year, you are aiming for increased profit, higher profit, but with the communications failure and energy, these unexpected events, if you to absorb these events and achieve the target may seem a bit difficult. So, it's not that you are aiming for to achieve the company's plan. Could you elaborate on the message? You may reach the target or not. What is your feeling? That's my first question. A very straightforward question. In Q2, we sent out a similar message. So, the negative factors for the full year was specified, so about Â¥20 billion of fuel cost hike, negative impact. This is a very big impact and difficult to recover. As of Q2 and energy business towards Q3 and Q4, we thought we can make a recovery we thought in Q2, but now it seems more difficult. Energy business is now facing a downside. So, this difficult factor has added on -- for over 20 years we have been increasing our profit year on years, so we want to continue this track record. Thank you. Second question. This is not relevant to the financial performance, but in 5G network slice, you are starting to operate network slice. Then corporate demand can go up one step in your business. Do you have a specific timing internally? If so, we want to know by when this can become a business, when you can launch this business? So 5G, as a standalone using slice, network slice. We are starting to launch a few. We are developing with our customers. And we need to increase this. To do that 5G SA, the area where we can offer 5G SA need to be expanded. These two need to go in parallel. The big demand will come next fiscal year, around the middle of next fiscal year. By then -- until then, we are preparing and announcing some. So, we need to follow through and also deploy horizon horizontally. So that is the order we are thinking of. Thank you. Follow up question. So, overall, when you slice it, you have to make sure it will not disadvantage the general users. So, with MIC, The ministry, I hear that you are coordinating with MIC. Is there any issue there? So, right now, by slicing, no issue so far, but as Mori-san just said, when we slice, the prioritized control, we have to avoid the impact. So, we need to control the area. So that's another point that we need to address. Zoom froze, sir. Sorry about that. My additional question about CapEx, outlook for your CapEx. Materials cost increased. I think that's one factor. And in the next fiscal year, there are projects that you must do and some -- and you perhaps manage that are those that are not urgent. All-in-all around the next fiscal year together with the environmental changes, what is the under -- your understanding for your CapEx? Thank you. Towards the next fiscal term and currently concerning 5G -- centering on the 5G, yes, we are making investment in the next fiscal term. Regarding the CapEx, last time we had to the response to the communication failure. So, this is about Â¥50 billion including the CapEx. So, including that about the policy for the next term, CapEx sales 12%, no changes from the previous ones in the mid to long term we'd like to control them. Yes. This is Moriyuki from SBI Securities. I have a question on page seven, the profit forecast once again. So, negative factor. This is unexpected. Few tens of billions of yen. In energy business, it's not mentioned here because the amount is not that large. How much is that, please? Right. We are not specific about that. It is not something we can disclose, but not as big. You are right. So roaming revenue, it will be the shortfall of Â¥11 billion. And then with telecommunications, you will absorb. And the other areas cost reduction. Offset with cost reduction. In Q3 Â¥20 billion. The reduction decreases Â¥20 billion. Initially we expected Â¥50 billion, but it's at this level. Fourth quarter, the trend will continue at this pace. But compared to Q1, Q2, the third quarter negative is bigger. Well, yes, naturally, of course, because the roaming area will decrease -- shrink. Understood. Next page 11, multi-brand ID, UQ mobile, new subscription au ratio is now declining. On the other hand, you said switching cost is lower, and so the mobility is now rising. So, until now, au shifted to UQ, but now going to other carriers and UQ is recovering that. And that is why the ratio is lowering. Can you see it that way? So the decline in internally, but it went outside and the shortfall was regained by UQ and that's why the ratio is lower. What is the reason the ratio is lower now? Is it because the volume zone has shifted? If you could elaborate please. So shift from au to UQ is slowing down. How we see the background, the reasons for that with the rise in churn, this is happening. So, I thought that that can be a one interpretation. But if the -- that move have already moved then. Yes, Amamiya-san. What you just said is a difficult part. We don't know how much people who were supposed to go outside are captured by UQ or the ones who were not planning to go to other carriers are shifting to UQ. How we see this is very difficult. But looking at the overall balance au -- the outflow from au is not that large and shift to UQ is declining. So, we're looking at various indicators to judge, but we are trying to reduce the churn and also reducing the outflow to other carriers. We think we're successful doing that. I see. Not that different. On the other hand, positive factors, UQ to au, is now becoming more prominent or how do you see this movement? It is increasing. In Q3, this trend became more conspicuous. So from au to UQ and UQ to au, the gap is now becoming smaller. So, page 11, this line graph. So, this is a reverse correlation. Thank you for your questions. It is about time. If you -- there was no person who wanted to raise a question. So with this, we would like to conclude this meeting with the business results of the third quarter of the fiscal year ending March, 2023 of KDDI Corporation. Thank you so much for your participation today.
EarningCall_598	Greetings, and welcome to the Cummins Inc. Fourth Quarter 2022 Earnings Conference. At this time, all participants are on a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Clulow, Vice President of Investor Relations. Thank you. Please go ahead. Thank you very much. Good morning everyone and welcome to our teleconference today to discuss Cumminsâ results for the fourth quarter of 2022 as well as the full year performance. Participating with me today are Jennifer Rumsey, our President and Chief Executive Officer; and Mark Smith, our Chief Financial Officer. We will all be available to answer questions at the end of the teleconference. Before we start, please note that, some of the information that you will hear or be given today will consist of forward-looking statements within the meaning of the Securities and Exchange Act of 1934. Such statements express our forecasts, expectations, hopes, beliefs and intentions on strategies regarding the future. Our actual future results could differ materially from those projected in such forward-looking statements because of a number of risks and uncertainties. More information regarding such risks and uncertainties is available in the forward-looking disclosure statement in the slide deck our filings with the Securities and Exchange Commission, particularly the Risk Factors section of our most recently filed annual report on Form 10-K and any subsequently filed quarterly reports on Form 10-Q. During the course of this call, we will be discussing certain non-GAAP financial measures and we will refer you to our website for the reconciliation of those measures to GAAP financial measures. Our press release with a copy of the financial statements and a copy of todayâs webcast presentations are available on our website within the Investor Relations section at cummins.com. With that out of the way, I will turn you over to our President and CEO, Jennifer Rumsey, to kick us off. Thank you, Chris. Good morning. Iâll start with a summary of 2022, discuss our fourth quarter and full year results and finish with a discussion of our outlook for 2023. Mark will then take you through more details of our fourth quarter and full year financial performance and our forecast for this year. Last year was an incredibly exciting one for Cummins and our stakeholders. We made significant strides in our inorganic growth strategy, most notably through the acquisitions of Jacobs Vehicle Systems, Meritor and the Siemens Commercial Vehicles business. We also navigated complex global supply chain challenges, advanced our preparation for the separation of our filtration business and transition from Tom to me as the CEO. We accomplished all of this and delivered record revenues, EBITDA, and earnings per share in 2022. We did so with the focus on the exciting opportunity in front of us to lead the industry to a broader clean economy and do so in a way that is best for our stakeholders and the planet. Decarbonization is a growth opportunity for Cummins, uniting our business and climate goals. In 2022, we launched our long-term decarbonization growth strategy, Destination Zero, which includes making meaningful reductions in carbon emissions through advanced internal combustion technologies widely accepted by the market today, while continuing to invest in and advance zero emissions technologies ahead of widespread market adoption. As part of our organic growth strategy, we unveiled the industryâs first unified fuel-agnostic internal combustion powertrain platforms, and we continue to see momentum in our electrolyzer technology and green hydrogen production opportunities. Demand for our products remains strong across all of our key markets and regions with the notable exception of China, resulting in strong revenues in the fourth quarter. Fourth quarter revenues totaled $7.8 billion. Excluding the Meritor business, revenues for the fourth quarter of 2022 were $6.6 billion, an increase of 13% from the fourth quarter of 2021, primarily driven by increased demand in many of our North America markets. To provide clarity on the fourth quarter and 2022 full year operational performance of our business and allow comparison to our prior guidance, Iâm excluding the Meritor operating results and associated acquisition and integration costs, the costs related to the separation of the filtration business and the costs associated with the indefinite suspension of our operations in Russia. Mark will provide more detail on the reported results in his comments. With these exclusions considered, EBITDA was $1.1 billion or 16.1% of sales in Q4, above our guidance of 15.5% and stronger than the $705 million or 12.1% reported a year ago. EBITDA and percentage improved due to an increase in gross margins with positive pricing, higher volumes, lower product coverage costs and some improvement in logistics costs, all of which offset increases in material costs. Gross margin improvement is key to meeting our long-term goals of increasing the returns in our core business while transitioning our New Power business to break even EBITDA by 2027. In the fourth quarter, Meritor operating performance and financial results showed improvement, and we continue to accelerate value capture opportunities across the business. Our employees have done an excellent job in integrating the Meritor operations and people within Cummins and continue to make strides in identifying cost reduction opportunities. We remain confident in our ability to achieve the $130 million in pretax synergies we referenced upon completion of the acquisition. And in addition, we expect to deliver incremental tax synergies as we integrate the business. Excluding Meritor, 2022 revenues were a record $26.2 billion, 9% higher than 2021. Also excluding Meritor, the costs related to the planned separation of the filtration business and the impact of the indefinite suspension of our Russia operations, full year EBITDA was $4 billion or 15.1% of sales compared to $3.5 billion or 14.7% of sales in 2021. Improved volumes, better price realization and an improved supply chain environment more than offset higher compensation expenses, increased material costs and lower joint venture income for the year. EBITDA percent improved year-over-year in Engine, Power Systems, Distribution and Components segments. Leading the way was the Components segment, which delivered 150 basis points of EBITDA margin expansion. The Power Systems business finished 2022 with another solid quarter and delivered full year EBITDA of 12.2%, up from 11.2% last year. The improvement in performance in this segment over the past six months is encouraging, and you will see from our guidance that we expect further margin gains this year. EBITDA margins in the distribution business increased by 110 basis points. Our reported full year 2022 results include five months of operational performance for Meritor or $1.9 billion of revenue and $26 million of EBITDA, including $115 million of acquisition, integration and purchase accounting related costs. Now, let me provide our overall outlook for 2023 and then comment on individual regions and end markets. Our 2023 guidance includes our expected results of the Meritor business and excludes the costs or benefits associated with the separation of the filtration business. We are forecasting total company revenues for 2023 to increase 12% to 17%, compared to 2022 and EBITDA to be 14.5% to 15.2% of sales, driven by the inclusion of a full year of sales from Meritor, continued strength in the North American truck market, improved demand in power generation markets, overall pricing improvement and slow improvement in the China on-highway markets. Industryâs production for heavy duty trucks in North America is projected to be 260,000 to 280,000 units in 2023, a range of a 5% decline to 2% improvement year-over-year. In medium-duty truck, we expect the market size to be 125,000 to 140,000 units, flat to up 10% from 2022. We expect our deliveries in North America to continue to outpace the market, as the engine partnerships we announced in 2021 continue to phase in. Our Engine shipments for pickup trucks in North America are expected to be 140,000 to 150,000 units in 2023, volume levels consistent with 2022. In China, we project total revenue including joint ventures to increase 7% in 2023. We project a 15% to 25% improvement in heavy and medium duty truck demand and 10% to 20% improvement in demand in the light duty truck market, coming off the low market levels in 2022. Industry sales of excavators in China are expected to decline 25% to 35% in 2023 as the market adjusts to new emissions regulations and digests inventory on hand. We are watching the situation in China closely, with ensuring the safety and well-being of our people as our first priority. The change in the countryâs COVID lockdown policy could positively impact our operations in the coming months. The current events make it difficult to gauge. The markets within China are at a low point, as we close out 2022 and our guidance assumes a slow recovery in 2023. In India, we project total revenue including joint ventures to be up 1% in 2023. We expect the industry demand for trucks to be flat to up 5% for the year. We project our major global high-horsepower markets to remain strong in 2023. Sales of mining engines are expected to be down 5% to up 5%, dependent upon the trajectory of commodity prices and supply chain improvement. Demand for new oil and gas engines is expected to increase by 15% to 25% in 2023, primarily driven by increased demand in North America. Revenues in global power generation markets are expected to increase 10% to 15%, driven by increases in non-residential construction and improvements in the data center market. In New Power, we expect full year sales to be $350 million to $400 million, more than doubling our 2022 revenues. We have a growing pipeline of electrolyzer orders, which we expect to convert to backlog and to be delivered over the course of the next 12 to 18 months. At the end of the first quarter of 2022, we shared that we had reached the milestone of a $100 million in electrolyzer backlog. This tripled to $300 million at the end of 2022, demonstrating the strong momentum in this market. With demand continuing to rise, we are focused on adding capacity for electrolyzer production. During 2022 we announced several capacity expansion investments and expect to have more than two gigawatts of scalable capacity in the 2024 to 2025 timeframe across Europe, North America and China. Additionally, we will continue to deliver battery, electric and fuel cell systems along with electric powertrain technologies as adoption continues in the transportation markets. As mentioned, Meritor results are included in our overall guidance for 2023. We are continuing to drive improvement in our margins post-acquisition and expect Meritor to be accretive to earnings per share in 2023. We will continue to provide updates on the progress of our value capture initiatives, which will be focused on the portion of the business within our Components segment. Within Components, we expect Meritor to add $4.5 billion to $4.7 billion in revenue in 2023 with EBITDA margins in the range of 10.3% to 11%, an improvement from the comparable 2022 EBITDA margin of 7.2%. The electric powertrain portion of the Meritor business has been integrated within the New Power portfolio with projected 2023 EBITDA losses of $55 million included in the overall guidance for that segment. In 2023 we anticipate that demand will remain strong in most of our key regions and markets, especially in the first half of the year. While some macroeconomic indicators have weakened in recent months, we have not seen a significant change in customer orders at this time. In summary, we expect full year sales growth of 12% to 17% and EBITDA to be 14.5% to 15.2% of sales. We have taken a number of actions to improve our EBITDA in 2023 and expect to generate very strong incremental margins within our core business and improve the margins of the Meritor business while continuing to invest in our New Power business. Having effectively managed through the challenges of the past couple years we expect improved performance in 2023 and are well positioned to invest in future growth while continuing to return cash to shareholders. There are four key takeaways from my comments today. First, we delivered strong results in the fourth quarter of 2022, exceeding our own projections for revenue and EBITDA from three months ago, and we delivered stronger margins Engines, Components, Distribution and Power Systems compared to a year ago. Second, we continue to make good progress on the integration of Meritor and we remain on-track to deliver $130 million of pretax synergies by the end of year three. We returned $1.2 billion to shareholders in 2022 in the form of dividends and share repurchases. Finally, demand for our products remains strong, supporting increased revenues in our core business and New Power and growth in EBITDA and earnings per share in 2023. Now, let me go into more details on the fourth quarter. Fourth quarter reported revenues were $7.8 billion and EBITDA of $1.1 billion or 14.2%. For the full year, revenues were $28.1 billion and EBITDA of $3.8 billion or 13.5% of sales. Also in the fourth quarter, Meritor generated $1.2 billion of revenue, $60 million of EBITDA, after incurring $27 million of acquisition and integration related costs. Our fourth quarter results also included $19 million of costs related to the planned separation of the filtration business. Full year 2022 results included five months of operational performance for Meritor, yielding $1.9 billion of revenue, $26 million of EBITDA, reflecting $115 million of acquisition, integration and purchase accounting related costs. We will all look forward to a cleaner set of numbers in 2023. Our full year 2022 results also included $81 million of costs related to the planned separation of the filtration business and $111 million of costs related to the indefinite suspension of our operations in Russia. To provide clarity on the fourth quarter and 2022 full year operational performance of our business and allow comparison to our prior guidance. I am excluding the Meritor results and the separation of filtration and the indefinite suspension of Russia in my following comments. But hopefully, you are clear after my earlier remarks about the magnitude of those -- each of those items. Fourth quarter revenues were $6.6 billion, an increase of 13% from a year ago. Sales in North America were up 25%, driven by continued strong demand in truck markets. International revenues decreased 1% with stronger demand for power generation and mining equipment in most markets, offset by declines in China and, of course, the impact of our suspension of our operations in Russia. Currency movements negatively impacted sales by 4% due to a stronger U.S. dollar. EBITDA was $1.1 billion or 16.1% compared to $705 million or 12.1% a year ago. EBITDA increased by $359 million due mainly to improved pricing, higher volumes, lower product coverage expenses, all of which contributed to stronger gross margin performance and more than offset higher material costs. Now, letâs go into our income statement, a little more detail by line item. Gross margin of $1.7 billion or 26.3% of sales increased by $420 million or 380 basis points from a year ago. Selling, admin and research expenses increased by $52 million or 6% due to higher compensation and research costs as we continue to invest in new products and capabilities to support future profitable growth, particularly in the Engines and New Power segments. Joint venture income decreased $28 million due to lower demand for trucks and construction equipment in China. Other income was $44 million, an increase of $13 million from a year ago, primarily due to higher pension income. Interest expense increased $58 million, largely driven by the financing costs associated with the acquisition of Meritor. The all-in effective tax rate in the fourth quarter was 17.2%, including $52 million or $0.36 per diluted share -- favorable discrete items. All-in net earnings for the quarter was $631 million or $4.43 per diluted share, up from $394 million or $2.73 a year ago. Operating cash flow in the quarter was an inflow of $817 million, including Meritor and, $85 million higher than the fourth quarter last year, driven primarily by higher earnings. For the full year â22, revenues were a record $26.2 billion or up 9% from a year ago, with sales in North America up 18% and international revenues down 2%. Currency movements negatively impacted revenues for the full year by 2%. EBITDA was $4 billion or 15.1% for 2022 compared to $3.5 billion of 14.7% of sales a year ago. Improvements in Components, Distribution, Power Systems and Engine margins were partially offset by increased investment in New Power and more than $100 million of mark-to-market losses on investments that underpin some of our nonqualified benefit plans. All of that run through our operating EBITDA. All-in net earnings were $2.2 billion or $15.12 per diluted share compared to $2.1 billion or $14.61 per diluted share a year ago. Full year cash from operations was $2 billion, down from $2.3 billion, primarily due to higher inventory levels. Capital expenditures in 2022 were $916 million, an increase of $182 million from 2021 as we continue to invest in new products and capacity expansion critical for future growth. We returned $1.2 billion of cash to shareholders or 63% of operating cash flow in the form of share repurchases and dividends last year. Now, moving on to our guidance for 2023, which includes Meritor, and thankfully, reduces the number of exclusions weâll have to explain each quarter, and I appreciate your patience as we work through that in 2022. We are excluding any separation costs associated with filtration, and for now, weâre assuming that the operating results of filtration are in our guidance for the full year 2023, as the timing of that separation is not yet determined. We expect Meritor to add $4.5 billion to $4.7 billion of revenue in 2023. We currently project 2023 company revenues, including Meritor, to be up 12% to 17% and company-wide EBITDA margins expected to be in the range of 14.5% to 15.2%. In â23, we expect revenues for the Engine business will be flat to up 5%, driven by continued strength in North American truck market and a modest recovery in China. 2023 EBITDA is projected to be in the range of 13.8% to 14.5% compared to 14.4% in 2022. We expect distribution revenues this year to be up 2% to 7% and EBITDA margins to be in the range of 10.3% to 11% compared to 10.5% in 2022. Including Meritor, we expect 2023 components revenues to increase 28% to 33% and EBITDA margins in the range of 14.1% to 14.8% compared to 15.0% in 2022. In â23, we also expect Power Systems revenues to be up 5% to 10% due to higher demand for oil and gas engines and power generation equipment globally. EBITDA there is projected to be between 13% and 13.7%, up from 12.2% of sales last year. And also this year, we expect New Power revenues to increase to the range of $350 million to $400 million. We expect New Power net losses to be in the range of $370 million to $390 million as we continue to make targeted investments in capacity, technology to support growing customer demand. Our goal remains to achieve breakeven EBITDA in 2027. Our effective tax rate this year is expected to be approximately 22%, excluding any discrete items. Capital investments will be in the range of $1.2 billion to $1.3 billion this year. We remain committed to our long-term goal of returning 50% of operating cash flow to shareholders over time and have accelerated cash returns to shareholders in recent years above that 50% goal when we have generated more cash than required to support our strategy. In 2023, we will prioritize cash towards dividends and debt reduction following the acquisition of Meritor while continuing to invest to deliver future profitable growth. Having a strong balance sheet is an important asset as we navigate through economic cycles and sustain our investments in new products for existing and new markets. To summarize, we delivered record sales, strong full year earnings in 2022, while managing through supply chain challenges and a very weak demand environment in China. As we move through 2023, demand for our products remains strong in most of our core markets with good visibility into the first half of the year. Weâll continue to focus on raising margins in our core business, driving improvements in the performance of Meritor, generating strong cash flow and investing in the products and technologies that position us to lead in the adoption of new technologies and penetrate new markets through our New Power business. Thank you, Mark. Out of consideration to others on the call, I would ask that you limit yourself to one question and a related follow-up. If you have an additional question, please rejoin the queue. Operator, weâre ready for our first question. I know itâs early post the acquisition of the Siemens propulsion systems and Meritor, but wondering if you could just comment on what the acceptance has been of the products in the marketplace? Post-Cummins ownership, whatâs the pipeline from the developments look like? How is that cross-selling working out versus what you folks had expected before acquiring the assets? Thanks. Yes. Thanks, Jerry, for the question. Yes, we are right now really focused on integrating the Meritor business, the Siemens Commercial Vehicle business and the investments that we were already making within New Power and having a number of conversations with our customers on how we bring that together to deliver those electric powertrains and components to meet their needs. So, it brings some strong products, employees as well as customer relationships, and weâre seeing growing opportunities as we have relationships at a senior more strategic level with these customers to grow our business going forward. Itâs really early days at this point, so weâll continue to talk about that as we bring those businesses together. Sounds good, Jennifer, thanks. And Mark, can I ask in terms of the pricing that youâre expecting in â23 within the outlook? And if you could just touch on the logistics costs embedded in the guide as well. You folks have been running pretty hot to hit deliveries in â22. Iâm wondering to what extent does that a tailwind within the guidance? Yes, weâve got about 2% of price cost benefit embedded in the guidance, Jerry. Thatâs the biggest single driver of margin improvement. I guess, two questions. Just given the concern on the macro out there, can you guys speak to by business line where you see the most visibility or where demand trends do you see sort of weakening? And then, I guess, on the engine margin guidance. I guess, I would have thought margins would have been a little better in implied guide just given maybe price cost going away, China improving. So, if you can just help me bridge 2023 to 2022 engine margins whatâs implied? Thank you. Great. Thanks, Jamie. Let me speak first to what weâre seeing in the market. And we, of course, are paying attention to some of these macroeconomic trends. If you take just the North America truck market as a starting point, while there has been some decrease in spot rates, we still continue to see healthy freight activity and strong backlogs out through the first half, which gives us confidence that the market is going to remain strong, certainly through the first half of the year. And itâs important to note, itâs just not been a typical cycle for us because for the last two years, weâve been undersupplying to the market demand. Theyâve been using that equipment. Weâre seeing that reflected in very high aftermarket demand which continues, and these new trucks provide efficiency benefits to the fleet. So, we continue to expect strong North America truck market. In the Power Systems business, again, we have a healthy backlog of products and strong demand across many of our markets. Mining, weâre forecasting to remain around flat, but growth in power generation, growth in the oil and gas business. So, weâre feeling pretty confident about that as well. The biggest uncertainty is really around China. And as I said in my comments, we do project some slow recovery throughout 2023. With the lift of the stringent lockdowns that they had in the last couple of years in December, we expect that that may result in economic strengthening and certainly, less operational disruption, but weâre still monitoring what happens with the COVID waves there, is there any government stimulus into the economy. We feel really well positioned there. Weâve launched our NS VI products, which we think will enable Cummins to grow our position in the market. Weâve launched the automated manual transmission there. Weâve got a new natural gas platform. So, weâre really well positioned as China continues to strengthen and just uncertainty on exactly what the shape of that will look like. Iâll let Mark talk about the margin question. Yes. I think the main thing on the Engine business margins is that we havenât got building a very strong recovery in China. And then the other piece that you didnât mention, Jamie, is that weâve got fairly sustained investments ahead of us over the next couple of years because weâre updating several of our platforms. Weâve won a lot of external business, and weâve got to meet future emissions regulations. So, thatâs the only other element thatâs running through the Engine business that may not be obvious from the outside, but otherwise, weâll expect them to do well if markets continue to be strong. Maybe just following on, on the Engine margin question, Mark. Given what you just described around increased spending, R&D, et cetera, should we think about sort of flattish incremental margins over the next few years, or can it still be better than that, if we have some volume? I think it can definitely be better than that. Weâre still battling some inefficiencies here and there Steve. Weâre still expecting to have aftermarket growth over time. So no, weâre not locked into these margins. I was just trying to be clear on what the underlying factors. Iâve seen a few comments around Engine business margins, but no, I think they can go higher. Getting China, which is the worldâs biggest truck market, I know the earnings come through JV, we have the lowest market in a decade. And we think we still got more share to gain there. Weâve got more content in the Components business. So, if I sit here today and say what could be the one thing that could move that could change our guidance most clearly, I would agree with Jen, it would be China, right now. We donât have visibility. People are more enthusiastic, but the activity hasnât yet materially picked up. So, that would be one important factor. Great, understood. And then, my follow-on maybe a bigger, broader question. But as we start very early days but we start to think about the 2027 emissions regulations, do you guys feel like you have line of sight to what you need to do technically to get there? Weâre starting to hear that this is going to be sort of the biggest emission hurdle ever and that some people may have trouble getting there or maybe have some massive costs associated with it, which has some implications for prebuys and maybe whether people do it themselves or outsource it to you, just your big picture thinking on 2027 and how that kind of plays through. Yes. We are focused on continuing to meet more stringent regulatory requirements and do so with products that will provide benefits to the environment and exceed our customer needs. We now have clarity on the EPA 2027 NOx regulations that happened late last year, and they finalize that standard at a 0.035 gram NOx. And our intention is to offer a full product lineup with our new fuel-agnostic engine platforms to meet that regulation, and weâre finalizing our product plans right now with our customers on those. But we really feel well positioned to invest in really as a part of our Destination Zero strategy, reduce CO2 and NOx impact to the environment and offer products -- market-leading products to our customers with that regulation. Hi. Thank you. The China guide, the up 7%, I assume that includes consolidated and JV revenue, sort of how you usually kind of speak to it. Even -- maybe can you update us on the mix of your end markets? It feels like the consolidated off-highway, the construction exposure you have that shows up in the P&L more so than JV, and the JV is more of the on-highway. Iâm surprised with the mix because that construction business at this stage must be pretty small after the declines weâve seen. So, to have truck up double digit for China, for heavy and light, even though the excavator is down a lot, the mix would suggest youâd be up more than 7%, if truck is up double digit and at now relatively small construction business is down. Are there other businesses keeping it only at 7%? Is there a share comment there? Just trying to understand why only up 7% with that China end market guide? I donât think thereâs anything significant in there, David. I mean, obviously, whether itâs consolidated or unconsolidated, trucks probably [70%] plus when you add up all of our markets. So, the truck does better, weâll be up more than 7%. If it doesnât, we wonât. I think for components, thatâs all consolidated revenue. Thatâs almost entirely on-highway. Itâs really the engine business that has the off-highway business of any of any size. And then, yes, I think Power Systems has been pretty strong last year in China. It has probably been the exception to what weâve seen in every other market. But thereâs no big change in dynamics. Just on your share, we expect to continue to grow our share in the China market with the launch of the NS VI product. So, thatâs assumed in our guidance. Iâd even think with some of the transmissions as well. So, Iâm just trying to understand like Photon is struggling more than I would have thought. Itâs still barely making money now for two quarters in a row. Is there something about that dynamic we should be more sensitive to on the margin recovery in China in the JV because of Photon? No. We did get some sizable tech fees and other things from the early part of last year, which kind of helped -- the wrong word, we were entitled to those based on product launches, but no, I donât think thereâs anything significant there. And Iâll hop off, just one kind of modeling question. If you take the interest expense in the fourth quarter and annualize it, itâs $348 million. You mentioned thereâs debt reduction, but your guide is $380 million. I mean, what are we assuming for interest rates from the fourth quarter on to have up interest expense, but youâre targeting debt reduction? Right. So, I think the answer to that is, weâll need to keep working that down. I think weâve got some floating rate exposure. Itâs not all fixed, and probably, the debt reduction will come in the second half of the year, but let me come back to you on that, David. Hi. I know itâs still early days, but youâre starting to see some ramp in electrolyzers. And I guess thereâs obviously a lot of uncertainty as to what the ultimate margin structure is going to be, New Power or clean energy generally. So I wonder if you have any thoughts on when you see clarity, any thoughts on where gross margins might trend. Maybe youâre still heavily investing, but the gross margins are improving, or just your thoughts on how the curve of profitability is shaping up in clean tech. Yes, the electrolyzer business is really going to drive the majority of our progress towards breakeven in â27 for New Power and the growth aspirations that we shared for 2030. And so, we expect during that time frame to scale up the product, the supply chain and manufacturing and continue to see growing backlog and conversion of orders into revenue. And so through that time period, youâll see margins going positive and improving, the exact margin structure of that business is still unclear. Thereâs not a lot of suppliers in the market, and we expect demand to be quite strong through that time period. So, Iâm optimistic on what margin structure for the business will look like. But, obviously, weâll share more as we get towards that breakeven point and go margin positive. Yes. Rob, one thing Iâll add is, for the gross margin on a project basis, weâre at gross margin positive last year, which is a good early indicator. We have other costs that are going in, too, for capacity expansion and other things that obviously offsets that, but itâs a good indicator that weâre on the right path for profitability as we move forward with more volume. Okay. Thatâs helpful. Thank you. And obviously, thereâs just still a lot of build-out in manufacturing and supply chain. So, do you have a sense as to how you stack up competitively on either design cost, or I guess you have a lot of advantages in manufacturing as you build out and off the top there. I mean one of the advantages we have here is weâre able to leverage our existing footprint and capability that we have as a part of the broader comment. So, you saw us announce recently, we plan to use our Fridley manufacturing facility for electrolyzer production in North America. So, we are tapping into that strength we have in our footprint and supply chain capability to help build out profitable both product as well as supply chain. And thatâs an advantage that I think Cummins has here. Maybe just on the distribution margins. It looks like you guys arenât expecting margin expansion there, even though sales are up 2% to 7%. I guess what is the reason for that? I think thereâs a little bit of improvement baked into the guidance, but weâve got a pretty strong track record of improving. Thereâs no structural impediments to growing margins over time. Itâs a range. So, under the different revenue scenarios, some variation, Nicole. But over the time, we expect the margins to keep going up. Okay, understood. Thanks. And then I guess Power Systems stood out to me. On the other side, itâs just the margins look really impressive year-on-year in 2023. Is price/cost the biggest driver of that, or is there any other big drivers of the margin expansion that you guys are expecting? I think, certainly, thatâs been a big factor, and weâve got pretty healthy demand locked in now. So, thereâs been a lot of focus on that business. Weâve been pleased with the solid results, particularly in the second half of this year, and we just -- weâve got a very, very strong focus on continuing to driveâ¦ For that business, itâs important to keep in mind, you see a very long -- we have a very long lead time on orders. So, as costs accelerated, it took a while for us to pass on some of the price increases to offset that, and that is in part what drove the strong margin improvement from â21 to â22. If you can give us a sense of how much of a growth moderation can we expect in the second half? Iâm assuming that will be the case directionally because youâll have the Meritor comps. And also, it sounds like you guys are more cautious on the second half. So, how much of a growth moderation are we expecting? Got it. Thatâs very helpful. And then, just one follow-up on the New Power front. Itâs been about a year since you guys announced the fuel agnostic engine. So, any update on that and the receptiveness from customers in your conversations? And also, I think back in August PACCAR announced that theyâre using your new natural gas engine. So, is there anything new on that front as well? Yes. So, the fuel agnostic platform, just to clarify, thatâs being developed as a part of our Engine business. And as I mentioned earlier, weâll launch a full lineup in North America of that product as a part of the 27 EPA regulation. As youâve seen, PACCAR is integrating and plans to introduce the natural gas version, and we have customers that are very interested in that product, including with renewable natural gas, and we announced partnerships around that. We also announced a memorandum of understanding with Tata late last year on the hydrogen version of that platform. And so really, we see a lot of interest in those platforms, both as a way to improve efficiency of diesel engines and then create flexibility to move to other fuels such as natural gas or hydrogen with the platform and really minimizing the integration pair up thatâs required for customers as they move between those platforms. So, weâll begin to launch those with the natural gas version here, in North America in late â23, early â24 and then accelerate introduction in the coming years after that. Can you characterize the current mix of investment spending in New Power? Just kind of give us a sense of the key buckets where youâre spending? Maybe you can even give us some guidelines on how much of the CapEx for this year would be attributed to New Power? And then, I think the higher question here is, are you ready to call 2023 kind of the peak of net investment spending for the segment? At a high level, the different categories of investment in New Power, of course, thereâs big investments happening in electrolyzers, and we talked about the growth and capacity investments that weâre making there. The other buckets include investments in batteries, other electrified components in the electric powertrain and then in fuel cells. So, weâre investing end of the prime mover as well as some of the key components to position ourselves as our current markets start to move to electrified powertrains to be both the powertrain provider as well as provide key components similar to the model we have today with Engine business and Components. Yes. So CapEx, probably in the $100 million to $125 million range. So just under 10% of the total for the company in the New Power segment, and most -- more of thatâs weighted towards electrolyzers where, of course, weâre ramping up production, albeit using existing Cummins sites, where possible and appropriate. And then, yes, Iâd love to call the peak in New Power losses. Theyâre going to have to peak soon because weâre aiming towards breakeven in 2027 at the EBITDA level. The only caveat is, if thereâs a significant change, should we invest in some new capabilities that arenât part of our current portfolio? Thatâs not part of our plan today, Noah, but that would be the only variation. Thatâs helpful. And then just to give us some expectations around the cadence of earnings this year, obviously, youâre guiding to EBITDA, not EPS. But thinking about China JV modestly improving, getting better synergies, capture on Meritor throughout the year, but then maybe some offset from potential deterioration in some end markets. So, just any guideposts you would give us on first half versus second half, the EBITDA or even EPS? No. I mean, by and large, it will go along with the revenue. Unfortunately, we had a tough Q3 in 2022. So that probably gives us the easiest comp, just kind of going through by quarter, and then we started the year much stronger. So ex-JV, I think weâll have a good first half of the year. The JV will be the biggest single swing factor. When you look at our P&L, I would think -- in the first half of the year, maybe that helps in the second. Q3 gross margins were disappointing. Weâve rebounded well in here in Q4. So yes, modestly expect first half to be stronger all in, unless revenues in the second half change direction significantly from what weâve guided. So my first question is, are you expecting any synergy savings from the Meritor acquisition this year? I believe you were expecting $130 million in total by year three. So, anything this year? Absolutely. Yes, weâre working very hard on that. I mean personally, along with many members of the Meritor, Cummins team. So yes, and weâll talk about those as we go along, but yes, weâre feeling confident about that progress towards that $130 million. Weâll try and get as much as we can -- both helps the long-term interest of that business and improve the cost structure. So yes, we expect the results clearly to improve, especially in the Components segment. Weâre assuming thatâs all in for now. If we get more, then weâll be happy to report. We wonât get more than $130 million, just to be clear. Thatâs a year three number, but weâre making good progress. Got it. And so, Iâm sorry if I missed it, but can you give some color on the embedded Meritor margin expansion cadence for the year? Should it be in the guided 10% to 11%, or does it ramp towards the back? Yes. So, let me just reiterate the guidance that we had within the Components business. We have $4.5 billion to $4.7 billion in revenue and EBITDA margins for the Meritor business, 10.3% to 11% compared to in 2022, that was 7.2%. And some of that is progress on price/cost in that business, operating efficiency as well as synergy cost savings. Hey, guys. Thanks for taking our questions on for Steve Fisher. Just in terms of the power generation market, can you talk a little bit more about whatâs driving that market to be so robust this year? We might have expected data centers weakening a little bit. It sounds like youâre expecting that to be up still again this year. But, if you could just talk about some of the drivers in that market. Yes. The power generation market really nonresidential construction as well as data centers, and despite some of the announcements that youâve seen from our data center customers regarding staffing levels, they continue to show interest in investing in data centers and have demand and drive backup power -- demand on our products in that market. So, we are still quite bullish about the opportunities there for 2023. I think itâs fair to say, itâs pretty broad-based across multiple markets, broad parts of the economy. Yes, the data center gets a lot of attention. It is a significant individual segment, but weâre seeing robust underlying demand for power generation across multiple segments. Okay. I appreciate that. And then just in terms of the New Power business, have you seen acceleration in the recent months following the IRA in terms of customer interest there? And does that possible acceleration in the market change your view on when we could be breakeven in that business? Yes. How I would describe it is, the inflation reduction act and the investments around that are really going to be key to enable the adoption rate that we anticipate is going to drive an acceleration in hydrogen investment. The details around that investment are being clarified right now. So, itâs going to take several years before you really see that translate into actual projects and business. Definitely, itâs going to drive growth in the hydrogen market in the U.S. between now and 2030 as that -- as those incentives come in place to both put the hydrogen production in place as well as drive adoption of some of these technologies, which today, frankly, just cost more. So, you need those incentives in order to start to drive customer adoption and bring down the costs and make them more viable in the market. I mean, in the short run, weâre investing more because weâre building up capacity as are others in the industry. So, the faster we go in the short run could consume more cash. But obviously, we want the market to move, and we expect to deliver good gross margins once we get this kind of investment phase. So, it could go faster. Itâs quite a long incubation period, so very different from, say, our on-highway engine business, while we take an order. And then typically, weâre shipping in a few weeks. Itâs not been that typical in the last 12 months versus sometimes more than a year between headline announcements to actually putting equipment into place and sometimes even more than a year. But we are encouraged, strong adoption for our technology, and yes, business is doing well on the business development side. Weâre showing time for one final question today. The final question is coming from Michael Feniger of Bank of America. Please go ahead. When we look at China revenue, the consolidated plus JV in 2022, itâs basically the lowest itâs been over three, four years. I think slightly below 2019. Iâm just curious, in those three years, how profitability looks maybe post some restructuring optimization? If units in China recover, are you more profitable in each of those units than maybe you were in the past? Well, whatâs happening over time is that the content is going up, right? So, one thing thatâs been a big positive for our business is China consistently adopting more advanced emission standards. So the amount of revenue that weâre selling is going up per vehicle quite significantly over time. And certainly, cycle over cycle, itâs billions of dollars of extra revenue growth a year. Weâre just at the lowest market in a decade. So, we agree that that growth rate is modest. We donât have any signs yet of a rapid adoption. Weâll be looking at the same data youâre looking at, and obviously, taken on board the feedback from our customers, but we are profitable in our operations. We donât disclose profitability by region, but for sure, when China volumes improve, our profits will go up. Thank you. And weâve seen quite a few emerging suppliers in the EV, e-mobility space really struggled in the last 12 months with deliveries or profitability. Do you see some of those dynamics driving OEM conversations back to you and traditional suppliers as we start looking ahead to some of these key dates and trying to adopt more of this altered powertrain? Yes. We talked about this in our Analyst Day about a year ago. We expect that this transition is going to take a long time for our industry, and that positions incumbents like Cummins well because you need to invest for the long term. Regardless of what our customers are adopting, weâve got the solution in our portfolio. And so for sure, you see the benefit of a company like us that has a portfolio of options to meet their needs, itâs going to be around for the long term and continuing to invest in some of these new technologies, be able to do that and support the product as an advantage, and itâs playing out to be more of an advantage as time goes on compared to some of the new entrants. We continue to pay attention to those new entrants though and how they advance the technology and work to enter the market. So, we wouldnât discount them, but certainly, this long investment period makes it more challenging for them to stay in and be successful. And I think also our footprint, our reputation for dependability, wherever our customers operate, is leading us to be approached in new segments by global large industrial players. So, itâs not just in the market that we operate in today, weâve been approached to expand into different market applications. Thatâs particularly exciting. Thank you all for your participation today. That concludes our teleconference. I really appreciate the interest. And as always, the Investor Relations team will be available for questions after the call this afternoon. Take care. Ladies and gentlemen, thank you for your participation and interest in todayâs conference. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.
EarningCall_599	Good afternoon. Thank you for attending today's BILL's Fiscal Second Quarter 2023 Earnings Conference Call. My name is Megan, and I'll be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to Karen Sansot, Vice President of Investor Relations at Bill.com. Please go ahead. We issued our earnings press release a short time ago and furnished the related Form 8-K to the SEC. The press release can be found on the Investor Relations section of our website at investor.bill.com. With me on the call today is Rene Lacerte, Chairman, CEO and Founder of BILL; and John Rettig, Executive Vice President and CFO. Before we begin, please remember that during the course of this call, we may make forward-looking statements about the operations and future results of BILL that involve many assumptions, risks and uncertainties. If any of these risks or uncertainties develop or if any of the assumptions prove incorrect, actual results could differ materially from those expressed or implied by our forward-looking statements. For a discussion of the risk factors associated with our forward-looking statements, please refer to the text in the company's press release issued today and to our periodic reports filed with the SEC, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q filed with the SEC and available on the Investor Relations section of our website. We disclaim any obligation to update any forward-looking statements. On today's call, we will refer to both GAAP and non-GAAP financial measures. The nonrevenue financial figures discussed today are non-GAAP, unless stated that the measure is a GAAP number. Please refer to today's press release for the reconciliation of GAAP to non-GAAP financial performance and additional disclosures regarding these measures. Additionally, please note that the appendix for quarterly investor deck, which is posted on our Investor Relations website, contains a supplemental table of revenue and metrics information. At times during this call, we will discuss BILL's standalone results, which exclude our Divvy spend management, invoice to-go accounts receivable and Finmark financial planning solutions. Thank you, Karen. Good afternoon, everyone. Thank you for joining us today. BILL delivered strong second quarter results and achieved another quarter of profitable growth as we executed on our strategy to be the essential financial operations platform for SMBs. Revenue in Q2 grew 66% year-over-year, and we made exceptional progress growing non-GAAP net income, which was $49 million for the quarter. Our non-GAAP net income margin was 19% in Q2, and we also delivered another quarter of positive free cash flow. Our results demonstrate the commitment we have to execution rigor and investing for profitable growth. The power of our scale, technology and business model enabled us to create significant float revenue tailwinds in this higher interest rate environment. We are leveraging our float revenue to invest in long-term strategic opportunities, while also delivering non-GAAP profitability. Given the strength of our financial position, conviction in our growth prospects and our proven ability to execute, today, we announced Board authorization for a $300 million share buyback program, which we believe will further enhance shareholder value and minimize dilution without compromising our ability to invest in future growth. Before talking about our business, I'd like to comment on the health of SMBs. Businesses today are faced with a challenging economy that includes inflation and rising interest rates. Time and time again, SMBs proved to be resilient and agile, and we're seeing them adjust to the current conditions. With our solutions, SMBs are empowered to better manage their business and cash flow. We are energized by the opportunity to help our customers succeed. As we discussed on our Q4 and Q1 calls, macro conditions are impacting small businesses, and they are taking action to moderate expenses. As we anticipated, these trends continued in fiscal Q2, and we experienced lower growth in total payment volume compared to prior periods. Our proven business model and track record of execution position us well to navigate this economy while pursuing our long-term aspirations to serve millions of businesses and capture billions of dollars in revenue. As champions of SMBs, we're proud that more than 400,000 SMBs use our solutions to better run their businesses. A great example of how we help companies streamline their financial operations is Ditch Witch UnderCon, a commercial and industrial equipment distributor that first use Divvy's spend management solution and then adopted BILL's accounts payable solution. Ditch Witch UnderCon started as a family-owned company in 1972 and currently has six dealership locations throughout the Midwest and South. Eid Aldosari, CFO, said and I quote, âDivvy and BILL have been a game changer by giving us more visibility and control of our cash flow. The ease of use in automating our finances is really important in running our day-to-day operations. The combination of BILL and Divvy has removed the hassle of a paper-based process and given us time back to focus on growing our business and providing our customers the equipment and service they need to get the job done.â Our large and growing partner and network ecosystem enables us to efficiently reach new businesses and gives us a competitive edge. We partner with an SMB's most trusted advisers, including their accounting firms and financial institutions with the shared goal to create more value for SMBs. Our diverse distribution channels are a key advantage and represent a competitive moat. Our proprietary network of 4.7 million members transact with BILL customers. This network enables us to offer a strong value proposition to both parties in every transaction, while creating a network effect for new customer acquisition. Our network members benefit from fast, efficient electronic payments, the ability to choose their payment types and easy access to data for streamlined reconciliation. We make it easy for businesses to connect, pay and get paid. Behind the scenes of our network, our platform is a complex scale operation with sophisticated capabilities, including risk management, multiple payment rails and a robust regulatory and compliance foundation. These capabilities enable us to innovate fast and to deliver efficient payment experiences at scale. We are now processing $250 billion in payment volume annually. The breadth of our platform positions us to be the financial nervous system for millions of SMBs. Another core foundation of our strategy is our go-to-market partnership with accounting firms. Our solutions enable more than 6,000 accounting firms to automate their bookkeeping operations, create insights for clients, grow their practices and provide strategic advisory services. Accounting firms often drive technology adoption and usage as key collaborators and strategic advisers to SMBs. Recognizing this, we build tools that are embedded into the operational day-to-day activity of their firms. Because of BILL, accountants are able to engage more efficiently with their clients. Our solution enables them to better support their existing accounts as well as take on additional clients. BILL is an integral part of their business. With the addition of Divvy, we have strengthened our ability to serve accountants needs. During the quarter, we streamlined the Divvy sign-up and client onboarding process. Looking ahead, one of the earliest customer-facing aspects of our unified platform experience will be a more powerful tool for accounts to help them manage and support their clients. An example of the power that BILL and Divvy bringing to account is RKL, a top 100 firm in the U.S. Gretchen Naso, President of RKL Virtual Management Solutions, said and I quote, "RKL Virtual is focused on optimizing and managing our clientsâ accounting and finance functions. Our best-in-class tech stack featuring BILL and Divvy enables us to streamline clients, operations, deliver better insights and help our clients grow. RKL Virtualâs rapid growth over the past 18 months would not have been possible without BILL and Divvy. We leverage BILL and Divvyâs functionality, ease of use and end-to-end automation to triple our practices transaction volume." Financial institutions represent another important component of our distribution strategy, and we partnered with six of the top 10 banks in the U.S. On the last earnings call, we discussed being selected to provide an SMB-focused solution for a new bank partner. Today, Iâm happy to share that we have recently launched with BMO, our white label solution will offer a variety of our payment solutions, including virtual cards to BMOâs customers, giving them a broad range of payment capabilities within one solution that automates bill pay and digitizes invoicing to help manage cash flow. Core to our success has been constantly driving innovation that creates more value for members of our ecosystem. With our diverse product portfolio and payment scale, we are able to quickly identify areas of opportunity and turn these learnings into new offerings. Increasingly, we are exercising our innovation muscle to provide more features and payment choices for the supplier side of our network. An example of this is our instant transfer product, which has seen strong demand and good repeat usage among smaller suppliers in our network. Instant Transfer enables us to pay suppliers faster and help shape our road map for future innovation. With these learnings, we are developing a working capital solution for existing known suppliers in our network to help them improve their cash flow by getting paid much faster. With our large data asset of existing customer and supplier relationships and transaction history as well as strong risk management capabilities, we are uniquely positioned to provide working capital solutions to existing customers and network members to enable payment advances. We believe there is significant demand for solutions like this in the marketplace today, and we are excited about the potential here. In closing, we delivered another strong quarter with high revenue growth and significant improvement in profitability while making progress toward our goal of being the essential financial operations platform for SMBs. We have built our business to create value for our customers, while also driving gross margin expansion and profitability. Our powerful business model positions us well to navigate the macro environment while pursuing our long-term aspirations to serve millions of businesses and capture billions of dollars in revenue. Iâd like to thank our customers and partners for the trust they place in us. Iâd also like to thank the BILL team for their commitment to serving SMBs, which enabled us to deliver strong financial results. Thanks, Rene. Today, Iâll provide an overview of our fiscal second quarter 2023 financial results and discuss our outlook for the fiscal third quarter and full fiscal year 2023. As a reminder, todayâs discussion includes non-GAAP financial measures. Please refer to the tables in our earnings press release for a reconciliation from non-GAAP to the most directly comparable GAAP financial measure. Weâve also included a table of metrics in the supplemental materials on our Investor Relations website. Please also note that when I refer to BILLâs standalone results, they exclude our Divvy spend management, invoice to-go accounts receivable and Finmark Financial Planning Solutions. In Q2, we delivered strong financial results that exceeded our expectations. Total revenue grew 66% year-over-year and non-GAAP gross margin was 86.7%, our highest margin on record. In addition, non-GAAP net income was $49 million or 19% of revenue, and we generated $48 million in free cash flow. Our Q2 performance was driven by growth in core revenue, which was up 49% year-over-year and significant sequential growth in Float revenue where we benefited from rising interest rates and active management focused on higher-yielding investments. Our performance highlights the strength of our diversified business model and our commitment to deliver balanced growth and profitability. Our diverse distribution channels are a key competitive advantage with no partner generating more than 3% of core revenue in the last 12 months. We're pleased with our Q2 performance considering the macroeconomic backdrop. In Q2, we saw customer spend levels for BILL and Divvy deviate from typical seasonal patterns in this challenging environment. Spending trends weakened throughout Q2 and notably in December, when we typically see a seasonal spike in payment volume. The lower payment volume growth was visible across most spend categories. Given the mission-critical nature of our platform, however, customer engagement remained healthy in Q2. For example, on our BILL standalone platform excluding financial institution channel customers the average number of transactions per customer was 77%, consistent with the prior quarter. Now moving on to our metrics and results in Q2; I'll provide a few highlights since we included a metrics and revenue table in the appendix of our quarterly investor deck. We ended the second quarter with 435,800 businesses using our solutions. BILL standalone customers grew to 182,700, up 35% year-over-year. Net new customer ads on our BILL standalone platform were 10,700, this included 7,200 net adds from our financial institution channel and 3,500 net adds from the direct and accounting channels. We attribute the lower net adds compared to recent quarters to smaller-sized businesses pushing out transformation decisions in this macro environment. Customer retention rates continue to be strong. For our Divvy spend management solution we ended the quarter with 24,700 spending businesses, an increase of 1,900 from last quarter and growth of 59% year-over-year. Moving on to payment volume, during the quarter we processed $67.3 billion in TPV. This included BILL standalone total payment volume of $63.7 billion in Q2, reflecting 13% growth from Q2 of last year and $3.3 billion in card payment volume from Divvy spending businesses, representing 76% year-over-year growth. Moving on to transaction volumes we processed 20.8 million payments in Q2. This includes 11 million payments on the BILL standalone platform and 9.4 million Divvy card transactions. Total transaction revenue per transaction was $8.17, growth of 19% year-over-year. For card payments processed through our spend management solution, in Q2 we generated a gross take rate of approximately 262 basis points. Now I'll review our reported Q2 results. Total revenue was $260 million, an increase of 66% from a year ago. Core revenue, which includes subscription and transaction fees was $231.1 million, representing growth of 49% year-over-year. Subscription revenue increased to $61.5 million, up 25% year-over-year driven by our expanding customer base. BILL standalone subscription revenue was $52.7 million, reflecting growth of 31% year-over-year, driven by our expanding customer base and a small effective price increase for customers in our direct channel. Transaction revenue increased to $169.6 million, up 59% year-over-year. As a result of increased card spend volume on Divvy, TPV growth and ad valorem payment adoption. BILL standalone transaction revenue totaled $80.4 million, reflecting growth of 42% year-over-year. And Divvy transaction revenue totaled $86.6 million, reflecting growth of 78% year-over-year. Float revenue was $28.9 million, significantly exceeding our expectations due to the magnitude of recent fed funds rate increases. Our yield was 341 basis points in the quarter, demonstrating that our scale, combined with our proprietary payment technology is proving to be an important differentiator that enables us to create tailwinds during this period of higher interest rates. Turning to gross margin and our operating results for Q2, non-GAAP gross margin was 86.7%, up 140 basis points year-over-year as a result of higher float revenue and increasing variable transaction fee revenue. Non-GAAP operating expenses were $194.6 million, an increase of 4% from Q1 due to proactive expense management, including moderating our pace of hiring and managing our variable spend. The work costs, which are included in sales and marketing expenses, were 50% of Divvy revenue consistent with prior quarters. Non-GAAP operating income was $30.8 million, an increase of $27.4 million year-over-year. Non-GAAP operating margin was 11.8% an improvement of 9.7 percentage points from 2.2% in Q2 of last year. Non-GAAP other income, net of other expenses, was $18.8 million and benefited from higher yields on corporate cash balances. Our non-GAAP net income was $49.4 million or 19% of revenue resulting in non-GAAP net income per diluted share of $0.42 based on $117.3 million diluted weighted average shares outstanding. Our non-GAAP net income was significantly better than our expectations due to our revenue outperformance combined with our disciplined approach to managing expenses as we grow. Moving on to the balance sheet. Cash, cash equivalents and short-term investments at the end of Q2, were $2.7 billion. Our capital position is an important advantage and provides flexibility for us to invest in scaling our business. Our number one priority for capital allocation continues to be investing in organic and inorganic growth opportunities that we believe will enhance long-term value creation. With our positive free cash flow results and the confidence we have in the durable strength of our business, we believe investing in a share buyback program to offset dilution is also a great use of capital. To this end, as Rene mentioned, our Board of Directors has authorized a $300 million share repurchase program. Before shifting to our financial outlook for the fiscal third quarter and full fiscal year 2023, I will provide insight about the impact we expect the macro environment to have on SMBs and our business. We anticipate the trends weâve experienced in recent quarters will continue in the second half fiscal 2023. This will impact our business, most notably on near-term payment volume growth. We estimate that BILLâs standalone TPV growth in Q3 will be approximately flat on a year-over-year basis, reflecting both the continuation of macro trends and our expectations for typical seasonally softer payment volume in the March quarter compared to the December quarter. For Divvy card spend, we anticipate growth of approximately 50% on a year-over-year basis in fiscal Q3. Weâre excited about our market opportunity and ability to extend our leadership position through this economic cycle, but we also believe that near-term trends warrant a conservative financial outlook. As a result, weâve adjusted our core revenue estimates to account for the risks that SMBs continue to adjust their spending levels. We will be disciplined in managing our operating expenses going forward and have proactively reduced plan hiring. We are also continuing to focus on investing in the highest impact initiatives for customers. Thus, we are taking a balanced approach to investing for growth over the longer term while addressing short-term challenges and delivering increased profitability. Now turning to our outlook. For fiscal Q3, we expect our total revenue to be in the range of $245 million to $248 million, which reflects 47% to 49% year-over-year growth. We expect float revenue to be approximately $27 million in Q3, which assumes our yield on FBO funds will be approximately 350 basis points. On the bottom line, for Q3, we expect to report non-GAAP net income in the range of $26.5 million to $29.5 million and non-GAAP net income per diluted share in the range of $0.22 to $0.25 based on a share count of $119 million diluted weighted average shares outstanding. For Q3, we expect other income net of other expenses, or OIE to be $17.5 million. We expect stock-based compensation expenses of approximately $73 million in Q3, and we expect capital expenditures were approximately $9 million to $10 million in Q3. Moving on to full year guidance for fiscal 2023, we expect total revenue to be in the range of $999 million to $1.007 billion. We expect float revenue to be approximately $100 million in fiscal 2023, which assumes a yield on FBO funds of approximately 320 basis points for the year. In summary, weâve adjusted the composition of our core and float revenue estimates to reflect external economic conditions. Weâve also increased our outlook for total revenue at the low end of our range while holding the top end of our prior total revenue guidance. At the same time, we are significantly increasing our profitability through diligent expense management. We expect to report non-GAAP net income for fiscal year 2023 in the range of $117.5 million to $125.5 million. We expect non-GAAP net income for a diluted share to be $0.99 to $1.05 based on a share count of $119 million diluted weighted average shares outstanding. In addition for fiscal 2023, we expect OIE to be $60 million, net of other expenses. For fiscal 2023, we expect total stock-based compensation expense of $340 million and capital expenditures were approximately $35 million for the year. In closing, we are confident that we are well positioned to successfully navigate the prevailing uncertain economic environment. We are committed to driving innovation and value creation for our customers while delivering revenue growth, operating leverage, and non-GAAP profitability for our investors. Thank you. [Operator Instructions] Our first question comes from the line of Brent Bracelin with Piper Sandler. Your line is now open. Good afternoon. I guess Rene for you, I guess first off, there are a few businesses out there growing 50% plus, in the teeth of recession, so that certainly is continues to depress here with the diversity of the model. That said, I guess we were a little surprised on the pace of slowdown in TPV growth, particularly relative to Divvy card growth that was still really healthy. So maybe just compare contrast, what are you seeing on the core TPV growth side thatâs slowing? Some of the SMBs are having challenges there, but it looks like theyâre not having as much challenges on the Divvy card side. Just compare to contrast those two markets and what you saw and the quarter in linearity would be super helpful. Thanks. Great, thank you, Brent. Iâll start and then let John add his perspectives. First and foremost, we are pursuing a massive opportunity in front of us. We see the opportunity to, for growth to be decades over the next decade, and this is a point in time where the macro environment is putting SMBs in on the mode of standby, right? So the standby mode for them means that they are kind of distracted by other things in their business, and that has led to them managing their spend more aggressively, and that impacts the TPV growth that weâve seen. Like I said, thereâs a point in time we are growing for the year. We will grow over 50% as a company, and we are doing all of that at the same time, while balancing our profitability goals and doubling the profitability on a non-GAAP net income basis for the year. So, John, any other comments youâd like to add? Iâd just add that, itâs been a bit of an evolution in the spending patterns that weâve seen from small businesses, starting with some of the larger businesses mid last year to other segments focused on discretionary spend being lighter. And now weâve seen some trends that suggest businesses of all sizes are taking a hard look at most all of their spending. As it relates to BILL versus Divvy, that the BILL core customer base is slightly smaller in size and perhaps more sensitive to the economic conditions that are prevailing right now. The Divvy customer base is slightly larger and itâs a newer customer base where the growth profile is obviously earlier, at an earlier stage than BILL and obviously much stronger growth. So we feel good about the visibility that we have and how weâre helping SMBs to this in environment. And in the near term though we have made some adjustments, in the way weâre operating to account for some of the uncertainties that SMBs are facing today. Thank you for taking the question. Yes, I wanted to go to the core net adds, thatâs number, I think this quarter did tick below 5,000 if you exclude the FI channel. So maybe just talk to, the go-to-market motion maybe where youâre having success and maybe where things did slow just would be curious on the trend there. Thank you, Josh. We definitely like I just pointed out, the opportunity in front of us is very large, and what we are seeing from a macro perspective is that as businesses, especially small businesses are being distracted by this, wait-and-see economy or if you want to say the standby and weight, mode that is impacting their ability to kind of move quickly on improving their operational efficiencies. So what we see across the business is that we continue to drive through our ecosystem, great customer adoption, great value to our customers, and we, like I said, this is really a point in time. This is not something that we see as long-term. We see decade of growth ahead of us. Yes. Good afternoon. Thanks for taking the question. I guess just looking at the guidance for the next couple quarters, curious how much of that is built upon sort of trends that youâre already seeing both through December and through the end of January here versus adding an extra level of conservatism given the directionality of seeing things weaken and expecting more of that to come and sort of wrapped within that, curious how much are you expecting both a decline in transaction counts along with the lower TPV that youâve already, or I guess the average transaction size that you already are seeing to sort of get to those numbers on the outlook? Thank you. Yes, thanks for the question, Matt. Weâve tried to take into consideration both the trends weâre seeing the, seasonal effect of the March quarter in particular, which I think as everyone knows is a softer TPV spend environment than the December quarter. So we kind of have both macroeconomic factors and seasonality that are playing into our estimates for the second half of the year. And weâve taken all these things into consideration as it relates to the payment volume estimates that we put out there. And Iâd say transaction counts are important as a measure of like how customers are using our platform and engaging and creating value from a monetization and revenue standpoint. Weâre obviously more tethered to the actual payment volume and subscription fees. And so weâve taken all this into consideration and assumed that the trends weâve experienced so far are continuing and that is reflected in the lower payment volume growth for both BILL and Divvy that weâve estimated for the second half of the year. Hey guys. I guess, I just want to understand a little bit more first about the mix of the customer distribution you have coming in, just given that thoughts, obviously now taking over half it looks like of the non-Divvy customer ads. Maybe just discuss with us a little bit your strategy, your go-to-market if youâre doing everything you should, you think you could be doing to emphasize the go-to-market on the direct side, just given how much more revenue and profitable it is than the FI is for you guys, at least for now. And then on that note expenses, the core expenses, including stock comp, still went up pretty notably. And I know youâre saying youâre trying to manage for profitability and interest in the comps, but I think investors kind of want to see the core business profitable, not just interest income. And so maybe just a little more color on what you guys are, how you think about that. And in the backdrop of this environment, if you, you plan on managing that expense base a little more aggressively. Thank you, Darrin. From a, customer acquisition perspective, one of the beauties of our model is that we do have a diverse ecosystem to attract and reach small businesses. And so whether thatâs through our director or account or the FI channel we have lots of opportunities to do that. And you are correct that the direct side does monetize more effectively for us. The ways that we do that obviously are continuing to evolve and get stronger. And what we saw in this quarter really was more of a, what I would say just a macro environment, not anything, again on the long-term. And so as we look forward, we expect this is kind of the impact weâll see over the next few quarters. And, Iâll let John maybe talk a little bit more about that and really to the core profitability question. Yes. Yes. Thanks Darrin. I think weâre in a really unique position to balance growth and profitability given our business model. And if you look at our earnings, our profitability capabilities, excluding the impact of interest rates, we're actually non-GAAP operating income without flow profitable in the second quarter, and we've increased our estimates by north of 10% for the full year. So, what we are focused on is driving near-term profitability while also investing in longer-term growth initiatives because this is a big market opportunity we are going after. And I think we're striking the right balance between growth and profitability in the near term. We'll obviously continue to adjust our operating plans, our expenses as needed given the market conditions, but we think that our estimates for the second half of the year are a good balance between those objectives. Hey Rene. Hey John. Thanks for having me on the call here. I wanted to dig into gross margin for a second. Even if we just pull out the float revenue still very, very healthy. Maybe if you could just dimensionalize the drivers there, whether it's mix or other factors? And then understanding that there will be some fluctuation in TPV in the back half, whether we're at sustainably higher level from a gross margin level perspective, any color there would be helpful. Thanks a lot guys. Sure. Thanks for the question, Andrew. Yes, we, I think, achieved our highest ever non-GAAP gross margin in the second quarter. And that's a function of both our payment type mix, where we're seeing increases in ad valorem payments at high margins. Our optimization efforts around transaction costs. So with our scale, increasing our ability to lower transaction costs as we're processing payments on behalf of SMBs. And obviously, you mentioned float revenue, which is a contributor as well. We're operating from a non-GAAP gross margin perspective, well above the ranges that we established earlier in the year. We expect to continue to be above the ranges in FYâ23, just given the current composition that we have and our ability to continue to deliver cost optimization to drive strong gross margins. So we feel really good about the margin potential of the business from here. Hey Jonathan on for Keith. Thanks for taking my question. First off, standalone BILL take rate expanded less than what we've seen historically. Can you help us understand some of the factors around that? Is that macro potentially impacted customer behavior around payment modality and was there a change in pace around payment widely adoption at the quarter? Yes. Thanks, Jonathan. I'll take that question. I think we talked about a few times before that we've been really successful at driving expanded monetization over the last couple of years, but it's not perfectly linear quarter-to-quarter. Our primary goal is finding the right payment method between buyer and supplier in order to drive the transition to electronic payments and repeat transactions. And I think we've been very successful at doing that. In any given quarter, there is a lot of moving parts. In the December quarter, we continued to drive adoption of ad valorem payments. But there were some other factors that influenced our monetization expansion. Examples would be we had a slight headwind associated with foreign currency given the U.S. dollar weakening. That was roughly 0.1 to 0.2 basis points in the quarter, a slightly lower monetization expansion because of that. We also saw a much higher percentage of ACH payments versus check payments, which is a good testament to our ability to drive electronic payments, and we're now roughly 85% electronic overall for the business. So near term, our expectation is for monetization expansion probably to be similar to what we saw in the second quarter, which is slightly below historical averages. But looking at the longer-term opportunity, we're still very confident that we can continue to significantly expand monetization, especially given our large network and our expanding supplier network enablement capabilities over time. Hey thanks for that color. A follow-up here, how should we think about sales and marketing leverage at Divvy? I mean given some of your private competitors and the state of the funding environment, have you seen the intensity in sales and marketing spend there soften a bit? Well, as you know, the spend management market, which frankly Divvy helped create and has been a leader in the space for a long time, it's still very early in its evolution. We've been working in the AP automation space for a long time and the spend management is even earlier. So there is still the need to drive awareness, to connect with prospective customers to change behaviors around a completely new way of doing business. And we're continuing to invest in growing that segment of the business and tapping into that market opportunity. I would say we're less influenced by day-to-day competitive pressures, just given the sheer size of the market and the very small number of businesses in total that have adopted the type of solution that Divvy offers. Obviously, as we scale as a company, we're approaching $1 billion in revenue; we do expect to create operating leverage across the entire business, sales and marketing included. Thank you. [Operator Instructions] Our next question comes from the line of Kenneth Suchoski with Autonomous. Your line is now open. Hey good afternoon Rene and John. Thanks for taking the question here. It seems like you're factoring in a recession in your TPV growth outlook. So can you just talk about the different levers you can pull, whether it's on the transaction side, the subscription side or maybe even the Divvy side that might support revenue growth as volumes seem to be coming under pressure from the macro environment? And I'm just curious to get your appetite to pull some of those levers over the coming quarters. And then I don't think I heard the FI TBV contribution in the quarter and the TPV per customer growth, XDFI channel. So any color there would be great. Thanks so much. Thanks, Ken. Yes, I think, first off, what we've seen with businesses already is that this standby mode is impacting how they think about things. So in some ways, I would say that businesses are probably in front of the broader economy. I think the consumer spend is 70% in business is 30%. So we may be seeing it first there. And the levers that we have really do continue to drive the innovation that we've been doing across all of our payment products. So obviously, we've launched a number of payment products we referenced the instant transfer capability and how that's informing our ability to do working capital and invoice acceleration for known suppliers in the network. So some of the levers we have are going to continue to work on the transaction monetization across the business and continue to work on the diverse ecosystem that we have to drive customer adoption and make sure that customers know we are there for them when they are ready to make these decisions. And we see the diversity to system and making a difference in all the different areas that we've done over the last few quarters, and we expect that to continue in the near term as well. And Ken, let me just add a couple of points that you asked about. Our TPV for financial institution customers in the quarter is at $6.2 billion. And as we look at the BILL standalone business, excluding the FI customers, our TPV per customer is about 441,000 in the quarter, which is pretty consistent, I think, flat on a quarter-over-quarter basis. Hey guys, I appreciate you taking the questions. And also just want to say I appreciate all the enhanced disclosures and the backup presentations, super helpful. I wanted to go ahead and ask a follow-up kind of the customer mix question, I think that Darrin was asking about earlier. The FI channel is obviously now contributing a significant part of your net adds or over half of your net adds on a quarterly basis. I think you guys have been very clear that in the near term, this isn't going to have a significant impact on the incremental revenue. But I'm wondering if you could kind of look out however long you feel is appropriate and give people a sense for what this channel can sort of do for you over the long term once you kind of get fully ramped up and get through some of these RPOs that you're under right now. What is â how do you kind of paint a picture for investors of the FI channel contributing significantly more revenue per customer than where it is today? Thank you. Thank you, Ram, a few points and then John, if you have anything to do that. So the first thing I would say is, we have worked very hard to make sure that the payment products and offerings we are building and innovating on are available to our partners. And so I think in the prior quarters, we announced one of our larger partners and signing up to have the spend management solution that we have at Divvy. We announced today that BMO is going to be enabling virtual cards to the get go. We continue to work on that capability to kind of drive the monetization for the FI channel. But one other note that I would just add is that every customer that joins Bill.com and uses the bill solution is able to really add their network members and suppliers into the ecosystem. And so the FI channel does also provide that capability for us. So these new ads allow us to grow and scale the network and will allow us to increase the monetization over time as we enable more capabilities across that channel. John? Yes, I would just reiterate that weâre starting to have more opportunities and create proof points around some of our ad valorem products being integrated into our white label solutions with various financial institution partners that I think will take time to evolve. Itâs not going to be an instantaneous step-up in monetization. But I think weâve proven through our direct business the ability to create value for buyers and suppliers that will play out in the financial institution channel as well. Weâre 4% to 5% of revenue is what the financial institution contributes today, and weâre expecting over the longer term, that to be a much higher percentage of our overall business. So, weâre â thatâs why we keep investing in the channel, and we understand that itâs a long-term investment. We have seen a significant increase in the number of financial institution customers as a percentage of the total net new customers that weâre seeing; we saw slight declines in both segments, Bill direct [ph] and the FI channel in the last quarter. And we think thatâs a little bit of a function of, as Rene mentioned, businesses just going on pause a little bit, being on standby being a little bit slower to make some of the decisions around transforming their operations. So weâre kind of expecting that to continue in the near term. Over the next couple of quarters, weâre thinking that our net new ads will be similar to what we experienced in the December quarter. Thank you. Our next question comes from the line of Scott Berg with Needham & Company. Your line is now open. Hey guys, this is Josh on for Scott. Thanks for taking my question. Can we get some more color on trends you were seeing here in the month of January relative to the December quarter? And how does recent activity influenced the updated guidance for the year? Thank you. Thanks, Josh. So we â as I mentioned earlier, I think took all data points into consideration as we updated our estimates for the second half of the year. And most notably, those include the lower TPV growth across BILL and Divvy as well as slightly lower monetization expansion. And we think that, that fully reflects the softer environment that weâre facing with SMBs adjusting the spend and reacting to the macro environment. So thereâs nothing incremental or new to report on the month of January other than itâs all a part of what we considered in updating our numbers, we think, to appropriately adjust for some of the macro conditions. Hi, thank you so much. Just a clarification and a question for you, John. Just does the slower spend outlook changed in any way your risk appetite for growing, Divvy, Iâm not sure if you commented on that â and then just on the share repurchase on the execution of that, is that opportunistic or systematic? What are you putting in place against that? Just want to make sure I cut that. Thank you. Yes. Thanks for the question. First, on Divvy, weâre â obviously, weâve been very proactive at managing the growth of Divvy and improving over time, our capabilities around risk management and the card program there, which obviously has a very short repayment cycle. Itâs a charge card, not a revolving credit card with an average payment cycle around 10 days. So weâre very proactive in managing that. And part of what weâre doing is improving the overall sort of health, their financial stability of the customer base associated with that charge card. And we feel good about the progress that weâre making there. And we obviously do take the macro conditions into account as weâre making some of those decisions. On the share repurchase that was authorized. This is an opportunistic program. Itâs not an accelerated purchase or programmatic effort at the moment. Hey, thanks. Hi, Rene and John. Maybe just â I know that the question on guidance youâve been asked, John, I wondered maybe drilling a little bit more specifically, if I think about the 3Q guidance for TPV being flat year-over-year for BILL, I think that would imply that the same-store sales equivalent or existing customer TPV would be down maybe year-over-year? And assuming that new customers are still adding TPV. Iâm just curious if you could maybe break it apart that way. And then just also whatever your retention expectations are for subscription in the forward guidance would be helpful. Yes. Thanks, Samad. Yes, weâve estimated flat on a year-over-year basis. And the changes in absolute TPV thereâs less growth coming from the existing installed base, the new customers acquired in the last, call it, year or so are obviously still getting up to speed on the platform. And so there is some embedded growth there. And obviously, if you look at the year-over-year numbers and translate those into the transition from December to March quarter, itâs actually a decline on a quarter-to-quarter basis. That also factors in the seasonality associated with March. So itâs not just the macro conditions there. And weâre expecting â I donât think weâve talked about a specific retention number associated with subscription revenues, but it is an important part of our monetization and our pricing and packaging, and so we arenât expecting any significant changes there. I think as we mentioned on the earlier comments, engagement and retention of customers continues to be very strong, consistent with recent history. Hi, good afternoon guys. John, my question was around kind of the guide as well. Weâve all gotten a custom to build raising guidance, especially some of us are taken by surprise whenever thereâs any adjustments in the core growth. So just trying to figure out what surprised you that youâve had to adjust the core revenue down. Was it just the â is it just TPV impact, the fact that SMBs have kind of frozen? Or is there other things in either the sales channel or pricing or adding add-ons anything like that, thatâs also kind of impacted the guide kind of surprised you from what you originally thought? Thanks. Thanks, Bryan. Iâd say no surprises. We for, I think, a few quarters now talked about the beginnings of shifting patterns from SMBs and their spend behavior, starting with mid-market customers, then extending to all sizes. And now weâre seeing some changes in spend, not just in discretionary items, but kind of across the board. Itâs not true across all categories, but weâre seeing businesses adjust. And so weâve taken that into consideration. Weâve also assumed slightly lower monetization expansion in the second half of the year. We think that is temporary as is the spend patterns from SMBs. We are at a point in time now where economic conditions need to be taken into consideration for all businesses, but weâll obviously grow through this particular cycle as well. So we've tried to account for really the trends that have continued throughout this fiscal year versus something new that's happened, say, recently. John, Rene, I was encouraged to hear your comments about pricing on the subscription side. I was hoping you could unpack that a little. Is that only direct? Is there an opportunity to take price or set price rather on the FI channel as well? Any commentary on the pricing would be helpful? Thank you. Yes, we're in fiscal 2023, we've announced a price increase that impacts our BILL direct and accounting clients, basically. So it's not in the financial institution channel. And it's a phased approach. It's been some time since we've done a price increase, I think, more than in two years, and it will be later in the fiscal year Q4, so before the effect of the price increases across all of our direct and accounting channel customers. So we think we still are positioned really well from a value proposition standpoint and what we can help small businesses accomplish relative to our low price points considering some of the other software that they invest in. So notwithstanding the price increase, we still feel really good about the value proposition that we're delivering for small businesses. Thank you. Our next question comes from the line of Brad Sills with Bank of America. Your line is now open. Great. Thanks guys. I wanted to ask a question on the core transaction business. John, you mentioned an FX impact in there but I think even ex that, a little bit lighter monetization. So could you comment on whether or not you saw any impact from the macro on the uptake of cross-border virtual card, the Ad Valorem Services? And do you think exiting the macro, we might get back to the same level you had been seeing in that kind of uptick quarter-to-quarter in the core transaction business take rate? Yes. Thanks for the question, Brad. I'd say we haven't seen any direct impact on monetization expansion from macro. Certainly, indirectly there could be some influence. But as I mentioned before, it is normally not linear or expansion. We're working hard to optimize payments for repeat transactions more than monetization expansion. And I think the conditions that we're operating in now really that SMBs are operating in is at some point going to be temporary, and I think beyond this particular uncertain period we're very confident in our ability to continue to expand monetization at historical rates are better. But in the short-term, we've tempered those expectations given the conditions that we see in the market. Hey thanks for taking my question. Just trying to understand really the slowdown that you guys are calling out on the guide here; I mean, it seems to me that just the magnitude of slowdown that you guys are going for in the back half of the guide. It doesn't necessarily square with a lot of the other data points we're seeing in the market, be it Facebook calling out a bottoming in ad spend or American Express calling out relatively stable business trends. I'm just trying to get a sense if there's something beyond the macro that we're missing here that maybe you need to build that you guys are facing? Are there any impacts you're seeing from into its announcement to double down on B2B? Or just maybe there's just something else that we're not hitting on here. Thank you, Andrew. Generally, what we would say it's really â it is the macro environment where businesses are pausing. They're in standby mode and I think I mean just if you look at the macro trends that are in the media, the amount of companies that are now seeing layoffs and impact on their employee base, I mean it's clear that businesses are thinking about how they spend, and they're being very thoughtful if not scrutinizing their spend directly. So ultimately that is what we see across the competitive environment like we've defined and created this category, we continue to define and create the category. And we have not seen any impact from a competitive perspective from anybody on what we're able to do and drive in the market. Hi there. Thank you for taking my question. I think I'd like to get some more color on the working capital management offering that you mentioned there. Obviously, that's something you guys have talked about for; I think since the IPO, it sounds like it's coming to fruition. So maybe just thoughts on what the revenue model would be there, whether or not you keep those loans on your balance sheet? And then anything you can provide around timing would be helpful? Sure. Thank you, Matt. Ultimately, one of the things that we pride ourselves on is that we drive the electronification of B2B payments, right? We make it so that businesses can pay and get paid and now choose the timing of how they get paid. And that's something that we've worked hard at, something that we have north of 80% of all payments across bill or electronic. And one of the impacts of having a broad payment platform that we do is that we get to learn from each of the payment offerings that we develop. And so when we launched Instant Transfer in the last year, we had a chance to see that there was demand from repeat demand from suppliers that were known in our network that they wanted to be paid faster than what was able to happen through either the check or the ACH mechanism that they're getting paid. And so that led us to engaging and understanding from suppliers that were known to us, what would be helpful. And so if there's an opportunity for us to accelerate the invoices they have with a BILL customer and we can actually drive the capability to make that happen, what are they going to be willing to pay? And the reality is they are willing to pay for that, it will be an impact on the ability for us to monetize. And what we're excited about is that we are now in a position to start learning exactly how to roll that out broadly across the 4.7 million members in our network. Thank you. Maybe just a big picture question to summarize some of the questions that were asked before. I know it's a fluid macro backdrop, but could you maybe just give us a sense of how predictable do you think the model is for a given macro backdrop given that it's a fairly â it's not â it's a newer model. I'm just trying to think about the consensus forecast calling for more macro weakness? And maybe how we should gauge how those macro factors affect the assumptions you've made? Thanks. Thank you, Sanjay. We have a lot of data that we're able to use and look at and see the trends across all of our customers, different size customers, different segments of customers. And that is what informs the modeling that we do and the guidance that we provide. So we feel like we have the insights to be able to really understand what is happening with businesses at the time, and that's how we create and form the guidance that we provide today. I think I'd just like to say thank you, everyone for joining the call today. We look forward to communicating our progress as we pursue the tremendous opportunity in front of us. And again, thanks for joining the call. That concludes Bill's fiscal second quarter 2023 earnings conference call. Thank you for your participation. Have a wonderful rest of your day.

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