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Thank you for standing by, and welcome to the American Financial Group 2022 Fourth Quarter and Full Year Results Conference Call. [Operator Instructions]. We released our 2022 fourth quarter and full year results yesterday afternoon. Our press release, investor supplement and webcast presentation are posted on AFG's website under the Investor Relations section. These materials will be referenced during portions of today's call. I'm joined this morning by Carl Lindner III and Craig Lindner, Co-CEOs of American Financial Group; and Brian Hertzman, AFG's CFO. Before I turn the discussion over to Carl, I would like to draw your attention to the notes on Slide 2 of our webcast. Some of the matters to be discussed today are forward-looking. These forward-looking statements involve certain risks and uncertainties that could cause actual results and/or financial condition to differ materially from these statements. A detailed description of these risks and uncertainties can be found in AFG's filings with the Securities and Exchange Commission, which are also available on our website. We may include references to core net operating earnings, a non-GAAP financial measure, in our remarks or in responses to questions. A reconciliation of net earnings attributable to shareholders to core net operating earnings is included in our earnings release. And finally, if you are reading a transcript of this call, please note that it may not be authorized or reviewed for accuracy. And as a result, it may contain factual or transcription errors that could materially alter the intent or meaning of our statements. Well, good morning. We're pleased to share highlights of AFG's 2022 fourth quarter and full year results, after which Craig and Brian and I will respond to your questions. AFG's financial performance during the fourth quarter was excellent and a strong finish to an outstanding year. Core operating return on equity topped 21% and nearly all of our Property & Casualty businesses grew during the year, establishing a record level of premium production for the company. We are also very pleased to report record full year underwriting profit and investment income in our Specialty Property and Casualty business. Our compelling mix of Specialty Insurance businesses and entrepreneurial culture, disciplined operating philosophy and astute team of in-house investment professionals collectively have enabled us to outperform many of our peers over time. Craig and I thank God, our talented management team and our employees for helping us to achieve these exceptionally strong results. I'll now turn the discussion over to Craig to walk us through AFG's fourth quarter results, investment performance and our overall financial position at December 31. Thanks, Carl. As you'll see on Slide 3, AFG's core net operating earnings were $11.63 per share for the full year 2022, generating a core operating return on equity of 21.2%, which was even better than the excellent 18.6% core ROE achieved in 2021. The earnings power of our operations, coupled with efficient capital management, allows AFG to produce returns on equity in excess of most of our peer property and casualty insurers. Understanding that capital management is a critical component of delivering top-tier ROEs, we make capital management one of our highest priorities. Returning capital to our shareholders is an important component of our capital management strategy and reflects our strong financial position and our confidence in AFG's financial future. Carl and I are pleased that we returned $1.23 billion to shareholders during 2022, including just over $1 billion or $12 per share in special dividends and $197 million in regular common stock dividends. Our quarterly dividend was increased by 12.5% to an annual rate of $2.52 per share beginning in October of 2022. We're proud of our track record of value creation. During 2021 and 2022, we returned a total of $3.9 billion in capital to shareholders in the form of dividends and share repurchases. In addition to deploying the excess capital created from the sale of our annuity business, we've continued to generate and deploy excess capital through AFG's strong property and casualty operations. Growth in adjusted book value per share plus dividends was an impressive 18.5% in 2022. Turning to Slides 4 and 5. You'll see that the fourth quarter of 2022 core net operating earnings per share of $2.99 produced an annualized fourth quarter core return on equity of 22.3%. Net earnings per share of $3.24 included after-tax noncore realized gains on securities of $0.25 per share, which include fair value changes on securities that we continue to hold at the end of the quarter. Now I'd like to discuss the performance of AFG's investment portfolio, financial position and share a few comments about AFG's capital and liquidity. The details surrounding our $14.5 billion investment portfolio are presented on Slides 6 and 7. Pretax unrealized losses on AFG's fixed maturity portfolio were $630 million at the end of the fourth quarter, reflecting the increase in market interest rates and widened credit spreads compared to year-end 2021. As we entered 2022, the duration at our fixed maturity portfolio was at its lowest in recent history. Over the course of the year, we acted on opportunities presented by the increasing interest rate environment and extended the duration of our P&C fixed maturity portfolio, including cash and cash equivalents from approximately 2 years at December 31, 2021, to approximately 3 years at December 31, 2022. In the current interest rate environment, we're able to invest in high-quality, medium duration, fixed maturity securities at yields of approximately 5.5%, which compare favorably to the 4.15% yield earned on fixed maturities at our P&C portfolio during the fourth quarter of 2022. In addition to the favorable impact of higher reinvestment rates, as we look forward, we expect our portfolio of floating rate securities, most of which were tied to 1-month or 3-month indices to benefit from additional increases in short-term interest rates. Altogether, we expect the yield earned on P&C fixed maturity portfolio to increase by 20 basis points by the fourth quarter of 2023 compared to 4.15% earned for the fourth quarter of 2022. Looking at the results for the quarter. For the 3 months ended December 31, 2022, Property & Casualty net investment income was 19% lower than the comparable 2021 period. These results included an annualized return on alternative investments in the fourth quarter of 2022 of approximately 5.3% compared to an exceptionally strong 26.3% return for the fourth -- for the 2021 fourth quarter. The average annual return on AFG's alternative investments over the 5 calendar years ended December 31, 2022, was approximately 14%. Excluding the impact of alternative investments, net investment income at our Property & Casualty insurance operations for the 3 months ended December 31, 2022, increased 64% year-over-year as a result of the impact of rising interest rates, enhanced by the strategic positioning of our portfolio coming into 2022 and higher balances of invested assets. For the 12 months ended December 31, 2022, P&C net investment income was approximately 3% higher than the comparable 2021 period and included a return on investments on alternative investments of 13.2% for 2022 compared to the remarkably strong 25.3% earned on alternative investments in 2021. We're very pleased with the double-digit return on alternative investments earned in 2022 in a challenging investment environment. Excluding alternative investments, net investment income at our property and casualty insurance operations for 2022 increased 29% year-over-year as a result of the impact of rising interest rates and higher balances of invested assets. As we look forward to 2023, our guidance for the year reflects a return of approximately 7% on our $2.1 billion portfolio of alternative investments is an assumed high single-digit return on our multifamily housing-related investments is anticipated to be partially offset by somewhat weaker performance of traditional private equity investments. Please turn to Slide 8, where you'll find a summary of AFG's financial position at December 31, 2022. Our excess capital was approximately $1.4 billion at December 31, 2022. This number included parent company cash and investments of approximately $876 million. During the quarter, we returned $224 million to our shareholders through the payment of a $2 per share special dividend and our regular $0.63 per share quarterly dividend. Yesterday, we announced a special dividend of $4 per share payable on February 28, 2023. This special dividend is in addition to the company's regular quarterly cash dividend of $0.63 per share most recently paid on January 25, 2023. Even with the $4 per share special dividend declared yesterday, we expect our operations to generate significant excess capital in 2023 to the point where we could deploy in excess of $500 million of excess capital for share repurchases or additional special dividends through the end of 2023. As you may recall, the portion of our excess capital that we view is available for special dividends and share repurchases is limited by our internal total debt-to-cap target of 30%, and that capital number is impacted by unrealized gains and losses on fixed maturities. However, it's important to note that each dollar of debt repurchased frees up approximately $2 of excess capital for distribution to shareholders. For the 3 months ended December 31, 2022, AFG's growth in book value per share plus dividends was 8.7%. For the 12 months ended December 31, 2022, AFG's book value per share plus dividends increased by 4.8%, reflecting very strong earnings, partially offset by the increased unrealized losses on fixed maturities from the impact of rising interest rates and widened credit spreads. Excluding unrealized losses related to fixed maturities, we achieved growth in adjusted book value per share plus dividends of 6.3% during the fourth quarter and 18.5% for the full year. The short duration of our fixed maturity portfolio and somewhat limited exposure to publicly traded common stocks when compared to some peer companies helped their performance in 2022. I'll now turn the call back over to Carl to discuss the results of our P&C operations and our expectations for 2023. Thank you, Craig. Please turn to Slides 9 and 10 of the webcast, which include an overview of fourth quarter results. Our Specialty Property & Casualty businesses closed out 2022 on a strong note, producing record full year underwriting profit and record full year pretax Property & Casualty core operating earnings. I'm especially pleased that each of our Specialty Property & Casualty subsegments produced combined ratios of 90% or better for the fourth quarter despite elevated industry catastrophe losses. We set new records for premium production in 2022 and are meeting or exceeding targeted returns in nearly all of our businesses. When we look at year-over-year comparison of our Property & Casualty results for the fourth quarter, it's easy to lose sight of the strong fourth quarter results in 2022, especially noting the average crop results achieved in 2022 following the extremely results reported in our crop business in the comparable prior year period. As you'll see on Slide 9, the fourth quarter 2022 combined ratio was an excellent 86.6%, although 5.9 points higher than the exceptional 80.7% reported in the comparable prior year period. If we put our crop business to the side, our combined ratio for the fourth quarter was comparable to the 2021 fourth quarter results. Results for the 2022 fourth quarter include a modest 0.9 points in catastrophe losses despite elevated industry catastrophe losses during the quarter. By comparison, catastrophe losses in the 2021 fourth quarter added 1.8 points to the combined ratio. Fourth quarter 2022 results included 3.6 points of favorable prior year reserve development compared to 5 points in the fourth quarter of 2021. Gross and net written premiums increased 6% and 5%, respectively in the 2022 fourth quarter compared to the prior year quarter. Year-over-year growth was reported within each of the Specialty Property and Casualty groups during the fourth quarter as a result of a combination of new business opportunities, increased exposures and a good renewal rate environment. The drivers of growth vary considerably across our portfolio of specialty P&C businesses. In the aggregate, year-over-year growth in gross written premium for the full year in 2022, excluding crop insurance, is about half attributable to new business opportunities and change in exposures and half attributable to rate increases. Average renewal pricing across our Property and Casualty Group, excluding workers' comp was up approximately 6% for the quarter, and up approximately 5% overall, in line with the renewal rate increases reported in the prior quarter. The renewal rate environment has remained relatively consistent throughout the year, and has enabled us to meet or exceed targeted returns in nearly all of our specialty P&C businesses. We've been focused on achieving adequate pricing for some time and have achieved overall rate increases across our entire specialty book for 26 straight quarters. We feel very good about the level of rate increases that we continue to achieve and importantly, the impact of cumulative rate increases over time which have enabled us to stay ahead of prospective loss ratio trends and helped us to feel even more confident in the adequacy of our reserves. In January, we successfully renewed our 2023 property cat and property per risk treaties within a challenging reinsurance market. Our other divisional January 1 renewals have gone very well and were executed with terms similar to 2022. Talking about our property cat. Our property cat coverage has traditionally attached at levels that are relatively low compared to similar sized peers. Having long-standing trusted relationships with reinsurance partners who understand our underwriting discipline and risk appetite and an existing catastrophe bond attaching at $125 million provided a solid foundation as we entered renewal discussions. We placed $75 million of coverage in excess of a $50 million per event primary retention for the vast majority of our U.S.-based operations. This new structure provides for an increase in our per occurrence retention from $20 million to $50 million and collapses our treaty tower to 1 layer of $75 million excess of $50 million, which covers us up to the attachment point of our catastrophe bond. Our cat bond provides coverage of 94%, up to $325 million for catastrophe losses in excess of our $125 million property cat tower and expires in December 31, 2024. Our management teams always consider reinsurance costs and higher retentions and ensure that these factors are reflected in the pricing of our primary property coverages. The terms, pricing and retentions of our reinsurance arrangements, including the higher per occurrence retention in our property cat coverage, is factored into our 2023 guidance. Now I'd like to turn to Slide 10 to review a few highlights from each of our Specialty Property and Casualty business groups. Lower year-over-year underwriting profit in the Property and Transportation Group was primarily the result of average underwriting profitability in our crop insurance operations when compared to the exceptionally strong crop results reported last year. Excluding crop, the fourth quarter calendar year combined ratio in this group improved 2.8 points year-over-year, reflecting improved results in the majority of the businesses in this group. Catastrophe losses in this group, net of reinsurance and inclusive of reinstatement premiums were $7 million in the fourth quarter of 2022 compared to $15 million in the comparable last year period and were primarily attributable to Winter Storm Elliott. Fourth quarter 2022 gross and net premiums in this group were up 8% and 1%, respectively, when compared to the 2021 fourth quarter, primarily due to higher winter wheat commodity prices and new business opportunities attributed to crop products with higher sessions. Overall renewal rates in this group increased 7% on average for the fourth quarter of 2022, accelerating from the 5% rate increase reported in the third quarter. Pricing for the full year for this group was up 6% overall. Now in our specialty Casualty Group, higher year-over-year underwriting profits in our excess and surplus lines and excess liability businesses were more than offset by lower underwriting profitability in our workers' comp businesses. Though the underwriting profitability in our workers' comp businesses continued overall to be excellent. The businesses in the Specialty Casualty Group achieved an outstanding 81.3% calendar year combined ratio overall in the fourth quarter, 3.3 points higher than the exceptionally strong 78% achieved in the comparable prior year period. In fourth quarter 2022, gross and net written premiums both increased 4% when compared to the same prior year period, with the vast majority of businesses in this group reported growth during the quarter. Factors contributing to year-over-year premium growth included new accounts and strong account retention in our social services business, increased exposures from payroll growth and new business in our workers' comp businesses, and additional business opportunities in our E&S operations. The growth was partially offset by lower premiums in our mergers and acquisitions liability and executive liability businesses. Majority of the businesses in this group achieved strong renewal pricing during the fourth quarter. Renewal pricing for this group, excluding workers' comp, was up 6% in the fourth quarter and was up 4% overall with both measures down about 1% from the renewal pricing in the previous quarter. Average renewal rates in this group for the full year, excluding comp, were up 7% and up 5% overall. Now the finance -- Specialty Financial Group continued to achieve excellent underwriting margins and reported an 83.1% combined ratio for the fourth quarter of 2022, an improvement of 2.4 points over the prior year period. Higher year-over-year underwriting profit was primarily the result of the favorable impact on underwriting results from lower than previously estimated reinstatement premiums related to Hurricane Ian. Catastrophe losses for this group net of reinsurance and inclusive of the adjusted reinstatement premiums from Ian had a favorable impact of $3 million in the fourth quarter compared to losses of $6 million in the prior year quarter. Fourth quarter 2022 gross and net written premiums were up 12% and 15%, respectively, when compared to the prior year period due primarily to the growth in our financial institutions and commercial equipment leasing business. In addition, lower than previously estimated reinstatement premiums from Hurricane Ian contributed to higher year-over-year net written premiums. Renewal pricing in this group was up 4% for the fourth quarter, consistent with rate increases in the previous quarter. Renewal pricing in this group was up 5% for the full year of 2022. Now if you'd please turn to Slide 11, where you'll see a full page summary of our initial guidance for 2023. Overall, we continue to expect an ongoing favorable property and casualty market with opportunities for growth arising from both continued rate increases and exposure growth. We expect AFG's core net operating earnings in 2023 to be in the range of $11 to $12 per share, which produces a core return on equity of over 20% at the midpoint. Our guidance reflects an average crop year and the expectations and assumptions regarding investment income including an estimated return on alternative investments of 7% in 2023 compared to 13.2% achieved last year. Core net operating earnings at the midpoint of our 2023 guidance, excluding income from alternative investments would increase 10% year-over-year from 2022's results on a similar measure. As we consider the outlook for our Specialty Property and Casualty operations, we expect a 2023 combined ratio for the Specialty Property and Casualty Group overall between 86% and 88%. Net written premiums for 2023 are expected to be 3% to 5% higher than the $6.2 billion reported in 2022, and excluding crop, we expect growth in the range of 4% to 6% in what we expect to be a more challenging economic environment. Looking at each subsegment. We expect Property and Transportation Group combined ratio to be in the range of 89% to 93%. Again, our guidance assumes average crop earnings for the year. We estimate growth in net rent premiums for this group to be in the range of 1% to 3%. Our premium growth guidance factors in the impact of commodity futures pricing and volatility on crop premiums, which at current levels would negatively impact premiums and related exposure year-over-year in our crop business. Based on current commodities futures pricing, we expect net written premiums in our crop insurance business to be down 3% year-over-year. Excluding crop, growth in net written premiums in this group is expected to be in the range of 3% to 5%. Specialty Casualty Group is expected to produce a combined ratio in the range of 80% to 84%. Our guidance assumes continued calendar year profitability in our workers' comp businesses overall, and we're estimating growth in net rent premiums in a range of 4% to 8%. Premium growth will be tempered by rate decreases in our workers' comp book, which are the result of favorable loss experience in this line of business. So excluding workers' comp, we expect premiums in this group to grow in the range of 6% to 10%. Now we expect the Specialty Financial Group's combined ratio to be in the range of 83% to 87%, with all businesses in this group projected to produce strong underwriting margins, and we expect growth in net written premiums for this group to be in the range of 4% to 8% based on projected growth in nearly all of the businesses across this group. We expect renewal rates overall to increase between 2% and 4% in our Specialty Property and Casualty operations overall and excluding comp, we expect renewal rate increases to be in the range of 3% to 5%. Craig and I are very pleased to report these exceptionally strong results for the fourth quarter and full year, and we're proud of our proven track record of long-term value creation. Our insurance and investment professionals have executed well in a dynamic insurance industry and uncertain economic environment, but their work positions us very well as we begin 2023. I will now open the lines for the Q&A portion of today's call. And Craig and Brian and I would be happy to respond to your questions. Congratulations on the year. I was hoping you could just kind of reassess a little bit the competitive environment for the variety of your specialty businesses. It felt like it got a little bit more competitive in 2022. I don't know if that's a fair thing as the year went by, and it maybe seems like it's not really tailing off despite some of the volatility inflation and the higher reinsurance prices. Is that a fair assessment? Or am I obviously probably oversimplifying it? Well, we have 30 or so specialty businesses. And I'd say we felt that there was more competition in certain of our businesses for sure in California, workers' comp and higher excess layers on national excess liability types of risk on clearly in the public D&O arena. There seem to be -- particularly in those 2 -- last 2 areas I mentioned, there seem to be more competitors that were in that market and certainly was more competitive in that. I think in most of our other businesses, it's probably pretty status quo with maybe marginally more competitive in that. But I think the social inflation, the increased property cat pricing and a slowing economy and those factors, I think, have kept the majority of our business in a reasonably competitive environment. Makes sense. Maybe a few thoughts on sort of the talent pool as you're trying to grow it. It doesn't seem like you added a ton of new teams or new segments in a while, other than maybe a couple here and there. Is this just a sign of how competitive it is in the environment? Or is it philosophically you're trying to be more careful and more conservative in how you think about new products and new businesses? Well, last year, we grew 11%. So I think that coming -- certainly during COVID and coming out of COVID, the talent market was tighter in all businesses pretty much. Ours wasn't any exception. But I think our HR department and our group did an outstanding job in attracting the talent necessary to grow our business in that. So I didn't see that as too much of a limiting factor. I think what we have going for us is a -- we're a very successful company. We've created a culture and values and incentives that people really like to work with them in our industry, and we have a reputation for that. So I don't see talent as being a limiter on growth or a limiter in what we want to do. I think it's more -- I think we're always looking and have room to expand geographically in all of our businesses and in some sub-niches. It's always more difficult to find the right additional opportunities in businesses to grow your business or to find acquisitions that are not only accretive but, in our case, our hurdle is we want to earn double-digit returns on equity over time in the M&A side. It's a piece of cake being accretive with interest rates as low as they've been in that, but we're about adding businesses and investing capital at double-digit returns. First question on the outlook in terms of the decel in average renewal rates outlook, 2 to 4 year-over-year. I think hearing some of the color in the prepared remarks, some of it might be coming from workers' comp, but maybe you can kind of elaborate if there's any other lines of business you'd like to call out, maybe even moving some moving higher, some moving lower in terms of expectations? Yes, Mike, good question. I think certainly, in workers' comp, there continues to be some rate give up tied to positive results in that. I think it's kind of a good news, bad news. The prior year excellent year for the industry and for us have turned out better generally over the last couple of years than what was expected. So I do think that is a factor. That said, I think in some of our comp businesses, we're going to be growing in that. And our comp businesses continue to have excellent results. Our pricing guidance ex comp is 3% to 5%. And when you look at kind of the prospective loss ratio trends excluding comp, they're right around 5%. So I think the -- where we're not quite getting to where we want to be on our rate increases or in some of the lines I just mentioned. Public D&O is more competitive than what it should be. The higher excess liability business, particularly among Fortune 1000. I think as a business, we're not going to get to the -- to a prospective loss ratio trend. So I do think -- I want to be careful because I do think that in our case, we've had really strong cumulative multiyear increases in our book, and we're running in an 87% percent combined ratio this year. And some of our businesses are higher than that. Some of our businesses are better than that. And in our case, we look at each one of the businesses and what the strategy should be in each one. So anyhow, that would be my perspective on things. Okay. That's helpful. I admit I'll have to reread the transcript a bit on the good reinsurance renewal color. But I think I heard that retention went up materially. And if that is correct, should we be just thinking about anything in our models in terms of seasonality now or cat load or something? I think what we've tried hard to do every year when we give guidance is to bake everything into our guidance. And I think we've tried to reflect that. I think one thing, in our case, I think retention went from 20 to 50, we probably should have been at 50 anyhow because when you look at the rate online, we had to pay and the amount of premiums that we had to pay for that lower layer, you could argue that we probably should have kept it anyhow. And that -- so you have -- it's not $30 million of extra exposure, it's really $30 million -- I would guess, we probably paid $15 million or something like that. Okay. Yes, now that helps put it in context. Okay. And maybe I appreciate that there's lots of different lines of business, but there's been a lot of discussion on some of your competitors' calls about loss trend maybe creeping up a bit for some, particularly not just on the property side, but a bit on the casualty side. Some have talked about the transportation segment that you guys have one of the most profitable transportation segments of publicly traded insurers. But any changes that you'd like to call out you're seeing on the margins on loss trends? I don't think so. I think in past calls, I've kind of mentioned when we look at prospective loss ratio trends and the numbers that we're using for those, they -- I think we've been pretty conservative or tried to stay with what the trends are for instance. And I think I've talked about commercial auto liability not being where we want it to be, probably at around breakeven underwriting profit. We took about 9% rate and our prospective loss ratio trend for that we're using about 7%. We think that's pretty good. And I think I mentioned in the past on some of the excess liability, that part of our business, how we're using, depending on what the business is tend to almost 14% in prospective loss ratio trend as we set our pricing, as we look at our reserving and that. So I don't think that's really changed. I think we've kind of been in that mode for pretty much for the year. Okay. And just lastly, just switching gears on the investment portfolio and maybe this was already answered. But in terms of the alternative guide of 7%, does that imply a weaker 1Q '23? Or is just -- it's been a great run and trying to bake in some -- maybe some more lower returns given the macro environment, although interest rates are up. So just trying to -- how to think about that. Yes. This is Craig. I'll tell you how we arrived at the 7% number. As you know, about 60% of the alternatives are invested in multifamily. We've had just an incredible run in multifamily returns the last couple of years, as I recall, were something in the neighborhood of 20%. We were able to push the renewal rates at extraordinary levels. And we also had some sales of properties. So I'd say our view is that we're back to a more normal environment now. We still really like the asset class. We still like our positioning there. But we're back to a more normal environment instead of getting the double-digit type increases in rental rates. We're now -- I mean we would guess that this year, it will be somewhere between 3% and 5% increases in the rental rates. So that will drive the NOI. We think that the marks on the portfolio are reasonably conservative. The average cap rate at the year-end market value was right around 5%. And the strong growth markets that we're in, we're not seeing transactions above 5%. So we like our positioning there. We don't see the really large increases in mark-to-market, and we don't see ourselves selling properties like we have the last couple of years. So anyway, looking for a high single-digit return on the multifamily piece, the real estate piece which is about 60% of the portfolio. The balance of the alternatives, the 40% that is in more traditional private equity is the piece that's much tougher for us to value. Last year, we substantially outperformed the market. I think the S&P was down some 18% and our private equity was up, I believe, around 6% or so. As you know, private equity marks typically are done on a lag basis. So we're just being a little more cautious on our outlook for the -- that traditional private equity piece. It's -- that's the piece though that's much harder for us to value. I hope it comes in -- given the strength of the market early in the year, I hope that the returns on that piece are stronger than what we're assuming. But that's how we arrived at the 7% number on the $2.1 billion of alternatives. A quick question, I guess, to start with. I think it's more of a modeling question than a reality question. But the other specialty segment had some adverse reserve development in every quarter in 2022. And I was hoping you could talk about what's going through that. Sure. Sure. This is Brian. So the other specialty is primarily our internal reinsurance facility. So that's where we take on more of our business corporately than we do in the individual business units. So what we're seeing there is adverse development in some of the social inflation exposed lines, the excess liability type of lines where we have participated in the reinsurance above the business unit. So social inflation is driving the number there. We obviously are -- as you know, we're conservative in our reserving. So we are -- we feel like we're in a good place now, but that's what's driving the $13 million in the quarter and the $40 million for the year as an adverse development coming out of the social inflation exposed businesses that would be part of our Specialty Casualty segment going into that reinsurance facility. Okay. That's helpful. And then one other question. Can you give us a sense as to the macroeconomic growth that underpins your net written premium growth expectations for 2023? I'm not sure we really -- really have kind of underpinned based off of a given GDP number versus more of -- each of our businesses are so different than the other with kind of their own mini economic environments in that, whether it's equine mortality or workers' comp in that. But clearly, we've couched our premium guidance in an economy that has slowed down and slowing down in some cases. And whether it's impact on payroll or sales or things that premiums are based off in different businesses. That definitely has an impact in that. Okay. Understood. Like the third question is if that the delta between pricing and premium growth is 1%, which seems fairly conservative. As I mentioned before, we try to -- the crop business is going to -- it's a fairly -- we're projecting that to be down 3%. We won't know for sure until the average of soybean and corn's future prices for the month of February. So we'll know more at the end of February exactly what that is. I think that has an impact. And then I mentioned earlier on the call, some of the competition that doesn't make any sense in things like public D&O and in high excess liability, where I think new entrants have jumped in trying to establish a position. That will come back to haunt us at some point, particularly -- those are 2 businesses that have social inflation exposure in that. So I have no doubt about that. Thank you. I'm showing no further questions at this time. I will just turn the call back over to Diane Weidner for any closing remarks. Thank you all for joining us this morning. This concludes our prepared remarks and Q&A session, and we look forward to talking with you all again next quarter. Thank you. Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.
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Greetings. Welcome to Graham Corporation's Third Quarter Fiscal Year 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. Thank you, Sherry, and good morning everyone. We certainly appreciate your time today and your interest in Graham Corporation. Here with me on the call are Dan Thoren, our President and CEO; and Chris Thome, our Chief Financial Officer. You should have a copy of the third quarter fiscal year 2023 financial results, which we released this morning and if not you can access the release as well as the slides that will accompany our conversation today on our website at ir.grahamcorp.com. Dan and Chris will provide their formal remarks, after which we will open the line for questions. If you would turn to Slide 2 in the deck, I'll review the safe harbor statement. You should be aware that we may make some forward-looking statements during the formal discussions, as well as during the Q&A session. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release, as well as with other documents filed by the company with the Securities and Exchange Commission. You can find those documents on our website or at sec.gov. During today's call, we will also discuss some non-GAAP financial measure disclosures. We believe these will be useful in evaluating our performance. However, you should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliation of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and the slides. So with that, if you would please advance to Slide 3, I'll turn the call over to Dan to begin. Dan? Thank you, Debbie, and good morning, everyone. Before I get started, I'd like to congratulate the Barber-Nichols team for making Glassdoor's Best Small & Medium Places to Work list for 2023. They notably ranked tenth out of the Top 50 companies named. Our team and the culture at Barber-Nichols have created a cohesive and innovative environment that people enjoy, which is validated by rankings such as this. Throughout Graham Corporation, as we advance our strategy, I believe it's important for our businesses that we keep our workforce highly engaged, that we provide a work environment in which all feel welcome and we strive to create opportunities for each to achieve the best of their abilities. I believe we accomplished this by providing our teams with the resources, inclusive culture, and professional development they need to be their best at addressing our customers' requirements. Now, on to our results for the quarter. Our third quarter results reflect improved execution and demonstrate continued steady progress as we increase our sales and improve our profitability. Chris will walk you through much of the details, but let me touch on some important highlights. We delivered $40 million in revenue achieved $0.03 per diluted share in earnings and $0.08 in adjusted earnings per share, and we ended the quarter with $294 million in backlog. Driving this was strong gross profit, improved gross margins, and continued cost discipline. In fact, we generated $2.2 million in adjusted EBITDA this quarter. Our solid results enabled us to raise our fiscal 2023 revenue guidance to be in the range of $145 million to $155 million and tighten our adjusted EBITDA range to be between $7.5 million and $8.5 million for the year. We believe the quarter is a proof point along our path to reach our strategic long-term goals of $200 million in revenue and 10% to 15% adjusted EBITDA margin by fiscal 2027. Our successes with the U.S. Navy have resulted in a very robust backlog of defense business and we are continuing to strengthen our position in commercial aftermarket, while increasing our presence in the growing space industry. In fact, I will dive a little deeper into the backlog and long-term visibility and growth potential of Navy projects later this call. While orders in the quarter of $20 million were soft, we believe it was primarily due to timing and a reflection of the general ebb and flow of large projects being released. Our trailing 12-month orders of approximately $176 million and the 114% book-to-bill ratio are a better representation of our growth in future potential. This is especially true given the large value of repeat orders we have received for critical U.S. Navy projects, which we believe validates our position as a key supplier for the defense industry. I should note that January order rates have started out strong, which is very encouraging. I'll now turn the call over to Chris who will provide more details on the quarter and expectations for the remainder of the year. Chris? Thank you, Dan, and good morning, everyone. I will begin my presentation on Slide 4. As Dan mentioned, our third quarter performance was in-line with our expectations. We had record quarterly sales of 39.9 million, up 39% or 11.1 million over last year's third quarter, and was driven by our defense, refining, aftermarket, and space markets. I would like to point out that this growth was all organic as both periods include a full quarter from Barber-Nichols. Sales to the defense market were up 5 million and represented 54% of total revenue. The increase over the prior year period reflects the achievement of project milestones, as well as improved execution. You may recall that last year's third quarter included the impact of U.S. Navy first article project, labor and cost overruns, which impacted revenue, as well as margin. As noted in our release today, we delivered an additional first article unit for critical U.S. Navy program during the quarter, bringing the total of first article units shipped to four this year. We are on schedule to ship the remaining first article units by the end of the second quarter in fiscal 2024. Base revenue increased 2 million versus the prior year and is being driven by newly awarded programs, which continue to ramp up and the relationships we have with many of the key commercial players in this growing industry. Additionally, during the quarter, we continued to see strong growth in the refining aftermarket, which was up 2.5 million or 64%. We are encouraged by this aftermarket demand as it oftentimes is a leading indicator of future capital investments by our customers. Additionally, we are proactively working to drive aftermarket demand, which is a key strategic initiative for us. For the quarter, sales in the U.S. increased 34% and represented 83% of our sales, while international sales accounted for 17% of total sales and is 66% higher than one year ago. The mix of U.S. to international sales has shifted over the last couple of years given the growth in our Navy business, as well as the addition of Barber-Nichols, which sells primarily into the U.S. Gross profit and margin improved significantly over the prior year period, which was impacted by the labor and material cost overruns I just mentioned. Sequentially, gross profit improved 18% on a 5% increase in revenue, due to continued improvement in execution better pricing, as well as a better mix and increased volume. SG&A expense for the third quarter, excluding intangible amortization was 5.3 million, up 12% or approximately 555,000. However, SG&A expense as a percentage of sales improved to 13.3%, compared with 16.4% in the comparable period in fiscal 2022. As we continue to maintain strong cost discipline while growing our top line. The net result of our growth in revenue and gross profit combined with strong cost discipline is shown on Slide 5. For the third quarter of fiscal 2023, net income was 368,000 or $0.03 per diluted share. On an adjusted basis, earnings per share was $0.08 per diluted share and adjusted EBITDA was 2.2 million. This was the third consecutive quarter of solid results as we have stabilized our business and improved execution. We continue to drive increased productivity through improved project management and accountability. Turning to Slide 6, you can see our capitalization. Total debt at quarter-end was 14.2 million, compared with 19.1 million at the end of the second quarter. We paid down 5 million of debt during the quarter, which was funded by 9.3 million of cash flow from operations. I should point out that current quarter cash flow reflects 8 million of customer deposits received for materials related to larger defense contracts. Going forward, we expect our cash flow to be lumpy, due to the nature of these large contracts. Also noteworthy is that these debt payments and stronger EBITDA levels brought our bank leverage ratio down to 2.5x at December 31, and we are now back in compliance with the original terms of our credit agreement. This is one quarter ahead of schedule and is a direct result of the hard work of the Graham associates who continue to execute our strategic plan. Capital expenditures for the quarter were 1.2 million, which brings the nine month total to 2.4 million. We continue to expect capital expenditures to be approximately 3 million to 4 million for fiscal 2023, which implies about 1 million in CapEx for the fourth quarter at the mid-point of the range. Going forward, we expect capital expenditures to be at an elevated level as we invest in our growth initiatives. We are focused on generating cash to reduce debt and are making investments in organic growth opportunities. We have instituted strong cash management throughout the organization, which includes actively managing working capital and operating expenses, while increasing oversight of capital expenditures to ensure a proper return on capital. Turning to Slide 7. For the quarter, orders were soft, primarily due to the project timing. Despite that, our pipeline of opportunities remains robust. For the nine-month period, orders were 151.9 million, up 26% over the prior year. And our book-to-bill ratio was 133%. This includes a 47% increase in defense orders, a 141% increase in space orders, and a 33% increase in energy and chemical aftermarket orders. We believe that the repeat orders for critical U.S. Navy programs validates the investments we made over the last year, and our customers' confidence in our execution. We also expect these repeat orders will be at higher margins through increased pricing and better execution. If you turn to Slide 8, you can see that orders drove an 8% increase in backlog from the third quarter last year and now sits at 294 million. We believe 40% to 50% of this backlog will convert within the next 12 months and 20% to 30% is expected to convert the following 12 months. Most of the backlog expected to convert beyond 12 months is for the defense industry, primarily to the U.S. Navy. Defense now comprises 80% of our backlog and is significant and that it provides greater visibility and stability to our business. I'll now turn the call back to Dan to speak to our longer-term strategy and in particular the opportunity with defense, as well as our outlook for the remainder of the year. Dan? Thanks, Chris. Let's turn to Slide 9. As you saw on the last slide, we have measurably increased our presence in the defense industry. The recent wins have grown our defense backlog to 234 million, which is 80% of total backlog. And I'll remind you that more than half of our revenue in the quarter was from the defense industry. These long-term U.S. Navy contracts provide us longer-term visibility with revenue over several years and the repeat build process drives a solid recurring increasingly profitable revenue stream. Navy ship procurement spans over decades and our contracts are often 3 years to 5 years in duration. It's worth reminding you that we are often the sole qualified supplier on orders with high barriers to entry for the competition to overcome. Executing well, delivering to plan, and high quality helps ensure future orders. Once we win these opportunities, we work to expand our margin through improved efficiencies and supply chain management and improved pricing as we win future orders. Beyond the equipment we are currently supplying to the Navy, we see other potential revenue streams. There are for example opportunities for repair and maintenance revenue. And as we look further into the future, the next generation attack submarine design has begun and Graham has a role in that development program. Now, let's turn to Slide 10. This is a bit of an eye chart, but it will help you understand the growth potential we have as it relates to planned projects. I'll walk you through this. With the CVN Ford Class Carrier, there are two completed carriers and two currently under construction. There are eight remaining builds planned with a timeline of one every four years. Our revenue per ship is approximately $40 million to $50 million. We estimate that over the remaining life of the program, including what we have in process, we have about 400 million in revenue potential. With the SSN Virginia Class Subs, there are 22 subs completed and eight are under construction. Over the next 25 plus years, there are 36 remaining builds planned at about two subs per year. We estimate our future revenue potential for this ship class is about $300 million. I should point out that we are typically building ahead of actual submarine funding with advanced funding as new design blocks are initiated. Finally, for the SSBN Columbia Class Subs, there is one under construction and 11 planned builds remaining. The Navy is currently planning build one Columbia Class per year through 2035. Our per sub revenue is approximately $40 million with total future revenue potential of $400 million. Based on these projects and then rounding up for torpedo power & propulsion hardware that we provide, we estimate approximately $1 billion to $1.3 billion in total potential revenue over the next 30 years from [lease planned] [ph] projects with the Navy. The torpedo's content and value is confidential as you might imagine and of course a number of torpedoes is subject to arsenal inventory plans. There's a lot of excitement here at Graham Corporation regarding our many Navy projects and it does give us confidence regarding our strategic plan and goals. If you turn to the next slide, you can see our updated full-year guidance. Overall, we did take our fiscal 2023 guidance up including bumping the revenue range up to 145 million to 155 million, sticking with a gross margin of about 16%, SG&A about 15% of sales, and adjusted EBITDA ranging between 7.5 million and 8.5 million. This implies an adjusted EBITDA margin of approximately 5% at the midpoint of the range, well short of our aspirational goals, but significantly above last year. We are making steady progress against our plan and expect that we will continue to do so over the next several years. Importantly, as Chris noted, we are strengthening our balance sheet, improving financial flexibility, and generating cash. This will help enable us to execute on our growth plans both organically, as well as with acquisitions. Yes. So, yes, it's clear that orders are lumpy here and I want to talk about that for a minute. And if I look back over the last couple of years, fiscal 2020 was a desert and the orders have been, sort of ramping up 2021 and 2022. And if I do a trailing 12-month or a last four quarter, average, the curve keeps sloping upward. How much further upward is this going to slope up in your opinion? Well, certainly one big thing that happened in that time frame was the acquisition of Barber-Nichols. And so that certainly helped make the thing trend up. We again, kind of long-term guidance that we had put out there, I mean by fiscal 2027, we want to be at the $200 million range. So, is it a smooth path there, is it a lumpy path there? Hard to tell at this point. But growth is something that we're working pretty hard on getting into strategic programs like we've been getting into. Being much more aggressive on the commercial side of the business in the energy and petrochem side, as far as going after a lot of that aftermarket business all fits into this longer-term growth. So, I would say that it is expected to continue to grow and kind of towards that 200 million in 2027. Okay. And in the refinery market, what are the dynamics there that are giving you confidence about the future business for you? That market is kind of crazy. So, there's â certainly we've seen an uptick in aftermarket orders and those have remained strong here over the last year. In the past, those have been a precursor to more of the capital, the larger capital type equipment orders. We havenât seen those pick up quite yet, but it's interesting to watch the market and a lot of the press regarding that in all of the big profits that the oil companies are making. Refineries are running full-out. They're just unbelievably hard pressed right now and the U.S. really hasn't expanded our refining capacity for a while. So, at some point, we do expect that we'll see some of the capital markets start to â or the capital equipment orders start to turn on, but we just haven't quite seen that yet. Hi. Good morning, everyone. Just to follow-up on Ted's question around the aftermarket and the refining area. Can you give us â you mentioned that you're really putting a proactive effort to drive aftermarket sales. Can you talk a little bit about what gives you that confidence around those and what type of efforts you'd be employing there? Yes, it's â so Graham Corporation had a very significant database of installations and they talked about like $1 billion of installed base that they've had over the many, many years that they've been working in these markets. And as we look at that installed base, we realize that we're not as proactive in going back and following up with those prior customers to understand how the equipment is continuing to operate. Some of that equipment has met its lifetime. And it's time to replace it and we just not â have not been as aggressive with that as we could have been. So, building up our aftermarket team using the database of the [installed] [ph] base to really understand how old is that equipment, what would we recommend to the operators, as far as maintenance and replacement. And we've got a lot of industry experience knowing how long those things last. So, helping our customers, kind of get ready for that. So, it's not an emergency in the end, it's really the [tact] [ph] that we're taking. All right, great. Yeah. And then that makes sense. I mean, obviously, the existing fleet of refiners in the U.S. is just going to be run harder and harder because permitting to get anything new is going to become more challenging, it looks like. So, one other question. Last call you talked a little bit about you're seeing some good activity around the nuclear power space around small modular reactors. Given some of the events that were, sort of positive announcements that have been coming out there in terms of players coming into that space, are you still seeing strength there? And if so, how soon do you think you could see orders from that area? Yes. So that is very much an industry in the middle of research, development, and technology demonstration. And the activity that we've seeing there really has been to support those technology demonstrations. Some of them are subscale some of them â well, a lot of them are subscale actually. Some of them are working on just particular areas that they're trying to show technology works well. We don't expect really any production orders to come forward, gosh, probably another five years, but this is the perfect place for engineered product companies to get involved in new technology and that is, just getting involved with the big players to help them demonstrate that technology start to develop the new product and then be in the position to really help them roll this out as it starts to roll-out. So, we continue to stay involved. Are we involved with all the right players? Hard to say? But we think that we're well positioned for any small modular nuclear types of applications going forward. For 50 years, Graham has been known as a low multiple metal tank and piping fabric cater for their industrial products, but since June of 2021, when you acquired Barber-Nichols, you've almost overnight transform the company into a highly technical, critical component manufacturer for defense industry, and the fast growing space industry. And I don't believe that the markets become aware of Graham's transformation. Certainly, I think your company should pick up a higher multiple that reflects that change. On the bottom of Slide 10, under the Graham Engineered & Manufactured Content, you show a number of products such manufacturer, but investors really don't understand how critical these components are, especially for nuclear propulsion and subs and carriers. But also, here's one example that confused me. You show ejectors on Slide 10 are one of the components listed. I've been following Graham a lot of the years and I understood that Graham made ejectors and the ejectors were sophisticated engineered venturi pipes. They had no moving parts, but they manage the air pressure in the distillation process for refineries. And the description on your website under submarine ejection system says Barber-Nichols makes ejection assemblies that form part of the pressure boundary of naval submarines, but it really doesn't explain what these things are. And now I understand what these are. Could you like for the benefit of new investors, maybe and existing investors who knew the old Graham, can you explain what these submarine ATP ejectors are? And how complicated they are to develop? And what their function was on Virginia-class submarines? Sure. Let me just probably explain both of them. So, Graham Manufacturing in Batavia that has been involved in refinery and petrochem plants, mixed vacuum equipment that is based on a convergent, diverging nozzle. It's essentially an ejector that produces vacuum. And that is not to be confused with torpedo ejection systems that are on submarines because torpedo ejection submarines on submarines are used to basically just eject the torpedo out of the submarine and you do that with your â you're pumping water into the torpedo tube and pushing the torpedo out of the submarine. So, while they have the same descriptor, they're greatly different applications, and equipment. The torpedo ejection system on a submarine is really a very sophisticated pump that's pumping water. And then the ejector used in power systems and refinery applications and petrochem applications is more of a static piece of equipment that's based on a convergent divergent nozzle to generate vacuum. Yes, okay. And when I dug into it, it says it's a 10-stage system and it has to be super silent to the subs. Yes. It's kind of interesting in the old movies you would see the captain of the torpedo saying, launch the torpedo and you hear this big whoosh because they used to launch them with air pressure and the air really gave the submarine position away. Because it was so noisy. Now, they launch them with water and so they're much quieter. Okay. Also on Slide 10, you didn't mention, but you had in the past about regulators and alternators. And didn't you just win your third five-year contract to manufacture alternators and regulators for the MK 48 torpedo? Correct. Yes. So that is lumped into that torpedo power & propulsion hardware. And Barber-Nichols is involved in several different programs, some that are brand new, some that are more in the technology demonstration realm, some that are in production. And so, we tended to more genericize that and just describe that as torpedo power & propulsion hardware. And it's not just for the Virginia class, but for four sub classes, for Los Angeles, Ohio, Virginia, and Columbia subs covers a lot of torpedoes. Yes, for the components that we're supplying, obviously we're supplying those to a larger defense integrator prime that is providing the complete torpedo to the Navy. And the Navy needs a lot more of those and that's why you're getting the CNC milling and threading machine so that you can accelerate your production. Is the Graham Corporation now, pretty much have all the key personnel positions filled, Dan and Chris that need to be filled to execute your game plan going forward here? I would say the key ones, yes, Bill, there's certainly still some very important holes to fill as we go forward, but the key ones are pretty much filled at this point and we're able to execute much better than we had in the past. So, yes, I would say so. The only thing I would add to that is just like every other company, labor does continue to be a challenge, we are making substantial progress in that area and have seen quite a bit of increase in direct labor over the last year. So, just like everyone else, the market for engineers and welders and skilled labor continues to be challenging, but we're navigating our way through that fairly well. As far as, I guess important positions, how are you staffed up regarding your technical engineers to focus on your petrochemical and refinery aftermarket business as you go after greater penetration of the installed base on the repair and maintenance side of the business? Are you staffed up there the way you want to be to pursue that business as aggressively as you'd like to? No. We still have open positions in Batavia for engineering. We believe that we need more to be able to handle additional volume that may be coming in the future. As Chris had mentioned, people are still tough to come by. Unemployment is still relatively low. And so, just individual positions within our companies are a little bit tough to fill, you know still even after we've come out of COVID and that will work. So⦠How about the personnel in your regional offices down the [indiscernible] calling maybe more directly on the customer? How are you staffed out there right now? Staffed pretty well â we still have one more opening that we're trying to fill within the Houston office, but doing fairly well there. Okay. And I know it's probably a little early to talk about your strategic focus on fiscal 2024, but at this stage, are you in a position to, kind of outline from a high level what your, let's say, key focus or key performance focus will be for the company in 2024? Iâm not [talking] so much financially as I am, I guess, just strategically as far as⦠Key initiatives, I guess, is what I'm talking about, key initiatives? Yes. So, certainly from a strategic plan perspective, you don't want it to completely changed direction from year-to-year. So, I would suspect that it will be a very, very well aligned with the strategic plan we laid out, yes, last year. We're tweaking it at this point. We're modeling the budgets, looking at our markets, understanding where the revenue is coming from, etcetera. But we haven't completed that process and gotten approval from our Board yet for that. So, we're still in the process, but I would suspect that it will be very much along the lines of, we have â we have stabilized Graham Batavia pretty well. You'll continue to see improvement initiatives there to get better and better. And then on the Barber-Nichols side, we talked about, kind of the four major areas of work that Barber-Nichols is pursuing and that hasn't changed. So, at a high level, it will be tweaks on last year's strategic plan to take what we learned this year and improve ourselves even more. Just two more quick items if I could, Dan and Chris. On the Batavia manufacturing, are you still using some outside contract labor to get your work done or are you pretty much converted that now to your internal production staff? Sure. Yes. So, the contract welders that we held to get back on schedule, those have â all those contractors have left and have been dismissed. We do from time-to-time to fill in where â for the gaps in production, we do subcontract out some of our commercial work. So, we do still have that going on, but the contract welders that we had on-site have gone home. Okay. And secondly, I just wonder if you could do a little bit more of a deep dive into the nature of your space business, as far as maybe not so much to customers who I assume are probably confidential, but the types of products that are being included in the space business. What's the nature of the products there? The key product? Yes. Kind of think about it mostly as fluid movement. So, we get involved in launch vehicles where we're basically pumping fluid out of the tanks and into the combustion chamber. And so those are rocket engine turbo pumps is what we talk about. And then we also have thermal management systems on communication satellites. So, it's pumping fluid around within the satellite to cool the electronics and communication equipment, so thermal management systems. And then we've also got a contract through NASA that is public that where we're developing both blowers and pumps for the NASA's future backpack. So, when the astronauts go on space walks, Barber-Nichols will have some of the environmental control types of equipment in those backpacks. And do you look for the trajectory of the space business to be fairly, I guess non-lumpy, I'll say? I mean, or is it going to be, kind of a, you know probably up and down, but the long-term trend will be up? Is it going to have a lot of volatility there or is it going to be fairly predictable? I don't think it'll be predictable, Bill. But it's so small right now that we do expect that it will continue to grow. It might be a little bit lumpy depending upon what applications we get on. We are searching for those applications that have repeats potential associated with them. So, launch vehicles is one of those, satellites is another one of those. And then the backpacks, not sure how many they're going to be making, but there's multiples of those also. So, we tend to kind of focus on the ones that have some repeat potential associated with them because that forms more of a steady base of business than the one-offs. While the one-offs are a lot of fun from an engineering perspective, they aren't as good from a business stability. I echo the previous callers about the great job that's going on and the turnaround well underway. It looks like, so congrats on that. You touched on a space quite a bit, which is â what was one of my questions, so I can skip on. I was just wondering, is your [welding schools operating] [ph]? Are you still involved with that? Yes. We still [indiscernible] for the students that attend. And then in exchange for that, they come to work for us for two years. We just had a class that graduated at the end of the year and we're recruiting for our class, which is going to start here in February and we have some good response there and we continue to â it's been a nice program for us. As I mentioned, we have a â we're at the highest level in Batavia direct labor than we've been for the last year and a half. So, we're pleased in the way that's going. We continually need to bring in talent as we talked about earlier on the call with welders and engineers and looking for ways to keep doing that. And as you heard Dan mention, Barber-Nichols being ranked in the top 10 on Glassdoor for small and medium sized business companies to work for just show some of the work that they're doing, to recruit talent. So, just like everyone else, talent is a resource that we continue to go after. Sure. So, that's probably something that's more of a fixture longer-term, not something that you would conceivably stop pursuing the school, the welding school that is. Something that could be on for a long time? Sure, great. And you mentioned to in the call about needing some engineers in the Batavia office. And I was just wondering do you have many in your [Gulf Coast Houston] [ph] area? And the thought being there's such a vast amount of petrochemical and refining activities there that perhaps the pool of recruits would be better, and I'm sure you've thought about this, but just wondering how you look at that or is the Batavia positions more specific to the needs up there? Yes. So, I would say that the approach that we've taken thus far for the Gulf Coast area is really on the sales and service engineering side and we haven't put design engineers down there yet. But boy, everything is open at this point. We think that we have better control over our designs, have the subject matter experts in Batavia, but we are looking at alternative ways to be able to outsource more of the mundane engineering tasks that aren't being done in Batavia now that potentially we could be having done elsewhere and then have our subject matter experts really be able to work on the high value engineering contributions. And so John, I would probably, just to answer your question more along the lines of yes, all things are open and we're considering several at this point. Just think that perhaps a pool might be a little bit bigger down there and folks that might be more inclined to join Graham or Barber-Nichols without having to move. So, just â I don't [indiscernible] Just a relative thought there. And then lastly, in the past, you talked a little bit about some exposure to biodiesel and the green revolution, if you will. And really not much color on that, can you talk a little bit about that? Are you seeing much continued activity or interest in that area that you can be involved in? Yes, absolutely. Graham has provided quite a few different types of heat exchangers to biodiesel applications. And continues to have more inquiries in those areas. So, absolutely, yes. And we're pursuing that fairly heavily. On the hydrogen side, we're also seeing quite a bit of activity. And so, for both companies actually, and so, this is again one of those, kind of early types of industries that people are trying to figure out what the best solution is demonstrating the technology and then starting to build the initial plants to produce this and distribute the hydrogen etcetera. And we're talking to many in that space. So, we're pretty excited about that. And I think that you'll see more and more press releases coming out in the future about that because there is a ton of money being spent in those areas. So, we would expect that we'll win some of those going forward. Not really at this point. John. We just have not seen a lot there yet. And so, that's one area that I would say that we haven't seen a lot of exposure to. We have reached the end of our question-and-answer session. I would like to turn the conference back over to Dan for closing comments. Thank you, Sherry. And thank you, everyone, for joining us here today. We are excited about Graham Corporation's future and I hope that you share in that excitement. We are building better companies, creating opportunities, and steadily delivering on our plan. I look forward to talking with you again in the near future. Have a nice day. Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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EarningCall_602
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Good morning, and welcome to the fourth quarter results. Let me start off with the value creation strategy we presented at our Capital Markets Day back in September and the direction we have for each of our four business areas. Firstly, to be a leading Nordic telco with profitable growth. This means growing both core connectivity and new services with a sharp focus on margin expansion through modernization. Secondly, to develop a strong and more independent Asia, focused on realizing synergies, driving operational efficiency and delivering cash flow. Thirdly, to crystallize values in a leading Nordic infrastructure company, to mean further operational improvements and transactions to visualize and monetize the values in these operations. And finally, to continue developing the Telenor Amp portfolio, our adjacent businesses, through organic growth, partnership and transactions. On the ESG side, just this week, we had an opportunity to host and share our experiences from setting and implementing science-based targets with other Norwegian companies. We are happy to work together with the industry as well as with our stakeholders in establishing ways to address Scope 1, 2 and 3 emissions. Throughout Q4, we also continued to focus on energy efficiency. A PPA sourcing process was initiated in Finland and is expected to conclude during this year. This adds to the PPAs already secured in Denmark and in Norway. Then to the quarter. The fourth quarter results shows that we are well underway on executing on the strategic agenda I just went through. I'm very pleased to see the growth in the Nordics is continuing with a mobile revenue -- service revenue growth of 5% in this quarter. And as you may remember, we had a 4% mobile growth in the Nordics in the last quarter. Profitable growth will also require continued modernization and efficiency improvements. We have now reached an important milestone as we have shut down the last copper-based subscriber in Norway. This makes us the first legacy-free incumbent in the whole of Europe, ready to move forward with our modernization program. Then, as you know, also completed two large M&A transactions to visualize true value of our assets. The closing of CelcomDigi merger in Malaysia marked a successful outcome of a process that started almost two years ago. And yesterday, we also completed the sale of 30% of our Norwegian fibre assets in a transaction that will benefit the future fibre rollout in Norway. Combined with healthy earnings in 2022, the CelcomDigi transaction contributed to a record high net income of NOK 45 billion. Overall, I'm satisfied with this quarter. The investments we have done and the modernization programs we have been running now for several years, are starting to really yield results. Despite a high investment level last year, we were generating NOK 11 billion in free cash flow. And in a year of volatility, the good underlying EBITDA performance is driven by efficiency program and strong operational performance. Let me then move to Malaysia. Almost two years have passed since we announced that we are in discussions about the merger of Digi and Celcom in Malaysia. This merger processes takes time, but we have used the time well for our integration planning. Now all the pieces are finally moved into place such that we can close the transaction, and we did that on the 30th of November last year. This large transaction positioned the new company, CelcomDigi, as the leading telecom operator in Malaysia and as the largest tech company at the stock exchange in Malaysia. This should position us well as a market leader to take part of the future growth in the Malaysian market. With the current market capitalization of around NOK 115 billion, Telenor's 1/3 of the company is valued to around NOK 38 billion. And as a result of the transaction, our assets were reevaluated, generating a gain of NOK 33 billion. In the merger process, we and our merger partners identified synergies of around NOK 18 billion on a 100% basis and the company has now taken on the work to realize these synergies. We expect this to create significant value in the years to come, and for the shareholders of Telenor, this transaction should be dividend accretive from 2024 and onwards. Moving to Thailand. After finalizing the merger in Malaysia, there is more to come, as we have talked about before, as we now are closing in on completion of the merger also in Thailand. A major step forward was made by the Board of Directors in both True and dtac by calling for a joint shareholder meeting on the 22nd of February to conclude on the final matters. And as earlier communicated, we expect closing before the end of this quarter. In many respects, this transaction is 2x to 3x larger than the Malaysian merger. And it is, in fact, the largest ever telecom M&A transaction in Southeast Asia. As in Malaysia, we therefore expect significant synergies coming out of combining these two assets into the new company. We are, as we also are doing in Malaysia, here also creating a clear number one player in the market with 55 million customers, with the scale and capabilities to be at the forefront of the digital shift we see for consumers and businesses. For dtac, this means a transition from a mobile-only operator into a full-fledged service provider. The new company will have a leading market position on both mobile, on fixed broadband, on TV and on digital services. This is, as we call it, as -- a merger with a spirit of equals with an aim for both of the principal shareholders to retain around 30% ownership in the combined company. And on this background, Telenor and the CP Group will have a balanced representation on the Board and also a balanced representation in the top management team, including strong candidates from both dtac and from the Telenor Group. Then, back to the Nordics and also in line with our strategy. Yesterday, we delivered on the plan to crystallize values from our infrastructure assets. This was done through the sale of a minority part of our Norwegian passive fibre assets to KKR and Oslo Pensjonsforsikring. The transaction values the business to NOK 36 billion and goes to illustrate the values we have built up in our fibre investments over the last 10 years. The sale -- minority sale of 30% of the fibre business yield the proceeds of NOK 10.8 billion. This will strengthen the balance sheet of Telenor and also support further investment into fibre network in Norway. In addition to the value crystallization, as we communicated at our Capital Markets Day, in the infrastructure business, our ambition is also to create more value out of our digital infrastructure. The fibre deal confirms the value of our assets, and we will now continue to create value, both within fibre and our towers. And in addition to that, we are also exploring opportunities with our data centers. Let me then turn to -- from transactions to our daily operations. At the Capital Markets Day, we highlighted growth in the Nordics as a key strategic priority in the 3 years plan that we presented. And looking at this graph, I must say, I'm pleased to see that the system we have made over the last year is now translating into a solid mobile service revenue growth of 5% in the quarter. And with this, we have a good growth momentum also going into 2023. The growth you see here is driven by 3 key elements. First, for several quarters, we have talked about the increase we have in our value-added services, such as security and insurance. These services have been, and continues to be a solid growth contributor. Revenues from these services are now growing in the range of 12%, 13% year-on-year, and in Norway is contributing to around half of the ARPU growth we see in this quarter. The other growth elements are growth in 5G connectivity and the selective price adjustments we have implemented across the markets and across most customer segments. Growth is, however, only part of the ambition, and to improve profitability, we also need to keep modernizing ourself. In Q4, we saw an EBITDA in our home market in Norway decline by 3%. Part of this can be explained by higher energy costs, but the main headwind continued to come from the effects of the copper decommissioning. The EBITDA growth of 6%, excluding copper and energy, is representing a material improvement compared with the 2% growth we had in the last quarter. We have done significant modernization programs the last year in Telenor, and we are not done yet. We took the decision to move away from copper network already back in 2018, and the last years, this has been one of the biggest projects we have been running in Telenor. And as you can see on this graph to the right, this has cost us around NOK 3 billion in loss EBITDA from 2019 through 2022. The upside, however, is that, we now can move forward with a legacy-free, future-proof network as the first incumbent, as I said in Europe. The last POTS and DSL retail lines were closed in December. And as you can see from the graph, we expect a significant lower EBITDA headwind from copper in 2023 and going forward. The last quarter, I talked about the plans we have for continuing our modernization of Telenor, Norway. Digitalization is driving constant change, and it's fundamental to stay relevant for our customers. Touch-free operations, you have heard me talking about that several times before, and that is continuing to be an ambition and focus for us, how we digitalize to simplify and automate processes to improve quality for our customers, but also reduce costs. We believe that we are in the forefront in the industry when it comes to touch-free operations. 75% of our technology operations in Norway are not touch-free, with a network being more than 90%. These proactive technology shifts enable us to move on to the next phase of modernization and to focus on resources and new initiatives. In Norway, we are simplifying our organization and the processes, and changing the way of work. As a part of this, we have just announced that we are merging two divisions -- two customer divisions into 1 customer division. In addition to that, we built one customer service to serve all our customers at one Telenor across the different commercial lines that we have. This frees up resources. And we, therefore, recently announced a downsizing of around 400 FTEs in Norway. This will come from a reduction of around 200 fixed employees and another 200 from fewer external consultants, turnover and structural initiatives. In total, this is estimated to reduce the number of FTEs in our Norwegian operation and consultants within -- in the range of 10% to 12%. As you know, we have now also gathered all the Nordic -- foreign border Nordic units under one Telenor Nordic management. With that, we are strengthening the collaboration across the Nordic region. And we are developing a Nordic operating model to support speed and agility in the local markets, and at the same time, taking out cost synergies through shared and common solutions. Focus is on the technology and IT domain as well as support functions like HR and finance. The financial impact of these initiatives, mainly OpEx and CapEx, are now, as we discussed at the CMD, expected to come within the 3-year period. Summing up, we are well on our way to fulfill the ambitions we set out for the first 12 months when we had our Capital Markets Day in September. We have closed the merger in Malaysia. We have closed the sale of 30% and visualized values of our fibre assets in Norway, and we have completed the decommissioning of the copper network. We are moving thoughts at closing of the large merger in Thailand also during this quarter. Entering 2023, my and my management team's key focus will continue to be profitable growth in the Nordics. We have, as you can see, got off to a good start with the mobile revenue growth we saw in the last quarter, strengthening position and realizing synergies in Asia. We will also continue to work with our structural agenda in Asia. Our plans are to contribute to crystallized values in our infrastructure portfolio, and we will continue to oversee and contribute to a positive development in our Amp portfolio. And with that, let me welcome Tone, our CFO, on the stage. Thank you. You have heard from Sigve on the main points in the quarter with the large M&A transactions and the positive trends we see in the Nordic mobile business. 2022 has been marked by volatility and unknowns. Our main focus has been on strategic development and our operational performance. And I'm pleased with the execution capabilities in the organization and how we have been able to deliver this year. Overall, we showed 2% organic growth for the fourth quarter and stable EBITDA. This means that we end the year with 2% organic revenue growth and 1% growth in EBITDA, in line with our guidance. We also deliver within the guidance for CapEx at just below 17% CapEx for the full year. Free cash flow was close to NOK 11 billion for the year, despite high investments in 5G and fibre, and this cash flow is somewhat higher than the level we outlined at the CMD in September. The service revenue growth of 2% mainly reflects strength in Nordic mobile, Bangladesh, and strong growth in Telenor Maritime and Connexion. Sigve highlighted the growth of around 5% for the Nordic mobile business. And as you can see, we saw growth rates from 3% to 7% across the Nordic businesses, when we exclude the significant 1% group drag from copper. Grameenphone in Bangladesh delivered 4% growth, despite the SIM ban that was lifted in the beginning of January. We are now back to normal business here. Finally, we saw positive momentum in Telenor Maritime, mainly owing to the return of cruise traffic and double-digit growth in our IoT business of connection. Both of these had good contribution to the 2% growth rate. As you know, Digi is deconsolidated, and dtac will be deconsolidated once the merger closes. This will materially change the revenue composition and these companies accounted for around 1/3 of the revenues in 2021. For reference, we would have seen organic revenue growth of close to 3% if we had excluded dtac also in 2022. And now to OpEx. We report an 8% or NOK 620 million OpEx increase in Q4 compared to the same period last year. NOK 250 million of the increase reflects higher energy cost, and adjusted for this, the increase was around 5%. Another NOK 175 million was driven by one-time effects impacting Bangladesh and other units. And as you see in the graph to the right, the cost increases for more regular items such as personnel, sales and marketing, and operations and maintenance were more moderate. In the graph to the left, you see the cost increase split by country, and by the looks of it, OpEx decreases by NOK 10 million in Bangladesh in the quarter. That needs to be seen together with a high increase in other and elimination, and underlying costs in Bangladesh increased around NOK 100 million. For 2022, as a whole, we see OpEx increase of around 5%, driven by energy and sales and marketing costs, in particular. At the CMD and the third quarter, we highlighted the uncertainties regarding the outlook for energy cost. As it turned out, Q4 prices ended somewhat lower than Q3 prices. And by this, we also saw lower level than what was -- what we outlined on the CMD. Nevertheless, the energy cost levels were still around 40% higher than in the fourth quarter of '21. And for the full year, we saw energy cost increase with around NOK 1 billion to a total of NOK 3.9 billion. Looking into 2023, we have around 80% of the Nordic energy exposed to spot prices and around 20% on hedged prices. As we stand now, our best assessment, given the prices we currently observe, is that energy prices in the Nordics will have a fairly neutral impact on the EBITDA from 2022 to 2023. However, the phasing during the year may naturally be different. As you know, we have PPA agreements that will come into effect in Norway towards the end of this year and in the second half of 2024 in Denmark. These agreements have pricing more in line with historical averages, as we have talked about before. Moving to EBITDA. The organic EBITDA was stable in the fourth quarter with a negative impact of 5 percentage points from energy and copper. In Norway, the reported EBITDA is down 3% compared to the negative 9% we reported last quarter, and Sigve gave you more insight into this. In Sweden and Denmark, we continue to see EBITDA growth from improved top line momentum, while EBITDA in Finland continued to be impacted by increased group charges and energy cost. In Thailand, we see continued headwind from reduced affordability in the market, as the COVID recovery is still to materialize. Despite this, we see strong cost control and lower sale of handsets resulting in a solid EBITDA growth of 3% in the quarter. As mentioned on the OpEx, the figures from Bangladesh include some special elements this quarter, and a strong positive EBITDA contribution from Bangladesh is on the group level, partly offset by an opposite effect under eliminations. Other items under other eliminations were positively driven by improvements in the Amp portfolio. Pakistan continues to be tough, with macroeconomic putting pressure on the financial performance and result in a 17% reduction in EBITDA, which is mainly driven by both lower revenues, but also the high energy cost in particular. When entering 2022, we knew we would have negative impacts from copper and project costs, which took down the EBITDA with around NOK 1.1 billion. And the high energy cost has taken the EBITDA down with another NOK 1 billion or equivalent to 3%. On the positive side, we've had one-offs of around NOK 1.2 billion this year, and a strong operational performance has contributed with NOK 1.2 billion to the EBITDA. Summing up, we ended the year with organic EBITDA growth of 1% to NOK 42.4 billion. This is in line with the EBITDA guiding we presented at the beginning of last year. Both for fourth quarter and 2022 as a whole, we see record high net income to equity holders of Telenor. This comes mainly from the closing of the merger in Malaysia, combined with ordinary result and tax effects, result in net income of NOK 38 billion in the quarter, and NOK 45 billion for the full year. In line with our strategy to reshape Telenor, we organized the mobile businesses in Asia in a legal entity under Telenor Asia. As part of this process, a deductible tax loss of NOK 14 billion has been realized. These losses have already been incurred and recognized in the financial accounts in previous periods, but the tax impact of the previous accounting losses are now realized. It is worth noting that closing of the transaction in Thailand will generate similar type of effects in 2023. As Sigve mentioned yesterday, we closed the sale of the 30% of the fibre business in Norway. This will contribute to NOK 10.8 billion in cash flow and have a positive impact on equity in the first quarter. CapEx in the quarter came in at NOK 4.5 billion or 18% of sales. For the full year, CapEx to sales ended at 16.8%. With regards to the leverage ratio, we are adjusting the calculation to account for dividend from associated companies, following the deconsolidation of the assets in Asia. Based on the adjusted definition, the leverage ratio at year-end stood at 2.2x. Turning to cash flow. Free cash flow from operations in Q4 came in at NOK 2.4 billion, whereas cash flow from M&A was negative NOK 1.6 billion. The negative contribution from M&A is a result of the deconsolidation of Digi and cash outlay in relation to closing of this transaction of NOK 700 million. For the full year 2022, free cash flow ended at NOK 10.6 billion, of which NOK 9.9 billion was from operations and before M&A activities. This cash flow is slightly above the level that we outlined for 2022 on the CMD in September. Going forward, the free cash flow outlook, excluding M&A, remains unchanged from the CMD. The cash flow before M&A for 2023 is expected to come in below 2022, as the deconsolidation of the cash flows in Malaysia and Thailand will only be partly offset by dividends received. From 2024 and 2025, we expect to see a ramp-up in dividends from Asia, which, over time, will make these transactions dividend accretive to the shareholders of Telenor. We expect to realize large synergies in both Malaysia and Thailand. The CelcomDigi transaction in Malaysia is expected to have a shorter integration period than Thailand before we reach the full run rate of synergies. In the Nordics, we expect to see improved free cash flow contribution throughout the period, supported by both EBITDA growth and a nominal CapEx reduction of around NOK 2 billion in the period 2022 to 2025. Our results, cash flow and strong financial position, enable us to deliver in line with our dividend policy. For 2022, shareholder remuneration will include both ordinary dividends and share buybacks. The share buyback is based on the sale of the 30% of the Norwegian fibre business. Following the EGM last week, the Board intends to use 35% of the proceeds from the sale for share buybacks. The buyback program will start now in February, and an agreement is in place to redeem a proportionate share of the Norwegian state's shareholding. The proposed ordinary dividend is NOK 9.40 per share, which is in line with the policy to have a nominal increase in dividend per share. The proposal is subject to approval by the AGM in May and the payout is planned in 2 tranches of NOK 5.00 per share in May and NOK 4.40 per share in October. Then, let me round off with a view on the outlook for 2023. From Q1 this year, we will change the reporting structure to reflect the new business area structure. In line with the strategy, as outlined on the CMD and based on the changes we are making to our portfolio, our guidance for 2023 is related to the Nordics operation. In the Nordics, in 2023, we expect low to mid-single digit growth in both organic service revenue and EBITDA, and we expect a CapEx to sales ratio of around 17%. Looking further ahead, we see a mid-term outlook for low to mid-single-digit growth in revenue and mid-single digit growth in EBITDA. This is unchanged from the mid-term outlook we presented at the CMD. We are now also able to add some more flavor on our expected CapEx profile in the Nordics, and this is showing our ambition to cut CapEx in nominal terms by around NOK 2 billion in the period from 2022 to 2025. These ambitions are consistent with the cash flow outlook we have presented, our capital allocation priorities and our stated dividend policies. With that, I would like to thank you for your time and welcome Sigve on stage. Thank you very much. Good morning and congrats on the completion of the decommissioning in Norway. It's obviously been a long-term project that's been fascinating to follow. One question, please, on the -- as you said initially, your EBITDA growth has been aided and supported by OpEx reductions, and you have -- envision of reducing your OpEx by 1% to 3% going forward. So my question is, do you think it has become more difficult in this environment? But also do you think that you are -- you will become less dependent on OpEx reductions going forward, given that we have a new sort of improved growth profile in the Nordic countries with better top line growth? Would that make it -- would that make you less dependent on the OpEx reductions to secure EBITDA growth? And then just a quick follow-up, if I may. Sigve, you highlighted at the beginning you envision for the infrastructure business to continue to crystallize value as you've done with the fibre transaction with towers, fibre, the data centers. Do you think, Sigve, is the new environment, higher interest rates, this has become more difficult to crystallize those values in line with what you had anticipated and you envisioned? Yes. To the first question, what we said at the Capital Markets Day, it's -- we are not going to change that. We talked about our revenue growth, but we also talked about a continued cost reduction of 1% to 3%, as you mentioned it. So we are going to continue with that. And that's why we are so focused on the modernization programs that we have brought in Norway, but also throughout the Nordics. So that's why we maintain the same guiding on low to mid-single digit revenue growth and mid-single digit mid-term EBITDA growth, which means that, for us to achieve that, we need to continue the cost focus that we have. So no change to that. On your second question, what we also said at the Capital Markets Day was that, we will look at our towers -- our Nordic tower infrastructure. And I think we said, Tone, that, within a period of 12 to 24 months, we will look at crystallization alternatives. And that's exactly what we are doing now. I cannot comment on the interest environment or the macro environment, but we are quite happy with the closure of the fibre deal also in the midst of all the uncertainties. We got, as far as we see it, a good deal and a good valuation out of that. Yes, congrats on a fairly strong result. I would -- my question would be really on the net customer additions or subscriber additions in Norway. They were a bit lighter than we had been looking for and down some 60,000, I think, year-on-year. How do you see the consumer in Norway now reacting to the consumer -- yes -- the pressures that are going on? How do you see that affecting the more price sensitive segments of your customer base? Is that something that you're observing in -- during the quarter? And what are your concerns or lack of thereof going forward in that respect? Yes. Let me answer with a general answer first, and then I will be a little bit more specific. We have done price adjustments across all our 4 Nordic markets and also across most of the customer segments that we have. And I think my general observation is that we haven't really seen a challenge when it comes to affordability across our 4 Nordic markets so far. So they are reacting well to the price adjustments that we have done. And the reason -- or the way we are doing it, it's trying to follow the more for more when we do these adjustments. And I think that the quality -- network quality and also quality of the products and services that we have, it's well received by our customers. So, so far, no real price sensitivity in relation to more the macro or inflationary interest rate environment. Then to Norway, yes, you are correct. We lost some customers in Norway during the year. This is mainly prepaid customers and customers coming from the price sensitive segments. The Norwegian market has been, is and will be competitive. However, we don't see that the competitive intensity is changing a lot. We were the first one that adjusted our prices in Norway. It took some time for our competitors to do the same, and that could have been some of the effects that we have seen when some of the price sensitive customers have churn out. Hi, good morning. Thanks for taking the question on a strong result. I had one follow-up on EBITDA and then a question on CapEx, please. So on the EBITDA, because if you look at the building blocks and in terms of energy, for example, we can -- there may be a stable year-over-year development on a net basis, the copper legacy drag versus the cost takeout should be again roughly neutral. So I'm just wondering in terms of the top line growth feeding into EBITDA, is EBITDA in your expectations largely a function of the top line growth next year? Or is there some cost takeout beyond the kind of structural things that we're aware of, i.e., primarily the legacy takeout? And then a question on CapEx, please. So you're guiding for a NOK 2 billion decrease, which is a pretty big number. It's about 20% of your full year Nordic CapEx. So where is that exactly coming from? And can you confirm in terms of the fibre rollout plans that you have about -- 0.5 million homes you mentioned at the CMD. Is this entirely covered by the 30% stake sale that you've just finished? And how long do you expect to cover -- or how long do you expect it to take to cover these 0.5 million homes with fibre rollout? Yes. On the EBITDA for 2023, we are guiding on a low to mid-single digit growth in EBITDA. This, of course, encompass all the effects of what we are doing, including the effects on EBITDA of the copper decommissioning. And as you saw, we will continue to have some year-over-year impacts on that. At the same time, as Sigve said, we are executing and continue to execute on the modernization agenda we have for the Nordics, and the plan we have towards 2025 remains unchanged. So there will be mixed effects in the EBITDA development in 2023 as we see every year. And energy is correctly, as you say, one of these key elements. So then to the CapEx. Yes, we are giving you more flavor to how we see the CapEx into 2025. In 2022, we had very high investments throughout the portfolio, and it is, of course, linked to the 5G rollout and the fibre rollout. We are now around 65% coverage in Norway, which is the biggest investment that we're making. And towards the period 2025, we expect the 5G rollout to ease off, as well as there might be less investments in fibre when we reach that point of 2025. So it is related to the Nordic CapEx, and it is both related to 5G and other network-related investments, but also the fibre. And then, I must admit I was a bit struggling on your question on the fibre, but it is a fact that we are splitting out the fibre now into a separate company, and 30% of that is then what is being entered into the agreement with KKR on. And the intention is that this -- and this split out covers the full portfolio related to the consumer fibre. And just to confirm the sale, the 30% -- The question was, if the 30% covers in terms of CapEx, the goal that you have, which you presented at the CMD, which was covering an additional roughly 0.5 million homes with fibre to the homes. Is that fully covered by the divestment, was really the question. Yes. If I understand you correctly, the CapEx we use for fibre is within the guiding, and it's also within the guiding going forward. And it is also -- we are now realizing NOK 10.8 billion of investments, and that is a key element of also our investment in fibre going forward. Good morning, guys. And thanks for taking the question. Just from my side, just on the monetization potential in towers and data centers. So you're very clear earlier talking about a 12 to 24-month process at the Capital Markets Day. Do you think you'll do all of those infrastructure assets all in one go? Or do you think you'll split them into different elements? And I just noticed that Telia yesterday hinted that they were pushing back the rooftop monetization time frame, sort of indicating the high rates environment was pushing down prices from potential bidders. Does the rate environment impact your thinking of timing on that? Yes. I'm not able to answer your question, Maurice, because we are looking at different alternatives. We are looking at doing this on the Nordic level. We are looking at doing it on the country level. So that is the evaluation we are in the midst of. And that's where we need some time here to do that. In the meantime, we are not rushing this, and that is not because of the macro environment. That is because we want to create an even better profitability out of the infrastructure that we have. We are focused now on efficiency in the way we're running our tower infrastructure. We have now set up, as you know, infrastructure tower companies in all the Nordic countries. And we are also focusing on getting more external revenues to lift the EBITDA here, to have a better position when we potentially are monetizing or crystallizing this. So that's what we are looking at. So the outcome of this could be various type of structures, and we will have to come back to that when we have finalized the view, we have on this, or the process here. Just as a quick follow-up. Have you disclosed how many data centers you have, or any data points regarding -- maybe you have but I missed it. Hi. Good morning. Thank you for taking my questions. I have two, please. The first one is trying to understand a little bit better the competitive dynamics in both Sweden and Finland. You have seen an acceleration in terms of service revenues. And therefore, what I can see, there has been a push in terms of marketing and sales into Q4, but also in Q3. How should we be thinking about the 2023 dynamics? And specifically in Sweden, we heard from some of your peers different market sentiments in terms of consumers. Are you seeing any decline on consumers' willingness to spend or not? The second one would be, if you can give us an update on the Thailand merger, have you more clarity now understanding potential remedies on the -- specifically on the price caps and the tower and the commissioning? Yes. When it comes to the competitive intensity, we don't really see any change. All these markets are competitive. In Finland, we see the market leader, it's leading the pack, and it's a healthy, growing market. We still continue to migrate 4G customers over to 5G, and that's an important part of the revenue growth and the ARPU growth we see in Finland. So I don't really see any change there. And in Norway, I already commented on. In Sweden, it's the same. The competition on the B2B segment has been and is still quite tough. And that's why we see that we have less of a growth on the B2B segment than we have on the B2C. And we are quite happy with the ARPU growth we actually saw in Finland also after the price adjustment that we had. So of course, I cannot rule out that we will have some more macro effect or sensitive -- price sensitivity effects in Sweden going forward. But so far, we haven't seen the same as we have heard from our competitors. Then to Thailand. As I said, we are now in the final stage. We have called for a shareholders' meeting to get the final approval, and that's why I'm confident now that we will be able to close that transaction in -- within this quarter. And I'm not able to give more insight or details than that. If I may follow on Finland and Sweden. Are you willing to pursue a similar strategy as in H2 '22 to drive more marketing and sales investment, to achieve more service revenue growth into 2023? Or how should we be thinking about your marketing and sales strategy? You should be thinking about it from what we have said, that we want to generate a profitable growth across the Nordics. That's on the revenue side, but that's also on -- continued with our modernization programs to reduce costs. And that is something we have been working on now for several quarters, and I'm very happy to see that this is exactly what is coming through going forward. So it's a mix, of course, then, on how much are you fueling the market versus what are you getting back. But the -- what we are measuring our management teams on, it's actually cash flow, including also the investment part of it, but it's very much the EBITDA growth and -- because that's the best measurement we have on what we call profitable growth. So we will be as aggressive as the competition of losses to be, and as aggressive as we see that a profitable growth will result. Good morning, everybody. May I ask 2 questions, please. Firstly, on the True business, True Corporation. What visibility do you have on that dividend there? Because you've got a company that's potentially very highly geared after the merger. So could you maybe update us on what you think the dividend policy might be, or at least anything that you might have on -- in dividend policy there? And then secondly, just to go back to Ondrej's question as well on the fibre rollout, what's going to be the cost of the 500,000 extra homes on fibre do you think? Is it going to be more of an overlay of fibre on the cable network? Or is it new homes that you're doing with -- the new 500,000 homes with new fibre? Yes, I can answer on the Thailand question, and then you take fibre, Tone. I cannot give you all the details here, of course. But as I said, these processes have taken time, in Thailand also about 2 years' time. And that time we have used to detail out our business plan going forward, together with our partner. And going forward, we now have agreement on how both dividend policy should be. We have agreement on our go-to-the-market strategy. We have agreement on how to take out the cost synergies. And -- but more in detail what that is, you have to wait before we can announce that. We have not announced any cost synergies in the Thai transaction, but we will do that if and when that transaction is closing. But -- so the only thing I can say about that is what Tone already said, that both in Malaysia and in Thailand, our ambition is to -- that this will be dividend accretive for Telenor going forward. And then to the fibre question, yes, we -- as we said, we aim to take our significant share of the remaining homes to be connected on the fibre in Norway. We have talked about several times that we are going from a greenfield build-out to a more diverse build-out, and we see that also going forward. There are still greenfield areas which would be in the scope, but there is also and has been an increasing degree of densification. So going forward, this would be a mix of these 2 elements. But there's no cable overlay in that as well as these new areas for Telenor fibre? It's not covering existing fast broadband businesses like cable or obviously not fibre, but there's certainly cable areas? Yes, it's obviously not black and white. But we don't see a big overbuild tendency in the Norwegian market yet. So there will -- we expect there to be limited overbuild and there will be maybe some overbuild of all technologies, but it's not a material part of the strategy going forward that is impacted by this. Turning to maybe the other parts of Asia. If you could give us an update on Pakistan. You mentioned, Tone, that it's still tough. Is that what we should expect also for '23? And maybe also your view on Bangladesh now, and the SIM ban is being dropped, And secondly, just a clarification. The guidance that you gave for the Nordics, I think we should assume that, that includes that you lose FeudCraft to one of your competitors. I think I can answer that. Yes, to the last question. Of course, it's assumed that as a fact. In Pakistan -- yes, we are still in a challenging environment in Pakistan, that being both interest rates, that being energy, that being currency and all the macro effects that we see. How it's going to develop this year, it's too early for us to say. In the midst of that, we are also then continuing our strategic review, as I have talked about now in the last two quarters. In Bangladesh, we see the growth is coming back after COVID. It took much longer time to recover from COVID in Asia, also in Bangladesh, than what we expected. Now we are back. The markets are open. The consumers are back in doing business, and we see that normality in a way has come back. The issue we have had in Bangladesh over the last half year, as I guess, you know, is the SIM ban. We were not allowed to sell SIM due to the regulators' view on our quality of service, meaning the network quality. Fortunately, we have now been able to agree with the regulator on that. So we are back full force also on the sales side. So that's why you see that we were affected both in the third quarter and in the fourth quarter due to the SIM banned. But now we are back in a more normalized also situation when it comes to take our fair share of the subscriber growth. Hello, thanks fort the opportunity. I just have a question regarding the comment on the India report about the adverse VAT ruling in -- . Yes. In the interim report you were mentioning an adverse VAT ruling that you received in January. I think the exposure is NOK 800 million without penalties and interest charges. Could you perhaps maybe indicate what -- exposure would be, [Tech Difficulty] January being that this --. Just related to this, I mean, what impacted this ruling and on the broader kind of exposure you had in Bangladesh with? Yes. We're just interested with what your full exposure is including interest and penalties and what this adverse ruling means for the national exposure that you had in Bangladesh, which I think is around NOK 12 million ? Yes. I believe I understand your question. So we make the provisions, we do, as you point to now, based on that January oral confirmation from the government. We will now -- we believe that the provisions we made are, as always, in line with our expected outcome of the case. Then we will have to evaluate once we get the written paper from the government, whether there are needs to do adjustments. This case is an old case. It's part of the overall picture that we have in Bangladesh. And sometimes, these go in our disfavor, and sometimes they go in our favor. As you recall, in the third quarter, we had a big positive impact from a case in Pakistan that went in our favor. So going forward, we continue to maintain provisions in line with our expected outcomes of these various cases. And then, we are adjusting as new information -- or as there are final confirmations from the legal system or the authorities on these cases. Hi, thank you very much. I just had two quick follow-ups really. The first one was on Pakistan. I just wondered if I could push you a bit more because, local press, I think I've seen this week, is suggesting the sale is getting pretty close. So if there's anything more you are able to say, whether or not those reports are correct. That would be helpful. And then secondly, I wanted to ask about your conversations with credit rating agencies in light of the restructuring of the group. It strikes me that your adjusted net debt-to-EBITDA calculation is a little unusual, taking the contributions from dividends, but then deconsolidating the debt, which presumably is not the way that the rating agencies are going to be looking at it. So if you could just talk about how those conversations are evolving, that would be helpful. Yes. On Pakistan, I think there have been rumors for the last almost a year after we announced that we are going to do a strategic review, and we are not commenting on rumors. So I cannot comment on the report or the media article that you're referring to. What I can say is that we are looking at all different options for Pakistan going forward. After we hopefully are concluding also the merger in Malaysia, we will have #1 positions in 3 of our markets in Asia, and that's why we also see what can we do in Pakistan. But all the options are on the table. And we are still in the midst of reviewing and -- our strategic alternatives. I cannot say more than that, unfortunately. Yes. And, on leverage, we are correctly, as you say, given that we no longer control Digi, we are deconsolidating both the EBITDA of Digi and the debt of Digi. So that means that if you take both of those out, there is no impact from Digi on the leverage ratio. However, we, of course, have the financing of the asset in our debt base, the group debt of around EUR 7 billion. So, then, it is natural to also include some debt servicing capacity for that asset. And then we have ended on the definition where we include the dividend received from associates in the net debt-to-EBITDA calculation. From our view and from our discussions with the credit rating agency, this is fully in line with also how they consider these -- this kind of assessment related to associated companies. So this is a dialogue we have had with them for a period as we've worked on this transaction for a long time, as you know. So we believe that this is fully in line with the way they also are assessing this from their perspective. Good morning, everyone. Just had a couple of questions on M&A and portfolio management. I just wondered if you could update us on the potential time line and your ambitions for a secondary listing in Asia. Has anything changed on either of those since your Capital Markets Day? And then just secondly, a few questions and investor attention around the Swedish spectrum auction that's coming up at some point this year. Sigve, in the past you've suggested that you might be open to you pursuing in-market consolidation in a couple of your Nordic markets. And we note that you -- we're seeing attempts elsewhere in Europe on that front. Any change or kind of acceleration in time line or additional incremental thoughts you can add on the justification or ability to go for market consolidation, particularly with -- in mind to that Swedish spectrum auction? Now, to your first question, there is no update on this different from what we said at our Capital Markets Day. We are pursuing now that we are wanting to close those 2, or the remaining merger in Thailand. We are, as we -- as I already talked about, reviewing Pakistan. And on top of that, we are also reviewing what we could do in Asia as a whole, although more on the regional level. But I have no news on that. On the Sweden and Denmark, of course, we are following the merger processes that is going on in Europe. We are following what the competition authorities in the EU -- how they will look at that, if that is different from when we tried to merge with Telia in Finland now 6 years ago. But I have no updates on our plans or our observations or our thinking around it. Great. Thanks very much. I've got two questions, please. Firstly, on working capital. So in your report, you referenced positive changes in working capital contributing to this quarter. So could you please just elaborate a bit more on this and the moving parts within that and including any headwinds that we should look out for in 2023? And then the second question is just on guidance. And so, guessing from your Nordic EBITDA guidance for low mid-single digit growth this year to your medium-term guidance of mid-single digit growth, could you just explain the drivers of the improvement and also any headwinds we should look out for here? Yes, let me start with the working capital. We end 2022 fairly neutral on working capital compared to 2021. However, we saw in the first half of the year that we had a somewhat negative development. And we have been focusing on this, as we always are, but it is -- has been one of the key focus areas in 2022, and we saw the trend turning as we also said in the second quarter. Then, of course, there are different elements, and as you allude to different parts in this portfolio. But overall, we believe it is a good status as of year-end 2022. When it comes to the guidance, this guidance reflects the outlook as we see it for the Nordics. There are -- it is the -- we are in the market environment; we are macroeconomic and that is also impacting our perspective. We have talked about the energy impact that we've seen in 2022, and we've given you the indication of what we see now, where we stand today for 2023. And we have also given you the detailed information on the copper decommissioning and the impacts that has had and also the impact that it will have in 2023. So I believe that is kind of providing the framework around the guiding that we are now giving to the market. And with that, Tone, I don't think there are any more callers. So thank you very much for listening in, and thanks for your questions.
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Good morning, and welcome to the Standex International Fiscal Second Quarter 2023 Financial Results Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. Please note that the presentation accompanying management's remarks can be found on the Investor Relations portion of the company's website at www.standex.com. Please refer to Standex's Safe Harbor statement on Slide 2. Matters that Standex management will discuss on today's conference call include predictions, estimates, expectations and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially. You should refer to Standex's most recent annual report on Form 10-K as well as other SEC filings and public announcements for a detailed list of risk factors. In addition, I'd like to remind you that today's discussion will include references to the non-GAAP measures of EBIT, which is earnings before interest and taxes; adjusted EBIT, which is EBIT excluding restructuring, purchase accounting, acquisition-related expenses and one-time items; EBITDA, which is earnings before interest, taxes, depreciation and amortization; adjusted EBITDA, which is EBITDA excluding restructuring, purchase accounting, acquisition-related expenses and one-time items; EBITDA margin; and adjusted EBITDA margin. We will also refer to other non-GAAP measures, including adjusted net income, adjusted operating income, adjusted net income from continuing operations, adjusted earnings per share, adjusted operating margin, free operating cash flow and pro forma net debt to EBITDA. These non-GAAP financial measures are intended to serve as a complement to results provided in accordance with accounting principles generally accepted in the United States. Standex believes that such information provides an additional measurement and consistent historical comparison of the company's financial performance. On the call today is Standex's Chairman, President and Chief Executive Officer, David Dunbar; and Chief Financial Officer and Treasurer, Ademir Sarcevic. Yesterday, prior to our earnings release, we announced a signed agreement to divest our Procon pumps business to Investindustrial for $75 million, subject to customary post-closing adjustments. We expect the closing of this transaction to occur during the month of February. The program divestiture supports continued simplification of our portfolio and enables us to further focus on our larger businesses and fast growth end market opportunities. We plan to use the proceeds to fund attractive organic growth and acquisition opportunities consistent with our capital allocation model. I would like to thank our Procon colleagues for their contributions to Standex and wish them much success as they start a new chapter for the business. Shifting to our second quarter performance. We are proud of our results, which came in better than our expectations. We were able to continue our trend of sequential margin improvement with double-digit organic growth in three of our segments. The execution by our global management teams and strong demand in our fast growth markets position us to continue growing organically, while sustaining and improving upon our other key financial metrics. We continue to be optimistic about our new product and applications developments across our businesses. I want to thank our employees, our executives and Board of Directors for their continued dedication and support. Now, if everyone can turn to Slide 3, key messages. We are very pleased with our sales performance and another record margin in the quarter. We reported 5.5% organic revenue growth year-on-year, as three of our five business segments exhibited organic revenue growth greater than 10%. Electric vehicles, renewable energy, commercial aviation and defense end markets remained strong, while the scientific segment, as expected, was impacted by lower demand for COVID vaccine storage. Revenue contribution from high-growth markets such as electric vehicles, green energy and the commercialization of space increased approximately 35% year-on-year to $19 million in fiscal second quarter 2023. We anticipate this revenue stream to grow by approximately 40% in FY '23. Order trends remained healthy and backlog realizable in under one year grew 2% year-on-year to approximately $269 million. The continued effectiveness of our price and productivity actions improved our margin profile in the quarter and produced our seventh consecutive quarter of record adjusted operating margin. Consolidated adjusted operating margin of 15.2% in fiscal second quarter '23 was a 160 basis point increase year-on-year and a 20 basis point improvement sequentially, despite a challenging global environment. Four of Standex's five business segments expanded margin year-on-year, with three segments showing margin expansion of 270 basis points or more. All five of our segments reported operating margin over 15%. As part of our value creation system, we continue to have an active focus on lean initiatives and in turn the standardization of operating disciplines across all business units, further leveraging our G&A structure. As a result, we are seeing continued improvement in our ROIC metric, with Q2 FY '23 annualized ROIC at 12.3%. Ademir will discuss our financial performance, liquidity position and capital allocation in greater detail later in the call. In fiscal third quarter '23, on a sequential basis, we expect a slight to moderate decrease in revenue due to unfavorable foreign exchange and the impact of the Procon divestiture. We expect slightly lower to similar adjusted operating margin compared to fiscal second quarter '23, as price and productivity actions mostly offset lower sales. We expect higher adjusted operating margin compared to the same period a year ago. Now, please turn to Slide 4, and I will begin to discuss our segment performance and outlook beginning with Electronics. Segment revenue of $73 million decreased 5% year-on-year as an organic decline of 0.2% and a 6.1% negative impact from foreign exchange more than offset 1% contribution from acquisitions. Most of the end market trends remained favorable, particularly for industrial applications, power management, renewable energy technologies and EV-related markets. From a regional standpoint, North American market demand was very strong, while China and Europe demand, primarily in the appliances end market, remained soft. We do expect China market demand to start improving after the Chinese New Year. Operating margin of 23.4% increased 100 basis points versus the year-ago period, primarily due to productivity initiatives offsetting lower volume and the currency impact. The pictures on Slide 4 highlights the Electronics segment's focus on growth markets, such as the expansion and modernization of the electrical grid. In this example, you can see we provide the mission critical transformers and inductors essential to monitor performance in utility substations. Sequentially, we expect revenue in our third fiscal quarter to improve slightly to moderately with strong demand across end markets in North America and increased sales into fast growth markets. The company expects similar to slightly lower operating margin due to unfavorable product mix and plant moves in China and Germany, which were completed in early January. Please turn to Slide 5 for a discussion of the Engraving segment. Revenue increased 3% to $38 million, a strong organic growth of 12% more than offset a 9.2% headwind from foreign exchange. Operating margin of 16.9% in fiscal second quarter '23 increased 270 basis points year-on-year due to realization of previously announced productivity actions in North America and Europe. The segment continues to see positive trends in soft trim tools, laser engraving and tool finishing. The picture on Slide 5 illustrates how the customer intimacy model is deployed in the Engraving business to provide broad solutions. The Design, Verify, Produce process was used with several large OEMs to first develop texture design concepts for new vehicles, then implement them on both hard trim parts and soft trim parts. These projects also leveraged a global supply chain and our global presence allowed a coordinated and seamless simultaneous delivery to meet the customers' launch schedules. In our next fiscal quarter, on a sequential basis, we expect revenue to decrease slightly and operating margin to decrease moderately due to unfavorable project mix. We expect more favorable mix in fiscal fourth quarter '23 as well as continued growth in soft trim demand, reflecting auto manufacturers' increasing move to higher quality interior surfaces and textures. Please turn to Slide 6, Scientific segment. As expected, Scientific revenue decreased 22% year-on-year to $19 million primarily driven by lower demand associated with COVID-19 vaccine storage. Operating margin of 21.6% decreased 70 basis points year-on-year due to lower volume more than offsetting price, productivity actions and lower freight cost. The picture on Slide 6 illustrates a newly designed flammable material and hazardous location storage cabinet that meets required regulatory standards. This differentiated product is primarily used in academic research and industrial settings. On a sequential basis, in the fiscal second quarter of '23, we expect slightly lower revenue and a similar operating margin as productivity actions and lower freight costs are projected to offset volume decline. Now, turn to the Engineering Technologies segment page on Slide 7. Revenue of $24 million increased 34% year-on-year, reflecting strong growth across all markets. Operating margin of 15.5% increased 270 basis points year-on-year due to higher volume and the impact of productivity and efficiency initiatives. As pictured on Slide 7, our engineering team is leveraging its advanced metal forming capability to enable the world's first zero-emission aircraft. We recently announced a contract to manufacture prototype hardware for the Airbus' ZEROe hydrogen powered aircraft. In fiscal third quarter '23, on a sequential basis, we expect a significant decrease in revenue due to project timing and a slight decrease in operating margin as productivity actions offset volume decline. We do expect more favorable timing of projects in the fiscal fourth quarter of 2023, which is supported by a healthy backlog. Please turn to Slide 8, Specialty Solutions segment. Specialty Solutions revenue of $34 million increased 15% year-on-year due to healthy organic growth in the hydraulics and display merchandising businesses. Operating margin increased 420 basis points to 16.8%, reflecting price and volume increases and realization of productivity actions. As pictured on Slide 8, our display merchandising business has continued to enhance its offering to redesigns of existing products, which is fueling growth and represents about a quarter of business sales. In the fiscal third quarter '23, on a sequential basis, we expect revenue to decrease moderately to significantly, primarily due to the Procon divestiture. Operating margin is expected to increase slightly to moderately due to ongoing pricing and productivity actions in the hydraulics and display merchandising businesses. First, I will provide a few key takeaways from our second quarter 2023 results, which came in ahead of our expectations. Our operating performance and related earnings strength reflected the continued effectiveness of our pricing actions and productivity initiatives. As a result, we achieved our seventh consecutive quarter of record consolidated adjusted operating margin with adjusted earnings per share of $1.74. In addition, our end market demand trends remain stable as we ended the second quarter with an overall book to bill ratio around 1. Now, let's turn to Slide 9, second quarter 2023 summary. On a consolidated basis, total revenue increased 1.1% year-on-year to $187.8 million. This reflected organic revenue growth of 5.5% and a 0.4% contribution from the Sensor Solution acquisition, partially offset by 4.8% impact from foreign exchange. Second quarter 2023 adjusted operating margin increased 160 basis points year-on-year to 15.2%, our highest in the history of the company, as our adjusted operating income grew approximately 13.3% on a 1.1% consolidated revenue increase year-on-year. Our second quarter 2023 tax rate decreased 100 basis points year-on-year. Sequentially, we expect a similar tax rate in the fiscal third quarter of 2023 with a full tax rate between 23.5% and 24%. Adjusted earnings per share were $1.74 in the second quarter of fiscal 2023 compared to $1.45 a year ago, approximately 20% growth year-on-year. Net cash provided by operating activities was $29.8 million in the second quarter of 2023 compared to $23.6 million a year ago. The improvement reflects a more linear distribution of sales with a continued focus around inventory management and the impact of our shared services implementation. Capital expenditures were $5.8 million compared to $4.7 million a year ago. As a result, free cash flow was $24 million in fiscal second quarter 2023 compared to free cash flow of approximately $18.9 million in fiscal second quarter 2022. Our free cash flow conversion level was approximately 120% of GAAP net income in the second quarter of 2023. We expect to remain at or above 100% through the balance of the fiscal year. Our balance sheet continues to provide substantial flexibility to support an active pipeline of organic and inorganic opportunities as well as interest investment in R&D and growth capital. Please turn to Slide 10, FY '23 segment snapshot. From a segment perspective, three of our five segments exhibited organic growth year-on-year above 10%, highlighted by Engineering Technologies at 36.2%. As expected, Scientific segment sales declined organically 21.7% due to lower demand for COVID vaccine storage. Foreign currency was a headwind to revenue growth primarily in the Electronics and Engraving segments [Technical Difficulty] 6.1% and 9.2% headwind, respectively. From an operating margin standpoint, four of our five segments expanded operating margins year-on-year. [Technical Difficulty] Engineering Technologies segments each improved by 270 basis points. The Scientific segment maintained operating margins over 20% despite 22% organic revenue decline due to pricing and productivity actions and favorable freight costs. Next, please turn to Slide 11 for the summary of Standex's liquidity statistics and the capitalization structure, which remains strong. Standex ended fiscal second quarter 2023 with $324 million of available liquidity, an increase of approximately $43 million from the prior year. At the end of the second quarter, Standex had net debt of $74 million compared to $70 million at the end of fiscal 2022 and $52.5 million at the end of fiscal second quarter 2022. Standex's long-term net debt at the end of fiscal second quarter 2023 was $187.5 million. Cash and cash equivalents totaled $113.5 million, with approximately $107 million held by foreign subs. We repatriated $4.3 million from foreign subs in the second quarter. We now expect to repatriate between $25 million and $30 million in cash in fiscal 2023. With regards to capital allocation, we repurchased approximately 50,000 shares for $5.1 million in the second quarter and $77.1 million is remaining under the current repurchase authorization. We also declared our 234th quarterly cash dividend of $0.28 per share, an approximately 7.7% increase year-on-year. In fiscal 2023, we now expect capital expenditures to be between $30 million and $35 million compared to approximately $24 million in fiscal 2022. The increased investment year-on-year includes additional capital for capacity expansion, productivity actions and growth efforts as we deepen our presence in high growth markets. I will now turn the call over to David to discuss our longer-term outlook and key takeaways from our second quarter results. Please turn to Slide 12. Over the past few years, we have demonstrated track record of improving our operating performance and key financial metrics, delivering consistent and predictable results and transitioning to a growth-focused operating company. We've recently revised the strategic plans with all of our businesses and would like to share the updated view on our long-term financial outlook, starting with our fast growth markets. As part of this long-term view, we believe our fast growth market sales will reach 20% or greater of total sales within the next five years, which would represent $200 million plus in sales by fiscal year 2028. Our fast growth market sales grew 35% year-on-year to $60 million in fiscal year '22 and are expected to grow another 40% to more than $80 million in fiscal year '23. Beyond 2023, we expect fast growth markets sales to grow at an approximate 20% CAGR through fiscal year 2028. We believe the secular trends will continue under different economic scenarios and we will continue to focus our strategic investments to align new products and applications with these trends and expand upon our strong customer relationships. Please turn to Slide 13, our updated longer-term financial targets. We target continued organic growth at a high single digit compounded annual rate over the next five years, reaching greater than $1 billion in sales by fiscal year 2028. This growth target excludes the impact of potential acquisitions. We target adjusted operating margin of higher than 19% by fiscal year 2028 from 15.1% margin year-to-date in fiscal '23 or an approximate 400 basis point improvement. We have replaced our previous adjusted EBITDA margin target with an adjusted operating margin target to better align with our business segment reporting and internal operating process. We expect to reach our previous targets of better than 20% adjusted EBITDA margin and better than 12% return on invested capital within the next fiscal year. We expect to continue to ramp up our R&D investments with a target of over 3% from approximately 2% year-to-date in fiscal '23. It is our expectation that with this financial performance, we will increase our return on invested capital to greater than 15%, an improvement from our prior target of greater than 12%. Our return on invested capital target applies to our current portfolio of businesses and excludes the impact of potential acquisitions. Finally, with our substantial financial flexibility, we plan to continue to execute on an active pipeline of organic and inorganic growth opportunities. These targets exclude potential investments, revenue and profits related to our solar energy project with ENEL. Please turn to Slide 14. Standex is well positioned to deliver sustainable profitable growth as an operating company, comprised of a stronger mix of high-quality businesses with attractive growth rates and higher margin profiles. We are pleased with our healthy organic growth rates in Engineering Technologies, Engraving and Specialty Solutions and remain confident in our long-term organic growth potential across our business in that segments. As seen through our Procon pumps announcement, we will continue to optimize our portfolio to focus on larger businesses and advantageous growth opportunities. We continue to see strong growth in our fast growth markets. Looking forward, we're optimistic about global trends that align with our products, applications and research and development efforts. We are excited about the long runway ahead for these opportunities, as they evolve with our customer intimacy model. Our pricing disciplines and OpEx actions that are fundamental to our business allow for us to adapt to the different scenarios presented by this global environment. Our durable balance sheet positions us to be opportunistic on an active pipeline of internal investments and an active funnel of inorganic candidates. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Chris Moore from CJS Securities. Please go ahead. Certainly -- good morning. Appreciate the updated five-year targets. The 19% operating margin target in five years, obviously, very attractive, around 14% in fiscal '22. Maybe just talk a little bit more about what the big drivers are there? Are you targeting roughly that 80 basis points to 100 basis points per year improvement, or is it likely to be a bit more lumpy? Yes, Chris, it's Ademir. I think that's probably a good handicap. Obviously, it could get a little bit lumpy year-on-year depending on the general economic environment. But we do feel that we're going to get to those rates through our organic growth improvement and we put up some numbers we feel pretty confident about regarding our fast growth end market opportunities, as well as continued operational improvements in our businesses. So that's kind of the basis for it. And we just finished our five-year LRP, long range planning, with all of our businesses and it's a result of that process as well. I guess in terms of the rate, you'll see the expansion, we'd anticipate to be relatively steady through the five years just as we've had pretty steady improvement in recent years? Got it. And just in terms of Procon, just two quick ones there. The operating margin associated with Procon is relatively the same as overall Specialty operating margin or is there much of an impact there? Got it. And the last one on Procon. Just how should we be thinking about the tax implication on the Procon sales? Is there anything you can do to protect most of those proceeds? Oh man, Chris, this all for me. So, yes, so -- we do believe after the customary closing adjustments in using some of the deferred tax assets we have on our balance sheet for prior divestitures. We should be able to net majority of those proceeds north of $70 million. Got it. And maybe the last one for me. Just in terms of the visibility on ETG, obviously, one was -- Q1 was softer, Q2 stronger, you signaled a softer Q3, stronger Q4. Is that pattern unique to fiscal '23, or is it too soon to tell for '24? Just trying to understand -- I know there's a backlog there, and trying to understand if you can see that progression or not that far out. If you look back over years and years of Engineering Technologies, you will see no discernible annual seasonal pattern. It's completely a function of customer schedule. So, on the aviation side, the Airbus, their production rate has gone up and down into the pandemic and out of the pandemic. Commercial space launches and their schedules affect this, the recent ramp up in military and defense. So, those things don't follow a seasonal calendar schedule. But our visibility is very good to that business. And we've got a great backlog. We're very confident in a very strong Q4 following our guidance for Q3 being a little softer. Wanted to dig a little deeper into the -- wanted to dig a little deeper into the Procon sale. Was that -- were you approached -- I mean, you obviously got a nice price for -- over 2 times sales. Was that something you had put up for sale or were you approached by the buyer? Well, I'd say just if you step back a little bit, the divestitures we've made in years past were troubled businesses. We really needed to divest, so we could focus on the better businesses. Now with the divestiture of Refrigeration, all the businesses we have are good in their sectors. They have competitive advantage. They perform well. And so, for those that don't have the long-term prospects in our portfolio, our approach to divestiture has been to pick and choose the time when -- either when the opportunity presents itself, we think the market is healthy. So, with respect to Procon and other businesses, we regularly receive inbound calls from companies that are interested in the acquisition. And we thought we were in a position this year that we could make a divestiture, given the strength in our other businesses. So, we just kind of compared the prospects for the different businesses. We saw good opportunity here. We knew there were interested buyers out there. We did run a process. There was good participation in the process. And we're very happy with the outcome. We think we found a long-term home for that business that will really emphasize the capabilities the Proton brings and the competence of the management team. So, everything aligns to make this good timing and a good deal. Okay, great. And then, I want to talk a little bit about the M&A pipeline. Now that -- once you close Procon, you basically had net debt at zero. Can you talk -- it almost makes me feel like you kind of -- this was a great opportunity, because maybe you have some nice opportunities on the M&A front ahead of you clearing your balance sheet. Talk about now that you have all this firepower to go after M&A, what the M&A pipeline looks like, please? Well, even without that divestiture, we have a plenty of -- we have $300-some million of available liquidity had we needed it. So, we didn't feel constrained. So, there was no pressure on that front. But if you think about through the five or six dimensional problem in moving these portfolios, we do want to put capital to use in a relatively rapid order and we want to continue to make progress in our sales and growth progress. So, we do have an active pipeline. There are a few opportunities in there that could be actionable in the coming months. We're relatively knock on wood. You never know when these things will come together. But there are good opportunities we think are actionable. We're trying to get them over to finish line, and put those proceeds to work right away. Yes. And Michael, we are on a pretty disciplined process on M&A side as far as to look at opportunities. If you look at our track record, we are pretty pleased with how most of our acquisitions played out since David became the CEO. So, you can expect us to continue acting in a similar manner and be disciplined allocators of capital. And to David's point, we have a very active M&A pipeline. Great. And now just one more question, I'll get back in the queue. The CapEx, you're still projecting $30 million to $35 million for the year. It's obviously not been at that run rate. Can you talk about what's in the works for CapEx for the second half of the year? Yes. I mean, a lot of CapEx, not a lot -- some of the CapEx investments we have this year is probably more focused over growth than maybe in prior years. So, you would see us putting that CapEx to work and are targeting some of our fast and -- fast growth and market opportunities, primarily in Electronics, some of this capacity expansion, et cetera. So, we do expect our CapEx to pick up in the second half of fiscal '23 versus the first half. Hey. Just speaking of Electronics, can you maybe just kind of walk us through some of the puts and takes there? I mean, coming into the year, it looks like organic sales have been roughly flat to down, if you take out the deferred revenue. And I mean, looking forward, it kind of looks like third quarter guidance also implies organically -- probably flat to down also year-over-year. So, I mean, this is all consumer appliance? I mean, how can we kind of maybe gel that with the weaker margin commentary too on the favorable mix? Because I mean the margin profile too -- I don't believe first quarter is supposed to be the high -- or the low point for the year, but now it seems like we're kind of decelerating here. So, I mean, if China starts coming back, I mean, does this does this revert? I mean, does this trend kind of start reflecting positive? Yes. Ademir and I can tag team on this one. So, if you look at Electronics, first you look at what -- how the composition of the business, within Electronic, I think we said this year, we'll have $19 million-or-more of sales that come from new applications, new business opportunities. We're on track to deliver that. Nearly $15 million of our fast growth sales are in Electronics. Those continue to progress well. But there's a large piece of the business that kind of serves the general economy. And we've talked in the last couple of quarters about slowness in appliance, China and Europe. And so, we got both of those things happening simultaneously. We got a little bit of slowdown in Asia and appliances, largely offset by these growth end markets. I would say that in terms of Asia, we are seeing orders pick up in China. This activity after the Chinese New Year seems to be more promising. We think that the China reopening could help turn that business around. Ademir? Yes. No, I think, Ross, that's right. Q2, Q3 is kind of -- from an organic growth standpoint, it's a bit of a softer quarters for us. But indications are with China reopening and some of our fast growth end market growth, I know that sounds kind of weird the way I said it, we expect Q4 to fuel -- Q4 organic growth to be much stronger in Electronics than in Q2 and Q3. So, that's -- and this business has grown significantly in fiscal '22. So, if you kind of look at our overall organic growth rate in FY '22, we posted almost 15% organic growth rate. We are having a little bit of general economic impact primarily in Electronics in Q2 and Q3, we expect that it's going to resolve itself over time and we'll get back to our usual run rate. Okay. That's helpful. And then, maybe transferring over to the 2028 targets, thanks for providing those, very helpful. High-single digit organic growth, I mean, it seems to imply well over $1 billion. And I know that -- I think you guys have previously spoken to like 2025, you're looking at double-digit growth from new product initiations and you're going to double R&D over the next five years. So, maybe what are some of the assumptions as we think about kind of a base case, spare case, and how we get above that $1 billion by 2028? I mean, what do you guys kind of bake it in there? Well, just think of it -- the last few years as we've given this kind of longer -- this rolling longer-term outlook, we complete our strategic reviews with all the businesses, we kind of risk assess them, roll them up and then update our longer-term outlook. Two years ago, we came out and said we'll have mid-single digit growth, we get to EBITDA 20%, and five to five years ROIC 12%. We're basically at those margin targets now in less than the three years. And last year, we took up the growth rate based on this fast growth market impact. So, now, here we are a year later, we've again updated the strategy review and are updating these numbers. And since we basically -- we're at the ROIC number now and within the next 12 months we'll hit that EBITDA number. So, it's time to update them. Rather than the top three to five, we just said five years, but look at our past performance, there's opportunity to deliver that a little earlier with some -- depending on what's going on in the general economy and maybe faster growth in some of the fast growth -- faster growth markets and opportunities. So that basically -- we follow the same process we have in the last few years. And we're very confident that our businesses are -- continue to position themselves better in these stronger markets. And so, you mentioned the double-digit growth. We've always -- we started mid-single digit. We said we could get to upper single digit. I think there was a question a few, I don't know, years or so ago, when would we be in a position to announce that we could hit double digit growth? And I think my answer was, in a year or two as we see our R&D grow and our effectiveness at rolling out these new products and our foothold in fast growth vector, we would then be in a position to pronounce on that. But for now, we're confident with the upper single digit and the outlook we provided. Okay. And then maybe just looking at the margin target there, I mean, 19% [Technical Difficulty] couple of years ago. How should I think like the buckets of productivity savings that are going to get us there versus overall operating leverage? And where is maybe the biggest deltas across the businesses? I mean, is there more upside in Electronics? I vaguely remember a note here that in Scientific it kind of tapped out in the low 20%. So, what kind of the engines that are going to drive this on the earnings side? Well, I'll just say a couple of things and turn it over to Ademir here. I mean, the growth -- we're preparing an update in our investor presentation and that will step back and talk a little differently about growth. And so, as we look in the next few years, we've broken down our growth in our core business and the new applications and new products. And new applications and new products come out at margins that are accretive to our margins. So, there's -- some of the margin growth comes from introducing new products with better value propositions and more in a stronger competitive advantage, mixing us up in volume. There is an expectation, every one of our businesses every year that productivity plans will drive 3% of COGS to the bottom-line. And those things help fund the R&D increase that you mentioned. Yes. Ross, I mean I think if you remember we put up those few slides by segment that kind of shows the margin potential of each segment. Some of that will be purely volume growth and pricing. But there are a couple of segments and specifically in Engraving and Engineering Technologies, there is more productivity actions to -- that we need to drive to get those margins to hit those levels that we summarized in the slide. So, it's really a mix of everything. And as we have focused on this over the last few years, we're going to continue to focus on driving productivity in our businesses, and as well as growth and hitting those targets. This concludes our question-and-answer session. I would like to turn the conference back over to David Dunbar for any closing remarks. I want to thank everybody for joining us for the call. We enjoy reporting on our progress with Standex. And finally, again, I want to thank our employees and shareholders for your continued support and contributions. We look forward to speaking with you again in our fiscal third quarter 2023 call.
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EarningCall_604
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Weâll make some forward-looking statements today. These statements are based on our current expectations and they involve certain risks and uncertainties. The factors that could negatively impact results are explained in the various SEC filings that we have made including Forms 10-K and 10-Q. We encourage you to refer to these filings to learn more about these risks and uncertainties that are inherent in our business. First, let me start out by performance. During the second quarter, net sales increased over $21 million or 8.3% compared to last year's second quarter, and we delivered strong bottom line growth as our diluted EPS increased 26.5% to a $1.45 per share. Our strong quarterly performance resulted from numerous, continuous improvement initiatives, a focus on reducing our operating costs, reduced discretionary spending and selling price alignment efforts initiated last fiscal year as a response to inflationary cost increases. We continue to see strong demand for our products, especially from our private brand customers in our consumer channel. Our sales volume grew over 3% in the consumer channel, excluding the one-time loss of a private brand grocery customer, compared to the overall decline in the snack nut category. During the quarter we continued to execute against our Long-Range Plan. First, we paid a $1.00 per share special dividend, reinforcing our goal of creating long-term shareholder value by returning capital to our shareholders. Second, we completed the acquisition of the Just the Cheese brand, which is part of our strategic initiative to further diversify our product offerings. We are excited to add Just the Cheese to our branded portfolio as it complements our current brand offerings in the snack category. And the acquired production capabilities will help accelerate growth with our private brand and foodservice customers. Just the Cheese was invented in 1991 and relaunched in 2017. It is manufactured at Specialty Cheese in Reeseville, Wisconsin. Just the Cheese is one of the nation's leading baked cheese snacking brands and offers a hundred percent real cheese snack bars and cheese crisps. The acquisition will provide us with a product that expands our portfolio into new snacking categories. And third, Iâm proud to announce that we began to ship our new product line of private brand nutrition bars, which our team members across the organization have worked tirelessly over the last several years to develop and bring to market. JBSS is excited to enter into the snack bar category. The snack bar category is around $8 billion in size across omnichannel and $6.6 billion in IRI multi-outlet and consistently grew for over a decade until the pandemic started. Post-COVID it has bounced back with 10% growth in dollar sales over the last 52 weeks. One of the white spaces in the category is high quality retailer brand offerings. We believe JBSS can become the partner of choice in the nutrition bar segment for retailer brands given our strong track record of quality, service and innovation. I will share additional details of our new product line in future earnings calls. The management team is focused on executing the company's long-term strategic plan for growth. We continue to invest the time and resources to look at macro trends, consumer insights, competitive activity, supply chain, retailer strategies, e-commerce, and innovation and manufacturing capabilities. There is more work to be done, but there is alignment on the direction and path for JBSS to become a $2 billion business in the future. A few highlights I will mention. We are executing our growth strategies by continuing to invest in our brands and customers. A great example is our Orchard Valley Harvest or OV brand as we call it. Over the past year, our marketing, R&D, and consumer insights teams have transformed the Orchard Valley Harvest brand. It is now a purpose-led brand, which supports our larger social good goal to fight food insecurity. OVH has been completely relaunched with new graphics, new price pack architecture, new innovative products, and a new marketing campaign to make it more accessible, appetizing and approachable. We've established a partnership with an organization called Conscious Alliance, whose mission is to stop child hunger. And 1% of OVH sales goes towards tackling child hunger across America. Our sales teams are working hard and have been actively pursuing new distribution across the country. I look forward to sharing more details in the future. We're executing our growth strategies by continuing to invest in new capabilities and food safety to provide more value to our private brand retail partners and food service partners. Both these business segments are important to the company's success. The significant expansion of our capabilities into the snack bar category is a great example of JBSS executing its long-range growth plan. In addition, as I mentioned, we have now entered the cheese snack category as well, which provides a new capability in a new snacking segment. And strategically, there are significant opportunities to use cheese snack ingredients and new mixes across our customer base and product portfolio. And one last comment, we are executing our growth strategies by investing in our people and our culture. We are being intentional in diversifying our workforce and creating a robust and inclusive leadership team across the organization. We are being intentional in improving our impact on the environment and being good stewards in the communities where we live and work. I am proud of the hard work and progress our ESG committee has made in establishing a framework for our goals and plans. We are living our mission to create real food that brings joy, nourishes people, and protects the planet. Thank you, Jeffrey. Starting with the income statement, net sales for second quarter of fiscal 2023 increased 8.3% to $274.3 million, compared net sales of $253.2 million for the second quarter of fiscal 2022. The increase in net sales was due to a 12.7% increase in the weighted average sales price per pound, partially offset by a 3.8% decrease in sales volume, which is defined as pound sold to customers. Sales volume for peanuts and all major tree nuts, except pecans, declined in the current second quarter. The increase in weighted average selling price partially resulted from higher commodity acquisition costs for pecans, cashews, peanuts and dried fruit. Sales volume decreased 2% in the consumer distribution channel, primarily due to a 5% decrease in sales volume for our branded products, which include Fisher recipe nuts, Fisher snack nuts, Orchard Valley Harvest, and Southern Style Nuts. The sales volume decreased for our branded products was mainly attributable to 24.1% decrease in the sales volume of Fisher snack nuts due to competitor pricing pressures at two grocery store retailers and lost distribution at another grocery store retailer. The overall sales volume decreased in the consumer distribution channel was partially offset by a 0.7% increase in sales volume for private brand sales. New private brand peanut butter business, a mass merchandising retailer, and increased seasonal distribution at our mass merchandiser retailer or substantially offset by loss distribution with a private brand grocery customer that occurred in the fourth quarter of fiscal 2022. Sales volume decreased 7.7% in the commercial ingredients channel due to a 38.9% decrease in sales volume of bulk products to other food manufacturers as a result of reduced consumption from softened consumer spending. This decrease was partially offset by a 2.9% increase in sales volume to food service customers due to new distribution at existing customers. Sales volume decreased 11.4% in the contract packaging distribution channel, primarily due to earlier time of holiday shipments at a major customer in this channel. Second quarter gross profit margin as a percentage of net sales remained consistent at 20.6% compared to the second quarter of physical 2022. The consistency in gross profit margin was due to lower acquisition cost for almonds and walnuts, which were offset by inflationary cost increases including labor and manufacturing supplies, increased depreciation expense and a decrease in sales value. Gross profit increased $4.3 million or 8.2% mainly due to higher net sales base. Total operating expenses for the current second quarter decreased $1.9 million in a quarterly comparison due to decreases in advertising spend, incentive compensation, loss on asset disposals and freight expense, which were partially offset by an increase in base and equity compensation. Total operating expenses for the current second quarter decreased 11.7% of net sales from 13.4% for last or second quarter due to the reasons noted above and a higher net sales base. Interest expense for the current second quarter increased to $600,000 from $400,000 for second quarter fiscal 2022, primarily due to higher weighted average interest rates. Net income for the second quarter of fiscal 2023 was $16.9 million or $1.45 per diluted share compared to $13.2 million or $1.14 per diluted share for a second quarter of fiscal 2022. Now, taking a look at inventory, the total value of inventory on hand at the end of this current second quarter decreased $5.7 million or 3.2% compared to total value of inventory on hand at the end of the second quarter of fiscal 2022. The decrease in the value of inventories was primarily due to lower commodity acquisition costs for all major tree nuts and lower quantities of finished goods and pecans, partially offset by higher quantities of cashews, raw materials, working process, and farmer stock peanuts. The weighted average cost per pound of raw nut and dry fruit input stock on hand at the end of the current quarter decreased 24.2% compared to weighted average cost per pound at the end of the second quarter of fiscal 2022 and was mainly due to lower acquisition costs for all major tree nuts. Moving on to year-to-date results. Net sales for first two quarters of current year increased 9.9% to $526.9 million compared to the first two quarters of fiscal 2022. The increase in net sales was primarily attributable to 11.1% increase in the weighted average selling price per pound, partially offset by 1.1% decline in sales volume. The sales volume increased in the contract packaging channel was offset by sales volume declines in the consumer and commercial ingredients channels. Gross profit margin decreased 1.4% to 20.3% of net sales. The decrease in gross profit margin was mainly attributable to higher commodity acquisition costs for all major tree nuts except walnuts and peanuts. Other inflationary costs increases cited in the quarterly comparison and increased depreciation expense. Total operating expenses for current year to-date period increased $1.8 million to $60.3 million. The increase in total operating expenses was mainly due to a non-recurring gain of approximately $2.3 million from the sale that Garysburg, North Carolina facility, which occurred in the first quarter of fiscal 2022. In addition, increases in base and equity compensation expense and sales broker expenses contributed to the overall increase but were partially offset by decreases in advertising spend and freight expense. Net income for the first two quarters of fiscal 2023 was $32.5 million or $2.79 per diluted share compared to net income of $32.5 million or $2.81 per diluted share for the first two quarters of fiscal 2022. Please refer to our 10-Q, which was filed yesterday for additional details regarding financial performance for second quarter of fiscal 2023. Now I'll turn the call over to Jeffrey to provide additional comments in our operating results for the second quarter of fiscal 2023 and discuss category trends. Great, thanks Frank. So Iâll share some category and brand results with you for the quarter. As always, the market information I'll be referring to is IRi reported data, and for today, it is the period ending January 1, 2023. When I refer to Q2, I'm referring to 13 weeks of the quarter ending January 1. References to changes in volume or price are versus the corresponding period one year ago. We look at the category on IRiâs total U.S. definition, which includes food, drug, mass, Walmart, military, and other outlets unless otherwise specified. And when we discuss pricing, we are referring to the average price per pound. Breakouts of the recipe, snack and produce segments are based on our custom definitions developed in conjunction with IRi. And the term velocity refers to the sales per point of distribution. First, the total nut and trial mix category was up 1% in dollars and down 4% in pound volume in Q2, this is the same pound rate we saw last quarter. While retail dollars showed slight improvement, all segments continued to decline in pound volume in Q2 while trail mix, recipe and snack nuts grew in dollar sales. Overall, prices across the category were up in Q2 versus the prior year by 5.3% with almost all nut types increasing. Now I will cover each segment in more depth. Starting with recipe nuts. The Recipe Nut segment was up 4% in dollar sales and down 7% in pound sales. This is slightly better dollar performance than we saw in Q1. Prices of recipe nuts were up 11.3% versus last year, the largest pricing increase of any segment. Our Fisher brand had a successful holiday season and grew 19% in dollars and 9% in pounds. Fisherâs performance resulted in growing dollar share by 2.7 points and remaining the branded leader. Fisherâs performance was driven by increased distribution and velocity in the mass and grocery channels. Velocity growth was driven by focused holiday promotional strategies, including off-shelf displays, features and pricing. We are excited to carry this momentum as we head into the New Year. Now letâs turn to the Snack Nut segment. In Q2, the Snack Nut segment was flat 0.4% in dollar sales and down 4% in pound sales. This is slightly better than the decline we saw in Q1. Most nut types except macadamia and pecan nuts increased in price. Fisher snack slightly declined in dollar this quarter down 0.2% and was down 11% in pounds. On peanuts, the largest nut type within the brand, we are seeing significant competitive pricing and promotional pressure. We continue to see strong results in the Oven Roasted Never Fried line across our large sizes as consumers continue to look for better for use snacks at a good value. And we are focused on continuing to build distribution and drive velocities against this line. The Trail and Snack Mix segment was up 5% in dollars in Q2 and down 5% in pounds. Prices of retail mixes were up 10%, slightly greater than the last quarter. Our Southern Style Nut brand delivered 6% dollar growth and declined 1% in pounds, beating the category. Dollar growth was driven by increased distribution and velocity in the food channel. Private brands continue to drive trail mix category growth up 11% in dollars in Q2. Our last segment Produce Nuts declined 2% in dollars and 3% in pound volume in Q2. This is slightly worse than the performance we saw in Q1. Our produce nut brand Orchard Valley Harvest declined 8% in dollars and 8% in pound sales, driven by distribution declines in mass, offsetting strong performance in the grocery channel. We have started the repositioning and relaunch of this brand at mass and should start seeing new products flow into the market over the next several months. In closing, we start the second half of fiscal 2023 with excitement and optimism as we begin to see stabilization in the supply chain, modest downward pressure in acquisition costs of tree nuts and the continuation of our journey to diversify our product offerings. As always, we will continue to respond to challenges, including the current economic and operating environment and the recent category contraction. I believe we have the right team, initiatives and strategies continue â to continuously overcome these challenges and deliver long-term shareholder value. Our management team and all our associates continue to work hard to expand our business, to build stronger brands, to build more innovative product platforms and to provide higher levels of quality and service. JBSS is positioned well for stronger results in the future. We appreciate your participation in the call. And thank you for your interest in our company. I will now open up the call for questions. Hi. Yes. Hi, good morning, Jeffrey and Frank. And good job in a challenging couple years here. Youâve done a great job. I know you havenât had a few question in the past couple quarters, so just wanted to kind of throw my head in the ring here and talk a little bit about capital allocation and how you view it. I know you guys have been very consistent with paying special dividends. Just in the context of the Hormel acquisition of Planters about 3.4x sales. And I know your branded products are only about a quarter of your sales. But it just seems like the market isnât giving you enough credit maybe for that part of the portfolio or for your private label portfolio. And I want to know what youâve thought about that in the context of capital allocation, potentially share purchases. So thanks for the question. Over the last quite a few years, weâve really been investing in building our brand portfolio. We realize that weâve got much stronger margins in our brands. We have much more control over what we do with the brands, where we launch, what we launch. And so capital allocation is extremely important as far as continuing to invest in our brands. I touched on the relaunch and transformation of our Orchard Valley Harvest brand, which is just hitting the market literally this week. And so we see the branded portfolio is extremely important. Weâve talked about how private brand is the biggest piece of our business today. It is still like very critical component of our success, and we believe we are really strong value partners with our key retail partners that we work with. But definitely brands as a part of our investment in the future. And we see a lot of opportunities. We see a lot of white space within our brand portfolio to continue to grow them and really build stronger equity in our brands, which in turn, as we can build a stronger brand portfolio as a percent of our total sales. I think weâll get the improvement in some of our returns and investments. And as far as your question about share buybacks, we prefer special dividends as a way to return capital to our shareholders, mainly due to our daily trading volume is pretty low. So we think the more shares out there, itâs probably better for our trading volume and for our share price. And we believe declaring dividends and paying special dividends is a beneficial way to return capital. Thank you. [Operator Instructions] All right. I donât see any further questions in the queue. I will turn the conference back to our CEO, Jeffrey Sanfilippo for his closing remarks. Great. I want to thank everyone for their interest in JBSS. This concludes our fiscal 2023 Q2 call. Thank you for your interest in the company and have a great day.
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EarningCall_605
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Good day, and welcome to the Centene Fourth Quarter Earnings Conference Call. [Operator Instructions]. Please note, today's event is being recorded. I would now like to turn the conference over to Jennifer Gilligan, Senior Vice President of Investor Relations. Please go ahead, ma'am. Thank you, Rocco, and good morning, everyone. Thank you for joining us on our fourth quarter and full year 2022 earnings results conference call. Sarah London, Chief Executive Officer; and Drew Asher, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call, which can also be accessed through our website at centene.com. Ken Fasola, Centene's President; and Jim Murray, our Chief Operating Officer, will also be available as participants during Q&A. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the purpose of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in Centene's most recent Form 10-K filed on February 22, 2022; and other public SEC filings. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our fourth quarter 2022 press release, which is available on the company's website under the Investors section. The company is unable to provide a reconciliation of certain 2023 and 2024 measures to the corresponding GAAP measures without unreasonable efforts due to the difficulty of predicting the timing and amounts of various items within a reasonable range. Thank you, Jen, and thanks, everyone, for joining us this morning as we review our fourth quarter and full year 2022 results and provide our updated outlook for 2023. First, let's close out the year. 2022 was a dynamic and productive year for Centene. We took on many challenges, including a leadership transition, transforming our organizational structure, modernizing our approach to corporate governance, focusing on our core business, improving operations and quality and delivering on our financial commitments along the way. This morning, we reported fourth quarter adjusted EPS of $0.86 and full year 2022 adjusted EPS of $5.78. These strong results came in above the top end of our most recently issued 2022 guidance and were 7% higher than the midpoint of our initial outlook for the year. Looking back over 2022, our 3 core business lines performed well. In Marketplace, we materially improved the profitability of our Ambetter product line through advancements in our clinical programs and strategic product positioning, delivering more than the 500 basis points in margin improvement we promised while continuing to show solid growth and market expansion. This provided Ambetter with a strong jumping off point to achieve our long-term target margin and profitable growth goals in 2023. In our Medicare Advantage business, Centene generated outsized growth in 2022, ending the year with 21% more members compared to year-end 2021. Our focus throughout the year was on strong clinical program performance, quality improvement, which you've heard a lot about; expanded value-based care relationships; and providing enrollees with a more seamless member experience. In 2022, the strength of WellCare's underlying performance was demonstrated through year-over-year HBR improvement. And we're confident in our increasingly disciplined approach to quality operations will provide an important lever as we move through 2023 and work to improve WellCare's profitability on its expanded scale. Our local markets also performed well throughout the year, serving more Medicaid members in more geographies than ever before. Our Delaware go-live, as well as a significant number of successful reprocurements and program expansions, including in Louisiana, Nebraska, Texas and Missouri, to name just a few, bolstered our market presence and leadership position in Medicaid managed care. In California, Centene was ultimately selected to serve the state through direct contracts in 10 key markets, including Los Angeles and Sacramento Counties. We are working towards readiness for the 1/1/24 start date of the new California contracts, and we look forward to our continued partnership with the state to improve the medical health care delivery system and advance the state's innovative programming. 2022 also marked the first full year of execution on our value-creation plan, and it was by every measure of success. We hit all major milestones, including redesigning our UM function across the enterprise; successfully negotiating a new PBM partnership, reducing our real estate footprint by 70% to accommodate new workforce flexibility, itself an important cultural evolution for the company; and making important investments in data and digital tools that will make it easier for our members, our providers and our employees to work with us. We exit 2022 not only well positioned to achieve our $400 million in targeted SG&A savings in 2023, but also having added $300 million in new SG&A opportunities to our longer-term backlog. In addition to achieving these value-creation milestones, we made meaningful progress on our portfolio review process. We closed 3 divestitures in 2022 and announced a fourth. Notably, in the first weeks of 2023, we closed the previously announced sale of Magellan Specialty as well as the sales of Centurion and HealthSmart, bringing our total number of divestitures since Q4 of 2021 to 7. This disciplined execution has streamlined our enterprise, reduced distraction and allowed us to increase our focus on our core business lines. It has also powered significant and timely share repurchases during 2022 and year-to-date in 2023. Finally, in December, we aligned the enterprise around a long-term strategic plan, inclusive of a commitment to 12% to 15% long-term adjusted EPS growth. With our senior leadership team in place and the company's demonstrated progress against our strategic and financial goals in 2022, we are well positioned to capitalize on the momentum of the past year and successfully continue our value-creation journey for shareholders and members in 2023. With that, let's talk about 2023 so far. Centene's Marketplace products yielded exceptional growth during this year's open enrollment, outpacing even the robust growth of the total market itself. This year's OEP performance only reinforces our view of the increasing durability of the Marketplace as a coverage vehicle and Ambetter's leadership position within this market. To harness this growth opportunity, our Ambetter team applied a portfolio approach to pricing and product positioning, decisively leveraging our local expertise and strong broker relationships on a market-by-market basis to attract and retain membership across our Marketplace footprint. While it is still early days with respect to claims experience, we want to share a few observations about Ambetter's strong OEP growth and provide some performance expectations given the team's outperformance on membership. Approximately 70% of our 2023 membership is enrolled in a Silver Plan compared to approximately 72% in 2022. Silver plans have consistently represented the majority of our membership year after year, and 2023 is no different. Similar to previous plan years, the majority of our 2023 membership selected our core product. At the same time, we are pleased with the continued uptake we are seeing in our newer products, demonstrating the value of flexibility and plan design for our members. Key membership demographics like gender, age, geography and subsidy levels are consistent with what we experienced last year. Most importantly, these factors are also consistent with the pricing assumptions we used for 2023 product positioning. We continue to expect our Marketplace business to achieve margins within the long-term targeted range of 5% to 7.5% during 2023. And we are pleased to have the opportunity to serve so many Marketplace members as the reach of that product continues to expand. As we highlighted for investors last month, Medicare Advantage enrollment results for 2023 developed softer than expectations we provided at Investor Day in December. Our goal for the 2023 AEP was to foundationally align our Medicare offerings for long-term margin recovery, product stability and overall quality, capitalizing on the scale we achieved through outsized growth in 2021 and 2022. In our effort to better control the overall member experience, which requires operational stability and contributes directly to quality results, we made the decision to change our distribution strategy and focus more on proprietary channels. Near-term sales and retention were more significantly impacted by our distribution strategy than expected, particularly in light of competitor investment in channels we deprioritized. That said, several of the channels we prioritize performed better than expected, reinforcing our long-term view of an optimal go-to-market strategy for Medicare Advantage and dual eligible members. Despite the soft membership results relative to expectations, we continue to expect 100 basis points of Medicare HBR improvement in 2023. Importantly, we are already seeing positive operational impact for members and brokers, with strong service levels, improved customer satisfaction and a 30% reduction in overall calls compared to this time last year. Turning to more recent Medicare news. Regarding the finalization of the RADV rule, we are supportive of CMS' decision to limit the scope of historical audits. CMS' decision in this regard avoids significant cost and abrasion for our provider partners. That said, the lack of fee-for-service adjustment and the as-yet undefined sampling and extrapolation methodology leaves a number of open questions as to the viability of the final approach. We are working in collaboration with our industry partners to determine the best path forward. Regarding last week's preliminary rate notice, 2024 initial rates are less favorable than recent years and below our internal expectation for funding. We will fully exercise our ability to provide feedback to CMS during the comment period and look forward to collaborating with the agency as we work towards rate finalization in April. That said, we see a path to achieving Medicare Advantage results that meet member needs and support our 2024 financial goals. Finally, as we all know, 2023 will be an important year for the Medicaid business. In December, Congress passed the Federal Consolidated Appropriations Act for 2023, which ends a continuous coverage provision on March 31. This tees up redeterminations to begin this spring, an event we have been working to prepare for throughout 2022. As we approach the redetermination process, we are focused on 3 things: first, optimizing the verification process for members. We are working closely with our state partners and our network of community partners in each market to facilitate member transition and coverage continuity. In the last month, we've deployed internal and external training designed to maximize each member touch point and our ability to support beneficiaries as their eligibility is reviewed. Leveraging Centene's unique and powerful data, we've launched eligibility likelihood modeling across our Medicaid footprint in order to prioritize and customize member outreach. And we've launched enhanced reporting and membership dashboards for clear tracking of redeterminations-related activities across the enterprise. Second, we are focused on ensuring that state program rates reflect any shifting of the risk pool created by membership changes. We recognize the dynamics in each market are different, so we are leveraging our data to support early collaborative discussions with our state partners. And third, we are focused on maximizing the opportunity to provide coverage continuity to members who are no longer eligible for Medicaid, but who are eligible for subsidized coverage on the Marketplace. Given the strong overlap of our Medicaid and Marketplace footprint in 25 states, we continue to size the opportunity for our Marketplace products at 200,000 to 300,000 lives throughout the duration of redeterminations. In 15 of the 25 states, where we have both Medicaid and Marketplace products, we will reach out to our current members directly with educational information regarding the enrollment process as well as with Marketplace plan options. We expect that state count to grow as we advance through the redeterminations process, and we have a robust, scalable plan in place to support this communication and education effort. Finally, I'd like to highlight some important news that came just a few weeks ago. In late January, the FCC issued guidance to improve member communication opportunities related to maintaining Medicaid and other governmental health care coverage. We view this as an incredibly important step, not only relative to supporting a seamless verification process, but also a meaningful step forward in modernizing the industry's overall approach to Medicaid member engagement. We are working closely with states to integrate this guidance into our redetermination strategy and to prove the value of digital engagement in reducing cost and improving member outcomes. On balance, when you take into account our more informed view of open enrollment for 2023, the updated timing of redeterminations and recently closed divestitures, we are well positioned to achieve the top half of our full year 2023 adjusted EPS guidance. Drew will provide greater detail on our outlook in just a moment. As we look ahead, 2023 promises to be another transformative year for the enterprise and one in which we will need to navigate notable market dynamics across our product lines from redeterminations to Medicare positioning to fast-growing Marketplace products. This is not new for Centene, and we are better equipped to manage through this change than we ever have been before, thanks to the work we have done over the last 18 months to focus and fortify our operations and to align the organization around value-creation principles. As we look downfield, we continue to see tremendous opportunity for all 3 of our core businesses, including complex Medicaid populations and dual eligibles, Marketplace adjacencies and STAR score improvement. We continue to track well against our long-term goals and look forward to executing against our strategic plan, driving strong results and delivering value to members and shareholders. Thank you, Sarah. Today, we reported fourth quarter 2022 results, including $35.6 billion in total revenue, an increase of 9% compared to the fourth quarter of 2021, and adjusted diluted earnings per share of $0.86 in the quarter. For the full year, we reported $5.78 of adjusted EPS, a 7% beat over our original 2022 guidance and growth of over 12% compared to 2021. Let's start with revenue details for the quarter. Total revenue grew by $3 billion compared to the fourth quarter of 2021, driven by strong organic growth throughout the year in Medicaid, primarily due to the ongoing suspension of eligibility redeterminations; strong Medicare membership growth; and the January 2022 acquisition of Magellan, partially offset by divestitures. Our Q4 consolidated HBR was 88.7%, a little bit better than our expectations, and 87.7% for the full year. Medicaid at 89.6% for the full year was right in line with our expectation of an HBR in the 89s for 2022. Medicare at 86.2% for the full year was 90 basis points better than 2021, driven by execution of clinical initiatives. And on commercial, recall, we originally promised a 500 basis point reduction in the HBR in 2022. How did we do? We were down 550 basis points for the full year. This was driven by disciplined pricing actions, initiatives executed in 2022, and as expected, a reduction in COVID and pent-up demand costs compared to 2021. Moving to other P&L and balance sheet items. Our adjusted SG&A expense ratio was 9.3% in the fourth quarter compared to 8.7% last year, driven by the inclusion of Magellan and the sale of PANTHER as well as increased Medicare marketing and value-creation investment spending in the quarter, given the overall company outperformance. Cash flow used in operations was minus $1.6 billion in the fourth quarter. You may recall, in the third quarter, we had an early receipt of $2.9 billion of CMS payments pertaining to the fourth quarter, which is driving down our reported Q4 operating cash flow. Cash flow provided by operations was $6.3 billion for the full year, representing 5.2x net earnings or 1.9x adjusted net earnings. This was driven by earnings before charges, including real estate and divestiture-related impairments and an increase in medical claims liabilities. Our domestic unregulated and unrestricted cash on hand was $793 million at year-end, though after making some planned pass-through payments in early January, that amount is closer to 0. From January of 2022 through today, we repurchased 39.1 million shares of our common stock for $3.3 billion. Debt at quarter end was $18 billion, down approximately $800 million from prior year-end, driven by senior note repurchases of $318 million, a repayment of our $180 million construction loan and repayments of over $100 million in revolver and term loan borrowings. Our debt-to-adjusted EBITDA came in right at 3.0x, down from 3.5x a year ago. Days in claims payable was 54 in Q4 of 2022 compared to 54 in Q3 of 2022 and 52 in Q4 of 2021. GAAP earnings during the quarter include impairments related to several divestitures that were completed or pending as of December 31, as well as an impairment of our federal services business, partially offset by a gain on the sale of MagellanRx. Looking back at 2022, it was a very good year of execution during some notable changes for Centene. Sarah hit on some of the highlights, but let me remind you of a few. We beat original adjusted EPS guidance by 7%. We bought back almost 7% of the company's shares, including January 2023 repurchases. We reduced debt-to-adjusted EBITDA to 3x and got upgraded to investment grade by Fitch. We continue to execute on divestitures. Since Q4 of 2021, we've completed 7 divestitures for gross proceeds of over $3.5 billion. We improved the discipline of the company in many areas while strengthening DCP by a couple of days, and we picked up 2 very strong operators, Fasola and Murray, along the way. All right, enough on the rearview mirror. Let's talk about what really matters today and tomorrow, starting with 2023. We gave detailed guidance elements at Investor Day, but a few things have happened since then, including more clarity of the timing of the restart of redeterminations, a couple more Centene divestitures, a very strong Marketplace annual enrollment period and softer Medicare Advantage enrollment as we mentioned at the recent investor conference in San Francisco. My bias when we haven't yet closed the first month of 2023 is not to touch 2023 guidance until we have some actual results, but there are a few things that will help you understand how we are starting out of the gates compared to what we outlined at December Investor Day. Our 2023 premium and service revenue should be approximately $2 billion higher than the range provided at Investor Day. Let me bridge that for you: $1.5 billion more of Medicaid premium revenue from a higher starting point in 2023 and an additional 2 months until redeterminations recommence April 1; plus an additional $3 billion of commercial premium revenue from an outstanding marketplace open enrollment period; minus $0.5 billion of Medicare revenue as we were off in the annual enrollment period, down high single digits versus down mid-single digits; and minus approximately $2 billion of divested revenue previously in guidance, Magellan Specialty, Centurion and HealthSmart. Let me go a little deeper on 2 2023 topics. On the additional Medicaid broad growth of $1.5 billion, we expect to give about 2/3 of that back in the redetermination process. So our previous estimate of $8 billion of ultimate run rate revenue give back goes up to $9 billion. By April 1, we expect to have grown by 3.4 million Medicaid members since the onset of the pandemic, excluding new markets and we expect to lose approximately 2.2 million of those members in the redetermination process over the next 1.5 years. In other words, about 65% of that growth. The 2023 portion is baked into the new revenue guidance. The remaining 2024 portion would be about $6 billion of the $9 billion. And I know a number of you have asked about our early read of attributes related to our growth in Marketplace. As Sarah outlined, based upon a review of the demographics, metal tiers, product types, subsidy eligibility and distribution sources of our new membership, we don't see any signs of alarm. The proof will ultimately being the claims data, but all of this Marketplace growth, even membership from carriers who have exited, comes in at our product design, our network construct, our pricing and into our clinical models. While we aren't changing our adjusted EPS guidance range at this very early stage for 2023, all of this recent insight, including the higher revenue base, biases us to the top half of our adjusted EPS range of $6.25 to $6.40. And of course, once we see from data -- once we see some data from Q1, we will refine all the underlying elements for you no later than our Q1 earnings call, suffice to say that we ended 2022 strong, and that looks to be continuing into 2023. As we look out to 2024, we remain committed to our previously provided adjusted EPS floor of at least $7.15. While we're 10 months away from giving formal 2024 guidance, let me give you some updated color on recent events that are included in this assessment. First of all, on the positive side, 2023 looks to be a little stronger out of the gate as we just discussed. Second, we completed California renegotiations in late January and are pleased with the outcome. Third, our Marketplace business is $3 billion larger than we had previously assumed, and we expect performance in the target margin zone in both 2023 and 2024. Four, investment income continues to grow, including the recent 25 basis point Fed rate increase in early February. Five, share count is down further, and with the stock price lower, we will strive to accelerate planned share repurchases earlier in the year. That's a pretty good collection of tailwinds. On the headwind side, though, Medicare is going to be challenging for us in 2024. We knew it was going to be tough given the cards we were dealt in STAR scores, stemming from poor decisions in 2020. And the impact of a disappointing advanced notice on 2024 rates does not help. We will most certainly be pricing for a negative margin in Medicare Advantage in 2024 temporarily. And we don't expect to grow Medicare Advantage in 2024 and likely will shrink a little. We have a lot of work between now and the first Monday in June when the bids are due to refine our estimates and products further. And obviously, the industry will be asking a lot of questions about the components of the advanced notice in anticipation of final rates in a couple of months. But here is the silver lining. If we can achieve at least $7.15 of adjusted EPS in 2024, with a meaningfully underperforming Medicare business embedded in that result, that becomes a margin expansion and growth opportunity in the back half of the decade as we improve STARS and pull other levers over the next few years. We know what needs to be done. It just takes time, especially in STARS. We can now turn the page from a very good 2022, the first year of execution from this management team and an important foundational year for multiyear improvement as we look ahead and ultimately getting to our long-term growth and earnings algorithm we shared with you at Investor Day. I wanted to start on the weaker MA start in the selling season. And maybe you could talk a little bit about was that due to changes by competitors? I heard something -- I heard a lot about the distribution channel changes that you made, but any specifics would be helpful. And then any benefit design changes that you made that you think contribute to some of that lost membership would be helpful as well. Yes. Thanks, Josh. Happy to hit that at a high level and then have Ken weigh in as well. So as I mentioned in my remarks, our major focus in the selling season was on operational stability, and on the fundamental underpinnings, that would contribute to quality results because we continue to take long-term view in Medicare. And so in order to achieve those results, we started rebalancing our distribution channels with a bias towards more proprietary channels where we feel we could control the member experience better. And so that was part of what impacted the softer results because, as you pointed out, we also had the competitive dynamics, investments from competition, not just in the market, but in those -- some of those channels that we deprioritized. But Ken, if you want to weigh in a little bit on benefits as well. Yes. Thanks, Josh. The CMS data, which is readily available, demonstrates. So I think you've seen where members have moved. For our part, we rotated towards margin improvement, recognizing going in that, that would probably be at the expense of some member gains in very targeted markets. But I think the insight that we've gained this past year, both with respect to the comments Sarah made about the distribution mix and the really overperformance from owned and more captive channels, along with, I think, a greater insight with respect to the characteristics of the kind of members that are likely more responsive to both our product and network mix, I think, gives us really the opportunity to be vastly more precise as we move into the new year. And I think you'll see that as we move, not just through our product design positioning for the coming year, but the way we allocate and optimize distribution, resources and the marketing, now that we've all -- and we've moved marketing internally. We had some of that subcontracted, I think, is going to create a strong platform for the achievement of the guidance we've provided. And just a quick follow-up. Do you have visibility or any insights into the changes in membership, whether that's helpful from a quality improvement, STARS improvement perspective? Do you know the members that have lapsed relative to the members that you've retained? Does that feel like you're moving more towards the right direction on STAR improvement? This is Jim. Absolutely. Sarah and Ken both reference the focus on proprietary distribution channels. In past lives, I've seen that creating a relationship -- and we talked a little bit about in New York, creating a relationship with those members goes a long way towards some of the things that are measured in STARS. For example, complaints. If you have a relationship and you bring the member in and explain to the member the benefits that they are going to get and how to use the system, obviously the complaints to CMS are significantly reduced. We're beginning to see that, frankly, in 2023 in the first 1.5 months of results. Disenrollments are much lower as a result of using proprietary channels. The other thing is that because of the stability of the existing membership, we expect that we're going to see some improvement in STAR scores as well as RAF scores going forward, which will help our overall margin profile going forward. So we feel really good about that. So focusing on relationships and how long we keep a member used to more of a 7- to 8-year member retention, and we need to begin to build that kind of stability going forward. And a lot of steps that we've taken around STARS are starting to see some favorable results. So feeling good about that. First, I want to appreciate the color on '23 and '24. Just wanted to get a little bit more detail, of course. So it looks like you're at 2.7% net income margins for 2023, give or take. From there, Drew, you mentioned Medicare Advantage margins go lower, it sounds like, year-over-year. I think the market certainly expects pressure on the risk pool in Medicaid year-over-year. So curious in terms of what gets better in 2024. I know one of the big buckets is Jim is working on those cost-cutting. Maybe you can share, for instance, how much cost-cutting benefit you expect to get from '23 to '24 as well as kind of your thoughts on that Medicaid margin in general and any other moving parts we might have missed. Yes, sure. Thanks, Justin. Yes, some of the tailwinds for 2024 that are sort of baked into our forecast, obviously, a really meaningful tailwind from the PBM RFP as sort of a stair-step benefit, as we've talked about, that commences 1/1/24. And we're well in the integration period and the transition period, working well with ESI and CVS as both good partners. So we expect to yield that benefit across our entire book of business. Investment income continues to be strong. We expect that to continue into 2024 share buyback. You see our share count, as we disclosed in our Investor Day deck, ended the year lower than we had anticipated. So we're able to bake that into our 2023 guidance. And at these prices, we'll be buying. That's for sure. Marketplace will be a few billion larger than we originally anticipated in 2024. And we like our margin position there, and we can probably make another step or we will make another step in 2024. And then as you mentioned, the overarching value-creation plan, including a lot of the work that Jim and a lot of other people around the company are executing on pulling levers, we expect momentum as we get into really the third year of that value-creation plan. So those are all the tailwinds. But as I mentioned, Medicare is going to be a pretty significant headwind given STARS as well as the lackluster and advanced notice. You also asked about Medicaid. So as I think about Medicaid, and I know you've asked this a number of times, but now we're on the conference call, that's FD compliant, so I can answer some of those questions. So as we think about the progression going from 2022 to 2023, we ended the year at 89.6% in 2022. And we've got about 30 basis points of pressure built into 2023 up to the very high 89s. But as we dissect the 2022 actuals and we look at things that we had to fortify or are unlikely to recur. That's another 10 to 20 basis points of nonrecurring, call it, items embedded in the 2022 Medicaid HBR. So we think that gives us adequate room for a little bit of pressure from redeterminations as we are working hard with our associations, with the actuaries that represent our associations, the actuaries that represent the states, our state regulators, departments, and really sort of warming them up for what may or may not be necessary. But to the extent that there is a risk pool shift, we expect action probably not as fast, but hopefully close to as fast as the action that was put in, in the other direction with acuity changes during the COVID era. So we're prepared for that. We've had a lot of time to prepare. And this, the elongated process of redetermination and the sloping, will help us gather data and be able to manage that HBR in the high 89s. And just to put a bow on it, anything on update on the 3.3% net income margin target at North Star for 2024, how you view that? Yes. Well, our target is at least $7.15 of EPS. The interplay between operating income and share buyback will sort of affect whether or not that 3.3% is the absolute number that we hit for 2024. But that is our North Star, and we're going to keep on pushing for that. And obviously, the divestitures, as we've talked about, have some impact on the denominator there in terms of both the margin and the dollars. But we're going to fight hard to deliver that, at least $7.15, even though we've got a pretty meaningful Medicare headwind in 2024. A couple of questions on the quarter. I wanted to ask about reserves in PYD. I think that the DCPs look good, but trying to understand the magnitude of PYD you experienced in the quarter better. For a lot of other companies, by the time we get to the fourth quarter, PYD is pretty minimal. It doesn't seem like that was necessarily the case here. I would love to understand what drove this quarter and what business was impacted. And this might be the same answer, but wondering why we didn't necessarily see the same typical Q4 MLR seasonality in commercial. Any color there would also be appreciated. No, you're right. We outperformed. That was probably the biggest contributor to our sort of overall slight outperformance on HBR, but commercial continues to be strong. And I'd chalk that up more to execution and the momentum that we've gained over the last, call it, 5 quarters in that Marketplace business, implementing clinical initiatives, the interplay with the value-creation office, not just for SG&A, but also for trend vendors and HBR initiatives that drive both quality and the affordability of health care. So those are some of the drivers that helped the commercial business, and we feel pretty good about that heading into 2023. We do disclose that the roll-forward tables, I think one of them is in the press release, the rest will be in the 10-K, last year. So 2021 saw a higher favorable development of the 12/31/2020 reserves. That's understandable with sort of the chaos of practice patterns and claims patterns during the 2020 year of COVID, but still consistent reserve methodologies and a pretty strong showing of development during 2022 off of the 12/31/2021 reserves. A couple of things, if I could. First, on the Marketplace. I know -- I appreciate the comments about the demographics of the people you've seen through the open enrollment period. There's also been some questions about what are the demographics going to be of people that reverified off of Medicaid and go on the exchanges. I know the current exchange population has very diverse health needs. Do you think those redetermined Medicaid people that end up on the exchanges will pull up the risk pool? Pull down the risk pool? How are you thinking about that, first off? Yes. Thanks, A.J., for the question. So if we think about the members who are redetermining off, we do think that those numbers are probably carrying a slightly higher acuity, but then you have to balance that with a view that with the growth that we've seen in the Marketplace product. And if you look back to historic periods of growth of this magnitude, it tends to bring many more healthy members into the pool. So the net effect of those 2 dynamics, it's hard to say exactly where that equals out, but our Marketplace team is watching both of those cohorts pretty carefully and I think has obviously had visibility into the fact that redeterminations were going to factor into 2023 and took that into account in pricing. Okay. if I could slip in another one on your Medicare comments for next year. I know on the RADV, you said, "This is what we like. This is what we don't like." When you think about the rate notice, it sounds like there's places where you think the industry can comment to CMS and potentially ask, maybe look at it in a different way or something. Could -- are you willing to talk about where some of those points of discussion, at least between the industry at large and CMS might be? And in terms of your strategy, it sounds like you're talking about a potential negative margin. So that must mean you're going to try to stabilize benefits year-to-year in a growing market. I'm wondering, is it conservative to say we're going to have stable benefits, but not have growth on the enrollment side? Yes. On the Medicare side, we've said this coming into even this year is we try to design benefits in order to maximize stability as we move through '23 and '24. And I think we will continue to do our best to keep benefits as stable as possible, taking that long-term view that, that stable operations, optimizing for member experience, improving quality is the right thing to do, and weathering the '24 headwind may have an impact on margin as a result. But the goal would be to keep benefits as stable as possible. So we're not members, and we are focused on building those longer-term relationships, as Jim talked about. Relative to your first question, the RADV rule is sort of in the final state. And so there, it's really about talking to our industry partners about how we feel about the impact of the as yet undefined methodology and what impact we think that may have and how comfortable we are with that. And then the 2024 rate notice is a regular cycle of conversations that we have with the agency in order to communicate what we believe the impact of the somewhat lackluster rates might be on the overall industry and the benefits to seniors. Pardon for the interruption, everybody. This is the operator. Mr. Taylor, your line is breaking up very badly. It looks like we have a bad connection. I would ask that you please disconnect and dial back in or pick up your speaker phone, if that's the case. Okay. I apologize. I just wanted to ask about expectations for ACA risk adjustment given the enrollment growth for '23, when we've seen companies with really large enrollment growth in the ACA. Sometimes, they've been surprised to end up being increasing payable on the ACA front. So it looks sort of like in this case, you guys have generally been a receiver and now you're going to have a much larger population. Is your expectation that's fairly even? Or is there any material additional payable you're contemplating for '23? Yes. So it's a good question. The demographics of what's coming in looks very similar to -- and actually, the subsidy eligibility has gone up a little. So nothing really alarming in all the attributes we can look at what we know today. Obviously, the proof is going to be in the med cost. And you're right, in Marketplace, it's a zero-sum game concurrent risk adjustment process for 2023. So that's something we'll be watching. There's also 2 less competitors out there. And so we thought about that as we not only booked our 2022 risk adjustment receivables, but also as we forecast into 2023, we'll get the first Wakely data in June this year, and we'll have to take a look at that. But we've thought about that as we forecasted and as we closed out 2022. I wanted to follow up on the Medicare business. Drew, could you help us think about the magnitude of the step down that you are thinking for Medicare margins in 2024, just given the comments that you made about pricing for a negative margin and trying to keep benefit stable maybe relative to the margin that you're targeting for 2023? And then I guess outside of plan design, are there any offsets that you think you can leverage to try to mitigate some of this impact in 2024? We're always looking for whether it's -- Jim and the team, the Medicare team are focused on SG&A. I think there's opportunity there. There's continuing maturity in trend vendors. So yes, we're going to look for any possible offset other than benefits. And as Sarah said, we'll try our best to keep stability for our members, but we do expect at least at this early point to shrink a little bit in 2024. But the swing is pretty meaningful, both in terms of STARS and the very disappointing advanced notice with rates. I mean, that advanced notice for us, call it, minus 1%, excluding STARS because we made our own bed in STARS, but we are expecting a positive low single digit. So it's a pretty meaningful swing. Every point is a couple of hundred million dollars on a $20 billion business. So we've got to manage through that, and it will be a pretty sizable drop. I can't give you an exact number yet. We'll definitely give you that in 10 months after we've gone through the bids, we've got the final rates, and we've developed sort of that balance between margin degradation and stability in the product. But it will be tough. We'll power through it. And '25 and beyond will be margin expansion and growth as well ramp up over the next few cycles of STAR results. And it's good to hear, Jim conveyed to you guys, that we're already seeing some elements of optimism that we're going to be able to achieve that multiyear improvement that we're seeking. One other thing I would add when we think about levers in 2024 is the breadth and depths of our value-based care relationships, which is something that I think we are -- we're already planning on, but have the runway to accelerate in 2023 in order to be in an even stronger position. And as many of you know that, that was -- we have a good set of relationships with a number of the sort of leading value-based care providers, but I think we have been not as aggressive in that in the past, and so in 2022 started to turn our focus there. Our organizing around that internally brought in some great talent to help accelerate. So that will be a focus in 2023 that I think will give us some benefit in 2024 and then obviously beyond that as well. I just wanted to ask a bit more about redeterminations and expectations. Appreciate all the color on the 30 bps of Medicaid MLR pressure in '23. I recall hearing at your Investor Day that your state composite rate increase, improved about 50 bps. So I'm just curious, how did that compare to your original expectations? I think there's originally been some concern that state rate increases may not go into effect until a couple of quarters after redeterminations were underway, but 50 bps improvement feels pretty strong, pretty positive, quite high. And I think -- and if I think about the messaging around just most states expecting to complete redeterminations likely later in '23, then in that scenario, you're entering '23 strong rate increase, couple that with a very slow rollout of redetermination. It seems like a recipe that could present some earnings upside this year. Is that a fair way to think about how redeterminations might develop? Yes. So the composite rate that is embedded in our guidance as we -- as you properly pointed out we disclosed at Investor Day is 1.4%. So I guess, yes, compared to a meager 0.9%, that is a big jump, but it's still on an absolute basis, 1.4%. So think about that in context. But the reason why we are 0.9% relative to the 1.3% that we had baked into our 2022 guidance, Florida was a pretty big piece of that. We expect the recovery there this year as we demonstrate the need for rates. So that will be an ongoing process as we go through the rate cycles. Luckily, they're distributed across the year. They're not all stacked on 1/1, like the commercial business or the Medicare business. They do -- we have slugs that renew throughout the year, which will help with the sloping of redeterminations as well. Maybe just to add a little bit of color on the process. To your point about sort of the methodical approach that we were expecting, with the certainty of the year-end bill, we started to get updated information obviously from each 1 of our states and are -- continue to be in regular contact with them. And I would say that in general, we are seeing that methodical approach hold with the vast majority of our states sitting in a 9- to 14-month bucket in terms of the time frame that they expect redetermine redeterminations to play out under, and some of them indicating that they won't start April 1, they'll start closer to summer time. So as you think about sort of the start date shift, overall, nothing that suggests overall slope line will shift materially. And we are seeing continued positive momentum from our states and being open to and encouraging our support in outreach and communication education efforts to members. So in general, I feel like the industry is aligning and organizing around an approach that will minimize or seek to minimize member abrasion in the process and are allowing us to run alongside our state partners, all of which is positive from our perspective. Wanted to just drill in a little bit more, especially given possibly the importance of the buybacks. Just if you can walk us through your updated sources and uses of cash for 2023 and how much you think you can have for deployable excess capital for buybacks. And then, Drew, I'm not sure if you've given us 2023 operating cash flow guidance yet. So if you do have that, I would appreciate that, too. Yes. So as you've seen, we did quite a bit of buyback in 2022. And even as we were in the 70s in January, we were able to execute on a few hundred million more. That was largely driven by divestiture proceeds. So we're continuing the portfolio review process. So the timing of buyback associated with divestitures will vary based upon sort of that M&A process. But in the normal course, yes, we expect late in the year a few billion of share buyback. We're going to see what we can pull forward, but we also have improved the allocation process and therefore, the management fee process, and that will trap a little bit of cash in the first half, maybe the first 3 quarters of 2023. So that's why we are back-weighted. As you look at our guidance for share buyback, we've sort of back weighted that share repurchase. So it won't have a meaningful impact on '23, but it will roll into '24. So we're going to do our best. We'll probably pay down a little bit of debt as well as we're -- if we sell off an asset that had EBITDA, we'll pay off some debt as well to manage that. And now when you actually -- you pay off debt, you get a benefit with the interest rates higher. So we're going to do our best to take advantage of where we're trading, but we also need to do that with a balanced view of the capital structure. Just wanted to make sure I understood. I think you guys said that you expected to add 200,000 to 300,000 lives on the exchanges from redeterminations. I just want to make sure that, that was now, I guess, in your guidance. And then you talked a little bit about the risk pool on the exchanges, really interested in that concept about the people who come on from redeterminations because that's where I would guess, it would look more like the SEP from prior years, where you only have them for 6 months. You don't have time to risk score. And in theory, they're sicker than ever. So I would love to kind of hear how you're thinking about the risk pool of those members. Yes. So relative to the redetermining members into Marketplace, we do -- again, as I said earlier, we do expect that on balance, they probably have slightly higher acuity. But at a minimum, pardon me, your point about the fact that we don't have them for the full year means that they turn to profitability as we move into 2024. And again, this is something that the team had visibility to throughout 2022 and coming into the year and baked into our guidance, and I think will be -- have the offset of our expectation that a number of those members who are coming into the pool will be healthier to offset that overall and are coming in with a 1/1 start date. So we have the full benefit of their 2023 risk adjustment. And then relative to the 200,000 to 300,000, that continues to be our estimate that is baked into guidance. And a lot of that is of a belief that the vast majority of members who redetermine off will first go to the commercial book. And again, we just need to see how the data starts to play out and whether there are any adjustments to that as we see folks coming over on to the marketplace products. Really just a quick confirmation questions around potential impact [indiscernible] for the changes [indiscernible] for '23. [indiscernible] feel like they should be an as higher or greater to be offset by [indiscernible]. Pardon me, Mr. Valiquette, sir, I apologize. Your line is very bad, the connection. Can you pick up your handset if you're using a speaker phone, sir? Actually, no. It's not coming through well at all, sir. We're not able to understand what you're asking. Would you be able to reconnect or possibly reach out off-line. I apologize, we have to move on. We're not able to hear what you're saying. Our next question today comes from Calvin Sternick with JPMorgan. First, a quick clarification on MA. I think I heard a comment about lower disenrollment. Was that for this AEP? Or is that more of a go-forward comment? And then second, it sounds like MA has got a margin expansion beyond 2025. Just curious how you're thinking about the overall level of membership growth once you start getting -- you get past the STARS [indiscernible]. This is Jim. I'll take the first part of your question. We've been doing a lot during 2022 to address some of the issues that we've had with STARS. A big driver of some of our poor STARS results had been the customer complaints called CTMs and disenrollment. And we're obviously -- I like to look at things every day. We're watching our CTMs and disenrollments for this past year, and the amount that we're seeing is favorable to what we've seen in the past. And so a lot of the steps that we've taken during the course of '22 seem to be bearing some fruit. Those results will -- as Drew mentioned, STARS takes time, will favorably impact our 2026 revenue. We're also in the process right now. CMS comes out with CAP surveys from March to May. We're in the process of doing a number of procedures that have never been done here before as a consolidated Centene to enhance our CAP scores as CMS does that survey. So there's a lot of good things that are going on to positively impact where we think STARS will be in the future. I think when we were in New York together. We talked about 20% for 2025 being in 4-plus STAR plans, 20% of our membership. We want that to be at least 40% in '26, and then we're targeting 60% in '27. Drew, I just wanted to circle back on the idea that you sounded pretty bullish on the opportunity on the PBM transition. Just wanted to see if there were any changes to expectations or synergy targets as it relates to that. No. My bullishness is ESI and Centene working together to deliver what we anticipated when we inked the deal a couple of months ago or a month or so ago. One more thing. Let me -- on share buyback, let me clarify something that I said earlier. I was answering a 2024 question. The $3 billion is our placeholder for 2024. The 2023 back half of the year share buyback is about $1.5 billion. And that's because we've got a little bit of trapped capital that we'll have to get out over the following year or so. So the $3 billion I mentioned is the forecast for 2024, absent any acquisitions. Thank you. And ladies and gentlemen, this does conclude today's question-and-answer session. I'd like to turn the conference over to Sarah London for any closing remarks. Thanks, Rocco, and thanks, everyone, for your time this morning. Please reach out to Jen with any follow-up questions, and we look forward to talking to you throughout the rest of the quarter. Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
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Ladies and gentlemen, good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to Unifiâs second quarter fiscal 2023 conference call. Today's conference is being recorded, and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you, and I will now turn the conference over to A.J. Eaker, vice President of Finance and Treasurer. You may begin. Thank you, Abby, and good morning, everyone. On the call today is Al Carey, Executive Chairman; Eddie Ingle, Chief Executive Officer; and Craig Creaturo, Chief Financial Officer. During this call, management, weâll be referencing a webcast presentation that can be found in the Investor Relations section of our website, unifi.com. Please turn to Page 2 of that slide deck for our cautionary statements. Management advises you that certain statements included in today's call will be forward-looking statements within the meaning of the federal securities laws. Management cautions that these statements are based on current expectations, estimates and/or projections about the markets in which Unifi operates. These statements are not guarantees of future performance, and involve certain risks that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecasted, or implied by these statements. You are directed to the disclosures filed with the SEC on Unifi's Form 10-Q and 10-K regarding various factors that may impact these results. Also, please be advised that certain non-GAAP financial measures such as adjusted EBITDA, adjusted EPS, adjusted working capital, and net debt may be discussed on this call. Thanks, A.J. Good morning, everyone, and thanks for joining this call. I have a few remarks to kick this off, and then I'm going to turn it over to our CEO, Eddie Ingle. So, as you can see, quarter two of 2023 has been a very difficult environment to operate in, and you saw that in the pre-release that we had a couple of weeks ago, and also our materials for today. At this point, I think most of you have heard about apparel retailers and apparel brands that have had significant backlogs of inventory in their system and in their stores, and they've been trying to discount this inventory and clear it out all the way through the Christmas holidays. And this imbalance of inventory began all the way back in June of 2022. So, it's been with us for a while, and this has very definitely had a significant impact on our volume and our profits in Q1 as we reported before. And then it's also persisted, this issue is persisted and actually worsened for Q2. Now, there is good news. We have seen a pickup in the month of January in orders for our US operations, and it looks like we should see a gradual improvement through the balance of this fiscal year, and then a corresponding improvement in profitability as well. With regards to our Asian business, that same inventory backlog from US retailers, is having an impact on our China business, because a great portion of our business there is for US retailers. So, it's had a significant volume decrease for our Asian business. This situation has continued all the way through Chinese Lunar New Year holiday that ended last week. We expect to see some level of volume improvements coming very soon. We'll know more in the next couple of weeks, but we do know that many manufacturers are opening up this week in China. While all of this has been going on, our people were busy working on several ideas. One was working with our customers on future volume increases, and I'll tell you, there's a very definite increase from our customers for recycled material for their apparel, and it gives us optimism for our brand REPREVE. And this activity will show up in future sales, but I would say that the brand has actually gained momentum with our customers in terms of their interest all the way through the pandemic period and likely to include - to continue right now. The organization has also been very hard at work on cost reductions. We've managed our inventories aggressively, and we've been able to reduce North American labor and headcount by a voluntary attrition strategy and holding positions opened, and that gave us the opportunity to avoid excess costs. Additionally, the team has done a good job at generating cash, even in this tough environment, and we have a strong balance sheet thanks to a new credit facility. You'll hear more about that from Craig. We do believe the worst is behind us, and we're going to see gradual improvements in volume and profits in the next two quarters, and we also see the fundamentals for our long-term business to remain in place, despite all the turbulence that we have had over the last six months. In closing, Iâll just tell you this, the Unifi employees and the management team during this timeframe have done a very good job and we're proud of them. Everyone's working hard to offset these challenges, and they've kept an enthusiastic attitude, even though most of the challenges we face are well beyond their control. So, we are proud of them. So, at this point, let me turn it over - turn the presentation over to Eddie Ingle, our CEO, and he'll take you through the details of our performance. Thanks Al, and good morning, everyone. As Al noted, our second quarter fiscal 2023 results reflect the very difficult operating environment stemming from the continued demand disruption we have experienced, a result of inventory destocking measures, and slowed global apparel production. As I mentioned, our employees really have shown an amazing amount of resilience while enduring a very challenging period across the industry, and I want to thank them for their commitment to the company and their hard work. For many reasons, we remain confident in our business model, and we are optimistic towards the future growth opportunities of the business as a global leader in sustainable fibers. Now, turning to Slide 3 for a closer look at the quarter, our net sales for the quarter were $136.2 million, down 32% compared to the second quarter of fiscal 2022. This resulted in an unusually large amount of fixed costs becoming stranded, which we were not able to overcome in our domestic operations, unfavorably impacting our profitability. Last quarter, we cautioned that the higher than normal inventory levels across the world's largest brands retailers, would negatively impact our results in the second quarter. The magnitude of these macroeconomic trends was unforeseen, and the resulting adverse impacts to our business worsened in November and December, far beyond what we had anticipated. In the US in particular, demand disruption caused by destocking efforts from retailers, became more and more severe. This demand decline caused a slowdown in apparel production globally, and led to results that fell below our expectations. Now, while these challenges have created a difficult operating environment for our business in the near term, the disruptions to our business are expected to be temporary as retailers and apparel brands work through normalizing their respective inventory levels and supply chains. While this process plays out, our core business model remains intact, and we remain ready to meet increased demand as we return to more normalized levels. In the last few weeks, we've already seen in the US, as Al pointed out, notable improvements in weekly demand trends compared to the levels we experienced in November and December, which leads us to believe that demand levels bottomed out in the December quarter, and we are optimistic that our business is on the road to recovery. Profitability in the Americas during the quarter was primarily pressured by higher material costs from December, with the loss of asset leverage on lower volumes. We are glad to see that input costs stabilized during the December quarter, and our pricing is healthy against current levels, putting us in a solid position moving into the third quarter. Our expectation is that both energy prices and the geopolitical today situation, will remain volatile. However, we don't currently have any significant pricing actions planned. We continue to be proactive in our efforts to offset the impact of the temporary headwinds and challenges we've been experiencing in the US. During the second quarter, some of the cost saving measures we took included reducing external spend programs, minimizing overtime hours, extending production shutdown periods, delaying the backfilling of open positions to lower headcount temporarily, and lowering raw material purchases, and taking advantage of some of the payment term extensions we've received. Turning to Brazil and Asia, we continue to see strong demand in Brazil, with higher sales volume versus a year ago. This strength was completely offset by significant margin pressure from decreasing market prices in connection with excess capacity in Asia, while Brazil's inventory cost profile remained elevated from earlier months of higher cost purchases. In Asia, our operations performed well against the much lower demand as compared to any recent historical measure. The segment has maintained a strong margin profile, with a rich sales mix, and we are quite optimistic that demand will recover following the lunar new year. Now, I'd like to move on to Slide 4 to discuss REPREVE fiber. In the second quarter, REPREVE fiber products comprised 31% of net sales, significantly impacted by the lower sales in Asia. We have full confidence that REPREVE sales will rebound strongly in the near future once the operating environment normalizes, as we continue to see momentum in the REPREVE brand for new products, customer adoptions, and co-branding. In fact, in the fiscal 2023 second quarter, we shipped 19.8 million REPREVE hangtags to brand customers. On the marketing front, REPREVE continues to gain traction, with a mix of co-branded product launches, social media partnerships, activations, and PR placements. During Q2, several brands launched new REPREVE co-branded products, including Asics, Arcade Belt, Tom & Tailor, and H&M. The Asics launch was particularly successful, and weâre quite proud of that activation. In order to become more sustainable, Asics is committed to converting core styles from virgin polyester to REPREVE. The launch included several winter styles, and was supported by co-branded hangtags, digital marketing, social media, and PR. And we see this as the first step in a much larger partnership. For example, our mobile tour will activate at the Asics-sponsored LA Marathon in March. Our new PR strategy is certainly starting to bear fruit as we secured 56 placements, resulting in over 660 million impressions during the quarter. Additionally, our new creative direction is resonating particularly well on social media. A highly curated mix of REPREVE branded content, combined with imagery from key brand partners, is driving increased consumer awareness and engagement. Over the quarter, we partnered with Quicksilver Pottery Barn, Scotch & Soda, Beyond Yoga, Rigolo, and, (Ug), among many others. Now shifting to activations, our Bowl Season partnership cumulated with a mobile tour activation at the Dukeâs Mayo Bowl in Charlotte at the end of December. I was there myself watching NC State play University of Maryland, with over 37,000 fans in attendance. Additionally, the game was broadcast live on ESPN to over 2.6 million people. 2022 was the first year of a three-year partnership, so we look forward to building on this for 2023 and 2024. On November 28, Unifi announced the expansion of Textile Takeback. Unifi's Textile Takeback program is designed to reduce waste generated from fabric production or at the end of an article's lifestyle - lifecycle. Through a strategic mix of diligent media relations, the Textile Takeback launch garnered 12 pieces of notable media coverage, with over 70.5 million impressions across the business and trade media. Trade shows remain a core tenant of our B2B marketing mix. While our tenant is not back yet to pre-COVID levels, we exhibited at both ISPO in Munich and The Running Event in Austin in November. This is the first time Unifi exhibited at The Running Show, and was well received by both existing and potential new brand customers. Looking ahead to Q3 and beyond, we are focused on building on the momentum in both REPREVE and seeing the business return back to more normal levels. Thank you, Eddie, and good morning, everyone. The quarter we just completed exhibited the impacts of reduced demand by retailers and brands. Softer than our first fiscal quarter, the activity flowing through the apparel supply chain, drove significant margin pressure and lower than expected profitability. Outside of the short-term disruption, we believe underlying demand for our products remains strong, and our management team is focused on managing operating costs and working capital to remain nimble as we continue to pursue our long-term goals. Before reviewing the segment performance, I would like to discuss two (indiscernible) items in the income statement. First, when we refinanced our credit facility during the second quarter, banking and transactional fees incurred were approximately $800,000, and $273,000 were recorded as debt extinguishment costs to interest expense, driving a portion of the non-routine increase in interest expense. Second, we recognized additional benefits from our efforts in recovering prior period tax payments in Brazil. In the December quarter, we filed amended Brazil tax returns to recover certain components of income taxes paid. As a result, we expect to receive the associated cash refund of approximately $3.8 million within the next 12 months or so. You will note that this item has been included in our adjusted EPS calculation to improve the understanding of tax expense that relates to the current fiscal year. Let's turn to Slide 5 of the webcast presentation to begin the review of our reportable segment performance. For the Americas segment, revenues decreased 25.7%, driven by significantly lower sales volumes. Price and mix impact demonstrated generally higher selling prices, with the volume reductions partially offset by a higher proportion of chip and flake sales. In Brazil, sales levels were strong, with an 8.1% increase from volume that was offset by lower average selling prices in connection with the anticipated pressure from Asian imports that we mentioned in the prior earnings call. For our Asia segment, sales volumes were challenged by the overall apparel weakness, while pricing and mix remained strong. Accordingly, consolidated net sales were $136.2 million, with the vast majority of the decrease since December 2021 quarter, characterized by near-term apparel production weakness. Turning to Slide 6 for the quarterly gross profit overview. Consolidated gross profit decreased from $16.9 million to negative $8.0 million, with gross margin declining from 8.4% to negative 5.9%. The Americas segmentâs expected decline in gross profit and weaker gross margin percentage, were attributed to the shortfall in product demand, and the associated impact on fixed cost absorption. We took actions to reduce labor hours to appropriate levels, while minimizing overtime, allowed attrition to help normalize our employment levels, and made diligent efforts to control operating costs during this difficult quarter. In Brazil, the gross profit and margin rate demonstrated the pressure on selling prices from low cost import competition. Brazil's cost of goods sold were impacted by higher input costs at the start of the current fiscal year. Our selling prices required adjustment to the more current market dynamics. The Asia segment maintained a strong gross margin profile, with a high proportion of REPREVE products, albeit at a lower sales level due to the constrained demand. Our asset-light model continues to prove to be a great choice for the Asia region. Outlined on Slide 7, and as we described in our earnings release, we completed the refinancing of our asset-based lending facility during the second quarter. This new facility increases our borrowing capacity from $200 million to $230 million, moves the significant majority of our short-term outstanding borrowings to the expanded term loan, continues the favorable borrowing rate structure and overall loan flexibility that has been in place for several years, extends the maturity date to October 2027, and provides helpful liquidity during this current period of demand softness. It's helpful to note that the leverage ratio drives our interest rate pricing but is not a covenant for compliance purposes. Fixed charge coverage ratio only springs into consideration if our available borrowings fall below an established trigger level. At January 1st, 2023, quarter end trigger level was $23.0 million, and our available borrowings was $64.7 million. Thus, $41.7 million could be borrowed before the trigger level became applicable. Accordingly, we have great flexibility and runway on our new credit facility. We ended the second quarter with $3.4 million borrowed against our ABL revolver, and $115 million borrowed against our term loan. Moving to Slide 8 and our balance sheet highlights. Under our balanced approach to capital allocation, we expect to continue to invest in the business (indiscernible) and organic growth, maintain a strong balance sheet, and remain opportunistic for share repurchases and or M&A prospects. As a reminder, $38.9 million remains available for repurchases under the current share repurchase program, with no repurchases conducted in fiscal 2023 so far. During this demand suppressed environment, we continue to assess the proper timing of vendor payments and the magnitude of our capital expenditures, ensuring we conduct the most advantageous purchases and investments. As noted in our outlook, we are expecting sequentially less cash flow for capital expenditures in this third quarter of fiscal 2023, along with further reductions in the subsequent fourth quarter of fiscal 2023. Thank you, Craig. And before we turn the call over to our Q&A sessions, I'll give you an outlook and the expectations we have for the third fiscal quarter. As we discussed on this call, the operating environment and demand trends we're seeing, both domestically and in our international regions within the apparel and retail markets, are still working through demand pressures. Although our demand signals remain choppy, we are expecting stronger results in the second half of the fiscal year. For the industry, we're expecting the operating environment and the textile demand trends from the apparel market will recover at a modest pace during the calendar year. And with this, we expect modest sequential operating improvement from the second quarter to the third quarter. For the fiscal third quarter, we expect revenue to increase sequentially after we get past the normal slowdown in Asia during the lunar new year. We expect significant sequential operating performance improvements on an operating income and adjusted basis, and our effective tax rate is expected to remain volatile. While there remain near-term demand challenges that we need to navigate, the long-term growth potential of Unifi has not changed. We remain optimistic about our future and position as a global sustainable fiber leader. The drivers of our business remain valid today. Of course, everyone on the Unifi team is looking forward to the time when we have a more normal environment, where we can leverage our strengths. Weâve been pleased with our increased liquidity through our amended and expanded credit facility, and we will continue to maintain our strong balance sheet to act opportunistically on growth initiatives, as we remain well positioned and focused on being the sustainability partner of choice to brands across the globe. Thank you [Operator Instructions]. And we will take our first question from Daniel Moore with CJS Securities. Your line is open. Thank you. Good morning. Thanks for taking the questions. Maybe start with, you obviously give great color in the challenging, clearly challenging macro. Any more detail on what kind of âmodestâ sequential increase in revenue and significant operating improvement looks like for fiscal Q3? I guess I'm wondering, do we expect gross margin overall and or EBITDA to turn positive, or is that visibility a little bit more difficult at this stage? Dan, I'll take part of that question, and then I'm going to hand some of it over to Craig. From a volume perspective, the three segments, Brazil is certainly coming back nicely. They didn't suffer as much as the other business segments during Q2, or they were down not as severely down. So, we expect the volume to come back there nicely. In Asia, it was very strange what happened during the end of calendar Q4 around COVID. That resulted in lower production levels even further than normal in January, but we are expecting a very, very decent increase in the volumes relative to the December month, which was better than the November month. So, we're beginning to see quite a nice uplift there. And in the US, I'm going to refer to the first sort of two weeks of December relative to where we are now, we are seeing a nice uptick relative to the beginning of a December month outside of the holidays. So, quite positive all around in all our segments. Yes, the a little more color on the retailers, units were up 1% for the first three weeks of January. So, itâs a very small window to look at, but it's definitely - it's better. It's better than it was. And to - Dan, to add to your question, as far as additional commentary of color around the outlook, I would say for our Q3, we are expecting to return to positive gross profit. We do feel like the signs that we've seen, especially here in early January, where we're seeing our January sales volumes up 5%, 5% to 10% or so versus where we thought they would be, I think that is giving us comfort that we will be returning to positive gross profit here in this March quarter. I think we're continuing to watch - as Eddie was mentioning, we expect kind of a similar but slightly lagging rebound in Asia. Haven't seen that just yet, as we're still finishing out the lunar new year, and Brazil did have a - they had a tougher quarter here in this December quarter. As we noted, a lot of that was input costs kind of flowing through and some challenges on more competition lower price. That's really got to a more reasonable level, and we definitely expect them to start to return to more normal profitability. So, all that adds up for a much noticeable improvement in gross margin in Q3. Super helpful. I appreciate it. And Craig, you just jumped - led into my next question, which was Brazil. I know it's impossible to tease out, but any color on sort of the magnitude of the impact from increased Asian competition as all that extra volume sort of flowed through - flowed around the world versus just timing in terms of mismatch in terms of COGS and pricing. Just trying to get a sense for how much is in your control as you increase prices and how quickly those margins might snap back. Yes, I'll jump in and answer that question, Dan. Our fiscal Q2 in Brazil was quite unusual. It was similar to what happened to Q4 fiscal 2022 where there was the Chinese and Asian importers into Brazil were putting yarn on the market at incredibly low prices. And that really - we are very market-driven down in Brazil, and that resulted in us reacting as we should have to the market conditions. The situation is changing now. We will flow through that higher price raw material in Q3 that we purchased, and that will improve the margin significantly down there. And the volumes are, as we said, coming back nicely also. So, that will change the profit profile down there. Got it. Maybe one more, and I can jump back in queue, but just what was the sort of volume versus pricing in the quarter? And - or do we expect pricing to be maybe a little bit more of a headwind going forward as input costs have declined? Just kind of where we are. You mentioned stabilized, but have input costs stabilized, pulled back in? What's the latest, both from a virgin perspective, as well as bail bottle pricing? Yes. In Brazil, the input costs will be declining as we move through the quarter, really significant impact from probably Q4 more than Q3. In the Americas, we have passed through all of our higher priced raw material inventories in Q2. So, we're expecting - we know that in Q3, we'll have a more stable, more normal raw material cost. And our pricing is nicely positioned relative to our raw material costs. What we're looking forward to is seeing this volume come back so we can take ad advantage of that. Hey, yes, good morning, and thank you for taking the questions. So, your inventory first, it was down sequentially, and certainly on a year-over-year basis as well. So, have you sold most of the high cost inventory by now? How should we think about that? Yes, I would say in the US, where we had a particular problem, the inventory has flushed through. In Brazil, it's going to - because we have a longer supply chain, it does take a little bit longer. And their profile, we saw the impact in the high price inventory in Q1 in the US, which we flushed out in Q2. They saw really the margin pressures because of their raw material costs, really impacted in Q2, and we're coming out of that as we move through Q3. So, we feel quite good about that in both regions. In China - in Asia, we haven't had that situation occur. Got it. Okay. Yes, thanks for that. And then as far as Asia, as far as what you're seeing there, we've heard from other companies that many companies have taken more extended periods of shutdowns around the lunar New Year. So, is that really what, what's, what's happening here, and are you seeing any signs now that I think we're just past the lunar new year, that things have picked up? Yes. So, two comments on that. You're right. A lot of our, not just suppliers, but also our customers, did take extended shutdowns in January, and the lunar new year was early also. So, and along with the number of people that are out in the workforce, even if you wanted to get some stuff made, it was sometimes difficult to get it made. We are seeing in February - we're only just a week past the lunar holiday. The signals we're getting are quite good. Thereâs huge demand for REPREVE. The innovative products we have over there are certainly garnering some new interests. When we make product in Asia in February, there's usually a six-month lag. So, we know that companies, brands, and retailers, are going to be gearing up for fall sales, and they're going to start placing orders in the February, march timeframe. And we have seen reductions - we've heard on the street that there are reductions in inventories. Thereâs still some work to do at the brand and retail level, but they've certainly made a lot of changes to their inventories over the last six months. They'll continue to do that over the next six months. But they need to order now in Asia to meet the demand they're going to have for fall and for Christmas. Thank you. Got it. Okay. Yes, thanks for that. And then, so in the quarter on a consolidated basis, your price mix was up 4.5%, but you talk about material costs stabilizing. So, what is your confidence level as far as your ability to hold pricing, or do you think that perhaps given the current weak macro environment, that you may have to adjust your pricing because of competitive pressures perhaps? It's a question that we ask ourselves all the time. We are very strategic in how we're pricing. Itâs always a balance between volumes and the opportunities. But we are being very thoughtful around pricing, and I think we've made changes to how we approach the market, which are very different from how we used to approach the market several years ago. So, I will tell you, we're being very thoughtful and we're being considerate to our customers. At the same time, we are waiting for volumes to come back, which will allow us to be a little more strategic in our pricing. Understand. Okay. And then last question. So, obviously I realize that you're very heavily tied to the apparel markets, but that being said, just curious as to what you've seen from other vertical markets. Is it similar downward trend that you saw in the quarter, and do you think with this current macro environment that we're in, will this make it more difficult for you guys to expand beyond apparel? Yes. So, I think everybody in the US were trying to reduce their inventories as they went through December. So, we saw a lot of that destocking taking place, orders being canceled as people were trying to manage their cash through the quarter. Some of the markets weâre chasing beyond - what we call beyond apparel, would be home. We have seen some nice interest coming out of the holiday season in mattress. We have seen an uptick in some demand in automotive. And I think there are two things. One is, they've gone past their inventory targets that they wanted to achieve, but also there is some uptick in some demand in some of those different markets. And we are still very focused on beyond apparel, on trying to be less dependent, particularly in the US, on some of the apparel markets that we service. Yes, thanks. One of my follow-ups was covered and you gave good detail. Obviously, CapEx is going to tick lower as we go through the balance of the year. Just any comments on what cash flow might look like for the back half, either for Q3 or the back half of the year in terms of the operating cash flow and free cash, either usage or generation as it relates to that liquidity position. Thanks. Yes. I think, Dan, we've been doing a lot of things to help put ourselves into a good cash position. In the release, we noted that we generated $7 million of operating cash in the first six months of this fiscal year. By comparison, we had used $4 million in that FY same six-month period in FY â23. So, we feel like we've done a lot of good things there. We did talk about the specifics about the things that we are doing here in the US, being careful on inventory purchases. We've got lower amounts of inventory. We've got lower price per pound as the pricing has moderated. We've taken the actions labor wise. And really specifically, we've allowed about a 10% reduction in our US workforce, and that's really again, through attrition, through being slow to kind of evaluate, and make sure that we're backfilling where we need it. We've asked people to take on some additional responsibilities. And really, I think back to Al's comments about really everybody stepping up and doing well, that is what we're seeing. So, we've been able to do that, and that's about 10% or around 200 people here domestically. So, those are some of the things that have set us up to be in a good spot. From a cash generation perspective, we're actually thinking and anticipating that as the business comes back, we'll have higher levels of sales, then we'll have higher levels of accounts receivable, and we'll need to start to build a little bit more inventory to be ready for that than we have. So, over the next couple of quarters, we know weâll be utilizing or using some working capital to do that. And again, we've got plenty of head room. Good things that we've done here recently are setting us up to be able to grow that business as it comes back. So, again, we're also very fortunate, and I think as we touched on a little bit, both of our Brazil operation - both our Brazil operation and our Asia operation, are very self-sufficient. They don't need or require cash from this region. So, that's very helpful. Even in spite of some lower demands in both of those regions, both of them are doing fine financially. So, we are looking forward to seeing that business come back, and we know it's going to take some working capital address to address that, but we're prepared to do that.
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EarningCall_607
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Good day and welcome to the Q4 2022 Enact Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Mr. Daniel Kohl, Vice President of Investor Relations. Please go ahead. Thank you and good morning. Welcome to our fourth quarter earnings call. Joining me today are Rohit Gupta, President and Chief Executive Officer; and Dean Mitchell, Chief Financial Officer and Treasurer. Rohit will provide an overview of our business, our performance, and progress against our strategy. Dean will then discuss the details of our fourth quarter results before turning the call back to Rohit for closing remarks, and then we will take your questions. The earnings materials we issued after market closed yesterday contained our financial results for the fourth quarter of 2022 along with a comprehensive set of financial and operational metrics. These are available on the Investor Relations section of the company's website at www.ir.enactmi.com under the section marked Quarterly Results. Today's call is being recorded and will include the use of forward-looking statements. These statements are based on current assumptions, estimates, expectations, and projections as of today's date and are subject to risks and uncertainties which may cause actual results to be materially different. We undertake no obligation to update or revise any such statements as a result of new information. For a discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in today's press release as well as in our filings with the SEC which will be available on our website. Please keep in mind the earnings materials and management's prepared remarks today include certain non-GAAP measures. Reconciliations of these measures to the most relevant GAAP metrics can be found in the press release, our earnings presentation, and our upcoming SEC filings on our website. Thank you, Daniel. Good morning everyone. Thank you for joining us to discuss our fourth quarter and full year results. 2022 was an exceptional year for Enact in which we delivered record performance, achieved several new milestones, and generated a total shareholder return well ahead of the market. We ended the year with record insurance in-force of $248 billion, driven by rising persistency that reached 86% in the fourth quarter and new insurance written of $66 million for the full year. Net income for the full year was a record $704 million or $4.31 per diluted share, up 28% from a year ago and return on equity was 14%. These results are the product of the continued execution of our cycle-tested growth and risk management strategy and reflect the commitment hard work and talent of Enact's employees. I'd like to thank all of them for their continued focus and dedication. As I mentioned, we achieved several significant milestones in 2022, reflecting progress against all aspects of our strategy. We strengthened our value proposition and ability to compete and win new business. Our investments in innovative technology-driven tools and solutions have further differentiated our platform, while also driving efficiency and enhancing decision-making. We've seen several benefits from these investments across our business including improved underwriting efficiency and deepened understanding of layered risk. One of our stated goals at our IPO was to expand and deepen our customer relationships and I'm pleased to say that we made meaningful progress. Supported by our investments in the business and our enhanced financial flexibility, we have either activated or increased our new business share with 80% of our target customers since our IPO and the team is committed to building on this momentum in the new year. We continue to take actions to maintain our financial strength, flexibility, and a strong balance sheet. We ended the year with PMIERs sufficiency of 165%. We continue to execute against our credit risk transfer strategy and completed three excess-of-loss reinsurance transactions to manage our overall risk, demonstrating our ability to source cost-effective PMIERs capital, and loss protection in a period of capital markets volatility and widening spreads. And in July, we received our second upgrade from Moody's since our IPO, recognizing our performance and the strength and flexibility of our balance sheet. Finally, we believe that as of the end of 2022, Enact and Genworth have fully met all the conditions necessary to remove the restrictions placed on Enact by the GSE. As a result of this significant milestone and upon confirmation from the GSE, we expect the GSE restrictions on Enact will be lifted a step that will further enhance our financial flexibility and elevate our competitiveness by no longer making us subject to more stringent capital requirements than our peer group. In addition to investing in our growth, we remain focused on disciplined cost management and our expense levels for 2022 were below our target of $240 million. As part of our disciplined focus and to ensure our operations are aligned with current market dynamics, during the fourth quarter, we affected a Voluntary Separation program and renegotiated our Shared Services agreement expenses with Genworth. We remain committed to cost discipline and operational excellence, particularly in response to a market environment that remains uncertain and are currently targeting expense levels in 2023 below what we achieved in 2022. Dean will have more to say on this during his comments. Now, let me turn to capital allocation, where our strong execution enabled us to achieve our capital return commitment for the year. Through the initiation of our regular quarterly dividend and our special cash dividend in December, we returned just over $250 million to shareholders over the course of 2022. In November, we also announced the Board's approval of $75 million share repurchase program. Taken together, these actions reflect the strength of our balance sheet, the sustainability of our cash flows, the confidence we have in our business and our commitment to create value for our shareholders. I'd now like to touch on our solid fourth quarter, which capped a strong year for Enact. While we have seen a slowdown in housing activity the fundamentals of our business remains resilient. As I mentioned earlier, Insurance in-force reached a new record and we wrote $15 billion of NIW, inclusive of a one-time season deal in the fourth quarter. Excluding this theme, NIW was marginally lower sequentially in a smaller market suggesting Enact gained share in the fourth quarter. As we have previously commented on market share across the industry fluctuates quarter-to-quarter, largely driven by rate engine variations, we are pleased with our NIW performance and it reflects the strength of our platform and our ability to win new business expand relationships and deliver value to our customers. The pricing environment also remained constructive. During the quarter, we saw an increase in industry pricing and we implemented several price increases on new business and we have continued these actions into the first quarter as well. We are confident in our ability to continue to write new insurance written that generates attractive risk-adjusted returns and value for shareholders. As I've discussed previously, persistency is a natural hedge in our business and tends to increase as interest rates rise and new mortgage originations fall. Persistency again improved during the fourth quarter, reaching 86%. At the end of the quarter, 98% of mortgages in our portfolio, had rates at least 50 basis points below current market rates and we expect this dynamic to continue to support persistency moving forward. Higher persistency and new insurance levels have driven record insurance in-force, which has continued to be a tailwind as the business benefits from increased duration without a corresponding increase in cost. Our delinquency rate in the fourth quarter was stable and consistent with pre-pandemic level. Importantly 90% of delinquencies had an estimated 20% or more of mark-to-market equity. Ever-to-date, home price appreciation, our approach to risk management and loss mitigation and the favorable resolution of long-term forbearance plans resulted in a net release of an additional $42 million of reserves in the fourth quarter, leading to a loss ratio of 8%. As we did last quarter, we continue to take a prudent view on loss reserves with careful consideration given to the uncertain macro environment and any other factors which may affect the future credit performance within the portfolio. I believe it is prudent for us to be well reserved in this uncertain environment. The credit quality of our portfolio remains healthy. And while the broader housing market has slowed, we believe overall underwriting quality remains favorable. On an insurance in-force basis, the weighted average FICO score in our portfolio during the quarter was 743. The average loan-to-value ratio was 93% and our layered risk was 1.4% of risk-in-force. I'd like to now speak about the economic environment and housing market and how we are thinking about these factors in relation to our business moving forward. Overall, we believe we are well-positioned for 2023 and beyond though a smaller MI market is expected and uncertainty remains in the near-term. While employment and household balance sheets are healthy, inflation, rising borrower cost and the possibility of a recession pose risk. Households have started to draw down the buffers of savings that had accumulated during the pandemic and revolving credit card balances have increased. That said revolving balances and household savings are both still favorable to pre-pandemic levels and the labor market is strong. And as we look to the housing market, we see strong long-term demand driven by demographics surrounding first-time homebuyers and housing supply that remains tight, which is supportive to prices. These factors are constructive for the MI industry and mortgage insurance is an important tool to help buyers qualify for a mortgage, especially in an environment of lower affordability. So while the near-term outlook is uncertain, we are confident in the long-term foundational strength of the MI industry. Against this backdrop, we will continue to execute on our cycle-tested strategy, prudently investing in our capabilities, taking the appropriate actions to align our costs and operations with the market environment, pursuing new business that appropriately balances risk and reward and ensuring we maintain the financial strength and flexibility to both support our policyholders and create value for our shareholders. Our performance in 2022 is evidence that we have the right plans and people in place to achieve our goals. I'd like to now comment on the actions that FHFA has announced over the last few months pertaining to the elimination of upfront fees for certain borrowers and affordable mortgage products. These actions represent an important step in facilitating equitable and sustainable access to homeownership. We continue to be encouraged by the FHFA support of core mission borrowers and believe the spirit of these changes is consistent with our mission at Enact to help people responsibly achieve and maintain the dream of homeownership. Before I close I would like to note that beyond our financial performance, we have been and will be committed to making a difference. We have spoken in the past of our mission to help those who might otherwise not be able to achieve the dream of homeownership. And in 2022 we have helped 192,000 homebuyers qualify for a mortgage. In addition, this year we were awarded the diversity, equity and inclusion, residential leadership award from the Mortgage Bankers Association, demonstrating our leadership and increasing diversity in the mortgage industry and making homeownership more accessible for underrepresented communities. We also have formed new partnerships and created innovative recruiting programs that will help address the minority homeownership gap and bring diverse talent into mortgage finance. These examples are part of our long-standing commitment to strong ESG principles. We recently published our ESG road map, which lays out our priorities and approach to environmental, social and governance issues. We will have more to say on this front as the year progresses with the publishing of our inaugural ESG report in the first half of 2023. In closing, our business fundamentals remain solid. And while near-term dynamics are uncertain, we believe the long-term drivers of demand remain in place. Going forward, we will continue to execute and maintain the financial strength and flexibility needed to navigate and succeed in this environment. Overall, I believe we remain well-positioned to achieve our goals and continue creating value for all our stakeholders. Thanks Rohit. Good morning, everyone. We delivered another solid quarter and an exceptional year performance. GAAP net income was $144 million or $0.88 per diluted share as compared to $0.94 per diluted share in the same period last year, and $1.17 per diluted share in the third quarter of 2022. Return on equity was approximately 14%. Adjusted operating income was $147 million, or $0.90 per diluted share as compared to $0.94 per diluted share in the same period last year and $1.17 per diluted share in the third quarter of 2022. Adjusted operating return on equity was approximately 14.4%. For the full year, GAAP net income was $704 million, or $4.31 per diluted share, compared to $547 million, or $3.36 per diluted share in 2021. Adjusted operating income for 2022 totaled $708 million, or $4.34 per diluted share, compared to $551 million, or $3.38 per diluted share in 2021. Turning to key revenue drivers. New insurance written was $15 billion in the fourth quarter, compared to $15 billion in the third quarter as well and $21 billion in the fourth quarter of 2021. NIW in the quarter included a one-time seasoned transaction totaling $620 million. Excluding this opportunistic transaction, NIW decreased 4% sequentially and 32% versus the prior year driven primarily by lower mortgage originations resulting from the recent increase in interest rates. New insurance written for purchase transactions made up 97% of our total NIW in the quarter flat to last quarter. In addition monthly payment policies made up 91% of our quarterly new insurance written down from 94% last quarter primarily driven by the one-time transaction. The overall credit risk profile of our new insurance written remains strong with loans that are underwritten to prudent market standards. Rohit discussed the natural hedge that persistency provides in our business model. With rising interest rates persistency increased again during the fourth quarter to 86%, up from 82% last quarter and 69% in the fourth quarter of 2021. Persistency reached an annualized rate of 87% in December. Given the expectation that interest rates will remain elevated in the short-term, we expect to see continued strength in persistency levels, which is a positive for the future profitability of our in-force insurance portfolio. Insurance-in-Force increased 10% in 2022 and 3% sequentially to a new record of $248 billion, driven by the combination of $66 billion of new insurance written and increased persistency. Our base premium rate of 41 basis points was down 0.7 basis points sequentially and down 2.4 basis points year-over-year, which is favorable to the guidance we provided in 2022. As we've noted before, changes to base premium rate are impacted by a variety of factors and can deviate from quarter-to-quarter, which makes precise estimation difficult, which is especially true in a period of heightened economic uncertainty. As a result, we will not be providing guidance yet on our base premium rate trajectory for 2023. However, we do expect the change to be less than the 2022 decrease of 2.4 basis points. In addition to changes in base premium rate, our net earned premium rate also reflected lower single premium cancellations sequentially and year-over-year. For the quarter single premium cancellations contributed only $2 million of net earned premium limiting its potential for meaningful future dilution. Over the past several quarters, our net earned premium rate has been the highest in the industry driven partially by our efficient CRT program. Total revenues were down 2% year-over-year in 2022 ending at approximately $1.1 billion. Revenues for the quarter were $277 million, compared to $275 million last quarter and $273 million in the same period last year. Net premiums earned were $233 million down 1% sequentially and down 2% year-over-year. The slight decline in net premiums earned reflected the lapse of older higher-priced policies as compared to our new insurance written as well as a decline in single premium cancellations and modestly higher ceded premiums year-over-year, as we continue to prudently manage our risk through our credit risk transfer program. Investment income in the fourth quarter was $45 million, up 14% sequentially and 27% year-over-year. For the year, investment income totaled $155 million, up 10% over 2021. The recent rise in interest rates in current rate environment is providing a tailwind for our investment portfolio, as our new money yield for the quarter increased to above 6%. As of the year-end, unrealized losses in our investment portfolio decreased by $56 million to $487 million. Unless we identify opportunities that create long-term value within the portfolio, we do not expect to realize these losses as we can hold the securities to maturity where market values trend to par value. Turning to credit. Losses in the quarter were $18 million as compared to a benefit of $40 million last quarter and a provision of $6 million in the fourth quarter of 2021. Our loss ratio for the quarter was 8% as compared to negative 17% last quarter and 3% in the fourth quarter of 2021. Losses and loss ratio in the quarter were driven by favorable peer performance on 2021 and prior delinquencies which were above our prior expectations and resulted in a $63 million reserve release in the quarter. This was partially offset by $21 million of reserve strengthening on 2022 delinquencies and incurred but not reported reserves as we take prudent action in response to the increased economic uncertainty. For the year, losses were a benefit of $94 million compared to $125 million in 2021. New delinquencies increased by approximately 1,200 sequentially to 10,300 from 9,100. This increase was driven in part by the impact of approximately 750 new delinquencies from natural disasters in FEMA-impacted areas in the current quarter. Seasonality coupled with higher new delinquencies from recent large books that are aging and going through their normal loss development pattern also contributed. Excluding the impact of new delinquencies from natural disasters, our new delinquency rate for the quarter was 1% consistent with pre-pandemic levels and reflective of the continuation of positive credit trends. Our claim rate estimate on new delinquencies is approximately 10% for the quarter. Absent new delinquencies related to natural disasters, all 2022 new delinquencies are booked at an approximate 10% claim rate reflecting our prudent and measured approach to reserving as a result of the heightened economic uncertainty. Total delinquencies in the fourth quarter were approximately 19,900. Excluding delinquencies from natural disasters the associated delinquency rate was 2%, which is stabilizing near pre-pandemic levels. The embedded equity position of our delinquent policies remains substantial with approximately 90% of our delinquencies at the end of the quarter having an estimated 20% or more mark-to-market equity using an index-based house price assessment. As I've noted in the past, this can help mitigate the frequency of claims and the potential future loss for delinquencies that ultimately progress to claims. Turning to expenses. Operating expenses in the fourth quarter were $63 million and the expense ratio was 27% versus $58 million and 25% respectively in the third quarter of 2022; and $59 million and 25% respectively in the fourth quarter of 2021. For the full year, operating expenses totaled $239 million. As Rohit has stated, we initiated a voluntary separation program during the fourth quarter that resulted in a restructuring charge of $3 million, which is excluded from our adjusted operating income and represents a 1-percentage-point impact in quarterly expense ratio. In addition, we renegotiated the existing shared services agreement with Genworth, as we continue to migrate additional activities to Enact. By agreement, we paid $25 million to Genworth for services in 2022 and we were scheduled to pay $20 million and $15 million respectively in 2023 and 2024. These amounts have been revised to $15 million and $12.5 million respectively in 2023 and 2024. While we are still operating in an inflationary environment, our initiatives and ongoing focus on operating efficiency and cost reduction position us to target 2023 operating expenses of $225 million, which represents a 6% annual cost reduction from 2022. Moving to capital and liquidity. Our PMIERs sufficiency remained very strong in the quarter at 165% or approximately $2.1 billion above the published PMIERs requirements compared to 174% or approximately $2.2 billion in the third quarter of 2022. At quarter end, we had approximately $1.6 billion of PMIERs capital credit and approximately $1.8 billion of loss coverage provided by our credit risk transfer program. Approximately 89% of our risk in-force is covered by our credit risk transfer program. As Rohit touched on earlier, Genworth and Enact believe we have satisfied the required financial conditions and ratings requirements for the elimination of the GSE restrictions first imposed on Enact with respect to capital after the issuance of our August 2020 senior notes. If confirmed by the GSE, we will no longer be subject to GSE conditions and restrictions. While the restrictions were largely redundant to our current and prior PMIERs sufficiency levels, elimination of these restrictions will allow for greater financial flexibility and further enhance our competitive position. This matter is detailed in our prior disclosures, and we would direct you to the disclosure for additional information on the conditions and restrictions. Turning now to capital allocation. We continue to execute against our capital prioritization framework during the period, including our commitment to return capital to shareholders. In the fourth quarter, we paid a special cash dividend of $183 million, along with our $23 million regular quarterly dividend. We also initiated a $75 million share repurchase program designed to balance the return of capital to the shareholders with an overall program size that is tailored to Enact's float. As of January 31, 2023, repurchases under the program have totaled $8 million. During the quarter, EMICO, our primary mortgage insurance operating company, completed a distribution of $242 million to our holding company, Enact Holdings, Inc., to bolster its financial flexibility and support our ability to return capital to shareholders as planned. Overall, we returned over $250 million of capital to shareholders in 2022. Let me close by saying that I am very pleased with our performance in both the fourth quarter and the year. We've executed against our strategy and generated strong results in an uncertain environment. Going forward, we remain focused on maintaining the financial and operational flexibility to adapt to market conditions as necessary and realize the opportunities we see ahead, while prudently managing our risk. The strength of our business, strategy and balance sheet, positioning us to continue creating value for our shareholders. Thanks, Dean. We are pleased with the performance we delivered in 2022 and are proud of the value we created for all our stakeholders. As we enter the first quarter of 2023, we remain confident in our business. With a more resilient portfolio, a strong balance sheet and significant credit risk protection, we are well positioned for both the near and long term. In an uncertain time, we and the MI industry more broadly continue to play a critical part in supporting families and the many other stakeholders in the housing sector. We are incredibly proud of this and will continue to seek opportunities to contribute to the safety and soundness of the industry going forward. Thank you. [Operator Instructions] And today's first question will come from the line of Doug Harter with Credit Suisse. Your line is open. Thanks. Hoping you could talk a little bit more about the relief from the PMIERs extra charge that you have been paying. Does that change the way you think about capital return in 2023 or going forward? Yes, Doug, thanks for the question. Like we said in our prepared remarks, we believe we -- both Genworth and Enact believe we've fully met the conditions necessary to lift those restrictions. They do need to be validated by the GSEs, as well as FHFA. But once that happens, those -- we expect those restrictions to be lifted. I think we talked about those restrictions largely being redundant to our PMIERs sufficiency levels, when they went in place. So, from our perspective, they were below any PMIERs sufficiency levels that we were going to hold just naturally in managing the business from a prudent balance sheet perspective. I think that same approach or same perspective also exists in the elimination of the restrictions. They're certainly not transformational in that they're not going to provide some windfall of release of capital that we would otherwise hold. They are useful in creating additional financial flexibility. We would say that flexibility is probably enhanced in times of heightened economic uncertainty and certainly in times of economic stress. So that's how we're thinking about it. And I think that's the appropriate approach. Yeah. That's the only thing I'll add to that, I think Dean covered it pretty well. From a competitive perspective it also puts us on a level playing field in terms of how other stakeholders look at us. So, this is a very good milestone for us and glad to be at this point. Thank you. One moment for our next question. And that will come from the line of Mihir Bhatia with Bank of America. Your line is open. Hi. Good morning, and thank you for taking my question. I wanted to start by asking about the seasoned NIW that you mentioned this quarter. Can you provide any more detail on it? Like, I think you mentioned, it was like a one-time opportunistic deal, but like any more background or any color you can provide on it? Was this a competitive process? Was â how did it come about? Did you already know the NIW that you were taking over? Yeah. Good morning, Mihir. Thanks for the question. So I would say that, NIW deal that we talked about the one-time deal was a portfolio transaction with the lender, and this lender had been holding these loans on their portfolio for a period of time. So two-thirds of the deal was more than one-year seasoned, and we disclosed the magnitude of the deal in our disclosures. And essentially, they were looking for loss coverage and capital coverage. And to the best of our knowledge there were several MI companies that were involved in the process. And at the end of the day, our relationships our value proposition as well as our capital strength made us win the deal. We do expect that to be a one-time deal. These are not very frequent transactions in this current environment. Most portfolio lenders actually ensure their high LTV mortgages on a regular flow basis. But we thought from a transparency perspective, it was worthwhile to spike that out. That's right. These are high LTV loans at origination, and we found attractive return and the portfolio itself basically was within our credit policy. So everything aligned for us. Okay. And if I can just ask one follow-up, you're at a 14% ROE, right? Is that around where we should expect? Like, what are you underwriting to? Are you underwriting generally to higher lower? What I'm trying to, I guess, get at is was this like a typical quarter understanding that you're going to have quarter-to-quarter variability going forward, and a lot of it depends on the economic environment, et cetera? But like, as we think about just the returns from the business is this quarter more or less typical? Like you had some reserve release, you had some results strengthening, some parts moving around, but more or less run of the mill this is what Enact should be doing consistently, or are there some additional puts and takes we should consider? Yes, Mihir. Very good question. So let me start with the kind of a macro perspective and then have Dean chime-in. I would say, there are a lot of things going on in this quarter, including our reserve release, obviously impact of interest rates on our investment portfolio that flows through when it comes to that ROE. But I would say, the way we think about running the business in this environment is much more aligned with what we see in market conditions. So we have seen market conditions being more uncertain. And as a result of that, we have been talking about increasing our price for the last three quarters. So you have seen us increase and stabilize our price from second quarter, third quarter and this quarter. And I mentioned in my remarks that, we saw a higher frequency and a higher magnitude of those price increases. So I think when it comes to the new insurance written that we are adding, we are making sure that we are building a resilient portfolio for different economic scenarios and that drove our action. So when you think about our pricing returns, we are not providing any specific guidance but we do believe that we are writing business to create returns that are accretive to shareholder value. Now, from a balance sheet ROE perspective, I'll have Dean chime-in terms of whether this was normal or has some sense up abnormality in it. Yeah. The only thing, I'd say Mihir is, you pointed out the loss reserves. I think any time we're booking loss reserves at the end of a period it represents our best estimate of ultimate claims on those existing delinquencies. So I would say, that's â our expectation isn't that we're releasing reserves through time. Now, if cure activity continues to perform at elevated levels relative to those embedded in our -- in the establishment of our expectations that certainly could happen prospectively. But I think just our mindset when we set reserves in a very prudent and measured way is thinking about how we expect those to develop over an ultimate time period on a best estimate basis. Thank you. One moment for our next question, will come from the line of Bose George with KBW. Your line is open. Hi, everyone. Good morning. Can you discuss the, sort of, the cadence of dividends this year? Will it be, kind of, similar to last year with normal dividends and kind of a special at the end? Yes. Thanks for the question. So I think thinking about dividends in terms of tools that we have at our disposal may be the most appropriate place to start. So we've obviously initiated the quarterly dividend. Our expectation is to continue prospectively. We also initiated the share repurchase program. That gives us a tool that's very opportunistic both opportunistic based on valuation as well as opportunistic through time to return capital to shareholders. And then we'll continue to evaluate special dividends at the end of years based on a combination of business performance as well as the prevailing macroeconomic environment. So I think the cadence we have is probably the cadence you'll see subject to those dynamics playing out. Okay. Great. Thanks. And then the new notices in the FEMA disaster areas. Can you remind us how that would be reserving for those works? Sure. So Bose is your question in the context of PMIERs, or is your context in the -- question in the context of reserves? Yes. So we apply our best estimate of ultimate claim on FEMA-designated delinquencies in the same manner same approach that we do with any other delinquency. We do rely on our storm-related experience. Think about Harvey, Irma, Superstorm Sandy those types of storm-related activity and how delinquencies have performed historically based on our experience. Our experience suggests that those will cure at elevated rates. And so our claim rates reflect that. Thank you. One moment for our next question. And that will come from the line of Eric Hagen with BTIG. Your line is open. Hi. Thanks. Good morning. Just one on new delinquencies, which are so low to begin with. But would you say that there's any trends that you're spotting within those loans and that bucket of delinquencies? Like is it unemployment? Is it some homeowners that could be underwater in some cases? And how do you see that maybe developing from here? Yes, Eric. Thanks for the question. I think consistent with our prepared remarks credit performance remains strong. There's a lot of factors I think that support good credit performance everything from the quality to underwrite the strong credit quality of our insured loans and then even the macroeconomic landscape that despite the risk that Rohit referenced remains pretty balanced in its current form with strong employment cumulative home price appreciation and then meaningful household savings all of that kind of goes into a mosaic that has been supportive of strong credit performance. I do think the one thing that we have our eye on is we do have large new books that are aging through their normal loss development pattern and that could increase new delinquencies heading into 2023. But at the end of the day I think 2023 credit performance is going to largely be driven by the macroeconomic environment. So we have a keen eye towards that. And maybe more specifically, Eric to your question, we believe that future credit performance is going to be more highly correlated with unemployment during this part of the cycle and employment has remained strong to date. So what we're going to look at is the macro, look at unemployment and if recessionary pressures emerge that have more significantly affect employment, we'd expect some deterioration in the credit. That would be ultimately impacted. How those -- if delinquencies increase, as a result of those recessionary pressures, then we'd see how they ultimately progress the claim being impacted by cumulative home price appreciation and other loss mitigation activities that we employ during times of financial challenges. Eric, the only thing I'd add to Dean's question -- or Dean's answer is, when you just think about the environment we are operating in from a macro perspective housing and consumer, I think we are in a very different place than where we used to be pre-global financial crisis. So the impact of home price appreciation, home price decline on consumers is much lower. We are in an environment where the credit quality as Dean said is much higher. The cumulative equity accumulation for these consumers is pretty significant. And then you think about our portfolio being primarily -- primary occupant and also a lower housing supply in the market. And while home prices will fluctuate in this market as we saw recently, we don't think that that's the primary driver for new delinquencies. Yeah. Yeah. That's helpful. Thanks for that detail. And I want to follow-up on the dividend too. I mean, how is your appetite to paying a dividend change, or maybe how would you run the business any differently, if your PMIERs ratio were either higher or lower than it is today? Yeah. Eric, I think we're comfortable with our PMIERs sufficiency levels where they are today. We've talked about certainly under more economic uncertainty maintaining PMIERs levels above 150%. I think really our return of capital for 2023 is going to be driven by the macroeconomic uncertainty itself and how that ultimately -- those economic headwinds tailwinds ultimately resolve are going to influence kind of our perspective on the most appropriate amount of capital to return shareholders -- to shareholders in 2023. I think we're going to follow the same capital prioritization framework that we've talked about in the past. And one of the key aspects of that is returning capital to shareholders. So we're going to be thoughtful about that. And I think we've provided a little bit of a road map, at least to part of our capital return story in 2023 with our quarterly dividends that we expect to continue prospectively in our share repurchase program. I think if you put those together, you can see your way to $160 million $170 million of planned capital return in 2023, and then we'll continue to evaluate that the economic landscape as well as business performance through the remainder of the year to figure out if there's incremental to that. Yeah. And I think Eric just from a cycle perspective, in normal times and good times in the economy, PMIERs target might be something that is kind of -- we've talked about a range of PMIERs target for our business. But as we head into an uncertain environment, I think PMIERs might be more of an outcome. So if we want to buy more loss coverage on any part of our portfolio, it might drive a higher PMIERs ratio. That doesn't imply that we are trying to drive an explicit capital return out of that ratio. It's more of an outcome in that scenario. So I think that links very nicely with what Dean said. Thank you all for participating in today's question-and-answer session. I would now like to turn the call back to Mr. Rohit Gupta for any closing remarks. Thank you, Sheri. Thank you all. We appreciate your interest in Enact and look forward to sharing our story in future conversations. I also look forward to seeing many of you next week at the Bank of America Securities Insurance Conference. Thanks everybody.
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EarningCall_608
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Ladies and gentlemen, thank you for standing by. I am Katie, your PGI call operator. Welcome, and thank you for joining QIAGEN's Q4 Full Year 2022 Earnings Conference Call Webcast. At this time, all participants are in a listen-only mode. Please be advised that this call is being recorded at QIAGEN's request and will be made available on their Internet site. The prepared remarks will be followed by a question-and-answer session. [Operator Instructions] At this time, I'd like to introduce your host, John Gilardi, Vice President, Head of Corporate Communications and Investor Relations at QIAGEN. Please go ahead. Thank you, Katie and welcome all of you for -- and thank you for joining our call today. The speakers are, Thierry Bernard, our Chief Executive Officer; and Roland Sackers our Chief Financial Officer. And -- also joining us today is Phoebe Loh from the IR team. Please note that this call is being webcast live and will be archived on the Investors section of our website at www.qiagen.com. Today, we'll first have some remarks from Thierry and Roland and then move into the Q&A session. A presentation with details on our performance is available on the IR section of our website, along with the quarterly release. We will not be showing the slides during this call, but we encourage you to review the slides in conjunction with the discussion. Before we begin, let me cover as usual our safe harbor statement. This call discussion and responses to your questions reflect the views of management as of today February 8, 2023. We will be making statements, providing responses to your questions that state our intentions, beliefs, expectations or predictions of the future. These constitute forward-looking statements for the purpose of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those projected. QIAGEN disclaims any intention or obligation to revise any forward-looking statements. For more information, please refer to our filings with the US Securities and Exchange Commission and these are also available on our website. We will also be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. All references to EPS refer to diluted EPS. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in our press release and the presentation. Thank you, John. And obviously welcome everyone and a big thank you all for joining us. We are pleased to report a solid close to the year with the performance in the fourth quarter of 2022 that again, exceeded our outlook. Our teams at QIAGEN are doing a great job in showing their capabilities to proactively respond to new developments with agility and to execute successfully in a volatile environment. As a very important point before we move on, our quarterly report including the news that Rick Bright has been appointed as a new member of the Scientific Advisory Board of QIAGEN. As many of you may know, Rick is an American immunologist, who is an expert in vaccine, drugs and diagnostic development, with a significant public health track record. We are pleased to add his deep expertise to our team of advisors. Now, let me go through the top messages for today. First, we exceeded our outlook for net sales growth and adjusted EPS, both for the fourth quarter and for the full year 2022. Once again, the primary driver was double-digit CER sales growth in our non-COVID product groups. And 75% of the outlook bit for both the fourth quarter and full year 2022 came from sales in non-COVID product groups. While sales for product use in COVID testing declined as expected for both the fourth quarter and the full year over the 2021 period. Net sales for the fourth quarter were $531 million at CER and exceeded our outlook for at least $520 million sales. Our non-COVID product group delivered 15% CER growth over the fourth quarter of 2021 and represented 87% of our total sales. For the full year 2022, we also exceeded our outlook for net sales, with result of $2.26 billion at CER. This was above our outlook for about $2.25 billion. Our non-COVID business performed well throughout the year with 14% CER growth for 2022. Sales of products used in COVID testing as expected declined significantly and finished the year at $498 million CER compared to $704 million in 2021. Adjusted earnings per share for the fourth quarter were $0.55 CER above the outlook for at least $0.50 CER. For the full year 2022, adjusted EPS was $2.46 CER and this was also above the outlook for about $2.40 per share at CER. Roland will later cover the results at actual rates. And as you saw in the press release this is impacted by significant currency headwinds. Our second key message. Our teams executed on key goals in 2022 to advance our Sample to Insight portfolio. We are very pleased to report that all five pillars of growth exceeded their respective sales goal. Our three new platforms QIAstat Diagnostics, NeuMoDx and QIAcuity all achieved the goals we set for instrument placements. We also saw solid demand trends for consumables and instruments in our Sample Technology portfolio. Our QuantiFERON franchise continued to grow and broke through the milestones of $300 million of annual sales and exceeded the 2022 target as well. I will later walk you through an update on the 2022 achievement later. As a third key takeaway message, our cash flow continued at a high level for the year allowing us to invest into the business to increase shareholder value. Operating cash flow for 2022 rose 12% to $715 million, while free cash flow increased 30% over 2021 to $586 million. Those results highlight our ability to generate strong cash flow, while investing to support our growth ambitions as part of a very disciplined capital allocation strategy. A prime example is the recent acquisition of Verogen. Qiagen as you know has been very active in human identification for the last 20 years, primarily, thanks to our Sample Technologies portfolio. Adding Verogen means that we are creating the most complete workflow from sample prep to genomic analysis for human identification and forensics based on next-generation sequencing. This is really the type of merger and acquisition that we are focusing on deals that are extremely synergistic with our portfolio and enhance our growth profile. Lastly, we have taken a prudent approach to our outlook for 2023 given the macroeconomic trends, while continuing to expect double-digit CER sales growth in the non-COVID portfolio. For 2023, we expect sales of at least $2.05 billion at constant exchange rates and for adjusted EPS of at least $2.10 CER. We continue to feel confident in achieving the double-digit CER growth target for our non-COVID product group for the New Year 2023, while also planning for a significant decline in COVID-19 sales. We also recognize the volatility of the current environment and the impact it can have on some parts of our business. So while we recognize this ongoing volatility in the market, we are confident in this outlook for the full year 2023. Our teams all over the world are ready to again deliver on our full-year goals with a great portfolio, a solid pipeline of instruments and customer knowledge to support our growth ambitions. Thank you, Thierry. Hello, everyone and thank you from me as well for joining us today. Let me start with a review of our results for the fourth quarter and the full year 2022, and then move on to the outlook later in the call. For the fourth quarter, net sales were US$498 million at actual rates. These results over the year ago period represented a 14% decline at actual rates due to the expected currency headwinds of about five percentage points. In the fourth quarter, we again saw better-than-expected growth in our non-COVID product groups with these sales up 15% CER over the year ago period. For the full year 2022, non-COVID sales were up 14% CER and in line with our outlook for double-digit CER growth. As expected, sales from the COVID product group declined over 60% CER from the fourth quarter of 2021 and they're also down about 30% for the full year to $470 million at actual rates. Consumables and related revenues fell 11% CER in the fourth quarter over the year-ago period showing the impact of the decline in COVID-19 product sales. Instrument sales were much stronger in the fourth quarter of 2022, rising 6% CER. This shows traction of our new systems are gaining in the post-pandemic environment. In terms of sales among the four product groups, let's start with Sample Technologies. This product group represents the heart of our portfolio and contributes about one-third of total sales. This product group continued to trend of solid growth in non-COVID sales throughout 2022 and this sales rose at high single-digit CER rate in the fourth quarter over the year-ago period. For 2022, non-COVID sales in this product group rose at a mid-single-digit CER rate and represented a large majority of full year results. This result exceeded the 2022 overall sales target for at least $750 million at CER. Diagnostic Solutions is our second product group and represented about one-third of sales in 2022. The key driver of this group was the QuantiFERON franchise. These sales rose 15% CER in the fourth quarter in all regions and supported the 21% CER growth for the full year 2021. This led to our teams exceeding the full year sales goal for at least $310 million at CER. We also reached a milestone for QuantiFERON in 2022 surpassing $2 billion of our cumulative sales since acquisition in 2011. For QIAstat-Dx, we continued to see increasing demand for system placements and growing consumables usage around the world. More than half of the QIAstat-Dx sales in 2022 came from the healthy non-COVID demand. Full year sales for QIAstat-Dx exceeded the target for at least $85 million at CER. For NeuMoDx, the decline in sales for 2022 reflected the fact that about two-thirds of sales came from COVID-19 testing. However, NeuMoDx sales still exceeded the 2022 target for at least $80 million at CER and driven by sequential quarterly growth in non-COVID applications from the third quarter to the fourth quarter of 2022. In the PCR/Nucleic acid amplification product group, which represents more than 15% of total non-COVID product group, sales was about 20% CER compared to a significant decline in the COVID-19 product groups. QIAcuity is our entry into digital PCR and is included in this product group. These sales grew at a strong double-digit CER pace for both the fourth quarter and the full year as full year sales exceeded the 2022 target for over $55 million at CER. A key driver was the ongoing solid placement trends that reached over 1,300 total placements at the end of 2022. We also saw increase in consumables, which was supported by the recent launch of new assets for biopharma customers. In the genomics/NGS product group, which represents more than 10% of the total non-COVID product group, sales were also higher over the fourth quarter of 2021. This performance was led by our QIAGEN Digital Insight bioinformatics business and the expansion of our offering in terms of universal NGS for use with any sequencer. Looking at sales on a geographic basis, all three regions had lower sales in the fourth quarter of 2022 over the year ago period and also in most regions on a full year basis for 2022. This was due to the significant decline in COVID-19 sales. However, all three regions had solid non-COVID sales growth trends at constant exchange rates. In the Americas, non-COVID product group sales in the fourth quarter rose more than 10% CER, over the year ago period and led by solid gains in the U.S. In the Europe, Middle East, Africa region it was a similar situation with non-COVID product group sales rising over 20% CER. The top-performing countries in terms of non-COVID sales included Germany, France, Spain and the United Kingdom. In the Asia Pacific, Japan region sales in the non-COVID product groups was about 7% CER in the fourth quarter and were also up 8% CER for the full year over 2021. Sales in China rose in 2022 and this is a big achievement by our teams, given that the country was essentially in lockdown during most of the year. This was driven by sales of sample preparation [Technical Difficulty] Okay. Sales in China rose in 2022 and this is a big achievement by our teams, given that the country was essentially in lockdown during most of the year. This was driven by sales of sample preparation kits and enzymes in the first half of the year related to the COVID environment. We continue to closely monitor the situation as the local market landscape evolves. For the rest of the income statement, I would like to focus on results for the full year of 2022. The adjusted operating income margin was 30.6% of sales in 2022, compared to 33.5% in 2021. This was mainly due to our decision to accelerate investment into the business to support further growth opportunities. Turning to components the adjusted gross margin was 67.7% of sales in 2022 down slightly from 67.9% in 2021. The trends for 2022 included favorable margin developments for QIAstat-Dx due to higher utilization and improvements in cartridge production. At the same time, we have opportunities to improve the gross margin in particular by driving better utilization of production capacity. R&D investments rose to 8.9% of sales from 8.4% in 2021, as we continue our investments during 2022, especially into new tests for our systems. Sales and marketing expenses rose in 2022 reaching 22.1% of sales, compared to 20.3% in 2021. The 2022 results reflected a higher level of commercialization activities, after the slowdown during the pandemic as well as incremental investment into the five pillars of growth in light of the strong non-COVID sales trends. In terms of general and administration these expenses, these rose slightly to 6.1% of sales from about 5.7% in 2021, as we are seeking efficiency gains while making significant investments into our IT infrastructure and cybersecurity. Adjusted EPS for 2022 was $2.46 at CER and above the outlook for at least $2.40 CER. Results at actual rates were $2.38 due to the strong currency headwinds. The adjusted tax rate for 2022 was 18% and at the same level as in 2021. Turning to cash flow for full year 2022, operating cash flow rose 12% over 2021 to $750 million thanks to the solid business expansion. Free cash flow rose at a faster 30% pace to $586 million. This was due to a combination of the higher operating cash flow along with a reduction in the level of purchases of property plant and equipment, after a period of higher levels in 2020 and 2021. These investments fell to 6% of sales in 2022 from 8.4% in 2021. In terms of our balance sheet, our total consolidated net debt stood at $443 million at the end of 2020, compared to $876 million at the end of 2021. This reflects the solid cash flow trends, while at the same time repaying debt at maturity. As a result, our leverage ratio stood at 0.5 times net debt to adjusted EBITDA at the end of 2022 compared to 0.9 times at the end of 2021. In terms of capital deployment, we continue to take a disciplined approach that has served us well. We are using our healthy balance sheet to strengthen our business through investments and targeted M&A, while also considering ways to increase returns through share repurchase programs. In terms of M&A activities, we have completed two bolt-on acquisitions recently. This involves the purchase of BLIRT in 2022 to further develop our enzyme production capabilities and the acquisition of Verogen in January of this year to advance our human identification and forensic capabilities. We continue to review additional acquisition opportunities with a keen focus on strategic fit and financial discipline in terms of prices. We also review ways to increase returns through share repurchase programs and will consider these options as the year progresses. Thank you, Roland. And I would like now to provide you with some more details on the progresses of our teams in 2022 and the goals for 2023. First of all, let's talk about Sample Tech. As you may have seen, we recently launched another instrument upgrade with the release of the new easy-to-connect molecular diagnostic. This version is specifically registered for use in diagnostic laboratories in Europe and other areas accepting the CE-IVD mark. This launch expands the easy-to-connect line of instrumentation, which was first released in 2021 to address research and forensics customers. Even in light of the instrument placement during the pandemic, we continued to see good trends during 2022. This is a very positive signal about the value of our portfolio and should support future consumable trends. As an example, at the end of 2022, we reached a new milestone with over 3,200 cumulative placement of the flagship QIAsymphony system. The QIAcuity family surpassed 14,000 cumulative placement, while the EZ1 and EZ2 family reached over 5,000 cumulative placement. And the strong instrument placement trends were also seen among our clinical testing platform. Talking, for example, about QIAstat-Dx, we surpassed 3,500 cumulative placements at the end of 2022. We saw good demand for respiratory testing at the end of the year, driven by the need to distinguish between influenza and RSV infections, as well as for the SARS-CoV virus. This really once again shows the value of syndromic testing beyond COVID. In core lab testing, NeuMoDx is also making progress, transitioning to non-COVID use, especially outside of the US. where we have one of the broadest menus with 16 CE-IVD tests. About 300 platforms have been cumulatively placed in laboratories worldwide, which we see as already about more than 10% of the market share of the leading competitor, a result that QIAGEN achieved after only two years of active launch of NeuMoDx. Our last focus on instrument placements involves QIAcuity, our solution for digital PCR. This system are making solid market share gains, based on achieving over a 1,300 cumulative placements in just over two years since launch. This is a very strong base for future consumables growth, as we focus on expansion with research and biopharma customers. As you know, we are also preparing for important regulatory submission by the end of 2023 to bring the power of QIAcuity to clinical customer. Of course, our strategy around our five pillars of growth does not exclude the fact that we are also seeing good growth trends in our core business. Favorable advancements in those portfolios are worth mentioning as well. For example, in our companion diagnostic program, the FDA has approved a new therascreen assay for non-small cell lung cancer to identify patients eligible for treatment with a drug from Mirati Therapeutics. This adds to the portfolio of more than a dozen FDA-approved oncology assays that QIAGEN has developed with a range of pharma partners. In this business of companion diagnostics, we are expanding beyond oncology with a new partnership with Helix, which was announced at the start of 2023. Together, we want to advance companion diagnostic for use in improving outcomes for patients with hereditary diseases. This comes on the heels of a new partnership, for example, with Neuron23, signed in 2022 for the development of a companion diagnostic for Parkinson disease. As a reminder QIAGEN currently has more than 30 master collaboration agreements with global pharma and biotech companies. In fact, QIAGEN is probably the only company in precision medicine offering technologies and solutions ranging from NGS to PCR and digital PCR. In our Genomics/NGS product group, our decision to offer platform-agnostic consumables and bioinformatics is serving us and our NGS customers quite well. For example, in QIAGEN Digital Insights, which is our bioinformatics business, we have announced a partnership with ATCC to launch a new database that allows biopharma researchers to select relevant sale lines for drug development. Both the Universal NGS consumable and QIAGEN Digital Insight bioinformatics portfolio have historically grown at double-digit CER rates. And we continue to building their capacity to generate ongoing solid growth. So as you can see our teams have been working hard to build value in our portfolio and execute on our overall strategy, to progress not only our five pillars of growth but also leverage our core expertise. Thank you, Thierry. Let me provide more perspectives on our outlook for 2023 and also for the first quarter. We have initiated a full year sales outlook for 2023 for at least US$ 2.05 billion at constant exchange rates. As noted earlier, we are planning for double-digit CER sales growth for the full year in the non-COVID product groups and these represented US$ 1.67 billion in 2022. At the same time we expect COVID-19 product group sales to decrease to about US$ 200 million to US$ 210 million at CER in 2023 from the 2022 level of US$ 470 million. As a reminder in 2019, we had about US$ 150 million of sales from various product groups that got redeployed for COVID-19 testing. So this forms a baseline to consider for the future. Our strength is that we have a resilient portfolio, particularly with the high share of vectoring consumables that will help us to achieve the double-digit CER target. We also recognize in the short-term that we are facing a more volatile environment. This involves some areas of the world, such as China and also some areas of our portfolio, such as our OEM business. However, we are not seeing any signs that life science research funding is decreasing now that the clinical reimbursement environment is more challenging than usual. This is why we foresee a sales acceleration during the year. In terms of profitability, we have initiated an outlook for adjusted EPS to be about $2.10 at constant exchange rates. This includes the $0.03 dilution from the Verogen acquisition. We are intensifying our initiatives to drive our adjusted operating income margin above the pre-pandemic levels. Our teams are focusing on continuous operational improvements, such as expanding our digital customer engagement while also investing in the business and supporting our employees in the current inflationary environment. In light of these factors, we have set an outlook for the first quarter of 2023 for net sales of at least US$490 million at constant exchange rates. Adjusted EPS is expected to be at least $0.47 per share, also at constant exchange rate. As for currency movements we currently expect adverse trend against US dollar for at least the first half of the year, but to become more positive in the second half. Based on these expectations using exchange rates as of February 1, 2023 currency movements against the US dollars are expected to have a neutral impact on both net sales and adjusted diluted EPS on a full-year basis. For the first quarter, we expect currency headwinds to have an adverse impact of about two percentage points on sales and about $0.01 on adjusted EPS. Thank you, Roland. And as we are coming to the end of our call, let me provide you with a quick recap of our key messages before we move into the Q&A session. First, our results for both the fourth quarter and full year 2022 exceeded the outlook for sales, driven by double-digit CER gains in the non-COVID group of QIAGEN product. We also exceeded our outlook for adjusted earnings per share and delivered another year of strong cash flow. Second, our teams made excellent progress this year on advancing our Sample to Insight portfolio, especially but not only in our five pillars of growth. All of the five pillars exceeded their 2022 targets in terms of sales, and saw solid gains in instrument placement. Third, we are continuing our disciplined capital allocation policy that has served us well for many years. We have a healthy balance sheet that will enable us to continue investing our business, while considering ways to increase returns and create greater value. And last, we have announced an outlook for 2023 that continues the trend from 2022 in terms of double-digit CER non-COVID sales group for the full year, while taking a prudent view on the current macro trends. Obviously, again today we have conveyed to you our determination to continue to execute and deliver on our commitments as usual with humility, but with a clear determination. So while we recognize the ongoing volatility in the market, we are confident in our outlook for the full year. Our teams are ready to again deliver on our 2023 full-year goals with a great portfolio, a solid pipeline of instruments, a solid customer knowledge to support our growth ambitions. Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question comes from Patrick Donnelly of Citi. Please go ahead, sir. Hey, guys. Thank you for taking the question. Thierry, maybe one for you and I'm sure I'm sure Roland can jump in as well. Just in terms of the cadence throughout the year for 2023, it sounds like 1Q is going to be the low point for growth in margins then you're going to ramp from there. Obviously, the comp dynamic explains some of that. But can you just talk through some of the near-term headwinds. Obviously, China, it sounds like it's a piece the OEM side, maybe the impact there? And then just your visibility into the growth and margin improvement as the year progresses, what are the key drivers there? It sounds like the end market health is right where you want it just kind of navigating through some of these near-term headwinds and comp dynamics, but would love a little more perspective there? Thanks, Patrick. And as you said, obviously Roland can chime in. So first of all talking Q1, I think Roland and I, both alluded to the rationale behind our guidance for Q1. First of all, obviously, we very proactively look and consider and recognize our economic and financial environment. That's number, one. Second, as you know, there is a significant base effect Q1 2023 compared to Q1 2022, where by the way in Q1 2022, COVID testing was still extremely strong. Second -- and third, I'm sorry we highlighted two elements. First of all, we take a prudent look at the Chinese market for many reasons, because over the last three years we have constantly fueled some Chinese company with components for their own COVID testing. This is disappearing. It's particularly sales around enzymes and other components. And we know that the current market in China, is impacted by different factors. First, obviously, COVID recovery still affect in some regions of lockdown. So, it's better than I think for you and for us to take a prudent look. We still consider China as an important market, but we are cautious. Second, and nothing surprising, because we have kept saying that in the past, we see a more volatile OEM business in Q1. This is not a surprise. This is the nature of our OEM business, which has always had those volatile features. Over the rest of the year, we see as Roland highlighted, the constant acceleration of our business. First of all, because as you have seen last year, starting Q2, most of the bits quarter-after-quarter, were coming from non-COVID. So this is also obviously, going to help us in the rest of the quarter. The impact of COVID itself will decline. So the comp is going to be better. Second as we said, we have a clear vision of our pipeline of instruments. Therefore, we have also some vision on the potential recurring consumption on consumables under the instruments. Last but not least, do not forget what we have given as a number for Q4. More than 75% of the bit of Q4, is coming from the non-COVID portfolio. So this allows us as well, to believe that there will be this acceleration quarter after quarter. On the gross margin and the EBIT margin, I think Roland also alluded to that in the presentation today, we continue to believe that we have a pocket of efficiency especially around our investment around digital. Second as you know, part of our portfolio especially, in the five pillars is made of very new products, who have not -- that have not achieved the optimal ratio between cost of goods and volumes. We have seen QIAstat really improving well in 2022. We need to continue there. And so, this is why, we are also confident that we can improve those two dimensions, both on the gross margin and the EBIT margin. Roland, do you want to add something? Great. Excellent. Yes. Just one around the bioinformatics news last week. Could you confirm [Technical Difficulty] and what would be the aim of the stake sale or outright sale of the business? Would you -- will it be means to free up some capital, towards other investment priorities? Could you just talk through that? Thank you. Your voice was breaking up -- so breaking out. So, I hope that I captured the question. I believe that you asked around the news, that we were potentially considering alternative for our bioinformatics portfolio. So clearly, what we can say today is, that it's not just about bioinformatics. For every part of our portfolio, we constantly look at alternative to offer better potential of growth, better return on investment, better optimization of this portfolio. And so that includes as well bioinformatics, a market where clearly QIAGEN is a leader. Well, a market but also a market, where we believe that significant investments are needed to fully break the code if I may say so of the value of those bioinformatic solutions both in diagnostic, in research, in oncology or hereditary. So we are open for many scenarios. It involves potentially different options. What is sure is that we want to basically continue to develop and contribute to the growth of that market but we are open to different solutions. It's a bit premature to say which one will be retained but that's the situation as of today. Hi, there. Thanks for taking my questions. One on your molecular instrument installed base. Obviously, a strong year in terms of placements, despite COVID-related weakness here. Could you give us some color on how you expect your installed base to expand over 2023, particularly for NeuMoDx, QIAstat and QIAcuity? I mean would it make sense to expect the installed base growth to sort of normalize to a lower level compared to 2023, or would it make more sense to assume that growth will be led more by higher utilization? And then I have a small follow-up. So this management, Roland, myself, we have not changed here. We continue to have what we call a realistic ambition and that includes obviously, the growth of our installed base. We see no reason, not to continue to take market shares for QIAstat, for QIAcuity and for NeuMoDx for different reasons. First of all, because for those three instruments, it's a menu play. It's not a COVID play, it's a menu play. So we have added biopharma application for QIAcuity. It will help the growth of the installed base in 2023. We continue to add new registration for NeuMoDx, especially in Europe. We are going to see new ones in the US as well this year. It's going to help also the growth of the installed base. And QIAstat, as I did meningitis in Europe last year, we expect â we hope to have GI registered in the US this year. So that would help as well. What we always said to your question is that pivot, one of the changes post COVID for probably a year or two on the market is that the ratio capital sales versus placement will evolve much more in favor of placement in the coming years. But we are used to that. We are used to that because once again, we are used to sell instruments where we plan on selling consumables. So we are used to place instruments as well. Last but not least, you have heard also this morning that we expect the evolution of QIAcuity, our digital platform solution from life science to clinical diagnostics to happen at the end of 2023. So that would help as well because we open a new market, which is the clinical market in oncology for the digital platform. Hi, good morning. Thank you for taking my questions. So two, one is a housekeeping question. Roland, what's the assumptions for interest income and interest expense? Your assumptions there on overall net interest expense for fiscal 2023? And on your companion diagnostic business, what was that in 4Q and your assumptions in 2023? I'm trying to also just sort of think about what percentage of the pipeline is PCR NGS versus digital PCR? Just trying to get a sense on how the companion diagnostic technology landscape is evolving. And sort of are you starting to see tailwinds from your switches or your other NGS strategies and some of those products that were delayed coming back on? Thank you. Sure. Yes happy to do so. Hi, Derik. Yes, on interest â on the net interest income side I think the delta between 2022 and 2023, I probably would take somewhere I would say probably an additional $30 million compared to last year depending on the cash flow and also the interest development. So I would say that's probably the delta between 2022 and 2023. Again, two for both in terms of reported interest but also on the adjusted results from the net interest side. In terms on the companion diagnostic team, yes, I mean thanks for the question. I mean we are and we want obviously to remain a clear leader in that market. First of all, as we highlighted today, we leverage a unique network of more than 30 agreement with pharma companies. So you can imagine that any time we come up with a new technology be it NGS, thanks to our partnership with Illumina or be it digital PCR, obviously, it triggers interest and constant discussion. So far our portfolio is mostly PCR based. We are clearly a leader. We are not only a leader on numbers of companion diagnostics, but numbers of companion diagnostics that are regulatory approved, especially, at the FDA. But what is very interesting is that we are perfectly on line to deliver what we told you three years ago on companion diagnostic NGS-based. And obviously for the last 1.5 years, we see a significant traction with pharma of companion diagnostic digital PCR base. One thing which is also very important for us and gives us confidence to maintain this leadership is the agreement signed with Helix because if you look at our portfolio of companion diagnostics up to now it is mostly oncology driven. And with this partnership with Helix we offer a pharma company with a very interesting set of solutions for hereditary diseases. We started to implement that with Parkinson's disease. We have other projects. So leadership we want to maintain it. And this is why we invest in other solutions like NGS and digital PCR. Thanks for taking my questions. I just got two quick ones off on both upfront. First on Sample Technologies. Looking at that 2023 guidance of $685. I'm sure there's some COVID still in there. Could we -- could you kind of help provide more color on the non-COVID Sample Technologies growth that you see on the high single-digits last year? Is that kind of the trend that we should be expecting for Sample Tech? And then just secondly on margins for 2023. Should we be thinking more about sort of the pre-COVID 27 - 28 on the EBIT margin side going forward and then expanding from there? Thanks. Thank you, Matt. And I will ask Roland to answer on the gross margin and confirm what we have been saying for some time. On the Sample Tech non-COVID, yes, obviously 2022 proved relevance of this portfolio and our leadership because you have seen extremely healthy numbers growth numbers for the non-COVID part of the portfolio. For 2023, we come back to what we have said as early of December 2020, which was we expect the Sample Tech portfolio overall to have a growth between basically around mid-single digits and this is what we want to deliver on the market year after year. Yes. So happy to add on that. Yes, on the gross margin side I think as we said before overall we have seen nice improvements within 2022 actually on some of the areas where we expected improvement as well which is QIAstat with our large-scale production line now at least initiated here in Hilden. We clearly have seen a nice improvement in terms of cartridge costs. And again even future increases on volume will be very helpful. Same is expected over time for NeuMoDx. As we said before, NeuMoDx is clearly a business where we do expect double-digit sequential growth on the non-COVID side. At the same time, clearly, we have still a good number of COVID revenues in that business in 2022 which has to be normalized. So I would say that is an impact which we probably will see then in 2024 beyond and helping us in overall utilization of our production environment. I think the other topic where we are going as any company has to work on is clearly also on what we see on the inflationary side. I think it looks like right now that things are getting a bit easier in the world, but who knows how it looks in six months. So that clearly has an impact as well. Good morning. Thank you for taking the question. Maybe just to go back to the Sample Technologies business there. Can you maybe just give us the state of the union on where things stand with the automation upgrades for that portfolio? And then I guess just relatedly to that, how should we think about the impact of instrument automation on growth just what you're seeing in terms of utilization post these upgrades? Thanks. Thanks for the question Andrew. I think as you have seen over the last three years, it's not arrogant to say that QIAGEN is a company that has launched potentially the most ambitious program of updates in our implementation. You have seen QIAcuity becoming QIAcube Connect. EZ1 become EZ2. And any time we launched the life science version and after an MDx version, the clinical version. So, obviously, this is helping the growth, because customers in my view have average five years rolling period where they start reviewing and renewing potentially their platform and that it has helped. Second, any time we upgrade those platforms they come with new features be then around bioinformatics, connection, a new opening of business. For example, EZ2 is a better platform for example for forensic. So we open new segments. We now want to focus on the upgrade of our flagship system QIAsymphony. We expect this to come probably in the second half of 2024. And it's obviously -- it's of course for us clear that if we want to remain a leader in Sample Tech, which is once again the key first step for any kind of biological run, we need to continue to invest both in application but also in instrumentation and this is why it's definitely one of our five pillars of growth. Hey good afternoon. Thanks for taking my question. So my question is whether you expect any potential softness in the demand for equipment this year end? And I'm just asking because one of the larger lab chains in Europe sounded a bit more cautious on this week. And then my follow-up is, if you can confirm that everything is fine from a funding environment perspective? Thank you. So once again this is the question where Roland could also give his view. What I can say again is highlighting that Roland, myself, John, Phoebe for the last three years we talked about realistic ambition. So we really believe in the guidance we gave you for this year. One of the evolution I said on the market is that probably for the coming two years, we will see more placement of instruments than pure capital sale and this is clearly an impact of the COVID time. But we are used to do that. You see we basically make sure that we contract with customers based on the volume of consumables and we need to execute on those contracts. We are used to do that. Funding wise as Roland said in his own comments, if we look at the main health care system in the world for research, the US, Germany, the UK, France, we don't see any signal that their budget will be decreased. We continue to plan for example for a 3% increase of the NIS or CDC budget in the US. So this is factored in our numbers. And as Roland said himself as well, we have not seen any more challenging reimbursement decision than usual. And reimbursements are something that we factor also in our forecast. So this is what I can say at this stage, we want to be humble, cautious. There is a difficult environment, but we believe in our guidance and we believe in our portfolio. Hi. Thanks for taking the question. Actually just two-parted. One, would you provide a revenue number on where you see the bioinformatics business? I appreciate that double-digit growth, but could you just frame that from a revenue perspective? And then second, when you look across the five pillars of growth and the guidance you provided this year, which one of those do you think has the most potential upside versus your guidance in 2023 and why? Thanks. So going first to the five pillars, I think I'd like to say, first, let's execute on what we tell you, especially in the context where some of those five pillars namely QIAstat, NeuMoDx, Sample Tech have a COVID base in their 2022 numbers. So let's execute on what we have. I think that as we said for the last two years, with QIAcuity, we have really an exceptional solution for digital PCR. But as you have seen the growth compared to 2022 is quite significant. So let's execute on that. For bioinformatics, I'm pleased to report that for the year 2022, this is an activity that has achieved around $100 million, which makes us clearly the number one in the market. I mean twice as big as our immediate number two and five times as big as the number three in the market. So that gives you a magnitude of this activity. Hi. Thank you for taking my question. So just maybe on COVID, the guidance calls for COVID revenue between $200 million and $210 million CER. That's slightly below the $220 million you pointed to at a conference last month and below the $250 million give or take you've been pointing to prior to that during 3Q call. So, just curious as to how much that COVID number is derisked now in your view here for 2023? Thanks. I mean, with all due respect, I mean, being accurate to the million on COVID is a kind of crystal ball. We have seen that in 2021. We have seen that on 2022. And this is why I remind you all that QIAGEN was really the first company as early of July 2021 to fully decouple our P&L from the COVID volatility. And yes, I mean, we believe that -- and Roland alluded to that slightly over $200 million for the full COVID taking into account pre-COVID number of $150 million, which is a number which is growing probably between 2% to 3% per year. It gives you around yes $60 million or a bit less. Is it fully derisked? We believe that it's an appropriate view of what COVID could be this year. If it's less, we will have to compensate as well. If it's more, we will have to be relevant and continue to provide customers with COVID solution. This is the way we see it. But once again, the real priority and the obsession of this management is on the non-COVID portfolio. Yes, and probably Casey to allude to that a bit more, I think, the way we look at it from a quarterly perspective, it's clear that Q1 is probably a larger number on the COVID side and it really then goes down to what Thierry describing was a normalized level. So I would say over the course of the year, we probably approach what you were asking for. Question. I have one on QuantiFERON TB, which I will split in two parts. First, maybe can you talk to the contribution of market share gains in IGRA testing to QuantiFERON to reach sales growth? I know it's evolved over the past few years. And second when you strike the deal with your partner back in 2017 we were left under the impression that the exclusivity was for a specific period of time. Could you please give us some details around that and options that you have at the moment? Thanks. On market share, Hugo, thanks for the questions. You know the numbers those are numbers that we have given many times. With the growth that we are showing to the market, once again above double digits, it's clear that we are taking market shares. We are taking market shares against what? Mostly against skin tests. And I remind you all that there is still a significant market to convert here probably around 60 million, 6-0 million skin tests all over the world. If you just focus on the US, it's 16 million, 1-6 million skin tests in the US. So this is where we need to put the priority. We obviously take market share obviously from competition, but the main focus is on skin test. We have a tremendous respect in this company for the partnership with DiaSorin. It has helped QuantiFERON think it has helped DiaSorin as well. And you are perfectly right. In 2023, we need to discuss exclusivity. QIAGEN is very open. We have no dogma here. We need to start the discussion with DiaSorin considering their perspective, their growth perspective, the investment that they are going to put in that product and the evolution of the market. This is what we can say at this stage. Nothing is dogmatic, everything is open, but we respect tremendously the partnership with DiaSorin. Roland, would you like to add something to that? No, I think, it's very clear that QuantiFERON is a great success story for QIAGEN and we clearly still see that overall the conversion from skin test is quite low, while the overall market is still growing. So it's clearly a market where we stand alone, but of course, also as you said, in combination with DiaSorin had great success in converting it from skin test away. And I think that's a big thing for us. Good afternoon. Thank you. First question, another success for you has been QIAstat as discussed today. Can you just update on what you estimate the addressable market was in 2022 than last year? And also, what the each of the underlying growth of that market was? And also, can you remind us of the time line for approval of the GI and meningitis panels please? Thanks. I hope I captured all the questions because once again the line was not very good. So, the addressable market for us, we confirm that we believe that this is already a market probably around $1.3 billion to $1.5 billion. It's growing in our statistic above double digit probably between 13% to 15% per year. And this is how we see the market for the years to come. It is clear that the key success factor for QIAstat is going to as we said before to bring on a regular basis, new menu and new applications. We have now the three key assays or syndrome that allows us to participate in any kind of tenders in Europe, respiratory, GI and meningitis. We need to build this in the US. In our numbers for 2023, we expect our GI to be approved for the second half of the year and we will submit meningitis in the US before the end of 2023. So that means that we have no numbers meningitis because then you have obviously the time for approval. And for the other years, we need to continue to bring new menus that are in our R&D portfolio, namely direct identification of positive blood culture and a unique development which is around urinary tract infection, complicated urinary tract infection that we are expecting for those two developments to come in the coming two years. So this is how we see it. It's a menu play. And the current situation respiratory, between flu, RSV and COVID is proving the relevance in our portfolio to be able to offer not only a monoplex solution NeuMoDx; a short-plex solution for analyze NeuMoDx and QIAstat; and the large-plex syndromic solution QIAstat. Okay, Thierry. Thank you very much. And with that, I'd like to end the call and also just remind you, if you have any questions or comments or follow-up issues to resolve, please give Phoebe and me a call. We're always available. Thank you very much. Bye-bye.
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Welcome to the Q4 2022 ConocoPhillips Earnings Conference Call. My name is Michelle and I will be your operator for todayâs call. [Operator Instructions] I will now turn the call over to Phil Gresh, Vice President, Investor Relations. Sir, you may begin. Yes. Thank you, operator and welcome to everyone joining us for our fourth quarter 2022 earnings conference call. On the call today are several members of the ConocoPhillipsâ leadership team, including Ryan Lance, Chairman and CEO; Bill Bullock, Executive Vice President and Chief Financial Officer; Dominic Macklon, Executive Vice President of Strategy, Sustainability and Technology; Nick Olds, Executive Vice President of Lower 48; Andy OâBrien, Senior Vice President of Global Operations; and Tim Leach, advisor to the CEO. Ryan and Bill will kick off the call with opening remarks, after which the team will be available for your questions. A few quick reminders. First, along with todayâs release, we published supplemental financial materials and a presentation which you can find on our Investor Relations website. Second, during this call, we will be making forward-looking statements based on current expectations. Actual results may differ due to factors noted in todayâs release and in our periodic SEC filings. Finally, to make â we will make reference to some non-GAAP financial measures. Reconciliations to the nearest corresponding GAAP measure can be found in todayâs release and on our website. Thanks, Phil and thank you to everyone for joining our fourth quarter 2022 earnings conference call. As we sit here today, there are a number of cross currents in the global economy. While the energy sector is not immune to potential macro headwinds, our fundamental outlook remains constructive. On the demand side, we think that growth will continue in 2023 aided by normalization in China mobility following the loosening of COVID restrictions. On the supply side, we believe the continued producer discipline and the expected impacts of Russian oil and product sanctions are likely to keep balances tight. So while commodity prices are currently not as high as they averaged in 2022, we see duration to this up-cycle. Now stepping back, we remain steadfast in our view that a successful energy transition must meet societyâs fundamental need for secure, reliable and affordable energy while also progressing toward a lower carbon future. While we all recognize the challenges that global energy policymakers face to achieve the goals of the Paris Agreement, it is clear that doing so requires an all-the-above approach. This can be done by enacting policies that encourage the development of lower emission energy sources and oil and gas resources. These policies should include efforts aimed at fiscal stability, streamlining of the permitting process, increased transparency on timelines and supporting critical infrastructure. These are not just necessary for the oil and gas industry, but also for nuclear, hydrogen and renewables, all of which will be necessary to deliver on the energy transition. At the end of the day, itâs critical for our administration to remember that North American energy production is stabilizing for us for both global energy security and meeting energy transition demand. Meeting that demand will require investments in medium and long-cycle projects in addition to short-cycle U.S. shale. This is why you see ConocoPhillips leaning a bit further across our deep and diversified portfolio in 2023, whether itâs the Lower 48, where we achieved record production in 2022 or our diversified global portfolio, ConocoPhillips is well positioned to meet the worldâs long-term energy needs while also reducing our own emissions footprint. Shifting to our 2022 performance, ConocoPhillips showed continuous strong execution across our triple mandate. We generated a trailing 12-month return on capital employed of 27%, the highest since the spin. We delivered on our plan to return $15 billion of capital to our shareholders, which represented 53% of our CFO, well in excess of our greater than 30% annual through-the-cycle commitment and we further advanced our net zero operational emissions ambition with a new medium-term methane intensity target consistent with our recent commitment to joining OGMP 2.0. Now looking ahead, ConocoPhillips is well positioned to further deliver on our triple mandate in 2023 with a well-balanced capital allocation strategy. This morning, we announced a plan to return $11 billion of capital to shareholders, which represents about 50% of our forecasted CFO at $80 WTI. The other half of our cash flow will be dedicated to reinvesting in the business. From a portfolio perspective, our deep and well-diversified asset base is well-positioned to generate solid cash flow growth for decades to come. This is further evidenced by our organic reserve replacement ratio of 177% in 2022. We are also enthusiastic about our new LNG opportunities we are participating in, in Qatar and the United States, which are highly complementary to our existing LNG business. And we look forward to providing you a comprehensive update about our long-term strategy and our financial outlook at our upcoming Analyst and Investor Meeting on April 12 at the New York Stock Exchange. Now, let me turn the call over to Bill to cover our fourth quarter performance and 2023 guidance in a bit more detail. Thanks, Ryan. Starting with fourth quarter results, we generated $2.71 in adjusted earnings per share. Fourth quarter production was 1,758,000 barrels of oil equivalent per day, which included a 27,000 barrel a day negative impact from weather in the Lower 48. Lower 48 production averaged 997,000, including 671,000 from the Permian, 214,000 from the Eagle Ford, and 96,000 from the Bakken. Moving to cash flow. Fourth quarter CFO was $6.5 billion, excluding working capital at an average WTI price of $83 per barrel. APLNG distributions were $639 million and fourth quarter capital expenditures were $2.5 billion, including $2.1 billion of base capital and $300 million for acquisitions and North Field East payments. On capital allocation, we returned $5.1 billion to shareholders through ordinary dividends, VROC payments and share buybacks, while also reducing gross debt by $400 million. Full year CFO was $28.5 billion, excluding working capital at an average WTI price of $94 per barrel in 2022. Full year APLNG distributions were $2.2 billion and full year total CapEx was $10.2 billion with base CapEx achieving our guidance of $8.1 billion and $2.1 billion of acquisitions in North Field East payments. Full year return of capital was $15 billion, while $3.4 billion went to debt reduction with cash and short-term investments ending the year at $9.5 billion. Turning to 2023 guidance, we forecast full year production will be in a range of 1.76 million to 1.8 million barrels of oil equivalent per day, which represents 1% to 4% of organic growth. Our first quarter production guidance range is 1.72 million to 1.76 million, which includes $35,000 of planned maintenance, primarily in Qatar and the Lower 48. Our full year planned maintenance is expected to be similar to 2022. On capital spending, we expect a range of $10.7 billion to $11.3 billion, which I will discuss in more detail in a moment. We expect operating costs of $8.2 billion, DD&A of $8.1 billion, and corporate segment net loss of $900 million. For 2023 cash flow, we forecast $22 billion in CFO at $80 barrel WTI, $85 Brent and $325 Henry Hub at current strip prices for regional differentials. Included in our cash flow forecast is $1.9 billion in APLNG distributions with $600 million expected in the first quarter. Now regarding CapEx, we provide a waterfall in our prepared materials bridging 2022 actual spending to 2023 guidance. Starting with base capital spending, we forecast an increase from $8.1 billion in 2022 to a range of $9.1 billion to $9.3 billion in 2023. The remaining $1.6 billion to $2.0 billion is allocated to longer term projects. Of this amount, $1.5 billion to $1.6 billion is for LNG projects, which includes Port Arthur, North Field East and North Field South. For Port Arthur specifically, after factoring in expected project financing, we forecast that ConocoPhillips net investment will be just under $2 billion over the 5-year investment period. However, more than half of this capital investment will be in 2023. For Willow, we are guiding to $100 million to $400 million of incremental spending with the higher end of this range, assuming that the project is sanctioned this year. In summary, we are happy with our strong 2022 results, which would not be possible without the hard work and dedication of our talented workforce. And we are well positioned to balance investing in our deep and diversified portfolio this year while also continuing to return capital to our shareholders. Great. Thanks, Bill. As a reminder, just before we go to the Q&A, we ask that you please keep it to one question and a follow-up. With that, Michelle, we are ready to turn over to you for Q&A. Yes, good morning team and thanks for taking the time. Our first question is around Willow and recognize there is still some gating factors to getting it towards FID, but it seems to be moving in the right direction. So just talk about how you are thinking about that project, what remains outstanding to get it to FID? And then any thoughts on costs as well, the latest number we have is $8 billion all-in. Is that still good to go by or how should we think about that? Hey, Neil, this is Andy. Yes, there has been a lot of moving parts on Willow since the last earnings call. So let me just step through where we are in the overall approval process and then I can clear where we are with CapEx and scope. So with the approval process, I think most people saw that the final supplemental environmental impact statement was released by the Biden administration earlier this week. Now that should be published in the federal register in the next day or so and then that starts the required 30-day clock before the ROD can be issued. Now given the Biden administrationâs commitment to the Alaska congressional delegation, we then expect to receive that ROD in the first week of March. Once the ROD has been issued, our focus for 2023 will be to immediately initiate gravel road construction, ramp up fabrication and supply chain activities. Now we are going to need to take a look at the ROD in some detail, but assuming itâs consistent with the BLMâs 3-pad preferred alternative and there are no new unworkable restrictions added, we would then proceed to final investment decision. So switching to CapEx, 2023 is very dependent on the ROD timing. And as Bill mentioned, we have given a range. So with the ROD timing, any resolutions of outstanding issues, what we are guiding is about $100 million to $400 million of incremental spend in 2023. In terms of the total project costs, we have recently gone out to market to update our cost estimates and we have seen some inflationary pressures. We have also refined the scope, including an update to accommodate the BLMâs 3-pad preferred alternative. So we are in the process of finalizing our cost estimates, but we would anticipate the AFE to first production to be in the $7 billion to $7.5 billion range. Of the increase versus the update we provided in 2021, itâs been about 50-50 between inflation and scope refinement. So hope that gives you a pretty good update on where we are with Willow. And then at our April Investor Day, we will be happy go into some more details. Okay, thatâs great. And then the follow-up is just around return of capital. Last year was an outstanding year, 53% back to shareholders and of the cash flow and the guidance this year, $11 billion also implies a very strong return of capital number. I know we often anchored to the 30% or greater than 30%, but is the message we should be interpreting that there is a new normal here around return of capital and the bar has been reset higher? No, we are not trying to message that. What I remind people is the 30% commitment that we have is through the cycle commitment. We have also signaled to â or we have also told to shareholders that when prices are above our mid-cycle price, you should expect higher distributions for the company and thatâs consistent with what we have done over the last number of years. So as we look today, where the strip is trading, where the regional differentials are at, we have kind of picked $11 billion at an $80 price deck. So thatâs how we are going into the year. It represents about 50% of our cash flow. But again, that $80 is well above our mid-cycle price in our commitments tied to â through the cycle kind of mid-cycle price call. And it just represents that we are constructive with the environment that we see today and we expect the prices to be above our mid-cycle price call, which should inform that the distributions would be above that 30% as well. Well, thank you. Good morning, everyone. Happy New Year guys. So Bill, I think I didnât actually get to write down the numbers quickly enough. Could you just go through again the expected cadence of the three LNG projects? Full disclosure, I think we had expected a slower pace on Sempra or in Port Arthur, I guess. So can you just walk us through what you â how you expect that cadence to look please? That would be really helpful. And Iâve got a follow-up, please. Yes. Sure, Doug. I am happy to. So let me just kind of start with a bit of a high level view we currently bridge from 2022 to â23 in our documents for today. And Iâll just â Iâll start with kind of our exit rate. So if you look at our fourth quarter base capital spend, that would annualize out to about $8.9 billion with a low single-digit inflation rate versus â22 exit rate. And we have got some phasing in Norway and the additional incremental emissions reduction that gets you to about 9.2, which is midpoint of our guidance. And then really, the incremental spend is on LNG projects in Willow and that gets us to $11 billion midpoint of the guidance range. And I think that the primary issue here on cadence is likely the front-end nature of Port Arthur LNG spend, which really the market had no way of knowing. So as youâll recall, Sempra has communicated a Phase 1 gross cost of $10.5 billion for the EPC, on top of which there is going to be owners costs and other miscellaneous costs to bring the project online. And Doug, the project currently lining up debt financing for a portion of the spend, so you roll that all together, we would expect our 30% share of the net equity capital to be just under $2 billion over the 5-year investment period. But the front-end nature of equity component is going to result in over half of that $2 billion occurring in 2023. Thatâs what weâve included in our 2023 capital guidance. Now the project is still waiting on FID, but we do expect that in the first quarter, and we will be talking to you more about this in April. But if youâve been modeling a more ratable spend over 5 years for Port Arthur that would be about $400 million in 2023 or about to $600 million to $700 million less than our guidance. So I think that, that might be some of what youâre seeing in kind of the LNG spend, and I think itâs obvious with over half of the Port Arthur spend in 2023, obviously, the spending in 2024 and beyond is going to be less than a ratable rate. But I think thatâs probably the main gap in LNG spending that youâre seeing. Thatâs really helpful, Bill. And youâre exactly right. We were not expecting half. But of course, that means that the other half is probably more ratable, Iâm guessing, over time, but thatâs really helpful. My follow-up is a favorite topic of me, Bill. I hate to get in the weeds here, but again, another sizable deferred tax credit this quarter, although it does kind of look a little bit more like your â almost like youâre moving to a new normal based on your U.S. spending, thinking IDCs and things of that nature. Can you move just â am I thinking about that right? Should we be expecting a ratable deferred tax credit going forward in your cash flow? And Iâll leave it there. Thank you. Well, yes. So deferred taxes were a source of $0.5 billion in the fourth quarter, Doug, and we had a source of about $700 million in the third quarter. Now the source of those deferred taxes is primarily due to the impact of intangible drilling costs and generating deferred tax liabilities now that weâre in a U.S. cash tax paying position. Now as we look at 2023 at current investment levels, weâd expect deferred taxes are going to continue to generate a source of cash on a normalized basis. But Iâd expect the deferred tax source full year to be lower in 2022. Now we are in a U.S. cash tax paying position for the full year, but we also utilized all significant U.S. net operating losses, NOLs and EOR credit carryforwards in 2022. And that utilization generated a larger source of cash last year compared to what weâre going to be seeing in 2023. Thank you. Ryan, there is been a lot of focus on the Permian Basin of late, certainly from an industry perspective, and not all of it has been good, weâd say. And Iâd love if you just took a moment and help us differentiate Conocoâs assets in the basin, what youâre seeing from your asset. And certainly, some of the performance speaks for itself, but Iâd love if you could address that today. Yes. Thanks, Steve. Let me make a couple of comments, and then Iâll turn it over to Nick for maybe a couple of his thoughts in a bit more detail. Weâre not worried about our long-term development plans in the Lower 48. We see durability to our plans. And I know there is been a bit of noise about productivity and length and durability. And weâve been there for a long time. We know what weâre doing after the acquisitions that we made over the last 1.5 years. And I donât have any concerns about the durability to length, the efficiency of our program. And maybe Iâll let Nick provide a few more detail and color on that comment. Yes, good morning, Steve. So Iâll give a little more color on that one. Let me start with just the well performance that weâre seeing versus the tight curves. So if you look at our 2022 development wells, they have been performing slightly above the curve expectations across all four basins, including the Permian Basin. And that strong performance reinforces and validates the development plans that Ryan just mentioned, which is our focus on maximizing returns and recovery while minimizing the future interference. So if we step back in time, weâve been incorporating a lot of the learning curve from our developments over the past 3 to 4 years. In fact, when you look at our accelerated learning curve, weâve drilled the most horizontal wells in the Delaware and Midland Basin, more than any other company. So when you combine that data along with our significant operated by others portfolio and then the learnings in our mature development in the Eagle Ford and the Bakken, thatâs really helped us hone in on the best development approach of the stack. So in summary, Steve, if you look at our production performance at or slightly exceeding type curve expectations, combined with the development strategy, weâre very confident in our long-term outlook for these assets and we will update you more at AM. Thatâs great. Thanks. I really appreciate it. I mean if I could â just one quick follow-up, Nick. Could you just address the 25,000 acres of swaps and coring up that you mentioned this morning, I would, I mean one of the questions, I guess, is... Sorry, I must be the phone line. The question is on the â you have the 25,000 acres on the core up. And Iâm just wondering if you could address, Nick, how much more to go is there on that side? And where are you just looking at the checkerboard of the map down there? Yes, Steve. Maybe Iâll just go back for the whole audience on what weâve done in that space. Weâve been very focused on the acreage optimization, as you mentioned on trades and swaps. Last year, we completed 15 trades and that gives us a total about 25,000 acres since the Concho transaction. Now a couple of points I just want to address. These core ups have doubled the average lateral length of more than a yearâs worth of inventory, thatâs at our current level of drilling activity. Now the ability to drill extended laterals greater than 1 mile can reduce our cost of supply by 30% to 40%. So thatâs significant. Now to put that in perspective, Steve, our quality position in the Permian has an inventory with roughly 60% of our wells that are greater than 2-mile laterals, 60%. And then if you look at 1.5 miles or greater, thatâs an additional 20%. So thatâs a robust inventory that we have out there. Now if you will continue to, as you mentioned, the core up in 2023 through acreage and swaps there, but weâve got a significant deep robust inventory with those longer laterals. Hey, guys. Good morning. Thanks for taking my question. So my first question is just kind of a broad one on the upcoming Investor Day. You guys havenât done one for several years. Anything on what we can expect from the presentation in terms of the longer-term plan or maybe a breakdown of certain assets or projects. So just any color on that would be great? Yes, John, thanks. So we â I think we will show how weâre pretty excited about where the company has gone. Weâve got a better plan. Itâs the strategic and the financial plan of the company are got better duration, better depth, and we will show that to you what it means for the company for decades to come. I mean â so weâre pretty excited about where itâs at. We will do a deeper dive into where weâre at in the Lower 48, our global portfolio as well as the LNG business that weâve been developing here over the last 1.5 years. So look forward to sharing kind of our excitement around our plans, where itâs headed and just the quality of what weâre doing both strategically and financially. Great. Thanks, Ryan. And then just a question on the guidance for 1Q production, a little bit below the full year guide and you guys called out the maintenance number there. But maybe just some color on would be helpful. on how you expect production to phase in throughout the year? Should we expect it to be more back-end loaded or maybe more towards the middle, given the later 1Q? Hey, John, itâs Dominic here. So yes, I think as Bill remarked, we do have above normal seasonal maintenance in the first quarter. Thatâs at Qatar Train 6 and 7, but also Eagle Ford Sugarloaf of our stabilizer facility down there. Weâve actually been preparing that for a bit of expansion. So that explains the Q1 sort of rate. But thereafter, our expectation is that each quarter will be around 2% to 3% year-on-year growth. So thatâs really our base case. Good morning, Ryan. Our first one, maybe following up on Neilâs question on the cash return for the year, we realize that itâs still early in the year, but youâve already declared the ROC for the first part of the year. How are you ultimately thinking about the split of the $11 billion of total cash return between cash and buyback, and is the buyback more of a function of your mid-cycle price assumptions? Yes. I think the majority of our buyback is tied back to ratably buying our shares in our mid-cycle price assumptions. So we try to ratably buy some shares as we go through the year. And then we buy some variable shares depending on where we see the market. I would say, as weâre going into 2023, right now, weâre thinking roughly 50%, 50% between cash and shares in terms of the absolute return back to the shareholders. So the $11 billion would be split roughly $5.5 billion and $5.5 billion. Thatâs our thinking as we start the year, but we will watch the commodity price and where things develop as we go through the course of the year. Okay. Very helpful. Thank you. Iâll pencil that in â our second question, sticking with â23, but moving to CapEx here. We noticed that there is about $500 million to $600 million of incremental inflation included in the budget versus 2022 and there is some noise with the categorization of the Port Arthur spend. But it looks like Lower 48 will comprise about 60% of total CapEx for â23. And so our question is, how much of that $500 million to $600 million of incremental inflation is in the Permian and Lower 48 versus maybe other parts of your portfolio? And whatâs your estimate on how inflation ended up by region in â22 and maybe any assumptions that you have in your budget for â23 inflation? Thank you. Yes. Let me take a quick high-level shot. I think if youâre kind of looking at exit rates from 2022 going into 2023, itâs kind of low single digits. If youâre kind of looking at whatâs the increase annually year-over-year. Itâs more like mid-single digits. I think the difference weâre seeing this year maybe relative to last year is we see that mid single-digit inflation applying across the whole global portfolio and itâs slightly higher in the Permian to the question that you asked. So yes, weâre in â weâre seeing some categories of spend that are key to the company actually start to plateau and maybe even roll over a little bit, one that â one weâre watching pretty closely is OCTG, the tubulars, some of the raw materials that are going into making those are starting to come down and be slight a little bit. So weâre starting to see that category spend sort of roll over. Weâre seeing the rate of increase kind of in the onshore rig market start to lessen a little bit, which is good. We need that â and so when we kind of wrap all those categories to spend together for the company, it kind of manifests itself in an annual year-over-year inflation in the mid-single digits. Thank you. Maybe a follow-up on the Permian, I am not sure if you mentioned this earlier, but can you talk a little bit about what is assumed in your current guidance, I guess, both capital and production for the year. It sounds like the guide assumes kind of flat activity levels in the Permian versus late 2022. Is that correct? And in terms of how we think about activity levels and how should we think about the trajectory of production in the Permian over the course of 2023? Yes, Ryan, this is Nick. Yes, let me talk â walk you through that. So as you mentioned, weâve assumed a level-loaded steady-state program for 2023 based on that second half of 2022 for rigs and frac crews. The focus for this year will really be around improving capital and operating efficiency. Now we do expect some modest growth in partner activity as the year progresses. And then we have some larger operated pads that will come online in kind of 2Q, 3Q. So our Lower 48 plan will deliver production in that mid-single digits, with the majority of that growth weighted to the Permian. Now with respect to the profile shape, it will be kind of mid to back-end weighted in 2023. And as we talked about, Dominic mentioned this, we do have that Eagle Ford Sugarloaf stabilizer maintenance thatâs going on. And actually, Iâm pleased to mention that the turnaround that Dominic referred to is 5 days, and we completed that successfully in January. Now we will have a little bit of brownfield modifications on that stabilizer through mid-February as well. And then Iâll mention two kind of month-to-month, we will have wells, a little bit of lumpiness. But in the back end, we will be weighted in 2023 for a production profile. Great, thank you. Thatâs very helpful. And then â as we think about your emerging kind of global gas strategy, how should we think about your approach to the gas portfolio on these projects? Should we expect the majority sold under long-term contracts with a percentage held for spot cells? When you look to correspondingly build out your global gas trading capability similar to our European peers and maybe as youâre out marketing these volumes, are you seeing anything to comment on in terms of the environment, whether global gas tightness is helping the sales pricing out there? So any high-level views on your global gas strategy there would be great. Yes, sure. This is Bill. So Iâll just start with â weâve got a really strong understanding and presence in the LNG market have had for several years. Weâre regularly selling spot volumes into Asia of our APLNG venture. And we do think that Europe is going to be a long-term market for U.S. Gulf Coast and you will have seen where we recently secured regas capacity in Germany, which weâre really happy about and excited about. And so weâre looking at the best options in terms of long-term placements, but these are 20-year projects off the Gulf Coast. And so we think that the long-term strength of international pricing relative to U.S. gas is going to be pretty interesting. And that driver and that strength in LNG, we think, itâs going to be driven by its role in energy transition and reducing carbon emissions. So as you see us build out our LNG portfolio over the next few years, we may take some longer-term contract decisions in there. But right now, weâre not really disclosing where weâre at for competitive reasons in terms of how weâre developing that market. Hey. Good morning. Thanks for taking my questions. So, I wanted to first follow-up on some of the CapEx questions. Earlier, you laid out the $1.6 billion to $2 billion of spending this year on major projects, and you talked with some good detail about Port Arthur. Itâs not necessarily ratable across the projects. But when you put it all together, I was wondering if you could talk about how you see the magnitude of major projects been evolving or changing over the next few years. Outside of Port Arthur were some of the key moving pieces that we should be thinking about across the projects that could move that number higher or lower? Yes. I think we tried to explain kind of a bit about the front-end loading of the Port Arthur project. So, you ought to expect thatâs going to come down as you look into the 2 years, 3 years, 4 years. Some of the other moving pieces, we â if the commodity price environment supports it, we want to see some ramp in our Lower 48 activities up to our optimized plateau across the various assets. You will see Willow ramping up if we get an adequate projects approval from the Federal government. So, that will come in. And then obviously, there are some inflationary forces as well as we think about where itâs going. So, there is a lot of moving pieces, but thatâs kind of how you should think of the different pieces that we are looking at as we kind of think about the longer term nature of the capital. And we will be prepared to talk about that at our Analyst Meeting coming up in April. Got it. Makes sense. Just a quick follow-up on NFE and NFS, are those fairly ratable over the next few years? Any additional color on those projects specifically? Yes. So, this is Bill. You saw us in the fourth quarter and make our initial catch-up payment on NFE. And then you should expect that those projects are funding through the next couple of years. Hi guys. Good morning. Can I go back â Ryan, can I go back into Permian? You guys are talking about earlier in your prepared remarks on the inventory for the 3-mile well. I think the industry also think that the 3-mile may actually work even better. Can you talk about that? I mean based on where you are today, whatâs the inventory then on the 3-miles, and whether that there is a lot of opportunity there? You also donât know whether there is an update you can provide on the petrol, longer term petrol rate that you expect for Permian and that when that you will be able to get there? So, thatâs the first question. The second question that I have to say, I was super impressed that your Bakken production is actually flat sequentially from the third quarter given that the winter storm hit and so severely. I mean how about the 27,000 barrels per day, I mean how much is on the Bakken and how you would be able to get it so that you can actually get it flat? Alright. Yes. This is Nick there. I will just kind of walk you back through kind of the inventory related to our longer laterals as we have done the core up. Again, over 60% is greater than 2-mile laterals, and that does include the 3-miles as well. So, thatâs a significant part of our inventory in the Permian Basin. We have actually, this last year, in 2022, brought on, I think more than 30 wells that are in the 3-mile category and are seeing very encouraging results. So, we will continue to execute those as we are going forward. As we continue to core up and do swaps, that will give us more inventory as well for that longer lateral execution. Again, you will see probably cost of supply of about 30% to 40% reduction as we drill those longer laterals. I am sorry, Dominic, for the 60% you are talking about, how much of â what percent of them is actually in the 3-miles category? Yes. Paul, I donât have that in front of me at this point in time, but letâs wait until AM and I will give you a further update on that overall 3-mile categorization. Okay. On your second part of that first question related to plateau. Again, we will update the group on overall Permian plateau, Eagle Ford and Bakken at the April 12th Investor Day. Obviously, there is a number of factors that go into that. The macro, maintaining execution efficiency, continuing to capture the learning curve and capital efficiency, right now, with our middle â mid-single digit growth, we feel thatâs right in line with what we have communicated earlier. And then your second question was related to weather. Glad you brought that one up. Again, Bill, you had mentioned 27,000 barrels a day for fourth quarter 2022. Just a quick breakdown on that. Thatâs 13,000 barrels for Permian, 10,000 barrels for Bakken and then last 4,000 barrels in Eagle Ford. I think you asked kind of maybe quarter-to-quarter, Q3 to Q4, you are right, it was flat. We are at 96,000 barrels equivalent per day. And Paul, the main driver for that is we had some really strong operated wells that carried into Q4. And then on the operated by others, we had some larger pad projects come online in Q4 that offset that weather. Hey. Good morning. A bit of an old-school question on your reserve replacement. Historically, LNG FIDs were big blocky chunks of gas reserves going into the portfolio, thatâs not really going to be the case for a midstream asset like Port Arthur. But I am curious, can you go into a little more detail on the oil/gas mix shift on the reserve replacement, and how to think about the cadence of LNG coming in through that? Hey Bob, itâs Dominic here. Yes. So, let me talk a bit about that. I mean we are obviously very pleased with our organic reserve replacement ratio this year, 177%. The real drivers for that, I mean obviously, the LNG, we did have some bookings there from NFE as we commenced payments on NFE. We also saw some bookings to make LNG performance and for some project advancements in Norway. So, our international portfolio is contributing. But the main area this year was actually in the Lower 48 development program. And thatâs particularly in the Permian and that included an increase to our PUD bookings by extending the approved era we established by reliable technology, which is an SEC term. So, itâs consistent with SEC requirements. And so basically, we have a very extensive geoscience and reservoir engineering data set across the Permian now that allows us to support that. So â and you will be aware, Bob, just the rigor and the process and the controls governing the reserves booking process. So, this further demonstrates the depth and quality of our Lower 48 inventory. So, thatâs really the story this year. Going forward, we will continue to see bookings in the Lower 48. We will see bookings in Alaska, obviously with pending FIDs. And then we will continue to see some LNG bookings as well, particularly on the resource projects as we call them, NFE and NFS. You are absolutely right what you are saying about Port Arthur. But â so, I think you will see a mix going forward, right, as it stands now, our Lower 48 represents about 46% of our reserves and the remainder across the international. So, yes, we have simply appreciating the performance of our sort of diversified portfolio around our reserves booking. So, thanks for the question. Very clear. A quick follow-up on the portfolio. Great opportunities in 2020 to rebuild the portfolio, â21 again in the Permian, â22 was very much an LNG themed year. Is the star of the show for â23 Willow FID, or how do you think about the portfolio where it stands today? We are pretty pleased where the portfolio is at. I mean Dominic did a good job of kind of going across the globe. I think we spent a lot of time over the last 5 years really coring up the portfolio, really focused on getting it as low cost of supply as we can, getting the margins as expanded as we can leading to kind of the returns and the productivity that we are seeing today. So, we are just hyper-focused on making sure the efficiencies are there and the returns are there. And pretty happy with where we stand today. And then as you rightly note, Bob, we are leaning in a bit on some of these mid and longer-cycle projects because we are just very constructive. The world is going to need this all. Itâs going to need low greenhouse gas and emissions intensity oil, itâs going to need low-cost supply oil. Thatâs what we are all about. Thatâs what we are doing in our portfolio. And most recently, leaning in on the LNG side because we think the world is going to need this gas as part of the transition that we are going through. Good morning. Thanks for the time. My question is around just production and maybe around the Permian. I am just trying to get a sense of, you have got I think the 1% to 4% type overall growth. So, I am just trying to get a sense of expectations for the Permian, if you would back out obviously, whatâs going on up in Alaska. Have you all clarified or kind of said what the expectation is at. And it sounds like â second part of that, it sounds like itâs going to be pretty that growth you expect in the Permian, I assume that would be pretty linear for the entire year, if you could comment on those two things. Yes. Neal, this is Nick. Again, for the Lower 48, we will deliver production growth in that mid-single digits. And again, the majority of that growth is going to be weighted to the Permian. With respect to the profile shape, itâs going to be more of mid to back-end weighted. So, we have got some operated larger pads that are going to be coming on kind of the mid-year to third quarter. And then we have got a modest operated by other growth going through the year with more on the kind of the back end for Lower 48. Does that help? Thatâs very clear. And then just one last one. You all are obviously in a fantastic position financially. You have done some really positive M&A deals in the past. I think actually in the last couple of years among the best that I have seen out there. My question that comes in, I mean how do you view the landscape today? I mean obviously, prices are up, maybe commodity prices are up, so maybe expectations are higher, but just wondering overall, how do you view the M&A landscape? Yes. Thanks Neal. I mean we are in the market every day. We are trading. We are thinking about the market, we see whatâs going on every day. We think generally, there is more consolidation thatâs needed in our business. Itâs pretty tough that these kinds of elevated prices, but we watch it every day. I think it â we have been pretty clear and consistent about our financial framework and how we think about M&A. That has not changed. So, as we think about cost of supply, we think about assets that we can make better or can make our company better or improve our long-term plan, we know the assets that we like. And so we watch those constantly. But itâs a tougher market at these kinds of prices to transact. And some of the transactions that have occurred this year, we have looked at them. We have seen them. We have watched them. They just donât feel our framework. So, they donât make us a better company. Hi everyone and thanks as always, for the great disclosure. In fact, you guys have been leaders in the industry in many ways, starting with really the first capital discipline, cash return framework. You are in a position to make acquisitions at the bottom of the cycle. And now you are saying that you are leaning in is the word, Ryan â words to sort of mega project development using an $85 oil price assumption. Is this an indication that the industry is going to have to follow you, or is it more that these major opportunities have come up in 2023? And further to the $85 price assumption, could you just remind me what gas price assumption you are using? And what would you cut if oil prices went to, say, $60 over the course of the year? Thanks. Yes. Thanks Paul. No, I think we are â our view pretty constructive over the next number of years and through the decade. So, the time you want to do some of these big projects sort of front end of the cycle, we probably are a bit unique given our global diversified portfolio. We have opportunities in Alaska and Norway, in the Far East â in the Middle East. So, we look at those, make sure they fit our framework around cost of supply and what we want to go invest in. And as we look forward, we believe now is the time to be doing these projects, which is why you see us leaning in on the LNG side. We are constructive on the gas and why we are moving forward with our little project up in Alaska. And I will make a site com [ph], this is what the administration has asked us for U.S. production, this low GHG emission production. This is exactly what the administration has asked us to do as an industry, and thatâs what we are trying to do as a company. Now, looking forward, I think we will talk at AM about where we think mid-cycle price is and frankly, we think itâs probably come up from where we have been over the last 5 years, 6 years. We will show that to you at AM. And then finally, to your last question, yes, we have set a cash return target at $80 WTI, $85 Brent. And I think itâs 3.25 Henry Hub. Those are the assumptions we made that underpin the $11 billion. The price would have to go down considerably. I mean you said into the 60s, full year average, I think before we would talk about changing that. And we are prepared to use our cash on the balance sheet to fund these projects. Thatâs why we have that cash. Thatâs why we have that financial strength in that resilience. So, we are happy to use the cash if we need to. So, I think itâs resilient across a broad range of prices in terms of what we have established as our distribution target for the year. Great. Thanks. And then following on the leadership, you were instrumental in the export ban being lifted. Can you talk a little bit more about Willow? There is obviously some â you mentioned low GHG. Can you talk a bit about how it fits alongside what you just said about the administration asking for this in terms of its environmental footprint? Thank you very much. Yes. It will be some of the lowest GHG emission production in the world, less than 10 kilograms per barrel. So, itâs going to be something that we believe is what the world needs right now as we go through this energy transition. We need more oil and gas. We need more base load to supply the world reliable and affordable energy. And coming to the United States and North America broadly, in general, is the right thing to be doing right now. And it comes from companies like ours that have over 40-year experience on the North Slope. We know how to do this. We know how to do it responsibly and all the stakeholders support it, including the native community on the North Slope, the congressional delegation, the union labor leaders who need this opportunity for employment in Alaska. So, there is full alignment behind what we are trying to go do there. Itâs just the politics in D.C. Hey. Good morning. Thank you. I wanted to ask on the pace of CapEx as you move through this year. I am wondering with all of the major project components that there are some quarters that might be chunkier than others, or if there are any other timing or seasonal factors to consider? So, any guidance you can give there in terms of how to think about the progression of quarterly spending for some of those bigger ticket items as well as the base business would be very helpful. Thanks. Thanks Bill. Itâs Dominic here. Yes, the way itâs going to work out we think is pretty ratable through the year. We have got consistent activity in the Lower 48 level loaded. You are right that there is going to be a bit of lumpiness around some of the project spend. So, for example, in the first quarter, we do have a modest upfront payment in Q1 on Port Arthur, assuming thatâs sanctioned. But if you are running a fairly ratable profile, that would be a good estimate.
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EarningCall_610
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Good morning, and good afternoon, everyone. My name is Gretchen, and I'll be your conference operator today. At this time, I would like to welcome everyone to Coty's Second Quarter Fiscal 2023 Question-and-Answer Conference Call. As a reminder, this conference call is being recorded today, February 08, 2023. Please note that earlier this morning, Coty issued a press release and prepared remarks webcast, which can be found on its Investor Relations website. I would now like to remind you that many of the comments today may contain forward-looking statements. Please refer to Coty's earnings release and the reports filed with the SEC, where the company lists factors that could cause actual results to differ materially from these forward-looking statements. In addition, except where noted, the discussion of Coty's financial results and Coty's expectations reflect certain adjustments as specified in non-GAAP financial measures section of the company's release. Hi, good morning, everyone. I guess two questions. First on just the glass and the fragrance situation. How is this impacting the innovation agenda in terms of the pipeline and the launch calendar, if you could just provide any context? And I apologize, I missed some of the earlier remarks. I had some other company's reporting. Did you provide a timeline in the prepared commentary on when you feel like you'll be fully kind of back to normal from a component standpoint? And then, the second question is just would love your thoughts on what you're seeing on the ground in China currently? You suggested an improvement. I just was curious on some details behind some of those comments. Yes. Good morning. This is Sue speaking. Thank you again for the question. When it comes to the first part of the question, which is around the fragrance shortages specifically focused on the glass components, again, this is indeed the parts of the components that has been the most affected, and this is, I would say, an industry-wide issue and not just at Coty, of course. And this is improving already at the moment where we are talking. Hence, the communication around the sequential acceleration of our sales entering in Jan. And this is clearly something that's a very, very good news, coupled, as you can imagine, with the robust beauty demand, specifically on the fragrance side. So, I would say these two elements altogether give us a lot of confidence that we'll have these shortages slowly, but surely, fixed into the industry widely and at Coty, of course. So -- but I would say the way I would describe the story, did it impact the innovation pipeline? The answer is no. If you look at the way our innovations have been performing on the markets, the results have been, I have to say, outstanding, be it on the Burberry. I can start with this brand, because what's happened, for example, in a market like the U.S. behind Burberry is unprecedented. We've done last year the launch of the Burberry Eau de Toilette. And then, we continued this year, I mean, in September of calendar 2022 with the Burberry Eau de Parfum. And the Eau de Parfum, for the first time, surpassed Eau de Toilette sales, which, by the way, says a lot about the premiumization of this market. Traditionally, any innovation that's a line extension moving from Eau de Toilette to Eau de Parfum is performing 20% to 30% versus Eau de Toilette. In this case, it's bigger, which is really big, big sign. So, this one is doing fantastically well. Burberry Her in the U.S. is climbing the rankings incredibly, which allowed the brand to become a top 10 fragrance brand in the very competitive U.S. market, which is a jump of 9 ranks. If you think about what we've seen behind Hugo Boss in the rest of the world, because the brand is not as big as it is in the rest of the world in the U.S., so if you think about Europe, the rest of the world, Hugo Boss success behind fashion and now translating into the fragrance business allow us to have a top two fragrance launch with Boss Bottled Parfum. If you think about Gucci again with Flora Gorgeous Jasmine, that's the continuity of last year's Gorgeous Gardenia. Again, it's a top two to top five innovation. So, in a way, the shortages didn't prevent us from pursing biggest innovations during calendar '22, our key launches. Last but not the least, Chloe, specifically the line Atelier des Fleurs, Atelier des Fleurs is really booming in all the premiumized markets. If you think about the Asian ones, the Chinese one, hopefully, that is restarting now. This is clearly another leg of growth for us. So, no impact on innovation from what we have seen. Last but not least, again, going to China, we read, again, like all of you the headlines of Jan. being better than expected for the economy in general in this country. We've also seen some pictures that we posted during earnings call today where we see consumers back to stores, which is really a fantastic news for the beauty industry and for our businesses, as you can imagine, having the most important white spaces of the whole industry in terms of companies in this country. So, there is a confirmation. It's not, I would say, a strengthening/acceleration of two things we have seen since, I would say, the post lockdowns of last year and including some recent studies, because we continue to study the consumers' mindset in the country almost on a monthly basis. And we see the premiumization trend accelerating and becoming more radical, if I may say, and building into all categories on one side. And we see on the other side, the healthification trend stronger than ever, which is great for both our business as premiumizing and becoming more and more skincare in the country. And last but not least, something very important we are seeing in the country too is that the shift from, I would say, heritage brands towards new brands active in the Chinese market is stronger than ever. The highest end consumers are now more open than ever to try new brands, new innovation, versus the traditional, I would say, loyalty that we have seen in the past towards more classical and traditional brands. Hi. This is Sydney on for Ashley. My first question is just on China. So, I'm curious if you guys are seeing or expect any category mix rebalancing in China, just following that reopening and a return to socialization? And by the way, nice to meet you for the first time. So, in a way what I can tell you is that, again, concerning what I just commented on in terms of categories, premiumization, healthification, moving towards new brands, new offering a kind of speed in terms of transformation of how the Chinese market is looking more and more in terms of brands, I can tell you that there is rebalancing probably that will allow all categories to grow. In a way, skincare is the most traditionally fastest-growing category, the biggest category by far. But fragrances on one side and makeup on the other side -- of course, as you mentioned, because there is more socialization, people are getting outside their homes, going back to stores, traveling to Hainan. By the way, the travel to Hainan has been higher than last Jan, if you compare between Jan this year and Jan last year. So, we start to see this, which is really a great, I would say, information for us as Coty as a company, because it would mean that we will be able to really run on our three legs in China, of course, fragrance, makeup and skincare with the upcoming launch of Lancaster Ligne Princiere in March. Thank you. And then, just one more on the comment on the dupes. So, you called out CoverGirl and Rimmel has seen a little bit of a benefit from consumers trading down from the Prestige. Is that something that we should understand as evidence of trade down? Is that something that you're seeing more broadly? Or is it a bit more brand specific? Sydney, it's not a trade down from Prestige at all. In fact, this has existed since many years. It's been accelerating recently, of course, as you can imagine, because we have more and more consumers, specifically the Gen Zs shopping on TikTok and all these kind of social media artists making their opinions there before shopping online. And this, I would say, consumers in a way what they are looking for is high-quality at an affordable price, which is the reason why we are really working all our brands to become cool, efficient, clean because this is what people are looking for, still at an affordable price versus what is happening in the rest of the industry. When it comes to Prestige, we don't see any sign of slowdown on the fragrance business as you can imagine. The importance in fragrances of the brand name is very, very important. People are also shopping a brand name and this is, in a way, makes the fragrance category probably the most immune when it comes to any kind of trade down or dupe phenomenon. And of course, on makeup and on skincare, I would say the growth of these businesses is big enough to allow anyone to continue to thrive. Hi. Thank you so much for the question. Just curious with the momentum you saw in Prestige fragrance in fiscal Q2, we're seeing a nice acceleration in volumes in the Nielsen data since the quarter ended. I was wondering if you can comment on the momentum you're seeing post the quarter, and to what extent the supply constraints are affecting this as well? Thank you. Just wondering if you can comment on the momentum that you're seeing post the quarter with acceleration in volume, and then to what extent the supply constraints are affecting it? Yes, I got it. Thank you so much for the question. Again, the momentum -- sorry, in Prestige in fragrances in Q2, again, it's, in a way, explainable first by the very healthy beauty demand for this category. What we'd love to call "the fragrance index" is at full effect again, whatever the region again, and this despite, again, we have shortages that all the industry had been facing. The innovation that we've been putting in the market, again, I was quoting Burberry or Hugo Boss are clearly having a role in this momentum that we are seeing in the company, the premiumization of the market. Again, I'd love to give again and again the example of Burberry Eau de Parfum that's selling higher than Burberry Eau de Toilette, which is the first in the history of line extensions, if I may say, which says a lot about the upgrading and not the down trading of this market. So, this is, I would say, for me, a kind of explanation of what's happening. And this is, again, as you can imagine, during the quarter, without having any upside coming from the Chinese market where the penetration is very low and is expected to grow in the coming quarters and years as you can imagine. When it comes to the momentum that we started to see in Jan., if I may say, this I would really link it to three elements. The first one is, of course, improving of service levels and we are improving with this element quite fast and we will continue to improve on this element in the coming quarters. And of course, the continued strong beauty demand, which is driving this sequential growth acceleration that we have seen. There is also a phenomenon of big innovations that are [trending] (ph), at the moment we are speaking about CoverGirl in the U.S. market. Again, we referred to this during the presentation. The continuity of the Clean lines with Yummy gloss, with the Clean serums -- Clean Fresh serums, Clean eyeshadow. And last but not least, and I guess this will be a question at a moment on another, the latest improvement that's a very strong improvement in CoverGirl sell-out in the U.S. markets with the latest four weeks that show a 17% growth of the sales, which is the best performance since a year behind this brand. So, if you put all these together with a little bit of restocking from our retailers -- remember, our sales in Q2 were in line with the sell-outs, meaning that we start the year with very lean inventories, and therefore, there is a bit of restocking. So, this, I would say, is the bundle of element that explains the start of the year that's accelerating sequentially. Great. A little bit of, I think, a follow-up on some of the other questions and that is just -- look, to start off, clearly significant demand for fragrances, supply chain issues. Is there any way to guesstimate how much those supply chain issues impacted sales in the quarter? Yes. Hi, Robert. It's very difficult to estimate. I mean, two major points very clearly that indeed, I mean, we have the component shortage. But definitely, immediately, we have very tight work with supply chain procurement and ready to adjust. So, concretely, what Sue was explaining is that, in fact, we are ending the Q2 with lean inventory. Now, as we are improving service level, combined with great demand and great initiatives, in fact, we are seeing really some rebuilding of the inventory and restocking in Q3. No. Again, so that's not -- I will not call it material, again. So, this was definitely what we did and what we monitored really in a smart way. Again, it was [indiscernible] we made sure that we protected our clean innovation and we made sure that we're protecting [two pillars] (ph). So, that's really -- so that we are protecting the building blocks of the business, and to be consistent in the strategy. So, not material. And again, we are seeing some acceleration beginning of Q3. Yes, thank you. Good morning. Two questions if I could. The first one is just around the price increase that's planned for the end of 3Q. Just any further commentary you could offer in terms of where that's targeted? How widespread versus how nuanced the implementation of that pricing will be? Number one. And number two, you mentioned a couple of times this morning just the notion that this year's launch pipeline, specifically in Prestige fragrances, was primarily composed the brand extensions. And I'm just -- I'm curious as we look out to fiscal '24, an early peak into the innovation pipeline, if that is expected to continue, or if next year will be more of an innovation year that has more kind of Hero products, bigger innovations, that kind of thing? Thank you very much. Sure. Okay. Hi, Steve. So, on price increase, let me remind that, indeed, when we implemented mid-single digit price increase in summer calendar of '22, it went down smoothly. As I explained several times, we did -- we have a dedicated pricing of this, which started to work, in fact, [two] (ph) years ago. So, we did work in a very granular manner in this [calendar] (ph) is to really making sure we combined also with media support, also the strategic initiatives. So, it went very smoothly. So, it was -- again it confirms the strength of the brand and the professional work we are doing. And this was absolutely needed, as you said, because it was really the way to mitigate inflation in the gross margin and this is definitely a key driver of our gross margin expansion in Q1 and Q2. Then indeed, we shared and that we are implementing a new price increase in Q3 fiscal '23. So, this quarter, again, this is what we announced [indiscernible] again, because same approach with granular work, and again, making sure that we are also completely consistent with the consumer needs. We are also working a lot on the mix management. So, it's really because we are seeing [decent] (ph) appetite for premiumization and this is what we are doing in both Prestige and Consumer Beauty. So, perfectly on track, [in detail] (ph), we are granular, and again always focusing that we are matching consumer needs and expectations. Yes. And Steve, good morning. This is Sue. So, on the second part the question, which is around the launch pipeline that was mainly brand extension, thank you, first of all, for reminding everyone about this. The performance of our Prestige business is indeed in comparative with the big, big launches we have made last year. It was Burberry Hero, it was Gucci Flora, and of course Calvin Klein's CK Defy. So, this year, of course, it was a line extension. This is traditional in our business. But again, for the first time, line extensions that are towards more premium offerings, Eau de Parfum Burberry is 30% above Eau de Toilette has made, in a way, this second year, a year of continuing growth. But you're right, the question is how about fiscal '24 and, hopefully, we'll be back to blockbusters. Hey, good morning all and thanks for taking the question. So, first from my end, can you just touch a little bit about how you're thinking about China growth for the rest of the year? And how much improvement are you baking into guidance? And then, as we look into 2024, how are you thinking about expectations for China there? Thanks. So, in -- so first of all, we indeed -- hi, Korinne. First of all, we are confirming indeed our guidance, 6% to 8%. So, this is -- and as you can see, these H1 results, we are perfectly on track. Definitely, China was a headwind in Q2 due to lockdown. So, we are betting on acceleration definitely in Q3 and Q4. So, this is embedded in our algorithm, 6% to 8%. And this is, of course, supported by all the strong initiatives that Sue has explained. And definitely that all these initiatives will accelerate in '24. So, China will become indeed an acceleration for growth in fiscal '24. And again, all of this is fully included in our midterm algorithm of 6% to 12%. Very helpful. Thank you. And then, can you just touch a bit on the broader fragrance market? I mean, it's been growing really well the past couple of years, and then the fragrance segment for Coty has been growing even better. Can you just touch on how sustainable you think this market growth is? Do you think you will come up against some tough comps at some point? And then, as we think about the segment for Coty, how sustainable do you think that strength is? Thank you. Yes. Thank you, Korinne. This is Sue speaking. I'm going to take the second part. So, again, when it comes to the fragrance market/the fragrance index, indeed, the fragrance market is 25% -- 20% to 30% higher than the levels of 2019. And in markets like the U.S., again, and you may know this, the Prestige fragrance market is over 60% higher than compared to pre-COVID levels. Again, it's hard to see how this would just be driven to some one-time factors, I have to say. And sometimes I hear this, and I do believe it's not the right explanation. Historically, this has been a big distinct category. But what we are now seeing, consumers using fragrance as part of their daily routine. I mean, this business has become really a health business, mental health business, I would say. Fragrances being seen as huge boosters, allowing people to see better in the day-to-day life. In particular, during the last couple of years, we have seen increased usage by new categories where the penetration has increased structurally, I'm thinking about Gen Z, I'm thinking about men and I'm thinking about Hispanic consumers, if you, of course, focus on the American market. We are also seeing, at the same time, the rise of fragrance influencers in social media, specifically Tiktok, but also on YouTube, which is also helping to drive sustainable growth for this category. They are driving discovery of different fragrances. They are providing authentic ways for consumers to engage with the product virtually instead of purchasing, which is really new. It's a new kind of sampling, if I may say, virtual sampling. We are also noticing particularly with the younger consumers that they are using fragrances more and more. So, the penetration in the U.S., to conclude with, is in the high 20%-s level, which is still well below that of Europe, which is closer to 50%. Not speaking about the Chinese penetration, which is around 3%. So, this give you, I would say, a zoom out of what is coming soon with this fragrance category globally. Great. Thanks. Good morning. First, I wanted to talk about China and the reopening. And now that reopening is happening, what can go into place that wasn't [including] (ph) over the last couple of years? And could you talk a little bit about how much opportunity there is for you to grow shelf space and the conversations that you're having with your folks on the ground or with retailers, particularly in Travel Retail? Thank you. Yes. Good morning, Olivia. Thank you for this question, which is indeed a very important question. Again, just to refer to our [Daily Life] (ph) last week in Amsterdam, we had people from all around the world, spending a week for the first time since many, many, many, I would say, months and quarters altogether, including the Chinese general managers, the APAC general managers, everyone was in the same room, in the same place, spending five days discovering all the new innovation for fiscal '24 and above. And I can tell you that the level of confidence I have seen on the faces, specifically the Chinese general managers and teams and marketing director was a very, very strong sign of how they see Coty in this market where the opportunities are almost endless for a company like ours. What do we do better? And again, in a way, if I may say, I love to give this image of sometimes, destiny needs to help you, in a way. We had two years and a half to strengthen, to prepare, to strengthen our fragrance business, to strengthen our makeup business, specifically on the Prestige side, to put ideas, intelligence and marketing behind the brand like adidas or Max Factor that are two big brands in the Chinese market, and last but not least, to fully prepare for our first skincare launch in China, which is happening in next month as we are speaking. So, in a way, this is what's different. It's absolutely not the same Coty, but we're starting doing beauty business in China in March than the one that was doing business just two years ago. [Technical Difficulty] taking my question. I was just like hoping to see if you can talk about a little bit of the Prestige side in terms of like how you parse out skin? And I know Lancaster was a big launch vis-a-vis fragrances. Of course, I mean, fragrances are the main motor of that. But I was wondering the exit of the quarter, we did see not to take credit for it, but we did see the deceleration for the quarter. And even at Russia, it's probably coming in below expectations, and of course, understanding all of the supply chain issues. But if you can help us understand how skin vis-a-vis fragrances in the exit of the quarter? Thank you. Yes. Good morning, Andrea. Thank you for the question. If I understood well, you were referring to the end-of-the-quarter deceleration in fragrances. And again, I do believe that this is not the way you should read the figures, if I may say. Again, I'll reframe the story around our Q2 saying that this performance, given the shortages, given the boom of the demand, given the pipe of innovation last year, which were unprecedented in the history of Coty's, a very, very strong performance, I have to say. So that's really the way I see it. And I really see skincare, specifically on the Chinese market, as an additional layer and not something that's supposed to compensate anything else. Skincare is really for us an additional, I would say, a growth driver and a new journey for the company that's very, very important, as you can imagine, if we want to become a beauty giant in Asia. So, really continuous performance on our fragrance business, strong performance on our Prestige business, specifically in the U.S. without China, as you can imagine, that was under lockdown during the full quarter. And last but not least, adding a new leg, which is the skincare leg starting with Lancaster. Of course, not referring, but again, you gave me the opportunity to refer to this, the [indiscernible] launch that is going to happen also in the coming months. And last but not least, the extension with the high premium offer behind our radar that's happening in the coming quarters. So, just a follow-up on Andrea's question just around individual category growth. I appreciate, last quarter, the body care launch had some impact that was favorable. I think if I heard you correctly in the prepared remarks, you said that growth was more balanced across your categories between fragrance and body care and makeup. Can you maybe just contextualize how category delivery was for you in the quarter on a like-for-like sales basis? And maybe what your expectations are for the full year, in the context of your full year like-for-like sales guidance? Thanks so much. Yes, indeed, Chris. So, I mean, what you're highlighting, in fact, is definitely a strength for Coty's [unique] (ph) that we have a balanced portfolio, and indeed, that we are in both divisions. Now we have, I would say, subcategories which are performing very well. Just on Prestige, I do want to emphasize, again, that, of course, we have fragrance, but now we are seeing Prestige makeup and skincare, which are accelerating and will be strong growth drivers. On Consumer Beauty, so it's definitely also the same thing. So, Consumer Beauty, now we are seeing, I mean, strong acceleration in body care definitely. So, adidas successful innovations in Q2. So, it's really [indiscernible] so, it's really in high mix in terms of high value for the consumers. And really, we are seeing some great traction. So, it's coming on top of color cosmetic and mass fragrance. So, indeed, this is a great acceleration. I want to highlight also that we have also very strong performance in Brazil, okay, where body care is -- we have done a strong brand. And also, we can also create some cost synergy -- synergies with the rest of the business. So, this is definitely a strength for the company. So -- and definitely -- to conclude on skincare, so this is definitely what we'll accelerate in H2 and beyond, of course, in fiscal '24 and fiscal '25. Yes, hi. Good morning. I was curious, as you increase your spending on advertising and promotion over time, can you talk about where you're seeing the best ROIs? And as you spend more, are your ROIs actually improving over time? Thanks. Yes. Good morning, Linda. That's a very important question. I would say, this is even the daily focus of the organization. So, let me step back a little. This is what you are highlighting here is now fully part of our all-including umbrella. So, very clearly, we started to focus on fixed cost, then on cost of goods, now we are really addressing all the [agency teams] (ph) we are investing, and we are building methodology [indiscernible] of course, combined with marketing teams, digital teams and commercial teams, right now, we are getting fully equipped to measure and to optimize ROI. So, this is the number one focus. And also, we are improving because, as we shared just before, we are now also growing in different categories. And basically, the way you spend money in skincare is different versus the way you spend money in fragrance. So, these are really nice capabilities that we have built, and consumers want to say that [indiscernible] over the last two years, and this time to build these capabilities. So, ROI is the key word, definitely making sure that each dollar we are spending on either on innovations or base business, every time we're deciding based on ROI and is reviewed by Sue and by myself, and, of course, with the team in recurring session. So that's absolutely so that we make sure we are making the best of our money and the better ROI for the coming quarters. Thanks, and good morning, good afternoon, everyone. Two questions for me. One, just first on the Consumer Beauty. So, still gaining share there. The rate of increase narrowed a little bit in the quarter. I guess, what would be your expectations going forward for that? And then, maybe sort of related to that, curious about your views on the length of the current beauty cycle, which has, obviously, been a couple of years now coming out of the kind of the peak of the pandemic, mask warning, et cetera. So, fragrance and makeup have been drivers of the beauty category. Is it reasonable, if continues? And kind of what would be your expectations for the length of the current cycle? Thank you. Yes, good morning, Mark. So, thank you for these two questions. Sue speaking. So, again, when it comes to Consumer Beauty, you're right to point out on the fact that Consumer Beauty is entering the new cycle, in fact. The first cycle that started somewhere around Jan '21 was really to reinvent the brand equity, sometimes coming back to historical brand equities, strengthening this, modernizing this, creating great advertising with the highest ROI, as just mentioned by Laurent. And this was really what explains the back to market share gains, which happened now for the full year. This is the first time since 2016 that this division is gaining market share for a full year. So, this was Stage 1. Stage 2, in a way, I love to say that Stage 1 was fixing the surface, if I may say, and then Stage 2 is really getting deeper, and we start to see real, I would say, disruptive best-in-class in terms of efficacy in the market innovation. This takes time. It takes 1.5 years to create a fantastic mascara, fantastic foundation or a long-lasting lip color. So, this is now the moment of this. So, you can imagine that Consumer Beauty businesses, specifically behind makeup, are going to continue to put on the market, big innovation supported by excellent advertising, having the best ROIs in the company. And on top of this, we have the adidas brands. We've talked to you about adidas last quarter. We started in West -- Eastern Europe, sorry, with a very, very strong results, specifically on the high-end shower gels. And now we are implementing this innovation in the Western world. And as you can imagine, this has a big potential also this brand in China, where the brand is cooler than ever, and it's already the Number One shower gel brand for Chinese men in this country. So, you can imagine us building this brand into a well-being -- high-end well-being brand in Europe, in China and hopefully, in the rest of the world, as you can imagine. Now to answer the second part of your question about the beauty cycle, again, I'm a strong believer that the main thing that has changed since a few years now is what I call the healthification of the beauty industry. This industry is about things that make people look better or feel better. And this becomes something that's a non-negotiable for consumers. And there, the limit is only us in terms of ability to innovate, to tell new stories, to bring new brands and new technologies to continue to make the consumer interested in our category, because this is a need to meet and not something that is nice to have. Hi. Thank you. You talked about Prestige high single-digit growth, in mass, mid-single digit. Can you talk about how much of that was new doors? Or is that mostly just pure sell-through of kind of the new products you've been talking about? Yes. Hi. So, basically, the model we are using for Prestige and Consumer Beauty, so this is mostly organic growth, also definitely either Prestige and Consumer Beauty. But definitely, if I take the case of Consumer Beauty, now step by step, we are seeing that we are getting shelf space. So, definitely, that success of innovation, acceleration of rotation by all these elements step-by-step, we are regaining traction first with consumers and retailers and this giving us absolutely all the ammunition now to gain shelf space. So that's really -- we are building. So, [indiscernible] done in a healthy way. That's really back always we talk about discipline that we are doing definitely with marketing teams either Consumer Beauty or Prestige. We are really focusing on productivity [progress] (ph). And that's -- again, we're thinking about the right productivity progress with absolute KPI. Once we optimize productivity progress, then, of course, we are working on new doors, but with very selective criteria that we're entering new doors only and if only we have guarantees that productivity is really at target level. And we've reached our allotted time for question-and-answer session. I will now turn the program back over to our speakers for any additional or closing remarks. If you allow me a few closing remarks, the first one is about the category, beauty is and will continue to be the darling category of consumers around the world for all the regions we have mentioned during this earnings call. Please see Coty in its reinvention Stage 2 phase, entering into real innovation, fantastic ROI behind advertising, new white spaces in terms of regions, categories, including skincare and, of course, targeting leverage by about 3x at the end of this calendar. Last but not least, I would say that even Coty is not in its maturity stage. As you can imagine, we will continue to grow given all the white spaces that we're having. And the last remark is that it's very important that the long-term vision and view is really the one that is at play at Coty, and we are building this company for the coming, I would say, decades to become a true beauty power house. Thank you very much.
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EarningCall_611
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Good day and thank you for standing by. Welcome to the EMCORE Corporation Fiscal 2023 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. Thank you, and good afternoon, everyone and welcome to our conference call to discuss EMCORE's fiscal 2023 first quarter results. The news release we issued this afternoon is posted on our Web site emcore.com. On this call, Jeff Rittichier, EMCORE's President and Chief Executive Officer, will begin with the discussion of our business highlights. I will then update you on our financial results, and we'll conclude by taking questions. Before we begin, we would like to remind you that the information provided herein may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. These forward-looking statements are largely based on our current expectations and projections about future events and trends affecting the business. Such forward-looking statements include projections about future results, statements about plans, strategies, business prospects and changes and trends in the business and the markets in which we operate. Management cautions that these forward-looking statements relate to future events or future financial performance and are subject to business, economic and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance or achievements of the business or in our industry to be materially different from those expressed or implied by any forward-looking statements. We caution you not to rely on these statements and to also consider the risks and uncertainties associated with these statements and the business, which are included in the company's filings available on the SEC's website located at sec.gov., including the sections entitled Risk Factors in the company's annual report on Form 10-K. The company assumes no obligation to update any forward-looking statements to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation. In addition, references will be made during this call to non-GAAP financial measures, which we believe provide meaningful supplemental information to both management and investors. The non-GAAP, measures reflect the company's core ongoing operating performance and facilitates comparisons across reporting periods. Investors are encouraged to review these non-GAAP measures as well as the explanation and reconciliation of these measures to the most comparable GAAP measures included in our news release. Thank you, Tom, and good afternoon, everyone. Q1 continued EMCORE's strategic transformation into an Aerospace & Defense business. Consolidated revenue for fiscal Q1 was $25 million, with 87% coming from Aerospace & Defense. Only 13% came from broadband and cable television represented less than 6% of the company's revenue. There were encouraging improvements in the business as it continued to work through the operating challenges of such a significant transformation, generating a GAAP operating loss of $11.5 million. However, our non-GAAP operating loss was $8 million and adjusted non-GAAP EBITDA improved from negative$9.4 million to negative $6.5 million. Tom will provide color on Q1's gross margin, but I will start out by saying that Aerospace & Defense margins showed significant improvement at 22% with inertial navigation higher than that. Not much has changed with respect to the cable television industry and the inventory glut of head-end transmitters. In our last call, we pointed out that ATX publicly announced that they had licensed the entire Prisma II technology platform from Cisco, allowing that technology to move forward. Although ATX's entry continues to be an encouraging opportunity over the long-term, we do not see any short-term catalyst for improved demand, although we do see some signs of improvement in the underlying inventory positions within our customer base. Semiconductor availability continued to tamp down shipments for wireless and chips within broadband in Q1 as our customers were still not able to get enough silicon to ship transceivers and distributed antenna systems to meet their internal projections. Consistent with what we said in December, our chip business continued to get additional traction with customers in the form of engagements and planned growth in shipments. Going forward in the chip business, we expect to see the ramp get a bit steeper during the summer setting the stage for a much stronger FY '24. To conclude my comments about broadband, I'd like to return to a statement from our last call in which I made the point the cable television was complete -- was increasingly incongruent with our strategic direction. Consistent with these objectives, EMCORE is in discussions with several interested parties to divest our nonstrategic product lines. We are also exploring other strategic alternatives. Turning now to Aerospace & Defense. I will begin my comments by stating the demand for our inertial navigation products continues to build nicely. In Q1, our book-to-bill in Aerospace & Defense was approximately 1.2. In particular, we're seeing increased demand for AMPV in real-world situations experiencing GPS denial, such as in the Ukraine. International bookings were strong for turret-based platforms, stemming from our supplier position in both [indiscernible] and ESCRIBANO's GUARDIAN 2 programs. We also received additional interest in the Middle East for long dormant large-scale armored vehicle navigation programs. On the naval side of our business, we are leveraging our expertise in critical lightweight and heavyweight torpedo programs such as the Mark 48 and 54 by supporting next-generation Torpedo platforms. Finally, we rewarded a follow-on order in a precision-guided munition program that continues to gain momentum in international markets. Chicago's book-to-bill was actually better than the overall 1.2 that I mentioned earlier, with stronger visibility for key programs in all four branches of service. The on program [ph] CAPTURE, we're seeing important signs of acceleration of key programs into their LRIP phase, low rate of initial production. This is a leading indicator of long-term growth. In particular, infrared search and track has become a key area of focus across the services and our multiple design wins in this applications stand to benefit in terms of production timing. As I stated in December, the efforts of the extended engineering teams in Budd Lake and Concord allow shipments for two critical programs to begin in the December quarter and greater volumes are projected for the March quarter. The space and navigation team has started to build multiple TAIMU inertial measurement units in support of the design and validation -- design validation and qualification as it continues to meet shipment targets for BoRG. These two systems are critical to the launch schedule for United Launch Alliance. BoRG is part of the boost stage flight control for Atlas- Centaur and Vulcan launch vehicles, while TAIMU will be the primary inertial measurement unit used for navigation. Critical milestones for TAIMU must be met over the next few months as well as the beginning of product builds in Alhambra. Our expectation is to complete qualification late in the calendar year to enable significant volume builds and launches in calendar year '24. When these products hit full production, they're expected to produce$20 million to $25 million in revenue per year and are also expected to significantly contribute to gross margins. QMEMS suffered from some unexpected test set problems in late December and we're expecting QMEMS revenue to bounce back in the March quarter. We saw a steady stream of orders for QMEMS from our major programs of record, along with the precision guided munitions order that I mentioned earlier. As we've said before, PGMs are the largest market segment in inertial navigation and are expected to be a significant area of growth for EMCORE in FY '23. We remain bullish on these applications. Before I move on to guidance, I'd like to provide an update on integration, which is a key area of focus. As of today, space and navigation is now running a common ERP system within the rest of EMCORE and has made the cutover from L3Harris's IT systems. This will enable us to exit the cost of the transition services agreement that was part of the transaction. We are expecting the transition for Chicago to complete in the June quarter, but we've already moved the Rhode Island engineering team out of the KVH building. We began rolling out Camstar MES for shop floor control in Alhambra and expect to integrate it into the other facilities after we complete the ERP upgrades and exit transition services. Ultimately, this will make EMCORE more efficient and will help us improve our processes, costs and lower inventory. Turning now to guidance for the current quarter. We are expecting that inertial navigation will see some growth, largely driven by increased production in Chicago and Concord. This will be partially offset by continued weakness in cable television and wireless. Consequently, we are expecting revenue to be within the $27 million to $29 million range for the March quarter. Thank you, Jeff. Consolidated revenue for fiscal 1Q was $25 million, with 87% coming from Aerospace & Defense, and 13% from broadband. Aerospace & Defense segment revenue was $21.7 million, a $700,000 increase when compared to the prior quarter. A&D achieved sequential quarter growth despite shipping delays for our QMEMS product line, as the rest of the A&D portfolio performed well. This included the first full quarter of results for the inertial navigation operation in Tinley Park that was acquired during the prior quarter and the space and NAV operation in Budd Lake that posted another solid quarter. Additionally, the FOG product line in Alhambra, along with Defense Optoelectronics, both increased over the prior quarter. Broadband revenue was $3.3 million, a $1.3 million sequential quarter decrease due to a further drop in sales of optical transmitters and lasers sold into the cable TV infrastructure market. To add some perspective on the severity of the current down cycle, cable TV product revenue this quarter was $1.6 million compared to $28.5 million in the year ago quarter, and $20 million when looking back to just the March 2022quarter. As mentioned on our last call, we are in a much deeper cable TV down cycle this time around than the company has experienced in at least the last 10 years. Broadband revenue was also affected by lower nonrecurring engineering or NRE revenue associated with next-generation chip development. Let me now turn to the rest of the operating results, the focus of which will be on a non-GAAP basis. A&D gross margin rebounded to 22%, driven by: a, the return to historical gross margins for the recently acquired operations in Tinley Park and Budd Lake; b, one-time QMEMS inventory valuation charges in the prior quarter; and c, better QMEMS manufacturing yields at our Concord site. Conversely, the very low level of revenue for the Broadband segment, combined with higher fixed cost under absorption resulted in an overall consolidated gross margin of 15%. Operating expenses overall came in lower-than-anticipated at $11.8 million in the December quarter compared to$11.2 million in the prior quarter. While we added a full quarter of results for the inertial NAV business, project-related R&D costs, which tend to be uneven quarter-to-quarter were lower than average in 1Q. As mentioned during our last call, EMCORE has undergone a momentous and rapid change to the revenue profile. During the first half of fiscal '22, Broadband accounted for 75% of the business, and just a couple of quarters later in fourth quarter of fiscal '22 and first quarter of fiscal '23, this has completely flipped to over 80% of revenue coming from Aerospace & Defense. The company is now better-positioned for higher growth with a broader-based portfolio of inertial navigation products, expanded customer reach and in a substantially larger and more stable marketplace than the highly cyclical cable TV market. While the December quarter was better compared to the prior quarter, fiscal 1Q results still reflected the significant and swift changes to the size and mix of the top line. 1Q operating loss was $8 million compared to$10.8 million in the quarter before. Adjusted EBITDA improved to negative $6.5 million. Net loss was $8.2 million or $0.22 per share compared to $10.9 million or $0.29 per share in the prior quarter. Shifting over to GAAP results for a minute. Fiscal 1Q net loss was $11.7 million or $0.31 per share. This included acquisition-related costs of $2.1 million, severance charges of $475,000 and a $1.2 million book gain associated with the sale transaction of the Tinley Park property obtained as part of the inertial navigation asset acquisition from KVH. Turning to the balance sheet. We had cash of $24.2 million at December 31 compared to $26.1 million at September 30. The $1.9 million net decrease consisted of $6.5 million used to fund regular business operations, $3.5 million used for financing activities, consisting of a $3.2 million loan balance reduction and $300,000 in debt service costs. $1.4 million for acquisition-related costs and $8,000 for CapEx. Offsetting these uses of cash was $10.3 million in net cash proceeds received from the sale leaseback of the Tinley Park property. Before we get to the Q&A, I'd like to share with everyone that both Jeff and I planned to be at the Cowen Aerospace/Defense & Industrials Conference on Thursday, February 16, in Arlington, Virginia, including a presentation and in-person investor meetings. We plan on providing further details prior to the event. Well, hi, Jeff and Tom. Thanks for taking my questions. I think my first couple will probably be more for Tom here. Just looking at the December quarter results here on gross margins, broadband gross margin is actually negative and it seems hot or interesting that revenues went down $1.3 million and gross profit down almost the same amount. It seems like pretty high leverage. I know you -- I know it's high going up and down, but it seems like dramatically below what I would have expected. So can you help us understand that dynamic? Is that temporary? Or what was going on there? Well, the reason why there was a -- the sort of little bit of a disjointment that you're referring to is the absorption of the costs are based on production activity during the quarter, not revenue. So in the quarter before, we had with the under absorption in the fab, Richard, was not as low as it was this quarter, even though the revenue was lower this quarter. So that accounts for -- I think that accounts for the gap that you're asking about. And then -- but revenue does have -- we went -- we did go from 4.5 to 3.3. So that is obviously a factor as well. Okay. The activity levels you're referring to, are these at a bottom in the December quarter or not? I guess that will fall into a couple of questions I have later in gross margin going forward. But does activity levels improving from here? You referred to activity levels being even lower in December, those are the driver for gross margin. So are those activity levels bottomed out here in December or not necessarily as we get into March and later? Okay. Excellent. That's helpful. A couple of questions on how to look at the March quarter here. I just want to make sure I got the dynamics here, right? Obviously, some nice growth coming in A&D. I'm just wondering if I'm reading right that broadband could be flat, even down in the quarter. Is that the right way to interpret your comments? It's going to stay right around where we just -- where it is in the December quarter, Richard. I mean maybe some small changes. Okay. That's what I figured. I just want to make sure. So let's dig in here on the gross margins as you look through the March quarter, in Q1, if you want to draw some conclusions we should think about going forward, that would be great here. But you just talked about activity levels bottoming out in the broadband business coming forward into March here. You're growing in A&D, which has a nice fall through margins here. So how do we think about gross margins for this quarter? When we talked about 5 weeks ago in your last earnings call, you talked about a goal of getting to 20%. And so I'm wondering if that's the number that we should be thinking about? Or how do you help us kind of peg down what you're thinking for gross margins this quarter? Yes. I think overall, consolidated, that 20% number that you're referring to is a good way to look at it, Richard. The -- like we just said, the Broadband segment is going to look similar. That's our expectation in the March quarter. But A&D will expect it to see the growth in top line and in margin. Things are getting better in Concord. The extra volume alone will also help absorb some other overhead costs in some of the other facilities. The A&D business could very well do a gross margin, call it, somewhere between 25 and 30, somewhere in the middle of that range. And do the math, you can see that, that would probably come out to about a 20% consolidated margin if we execute towards that and we get the mix that we think we are going to get for the quarter. Okay. That is very helpful. Just a couple of questions, I will jump back in the queue here. Just touching quickly on the topic of divestiture of potential businesses here, I guess a two-part question for you, Jeff. How should we think about timing here? I know you're not going to talk about what kind of eventual outcome, including proceeds we might see from this. But any comments on kind of the end customer here? I think you may have mentioned something about a strategic partner for this one. And let's just start with there and get your thoughts, Jeff, please. Yes. I think the likely scenario is somewhere within a quarter of where we are right now, could be more toward the end, could be sooner. It just depends on due diligence with the parties and how long that takes. But I think that's a reasonable way of looking at it. The other thing is just to clarify one other thing. And I just got done looking at it before I sat down, the cable TV business did have some E&O, excess and obsolete that was a little bit unusually large, we wouldn't expect that to happen again. That was part of the thing that dragged down their gross margins. So -- but back to your original question, the -- yes, I would say, within 3 months is probably a quite reasonable way of looking at it. Okay. And just to be clear on that, Jeff, is this contemplating just the cable TV business or other elements of the Broadband segment? Okay. Perfect. One last question for me, I will jump out of line. Let's talk about the chip business here. I guess two pieces. Maybe you can talk about some of the new engagements that you have going on here, types of customers, applications, et cetera, when those might hit as well as I think you mentioned a ramp you're kind of getting this summer. How many customers and what's kind of your expectation or thought process that we can think about it as we get into fiscal '24 about revenues per quarter on that? Yes. So if you took a look at the total number of customers for custom chips and the engagements, some are shipping, some are not. I think, 5 or 6 seems about right. There are -- there's one customer that has multiple programs with us, and I can't say more than that. Again, what I would say is that all of these programs are targeted into the data center and possibly even telecom space. And so they really don't -- other than common design expertise and manufacturing assets, they really don't have an impact over what -- the things we are doing over in A&D. As we exit '23 and going into '24, I think you can look at revenue from those products sort of getting into the $3 million or $4 million a quarter range, right? And that will have a pretty significant impact on the absorption. The question on the operating expense side, came in nicely lower than at least I expected here. I don't know if that's some measure of synergy or acquisition integration. But as you look forward, is there anything kind of anomalous about that OpEx? And what kind of outlook do you have heading forward here for OpEx to hang around this level or maybe ramp up a little bit with revenue? Probably we will go a little bit higher than where we finished. The -- most of the OpEx, Tim, is pretty steady except you get into certain line items like project costs, this is materially used in R&D that tends to be uneven. Sometimes there's NRE to cover it. Sometimes there isn't. So that's really the thing that makes it move around from quarter-to-quarter. The rest of the salaries and the people and all those kind of costs are very steady. So what you're likely to see is a little bit of a bounce back up to, I would say, maybe the 12% range because materials are likely to go a little higher. I mean they were well below average this quarter. And even if they just go back up to average, it will be over 12%. But we also -- if you recall, last quarter, we announced a reduction in force. We got a little bit of the benefit of that only in the last few weeks of the quarter because we took the action in early December. We will get a full quarter of that, both in cost of goods sold and in OpEx, and that should keep the OpEx right around the 12 number per quarter. Yes. Tim, as Tom pointed out, the only wildcard in this is where the nonrecurring engineering contracts land. Sometimes depending on the deliverables, weâve to record those as an offset against R&D, in which case you'll see a movement down in OpEx. In other cases, those dollars just get built out through cost of goods. So -- and there's enough NRE in there, it could start to move the numbers around. So don't be surprised if for some reason, it looks a little better. I think Tom captured the spirit of where we are headed with this. Operationally, we are bringing out -- we've run out a fair bit of synergies and headcount. A few more we might get here and there, especially as we finish some of the systems work. But most of the -- most of those synergies are now going to come from improvements in the way the manufacturing operation works. So you'll see that in COGS probably starting in the summer, but and it will continue an improvement from there. Got it. And Jeff, you mentioned some signs over -- back on the Broadband side, some signs of improvement in inventory situation. We've seen pretty strong finish to the year in terms of what the big operators are doing, and obviously, Charter moving into a major upgrade cycle here kind of real time. I wonder if you could be more specific on what you're referencing with regard to those signs of improvement? And should we assume that's a result of some of this increased network investment activity, or how do you see that playing out? I think you touched on part of it, Tim, which is the -- just the fact that actually the primary glut of transmitters out there are what are called linear EMLs, those were primarily consumed by Charter, and we see evidence that, that is changing and that other MSOs are using those instead of DFBs. So that's part of it. The other thing is that one of the things you find when you've had a lot of inventory is that the OEMs misforecast the channel plan a bit. And so you can start to see based on the odd wavelengths that are ordered, what's really going and you have a pretty good idea where it's going. So that's -- those are the signs that I mentioned in the call. Thanks, and one more for me. I think you mentioned a 1.2 book-to-bill in the December quarter for A&D and higher in certain areas. I wonder if you can comment on what you're seeing from an order perspective thus far this quarter? And whether you expect that relatively robust order flow to continue and enable you to grow A&D revenue sequentially throughout the year? Yes. So it was really a good performance across the board, again, inertial NAV leading the way. And in the current quarter, it may come down a little bit. We still expect it to be north of one. And in the June quarter based on program timings, we are expecting to see something significantly better. And that's just based on what the program offices are telling us, but the point that I've made is oftentimes in cable, we are running with 6 weeks worth of backlog, and it's maddening at times. I look at our backlog report now, and it's greater than 6 months. And we see that starting to build in some of these larger programs. So the visibility is dramatically different. We didn't have 6 months visibility at any time in EMCORE for cable TV except during COVID period. And we expect that this kind of visibility is the norm rather than the exception in A&D. Hey, guys. Two more follow-ups from me. I want to follow-up on Tim's last question and your response here about -- taking about growth throughout the rest of the year. Maybe thinking about it another way, and Jeff taking some of your comments from your prepared remarks about some of these products, I think you're kind of taken mostly on a product-by-product basis rather than programs. Talk about TAIMU and BoRG and some QMEMS products. Broadly speaking, can you kind of fit those products into the quarter or quarters where you might see some outsized growth and ultimately kind of fit us into the scenario where you get to break even, how do we get there? Can you help us put those things together a little bit more carefully, I guess? Sure. Well, again, one of the points that we've made is I called it, I think, the 30-30 point which is we want to have gross margin in the low 30s and revenue in the low 30s in order to get to EBITDA. So let's just take the midpoint of the range, call it, 28 that we forecasted and you say, Okay, Jeff, you need another 5 where youâre going to go get it, okay? In my prepared comments, I mentioned that just all by itself, TAIMU could provide $20 million to $25 million worth of revenue a year. And that's -- so there's my 5 per quarter, and that is just one program. So there are other programs which are ramping up programs for Lockheed in infrared search and track we're seeing pushes by other branches of service with Raytheon for their own products like that. We are starting to see the work regarding the M1 A2C Abrams tank, which we are a part of with commander gunner sites start to move forward. And so the interesting thing, Richard, is it's really different for us at this point compared to, say, where we were 2 years ago is we've won the programs that we need to ramp. So this isn't a case where it's really speculative go-gets on program wins. It's executing on low rate of initial production, getting things qualified and then into production. So that's the answer to the first part of your question about revenue. Getting into the question about gross margin, again, there's -- the thing that we've always talked about is that we are volume sensitive. And so we get hit with these under absorption charge -- under absorption charges and those are in the fab primarily, but they also occur within the assembly areas in the business. So as we ramp up production and start generating this absorption, right, of the overhead, even without a change to the bill of material, even without a change in the product sales price margins go up period, end of story. So there's -- again, if you look at the P&L in the current quarter, yes, there was some cable TV stuff we decided to write-off. There was really not much of it in A&D. And scrap in most of the business was fine. I think all we've got to do is execute on the fundamentals and get the volume up and the gross margin problem largely takes care of itself. That's helpful, Jeff. Maybe 1 quick follow-up on the topic especially [indiscernible] stood out here in terms of the size, saying that kind of gap you all the way to breakeven here. Is that something -- in the last call, you talked about a breakeven point, maybe kind of early in the next fiscal year. I guess it was my understanding that TAIMU was going to be more of a calendar '24 story. So I would assume we've got other drivers, maybe smaller each individually that helps us kind of gap up there, whereas TAIMU is more of a calendar '24 story, or am I misunderstanding this? Yes. So it's not quite that black and white, Richard, because what has to happen, for example, is there's a big ramp up in activity purchasing materials, some of which we actually get to recognize some revenue for, albeit with just a material overhead rate on top of it, well prior to that production happening. So you will start to see signs of the ramp before the actual delivery of multiple units per quarter. And you'll see a little bit of that in March. But the other programs that are out there in terms of new orders for Mark 54, ramps on infrared search and track, ramps on this [indiscernible] munitions program. Those are the things that are going to continue to move the needle between now and the time where I'm telling you, hey, we were able to ship 24 TAIMU in a given quarter, okay? So there is no hockey stick. There is no step function. It's -- you're going to see steady improvement. I use the TAIMU production as an example because it's so definitive. We know what the hyper launch rates are. We know when ULA is expecting us to get done. And when I say expecting, I mean, needing us to get done and get this thing out the door to with a very high degree of quality and there's no room for error. But the reality is, we talked about this book-to-bill 1.2, and we are going to be giving you some color on that going forward. The other programs are there to continue to close the gap. And we ultimately believe that TAIMU will be a bit of icing on the cake. But between now and then, you're going to see continued signs of growth. And in the quarter, we just forecasted, that's what we've said. Okay. Thatâs fair enough. That's a great explanation. Thanks for all the detail, Jeff. My last quick question for both of you. The stock at the valuation that it's been trading at in the recent past year, fairly low, and I think people are worried about a dilutive capital raise. You talked about the path and potential timing of breakeven. We've got a potential divestiture that should yield some amount of money. I don't know how to speculate on that. You're not going to tell us what that is. But with the things that you know, what do you think the odds are of having to raise external equity capital versus being self-funded so you get to breakeven? Yes. That's really not something I can comment on today. Obviously, with the capital levels, the way that we are or where we are at, you look at what Wall Street thinks. And on one hand, I think there's a view that, well, I may get to see this thing on the bottom if we are on the way down if there's a raise. But on the other hand, there are, say, deep value longs that say, well, we need to make sure this thing is funded so that we don't have a problem that we can see our investment thesis play out. And so it's probably not something I feel comfortable commenting on today. Okay. That is fair enough. Just want to hear your best guess, and I think weâve heard that. So I appreciate all the answers, Jeff. Thatâs all for me. Thank you. This concludes the Q&A session. I'd now like to turn the call back over to Jeff Rittichier for any closing remarks. Well, I just want to close by thanking all of you for your interest in EMCORE. And as I usually do, I want to recognize the team for their absolute dogged efforts and perseverance as we reinvent the company as an Aerospace & Defense business. And thank you all for joining us today.
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Good morning, and welcome to the IDEXX Laboratories Fourth Quarter 2022 Earnings Conference Call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jay Mazelsky, President and Chief Executive Officer; Brian McKeon, Chief Financial Officer; and John Ravis, Vice President, Investor Relations. IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that our discussion during the call will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today. Additional information regarding these risks and uncertainties is available under the forward-looking statements noticed in our press release issued this morning as well as in our periodic filings with the Securities and Exchange Commission, which can be obtained from the SEC or by visiting the Investor Relations section of our website, idexx.com. During this call, we will be discussing certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in our earnings release, which may also be found by visiting the Investor Relations section of our website. In reviewing our fourth quarter 2022 results, please note all references to growth, organic growth and comparable growth refer to growth compared to the equivalent period in 2021, unless otherwise noted. To allow broad participation in the Q&A, we ask that each participant limit their questions to one, with one follow-up as necessary. We appreciate you may have additional questions, so please feel free to get back into the queue and if time permits, we will take your additional questions. Today's prepared remarks will be posted to IDEXX.com. Investors after the earnings conference call concludes. Good morning, everyone. I'm pleased to take you through our fourth quarter and full year 2022 results and to provide an overview of our financial outlook for 2023. IDEXX had a strong finish to 2022, reflected in our fourth quarter performance. Revenues increased 7% organically, driven by 8% organic gains in CAG Diagnostic recurring revenues and continued strong growth in our software and water businesses. Operating profits increased 14% as reported and 17% on a comparable basis, benefiting from solid gross margin gains and OpEx leverage. Combined, these factors enabled delivery of $2.05 in EPS, up 14% on a comparable basis. IDEXX execution drivers supported delivery of full year financial results at the high end of our updated guidance range. This performance is reflected in a 1,200 basis point U.S. CAG recurring revenue growth premium to U.S. clinical visits in the second half of 2022, driven by a solid volume growth premium and higher levels of price realization. We sustained record high customer retention levels and solid new business gains globally and achieved a record level of annual CAG premium instrument placements, which drove a 13% year-on-year expansion of our global premium instrument base. Effective P&L management supported sustained full year comparable operating margins adjusted for discrete R&D costs aligned with our updated 2022 goals. These performance trends position us well as we enter 2023, and advance our growth strategy. This year, we're targeting a return to 10% organic revenue growth at the high end of our initial guidance range. This outlook is supported by continued strong IDEXX execution and net price benefits captured in our goals for double-digit CAG Diagnostic recurring revenue gains across our U.S. and international regions. We're also targeting solid comparable operating margin gains, building on the higher profit levels we achieved through the pandemic. We'll walk through the details of our financial guidance later in my comments. We'll highlight the building blocks of our growth outlook and discuss how we're factoring in expectations for overall sector trends and potential macro impacts into our planning. We'll also review estimates for effects from FX and interest rate changes on our reported results in 2023. Let's begin with a review of our fourth quarter results. Fourth quarter organic revenue growth of 7% was supported by solid organic gains across our major business segments, including 8% organic growth in our CAG business, 10% organic growth in water and 6% organic growth in LPD revenues. PAG diagnostic recurring revenues increased 8% organically in Q4 compared to 13% prior year growth levels reflecting 9% gains in the U.S. and 6% growth in international regions. On a two- and three-year basis, Q4 results were in line with strong Q3 performance. We achieved continued double-digit organic revenue growth benefits from key execution drivers, including expansion of our premium instrument base, solid new business gains, sustained high customer retention levels and expansion of diagnostics revenue per visit, including benefits from higher price realization. Overall organic revenue gains were also supported by 17% growth in veterinary software and diagnostic imaging revenues. CAG instrument revenue was down modestly, reflecting placement mix and comparisons to high prior year placement levels. In terms of CAG sector demand drivers, we estimate same-store diagnostics revenue in U.S. veterinary practices increased 7% in Q4. These gains continue to be supported by expansion of diagnostic test frequency and utilization. Reflected in a nearly 10% increase in diagnostics revenue per clinical visit that included diagnostics. Clinical visit levels declined 2.8% in the quarter with consistent growth trends across wellness and non-wellness categories. As we continue to work through impacts from reductions in vet clinic capacity from peak levels and lapped a significant step-up in demand we saw in 2021 and including benefits from new patient growth. IDEXX's U.S. CAG Diagnostic recurring revenue growth of 9% in Q4 continues to outpace sector growth trends. IDEXX' U.S. performance was supported by a 1,200 basis point growth benefit from IDEXX execution drivers, including approximately 7% net price gains and continued solid growth contributions from customer additions and leverage of IDEXX innovation. IDEXX achieved solid organic gains across our testing modalities in the fourth quarter. IDEXX VetLab consumable revenues increased 9% organically, reflecting solid gains across U.S. and international regions compared to strong prior year growth levels. Consumable gains were supported by a 13% increase in our global premium installed base in 2022, reflecting double-digit gains across our catalyst, premium hematology and SediVue platforms. We placed 5,065 premium instruments in Q4, down modestly from high prior year levels. The quality of placements continues to be excellent, reflected in 3% global gains in new and competitive Catalyst placements, including 7% gains in the U.S. We also saw a 5% growth in new and competitive premium hematology placements globally leveraging strong customer interest in ProCyte One. Rapid Assay revenue grew 9% organically, supported by benefits from net price increases and solid volume gains in the U.S. Global Lab revenues expanded 8% organically, reflecting high single-digit gains in the U.S., which were impacted to a degree by holiday week weather impacts and improved organic growth in international regions. CAG Diagnostic recurring revenue results were supported by a relatively higher levels of net price realization, including benefits from our second half price initiatives. We estimate net price changes contributed approximately 7% to worldwide CAG Diagnostic recurring revenue growth in Q4, reflecting product and service enhancements and coverage of inflationary impacts. As we'll discuss, we've incorporated an expectation for a 7% to 8% global net price growth benefit for the full year in 2023 and building and effects from annual list price changes, which were communicated recently to our customers. In other areas of our CAG business, veterinary software and diagnostic imaging revenues increased 17% organically in Q4. Results were supported by continued strong growth in recurring revenues and ongoing momentum in cloud-based software placements. For the full year 2022, veterinary software and diagnostic imaging revenues reached $251 million up 15% organically and 22% as reported. This includes benefits from the ezyVet acquisition, which continues to track above our acquisition model projections. Turning to our other business segments. Water revenues increased 10% organically in Q4 and for the full year 2022, reflecting strong performance across our major regions, including benefits from net price improvement and volume gains. Livestock, Poultry and Dairy revenues increased 6% organically in Q4. Results benefited from growth in herd health screening, shipment timing and improved performance in China where we work through comparisons to high prior year levels for African swine fever and core wine testing. Turning to the P&L. We achieved strong operating profit and comparable operating margin gains in the fourth quarter. Operating profits increased 14% as reported and 17% on a comparable basis, driven by gross profit gains and OpEx leverage. Gross profit increased 6% as reported and 10% on a comparable basis. Gross margins were 58.5%, up 110 basis points on a comparable basis. Net price gains, higher software service gross margins, lab productivity gains and comparisons to higher prior year investment levels and business mix all contributed positively, offsetting inflationary cost effects. Operating expenses were flat as reported and up 4% on a comparable basis in the quarter. We benefited from investment prioritization and leverage from our prior commercial expansions as well as favorable comparisons to higher prior year OpEx levels related to incentive compensation accruals, the ezyVet acquisition and specific R&D investments. For the full year 2022, operating margins were 26.7%, supported by strong second half gains. On a comparable basis, full year operating margins declined 240 basis points, driven by 230 basis points of impact from discrete R&D investments. Q4 EPS was $2.05 per share, up 14% on a comparable basis. Fourth quarter EPS results reflected $0.05 in tax benefits from share-based compensation activity and $0.07 in headwind from foreign exchange changes net of $9 million in Q4 hedge gains. Full year EPS was $8.03, a decline of 1% on a comparable basis, net of approximately 9% of EPS growth impact from discrete R&D investments. For the full year stock-based compensation activity provided $13 million or $0.15 per share in tax benefit, lowering our effective tax rate by 150 basis points. Foreign exchange reduced Q4 and full year revenue growth by approximately 4% and 3%, respectively. For the full year, foreign exchange reduced operating profits by $25 million and EPS by $0.22 per share net of foreign exchange hedge gains of $26 million. Foreign exchange trends have improved significantly since our last call update, resulting in relatively lower projected financial impacts in 2023, which we've captured in our outlook. Free cash flow was $394 million for 2022 or approximately 58% of net income, net of $149 million in capital spending. This performance reflects 25% to 30% of free cash flow conversion impact this year from discrete R&D investments, higher inventory levels aligned with sustaining product availability, higher deferred R&D tax credits and investments in a major facility expansion. Free cash flow conversion came in modestly below our guidance outlook of 60% to 65%, reflecting higher than forecast year-end working capital levels, including impacts from timing. We're targeting improvement in inventory levels in 2023, which is reflected in our outlook for 80% to 90% and free cash flow conversion this year. Our balance sheet remains in a strong position. We ended 2022 with leverage ratios of 1.3x gross and 1.2x net of cash. Our 2023 interest expense outlook incorporates current forward interest rates and expectations for a modestly lower net leverage ratio this year. We allocated $68 million to repurchase 199,000 shares in the fourth quarter. For the full year 2022, we allocated $811 million to repurchase approximately 2 million shares. Effects from share repurchase support our projected 1% to 1.5% reduction in diluted shares outstanding for the full year 2023. Turning to our 2023 full year outlook, we're providing initial guidance for reported revenues of $3.590 billion to $3.690 billion. On an organic basis, which reflects a range of 7% to 10% growth overall and 8.5% to 11% growth in CAG Diagnostic recurring revenues. Our 10% overall organic growth high-end outlook is aligned with our long-term goals and reflects targets for 11.5% CAG Diagnostic recurring revenue gains in the U.S. and 10% growth in international regions. These targets incorporate a continued high-growth premium from IDEXX execution drivers, including growth benefits from our expanded global premium instrument installed base, new customer gains and increases in testing utilization supported by IDEXX innovation. Our high-end outlook also incorporates expectations for a relative flattening of clinical visit growth trends in the U.S. as we work through 2023. As noted, CAG Diagnostic recurring revenue gains will be supported by an estimated 7% to 8% full year growth benefit from net price realization with expectations for 8% to 9% global net price gains in H1 and 6% to 7% net price benefit in H2. In addition to benefits from solid CAG diagnostic recurring revenue growth, our overall growth outlook reflects goals for continued strong growth in our veterinary software and water businesses. We expect these gains will be moderated by flat to modest organic growth at LPD revenues in 2023 and reflecting current macro trends and approximately $10 million of impact from lower human COVID testing revenues. The low end of our overall organic growth outlook of 7% incorporates potential risks to our targeted growth goals, including effects from macroeconomic conditions. Terms of reported revenue, we now estimate foreign exchange will reduce full year revenue growth by approximately 0.5% at the rates assumed in our press release. FX revenue growth headwinds are projected to be approximately 3% in Q1 with relative improvement in the second half of the year. In terms of sensitivities to changes to the FX rates assumed in our press release, we projected a 1% change in the value of the U.S. dollar would impact full year reported revenue by approximately $12 million and operating income by approximately $3 million to $4 million, net of currently established hedge positions. Our reported operating margin outlook for the full year 2023 is 29.0% to 29.6%. At the high end, this reflects an outlook for approximately 340 basis points in comparable annual operating margin expansion, including approximately 230 basis points of benefit from lapping discrete R&D investments in 2022. We're planning for constrained gross margin gains on a comparable basis in 2023 as benefits from pricing and lab productivity initiatives helped to offset product and labor inflationary cost impacts including effects on steps we've taken to ensure high levels of supply chain and service continuity. We estimate foreign exchange will reduce full year reported operating margins by approximately 50 basis points driven by the lapping of the $26 million in 2022 hedge gains. Our 2023 EPS outlook is $9.27 per share to $9.75 per share, an increase of 16% to 21% as reported and 19% to 26% on a comparable basis, including approximately 10% of the EPS growth benefit from the lapping of discrete R&D investments. We estimate that foreign exchange will reduce full year EPS by approximately $0.23 per share at the rates assumed in our press release, with the bulk of this impact in the first half. We also expect the impacts in 2023 from higher interest expense of approximately $0.11 per share compared to 2022. Our EPS outlook factors in a 1% increase in our overall effective tax rate to 22% in 2023 reflecting lower projected benefits from share-based compensation activity. Our free cash flow outlook is for net income to free cash flow conversion ratio of 80% to 90%. This reflects estimated capital spending of approximately $180 million or approximately 5% of revenues including approximately $35 million of spending or about 5% of free cash flow conversion impact related to the completion of our major facility expansion. Overall, we're well positioned to deliver strong financial performance in 2023. In terms of our operational outlook for Q1, we're planning for overall organic revenue growth closer to the midpoint of our full year guidance range as we continue to work through some effects from relatively higher prior year clinic capacity comparisons and macro impacts on demand in international regions. In terms of our profit outlook, we're planning for a 50 to 100 basis point year-on-year improvement in reported operating margins in Q1. This includes benefits from a customer contract resolution payment of $16 million received in Q1 that will be recorded as an offset to operating expense as well as expectations for foreign exchange impacts and relatively higher OpEx growth in the first quarter related to specific factors such as the return of in-person sales meetings this year. Thank you, Brian, and good morning. IDEXX delivered excellent results in the fourth quarter, reflecting sustained high levels of execution of our growth strategy. Demand for veterinary services remained strong, resulting in increased diagnostic frequency and utilization per clinical visit, building on accelerated gains achieved through the pandemic. To address this strong demand, Veterinarians look to IDEXX as their preferred partner in diagnostics and software, which supported high levels of care and helped drive our solid growth results for the fourth quarter and full year. For Q4 in the full year 2022, we achieved 8% organic growth in CAG Diagnostics recurring revenues supported by double-digit contribution and growth from IDEXX execution drivers. This strong performance is reflected in record full year placements for both CAG diagnostics premium instruments and software practice information management systems, continued solid contribution from new business gains, sustained high customer retention rates and net price realization aligned with our expectations. These execution growth drivers helped to offset impacts from adjustments in vet clinic capacity following a period of extraordinary growth during the pandemic as well as macro impacts, which globally pressured clinical visit levels in 2022. IDEXX's ability to deliver solid organic growth with underlying strong performance in operational metrics demonstrates the attractiveness and durability of our business as well as the outstanding work by teams across our organization to deliver results every day. Our decade-long strategic focus on diagnostic sector development, including building strong commercial engagement and innovating to expand adoption of technologies that integrate diagnostics and information management position us to build on this momentum. This morning, I'll highlight how IDEXX advanced our commercial and innovation priorities in 2022 while delivering strong financial results. I'll also discuss our areas of focus for 2023 that build on this progress. Let's start with an update on our commercial execution. High levels of execution by IDEXX commercial teams who are trusted adviser to our customers continue to drive revenue gains above sector growth levels. These teams delivered fourth quarter global premium instrument placement levels that were the second highest for any quarter in company history, supporting 13% growth in our global premium instrument installed base and contributing to record annual premium instrument placements for the full year 2022. IDEXX is highly accurate and easy to use in-clinic platforms allow clinicians to gain the deeper diagnostic insights necessary to delivering high levels of pet health care. These platforms are highly integrated into practice workflow, giving customers the tools necessary to meet higher levels of demand for pet health care services. The strong placement performance throughout 2022 highlights how IDEXX has been able to support veterinarians during this past year, capacity constraints in a highly effective way. Not only was the magnitude of placements impressive, but they were also at very high quality. This is reflected in strong growth for Catalyst and premium hematology placements at new and competitive accounts globally. These gains demonstrate strong clinical interest in IDEXX's products and a compelling value proposition that our multimodality strategy and customer-friendly marketing programs provide to veterinarians. New and competitive placements helped drive U.S. revenue contribution from new business in the fourth quarter above historic levels, which is an encouraging signal for future growth as this new business will drive future recurring revenue flow-through supported by very high customer retention models. Customer retention rates remained at or above 97% across our major modalities throughout 2022. And another trend that highlights the strong capabilities of our commercial organization and the value that an IDEXX relationship brings to our customers. International premium placement growth was strong as well while also reflecting high-quality placements in new and competitive accounts, which supported solid net customer gains across modalities. This is a result of our global commercial teams increased leverage of our successful BDC model, which encourages a laser focus on engaging with veterinarians, educating them on the value of diagnostics in the way IDEXX can support their needs and ultimately building a loyal installed base, a key driver of our international growth opportunity. Installed base growth was supported by double-digit Catalyst placement growth in European countries where we have completed expansions since 2021. Commercial expansion is a key component of our international strategy, along with an optimized reference lab network and software tools like VetConnect PLUS. These results highlight our progress executing against that strategy. Moving forward, we look forward to building on these initiatives to address the two-thirds of our global TAM represented by international regions. The clinical and economic benefits of growing our installed base of premium instruments on CAG Diagnostics recurring revenue are notable. Let's take an example of Catalyst, our chemistry analyzer and our Catalyst SDMA slide or SDMA in combination with total T4. In 2022, customers ran and paid for over 5 million SDMA slides on a global basis and well over 40,000 clinics supported by VetConnect PLUS and IDEXX DecisionIQ. These are customers who have decided that SDMA and early biomarker for kidney impairment is a clinically important parameter in a wide variety of use cases. It's a great example of IDEXX brings not just highly differentiated innovations to our customers, but then invest in creating awareness, education, adoption and ultimately, continued utilization as part of our sector development strategy. Next, an update on our software strategy and our progress in delivering an integrated solution of information management with our reference lab and point-of-care diagnostics platforms. IDEXX software and diagnostic imaging businesses continued to deliver high placement and recurring revenue growth. This business includes an end-to-end stack of software products that create a seamless connected ecosystem across the whole tech clinic, which in turn enables deeper diagnostic insights, supports pet owner communications creates workflow efficiencies and help support greater diagnostics usage and revenue growth. Customers have never had a greater need for these solutions, as capacity constraints in some instances have limited their ability to support patient demand. This is evidenced by record PIMS placements and high-teens growth in Web PACS subscribers in 2022, which helped drive a continued shift towards recurring revenue for this business. On a full year basis, software and diagnostic imaging revenues reached over $250 million, up 15% organically. As we expand our software business, our recurring revenues are growing even faster, supporting strong gains in profit contribution and also reinforcing the value of software as a stand-alone business. PIMS placements continue to be driven by customer adoption of cloud-based solutions. As we highlighted at Investor Day this past year, the cloud is gaining momentum rapidly in the veterinary software space. We are in the midst of a significant shift towards these type of products and IDEXX's software portfolio is very well positioned to address this trend towards efficient, easy-to-use cloud-based solutions. Cloud-based PIMS comprise approximately 90% of placements in 2022, delivering a durable revenue stream and significant benefits to CAG gross margins over the -- given the SaaS-based model for these products. We are on track for cloud-based PIMS to represent over 50% of our global footprint this year and expect this shift to accelerate over the rest of this decade. These results were achieved while our software team was tasked with delivering the rapid integration of the ezyVet solution into our business, a multiyear priority that is tracking well and driving revenue and profit delivery ahead of the expectations established during the acquisition process. This progress is a great example of how IDEXX consistently delivers high levels of return on invested capital by deploying resources in the right place at the right time and delivering seamless execution and integration. This not only benefits our financial performance but also drives the sector forward and puts world-class products and enhance of our customers. Our software business will continue to provide attractive, highly synergistic investment opportunities. The early success of our cloud-first strategy, anchored by ezyVet positions IDEXX well over the coming years as software and cloud data products increased in relevance and importance to veterinary clinics. In addition to this excellent software performance, strong commercial results were also supported by IDEXX's relentless focus on innovation as a key driver of diagnostics adoption and utilization. 2022 is an exciting year of innovation for IDEXX in multiple ways, starting with continued strong adoption of our ProCyte One premium hematology analyzer, which launched in 2021. The ProCyte One offers customers very high clinical performance in an efficient, lower cost and smaller footprint platform. It is critical to our efforts to address the approximately 240,000 worldwide premium instrument placement opportunity given its relevance submitting hematology first international countries and its high attach rates catalyst. Worldwide placements grew 16% for ProCyte One in the fourth quarter, elevating the installed base of this new piece of technology to more than 8,000 units. This is very strong progress against our target for 20,000 incremental premium hematology placements by 2026, and we look forward to building on this momentum to achieve our long-term goals. In terms of more recent innovation launches, we were excited to announce multiple expansions to our preventive care solutions recently at VMX. These program extensions will provide veterinarians with deeper insights and allow them to detect issues sooner and include the launch of IDEXX Nu.Q Canine Cancer Screen now available at our U.S. Reference hub network, which expands our growing oncology platform by adding a more accessible way for veterinarians to screen for a disease that impacts nearly 6 million dogs annually in the U.S. And secondly, the rollout of IDEXX Preventive Care Simple Start, formerly preventive care challenge, an improved wellness program designed for the capacity-constrained practice, which includes staff training and tools for custom diagnostic profile development and client communications. At VMX, we also shared an expansion to the menu for IDEXX DecisionIQ, formerly clinical decision support which now includes endocrine features in addition to the vector-borne disease and chronic kidney disease conditions we rolled out earlier in 2022. This software service applies intelligent insights, to patient-specific data and delivers next step considerations in VetConnect PLUs. Valuable insights would support veterinarians to swiftly and confidently move through a case. Innovation does not stop at the point of launching a new product. However, integrating new technology into practice workflows and protocols and supporting customers with our medical consulting group is an important step in driving adoption and utilization of our diagnostic solutions. We have recently seen good traction in this area with some of our products and services, which were launched in 2022. Our approved 4Dx Plus in fecal, DX antigen test with detection of flea tapeworms are now included with the Preventive Care Simple Start program we announced at VMX. Another example is FGF23. And a biomarker that helps determine dietary phosphate restriction in cats with kidney disease that is offered through our reference labs has now been integrated into updated International Renal Interest Society Guidelines. These product rollouts are critical to our long-term efforts to develop the companion animal diagnostics and information management sector. They help drive the consistent positive contribution to sector diagnostics revenue growth for both diagnostics frequency and utilization that we saw in 2022 and continued adoption of new technologies to help build off these higher levels in 2023. The relentless focus on innovation demonstrates IDEXX's commitment to developing our sector and highlights our customer-first approach, which aims to address the most pressing needs of veterinarians. In this context, diagnostics has become an integral way for veterinarians to enable the provision of medical services and to grow their practices, reflecting same-store clinical diagnostics revenue growth of 7% that is outpacing total practice and clinical revenue gains and becoming a larger contribution to practice profitability. Our customers are hungry for solutions that help them deliver a higher standard of care and help support workflow, client communications and staff productivity. An additional key element necessary to provide this enablement is product and service continuity and turnaround time. For these reasons, it is of great importance that IDEXX gives our customers confidence and reinsurance that the products and services they need, will be available when and where they need them. Our supply chain teams ensured this continuity by delivering 99% product availability and on-time delivery levels again in the fourth quarter. A standard we achieved in each quarter of 2022. This performance gives us a pride to confidently say that if and when our customers ever need our help, where they help them. And in turn, our customers reward us with high retention levels and world-class NPS scores for our products and services. This customer-first mindset is fundamental to our strategy and we look forward to bringing it to our work on a daily basis in 2023. That concludes our prepared remarks. Before we transition to Q&A, I would like to recognize our nearly 11,000 IDEXX colleagues for their ongoing passion and high levels of performance, which supported solid growth in 2022 in a very dynamic external environment. Their work helps us work towards providing a better future for animals, people, our planet today, while also addressing the significant sector development opportunity ahead of us. It's an honor to report the results of this excellent execution against our strategic priorities, and it's exciting to share how IDEXX remains well positioned to deliver solid growth and financial results into the future. So on behalf of the management team, I'll say thank you to our colleagues for the enthusiasm and engagement you bring to our work every day. You are at the core of our progress we've made against our purpose to enhance the health and well-being of pets, people and livestock. Thank you. [Operator Instructions] At this time I'll take your first question from Nathan Rich from Goldman Sachs. Please go ahead. I guess, starting with the U.S., how are you thinking about the cadence of U.S. clinical visit growth this year? It sounds like 1Q will be similar to what you saw in the fourth quarter. And then Brian, I think you said the high end of guidance reflects a flattening of visits for the year. So could you maybe just talk about your expectation for how the year plays out? And do you envision a return to positive clinical visit growth by the back half of the year in the high end of your guidance? Thanks for your question, Nate. We are expecting that we'll still be working through some of the compares in the U.S. to the pullback in capacity that kind of happened through the first half of last year. And so you're correct. I think that's something we're acknowledging in the Q1 outlook. We'll still be working through that as well as some of the macro impacts internationally. We -- the guidance that we provided, as you pointed out, the higher end does for the U.S. assume that we see a flattening of the trend and that's meant to imply in the back half of the year. And so that would assume a relative level of improvement, but is not projecting growth. I think Jay can talk a bit more to that, but I think that that's an appropriate assumption we feel with the changes that we've been working through. Good morning, Nate. Yes. I would just qualitatively add that what we see from a market standpoint and customer standpoint, is the -- they made good progress in working through some of the capacity constraints they're not all working at the same pace. We've seen a bolus of practices who have adjusted care workflows, added staff particularly licensed veterinarians per overall veterinarian. So, the mix is more towards staff, and they've been able to increase productivity in that sense. So, I think just as we forecasted, it's taken time but I think the profession is making the progress. They're investing in technology. We've seen that with the purchase and inflation of our in-clinic laboratory software solutions particularly cloud-based software solutions is something that veterinarians are looking to as a way of supporting staff productivity, client communications, just overall workflow optimization within the practice. Okay, great. And maybe just to follow up on that. Obviously, you've talked about a higher level of net price realization expected for 2023. Could you maybe just talk about what the reactions from customers have been to the price increases that you took in 2022? And does the outlook kind of assume any impact on the level of utilization or volumes that you expect? And could you maybe also just comment on is the price realization kind of brought across the different product lines in CAG? Yes. So let me take the back end of your question first. It is. So this is a global approach that we've taken, and we think pricing is appropriate within the current context. I'll say from a qualitative standpoint, we see demand holding up well relative to both the back impacts in the economy as well as the different pricing scenarios we've articulated. Keep in mind that from a customer standpoint, they're highly appreciative and they value the overall IDEXX value proposition, goods and services and they recognize that on a sustained basis, we've invested and we'll continue to invest in innovation, but also the customer experience, which is critically important to them so that they can focus on providing care and don't have to worry about diagnostic service levels and just overall product continuity. The other thing that I would say is they also recognize that we have taken a technology for life type approach. If you take a look at our catalyst, our chemistry analyzer over the last decade, there have been nine parameter extensions or upgrades so that a customer who purchased. Our catalysts, chemistry analyzer today or 10 years ago would have the exact same features and functionality. And we think that's highly differentiated, not just in our industry, but really in the industry. Just reinforce to that our goals at the higher end, which is what we're shooting for as a company, we reflect sustaining the solid volume growth premium that we've been able to achieve. So, independent of the pricing benefit, how much we've been able to drive volume growth above clinical visit growth, and it reflects sustaining that strong level of performance. Just following up on the pricing one. Can you just talk at least directionally about longer-term pricing dynamics, not looking for specific numbers? But should we think about more normalized price increases as we look out to 2024 and beyond, and this is kind of like a unique window with what's happening with inflation and everything else? Or is this a -- it could be ongoing kind of trend with larger price increases? And then just a follow-up after that. Yes. Chris, we're not projecting beyond this year, so this is guidance for 2023. We recognize just as a pricing philosophy. We want to maintain a good balance between the value we deliver, the price of our testing services. Keep in mind also that veterinary practices that the diagnostics is a core neighbor medical services within the practice. It's a large profit center for them. They typically mark it up. But having said that, we want to make sure we don't get in front of where the value is. And we're taking a very long-term approach to developing the overall sector. So and you've seen that historically. And the way we've reported it, I think the difference in 2022 and 2023 as inflation and the macroeconomic cost impacts of running the business. Great and then just -- can you just elaborate a little bit more on your outlook for Europe? I guess how much of a macro headwind that you're seeing in these markets? And maybe just talk a little bit about how you see those headwinds playing out as we move through 2023? Yes. So, our goal is -- we came out of the second half of the year with about 6% CAG diagnostic recurring growth. Our goal is at the higher end for next year or 10%. And so, that's obviously an improvement. This year it's tougher to calibrate. We don't have the same clinic level data granularity, but I think the same-store sales headwinds in places like Europe are probably in the mid-single-digit range. So, it's softer than the U.S. and so consistent with what we're doing in our U.S. business, we're targeting sustained execution driver leverage. So, getting -- growing faster than the same store sales at the clinic visit growth levels, and we are building in some expectation for less of a headwind but still some headwinds. And I think that's appropriate just given the macro backdrop that our international markets are still working through, but we are targeting double-digit growth. We've got the pricing benefits that Jay highlighted to help support that and still feel very optimistic about the long-term potential in our international regions. Yes. Let me pick up on that of the long-term potential. We see two-thirds of the future TAM outside our U.S. geography. And so that's something that we've invested in. Over time, we've had seven expansions, commercial expansions over the last few years. Currently, there's some macro headwinds as Brian described them, but I think the opportunity is very significant over time and we're approaching it in a similar way that we've approached our sector development in the U.S., which is through innovation, through engagement with our commercial model as partners and really helping create awareness and education and ultimately, adoption. So, we're very optimistic over the longer term. We think also, I would just highlight the role that ProCyte One has played in our international geography. It's a very compelling solution. Our customers, it fits from a performance profile, cost standpoint. Many of these markets are hematology first markets, and we're seeing very nice uptake, and we expect, as we've laid out at Investor Day, that 20,000 premium hematology placements over the planning horizon. Great. Does your guidance for 2023 assume any sort of contribution from the two new platforms that you plan to launch here, hopefully, in the near future? And how should we think about those? Are they more of a 2024 event? And how should we also just be thinking about the timing of magnitude in terms of the contribution from the innovation pipeline? Yes. No, we haven't provided any specifics on the two new point-of-care platforms. And as we get closer to launch, we'll talk about this. Okay, great. And on the cost side, I guess, 7% to 8% price realization obviously tracking above historical. And I think Brian, you talked about some of this in your prepared remarks, but what are some of those key factors that we should be kind of aware of that are limiting the full drop through from a pricing perspective to the bottom line? The inflationary costs are real. On the product cost front, took a number of steps this year to ensure that we have high product availability and it's been a challenging kind of environment to manage the supply chain dynamics. Our operational team has done a fantastic job on that front, but we did make choices to ensure we've got supply, and that's going to be flowing through in our product costs for a period of time, and there are higher labor costs as well. I think we're the price increases that we advanced, I think reflected in our margin outlook where appropriate, given some of the dynamics that we're working through. And we're able to improve gross margins through initiatives like productivity activity and our initiatives in our lab operations and just continued focus on growing our recurring revenues at a strong rate. But the -- on the gross margin front, that's the primary impact. And I think we're always trying to be balanced with our base of overall investment and that's allowing us to deliver solid margin improvement overall at the higher end of our guidance range. Yes. I would also add, just on the commercial front, we're back to more of a normal type operational cadence. We attended the VMX and VMX was the biggest show in its history. We've had sales summits from a customer visit standpoint, our field organization is -- the majority of visits are now in person. So it's much more of a pre- pandemic type operational cadence. Great. Brian, I think in your earlier comments, you talked a little bit about the IDEXX premium, the bridge between the underlying vet visit volume and price and then your actual revenue growth. I think you said that the high end of the guide assumes a similar premium to what you've seen previously. Is there a lower premium at the lower end of the guide? Can you talk us through sort of what your expectations are for that between the 7% and the 10%, sort of what are you thinking in terms of the IDEXX growth premium? Right. Thanks for the question, Mike. So, just starting with the high end, let me use the U.S. So if we've got an 11.5% growth goal with 7% to 8% pricing, that's approximately implied about 4% volume growth and with some level of headwind from visits as we work through the first half of the year. That gets us to go to the volume growth premium that we've been delivering and kind of consistent with pre-pandemic trends. So that's how we're thinking about it. We have a range which we think is appropriate to calibrate for risks to that outlook, primarily macroeconomic impacts and, you know, so I think that's not linked to one specific factor, but I think it's something that we think is prudent, is the way we plan the business to make sure that we have financial plans where we can deliver solid profit gains, if things don't all go the way that we anticipate. And so again, it's not linked to one specific factor, but it builds in potential macro headwinds or if things don't recover the way that we're targeting in terms of the clinical visit trends. Okay. And then for the follow-up, we're seeing last year in 2022 and this year, some very specific product launches coming from HESKA and ABAXIS and others in the space. So, I'm wondering if you could touch on the competitive landscape just a little bit kind of tied into that previous question as well. Any changes you're seeing there? Any come conversations with customers, how that might factor into your pricing strategy? Yes. We've said for a long time, the diagnostics market is a very attractive market. There's a lot of competitive intensity. Nothing has changed on that front. We believe that through the customer lens that our overall solution portfolio is highly differentiated the combination of our in-clinic laboratory reference laboratory software, the connectivity of it all really helped support the practice mission. We see that if you take a look at our new and competitive placements, which we provided both for Catalyst and now for premium hematology, we're doing extremely well. We're growing our software in Web PACS and Diagnostic Imaging businesses very well. We feel very good about our focus on the customers and helping them to achieve their goals and we think it's reflected in the results. Great. First one, Brian, maybe just a clarification. I thought you said a $16 million customer contract resolution. Was that in the first quarter of '23? I'm not sure I heard you properly. And if so, is that in the GAAP 2023 EPS guide, I'm landing at $0.15-ish to the bottom line. Maybe you can comment on that. And then last, just bolt-on. Is that an offset to OpEx, if I'm right on all these assumptions, not a rev line item, and I'll start with that clarification, please? I think you had got all that right. It is a Q1 2023 factor that we highlighted in our Q1 outlook and it is recorded as an -- it's an other income item for us which is recorded as an offset to G&A, and that's correct. I got it all right. I don't know if I should push it. But the 9% to 16% comparable earnings growth that you sort of have in the release once you back out the 10%, is it in that one as well? The 9% to 16% also benefits from the $0.15? Perfect. And then just maybe to follow on Mike's question, I'm just sort of coming at it a little differently. For2023 clinical visits, it sounds like you're landing around down 1% to 2% for the full year, I don't know, around there. So vals are down, 1% to 2%, and price is up 7% to 8%, and just to be clear on price -- it's 7% to 8%, right. The press release read a little funny saying like 7% to 8% was the case if you were at the high end of your range. I'm guessing prices price, maybe you guys can clarify that. Okay. So price is right. So yes, there was a confusion incoming on that. So if vals are down 1% to 2% and price is up 7% to 8% if I take your 10% CAG Dx recurring you land at what we're calling 400 to 500 bps of non-price non-visit growth, which seems like an ongoing deceleration throughout sort of '22, certainly the back half of '22. And I know there's moving parts with U.S. and international, Brian, but sometimes we don't get such great granularity too. Just your thoughts on that 400 to 500 bps non-priced on visit growth the deceleration comments, and broadly speaking, is that sort of how we should view the business in the near term until maybe innovation kicks back in? Thanks, John. I was trying to follow your analytics. We focus those discussions on our U.S. numbers, just to be clear because that's where we actually have the reporting. So, the 11.5% overall growth if you use the midpoint of the pricing guide. And I do want to clarify the expected pricing benefit is something that we feel very good about across our performance range. So that is -- we were focusing on kind of the analytics around our high end to help people understand that. But going back to the high end of 11.5% CAG U.S. recurring diagnostic revenue growth, netting out the price benefit, use the midpoint that would be about 4% volume benefit. And we didn't explicitly highlight the clinical visit trend, but it bridges back to that that 5% to 6% kind of volume growth premium that we saw in the second half. That's about what we've seen pre-pandemic. And so, we're looking -- that's what we're shooting for. And all indications our execution is holding up really well. If you look at the performance of trips and just how we've consistently done, so looking to build on that momentum. Yes. I would just add to that, if you take a look at the execution metrics around customer retention, new customer acquisition, Brian highlighted price realization, which we think is appropriate given the current context. Overall, commercial execution has been excellent, and we anticipate being able to continue to execute well in the current year. Jay, maybe a big picture one for you. I'm curious if you look back over the last year or so with the capacity constraints your practice clients are facing. Have you noticed any material changes and maybe either based on your data or conversations with your customer-facing team, in regards to how they're using diagnostics. So changing the point of care to reference lab versus on-site or maybe running larger panels, so they don't have to do reruns, just anything like that from a macro trend basis that you're seeing? Ryan. So, we have not -- we continue to see that customers would use one modality and diagnostics tend to use more of the other modality and vice versa. It's testing begets testing. We've seen a continuation of that trend. We've also seen wellness versus non-wellness testing hold up well. We think that that's really a function of pet owner demand. Pet owners want to be able to get the great care, whether for health, happiness, even longevity of their pet. So, they're filling into the practices and for wellness and preventive care visits. So, we continue to see that as an important aspect of developing the overall sector. We do see practices I think, to a greater extent than in previous times. I appreciate the role of their staff, retaining their staff, investing in education of their staff. I think they've gotten smarter around the use of technology in the importance of technology. We've seen that in software and the move to cloud-based PIM systems, but also the applications that that integrate and extend the capability of their PIM systems. So, we think that overall, even given the overall macro impacts that we've described, pet owner and consumer demand has held up relatively well. Okay. And then maybe digging a little bit deeper into some of the clinical decision support, you spent more time, I think, than in the past talking about the cloud and kind of data analytics and using that data. So, can you dive a little bit more into DecisionIQ and how broad that goes in regards to informing point-of-care clinical decisions and how widely used that is from the practitioners that are using it to do next step diagnostics? I'd be glad to. Yes, DecisionIQ is what formerly known as clinical decision support as part of our VetConnect PLUS application. Keep in mind, just let me paint the broader context here is that the general practitioner is incredibly busy. They're responsible for this wide range of clinical and medical services and having DecisionIQ, which can support the decision-making, which can suggest the possible things that they may not have considered. And even I think to your question or point, suggest next step test, we think, is an important tool in the hands of veterinarians. We have tens of thousands of practices on a global basis, which are now using VetConnect PLUS and therefore DecisionIQ as part of their daily practice, the ability to support vector-borne disease and now endocrine is that menu will continue to be extended over time. So, it's becoming increasingly valuable in the hands of veterinarians and something that we think over time will just grow in value. But thank you for that question. That's a wrap. We're out of time. I'd like to thank everyone, and that concludes the Q&A portion of the call. I appreciate your participation this morning. So in summary, we see a significant decade-long opportunity to increase the standard of care for companion animal health care and remain committed to our consistent strategic approach to address this opportunity. Sustain high levels of performance by IDEXX teams enabled us to build on the decades-long investments in innovation, infrastructure and commercial capabilities to deliver solid growth and strong financial returns in 2022 and positions us well for 2023.
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Good afternoon, everyone, and welcome to Banco de Chile's Fourth Quarter 2022 Results Conference Call. If you need a copy of the management financial review, it is available on the company's website. Today with us, we have Mr. Rodrigo Aravena, the Chief Economist and Institutional Relations Officer; Mr. Pablo Mejia, Head of Investor Relations; and Daniel Galarce, Head of Financial Control and Capital; and Natalia Dele Investor Relations Specialist. Before we begin, I would like to remind you that this call is being recorded and that the information discussed today may include forward-looking statements regarding the company's financial and operating performance. All the projections are subject to risks and uncertainties, and actual results may differ materially. Please refer to the detailed note in the company's press release regarding forward-looking statements. Good afternoon. Thank you very much for attending this conference call. Well, we will review the main accomplishments achieved by our bank during the fourth quarter and the full year of 2022. In this call, we will also share our business analysis and guidance for 2023. Before reviewing the economic environment, I'd like to share with you some of our main achievements during the last year. Please go to Slide number 2. 2022 was an outstanding year for Banco de Chile when we undoubtedly reaffirm our leadership in the Chilean banking industry, not only financial performance but also in many other key strategic aspects when compared to our competitors. Even though we will go over our main accomplishments otitis presentation, I'd like to briefly highlight some of them. On the financial side, we see a historical bottom line of MXN1,409 billion, equivalent to an ROE of 51.4%, well above the industry average. As targeting the bottom line by the transitory and nonrecurring effect of higher inflation rate in the equity value, ROE would have been 19%, well above the rest of the period, but more in line with our historical figures. Our growth in operating income was accompanied by a historical efficiency ratio of 52% and robust as equality figures also positioning us better than our payers. 2022 was also a year where we strengthened our capital position even more by reaching a base ratio of 18% well above both the regulatory threshold and our main competitors. Moreover, we increased our additional provisions to an unprecedented amount of MXN700 billion, achieving a coverage ratio of 3.7x our nonperforming loans, allowing us to be even more prepared to face negative cycles. Additionally, we took important steps in our sustainability pillars. Apart from permanent activity supporting the community, we made numerous environmental, social and governance improvements, which allow us to be the best bank in ESG risk rating in Chile according to Sustainalytics [ph] and received several recognitions. Finally, we made important advances in our digital transformation process, which has been a critical piece to maintaining the best rate of customer service, improving productivity and strongly contributing to promoting financial inclusion in Chile. As I mentioned, we will develop these and other activities during this presentation. But before that, I'd like to share our view for the clean economy. Please move to Slide number 4. The Trian growth has continued to weaken, but the chart on the top left clearly shows. Generally, this trend is attributable to 3 main factors: first, the removal of several temporary stimulus implemented during the pandemic, such as the 52% rise in fiscal standing and the withdrawal of more than $50 million from pension funds. Consequently, the absence of further fiscal liquidity measures in 2022 contributed to reducing disposable income and domestic demand. A second factor has been the lag effect of the tightening in the monetary policy rate, which rose by 1,075 basis points between July 2021 and November last year. Finally, some local factors, especially those related to political uncertainty has also reduced economic growth. In this environment, the GDP fell by 1.6% year-on-year in the fourth quarter, posting the first negative annual figure since the second quarter 2020 at the other left chart shows. This slowdown has been explained by the fall in commerce and industry sectors, which fell by 8.4% year-on-year and 5.5% year-on-year respectively. Other cyclical sectors such as construction, have also been negatively affected. On the other hand, services have steadily risen in line with greater levels of mobility due to the ease in sanitary condition since last year. On a sequential basis, as can be seen in the chart of the other right, the slowdown has been also evident. In fact, the activity level posted in December of 2022, for instance, was 1% below the figure posted 1 year ago, reflecting that the economy didn't grow last year. The IMAX, which is the monthly GDP figure, breakdown shows that all sectors declined sequentially during the year. Despite the average unemployment rate in 2022 was 7.9%, 130 basis points below the figure both 1 year ago, it's important to be aware of the deterioration in the labor market. For instance, the weak expansion of the label I have reviewed the number of unemployed people. Therefore, the lower unemployment rate when compared to 2021 is a consequence of demographic changes rather than a greater dynamic in the economy. Additionally, real wages continue to fall minus 2.3% year-on-year in November due to the higher growth in CBI compared to the expansion in nominal wages. Finally, the formality rate has remained around 26% above the level of serve some years ago, suggesting a potential deterioration in the quality of jobs. However, the sub growth is contributing to reducing the macroeconomic imbalances that widen during the pandemic. Specifically, at the chart of the bottom right displays, the trade balance has been improving, led by higher export and lower imports, anticipating a lower deficit in the current account in the short term. This trend should anticipate a normalization in external accounts, which is a fundamental pillar for macro sustainability. This adjustment in the business cycle have been accompanied by changes in different prices as we will see in the next Slide number 5. Following the global trends, the CPI had an impressive rise last year, particularly, in 2022, the inflation ended the year at 12.8%, achieving the highest figure since 1991. This trend as observed in the chart located on the top left was a consequence of drivers. First, the higher global inflation, a factor that is particularly relevant for Anova volume of Chile, where tradable goods represent more than 60% of the total CBI basket. A second factor was the depreciation of the Chilean peso, especially in the first half of last year, as you can see in the bottom right chart. Finally, the substantial increase in domestic demand due to the similar implemented during the pandemic played a critical role in non-tradable pressures. Additionally, it's also important to be aware of the high indexation in Chile since several prices are set in U.S. which could add further persistence to the CBI. The trend in domestic prices led to an important adjustment in local interest rates, especially during the first half of the year. Part of the planation behind this trend was the material adjustment in the overhead rate, which rose from only 0.5% in July 2021 to a record figure of 11.25% November last year as the bottomless chart reflects. In fact, the monetary policy in Chile has been one of the most tightened in the world in the cycle. Nevertheless, the long-term rate has been falling, anticipating a weaker growth this year as well as a potential easing cycle and monetary policy over the next quarters. Despite the weaker cycle, the Chilean peso has strengthened during the last month. Some of external factors such as better copper prices and the weakening of dollar globally in addition to local factors such as the slight improvement in some risks have contributed to strengthening Dechanpeso [ph]. Among the factors that have reduced uncertainty is the mechanism defined for the incoming constitutional process to be held this year, which will consider the participation of both elected people and constitutional experts in elaborating the proposal. This mechanism, coupled with some borders defined for the discussion, such as a strong separation of powers, reduce the possibility of institutional weakening in the country. It is well known that an appropriate design of contrast can make the difference in the long term. Now, I'd like to move to our forecast for this year. Please move to Slide number 6. We expect the GDP this year to fall by 1.4% after a 2.7% expansion in 2022. These figures result from a U-shaped trend in activity with negative annual expansion rate between the 2022 and second quarter of this year as a result of the normalization of temporary factors that increased the growth, as I mentioned previously. This forecast consequently is consistent with a gradual recovery in activity since the second half of this year. This slowdown and the recent strengthening of the currency should contribute to reducing pressures on prices -- in our baseline scenario, the overall inflation will fall from 12.8% last year to 4.8% this year with a potential convergence to the 3% policy target only by 2024. Given these figures, we see room for lower policy interest rate in the near future. Despite the neutral buyer that the Central Bar has adopted in the last monetary policy meeting, we believe that the conjunction of lower growth and inflation will leave room to reduce the interest rate to nearly 6% by the end of this year. All these forecasts are subject to risk. In addition to global uncertainties where Chinese dynamism is a key driver for Chile and geopolitical conflicts in Eastern Europe could produce some noises in international prices, we have to pay attention to the evolution of some local factors as well, especially those related to political and institutional aspects. Some of them include the evolution of some reforms that are currently under discussion in Chile, such as the tax and pension bills as well as the ongoing constitutional process. The evolution of these factors will be critical to the length and deepness of the recession that we currently face. Before moving to Banco Itera discussion, I'd like to briefly discuss the evolution of local banking industry. Please flip to Slide number 7. I 2022 was a profitable period for the banking industry, posting stronger nominal results than the prior year. However, inflation was the main driver for this result. And as you will see later in the presentation, the true profitability adjusted by the loss of purchasing power due to the high level of CBI, which Chile has experienced is substantially lower than the 21% for the banking industry in 2022. The cost of higher CDI is also reflected in asset quality, where for the last 4 quarters in a row, the industry has seen an upward trend in loan loss provisions, as shown on the chart on the bottom right. Loan growth in real term has also weakened as shown by the chart on the bottom left, inflation in several sources of uncertainty have impacted demand. For 2023, we expect a weak real growth of around 1%, driven by mortgage and consumer loans. Now, I'd like to pass the call to Pablo, who will go into more detail about Banco de Chile strategy and financial performance. Thanks, Rodrigo. Please go to Slide number 9. The strong results that we have consistently achieved have been the product of our sound strategic pillars based on customer centricity, productivity and sustainability. To reach our midterm targets, we have established 6 core priorities. In the next slide, we will review some of these advances that we have been making. Please move to Slide number 10, where I'll highlight some of our digital banking initiatives. Our strategic ambition at Banco de Chile is to deliver the best customer experience and to provide the best digital banking platform to clients in Chile. During 2022, we strengthened existing platforms and continued implementing innovative digital solutions. We are proud to highlight that Quanta fan account has reached over 1 million clients as of December 31, 2022, by adding approximately 350,000 customers in this period. Another relevant aspect is that despite the quick growth of this product, we grew our customers by almost 50% this year without affecting our customer satisfaction levels. Among our other advances in 2022, we launched 3 new digital products to promote customer onboarding and financial inclusion, digital current account, fund plan and banana. The new digital current account was launched in the first half of the year and there's a full bank account with the possibility to open other products such as lines of credit and credit cards. Funan is a free digital account for teenagers between 14 and 17 years old with the purpose to build strong relationships early in the customers' life cycle. And FanPrint is a digital account for SMEs that has no entrance or maintenance fees and gives access to exclusive benefits for small businesses. All of these products are in line with our aspirations of growing our clients and also promoting financial inclusion. Furthermore, among other initiatives, we released several upgrades and innovations in our apps. As shown on the right side of this slide, we launched an improved investment that allows our clients to invest easily worldwide, and we made an alliance with other important institutions to facilitate the monetary transactions between clients of these 2 banks using telephone numbers and QR codes. In addition, we made important upgrades in our main app, Mibanco [ph], such as withdrawing funds from ATMs without the need of a physical card, providing online loan simulations and also approving these consumer loans online. Likewise, we added new functionalities and our app for enterprises called Mibanco [ph]. Finally, we are honored their advances in digital banking, together with our permanent focus on providing the best customer experience led us to be recognized by the European as the most innovative digital bank in Chile and by the digital newspaper focused on the financial industry and Chilean consumers called Chocolat as having the best digital banking solution in the country. Please move to Slide 11. We continued implementing changes and initiatives to reduce expenses and improve our operations in line with our efficiency and productivity objectives. We introduced a new purchase model, which uses an electronic auction and tender processes to increase competition among potential providers while ensuring transparency and cycle times. Additionally, we made several negotiations to fulfill all banking functions proactively through the annual purchase plan, which generated savings of approximately $20 million. And finally, regarding our cost reduction process, we have developed optimization projects that cover diverse aspects such as our branch footprint analysis, savings and energy costs while optimizing consolidating service purchases at the corporate level. On the productivity side, through the retail sales excellence plan, we increased consumer credit loan originations by 45% year-on-year, while maintaining our account managers' head count flat. This impressive figure was a fruit of a set of improvements such as the standardization of commercial processes, the digitalization of sales and refocusing intelligence of commercial campaigns. Due to the successful implementation of the productivity projects on our retail business, the bank decided to extend and adapt these initiatives to the SME banking segment that promptly achieved good results as the increase of 25% in the originations per account manager. Thanks to these and other actions previously implemented, we ended the year with the best efficiency ratio amongst our peers in Chile. We also accomplished important advances in ESG, as we'll discuss in the next Slide number 12. During 2022, we have taken important steps towards strengthening our sustainability strategy. We have proactively been reinforcing the development of social, environmental and governance initiatives, some of which are presented on this slide. We developed a sustainability financing framework to issue ESG-related bonds and to finance projects with positive impacts. In addition, we created a sustainability committee, led by the CEO to boost our ESG strategy and launched the Blue commitment program to promote our green products. Last year, we also continued boosting our social and environmental initiatives such as our financial education courses, turn them in to promote entrepreneurship, volunteer programs to support social organizations, care and support for elderly and reinforce station. Those programs directly benefited over 44,000 people. It's also worth mentioning that we have the largest corporate volume peering program in Chile, in which almost 10,000 employees participated as volunteers at the Telesto event in 2022. Finally, our permanent focus on improving diverse ESG aspects of our business, we were recognized as the best bank for financial inclusion by the European and the third best company in ESG in Chile according to the Corporate Reputation Business monitoring company called Medco based in Spain, among other recognitions. In addition, we are very proud to have received tremendous upgrade in our ESG risk ratings by sustainably that went from a medium risk to a low risk place us first amongst banks in Chile. This recognition demonstrates that we are advanced in the right direction as a responsible institution that contributes to the development of the country and its people. Please turn to Slide 14 to go into detail about Banco de Chile's financial performance. 2022 has proven exceptionally profitable for the bank in the industry in nominal terms, as evidenced by the chart to the left, where we led the sector with over 30% nominal ROE. Our competitive advantages, consistent strategy and strong governance practices have been key for our success. Accordingly, we took the proper actions during the pandemic and that translated into record results we are witnessing today in this environment of high inflation, interest rates and liquidity. However, it's important to be aware of the transitory impact generated by the high level of inflation on profitability. Since 2009, the nominal effect of inflation under Chilean gap similar to IFRS does not take into consideration the full impact of inflation on income or the balance sheet. When we consider the effective inflation on equity to recognize the loss in purchasing power, profitability becomes much more aligned with our long-term figures. The chart on the right demonstrates the inflation adjusted ROE from the main Chilean banks, considering the impact of inflation on equity by deducting the effective price level restatement of capital in the income statement. In our view, this measure provides a clear perspective of real profitability as it shows the full economic value that is generated by maintaining the real value of equity after considering the negative impact of inflation on its nominal value. Even after this approach, our adjusted return on average equity was far greater than those of our competitors and surpassed our prepandemic track record showing an impressive competitive edge and consistent long-term strategy. Please turn to Slide 15. Our financial performance in the fourth quarter of 2022 and over the course of the entire year was exceptional. As shown on the chart to the left, net income reached MXN347 billion in the fourth quarter of 2022, 21% higher than the same period last year. And for the full year, we grew 78% over 2021. This bottom line surpassed all of our main competitors in both absolute figures as well as growth, as shown on the chart on the right. The strong bottom line was composed of both temporary and core factors driven by our sound and consistent strategy. Our balance sheet positioning and superior competitive advantages permitted us to greatly benefit from the nonrecurring rise in inflation as a result of our U.S. GAAP position. Higher nominal interest rates also played a major role in this result due to the higher contribution of demand deposits. Other core factors that supported the bottom line came from higher loan originations and the dynamic fee business all being boosted even more by the persistent strong levels of asset quality. Please turn to Slide 16 on operating revenues, where we will go into more details. Our operating revenues experienced a rise of 15% when comparing the fourth quarter to the same period last year and grew 42% year-on-year. The latter grew 74% in noncustomer income and 28% in customer income. In terms of noncustomer income, we generated greater revenues from our U.S. structural GAAP position due to the high level of inflation we experienced this year and to a lesser extent, higher income from our management of our trading and debt securities portfolio, given the positive changes in both interest rates and inflation. The rise in customer income was the result of stronger demand deposit contribution given a scenario of high local and foreign interest rates and to a lower degree by a moderate increase in average balances. Likewise, lowered liquidity among individuals also resulted in the reactivation of higher-margin lending products such as consumer loans. Putting aside the temporary revenues that we generated in 2022, the charts to the right show how our overall operating income compared to our competitors. As you can see on the right of this slide, we have outperformed our peers in net interest margin, fees and total operating margin. We believe that part of this better performance responds to our consistent approach to risk, which is supported by prudent corporate governance standards. Please turn to Slide 17. I Total loans grew by 7.2% as compared to the previous year and 1.7% versus the third quarter of 2022. A large portion of this expansion is attributable to market factors as inflation had a significant uptick this year, particularly since 100% of mortgage and 37% of commercial loans are denominated in U.S. The difference in nominal versus real growth becomes clear in the chart to the right. Nevertheless, consumer loans continued to exhibit higher dynamism by growing 17.5% year-on-year and the impress of 6% quarter-over-quarter. This positive outcome is primarily due to strong loan origination figures, which were driven by effective marketing strategies and solid value propositions. We have also seen an important improvement in originations by account manager as a consequence of our successful retail banking sales excellence program. This has been implementing best practices across the organization, boosting productivity levels through 4 key pillars. First, improving the effectiveness of risk models to increase preapproved loans and adjusting risk attribution at the branch level to boost efficiency. Second, leveraging digital tools to enhance analytics; third, expanding our business intelligence and building new propensity model, which is a set of approaches to building predictive models to forecast behavior of a target audience by analyzing their past behaviors. And finally, developing dementia discipline through the implementation of management and training procedures, branch per branch. Through this program, we have been able to increase not only our originations of consumer loans that grew 45% year-on-year, but also our market share in this product that grew 76 basis points to reach 17.4%. A similar program is being implemented in the SME segment, and we are already seeing strong improvements in originations with a rise of 25% this quarter when compared to the same quarter in 2021. For 2023, we expect that loans in the industry should grow in line with expectations for inflation and that loan growth should be driven by consumer and mortgage loans. We expect that commercial loans will continue growing below inflation due to the low business confidence, follow uncertainties and the recession we are currently experiencing. As for our loan portfolio, this should follow a similar trend of moderate growth. Please turn to Slide 18. We have adjusted our balance sheet structure accordingly for the changes we are expecting with regards to falling interest rates and inflation. Consequently, this led to a change in our funding strategy by proactively placing U.S. bonds in the local market and increasing the source of funding 8% year-on-year and 5% in the quarter. This increase in the duration of our liabilities reduced the price risk in the banking book by decreasing our exposure to inflation as shown on the chart on the bottom right and refinance scheduled amortization of outstanding bonds. The timing of the issuances was especially relevant given the expectations that the local bond market may become very active in debt placements in light of the financing needs from the scheduled amortization of the FCIC financing beginning 2024 and the expected behavior of demand deposits, among others. With regards to demand deposits, we continue to see a normalization this quarter in terms of the source of funding decreasing by 6.4% during this quarter and 27% year-on-year from the unsustainably high levels of 2021 due to the pension fund withdrawals and relief programs. As can be seen on the chart on the upper right, the relationship of demand deposits to time deposits has been moving quickly to a more normal level, given the extraordinary high levels of short-term interest rates implemented to control inflation and normalized liquidity levels in the economy. Nevertheless, we expect that our current level of demand deposits equal to 36.5% of total loans is relatively in line with our long-term levels from this source of funding. We expect that DDAs will remain relatively flat throughout 2023 when compared to 2022. We are also confident that our premium customer base should continue to support our strong funding mix. Additionally, during 2023, we'll keep on assessing funding alternatives depending on the market dynamics, evolution of time deposits and demand deposits and loan growth. Likewise, we can't rule out that we'll continue to reduce price risk exposures in the banking book. For instance, in terms of the inflation gap, all of which will determine the steps we will take to finance our balance sheet. Please turn to Slide 19 to discuss our superior capital levels versus our peers. As shown on the slide, our profitability track record has consistently outperformed our peers, including return on average equity despite our larger capital base. We finished the year with a basal ratio of 18%, significantly higher than our peers, as shown on the chart on the top left and the positive direction of our CET1 ratio over the past few years has meaningfully surpassed both of our main competitors, as shown on the chart on the bottom left. This position of high return, high net income and high CET1 is truly unique, as shown on the chart to the right. We have achieved this through a customer-centric business strategy and the appropriate balance between risk and return. This has allowed us to grow our portfolio and bottom line sustainably. Additionally, we have been able to continue providing an attractive dividend without affecting this leadership position, all the while maintaining the largest gap of our capital over the regulatory limits to easily comply with Basel III regulations. Please turn to Slide 20. Undoubtedly, core expected credit losses are in the process of normalization. This quarter expected credit losses reached PHP123 billion, down from PHP138 billion posted 1 year ago with a lower amount of additional provision established. For the full year, we recorded COP 435 billion of expected credit losses, up 22% from 1 year ago. This rise is attributable to the normalization of asset quality after a period of high liquidity that maintain risk indicators transitorily low. As shown on the chart on the bottom left, rose from a very low level of 0.5% in the fourth quarter of 2021 to a still lower than pre-pandemic level of 1.08% this quarter, a rise that was significantly lower than those posted by our main peers. Excluding the decrease of PHP65 billion of additional provisions, the Retail Banking segment contributed the most expected credit losses with an annual increase of PHP31 billion, while the wholesale banking segment rose MXN13 billion due to the high inflation and weaker economy that is affecting individuals and businesses alike. Nevertheless, the quality of our portfolio and their risk management culture is evident when we compare to our peers, as you can see on the chart on this slide. Not only do we have the soundest portfolio, we also have the highest coverage ratio of 3.7x, and the most additional provisions amounting to PHP700 billion, as shown on the chart to the right. This clearly positions us better than our peers if the economy worsens beyond our baseline scenario. Lastly, it's important to stress the relevance that controlling risk has on their bottom line. This is truly a competitive advantage where we have demonstrated a superior track record to our peers, as shown on the chart on the bottom right. Since 2021, we have continued to widen the gap with our peers despite our significantly larger coverage ratio, demonstrating our excellence in managing our business. Please turn to Slide 21. Expenses have grown this quarter, 19% nominal over the same period last year and 14% nominal in 2022 over 2021. This rise is primarily due to the high inflation that reached 12.8%, which has an impact on most of expense line items, including salaries, advisory services and IT expenses that are indexed to CPI. We also recorded higher variable compensation due to the strong results during 2022. Nevertheless, the annual rise in real terms reduced significantly to only 2.8% as a consequence of our cost control efforts bearing fruit. In terms of efficiency ratio, we reached a ratio of 33.1% this quarter and 31.9% for the full year, both significantly below the levels recorded in 2021. When compared to our peers, we continue to lead and widen the gap in efficiency as shown on the chart to the right. We are confident that through our firm focus of strengthening cost control, boosting productivity and using technology to improve how we manage our business should continue to allow us to push strong normalized efficiency levels that are better than what we recorded in the past. Nevertheless, it's fair to mention that our current level of efficiency has clearly been driven by market factors such as inflation and interest rates that transitorily increased operating revenues. However, we are confident that we will continue to reach sustainable levels below 45% in the medium term. Please turn to Slide 22. The last few years have been turbulent. Despite this, we have managed the bank well throughout this cycle, posting historic results in 2022, they're well above all of our competition. We outperformed in total profitability measured by ROE and ROA and at the same time in capitalization. We posted the highest net interest margin, the highest fee margin and the highest operating margin. We record the best asset quality indicators and set the highest level of coverage to face possible uncertainties that could have occurred or that may lay ahead. Not only that, we also posted the best efficiency ratio in the industry, taking a way this recognition that has historically been held by our main competitor. Overall, we believe that through a superior customer-centric strategy, together with our uncompromising approach to manage risks are the main pillars of our solid track record. This is especially relevant as we are currently in the reception. We expect that the recovery should begin in the second half of 2023, and we are well positioned to take greater advantage of this environment than our peers. Our short-term guidance sees NIM decreasing sustainably high rates to a level of around 4.3%. Cost of risk should normalize this year to around 1.2% and efficiency should reach a level of around 40%. As per ROE, this should converge to a range around 18%, while also maintaining a solid capital base. Thank you very much for the presentation. We will now be moving to the Q&A part of the call. [Operator Instructions] Our first question comes from Mr. Tito Labarta from Goldman Sachs. Pablo, a couple of questions. I guess just on your expense outlook, I know efficiency deteriorating a bit as margins kind of normalize. But how do you think about expense growth from here? I know inflation has been high as inflation comes down, but you're still growing a bit above inflation. Is that what we should expect slightly above inflation? Or is there other room where you can improve efficiency on the cost side? And then a second question on your capital ratio, very strong at 13.7%. Just help us at what do you think is the right level of capital where you feel comfortable operating? And what could that mean for your dividend payout? Yes. So in terms of efficiency, what we're seeing is that the strong growth of 2022 inflation has an important effect in terms of the variation of costs in 2023. So it will probably start to see a level of around a couple of points above inflation in terms of cost because most of our costs are indexed to inflation, right? So we have some things that we've been doing throughout the year and prior years, like digital transformation. We've been improving everything related to our digital products, the services and tools that we provide online, the onboarding that we're giving customers. We had a reduction in a branch level. We optimized the branches across Chile. Today, we have 266 branches. Half of those branches are located in Chile, half of those, the other half is -- sorry, half of those branches are located in Santiago and the other half are located in regions outside of Santiago. In regions outside of Santiago, there's only 1 or 2 branches in those cities and towns, so there's not much room for improvement there or improvement in the footprint. In Santiago all depend on the evolution in terms of growth and how many customers use the branches. But today, the level that we have of the branch network is -- we feel is optimal as of today. And we've also been implementing improvements in efficiency through our efficiency program, where we've seen different improvements across the company in terms of how we purchase goods within the bank, implementing new tools and to option of purchases to get better deals and also on how we're doing training within the branches in order to improve productivity and increase the originations per account manager. So basically, in summary, for 2023, One of the main drivers for us is the effect of inflation through 2022, which is affecting the comparison base. So in the medium term, we should think that Banco decile will grow in line or slightly below inflation but for 2023, the main driver is 2022 inflation. Hi, everybody. Well, regarding capital ratios, in fact, we're still really confident with and pretty comfortable with the levels we have today, particularly in terms of CET1. And in terms of the dividend payout, as you probably know, the Board decided to propose 100%, 100% payout ratio for 2023 over the net distributable income, which, in fact, is an effective payout ratio of 68% approximately. It's important to consider that we -- as every year, we retain the effect of inflation on the shareholders' equity, of course. So we normally distribute the -- over the rest of the earnings. In this case, there is due to double earnings. So basically, we will continue to reinforce our capital base. And in the future, we will probably come back to the same pre-aeration that we normally have every year, which is approximately 60% of the net distributable income. Just a correction, the effective payout ratio is 62% of our net distributable over the total net income. The last year 2022 was 68%. Great. And just in terms of like what the optimal level of capital is where we think you should be operating? Yes. It will depend on the balance sheet growth, of course, but we feel pretty comfortable with the level we have today. Probably we will use some capital in the -- over the next 3 years, but basically, will depend on how that will expand in the midterm. Today, we have room to grow in terms of the balance sheet, of course, and probably levels of CET1 of 12%, 12.5% is something that is reasonable for us. To everyone, my question is related to your NIM sensitivity and you all look for Chile's inflation and interest rates. Can you please remind us what is the sensitivity that you have bought to mean to interest rate and inflation. And this is that I would like to understand what changed in your expectations when I compare this guidance that you're providing with the one you provided 3 months ago, I see that both for NIM you are guiding now to the upper end of that range that you guided before and lower end, sorry, and for cost of as you are guiding for the upper end. So I would like to understand what changed in your view of Chile over the past few months to provide these more caution guidance. Okay. So in terms of net interest margins, what we're seeing today, is a level that goes somewhere around 4.3% for 2023. And the main driver there is really for us the evolution of inflation. So depending on the evolution of inflation will be the main driver in the short term for where that level finishes for the end of the year. What we're seeing some other drivers, but less of an impact is how we're growing the retail base loans. So the evolution of the growth in loans that we're seeing, we see that retailers are a little bit healthier than the wholesale, but still it's not significant as inflation. So for every 100 basis point change of inflation, it's about the PLN60 billion change in net interest income or more or less and then around 13 basis points with the gap that we have on the balance sheet today. And if we look at the sensitivity to the overnight rate, once everything reprices after 3 years, 100 basis point change in the overnight rate is about a 30 basis point change in net interest margins. So that would be the main driver for 2023 for net interest margin is inflation. And there's some positive effects on growth in terms of loans, but what we're seeing is what it is relatively flat in total with slightly higher growth in terms of retail loans above inflation. Thank you, Pablo. And regarding your additional provisions this correcting this with the updated model for the standardized model for provisioning in consumer loans. Do you have any updated estimates of how much of your excess provisions are going to be used for this updated model? And if I assume it's not a full amount, will you consider to release some of those provisions in case the cost of risk this year at some point, exceed the 1.2% that you are forecasting now. Well, today, we have the highest level of additional provisions, which is $700 billion. It gives us a very strong coverage ratio of 3.7x. And the last -- if you look to the -- if you see in the presentation, in the last quarters, we've been provisioning -- the provisions that have been flowing through the income statement is more based on models and additional provisions. So we only set MXN15 billion of additional provisions in the last quarter. Now with respect to why we place these preparations or why we have these additional provisions, therefore, the evolution of the economy and how that can affect their portfolio, but not for model changes. What we're expecting is somewhere around 1.2% for cost of risk for the next year, and that's in line with our base scenario. Now we haven't mentioned the effect of the new provisioning model. But for us, it's not so material, but there's not a clear guidelines on how this will be implemented or also the rule of the provisioning model will end up at then because it just finished in the consultation period, and we still need to find the final draft. So, it's very important to keep in mind that there are some sources of uncertainty that they still remain for the country, for Chile. It's not clear. For example, what will be the long-term impact from the different measures that were adopted during the last year, for example, the long-term impact from the withdrawal from pension funds, the lower saving rate, et cetera. So there are some doubts related to the long-term GDP growth for Chile is not clear how it will be, for example, the long-term level of the monetary policy rate as well. So at the end of the day, it's very important, especially this year, to be aware of different source of uncertainty, especially considering some discussions that we're going to have 2023, including, for example, different discussions from the taxes, the pension reform, the constitutional process that it will be held this year as well. So the evolution of the sources of risk are very important in terms of the provisions in the future. And also, it's extremely important to pay attention to the evolution of the exchange rate in Chile because it has a critical impact in terms of inflation. You have to have an IA 10% change in the same rate. It changed the overall inflation in 1 year of around 150 basis points. So that's why there are some sources of uncertainty that is very important to pay special attention to this year. Pablo, Rodrigo, congratulations on the strong results. My question is related to the guidance. And I wanted to understand what are the -- what's the upside risk that you see what are the main sources for upside risk to your guidance? And what would be the main ones for the downside risks as well? I think the main upside risk that we're seeing today is in recent economic figures is better-than-expected results of the economy and maybe how that will transfer into 2023 with a stronger GDP growth. That would be positive also the evolution of the unemployment rate is also a positive factor that can continue benefiting different line items in the balance sheet, for example, stronger growth in the portfolio and more higher-margin products. We also have the benefits of lower cost of risk than could be expected if the economies are stronger, and we continue to see a very good payment behavior from our customers. I think those are the main upside. But the main downside also probably in the same line, I would say. As well if the economy grows slower, there's more uncertainty, the business confidence levels are weaker. That can have an effect in the balance sheet in terms of growth of the portfolio and also in the evolution of risk, but it's important also to mention that we have a huge amount of additional provisions. So if something escapes, it's a little bit more higher NPLs in our baseline scenario or it gets very difficult in 2023. We still have a large amount of additional provisions which the Board takes into consideration on a monthly basis on the evolution of those provisions and how they should be used. Yes. Yes. So in a word, the key sources of potential changes in our bottom line are related with macro drivers. So we're not especially concerned for, for example, any figures or special factor related to the industry sector or especially for Banco de Chile. So at the end of the day, the upside rise or downward risk related to the bottom line, mainly related with economic growth, with the evolution of interest rate, CPI, as Pablo mentioned, the unemployment rate, especially considering the material impact and risk -- so the potential gap between our guidance today and final results for the next -- for the end of this year will be closely related with the evolution of macro factors rather than specific aspects of our bank of the financial industry. Understood. So the changes in interest rates wouldn't have a direct impact on your guidance, you will be more indirect through economic growth expectations and inflation. Would that be correct? Our baseline scenario for interest rates is that they're relatively on average, similar 2022 and 2023. If the evolution of that changes or the evolution of inflation changes, that would have an effect on our net interest margins. So at the end of the day, the key figures to monitor this year is the inflation, the evaluation of CDI because that is the variable where we have more uncertainty. In fact, we knowledge some downward risk today in the evolution of the CDI. Just to have an EVA, for instance, our forecast of inflation for this year is consistent with rate of around 800, 850 [ph]. So if the churn rate continues, for example, covering in the current level, there would be a potential downward risk in terms of the inflation and consequently in the bottom line. So at the end of the day, the most relevant figure for this year in terms of the evolution of the bottom line will be inflation. Pablo, congrats on this incredible year. I have a question regarding fees. If you can provide some outlook. I guess this year was growing like 9%, 10%. And with lower inflation of that line should be slightly weaker in 2023? Or if all those new initiatives, we should see more supportive fee growth for 2023. And also regarding the NPLs, you have in the guidance, 1.2%, 1.3%. That is some 20 bps increase versus 2022. But in the release, you mentioned that maybe during the year, you could see some peak on like higher NPLs during the year. What do you mean by that? Like are you waiting for some kind of corporate cases? Is it just like a more cautious macro environment by half of the year? And as you charge off, or NPL comes down. So basically trying to understand the curve of EPL, right? Like should we start to see the peak in June 30 and then gradually improving the 4Q? What is the message here? Thank you. So, thanks for the question. So in terms of our expectations for fees, fees grow historically similar to -- well, the main driver of this is customer growth. So if we look at the last 10, last 5 years, customers, depending on how you calculate it, if you look at current account customers, we're growing on average over those periods, similar around 6%, 7% in the last period that we look in a short time frame, it slightly above that because of all these new products that we've been implementing, where we've been growing very strongly in terms of new current account openings, all these digital onboarding platforms. So one of the main drivers is the -- is customer growth, the sustainable drivers. Obviously, inflation has an effect of -- on fees because most fees are indexed in inflation. But in the long term, expecting a level of 3%, 3.5% for inflation. We should think that plus customer growth in current accounts, 7% somewhere around there, maybe hovering around there. That's the average more or less the average in the past, we should get to the high single-digit level of growth. There's cross-sell in there and for 2023, the main drivers that we're seeing is we have a very good ATM business place in very good locations that have a very high usage rates. That's a good driver, credit cards, mutual fund, the mutual fund business as well, current account administration fees. All those are the main drivers for 2023. In terms of the question of NPLs -- and I think I mentioned it should have around 9% or high single digits for fees for 2023 and beyond, it's a reasonable level to expect. Most fees are generated from the retail segment and transactions. In terms of NPLs, the NPLs should be around these levels. But if we look at by segment, we see NPLs in the corporate book, relatively similar to what we've had in the past. But if we look in terms of the mortgage or more retail NPLs from the retail book, there's still a little bit of change that can occur there. We're still seeing very good payment behavior, a very high-quality book, and we think that this should continue normalizing in line with the normalizing of liquidity. So during the evolution of that really will be more macro. So how the evolution of unemployment and how that passes through into the retail book could occur and also the activity in terms of the wholesale. We don't see -- today, we have a very high-quality book in all sectors. If we look at the real estate companies, they're strong. We haven't had material problems there. If we look at the retail sector, we're a bank that's focused on more upper-income individuals. So we've had a good payment behavior across the board, but it's still normalizing. The levels that we have today overall are still lower than a normal level. So changes is more macro. No, perfect Pablo. That was very clear. And just crap myself. I guess you grew like 14%, 15% in it's not like 90. It was more mid-single -- mid-teens? I have a question also on fees, and you referred to the placement of regulation. You don't refer to competition. Do you think that with the new open banking environment and more competition from digital banks you might have present in the future? Or do you think it will not momentary change the structure of the market? And then going forward, in terms of the group and within you still see yourself strictly a constraint to Chile? Or would you consider international opportunities or perhaps going into the pension fund business if that opens up. So I think in Chile, in general, the banking industry is a highly competitive environment. We have 18 banks in Chile that operates here in local banks and international banks. And there's a lot of regulations that have been set, which maintain fees low. So for example, no current account, if you pay anything for your current account as a customer, includes all the fees regarding transactions, for example, all transfers, electronic transfers are -- have no fees. You can transfer $0.50 equivalent or $100 equivalent. There's no fee associated to that. If we look at the ATMs, customers don't get charged to use other banking -- other bank ATMs. So there's less customer loyalty to your ATMs. The banks charge each other. So there's -- a lot of fees are very low already. There's areas like -- what we've seen through competition have been decreasing. For example, the mutual fund administration fees, those have come down over the years. But significant changes in the fee structure, we don't see a relative change to what we've seen in the past, the fee structure is relatively -- well, we see a lot of competition from all of these banks and I've mentioned there local international banks. In terms of the second question on the internationalization of Banco Chile. So for Banco de Chile, we're a bank that's focused in Chile. Obviously, any new deals or business opportunities are all evaluated. But today, the focus has been to be in Chile and to continue to operate in Chile and grow with our customers and help Chile grow. There's no news today of any changes of that. But obviously, if there's any opportunities that appear it would be something that we would evaluate at that time. It's also something that would be evaluated. If any deals occur, pension funds and anything related to the financial institution that we can operate in. It would be something that would be evaluated at that point in time and if it's an interesting and appropriate business and the cost structure makes sense. It would be evaluated at the Board level to see how we would enter or not into that opportunity, taking a good, always taking care of having a good relationship between risk and return. Thank you very much. Looks like we have any further questions. I'll pass the line back to Banco de Chile team for concluding remarks.
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Greetings, and welcome to the AMG Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow this formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Patricia Figueroa, Head of Investor Relations for AMG. Thank you. You may begin. Good morning, and thank you for joining us today to discuss AMG's results for the fourth quarter and full year 2022. Before we begin, I'd like to remind you that during this call, we may make a number of forward-looking statements, which could differ from our actual results materially, and AMG assumes no obligation to update these statements. A replay of today's call will be available on the Investor Relations section of our website along with a copy of our earnings release and a reconciliation of any non-GAAP financial measures, including any earnings guidance announced on this call. In addition, we posted an updated investor presentation to our website this morning and encourage investors to consult our site regularly for updated information. With us today to discuss the company's results for the quarter are Jay Horgen, President and Chief Executive Officer; and Tom Wojcik, Chief Financial Officer. AMG achieved outstanding results in 2022, delivering 10% growth in economic earnings per share over the past year, and 50% growth over two years. Notably, we generated these results across dramatically different market environments. In 2021, world markets rose significantly against the backdrop of low rates and easy monetary policies, while in 2022 global tightening and geopolitical risks drove double-digit declines across both equities and fixed income. Over that period, AMG delivered record earnings per share, driven by excellent performance from our affiliates, new investments in secular growth areas, and share repurchases. Our industry-leading results in an otherwise challenging environment for asset management highlight the efficacy of our model, the quality of our affiliates and the positive impact of our capital allocation strategy. And, as we will discuss today, we believe AMG is uniquely positioned for success and continued growth going forward. Stepping back, over the last few years, we have strategically evolved AMG by aligning our capital and resources with long-term demand trends. Since 2019, we have invested $1.3 billion for growth in new and existing affiliates that contributed more than $200 million in EBITDA to AMG in 2022. Alternatives, including both liquid alternatives and private markets, accounted for approximately two-thirds of these investments with the remaining one-third primarily in sustainable strategies. The decisions we made in 2022 were representative of our growth strategies. We began the year with an incremental investment in Systematica, one of the industry's leading technology-driven liquid alternatives managers, and we ended the year with an investment in Peppertree Capital, a high-quality private markets manager in the fast-growing communications infrastructure segment. Today, more than half of our earnings are generated by affiliates in areas of secular growth, nearly doubling our exposure since 2019. And, as we continue to evolve our business mix, we expect that contribution to increase, driving future growth and further differentiating AMG from our peers. In addition to our successful new investments, we have enhanced our strategic engagement with affiliates, working with our partners to magnify their efforts and improve their competitive positioning, thereby creating value for all stakeholders. For example, in 2022, our engagement and collaboration resulted in the successful combination of First Quadrant with Systematica. The combination further diversified Systematica's product offering, extends their client reach and supports their growing scale of a business that more than doubled since our initial investment. In addition, in 2022, strong business momentum at Baring, supported by our strategic engagement, enabled them to realize the benefits of a combination with EQT. As a result, AMG received more than $800 million in consideration for our interest in Baring. We have already deployed a majority of that capital for the benefit of AMG shareholders, including through our investment in Peppertree and an increased level of share repurchases. More broadly, we have used our capital and resources to further our affiliates' long-term objectives, including through product development, capital formation and other business development initiatives. Through our engagement over time, we expect to identify additional opportunities to build on our affiliates' long-term growth prospects and their strategic goals. Looking ahead, we entered 2023 in a position of strength, with a strong balance sheet, a diversified array of high-quality affiliates and a strategy focused on areas of secular demand. AMG's overall momentum should enable us to capitalize on opportunities that will emerge in the new market environment. Importantly, we believe portfolio allocations need to change, and taking an intentional approach to rebuilding portfolios for this new environment will be essential to achieving client outcomes in the future. Portfolios that were designed around antiquated asset allocation models underperformed materially in 2022, causing a renewed focus on the fundamentals of portfolio construction, including liquidity, reduced correlations and differentiated return streams. We have always believed that partner-owned firms with entrepreneurial cultures are best positioned to deliver differentiated returns across market cycles. And we expect our affiliates to be well positioned to benefit as clients recalibrate their portfolio allocations. This new environment also brings opportunities for attractive new investments, as most buyers retrench and the appeal of AMG's partnership approach becomes even more apparent. Having remained disciplined and selective through a period of high valuations and optimistic business plans, especially in private markets, we are seeing both expectations and valuations moderate. In addition, in times of uncertainty, an engaged proven partner becomes even more valuable. Our unwavering commitment to provide partnership solutions to independent firms and our reputation as a collaborative and supportive partner uniquely positions AMG during a time when other buyers are rethinking their approach. And given our competitive advantages, we expect to execute on attractive new investment opportunities that this environment will likely produce. Finally, I want to underscore our commitment to a disciplined capital allocation framework. Capital decisions are fundamental to our strategy and we evaluate every opportunity on a risk adjusted basis, factoring in the impact of the investment to our business mix, cash flows and franchise. These decisions require judgment and our allocation discipline is embedded across all elements of our process and culture. In executing growth investments in new and existing affiliates, we ensure proper alignment with our affiliate partners and structures that benefit all stakeholders. While we believe that these investments will drive long-term shareholder value over time, we also have a track record of returning significant excess capital to shareholders as part of our disciplined strategy. Since 2019, in addition to deploying more than $1.3 billion into growth invest, we have also returned $1.9 billion of excess capital, primarily through share repurchases. Looking ahead, given our opportunity set, we expect that the mix of our investments will skew more toward growth, but the outcome will always be governed by our capital allocation framework. In 2023, we celebrate 30 years of successfully partnering with independent firms. While our business and the asset management landscape have certainly evolved, we remain true to our fundamental objective of providing solutions to independent partner-owned firms and acting as a catalyst to support their success over time. Today, we are well positioned to deliver consistent earnings growth, given our unique competitive advantages. And through the execution of our growth strategy and our robust capital allocation framework, we expect to create significant shareholder value going forward. AMG's excellent 2022 results reflect the differentiation of our business model and stand out against a challenging industry backdrop. For the full year, we delivered $1.1 billion of adjusted EBITDA and economic earnings per share of $20.14 grew 10% year-over-year, driven by outstanding affiliate investment performance and the execution of our growth and capital allocation strategies. Liquid alternative strategies delivered strong results for both clients and shareholders and generated $227 million of net performance fee earnings. And our strategy resulted in two affiliate investments and significant excess capital returned through share repurchases, driving earnings growth today and positioning us well for the future. As we enter 2023, our affiliates' value proposition is resonating with clients. Our partnership solution set is uniquely positioned to attract new affiliates. And our balance sheet and cash flow profile enable us to execute on our strategy to create significant shareholder value. Now turning to our fourth quarter results. Fourth quarter adjusted EBITDA of $371 million and economic earnings per share of $7.28 were up 4% and 19%, respectively, year-over-year, reflecting strong affiliate investment performance and the impact of new investments and share repurchases. During the quarter, the Baring transaction was completed and we received $240 million in cash and 28.7 million EQT shares. For GAAP purposes, we booked a total after-tax gain of $576 million, including a $499 million gain on the transaction that we have reported as a separate line item on our income statement and a $77 million gain on EQT shares, which is included in investment and other income. These gains are excluded from our supplemental metrics and, additionally, Baring earnings are excluded from our fourth quarter and go-forward results. Turning to performance across our business and excluding certain quantitative strategies. Net client cash outflows for the quarter were $5 billion, reflecting continued strength in alternative strategies that was offset by fundamental equities and seasonal redemptions. Within alternatives, we reported another strong quarter, with almost $6 billion in net inflows led by $5 billion of private markets fundraising at Pantheon, Comvest and Abacus. Our affiliates continue to generate outstanding investment performance, and their excellent long-term track records across credit, real estate, secondaries and infrastructure continue to drive fundraising momentum. Demand for liquid alternatives continued, with approximately $1 billion of net inflows, as the volatility and correlation in traditional equity and fixed income markets led many investors to seek alternative sources of return and diversification. Our liquid alternative managers, including Systematica, AQR, Capula and Garda, delivered outstanding performance in 2022, with many strategies producing double-digit returns for clients, resulting in significant performance fee earnings for AMG. The diversification provided by liquid alternatives will be critical in building more resilient portfolios in this new market environment, and we expect our diverse set of affiliates will benefit from increasing client demand in this area. Turning to global equities, net outflows of $7 billion continue to be primarily driven by growth-oriented strategies, in line with broader industry trends. Given our affiliates' strong long-term track records in this category, they are well positioned to recapture client demand over time. In U.S. equities, we saw net outflows of $4 billion in the quarter, including approximately $1 billion of retail seasonality. Performance continues to be excellent and improved across all time periods in the quarter. Our affiliates including Parnassus, Yacktman, Beutel, River Road and Frontier continue to enhance their positioning amid the strong relative performance of value equity strategies. Finally, in multi-asset and fixed income strategies, flows were flat in the quarter, driven by inflows into wealth management and stabilizing fixed income results. Turning to financials. For the fourth quarter, adjusted EBITDA of $371 million included $188 million of net performance fee earning and grew 4% year-over-year, as strong performance fee earnings and the impact of our new investment activity more than offset the decline in markets and net flows. Economic earnings per share of $7.28 grew 19% over the prior-year quarter, further reflecting the positive impact of share repurchases and a lower tax rate versus a year ago. Performance fee earnings continued to provide a combination of earnings growth, diversification, stability and cash flow. Our affiliates generate performance fee earnings in several ways; across absolute return, beta sensitive, private market strategies, and many of those assets are growing as a function of excellent investment performance, positive flows and successful execution of our strategy across secular growth areas. In terms of performance fee earnings for full year 2023, we are informed by the combination of our first quarter guidance range, our current performance fee eligible asset base and our high watermark position. Consistent with historical experience, we expect a net performance fee earnings range of $125 million to $175 million for 2023, and we will update you throughout the course of the year. Now, moving to additional first quarter guidance. We expect first quarter adjusted EBITDA to be between $215 million and $220 million based on current AUM levels reflecting our market blend, which was up 6% quarter-to-date as of Friday, and including net performance fee earnings of $20 million to $25 million. As a reminder, our first quarter results will not include the impact of Peppertree, which will be reported on a one-quarter lag beginning in the second quarter and is expected to contribute approximately 1% to 2% of EBITDA on a full year basis. Turning to specific modeling items. For the fourth quarter, our share of interest expense was $30 million and we expect it to be at a similar level in the first quarter. Our share of reported amortization and impairments was elevated at $78 million for the fourth quarter. We expect it to normalize to approximately $30 million in the first quarter. Our effective GAAP and cash tax rates were 23% and 21%, respectively, for the fourth quarter. For the first quarter, we expect GAAP and cash tax rates to be at 26% and 17%, respectively. Intangible-related deferred taxes were $4 million this quarter and we expect a more normalized $15 million level in the first quarter. Other economic items were $1 million in the fourth quarter, which included the mark-to-market impact on GP and seed capital investments. In the first quarter, excluding any mark-to-market on GP and seed, we do not expect any contribution from other economic items. Our weighted average share count for the fourth quarter was 39.2 million, and we expect our share count to be approximately 38 million for the first quarter, reflecting the impact of the accelerated share repurchase program we entered into at year-end. Finally, turning to balance sheet and capital allocation. While market volatility in 2022 caused many industry participants to take a step back, we continued to focus on executing our strategy. AMG's business model is uniquely advantaged by our ability to deploy capital in the areas of highest growth and return by investing in both existing and new affiliates. In 2022, we successfully completed two growth investments, Systematica in January and Peppertree in October, both of which further shift our business mix toward areas of client demand. Consistent with our guidance, we also returned $475 million of excess capital through share repurchases. In addition, given our strong liquidity position, which was further enhanced by the Baring transaction closing in the quarter, we entered into a $225 million accelerated share repurchase program that will be executed over the first half of 2023. With respect to the Baring transaction, we've now realized nearly $600 million in total gross proceeds in cash, including monetizing two-thirds of our freely-tradable EQT shares. And many of the capital actions I just mentioned, including Peppertree, our increased 2022 share repurchases and the ASR were funded with that capital. Given our strong balance sheet and free cash flow profile, we entered the year with significant capacity to both execute on our growth strategy and return excess capital to shareholders through repurchases, evaluating all investment decisions under a disciplined common framework. For the full year 2023, we expect share repurchases of at least $425 million, inclusive of the $225 million ASR. The ultimate level of repurchases will be dependent on market conditions and new investment activity. And as Jay mentioned, we believe new investment activity can increase in the current environment given AMG's unique partnership solution set. The momentum in our business demonstrates the diversity and strength of our affiliates and the stability inherent in our model. The changing environment represents a significant opportunity for both our business and our affiliates to deliver differentiated performance. In this new market environment, we are confident in our positioning and in our ability to deploy capital to continue to generate earnings growth and shareholder value. Thank you. [Operator Instructions] Our first question comes from the line of Alex Blostein with Goldman Sachs. Please proceed with your question. Hey, good morning, guys. Thanks for the question. So, maybe we could start with a point, Jay, that you made in your prepared remarks about mixing in investments or prioritizing investments a little bit more for growth versus maybe share repurchase for the year. Maybe help us think through what areas you expect to be relatively more active in? And if the elevated pace of activity does not come through, should we expect you guys to be above the guide on the share buybacks for the year? Yes. Well, good morning, Alex, and thank you for your question. So, to address the first part on new investments, yes, we do think we're in an environment where we are going to see more activity for us on the new investment side, in part because we have seen the market environment change in our favor, both on the buyer side, we see buyers -- sort of historical buyers being more inwardly focused as I mentioned on a prior call, and we also see after a period of elevated valuations and sort of optimistic business plans, we see more modest valuations and modest expectations. So, we think that's a good environment for us to transact. And I think the last point is that the needs of independent firms, they, in these periods, really could use a helpful support of strategic partner like in AMG. And that is something that we see in our dialogue with new affiliate prospects, something that they are really looking for. And then, when you kind of take a step back and you look at our current pipeline, we do have a pretty active pipeline. We have a growth strategy to invest in both new and existing affiliates in areas of secular growth. So, our new investment pipeline very much reflects areas of secular growth. We've articulated that over some many years now, which we believe to be in areas where long-term demand trends continue to be in our -- in the world and in the economy, and that includes areas such as private markets, liquid alternatives, ESG or sustainable investing, Asia and wealth. And we continue to see businesses in those areas and we continue to expect that we will do more investments in capital to that -- to those areas. But you're also right that to the extent that we are not able to or willing to, I guess, make those investments over the course of this year or let's just say the next many quarters ahead of us we will return capital as we have for the last four years to shareholders. And when you really take the lens back out, and I think we described it in our prepared remarks, we've put $1.3 billion out into growth investments over the last four years and $1.9 billion into share repurchases. We would like to see that mix skew more towards growth, but we are prepared to return capital just as we have, because we have a disciplined capital allocation framework that governs those new investments. Yes. So, Alex, look, I think you asked your question in exactly the right way. And as Jay walked through, the first thing thinking about with our capital is all those opportunities for growth investment, and then we think about exactly that, which is what do we then do with our excess capital and how much should we repurchase. So, maybe I'll just spend a couple of minutes on our liquidity position and how we're thinking about repurchases, how the ASR plays in, et cetera. So, look, we entered 2023 in a very strong overall liquidity position. And that's aided not only by our strong 2022 financial results, but also the proceeds from the Baring transaction. And as Jay said, at the highest level, we're positioned to both invest for growth and return significant excess capital to shareholders via repurchases. Importantly, when you think about repurchases, we finished 2022 with about $475 million of repurchases and then we announced the $225 million accelerated share repurchase program. So, really the right way to interpret the ASR is, call it, $25 million of that gets us to our $500 million full year guidance number for 2022, and then, we really prefunded $200 million of what we plan to do in 2023. So, as you heard in my prepared remarks, for 2023, we used at least $425 million of repurchases as a good baseline number, which includes the totality of that $225 million ASR that's going to be executed in the first half of the year, and then another $200 million in the second half of the year. But we also have meaningful capacity beyond that to invest for growth in all the areas that Jay was talking about; call it, approximately $400 million of balance sheet cash that we've sort of earmarked for growth this year. And that's really even before thinking about using our revolver or taking up our leverage levels, that's just at a consistent leverage level with the liquidity that we have available to us today. Of course, if those investments don't materialize, we'll likely return more capital to shareholders per our capital allocation strategy and framework. So, you should really consider the overall earnings power that comes along with that $400 million of incremental capital that we have to put to work, whether it goes toward growth investments or whether it ends up being a return of capital via repurchases over time. Now, importantly, the goal is not to push all that capital out the door in any single quarter or calendar year, but really to ensure that we have the capital when we need it, when the highest quality opportunities become available, and that's really the way that we're managing our balance sheet and it's the focus of our overall capital allocation strategy. Thank you. Our next question comes from the line of Craig Siegenthaler with Bank of America. Please proceed with your question. So, I wanted to follow-up on Alex's question and just focus more on the investment side. Sometimes it takes the sellers time to digest lower valuations or bids. So, in the meantime, are firms generally willing to do transactions at lower valuations now? And are you seeing maybe some great businesses inside of a larger financial firm or another situation where the owner may need to sell over the near term maybe something more on the distressed side? Yes. Thanks, Craig. That's a good question. So, one of the things that drives our partnerships over the longest period, the last three decades, is just demographics itself. So that -- there's only so much that firms can do around succession on their own. We think that AMG is the market leader in succession planning with independent firms. And so, demographically-driven transactions for us is an ongoing supply of new prospects in really any period. And then, to your specific question on valuations, look, valuations have come down. They've been down for several quarters now. And I think the prospect of them going back up is relatively low. So, I do think that there is a -- I guess, this may be more of an acknowledgment that valuations in the sort of growth era that came to an end with the tightening or kind of in the rear view mirror. One of the ways that we are able to come together with a new partnership in getting transactions done is to structure really for multiple outcomes, so that if there is substantial growth in a business that we give that credit to the potential partner, and simultaneously, we are protecting ourselves with structures that allow for a level of cash flow in down scenarios. So, we do think, again, we have a particular expertise in structuring for multiple outcomes, which allows us to bring our sort of unique model to the table and get transactions done. I guess, the last thing I would say, and I enjoy saying this, is that when you partner for businesses and you are not buying 100%, because as you know in all cases, we leave a substantial amount of equity in the hands of our partners, then really what you're saying is the vast majority of my growth is ahead of me and therefore the emphasis on upfront valuations are a little bit lower in our transaction. So, we don't see that as an impediment in getting new investments done in this environment. I think the key question is what are the long-term demand trends and where are we going to make those, because that ultimately is going to be the indicator of success of those new investments over time. And as I've mentioned in my prepared remarks, we do think that a trend is emerging where portfolio allocations are going to need of change as they really got wrong sided with these changing geopolitical and Fed tightening. When we think about our own affiliates and their ability to deliver differentiated returns streams, we do think that this rotation to liquid alternatives, in particular absolute return, and differentiated strategies bode well for our current affiliates, but it also reflects on what we have in the pipeline today. We are looking at firms that have -- that very much could benefit from changing allocations in this environment. So, when we zoom way out, what I would say is we are looking for secular growth trends that our affiliates and new prospects can take advantage of. We do think that the time is right for us, because we have a committed strategy to supporting independent firms throughout their life cycle. And the needs of those firms are not -- have become more acute even in this environment. So, we do think that transaction volume could go up from here. Okay. Thank you very much for taking the questions. So, just maybe migrating on to maybe a flow discussion at this point. So, Jay and Tom, you both have spoken about this sort of ongoing rotation now, sort of rates normalized, what have you. Can you talk a little bit about what's been driving the alternative flows? And if you think that liquid alternatives will accelerate, where do you think that that volume will come from? Thank you. So, thanks Bill. Let me just kind of walk through flows overall. But maybe even before I go there, just to remind everyone, flows, obviously, are a very important driver of growth in our business over time. But AMG's model is unique. And really flows are just one of the important drivers in our business. And really in 2022, if you think about the performance that we delivered, it was driven by a number of the other areas that tend to drive growth in our business, excellent performance driving performance fee earnings, really strong capital allocation and new investments driving growth, and then also significant return of capital. So, flows, obviously, are going to be an important output of our strategy, but they really are only one of the components that's important. So, you heard us discuss today, our growth strategy is really driving an evolution of our business mix more towards secular growth areas. That's the way that we think about the business. And as we continue to execute against that strategy, we fully expect to enhance the long-term organic growth and earnings growth profile of the business. So, I'll touch both on the private market side as well as the liquid alternative side, and I'm sure Jay will want to add some as well. In terms of where we stand, look first of all, January was a much more constructive start to the year overall for AMG versus the environment that we faced in 2022, and we have a lot of positive setting up for 2023 and beyond. We continue to benefit from the diversity and depths of our private markets affiliates. And they're raising assets across a number of well-positioned strategies, including credit, infrastructure and real estate. And as we said, these flows are incredibly valuable given their fee rate, their long duration and the potential to generate carried interest. And I think importantly, most of our private markets AUM is also away from traditional private equity and that's where you're seeing the most acute impact of the denominator effect on fund raising. So, we feel more insulated from that trend given the unique nature of our private markets affiliates. And then, on liquid alternative strategies, as you know, we're delivering excellent performance. We're having much more active dialogue with clients around portfolio construction and the value of uncorrelated and diversifying return sources, and that all positions us very well in terms of future flow opportunities. So, to put alternatives together, over the course of the last two years, we've seen approximately $40 billion of inflows into alternative strategies and collectively those now represent more than 40% of our overall EBITDA. Maybe just to round it out and go through the rest of the business. In U.S. equities, we're very well positioned given our general tilt toward value strategies and sustainable strategies, and our performance is excellent. 97% of our U.S. fundamental value strategies are outperforming their benchmark on the three-year period. And looking ahead, we expect these categories to be even more in focus with clients. Look, obviously, global equities, the second half of the year was difficult in 2022, as we saw pretty significant de-risking across the industry. And in a sense, you could say that what happened in global equities really is clouding some of the progress that we've been making overall in terms of the underlying flow profile of the business at AMG. That said, we remain well positioned in terms of the long-term track records that our global equity affiliates and just the quality of those businesses. And then lastly, on multi-asset and fixed income, we saw fourth quarter inflows in our wealth businesses, those have been a long-term source of stability and growth, and we're also seeing some very positive signs out of the box in fixed income early in 2023. So, overall, really led by alternatives, a sizable position -- portion of our overall business is both in flowing today as well as well positioned for the future, and we feel very confident in our ability to drive long-term organic growth. Yes, Bill, let me just editorialize a bit further on Tom's remarks. The second half of 2022, it was very much a risk-off environment and we think it masks some of the underlying trends in our business. It really hit our long-only equities part of our business. And as Tom said, in January and early February, we've seen that really abate, the long-term outflows have really slowed down on that part of our business. And clearly, the liquid alternatives and private markets have been driving our organic growth on the other side. Ultimately, or really for us, flows are really just an output of our strategy. We have high conviction that if we invest in areas of secular growth and new and existing affiliates that we will ultimately see the flows follow. And then as Tom said, really what we're trying to do is grow our cash flow and our economic earnings per share, which we did in 2022 and in 2021. And the drivers are multiple drivers, because AMG's model is unique. We can see those drivers come from affiliate performance, we can see it come from flows, we can see it come from new investments, or we can see the compounding effect of share repurchases. And in this period that I just described, we got three of those four drivers and they were pretty significant to our earnings profile. Thanks. Good morning. Wanted to follow-up on the liquid alternative book, but focus on quants. And given the success and performance improvements you've seen over the last basically two years, do you think that we're going to be talking about this business or remove the ex-quant discussion in 2023? And maybe talk about the discussions you're having with clients and how you think about gross sales for that portion of your business in kind of this year or next? Yes, that would be helpful. Thank you. Yes. Good morning, Dan. Thanks for your question. Good question. Yes. So, we have had outstanding performance in liquid alternative strategies. And I think you're right to point it out, we've been reporting kind of an ex-quant flow profile for some time. It's a slightly more nuanced situation because some of that quant with long-only global equities, and so, to my prior point, we are still seeing some risk-off in those strategies, albeit that pie -- part of the pie has gotten smaller. So, it very well could be that we kind of just go back to straight up flows in 2023 because the liquid alternative strategies of the quant side have just excellent performance. And we do think that they've been underrepresented in client allocations. So, we do think that's going to change. Now, look, it takes time for those allocations to change. And if just conversations and activity at those affiliates are an indicator, we're having increased level of searches, increased level of conversations around putting more of these strategies into portfolios. And we think those -- we think portfolios need these types of strategies. Clearly, if you were under allocated to liquid alts especially in absolute return trend, macro, multi-strat in 2022, your portfolio performed much worse than those that had a fair allocation to these strategies. So, we do see in '23 and in '24 increasing organic flows into liquid alts. And our performance is just really good, almost categorically, Systematica, AQR, Capula, Garda, Winton, they all had excellent performance in '22. Most of those firms had great performance in '21, and their one, three, five and 10-year numbers all look very competitive with either their benchmarks or even markets like the S&P. So, we do see increasing organic growth into these strategies. And not to lessen the discussion around private markets, which are also on our alternatives bucket, when you think about private markets, we have a number of sort of specialty areas within private markets, including Peppertree, which was a business that we made investment late last year in the communications infrastructure, as well as a private debt manager in Comvest and a number of other high-quality businesses in that segment, which really are still experiencing significant growth and significant fundraising. So, just generally our alternatives area, which comes with higher fees, as Tom said, in many cases, longer lockups, the chance for performance fees, we see that driving our growth going forward. And I'll maybe, Dan, just add one statistic to that just to give you a sense, and this incorporates not just sort of quant, but our overall absolute return performance fee eligible book, just to give you a sense of kind of the evolution we've seen over the last couple of years. AUM today that we have in eligible absolute return strategies that are above high watermarks has increased by more than 50% since the beginning of 2020. So, when we think about not only the performance fee earnings growth opportunity, but also the organic growth opportunity, just a more and more sizable portion of our overall book is in a position to deliver those types of characteristics over time. And you really do get that network effect where excellent performance is driving performance fee earnings, excellent performance is driving new conversations with clients and flows, and we really do think that that's a real positive for us overall. And as you know and I know you know this, Dan, is that as you get new clients, you start the new clock with performance and performance fees. And so, there is kind of a positive upward cycle that you have with the idea that above high watermark new clients, [we get] (ph) the opportunity for even more performance fee opportunity, which is what we're seeing in our business today. Hey, good morning, folks. Apologies, I'm going to give you a multi-part question, if that's okay. Just linking a few things together. So, first of all, obviously, really strong 2022 relative to the asset manager peers with positive EPS growth. So, if you can talk about maybe what's your confidence level in repeating that? You're probably going to have headwinds for the asset manager industry overall. It's going to make positive EPS challenging for the industry. Maybe just talk about sort of what your confidences in having another year of positive EPS growth? And if we think about maybe the headwinds, obviously, being on the guidance on the performance fee side being a little lower, is that mostly driven by private capital monetizations being down? And then, as you think about new investments, are you more geared towards illiquid alternatives or liquid alternatives? Yes, thanks, Brian. Actually, we might be able to wrap a lot of that into letting Tom give you some more specifics around the guidance that we gave on the call. So, I'm going to let Tom do that here in one second. Just expressing confidence, I mean, we do have a level of conservatism in the guidance that we described, even around performance fees. The way we come up with that is we look at the amount that's above high watermark, we look at the types of businesses that we have, and we took kind of the performance assumption way down. And of course, in 2022, the performance was excellent. And in 2021, it was excellent. So, candidly, the level of conservatism just in our performance fee estimate is there. In fact, over the last two years, you could argue that we've actually reduced the amount of performance that we need to generate this level that Tom has given you guidance. So, it's probably more conservative than last year or the year before. So, there's upside there. There's also upside in capital, which Tom will describe, but we can't prescribe exactly when that capital will go out and that's why we haven't sort of put it into our guidance. Those two things really are the two positive drivers. How that plays out this year as well as things like market beta will really determine our growth in 2023 over 2022, but we're still very optimistic sitting here in February that we'll be able to do that. Yes. Brian, thanks for your question. So, maybe what I'll do is I'll just walk through sort of how you would bridge our first quarter guidance through to the full year conceptually. And obviously, there are a number of assumptions that you'll want to make as you do that. But before I do that, I know in our fourth quarter numbers, there were a fair amount of moving parts, in particular, around the Baring gain as well as the gain on the EQT shares that we monetized both the mark-to-market as well as the realized gains. I did state this in my prepared remarks, but just to reiterate, none of those gains are included in our EBITDA or our economic earnings per share. We've excluded all of that. So, just to be clear, those are clean numbers, excluding the sizable gains on both Baring as well as the EQT shares. So, to address your question, if you use our first quarter adjusted EBITDA guidance range of $215 million dollars to $220 million as a starting point, and then that guidance includes $20 million to $25 million of performance fee earnings for the fourth quarter -- first quarter that really gets you to a run rate number for management fee EBITDA, which is a pretty good starting point in terms of thinking about the year based on the run rate of where the business stands today. Then, you can factor in the impact of Peppertree starting in the second quarter and contributing something in the range of 2% to EBITDA on an annualized basis. And then, of course, you'll make your own assumptions about beta and flows and that will get you to a full year management fee EBITDA estimate. And then, we gave you guidance on the performance fee earnings range for the full year of $125 million to $175 million and Jay talked about some of the general conservatism baked into that at this early stage of the year. So, you can add that to get to sort of a full year number or a range for a full year number. But importantly, as I mentioned in a previous question and as Jay mentioned as well, that number only partially reflects the full earnings power of the business, given it excludes an incremental $400 million or so of capital that we have today to deploy toward growth investments. And that excludes any incremental leverage or tapping our revolver. That's really just upside to our numbers in terms of earnings power. And if we aren't able to allocate that capital toward growth over time, you should expect us to return more of that excess capital to shareholders through repurchases. But I think regardless of how you think about that $400 million in terms of where it goes, you do want to think about the run rate earnings power of the business, depending on how and when that capital is ultimately put to work and you should factor that into the earnings power of the business over time. Yes. And I appreciated your opening statement that we do think were differentiated relative to our peers, in part because of the discretionary cash flow nature of our business that we ultimately have a strategy to invest that cash flow into growth. But if not, we have a capital allocation framework to return that to shareholders. That's what's been driving our earnings in a positive direction relative to our peers and we expect that to continue in 2023. Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Horgen for any final comments. Thank you all for joining us this morning. As you heard, AMG achieved outstanding results in 2022. And through the execution of our growth strategy and our disciplined capital allocation framework, we are confident in our ability to create significant shareholder value going forward. We look forward to speaking with you next quarter.
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Good morning, and welcome to the CONSOL Energy's Fourth Quarter and Full Fiscal Year 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded today. I would now like to turn the conference over to Nathan Tucker, Director of Finance and Investor Relations. Please go ahead, sir. Thank you and good morning everyone. Welcome to CONSOL Energy's fourth quarter and full fiscal year 2022 earnings conference call. Any forward-looking statements or comments we make about future expectations are subject to risks, certain of which we have outlined in our press release and our SEC filings and are considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. We do not undertake any obligations of updating any forward-looking statements for future events or otherwise. We will also be discussing certain non-GAAP financial measures, which are defined and reconciled to comparable GAAP financial measures in our press release and furnished to the SEC on Form 8-K, which is also posted on our Web site. Additionally, we expect to file our 10-K with the year-ended December 31, 2022, with the SEC this Friday, February 10. You can find additional information regarding the company on our Web site, www.consolenergy.com, which also includes the supplemental slide deck that was posted this morning. On the call with me today are Jimmy Brock, our Chief Executive Officer; Mitesh Thakkar, President and Chief Financial Officer; Dan Connell, our Senior Vice President of Strategy; and Bob Braithwaite, our Senior Vice President of Marketing and Sales. In his prepared remarks, Jimmy will provide a recap of our fourth quarter and full-year 2022 achievements and a detailed discussion of our operations and sales. Mitesh will then provide an update on our balance sheet management, financial performance and 2023 outlook. In his closing comments, Jimmy will lay out our key priorities for 2023. After the prepared remarks, there will be a Q&A session in which Dan and Bob will also participate. Thank you, Nate, and good morning everyone. Let me start by congratulating Mitesh on being named the new President of CONSOL Energy as part of our long-term succession planning. I have worked very closely with Mitesh since he joined us during the formation of CONSOL CO. Resources LP, and MLP, which was public in 2015. Since then, he has been an integral part of our team. And I've had the opportunity to observe him grow and take on more responsibility. In addition to his continued role as our Chief Financial Officer, he will also oversee our marketing, business development, and environmental and sustainability efforts. I have the utmost confidence in his ability to take on an expanded role in the company, and he is well-suited for the task. Furthermore, the Board has asked, and I have accepted to extend my employment term by an additional year to December 2024 to ensure our long-term succession plan. Moving on to our financial and operating performance, CONSOL Energy finished 2022 as a record year in its history as an independent public company on multiple fronts, including one of the key metrics we measure ourselves against, free cash flow generation. As a result, we've advanced some of our key strategic initiatives during the year. First, our strong free cash flow generation allowed us to meaningfully accelerate progress toward our debt reduction goal and we made debt payments of nearly $300 million in 2022. Second, our free cash flow, in conjunction with our robust contract book, bolstered our ability to initiate and enhance shareholder return program during 2022, even while we were still at work reducing our outstanding debt levels. We paid multiple dividends during 2022, and resumed share repurchases at the end of the year. Third, our strong free cash flow enhanced our ability to reinvest in our business. During the fourth quarter, we restarted the 5th longwall at the PAMC, and shipped the first train of low-vol metallurgical coal from our Itmann Mining Complex. Let's now discuss our operational performance. On the safety front, our Bailey Preparation Plant and CONSOL Marine Terminal each had zero employee-recordable incidents during the full-year of 2022. The PAMC finished the year with a total recordable incident rate of 1.72 which was approximately 63% below the national average for underground coal mines. Coal production at the Pennsylvania Mining Complex came in at 6.1 million tons in Q4 '22, an increase compared to 5.6 million tons in the prior-year period. Production improved this quarter compared to Q4 '21 due to the restart of the 5th longwall in mid December, 2022, in the absence of geological challenges which we encountered in October of 2021. From a productivity standpoint, measured as tons per employee hour, the PAMC ended the year on a strong note, and improved by 16% in Q4 '22 compared to Q3 '22, as we moved past the geological challenges we faced in the third quarter. The complex ended the year with production of 23.9 million tons. On the cost front, our PAMC average cash cost of coal sold per ton for Q4 '22 was $34.89, compared to $30.81 in Q4 '21. But this was a reduction of nearly $5.00 per ton compared to Q3 '22, when we saw increased costs due to operational and geological challenges. The delta compared to the prior-year period was due to ongoing development costs associated with the 5th longwall and continued inflationary pressures on supplies, maintenance, contract labor, and power costs at our operations. This brings our full-year 2022 average cash cost of coal sold to $34.56 per ton. The CONSOL Marine Terminal had a throughput volume of 3.6 million tons during Q4 '22. Terminal revenues for the quarter came in at $20.9 million, with CMT operating cash cost of $6.4 million. For 2022, the terminal had a very strong operational performance, finishing the year with 13.7 million throughput tons. Terminal revenue for 2022 came in at $78.9 million, which was by far the highest level in CONSOL Marine Terminal history. CMT finished the year with adjusted EBITDA of $52.3 million, marking its first year above $50 million and the fifth consecutive year above $40 million. Now, let's discuss our Itmann project. After accomplishing several milestones in the second-half of 2022, the ramp up to full run rate production at Itmann has been delayed due to multiple factors including supply chain bottlenecks, equipment delivery delays, geological inconsistencies, and staffing challenges. We expect these issues to be transitory, and we have recently made several changes that will help us achieve our goals. In the immediate term, the mine is focusing on fully staffing and optimizing two CM super sections before focusing on the third CM super section. Moving further into 2023, we expect the ramp up to full run rate production to occur around midyear. The Itmann preparation plant was commissioned in the third quarter of 2022, having been purchased, disassembled, relocated and reconstruction on our site in just over a year's time. We shipped nine trains of coal from the plant in Q4 '22, and sold slightly more than 200,000 tons of Itmann and third-party coal, in aggregate, during 2022. The Itmann product has been successfully marketed to both domestic and export customers. As we ramp up production and achieve consistency from our operation, our focus will shift to securing new business with strategic partners. On the marketing front, the demand for our PAMC product remained robust in the fourth quarter of 2022. We sold 6.2 million tons of PAMC coal at an average realized coal revenue per ton sold of $75.92 in Q4 of '22, compared to 5.6 million tons at $51.27 in the year-ago period. The significant per-ton increase was driven by the ongoing improvement in the coal markets over the past year due to persistent coal supply shortages leading to increased commodity pricing. Henry Hub natural gas spot prices averaged $5.55 per million BTU in Q4 '22, a 17% increase compared to the prior-year period. PJM West day-ahead power prices finished the quarter at $68.73 per megawatt hour versus $54.39 in Q4 of '21. Despite these quarter-over-quarter improvements, we have seen significant volatility in the energy markets beginning in late-2022 and continuing till the start of 2023. Natural gas spot prices were north of $6.00 per million BTU at the start of December, but retreated more than 40% by the end of the month. A very similar trend played out in the international API2 market which retreated almost 30% throughout December of 2022. These markers each further declined by 20% and 29%, respectively, through the month of January 2023 as warmer-than-normal weather has gripped much of the U.S. and Europe, leading to increased gas storage levels and coal inventories. Fundamentally, we believe that the supply of high-Btu coals is still constrained, and the demand for our product remains strong for the foreseeable future. In fact, the International Energy Agency recently estimated that annual global coal demand eclipsed the 8 billion metric ton mark for the first time in 2022, and expects demand to remain around this level through 2025. In the shorter-term, the majority of our sales books for 2023 is committed, and we have a very solid contracted position for 2024. This gives us the ability to be patient as we work to fill out our sales books and maximize value for 2024, and beyond. Despite some of the recent volatility, our sales team opportunistically increased our forward sell position by more than 8 million tons through 2025. We now have 23.9 million tons contracted for 2023, and 12.5 million tons contracted for 2024. Thank you, Jimmy, and good morning everyone. First, let me provide an update on our balance sheet management and capital allocation progress before discussing our financial results and 2023 outlook. We continued to make considerable progress on our stated financial priorities in the quarter. During 4Q '22, we generated $116 million of free cash flow, 70% of which was deployed towards continuing to reduce our gross debt levels. As such, we made total debt repayments of $292 million in 2022, and our gross debt level at year-end was $380 million. In fact, since CEIX went public, we have reduced our net debt by 86% or $647 million which translates to more than $18 per share of equity value creation based on our current shares outstanding. Since yearend, we reduced our gross debt by an additional $50 million by making discretionary payments in January 2023 of $25 million each towards to our Term Loan B and Second Lien Notes that were not included in our fourth quarter results. Furthermore, at the beginning of February we submitted an additional redemption notice for $25 million of our Second Lien Notes which will be redeemed during 1Q '23. These three pay downs worth an aggregate of $75 million will bring our gross debt level to approximately $3 million. We remain committed to the ongoing strengthening of our balance sheet. And now expect to fully retire our Term Loan B and Second Lien Notes this year. During 4Q '22, we slightly increased our unrestricted cash balance finishing the year with $273 million which led to a significant liquidity position of $572 million. On the shareholder return front, we are pleased to announce this morning that the Board of Directors elected to issue a dividend of $1.10 per share which marks our third dividend since announcing our enhanced shareholder return program in the third consecutive quarter increasing the per share amount. This payment will total roughly $39 million or approximately 34% of our 4Q '22 free cash flow and will be made on February 28th to all shareholders of record as of February 17th. During the fourth quarter, we also restarted our share repurchase program after a hiatus of approximately three years as we worked to improve our balance sheet and infuse capital in organic growth projects. Now with most of the capital spending complete on our Itmann project, the fifth longwall back up and running at the PAMC, significant reduction in our outstanding debt and a strong contracted position, the management team and Board of Directors believe that share buybacks provide another attractive avenue to create additional value for our shareholders. So far, we have opportunistically repurchased 124,000 shares of our common stock in December for $8 million at a weighted average price of $64.18 per share. We are also happy to announce this morning an increase to our enhanced shareholder return program which will become effective immediately in 1Q '23. We now plan to return a range of approximately 35% to 50% of quarterly free cash flows in the form of share repurchase and/or dividend which are subject to the discretion of the Board of Directors. As mentioned previously, we also expect to continue to allocate a significant portion of free cash flow towards additional debt reduction with the goal of retiring our Term Loan B and Second Lien Notes this year. Once this goal is achieved, we will consider further increasing the percentage of free cash flow allocated toward shareholder returns. Now, let me recap our fourth quarter and full-year 2022 financial results. This morning, we reported a strong fourth quarter '22 financial performance with net income of $193 million or $5.39 per diluted share, by far our highest quarterly earnings per share levels since becoming an independent public company in 2017. Additionally, we finished 4Q '22 with adjusted EBITDA of $240 million and generated $116 million of free cash flow. For the full-year 2022, we reported net income of $467 million or $13.7 per diluted share. Adjusted EBITDA of $807 million and incurred CapEx of $172 million. CEIX finished the year with free cash flow of $501 million marking our highest annual free cash flow level in the last 5 years and the fifth consecutive year of positive free cash flow generation since becoming an independent public company. We finished 2022 with a net leverage ratio near zero. Now let me provide our outlook for 2023, on the guidance front for the PAMC, we are expecting our 2023 sales volume to be improved by approximately 8% at the midpoint compared to our 2022 level due to the availability of our fifth longwall. As such, we are providing our 2023 coal PAMC sales volume range of 25 million to 27 million tons. The upper boundary reflects our past ability to produce at 27 plus million ton pace with five operational longwalls at the complex, which includes mining at a high efficiency factor, effective coordination with our transportation partner, and potentially strong spot market demand. The lower boundary considers the potential for unforeseen supply chain or operational challenges. The lower end also reflects our ability to run to the market if there is unexpected weakness due to weather or unforeseen events. The good news is that all our longwall mines are currently running well, and we are 90 plus percent contracted at the midpoint of our guidance range. On the pricing front, we expect our average realized core revenue per ton to be in the $78 to $84 range relative to 2022 levels, this range reflect our strong contracted position and allows for upward or downward movement in API to PJM invest power prices, as well as the potential to further optimize our sales portfolio. Our guidance is based on CAL 23 PJMS Power Price expectation of $49.58 per megawatt hour at the midpoint, and the sensitivity for every dollar per megawatt chain in PJMS power prices is approximately $0.10 per ton on our entire portfolio. For comparison, the average PJMS Power Price in 2022 was approximately $73 per megawatt hour. Additionally, the midpoint of our guidance zooms and API to benchmark price of $165 per metric ton. We expect our 2023 PMC average cash cost of coal sold to be $34 to $36 per ton. We are expecting our cash cost to be similar to 2022 on a per ton basis at the midpoint despite incremental volume given the potential for ongoing inflationary pressures on certain goods and services, we began to see some relief in cost pressures in the fourth quarter. And our supply chain and operations team constantly focused on identifying ways to minimize our cash front. The bottom end of our cost guidance captures the potential for deflation in key commodities, including power prices, as well as fixed cost leverage at the higher end of the volume guidance. Conversely the top end accounts for reduced tonnage or an improved commodity market which would be a net benefit to our cash margins but a headwind to our power and supply costs. At the Itmann Complex for the time being, we are limiting our guidance until we get the mine fully staffed and ramped up to full run rate production. As such, we are currently providing a 2023 production guidance range of 400,000 to 600,000 tons from our Itmann mine which is dependent on the timing of the ramp up. Once the Itmann mine achieves these milestones, we intend to provide more detailed Itmann Complex guidance similar to what we provide for the Pennsylvania Mining Complex. Lastly, on the capital expenditure front, we are providing a range of $160 million to $185 million for 2023. This range reflects some 2022 capital spending moving into 2023. Keep in mind that we started 2022 with a top end CapEx expectation of nearly $200 million, but only spent $172 million in the year. As we highlighted throughout last year, supply chain bottlenecks have delayed equipment deliveries, and extended lead times, which has pushed toward unplanned expenditures from 2022 into 2023. Throughout last year, and during our budget planning cycle, we have been very diligent in adjusting our rebuild and Lifecycle Management timing to better align with these longer lead times. We also expect to further our greenhouse gas emissions reductions efforts, and have approximately $10 million in the budget for this effort in 2023. Thank you, Mitesh. As we embark on 2023, we have a few key areas of focus that we believe will further strengthen our company. First, we are laser-focused on wrapping up the Itmann mine to full run rate production by mid-year 2023. The Itmann Complex has now moved from the project team to our operations team. We have our key operations and management personnel dedicated to supporting the Itmann team and their staffing and ramp-up efforts. We are very thankful for the hard work and persistence from our Itmann team members. Now that they have switched to operations mode, we expect them to diligently work through the recent challenges and delays to ultimately deliver operational consistency. Second, our sales team remains opportunistic in its approach and remains focused on layering new business for 2023 and beyond, as well as continuing to optimize our contract book. We believe that one of CONSOL's strategic advantages is our ability to lock in contract duration, which allows us to generate positive free cash flow in all parts of the cycle and provides us the ability to benefit from strong markets for years to come. Third, reducing the debt on our balance sheet remains a major focus. We expect to hit our initial goal of $300 million gross debt level in Q1 of '23 and then continued towards fully retiring our Term Loan B and Second Lien Notes. We anticipate achieving these goals around mid 2023 as we simultaneously enhance shareholder returns including dividends and share buybacks. This continued debt reduction sets the company up for long-term success and facilitates additional avenues for growth and diversification. Finally, we are committed to increasing our free cash flow allocation to shareholder returns as our debt levels decline. As promised, we increased our shareholder return percentage due to our expectations of achieving our $300 million gross debt goal this quarter. Once our Term Loan B and Second Lien Notes are retired, we expect to consider a further increase to our shareholder return allocation. We are very pleased with our results and execution in 2022, which was a record year for us in a lot of ways. And we remain even more excited about the future. I want to personally thank all our employees for their dedication and hard work which drove these exceptional results safety and compliantly. I am extremely proud of this team and CONSOL Energy. Thank you, Jimmy. We will now move to the Q&A session of our call. At this time, I'd like to ask our operator to please provide the instructions to our callers. Jimmy, I want to turn to the -- and Mitesh, I want to turn to the balance sheet for my first question. It sounds to me like you're looking at $190 million of gross debt as a kind of near-term target, a little bit more conservative from the $300 million gross debt target previously. What caused that, and is that the right interpretation, $190 million, or maybe did I miss anything? Thank you very much. Thank you, Lucas. I think from a gross debt perspective, the way we think about it is we originally had a target of $300 million. We have today said we're going to retire all our Term Loan B and Second Lien. So, if you look at the announcement that we made this morning about additional debt reduction for the month of January, we are sitting with about $39 million on Term Loan B, and $74 million on the Second Lien. So, combined, both of those is just over $100 million. I think when those two are retired; you're going to be just north of $200 million, so you are in the ballpark. And really what makes up those just over $200 million is about $103 million of our Baltimore bonds and $75 million of our PEDFA bonds, those -- both of them are tax-exempt securities, as you know, and then the equipment leases, which at the end of the quarter, our forecast is going to be around $34 million. That's helpful, thank you. And the thought here is just to be a little bit more conservative given kind of broader -- capital market conditions? Yes. So, the Term Loan B and Second Lien, both have near-term maturities, as you know. When I say near-term, Second Lien has a little bit further than the Term Loan B. Term Loan B is maturing next year. And the idea is we want to get away from more interest rate-sensitive debt, but also right now both of these securities, at the end of Q1, are going to be under $50 million. So, they're not what you would call like necessarily appropriately sized. I mean, this will allow us to create some bandwidth if in future, if we want to do something and raise some debt, if capital market conditions warrant we can do just one ticket or something a little bit larger, if at all we want do it, but it's mostly cleanup stuff. Okay, thank you for that. And then, turning to the commercial side, could you share some details as to the price of the tons that were sold incrementally during the quarter for both 2023 and 2024? And then specifically for 2024, you have 12-plus million tons contracted to date. Roughly what's the split between domestic and export? And what would be the price on those 2024 commitments? Thank you very much. Sure, Lucas, I'll take that. We've increased our [sold] [Ph] position as you know, this morning, by 2.1 million tons for 2023. Last quarter, if you recall, we said our pricing was in the upper 70s based on the power forwards of that date. If you go back and look, power was at -- around $68.00, API2 prices were around $200. So, fast-forward to today, we said our midpoint in the guidance is based on $49.58 and $165 for API2. That basically would imply that our portfolio dropped about $5.00 quarter-on-quarter just based on power and API2. However, I can tell you that our pricing of the 23.9 million tons is actually improved. So, when you take a look at that and you model that, you'll notice that the pricing that we sold -- that the tons that we sold incrementally, the 2.1 million tons is certainly north of $100 per ton. Then on your second question, on the 2024 volume of 12.5 million tons, about 2.5 million tons are linked to power, 3.2 million tons are currently sold into the export market, and 6.6 million tons are domestic and fixed price. We're not providing guidance today for 2024. However, I would tell you that it's sitting between our 2022 and 2023 pricing right now. Bob, could I actually get a similar breakdown for 2023 tons that you just gave Lucas for '24? In other words, how many tons are fixed versus how many tons are open to fluctuations in index pricing, whether that's PJM West or API2? Sure. So, we have -- again, we have 2.5 million tons in 2023 that's linked to power, we have 8.2 million tons right now slotted for export -- or contracted, I should say, for export. Of that 8.2 million tons, we have about 5 million tons that are linked to API2 prices, and then of that 5 million tons, 3 million tons of those have ceiling and floor prices incorporated in the contracts. And then, the balance or 13.2 million tons is domestic and fixed price. Very helpful, Bob, appreciate that. And I guess sticking with API2 for a second, what -- with the pullback we've seen, what did netbacks look like at today's prices? Is that -- are still open for you guys? Would also be helpful to get any kind of sensitivity there? I know you said you're assuming a $165 price in your pricing guidance for '23. And then, you also mentioned that your long-term export contract with the collars for the year. Any color on where the netbacks are relative to the floor and ceiling on those tons? Thanks. Sure. I think we mentioned in the past that the coal that we sell into Europe when you look at an API2 price use somewhere around 65% to 70% of that price, and that gets you back to an [FOB] [Ph] mine price, and that, again, takes into account discounts, quality adjustments, along with freight. So, when you're looking at $140 API2 price, you're talking somewhere in that $90-range back to the mine. And again, that's really specific to coal that we're selling into Europe. As far as sensitivity is concerned, I will tell you it's not linear because we do have different floors and ceilings across several contracts. But a good estimate is for every dollar change in API2 prices; our overall portfolio change is approximately $0.10, so it has a very similar sensitivity to our power price as well. But again, that depends on loading months of vessels. Most of our contracts are priced based on the monthly average of the API2 price of month of it loading. But as we do with our netback sensitivity, we'll continue to refine this as well every quarter. That's very helpful, Bob, appreciate that. And then, the domestic side, that we've also seen [indiscernible] weaken as well given the mild start to the winter season. How are utilities from a stockpile perspective at this point, if you guys can see? Is there any possibility of deferrals as we move forward with the year or is it still a little early to think about that? Yes, I think it's early, Nate. There certainly has been an increase in natural gas production since the end of last year. But I really think the biggest issue here is really demand, right? I don't believe that there is that much of a supply response from the coal side right now. And I personally believe that as coal supply remains tight and I expect that to continue as we head into summer. Right now, inventories across domestic customers are at comfortable levels. However, that can change very quickly as we start seeing demand out of the U.S. and Europe for that matter. And I also tell you that many of our customers were sitting at less than 20 days of inventory heading into winter. As mentioned this past month, certainly afforded many to continue to build what I would call healthy levels. However, we do have several customers that are still telling us that they likely will have some spot needs to the back-half of the year, so, very positive there. And to Bobby's point, most of these coal inventory builds that we have seen, they are certainly not due to oversupply. They are related more to demand. And, we expect that second-half year we can't do anything with the weather unpredictive, but if that changes, we have a difficult summer up, we have had those inventory levels could become less than normal pretty quickly. Appreciate that, guys. Any comments or thoughts on coal to gas switching that's occurring today, you know, net gas around $2.50 or so? I mean we are definitely seeing gas dispatch little bit more now than it has in the past just based on this $2.50 range and where coal prices are. But, again I would tell you that as soon as demand picks up, I think you are going to see more coal units come online. Okay. And then, just one final question if I may, any thoughts on cadence of shipments or even pricing as we move through the next four quarters, I think one of your peers noted that it was potentially sold out for the first-half. Expected pricing to improve in the second-half as we see hopefully the expectation for Europe will be back up in the market shore up supplies for the next winter. I think you ask [indiscernible] the question. We're not too concerned about the first-half of the year. We are pretty much committed and sold to that. Back-half is where we have some open comps. And Bobby can go into more detail there. But, we still feel really good about our ability to move coal into international markets and demand picking up second-half of the year. Yes. Again, I think Europe there is a potential opportunity there for the second-half of the year. Right now, the gas that they have in storage today is Russian gas. And once that depletes, they could be relying fully on LNG. And then, I also I think is important message is that our fifth longwall Enlow Fork is our low sulfur longwall. We have been talking about it. It's the best quality. It's certainly opening up new markets for us. And also, it gives us the ability to ship more into the crossover market. And based on where [highwall B] [Ph] prices are today, that's the best market out there that's yielding triple digits back to the mine. So, we will continue to focus on those opportunities. And obviously, sell our coal to places that yield the best realization back to us. Hi, good morning. Congrats on the quarter. I am just trying to get some more color on the shareholder returns going forward. I am really happy to see that you guys have started buybacks this quarter. Any idea of the buybacks or the percentage of shareholder returns going forward? This quarter shareholder returns are much more skewed towards dividend. And I am just wondering if that can be expected going forward, or whether dividend and buybacks will be more balanced? Well, going forward, as we said we had that goal of $300 million of gross debt. And we saw this happening in Q1 is why we started our share repurchases. In Q4, we purchased 124,000 shares or about $8 million. And we expect to raise the return to shareholders 35% to 50% as we continue to get rid of debt. But if you look at it, we actually paid down $647 million in debt since 2018. And sometimes, we lose sight of that. But, that's created equity value of $18 a share if you look at our 35 million shares outstanding. So, what we will do is we are lucky enough to have great free cash flow generation. And if things hold, I think what you will see us do is steadily increase that number. And we will able to do all three. Or, if one provides a better return back to the shareholders, we can certainly pivot to that way. But currently, our plan is to stick with what Mitesh mentioned in his remarks, we want to retire the term loan B as well as the second lien and continue to pay back return to shareholders in forms of dividend or share backs. And we really haven't thought too far about which way we lean on -- do we go heavier on dividends? Or do we do all share buybacks? That will be a Board decision, and we'll have a discussion with them when the time comes. The good news is we believe that we're going to generate enough free cash flow to do all those things pretty quickly here in 2023. Thank you very much for taking my follow-up question. I just wanted to try to get a little bit more color on the domestic market. How much buying of coal is going on today, are utilities active today? And where would you place the domestic market for 2023 and 2024? Thank you very much. Well, Lucas, of the 8.3 million tons that we contracted for through 2025, 5 million was to a domestic customer under a term deal through 2025. So, again, I guess this just shows the fact that people are out there buying under term contracts, they are concerned about supply going forward. We're also in discussions with another domestic customer of our term deal as well. And then, when you look at the export side, I can't say much more, but we are in discussions with several end users in both Europe and Asia on term deals, and I'm hopeful by our next earnings call, we'll have a little bit more to report there. The pricing is kind of in line with where markets are at the time we conclude those deals. I mean we look at power and gas every time at that present time, we're concluding. And basically coming up with what we feel is the right netback and I think the customers are doing the same. So, that continues to fluctuate at $2.50 gas price, obviously, the mine prices aren't as attractive as they were when they were $6, but there's still certainly profits being made pretty much all cycles through the $2.50 through $7 gas price. I really appreciate that color, Bob. And you touched on it there, obviously, like domestic energy markets changed fairly dramatically since the beginning of December, more than a 50% drop. How much have attitudes changed? Is it too early to tell? Or is this having a real impact when you sit down with your utility customers? I'd say it's too early to tell. I think you're going to see a lot of utilities, pretty much take a seat on the sidelines for the next couple of months, kind of see how this market evolves. As Jimmy mentioned, inventory levels are, I would say, comfortable, but these can change very, very quickly. And we saw that happen last year. And once we get into summer, if it is a game changer, I think you're going to see a lot of utilities come to the market to try to secure their supply for the long-term. So, I'd say, give it two, three, four months. And by the time we have our next earnings call, we probably -- we will have, I should say more color and be able to give some more commentary on that. And Lucas, I'll add that, I think we have significant flexibility, as you know of moving into domestic and export market depending on where the best arbitrage is, right? And this is clearly visible in terms of the amount of exports that we are going to do this year versus last year despite having higher production numbers, right? So I think we are going to be market-driven. And as markets change, we'll just adapt to it. And our terminal at automotive allows us that flexibility. Very helpful. Thank you. Along this vein, do you have a target or a rough target for 2024 split between domestic and exports? Lucas, I would suggest to you, we could see exports climb to 14 million tons or thereabouts in 2024. I mean, obviously, we'll continue to watch the market and see where the best arbitrage is. But I think 14 million tons is a possibility for 2024. Thank you. And then, back to the domestic market. Have you heard in the industry or have you experienced any requests from utilities to push out coal deliveries? Nothing as of late, I still think it's too early. I mean we're one month in. I'm not getting overly excited. Yes, January didn't come in as expected. But again, look what happened last year, really the demand started hitting, the Russia-Ukraine war was at the end of February, we started seeing an uptick in the export business. And then, domestically, they were -- many utilities were burning gas because they didn't have coal in the summer months. So, that could potentially repeat itself, and we're keeping a close eye on it. But the good news for us is we're well contracted throughout the entire first-half of this year. Most of our open position or almost all of it's in the second-half. And if that does come to fruition, we might move more into the domestic market. We'll just continue to watch and see what presents the best opportunity for us. Thanks, Joe. On behalf of CONSOL Energy, I'd like to thank everybody for their time and interest this morning, and we look forward to speaking with you on our next earnings call. Thank you.
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EarningCall_616
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Good day and welcome to the Star Group Fiscal 2023 First Quarter Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. Thank you and good morning. With me on the call today are Jeff Woosnam, President and Chief Executive Officer; and Rich Ambury, Chief Financial Officer. I would now like to provide a brief Safe Harbor Statement. This conference call may include forward-looking statements that represent the company's expectations and beliefs concerning future events that involve risks and uncertainties that may cause the company's actual performance to be materially different from the performance indicated or implied by such statements. All statements other than statements of historical facts included in this conference call are forward-looking statements. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the company's expectations are disclosed in this conference call, the company's Annual Report on Form 10-K for the fiscal year ended September 30, 2022, and the company's other filings with the SEC. All subsequent written and oral forward-looking statements attributable to the company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements. Unless otherwise required by law, 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, after the date of this conference call. Thanks, Chris, and good morning everyone. The first quarter of fiscal 2023 was somewhat unusual in that during one month October. Temperatures were 130% colder than the prior year period. However, October is typically a transitional month for our customers with a lower overall impact on volume sold and it also falls outside of our weather hedge contract. The rest of the quarter's weather was only slightly colder than fiscal 2022 resulted in a $0.4 million charge against our weather hedge program. As a reminder, our weather hedge runs through March 31st, so this charge could be reversed depending on second quarter results. We were currently experiencing warmer than normal temperatures throughout our operating footprint. We were well prepared for the start of the heating season and I'm pleased with our overall performance, which included delivering adjusted EBITDA that was $4.6 million higher than the same period a year ago, as well as an encouraging net gain in accounts. Specifically, we achieved net account growth of 1.7% or a total of 7,000 customers representing our best such results in the years. The ongoing volatility in product costs, some isolated concerns over supply availability and the cool temperatures in October created a great deal of new account activity during the quarter. While largely temporary in nature, we were pleased to be in a position to take advantage of this increased market activity. And we believe that our ongoing efforts in improving the customer experience combined with the reputation of our brands as being among the most reliable and trusted within the markets we serve also contributed to the strong net gain performance. A recap of our results would not be complete without mentioning how grateful I am to our talented staff, who have not only supported but taken true ownership in effectively executing our strategy of differentiating Star from the competition through outstanding customer service. This team has remained completely committed to providing the absolute best service possible to our customers, and I could not be more proud of them. During the period, we also acquired two heating oil dealers that added roughly 1.5 million gallons of oil and other petroleum products annually to our company. We continue to evaluate a number of opportunities that support our strategic growth plan. While it's too early to say how fiscal 2023 will play out, we are managing through the milder temperatures encountered in the month of January with a focus on expense control, operational efficiency and solid margin management, and we believe we're well positioned to address whatever challenges or opportunities might present themselves over the remainder of the heating season. Thanks, Jeff, and good morning everyone. For the quarter our home heating oil and propane volume increased by 2 million gallons or 2% to 89 million gallons as the additional volume provided from acquisitions and the impact of colder temperatures more than offset net customer attrition and other factors. Temperatures for the fiscal 2023 first quarter were 15% colder than last year, but still 6.6% warmer than normal. Our product gross profit did rise by $14 million, or 10%, to $151 million reflecting an increase in per gallon margins in the higher home heating oil and propane volume. Delivery, branch and G&A expenses increased by $9 million, or 10%, to $105 million compared to $96 million last year. Higher product and delivery costs drove an increase in bad debt expense, credit card processing fees and vehicle fuels totaling $3.4 million. As of December 31, 2022, we also recorded an expense of $400,000 under our weather hedge reflecting the colder weather versus a benefit of $2.2 million recorded during the prior year period, representing an increase in operating cost of $2.6 million. All other costs rose by $3 million, or approximately 3%. During the first quarter of fiscal 2023, we recorded $17.6 million non-cash charge for the change in the fair value of our derivative instruments. By comparison, in the first quarter of fiscal 2022, we recorded $13.4 million charge. Net income decreased by $1 million to $13.5 million, largely due to the after-tax impact of the unfavorable non-cash change in the fair value of derivative instruments of $4 million and an increase in net interest expense of $2 million, partially offset by higher adjusted EBITDA of $4.6 million. Adjusted EBITDA rose by $4.6 million to $49 million reflecting the higher home heating oil and propane volume, and an increase in per gallon margins more than offsetting higher operating costs. Thanks, Rich. At this time, we're pleased to address any questions you may have. Chuck, please open the phone lines for questions. Yes, sir. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Tim Mullen with Laurelton Management. Please go ahead. Hi, thanks for taking my questions. I wanted to ask about both the unit repurchases and the customer gains. First on the unit repurchase, it was clear you guys slowed down the pace of repurchases in December as the stock price appreciated given the addition to delirium index. How, if at all, has that inclusion impacted your thinking about future repurchases? And then second on the customer gains, it sounds like given there are a function of kind of this market conditions and physical supply and then your comment earlier in the call about them being temporary. Can you comment on either any reversal to that trend that you've seen since I guess really as October and any sense for kind of how durable and long lasting those gains might be? Thank you. I'll take the first question on the unit repurchase. We still have our unit repurchase program. Again, it's an automatic program with the â with JPMorgan runs that for us. So we're not involved in that on the day-to-day basis and we got a certain target price that JPMorgan has, that's the buy in units. And we'll have to evaluate whether to change that price or go up or go down depending on the acquisition opportunities that we have versus buying in units. Yes, on the new account side, clearly our strongest month was October, although we had solid results throughout the quarter. We've seen less market activity in January. There's no question of that â about that. Some of that is, is the fact that at this time of year, typically many prospects potential customers have already selected a supplier. But I think there's also a combination of play with the weather. The temperatures in across our footprint are down approximately 30% in January, so we definitely saw less activity in the marketplace. Very difficult to see what that means for the rest of the year, but that â that's January. Okay. And in terms of the gains, are most of those folks that sign up for contracts that last say a year or are those really just temporary, they need the physical supply, you have it and they ask you to come deliver? It's a combination of both. So there are some customers that sign up on a variable price and then we've got customers that sign up on a protected price that â that agreement is typically a year in length if no longer. [Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Jeff Woosnam for any closing remarks. Please go ahead. Well, thank you for taking the time to join us today and your ongoing interest in Star Group. We look forward to sharing our 2023 fiscal second quarter results in April. Take care everybody.
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EarningCall_617
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And now at this time, for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please go ahead. Thank you. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Before turning the call over to Tim, I would like to remind everyone that the December quarter spanned 14 weeks, while the March quarter, as usual, has 13 weeks. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. Today, we're reporting revenue of $117.2 billion for the December quarter. We set all-time revenue records in a number of markets, including Canada, Indonesia, Mexico, Spain, Turkey and Vietnam, along with quarterly records in Brazil and India. As a result of a challenging environment, our revenue was down 5% year-over-year. But I'm proud of the way we have navigated circumstances, seen and unforeseen, over the past several years, and I remain incredibly confident in our team and our mission and in the work we do every day. Let me discuss the 3 factors that impacted our revenue performance during the quarter. The first was foreign exchange headwinds, which had a nearly 800 basis point impact. On a constant currency basis, we grew year-over-year and would have grown in the vast majority of the markets we track. The second factor, which we described in a November 6 update was COVID-19-related challenges, which significantly impacted the supply of iPhone 14 Pro and iPhone 14 Pro Max and lasted through most of December. Because of these constraints, we had significantly less iPhone 14 Pro and iPhone 14 Pro Max supply than we planned, causing ship times to extend far beyond what we had anticipated. As we always have every step of the way throughout the pandemic, we continued to prioritize people and worked with our suppliers to ensure the health and safety of every worker. Production is now back where we want it to be. The third factor was a challenging macroeconomic environment as the world continues to face unprecedented circumstances, from inflation to war in Eastern Europe, to the enduring impacts of the pandemic. And we know that Apple is not immune to it. But whatever conditions we face, our approach is always the same. We are thoughtful and deliberate. We manage for the long term. We adapt quickly to circumstances outside our control while delivering with excellence in the things we can. We invest in innovation, in people and in the positive difference we can make in the world. And we do it all to provide our customers with technology that will enrich their lives and help unlock their full creative potential. It's a wonderful thing to be a part of, and it's so rewarding for all of us at Apple when we hear how much our customers are loving what we create. Let me talk now about what we saw across our product categories. Starting with iPhone. Revenue came in at $65.8 billion for the quarter, down 8% year-over-year. However, on a constant currency basis, iPhone revenue was roughly flat. Our customers continue to rave about the astounding camera capabilities and unprecedented battery life and the groundbreaking suite of health and safety features. The iPhone 14 lineup pushes the limits of what users can do with a smartphone. During the quarter, Mac revenue came in at $7.7 billion, which was in line with what we had expected. We had a difficult compare because this time last year, we had the extremely successful launch of the redesigned M1 MacBook Pros. We also faced a challenging macroeconomic environment and foreign exchange headwinds. We remain confident in and focused on the long-term opportunity for Mac. Just last month, we introduced new MacBook Pro models powered by our latest developments in Apple silicon, M2 Pro and M2 Max. These chips enable unprecedented performance and do so with less energy, which is not only good for the environment but gives the newest MacBook Pro the longest battery life ever in a Mac. We also introduced the M2-powered Mac mini, which will supercharge productivity for users of all kinds and leave them stunned by just how powerful a Mac mini can be. During the quarter, iPad revenue grew 30% to a total of $9.4 billion. The very strong growth was due in part to a favorable compare to the December quarter a year ago when we experienced significant supply constraints. Customers continue to praise our new lineup for its versatility, whether it's the new iPad Pro now powered by the M2 or the newly designed iPad 10th Generation with its stunning liquid retina display and beautiful colors. Revenue for Wearables, Home and Accessories was $13.5 billion, which was down 8% year-over-year driven by foreign exchange headwinds and a challenging macroeconomic environment. We remain excited about the long-term opportunity in the category. As an example, a few weeks ago, we announced the next-generation HomePod, which is an indispensable addition to the smart home. This powerful smart speaker relies on advanced computational audio to produce an incredible listening experience. We're also helping users make their homes safer with sound recognition. This feature, arriving later this spring, allows HomePod to send a notification directly to a user's iPhone if a smoke or carbon monoxide alarm sound is identified. We continue to hear wide praise for Apple Watch Series 8 and Apple Watch Ultra, which has set a new standard for what's possible with a wearable. From a whole host of health and safety features to incredible new capabilities for extreme athletes, there is something for everyone in these amazing products. Customers are excited about some phenomenal new features we've made available across many of our products as well. One of the highlights is emergency SOS via satellite, which launched for iPhone 14 customers in the U.S. and Canada in November and for customers in France, Germany, Ireland and the U.K. in December. This is a feature we hope our users will never need, but it is incredibly heartening to get e-mails from people describing the life-saving impact our new safety features have had on them. We're always looking for new ways to empower people to create and collaborate. In December, we released Freeform, a brand-new app that lets users take their ideas wherever they want, anywhere they are, all while collaborating in real time. Freeform has already received praise from reviewers for its flexibility and simplicity as it works seamlessly across iPhone, iPad and Mac. Today, we are very excited to announce that we've achieved a truly incredible milestone. Thanks to our deep commitment to innovation, incredible customer loyalty and satisfaction and a large number of switchers, we now have more than 2 billion active devices as part of our growing installed base, double what it was just 7 years ago. This is an incredible testament to our products and services and the strength of our ecosystem. We set an all-time revenue record of $20.8 billion in services, which was better than what we had expected. We achieved double-digit revenue growth from App Store subscriptions and set all-time revenue records across a number of categories, including cloud and payment services. All told, Apple now has more than 935 million paid subscriptions. Apple has also just begun a historic 10-year partnership with Major League Soccer. Just yesterday, we launched MLS Season Pass, which will give fans in more than 100 countries access to every live MLS regular season game as well as the playoffs and MLS Cup, all with no blackouts. And while we're providing more content to sports fans than ever before, Apple TV+ continues to showcase powerful characters and moving storytelling. We were thrilled to celebrate the holidays alongside our Apple TV+ subscribers with the hit movie Spirited. And we're delighted to see how much people are enjoying new and returning series like Shrinking, Slow Horses and Truth Be Told. And we have some great upcoming movies in Sharper and Tetris, along with Emmy Award winner Ted Lasso returning this spring. During the quarter, we made some great updates to Fitness+ as well, expanding our catalog of more than 3,500 workouts and meditations to include a new kickboxing category and a new sleep theme for meditations. Our latest artist spotlight series features the music of the incomparable Beyonce, and we're excited to take a stroll with guests appearing on our fifth season of Time to Walk. And we continue to build on our decades-long commitment to helping small businesses thrive when we announced Apple Business Connect. This new tool gives business owners even more control over how billions of people see and engage with their products and services every day. Businesses of all sizes can now customize key information for users across Apple Maps, Messages, Wallet, Siri and other apps. Meanwhile, in retail, we celebrated 25 years of the Apple online store and also opened Apple Pacific Centre in Vancouver and Apple American Dream in New Jersey. And I'm grateful to all the teams who helped our customers throughout the busy holiday season. At Apple, we spend a lot of time focused on creating an unparalleled experience for our customers and every product and service that we offer. We're also just as dedicated to leading with our values in everything we do. As part of that work, we strengthened our deep commitment to privacy and security, giving users 3 new tools to protect their most sensitive data: iMessage contact key verification, security keys for Apple ID and advanced data protection for iCloud. At Apple, we feel a deep sense of responsibility to leave the world better than we found it. We're also a year closer to 2030, and we were ever focused on the environmental commitments we set out for the end of the decade. As an example, the latest Mac mini and MacBook Pro models all use 100% recycled aluminum in the enclosure and recycled rare earth elements in all magnets. And in a first for HomePod, we're using 100% recycled gold in the plating of multiple printed circuit boards. In honor of Black History Month, we released the Black Unity collection, including the Special Edition Apple Watch Black Unity Sport Loop, a new matching watch face and iPhone wallpaper. Through our racial, equity and justice initiative, we're expanding our support of 5 organizations focused on lifting up communities of color through technology. And we are committed as ever to building on our progress around inclusion and diversity. During the quarter, we also announced that since the inception of our Giving program 11 years ago, we've donated more than $880 million to humanitarian efforts, disaster relief, childhood education and more. And over the last 16 years through our partnership with (RED), Apple-supported grants have helped more than 11 million people get the care and support services they need. As we look ahead in 2023, we are excited about the year to come. At Apple, we are always looking forward, always focused on the next challenge, always determined to do great things with unmatched creativity and unrivaled innovation. And that makes me more confident about the future of Apple than I have ever been. Thank you, Tim, and good afternoon, everyone. As Tim mentioned, revenue for the December quarter was $117.2 billion, down 5% from last year. A number of factors had a significant impact on our results. First, we faced a very difficult foreign exchange environment, which affected our performance by nearly 800 basis points. In other words, we grew revenue on a constant currency basis. And in fact, we did so in the vast majority of markets. Second, the macroeconomic environment this past quarter was markedly more challenging than 12 months ago. Third, we experienced significant supply shortages for iPhone 14 Pro and iPhone 14 Pro Max in November and through December. On the other hand, we had the positive impact of the 14th week in the quarter that Tejas just mentioned at the beginning of the call. Products revenue was $96.4 billion, down 8% from last year due to the factors I just called out. At the same time, however, our installed base of active devices grew double digits and achieved all-time records in each geographic segment and in each major product category. We're proud to now have over 2 billion active devices in our installed base. This continued growth in the installed base is due to extremely strong levels of customer satisfaction and loyalty and a high number of customers who are new to our products. The installed base growth also helped our services set an all-time revenue record of $20.8 billion, up 6% over a year ago. We achieved this new milestone despite more than 700 basis points of negative impact from foreign exchange. We reached all-time services revenue records in the Americas, Europe and rest of Asia Pacific and a December quarter record in Greater China. We also set records in many Services categories, including all-time revenue records for cloud services, payment services and music and December quarter records for the App Store and AppleCare. Company gross margin was 43%, up 70 basis points from last quarter due to leverage and favorable mix, partially offset by foreign exchange. Products gross margin was 37%, up 240 basis points sequentially. And Services gross margin was 70.8%, up 30 basis points sequentially, both due to the same factors that impacted total company gross margin. Operating expenses of $14.3 billion were significantly below the guidance range we provided at the beginning of the quarter and grew at a slower pace than in the past as we took actions to respond to the current macro environment. Net income was $30 billion. Diluted earnings per share were $1.88, and we generated very strong operating cash flow of $34 billion. Let me now get into more detail for each of our revenue categories. iPhone revenue was $65.8 billion despite significant foreign exchange headwinds, supply constraints on iPhone 14 Pro and iPhone 14 Pro Max and a challenging macroeconomic environment. In spite of these circumstances, we set all-time iPhone revenue records in Canada, Italy and Spain, and saw strong growth in several emerging markets, including all-time iPhone revenue records for India and Vietnam. Importantly, the installed base of active iPhones continues to grow nicely and is at an all-time high across all geographic segments. In emerging markets, in particular, the installed base grew double digits, and we had record levels of switchers in India and in Mexico. Our customers continue to love their experience with our products with the latest survey of U.S. consumers from 451 Research indicating customer satisfaction of 98% for the iPhone 14 family. Mac revenue was $7.7 billion, down 29% year-over-year and in line with our expectations. There were 3 key drivers for our Mac results. First, we had a challenging compare against last year's launch of the completely reimagined MacBook Pros, our first notebooks with M1 Pro and M1 Max. Second, we believe that the macro environment impacted our Mac performance. And third, we faced significant foreign exchange headwinds. At the same time, however, the installed base of active Macs reached an all-time high across all geographic segments, and we continue to see very strong upgraded activity to Apple silicon. Customer satisfaction with Mac remains very strong at 96% based on the latest survey of U.S. consumers from 451 Research. iPad revenue was $9.4 billion, up 30% year-over-year despite significant FX headwinds. This performance was driven by 2 key items. First, during the December quarter a year ago, we experienced significant supply constraints, while this year, we had enough supply to meet demand. Second, we launched our new iPad and the iPad Pro powered by the M2 chip during the quarter. The iPad installed base reached a new all-time high, thanks to incredible customer loyalty and a high number of new customers. In fact, over half of the customers who purchased iPads during the quarter were new to the product. Wearables, Home and Accessories revenue was $13.5 billion, down 8% year-over-year. The year-over-year decline was driven by significant FX headwinds and a challenging macroeconomic environment. However, our installed base of devices in the category set a new all-time record thanks to the largest number of customers new to our smartwatch that we've ever had in a given quarter. In fact, nearly 2/3 of customers purchasing an Apple Watch during the quarter were new to the product. Moving to Services. We generated $20.8 billion in revenue, a new all-time record in total and for many Services offerings in spite of a difficult foreign exchange environment, and macroeconomic headwinds impacting certain categories such as digital advertising and mobile gaming. In constant currency, we grew Services revenue double digits on top of growing 24% during the December quarter a year ago. We remain focused on the large long-term opportunity in this category, and we continue to observe several trends that reflect the strength of our ecosystem. For example, we saw increased customer engagement with our Services during the quarter. Both our transacting accounts and paid accounts grew double digits year-over-year, each setting a new all-time record. Paid subscriptions also continued to grow nicely. We now have more than 935 million paid subscriptions across the services on our platform, up more than 150 million during the last 12 months alone and nearly 4x what we had just 5 years ago. And we continue to increase the reach and improve the quality of our offerings. For instance, Apple Pay is now available to millions of merchants in nearly 70 countries and regions. And we saw a record-breaking number of purchases made using Apple Pay globally during the holiday shopping season. Finally, our installed base of over 2 billion active devices represents a great foundation for future expansion of our ecosystem, and it continues to grow even during difficult macroeconomic conditions, which speaks to the exceptionally high levels of customer loyalty and satisfaction and our ability to attract new customers to our platform. The growth is coming from every major product category and geographic segment, with strong double-digit increases in emerging markets such as Brazil, Mexico, India, Indonesia, Thailand and Vietnam. Turning to the enterprise market. we are seeing continued adoption of our Services for business like Apple Business Essentials, AppleCare, Tap to Pay and Apple Financial Services. For example, Mars Incorporated has expanded its use of AppleCare for Enterprise to provide timely device support and assurance for iPads deployed across their manufacturing sites. Meanwhile, HCA Healthcare has leveraged Apple Financial Services to manage the annual refresh of its entire fleet of iPhones. This not only ensures that their staff stay current on the latest Apple technology, but also provides them with significant annual savings in the process. Let me now turn to our capital return program and our cash position. We returned over $25 billion to shareholders during the December quarter as our business continues to generate very strong cash flow. This included $3.8 billion in dividends and equivalents and $19 billion through open market repurchases of 133 million Apple shares. We ended the quarter with $165 billion in cash and marketable securities. We repaid $1.4 billion in maturing debt and decreased commercial paper by $8.2 billion, leaving us with total debt of $111 billion. As a result, net cash was $54 billion at the end of the quarter, and we maintain our goal of becoming net cash-neutral over time. As we move into the March quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we are not providing revenue guidance, but we are sharing some directional insights based on the assumption that the macroeconomic outlook and COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter. In total, we expect our March quarter year-over-year revenue performance to be similar to the December quarter. This represents an acceleration in our underlying year-over-year business performance as the December quarter benefited from an extra week. Foreign exchange will continue to be a headwind, and we expect a negative year-over-year impact of 5 percentage points. For Services, we expect revenue to grow year-over-year while continuing to face macroeconomic headwinds in areas such as digital advertising and mobile gaming. For iPhone, we expect our March quarter year-over-year revenue performance to accelerate relative to the December quarter year-over-year revenue performance. For Mac and iPad, we expect revenue for both product categories to decline double digits year-over-year because of challenging compares and macroeconomic headwinds. We expect gross margin to be between 43.5% and 44.5%. We expect OpEx to be between $13.7 billion and $13.9 billion. We expect OI&E to be around negative $100 million, excluding any potential impact from the mark-to-market of minority investments, and our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividend of $0.23 per share of common stock payable on February 16, 2023, to shareholders of record as of February 13, 2023. So Tim, and maybe this is for Luca as well. You talked about the supply chain returning back to normal after a very difficult October, November, but we're still seeing some disruptions across tech products, whether it's enterprise or consumer-facing. How do you think about your supply chain and maybe the levels of inventory or builds that you might need as we go forward to sort of insulate your business from these sort of episodic disruptions? Have you changed your view? And if so, how does that affect ultimately margins and sort of your balance sheet and cash flow items going forward? This is Tim, David. From a supply point of view, we did see disruption from early November through most of December. And from a supply chain point of view, we're now at a point where production is what we need it to be. And so the problem is behind us. In terms of going forward in the supply chain, we build our products everywhere. There are component parts coming from many different countries in the world, and the final assembly coming from 3 countries in the world on just iPhone. And so we continue to optimize it. We'll continue to optimize it over time and change it to continue to improve. I think when you sort of zoom out and back up from it, the last 3 years have been a pretty difficult time between COVID and silicon shortages and the like. And I think it's -- I think we have had a very resilient supply chain in the aggregate. In terms of supply for this quarter, which I think was one of your points, I think we're in decent supply on most products for the quarter currently. Luca, I wanted to dig a bit more into the commentary on gross margins. The guidance, especially at 43.5% to 44.5%, is obviously quite strong. So I'm wondering what's helping you out there, assume mix and some other things. And then how should we think about what currency and hedge is going to do as we look forward? And then I have a follow-up. Shannon, yes, I mean, we've had good margin for the December quarter to start with. We reported 43%. Obviously, in December, we have the benefit of leverage because of the seasonality of the business, but we also had favorable mix across the board. Of course, foreign exchange is an issue right now. In the December quarter on a sequential basis, foreign exchange was a negative 110 basis points for us. And on a year-over-year basis, it's 300 basis points. So obviously, the FX environment has changed a lot during the last 12 months. For March, yes, we've seen a margin expansion, 43.5% to 44.5%. We're doing a lot of work around cost, of course. Mix will continue to help, both within categories and services mix as we move away from the holiday season. But we're doing a lot of work on the cost structure, and that is paying off. Foreign exchange is still a negative, about 50 basis points sequentially, but it's mitigating. The last couple of weeks, the dollar has weakened a bit. And so hopefully, as we go through the year, hopefully, things will improve. But for now, as you correctly state, we are in a good position on margins. And then, Tim, can you talk a bit about China? What you're seeing -- obviously, you've had the issues with production, but I mean more on the demand side. As we've gotten through Chinese New Year and the opening, I'm just wondering, are you seeing the Chinese consumer come back? What are they buying? And how are you thinking about your position there? Shannon, last quarter, we declined by 7% on a reported basis, but we actually grew on a constant currency basis. And that was despite some significant -- the supply constraints that we talked about earlier. And obviously, the sort of the COVID restrictions throughout China that happened in various different places throughout the country also impacted the demand during the quarter. When you look at the opening that started happening in December, we saw a marked change in traffic in our stores as compared to November. And that followed through to demand as well. And I don't want to get into January. We've obviously -- January is included in the guidance, or the color rather, that Luca provided earlier. But we did see a marked change from December compared to November. Maybe, Tim, first one for you. That 2 billion installed base -- device installed base figure, that's up, I believe, 200 million units year-over-year. That implies the strongest annual gain in new devices in your installed base basically as far back as you've provided those data points. And so I guess my 2 questions are: one, do you -- can you provide the installed base for the iPhone at year-end? And then two, is there anything that you see in this new cohort of users that might look different or similar to past cohorts, either by demographic or regions or monetization ramp? And then I have a follow-up. Yes. The installed base is now over 2 billion active devices, as you mentioned. And we set records across each geographic segment and major product category. And so it was a broad-based change. Two -- I'll correct one thing you said, it's up over 150 million year-over-year. The last report we reported to be over 1.85. And so it's 150 million, which we're very proud of. We also saw strong double-digit in several of the emerging markets, which is very important to us. For example, India and Brazil as just 2 examples. So very, very strong. And obviously, it bodes well for the future. And then, Luca, obviously, the December quarter was negatively impacted by the production challenges. Can you just maybe unpackage where channel inventory levels are today kind of across the iPhone broadly? And then what the data that you're seeing so far this quarter is telling you about iPhone demand deferral versus kind of iPhone demand destruction and perhaps pushing some upgrades later into the year rather than into the March quarter? And that's it for me. Yes. Erik, I'll take that one as well. The channel inventory levels on iPhone, we obviously ended the December quarter below our target range given the supply challenges on iPhone 14 Pro and iPhone 14 Pro Max. But as you think about this, keep in mind that a year ago, we also exited the December quarter below our target inventory range because of supply challenges in the year ago quarter. Not related -- not the same issue, but just as a point. And so that hopefully gives you some flavor of that. In terms of what we're seeing in January, we've included in our color that Luca provided kind of our thinking. It's very hard to estimate the recapture because you have to know exactly what would have happened and how many people bought down. And it takes a while to get that -- to get those reports in during the quarter. And so we've made our best guess at it. In terms of the sizing of the constraint in Q1, what we estimate, although not with precision, is that we would -- I thought we believe iPhone would have grown during the quarter had it not been for the supply shortages. So hopefully, that provides you a little bit of color. I have two as well, if I can. I guess the first kind of question, just going back on the gross margin line. Pretty good guidance into this March quarter. I'm curious if you unpack that a little bit specific around what you're seeing as far as maybe benefits from component pricing in the guidance, if you're embedding any of that at this point. Yes. Of course, with our guidance, we try to capture every aspect of our cost structure. And obviously, components are a big portion of that. So definitely, that's included. And keep in mind, again, that foreign exchange -- I mentioned earlier, I think to Shannon, that the sequential negative on FX is 50 basis points, versus a year ago, it's 270 basis points. Obviously, the U.S. dollar has moved a lot over the last 12 months. So obviously, we need to find offsets and more to the negative FX in order to be able to provide this kind of guidance. And so obviously, components are a big part of that. Yes. And then kind of from a strategic perspective, given kind of the things that we're seeing out in some of your peer group, I'm curious, Tim, how you think about the role of AI in your strategy as far as particularly in the Services segment, whether you're not -- you see opportunities to excel monetization abilities within the paid subscriber base and whether or not AI, is it something that you're implementing a bit more strategically there. Yes. It is a major focus of ours. It's incredible in terms of how it can enrich customers' lives. And you can look no further than some of the things that we announced in the fall with crash detection and fall detection or back a ways with ECG. I mean these things have literally saved people's lives. And so we see an enormous potential in this space to affect virtually everything we do. It's obviously a horizontal technology, not a vertical. And so it will affect every product and every service that we have. I guess the first one I have is, Tim, I think based on your earlier comments that iPhones would have grown ex the production issue that implied that maybe it's a $7 billion or so impact that you had in December quarter from the production challenges on the high-end models. I'm sure it's tough to see what happens this time around. But I think historically, when you've had production issues or things like this happen, what has the consumer behavior being typically? Do they tend to go down towards the lower end models and get the phone they want quickly? Or do they just defer the production? Just from a historical perspective, I think do you typically recover what's deferred out or no? It's very hard to estimate is the real answer because you have to know a lot of data, and it's usually only in hindsight that you have a more reasonable view of it. And so we put our best views in the color that Luca provided. That's kind of what I would say. All right. And then I guess maybe if I think about Services as you go forward. I know you had really good growth in Services, I think, over the last several years. But as you go forward in Services, what do you think drives the growth more so? Is it the expansion of your installed base? Or is it more going to be driven by ARPU going higher for you? I'm just curious, how do you think about those 2 buckets as you go forward? Amit, there's a number of things, and I've mentioned a few of them during the call. The first step is always the installed base. Installed base is the engine for Services growth. And the fact that the installed base is growing very nicely, and it's growing in a lot of emerging markets, it's growing even faster, that gives us a larger addressable pool of customers. So that's incredibly important. The second one is that we are seeing that the level of engagement of our customers already in our ecosystem continues to grow. We -- I mentioned that both transacting accounts and paid accounts grew double digits. And so that bodes very well for the future. And we have a lot of transacting accounts that kind of moved to paid accounts over time. The other aspect that is very important for us is to continue constantly to improve the reach and the quality of our services. And I give the example of Apple Pay, which it's a great example because we started off primarily in the United States. Now we've taken it to 70 markets, millions of merchants. And so obviously, payment services are -- continue to set new highs all the time for us. And then as you've seen over the last few years, we also launched new services over time, and that obviously contributes to the growth. We're very excited. And when we look at the behavior of our installed base, we think it's very promising for the continued growth of our Services business. Tim, I had a quick question on emerging markets. Seems like you're making a lot of strides in India. Potentially wanted to understand the kind of share you have in China and India. And relative to that, what would be your aspirational but sort of achievable share in iPhones in those territories, whether it's units or revenues? And I was hoping to draw on your experience and maybe what you've seen in other countries where you've had some longer presence. And looking at the business in India, we set a quarterly revenue record and grew very strong double digits year-over-year. And so we feel very good about how we performed, and that was -- that's despite the headwinds that we've talked about. Taking a step back, India is a hugely exciting market for us and is a major focus. We brought the online store there in 2020. We will soon bring Apple retail there. So we're putting a lot of emphasis on the market. There's been a lot done from a financing options and trade-ins to make products more affordable and give people more options to buy. And so there's a lot going on there. We are, in essence, taking what we learned in China years ago and how we scale to China and bringing that to bear. And I don't have the exact market shares in front of me, but I think you would see that from a market share point of view that we grew around the world last quarter despite -- on iPhone despite the challenges that we've had on the supply side. And I wouldn't expect to have a difference in those 2 markets. Understood. And for my follow-up, I had a sort of interesting theoretical question on pricing. Assuming we get the CHIPS Act passed, and there's a whole bunch of manufacturing that happens in U.S. and other territories that are potentially somewhat more expensive than the ones you might be now, have you -- has the company done any studies to gauge the elasticity of demand relative to small price increases in your products? We have experience in that, but I wouldn't necessarily draw the same conclusion that you have in terms of the cost of the product. I -- we don't know at this point exactly what that will be, but we're all in, in terms of being the largest customer for TSMC in Arizona. I'm very proud to take part in that. That's what I would say about that. Tim, you've done a phenomenal job of driving consumer choice towards higher-end products within your portfolio. How would you compare this cycle for iPhones if you were to segment the Pro versus non-Pro models versus the cycles from the past few years? And do you think this move to higher ASPs is sustainable? Or do you think it reverses in a tighter consumer spending environment? And I have a follow-up. The Pro has been a -- the 14 Pro and the 14 Pro Max have done extremely well up until the point where we had a supply shortage and couldn't provide them -- couldn't provide the total of the demand. And so it's definitely a strong Pro cycle. I think there's a number of reasons for that, but the most important one is always the product. And I think the innovations and the product speak for themselves. And we feel very good about the product that we announced back in September and are happy to now be at a point where we're shipping to the demand. And Tim, do you think that this move to sort of higher ASPs that has happened over the last few years is sustainable? Or could it sustain in this very tough macro environment that you've cited? I wouldn't want to predict, but I would say that the smartphone for us, the iPhone has become so integral into people's lives. It contains their contacts and their health information and their banking information and their smart home and so many different parts of their lives, their payment vehicle and -- for many people. And so I think people are willing to really stretch to get the best they can afford in that category. Okay. Great. And Tim, you clearly emphasize the focus and importance of the installed base. If we think about the absolute grit of the installed base from 1 billion to 2 billion over 7 years from a device standpoint, how should we think about the penetration of services or the growth in paying customers on services or that time frame? Is that penetration rate increasing or decreasing? How fast is that growing relative to the growth of the overall installed base? Wamsi, it's Luca. Yes, of course, we keep track of that. It's really important for us. Over the last 7 years, as we doubled the installed base, we've seen a growing engagement of our customers on the platform. That happens, first of all, by customers transacting on the platform and then moving to paid accounts. So starting to pay for some of the services. That percentage of paid accounts tends to grow over time. We've seen it in developed markets. We see it in emerging markets. And that is due to some of the reasons that I was explaining earlier, including the fact that we made it easier for our customers to get engaged on the platform. For example, we offer multiple payment methods in many countries. And we've made it easier to explore for more services because we've added a lot of services on the platform over the last 7 years. So to your question, of course, higher engagement means a higher percentage of paid accounts over time. Tim and Luca, you both mentioned earlier on the Q&A a little bit about India. I was wondering if we're now entering a situation of even more opportunity because we've exited COVID, we've exited countries with different COVID criteria. We've also seen India build out its higher speed transmissions. And your market is -- shares tremendously underrepresented there. And it appears with the supply chain, you're looking at diversifying kind of operational risk not specific to any country, but just overall. Now you look at potentially opening up stores and stuff. Am I right that, that's the way you look at it is it's even more prime for opportunity now than ever? And once you start opening up stores there, you could just see a complete green shoot of adoptions or any additional commentary on your view on India as now we've navigated COVID and supply chain and so many challenges over the past 2 years? Yes. Jim, we actually did fairly well through COVID in India. And I'm even more bullish now on the other side of it, or hopefully, on the other side of it. And that's the reason why we're investing there. We're bringing retail there and bringing the online store there and putting a significant amount of energy there. I'm very bullish on India. And then as my quick follow-up, you had mentioned that Services, not necessarily specific to India, but Services overall were better than expected. And of course, supply chain was more challenged than expected. So what was the bridge factor of Services being better than expected on upside? Was it like advertising or apps or paid monthly subscriptions? Or what were kind of the things that really surprised you to the upside on Services? It was -- Jim, it's Luca. It's primarily the -- this level of engagement we saw, which then reflects into the, as you said, the paid subscriptions. We saw very good results in our cloud services business in payment services. Music was very strong. So we had a number of categories that set new records, all-time records. And they did a bit better than we were expecting at the beginning of the quarter. And so Tim mentioned that during, I think, his prepared remarks that when you look at it in constant currency, we grew services double digits. And that was on top of a 24% increase a year ago. So it's very sustained growth that we're seeing. I have 2. The first one, Tim and Luca, you mentioned how the macro did soften, and it has an impact. And as consumers tighten their belt, when you look across your hardware products and service businesses, where are you seeing the biggest impact and where are you seeing the least impact from the softening macro? And then I had a quick follow-up. We think there were some impact across the products and in Services. Probably, the ones that we saw the most impact on were Mac and Wearables. You can see that in those numbers. And probably, the least would have been iPhone. Got it. Got it. Very helpful, Tim. And then just a quick follow-up on the Mac. The PC industry is expecting a decline in PC shipments this year also. How do you think about the Mac relative to kind of like where the PC industry as a whole is expecting the shipments to end up? Is there any color you can give on that? The industry is very challenged, as you say. It's -- the industry is contracting. I think from us, though, is -- and I don't know how this year will play out, so I don't want to predict the year. But over the long run, we have a market that is a reasonable-sized market, a big market. And we have low share, and we have a competitive advantage with Apple silicon. And so strategically, I think we're well positioned in the market, albeit I think it will be a little rough in the short term. A replay of today's call will be available for 2 weeks on Apple Podcasts, as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 6541285, followed by the pound sign. These replays will be available by approximately 5 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us.
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Good morning, and welcome to Air Products' First Quarter Earnings Release Conference Call. Todayâs call is being recorded at the request of Air Products. Please note that this presentation and the comments made on behalf of Air Products are subject to copyright by Air Products and all rights are reserved. Thank you, Katie. Good morning, everyone. Welcome to Air Productsâ first quarter 2023 earnings results teleconference. This is Sidd Manjeshwar, Vice President of Investor Relations and Corporate Treasurer. I am pleased to be joined today by Seifi Ghasemi, our Chairman, President and CEO; Dr. Samir Serhan, our Chief Operating Officer; Melissa Schaeffer, our Senior Vice President and Chief Financial Officer; Sean Major, our Executive Vice President, General Counsel and Secretary; and Simon Moore, our Vice President of Investor Relations, Corporate Relations and Sustainability. As previously announced, he will be retiring at the end of March. After our comments, we will be pleased to take your questions. Our earnings release and the slides for this call are available on our Website at airproducts.com. This discussion contains forward-looking statements. Please refer to the forward-looking statement disclosure that can be found in our earnings release and on Slide #2. In addition, throughout todayâs discussion, we will refer to various financial measures. Unless we specifically state otherwise, when we refer to earnings per share, operating income, operating margin, EBITDA, EBITDA margin, the effective tax rate and ROCE both on a total company and segment basis, we are referring to our adjusted non-GAAP financial measures, adjusted earnings per share, adjusted operating income, adjusted operating margin, adjusted EBITDA, adjusted EBITDA margin, adjusted effective tax rate and adjusted return on capital employed. Reconciliations of these measures to our most directly comparable GAAP financial measures can be found on our Website in the relevant earnings release section. Thank you, Sidd, and good day to everyone. Thank you for taking time from your very, very busy schedule to be on our call today. I am proud to say that the people at Air Products delivered great results this quarter despite the significant macroeconomic headwinds. I would like to thank each of our talented, dedicated and motivated employees for their hard work. Now please turn to Slide #3. Our safety performance, which is always our highest priority. As you can see, we have made significant progress since 2014. But we always work hard to do better. Our goal is to achieve zero incidents and zero accidents. Now please turn to Slide #4. For the first quarter of our fiscal year 2023, our earnings per share was $2.64, an improvement of 0.16 per share or 6% versus last year. But our underlying performance versus last year was much better than that. The items that you need to consider to make a fair comparison versus last year are a $0.15 negative impact from currency, and a one-time gain of $0.20 in the first quarter of last year from the finalization of the Jazan ASU joint venture. I would like to point out also that our guidance for the first quarter was to deliver earnings per share of 2.60 to 2.80. Our actual EPS is $2.64, which is within our guidance but at the lower end. The principal reason is that the Chinese and European economies were weaker than our expectation in early November, [indiscernible] (512) forecast. Now, please turn to Slide #5. We are committed to recording our shareholders, while pursuing our long-term growth strategy. I am pleased to say that we have again raised our quarterly dividend this time by 8% to $1.75 [ph] per share per quarter, or $7 a share on an annual basis, extending our record of more than 14 consecutive years of dividend increase. We expect to pay out more than $1.5 billion to our shareholders in 2023, reflecting our commitment to return cash to our shareholders. Now, please go to Slide #6, [technical difficulty] which shows our EBITDA margin trend. While energy costs remain high, our margin improved this quarter. Our team has worked hard on increasing prices to offset the higher energy costs in our merchant business, and we continue to work on productivity. I would also like to point out that three quarters of the margin declined since the peak margin of around 42% is due to a higher energy cost pass-through in our upside business, which increases our sales but does not impact our profit. Now please turn to Slide #7. In addition to delivering strong results, we also achieved several significant project milestones during the quarter. In December 2022, we were very excited to announce our $4 billion green hydrogen project in the United States. This project will be located in Northern Texas, and is our latest mega-scale zero carbon, which means green hydrogen project since the announcement of our revolutionary NEOM green hydrogen project in 2020. And it will be by far the largest green hydrogen project in the United States. The information about this project and the recording of our December paid net cash is -- for this project are available on our website. Now please turn to Slide #8. We were pleased to announce in January 19, the completion of the second phase of the $12 million Jazan gasification and power project, which is 51% maturity owned by Air Products, and it is 60% project financed. During the first quarter, with the first phase of this project, which was completed in October of 2021, Air Products contributed around $0.5 billion for the purchase of $7.1 billion of assets from Saudi Aramco. In the second phase, which was just completed, Air Products contributed an additional $900 million for the purchase of $4.2 billion of additional assets. Our total cash contribution for this project is $2.5 billion. As expected, the first phase of the project at the end was $0.80 to $0.85 per share on an annual basis, which significantly contributed to our results in fiscal year 2022. With the completion of the second phase, we now expect about a total of $1.35 per share of earning contribution on an annual basis. This is fully in line [technical difficulty] the announced investors more than 3 years ago. Now please turn to Slide #9, [indiscernible] to provide you an update on our great NEOM green hydrogen project, which is appropriate to give you an update, since we are very close to completing a major milestone, which is signing the definitive project financing agreements for this project. And therefore, we wanted to give you an update, before you read about that in the next few weeks. We have been making excellent progress on this large-scale project to bringing green energy to the world. The engineering is now about 30% complete. All major subcontracts for the project have been awarded including [indiscernible] the power plant [technical difficulty]. Land preparation is completed and construction has started. And the joint venture team is in place and executing the project. Now, please turn to Slide #10. As you know, Air Products has a [indiscernible] ownership position of the NEOM production joint ventures. But importantly, and this is very important. We remain the sole offtaker of 100% of the green hydrogen produced in the form of green ammonia produced at this facility and an exclusive 30-year contract. We continue to see significant opportunities to use this [indiscernible] to bring green hydrogen to consumers around the world. And as I said we are the sole offtaker and distributor of this product. Then I want to emphasize that the offtake price for this green ammonia, it remains the same as when we negotiated the original project in the summer of 2020 when we announced the project. This is a very key point than the fact that now we are project financing this project, and as a result, we are absorbing all of the financing charges and so on that has not changed the offtake price. Then, now please turn to Slide #11. Initially the three partners [technical difficulty] which are Air Products, NEOM, which is owned by PIF; and ACWA Power, we intended to use our own cash to fund the project, the total project. Over the past 2 years, weâve seen significant interest from the global financial institutions who see tremendous value proposition on this project. Therefore, we got tendered [ph] and reconsidered and we decided that the best course of action to minimize our cash contribution and maximize the return on the cash is to do non-recourse project financing of this project. The partners will contribute 25% cash and the remaining 75% will be non-recourse project financing. And obviously, if you are doing non-recourse project financing, you want to maximize the amount of money that you can borrow. Therefore, you put a lot of your ongoing cost and you bring it forward to the real present value and borrow against that. I would explain this a little bit more when we get to the detailed chart. This means that Air Products -- this project financing means that now our cash contribution to this project will be $800 million, less than $800 million, which is significantly less than the $1.7 billion that we originally expected. That is what you would expect us to do, that is the ballpark point of project finance. Now please turn to Slide #12. Iâm pleased to say that the non-recourse financing is well underway and we are more than 2x over-subscribed from what we want to borrow. We have received commitments from over 20 global financial institutions, demonstrating their confidence in this project. Later this month, we expect to complete what we call the dry close, which is the signing of the definitive financing agreements, and we expect the full financial close to be completed a few months later. We will obviously let you know as we make progress on the project finance. Now please turn to Slide #13, so that I can provide you with an overview of the total project capital needs. First, the original $5 billion that we have mentioned before, for the capital required to build the facility. We have increased that -- it has increased by about $0.5 billion due to inflationary pressure that everybody expects. Then in addition, we have further increased the investment by $1.2 billion to include [indiscernible] service from other people, but now we want to provide those services ourselves in order to make the project totally self-contained and we wouldn't be dependent on others. These include power transmission lines and other infrastructure that was needed for the project. This increases the capital cost, but it decreases the operating cost and we decided that was a better trade-off. But the key point was to make sure that the project is not dependent on other people doing [technical difficulty] that people have control over the whole thing so that [technical difficulty] we have everything that we need for the project to be operated. Now the other item that I'm sure will be a subject of questions from people is the $1.8 billion for project financing costs. That is a big number, but it is really explaining why that is. Again, as I said, if you have project financing, you want to put and borrow as much money as you can. First of all, about $1 billion of that $1.8 billion is the interest during construction. So we are spending money. We want to borrow that money. There is an interest to that borrowing. Therefore, that adds up for the [indiscernible] of the project to about $1 billion. We want to finance that and borrow against them. Then we are using [technical difficulty] instead of leasing the land for 50 years, we decided to pay for the land upfront that reduces our ongoing cost, and we can finance that. That is a few hundred million dollars. Spares for the project. Usually you buy the spares as you go forward, we decided to buy all the sales upfront and finance it. So those are the kind of costs that comprise the $1.8 billion. It makes a lot of sense, and that is the beauty of finance that you can [technical difficulty]. You have the flexibility of bringing forward a lot of your costs that will save your operating costs in the future. So all together, the total funding needed for the project is $8.5 billion. Now please turn to Slide 14, which is the overview of the funding. As I described before, the $8.5 billion is made up $6.2 billion of non-recourse debt, which we wanted to maximize and $2.3 billion of cash from the three partners. Therefore, obviously, the Air Products cash contributions [technical difficulty], which is less than $800 billion and this is as compared to the $1.7 billion than we originally expected. So overall, we are very pleased with where we are. We are very pleased with the fact that our project financing [indiscernible], minimizing our cash flow, and we are very pleased that the prices that we are paying for the [indiscernible] has stayed the same as it was in 2020. We are very optimistic about projects and the prospects for a good return for the total supply chain as we go forward. Now please turn to Slide 15. I would like to summarize the discussion by sharing some thoughts about our strategy. As I have mentioned before, there are two pillars for growth strategy of Air Products and sustainability is the foundation for both of them. Through our core industrial gas business, the supply customers in dozens of industries with critical products and services that lower emissions and increase efficiency and productivity. Through our Blue and Green hydrogen [technical difficulty] project of the future, we will commit more than $15 billion by 2027 to deliver clean hydrogen at a scale helping to drive the energy transition and moving [indiscernible]. These two pillars, which support Air Products for success put us in the heart of [indiscernible] [Audio Gap] needs for -- the Board's needs for sustainable energy and environmental solutions. I'm proud to say that the people of Air Products have continued to drive results in the near-term and make excellent progress in executing our growth project as we move forward. Slide #16 summarizes our management principles, which I reiterate every quarter. These principles are critical to Air Products' success and will continue to guide us in the future. Now I'm pleased to turn the call over to Melissa, our Chief Financial Officer. Melissa? Thank you, Seifi. As Seifi mentioned earlier, we've delivered another set of incredible results in the quarter even with significant macroeconomic headwinds. Our commercial teams across the region continue to execute press actions and their efforts paid off. Price droves the 25% operating income improvement despite a significant negative currency impact, and operating margin was also 300 basis points higher compared to last year. I also would like to thank the team at Air Products for their continued outstanding efforts. Now please turn to Slide 17 for a review of our first quarter results. In comparison to last year, sales, volume and price were up nearly 10%. The 7% gain in price for the total company equaled a nearly 20% improvement in merchant price compared to last year, the fifth quarter in a row of double-digit increase. Volumes were up 2% higher, driven by better onsite in merchants, but partially offset by lower sales equipment activities. Volumes were strong in America and Asia, but weaker in Europe. Currency translation from the strengthening U.S. dollar reduced sales by about 6% and lower operating income at 8%. Despite this headwind, operating income jumped 25% and operating margin was 300 basis points higher, primarily driven by strong pricing. Operating income was higher across the region and particularly strong in America and Europe. Improvements in EBITDA and EBITDA margins were not as significant as operating income and operating margins due to the prior year one-time items primarily related to the Jazan ASU joint venture finalization. ROCE has climbed steadily over the last 6 quarters, reaching 11.3%, which is 120 basis points higher than last year. We expect ROCE to further improve as we bring new projects on stream and continue to put our cash on the balance sheet to work. Adjusting for cash, our ROCE would have been 13.3% this quarter. Sequentially, volume was weaker following a strong prior quarter, which also benefited from soft sales and a favorable contract [indiscernible]. Price continues to gain strength across the region. Merchant price improved 3% versus last quarter. EBITDA was down 5%, primarily due to weaker volumes, while EBITDA margin was up 200 basis points as positive price [indiscernible] cost pass-through more than offset the lower volume. Now please turn to Slide 18 for a discussion of our earnings per share results. Our first quarter adjusted EPS was $2.64 per share this year, up $0.60 or 6% compared to last year. Strong price drove the improved results. Price, net of variable costs contributed over $0.70 this quarter as our price actions more than offset the higher variable cost increases. Cost was $0.11 unfavorable primarily due to inflation and higher maintenance. Price, volume and cost together added $0.63 or a 25% increase compared to last year. However, the negative $0.15 from currency and a roughly $0.20 of prior year one-time benefit associated with the finalization of the Jazan ASU joint venture moderates a strong underlying results. The Jazan item accounted for much of the $0.14 decline in equity affiliates' income and an unfavorable $0.10 in non-controlling interest. The effective tax rate of 19.1% was 210 basis points unfavorable due to less tax benefit this year. We expect an effective tax rate of 19% to 20% in FY 2023. For the quarter, a non-service component of our defined benefit plans were favorable $0.04 last year and unfavorable $0.07 this year. As I shared with you last quarter, we now exclude the component from our adjusted results. Now please turn to Slide 19. Our distributable cash flow continued to climb, driven by improving EBITDA. While cash expenses included interest, cash tax and maintenance CapEx remains relatively stable over the last 3 years. Over the last 12 months, we generated close to $3.1 billion of distributable cash flow or almost $14 per share. From our distributable cash flow, we paid over 45% or over $1.4 billion as dividends to our shareholders while still had an almost $1.7 billion to invest for growth. Our ability to grow distributable cash flow, especially in challenging conditions, demonstrates the strength and stability of our business. It enabled us to continue to create shareholder value by increasing dividend and deploying capital for high return projects. Slide 20 provides an update of our capital deployment. As you can see, we have over $36 billion of capital deployment potential through fiscal 2027. The $36 billion includes over $8 billion of cash, additional debt capacity available today, about $17 billion, we expect to be available by 2027 and almost $12 billion already spent. We still believe this capacity is conservative given the potential for additional EBITDA growth, which would generate additional cash flow and additional borrowing capacity. As always, we continue to focus on managing our debt balance to maintain our current targeted AA2 rating. So you can see our backlog of nearly $20 billion will provide a substantial amount of growth in the future. However, please note this figure still includes the second phase of Jazan project that was completed in January as well as the capital required for NEOM at its original higher value as we work through the finalization of project financing. Moreover, we will include the $4 billion Texas green hydrogen project when the project reaches final investment decision. We have already spent over 30% and committed 74% of the updated capacity we show on this slide. We have made great progress and still have substantial investment capacity remaining to invest in high return projects. We believe that investing in these high return projects is the best way to create shareholder value for the long run. We continue to evaluate our capital deployment options and determine the best way to use available cash and trusted to us by our shareholders. Thank you, Melissa. Now please turn to Slide #21 for our Asia first quarter results. Our businesses were able to deliver positive volume and price despite the negative COVID impact in certain parts of China. Volume improved7% supported by new assets. This quarter, we benefited from more than 25 new small to mid-sized traditional industrial gas plants which came on stream across the region over the last years. Price was up 1% in total, which is 3% -- which translates to 3% in our merchant business. Although underlying sales grew 8% versus last year and energy pass-through was a positive 2%, overall [indiscernible] offset by a 10% weaker currency, which is obviously translation. Negative currency also reduced operating income and EBITDA each by about 10%. Operating income and EBITDA both improved versus prior year as better volume and price more than offset the negative COVID impact. Higher price and volume also drove margin improvement. Although China's government has relaxed its rules related to COVID, the subsequent high infection rates have impacted business activity. We expect economic recovery in China to take time. We anticipate power across the region to continue to rise, and we are taking action, which I mean pricing action, to mitigate the impact. Sequentially results compared unfavorably to last quarter, which benefited from some specific spot sales. Thank you, Seifi. Now please turn to Slide 22. As the chart shows, power costs for Europe moderated sequentially this quarter, but are still at a historically elevated level. Our commercial team has executed significant price actions to compensate to these costs in our merchant business and their hard work has paid off. Although we have fully recovered the higher power costs for the quarter, we are keeping a close eye on the dynamic power market in this region. As a reminder, power costs in our merchant business is the primary focus when managing the escalating energy costs in Europe. Our on-site business has contractual pass-through, which enables us to pass energy cost to our customers and almost all our national gas usage is for on-site hydrogen production. Now please turn to Slide 23 for a review of our Europe results. Successful price actions, we have worked hard to implement the last few quarters, drove the significant improvement in Europe's results. Compared to prior year, price increased 14% for the regions corresponding to a 24% improvement in merchant pricing. Volume declined6%, reflecting challenging conditions in the region. Demand for our hydrogen was weaker as customers continued to optimize their own hydrogen operations. Our merchant business was lower, partly due to the divestment of our business in Russia. Energy cost pass-through was up 9% due to higher natural gas costs although it had no impact in profit. Operating income jumped nearly 50%, while EBITDA was up almost 30%, primarily due to strong price. Although unfavorable currencies reduced operating income and EBITDA, each by more than 10%. Price primarily drove the more than 400 basis point EBITDA margin increase. This was net of the higher energy cost pass-through, which lowered the margin by about 200 basis points. Compared to the prior quarter, volume was unfavorable due to vehicle merchant this quarter and a favorable contract amendment in the prior quarter. Thank you, Sidd. Now please turn to Slide 24 for a review of our Americas results. Underlying sales increased15% despite the adverse effect of severe weather in December. Price improved for the region by 9%. This is equivalent to a 26% increase in the merchant business. Our team in the Americas has successfully raised the prices to cover the higher energy cost. Volume grew 6% primarily due to better merchant and on-site, volume also benefited from a new short-term agreement, which will benefit Americas results for the next few quarters. Operating income was up to almost 30% over last year. And operating margin improved 300 basis points, driven primarily by the strong price. Volume also contributed to profits, but costs were unfavorable. EBITDA improved less than operating income because of our lower equity affiliate income due to unfavorable one-time items and lower medical oxygen volume in Mexico as the COVID impact subsided. Sequentially, the price continued to gain strength. Merchant price was up 7%, but volume was down 3%, following a strong previous quarter. EBITDA margin improved by around 400 basis points, primarily due to lower energy cost pass-through which accounted for three quarters [indiscernible]. We expect our planned maintenance activity to increase next quarter and parallel with our customers' plan turnaround. I'm sorry, review the Middle East results and India before going to that. So please let's go to Slide 25 first for a review of our Middle East and India segment. Sales and operating income in this segment are modest since our Middle East and India wholly owned operations are smaller in size. However, the segment's EBITDA is significant, it includes the equity affiliates' income related to the Jazan gasification and power joint venture, our India joint venture, INOX Air Products and other joint ventures. For the quarter, an acquisition benefited sales and operating income versus last year, but was partially offset by land maintenance activities. Although our share of the ongoing Jazan gasification and power joint venture net profit added to the region's results, the equity affiliates' income declined by $28 million primarily due to the one-time benefit associated with the Jazan ASU joint venture finalization in the first quarter of last year. As Seifi mentioned before, we have successfully completed the second phase of the Jazan gasification and power project, and we have begun to receive additional income in the second quarter. Now please turn to Slide 26 for our Corporate segment. This segment includes our sales of equipment businesses as well as our centrally managed functions and corporate costs. For our sale of equipment activities, our LNG business historically has been the anchor, but our non-LNG related project activities have also grown in recent years to become major contributors to this segment. The cadence of project activities and timing of sales and profit recognition can vary the segment results. Our ongoing effort to support our growth strategy has also increased the centrally managed functions and corporate costs. For the quarter, the segment sales and profits were lower than last year, primarily due to lower sale of equipment project activities. We also continue to add resources to support our growth strategy. As mentioned before, inquiries for potential LNG projects have picked up recently. However, these projects take time to develop. We're excited, however, that we have signed one new agreement in the quarter and working hard to sign additional new projects. At this point, I would like to return the call back over to Seifi to provide his closing comments. Seifi? Thank you, Dr. Serhan. Now please turn to Slide #27. The outlook for the global economy remains uncertain. However, we remain confident in Air Products and the prospects that we have in the future and the stability of our business which is supported by our robust capital deployment strategy as you have seen. Therefore, for fiscal year 2023, we have left our guidance unchanged despite the significant uncertainties that exists in the world. For the second quarter of fiscal year '23, which is usually our weakest quarter. Our earnings per share guidance is $2.50 to $2.70, up 7% to 15% over last year. We still see our CapEx at $5 billion to $5.5 billion for the year, including the approximately $1 billion for the completion of the Jazan project that we just talked about. Now please turn to Slide #28. We include this slide in all our earnings call presentations. It describes very clearly my view that an enterprise can only be successful for the long-term when the people in the enterprise are motivated and committed to emission. At Air Products, our [indiscernible], our mission as a company is to bring people together so that they can collaborate and innovate solutions to the world's most significant energy, environmental and sustainability challenges. We continue to build a diverse and inclusive culture that are more than 21,000 people feel they belong and matter and are motivated to achieve our goals. I believe Air Products is uniquely positioned to help the Board transition to a cleaner and better future, and we are putting our efforts toward that each and every day. Great. Thank you so much. Seifi, just given all the macro uncertainty that's prevailing across the globe, can you just give us your current assessments of where you think you stand as well as the operating rates for the regional merchant businesses? Thank you. Thank you very much, Chris. Right now, obviously, it's very difficult under the current circumstances to predict what is going to happen in the next few quarters. But we feel very confident about our own operations and about our ability to keep our plants running and service our customers. And as I look around the world, we obviously saw the Chinese economy a little bit weaker in the first quarter than we expected. Right now, my view on the Chinese economy is -- we have to wait and see how it comes out after the Chinese New Year. We don't expect any kind of disaster or any bad news, but it's just a question of the rate of improvement how would that be? We are very well-positioned there. We have taken action to increase prices and most important, as I said, we are benefiting from the fact that we have 20, 25 smaller projects that we usually don't announce, but they are standard industrial gas projects, they are coming on stream, and they are contributing. So we feel that we will be able to deliver on Asia in general. In Europe, the economy again, was weaker than we expected in the first quarter. But right now, energy prices seem to have a stabilized. Power prices have stabilized, natural gas prices have not yet. But overall, we think that we should be okay in Europe. And in the U.S., you saw our actions in respect to pricing last quarter, we got overall,7% -- overall for the whole company, we've got 7%. But in the U.S., we got almost 14% price increase, which translates to almost 19% -- 20% price increase on the merchant side. Latin America is always very big, so we don't talk about it too much. So overall, we feel pretty confident that we should be able to deliver forecast that we have given you for the year. That's helpful. And just as a quick follow-up, just given now that investors and your team has had an opportunity to digest the IRA. Is there any key opportunity that's, let's say, specific to Air Products that you believe investors are missing? Is there something on the HEICO facility retrofits? Is there just anything else in terms of that materialization over the next several years that we all should be paying attention to? Thank you. Hi, Chris. That's a very, very good question. I don't want to comment too much about the IRA benefits because the law is that everybody can read that. But the opportunities for Air Products that we will definitely follow-through is, number one, we did put carbon capture on our existing facilities. There is two benefits on that: Number one, we reduced our CO2 emissions; and number two, that gives us an opportunity to have a lower carbon hydrogen that we can sell at higher prices. We will definitely do that. Then we are benefiting from the IRA [indiscernible] before the IRA, which was the project that we had announced before the IRA, which was the project in Louisiana. We did that project with the economic space, no IRA benefit on $85 for CO2 capture. We've been accounting on about $50. So that additional $35 enhances the returns on that project. And then we will do significant amount of green projects in the United States. We did announce the project in Northern Texas and we definitely are working on other mega projects to produce green hydrogen in the United States. The IRA credits for $3 for green hydrogen production. First, the fact that if you make an integrated facility, you also get credit for the renewable power that you generate makes it very attractive to make these investments in the U.S. We are extremely well-positioned with our pipeline in the Gulf Coast and with our know-how and with our distribution capabilities to do things that other people cannot do because anybody who can already take advantage of the credit if you can do something with the hydrogen. I mean people can run around and say, okay, I'm going to build a plant to produce green electricity and produce hydrogen. But then what do you do with the hydrogen. Air Products is one of the very few companies who knows what to do with the hydrogen, the other hydrogen company. Therefore, we are in a very unique position to take full advantage of the IRA registration. We are very pleased with that. That was a very significant step forward in the United States. And then the very good news for us is that, that has prompted other countries to take action. And I think yesterday or the day before that, you saw an announcement from the European Union that they are going to have a program of about â¬280 billion to promote the same kind of things which would, obviously, be very good for us because we are a global company. Thank you. Good morning. This is Anthony [indiscernible] on for David. Seifi, you mentioned in your slides, your new capital structure and the changes on the capital costs and contributions to NEOM, what is the return on this project versus what you were expecting when you first announced the project in July of 2020? Well, the thing is that I have three partners, and I don't want to speak for them and disclose the return on the project. But the thing that you have to take a look at is that we don't look at the return on the project because we are going to take the offtake and sell that and make money on that, and that is how we take a look at the return on the total investment. So on that front, the return on that is going to be in accordance with what they have given you a guidance, which is for every dollar that we invest, you should expect about $0.10 of operating income. So you have to look at total supply chain from Air Products' point of view. In terms of the specific return on the product, that is up to my partners to decide whether they want to disclose that or not. I don't want to disclose that because for us, that doesn't mean anything. It's the total supply chain. The important thing that you need to focus on is the fact that we are off-taking the ammonia at the same price that it was negotiated in 2020. Okay? Yes. Understood. And as a follow-up on the green ammonia, if you did not lock in this price to purchase, how much higher do you think it would be today versus when the project comes on stream? Well, it depends on what you would have negotiated with our partners. I don't expect it to have been significantly different. But because -- I mean, you talked about additional capital cost, but as I said, a lot of the operating costs is being capitalized. So that necessarily doesn't affect the return on the project. But again, I just don't -- I have two other partners, and I respect them. I don't want to disclose their financials there. But as I said, [indiscernible] from a product point of view, you need to look at the total supply chain. Yes, good morning. Thanks for taking my questions, Seifi so. Seifi, you seem excited about the price of the offtake for NEOM basically remaining flat. So I guess, why is that? Are you seeing interest from buyers right now that are higher than what you thought they would be at the time that you originally signed into this contract? I guess, how should we be thinking about that? Well, I think that's one way of putting it. The thing that we see is significant interest in the product. And obviously, as a businessman, we would like to offtake anything that we buy at the most favorable price that they can get. But I'm particularly interested in the reason I keep mentioning that because I just want to make sure that people don't think that, well, these guys said $5 billion, now it's $8.5 billion. Therefore, this -- the price of ammonia must have gone up. It did not. And it just -- look one other thing, John, you know this better than I do see our project financing this thing with some of the biggest banks in the world, giving us money. They have looked at this project, they have looked at [indiscernible] of the, and they are bidding to finance it. So I guess, they all think this is a good project and a good prospect, and they were going to get their money back. You know what I mean? Yes. No, for sure. I guess, maybe looking at it from a slightly different angle. So when you think about like when I think about project financing, the benefit of it is that tend to juice the returns a little bit more, but it does take out some of the EPS on the -- tied to the equity that's being put to work because there's less equity involved. I guess when you think about the total capital of the project overall, the distribution side as well as the actual production side and the economics around that. I guess, how has that changed relative to what you thought originally with the project financing now in place? John, it has obviously improved because I'm putting less cash on the production side. So we are bit off. And as long as the price of ammonia is the same. So we have made an improvement. We have another $1 billion that we were going to invest to do other things. We will go next to John Roberts with Credit Suisse and thank you. ExxonMobil recently announced a blue hydrogen project in the Gulf Coast that includes ammonia as well. And it looks like it has merchant ambitions there? Since refiners are a large customer for Air Products, help us understand, would you have bid for that project as well? Or how do we think about how your customers might play in the hydrogen and potentially ammonia market? Well, I mean, I can't comment on their strategy of Exxon and what they're going to do. But this is a competitive Board. If Exxon decides that they want to get into their merchant ammonia business and make blue ammonia to sell, then we will have an extra -- an additional competitor. Hydrogen that they are going to produce a significant amount of that from what I understand is going to be used to replace the natural gas that they are using because the whole purpose of the project is to reduce their carbon emissions. So if they do that, now are they going to make so much hydrogen have extra amount to do merchant. I don't know, I don't have any visibility on that and all of that. That to them to do what they want to do. We would have [technical difficulty] you know what we are doing and as I said, I'm sure other people will get attracted to these projects. But it's one thing talking about these things is actually doing the details they just announced they're doing a fee. They have to wait until they do the fee, then they add their costs and then they find out what the total cost is and all of that. But it's a target up to them. They decided to do it themselves, which is fine. Okay. And then since the Alberta blue hydrogen plant will be the first really big project up online, do you think you'll get a premium on all of the hydrogen out of that plant? Or do you think some of the hydrogen is going to be sold with the existing gray hydrogen market. What the interesting thing is that you mentioned [indiscernible] our project in Canada, the customer for that project is Exxon. We are, right now, almost sold out of that project, and they are getting a significant premium, yes, because Exxon through their subsidiary, which we have announced this publicly, so I'm not putting anything new to their ancillary, which is the inferior Chemical Limited, they are going to use the blue hydrogen we give them to produce renewable diesel that they're going to sell in California at premium prices. And as a result, they are giving us a significant premium for the blue hydrogen that they are buying from us in Canada. Yes. You had some pretty hefty merchant price increases in Europe and Americas. My question for you is how much of that had a surcharge in it given gas costs have dropped in both regions. Could you see some sequential decline in pricing in those regions? What the question that you're asking, Steve, is very relevant. We obviously have increased the prices in order to recover the power cost. Obviously, at some point in time, if the power costs go down, then some of the customers would expect us to decrease those prices. And we listen to that and we will make a decision based on supply-demand situation as we always do. So it is possible. But if the price declines in the future, then that would be as a result of power price declining, therefore, theoretically, there shouldn't be an impact on our bottom run. Okay. And just a follow-up on NEOM. Has the design of it changed, is it still a couple of gigawatts of electrolyzer capacity or has this changed? Could you produce more than the 1.2 million tons of ammonia. It seems like you could battery backup. Is that also enabling you to lead -- to have an unchanged ammonia price from this project? Steve, you're asking a very good question, which is subjective in general discussion cloud event. We are -- this is the first significant project that we are doing for green. We are obviously installing a significant amount of wind and solar capacity and we are installing a significant amount of electrolyzer capacity. What these electrolyzers and wind and the solar we do actually might end up giving us the capability of making a lot more than the $1.2billion. But I don't want to get ahead of ourselves. I don't want to promise that, but you are on the right track that there might be an upside in that side. And I personally understand there could be an upside, but we have to wait and see. Thank you. Great. Thanks. Good morning, guys. First question is on the -- on the new $8.5 billion kind of oven CapEx number. Can you just give us some comfort of framework around how walked in, that number is obviously, there is still about 70% or so, the engineering works left. Just any comfort around now what youâre doing to make sure that number is not going to move again, say, in the next three years. At this point I can say that we had an off contingency there. And we have done enough work that I think thatâs a pretty good number. But nothing just 100%, but I feel pretty good about that number at this stage. [Indiscernible] underlying, who is in charge of our -- all of our engineering and all of that. But I think [indiscernible] pretty comfortable that, that is a good number. We spend a lot of time making sure that when we are doing project financing that we don't have to go back for additional financing, but we feel pretty good about the number at this stage. Besides the engineering, we haven't add the page made the major orders on the project. So basically, that's also much then for like and even for construction for the green element that's also being replaced. Great. Thank you. Yes. And just as a quick follow-on with the new capital structure, that obviously can sometimes come with some level of covenants or restrictions around distribution. So just how should we think about the cash dividends from the project? Should they generally match income? Or are there some constraints or restrictions around the cash you can get back to their products. For the cash income from the project itself, obviously the project will have a cash flow that we'll go to servicing the debt and if there is any extra of that, which I hope there is, that will come back to the shareholders. That's the major structure [ph]. Yes, good morning. With regard to Asia, you had healthy volume growth of 7%. But in the prepared remarks, I think you made a comment that you started 25 new assets in the region over the past year, which sounds like a fairly large number. So I was hoping you might be able to put that into context for us. Looking ahead, would you expect the contributions from those startups to remain elevated or regressed by some amount? How would you describe the shape of that profile in Asia? Kevin, quite honestly, that's a very good question, [indiscernible], good morning. Should -- I did think this is a good opportunity for me to make a comment. At other times, people think that at Air Products, the only thing we do is make our project. We have our base business, and we are making good progress in our base business. We are getting our share of all of these small products. We don't announce it every time we have a $50 million nitrogen generator, but these things do add up. We had about 25 of them [indiscernible] on the stream in Asia. What they are doing is that they are helping us to deliver the volume increases despite the fact that you know that economic activity in China was almost -- it has gone from 6%, 7% back to about 2%, 3%. So we are getting the benefit of that. And these things will help us in the future to make up for any weakness and therefore, continue to help us to deliver good results for that region despite the fact that China might be flat or slowing down. So these are the good things. They are going to contribute, and we are very excited about it. Hey, thank you for that. And then secondly, if I may, in North America, you made a comment that volume benefited from a new short-term agreement. Can you elaborate on that? What impact did that have? And how long might it persist? Well, I don't want to disclose the name of the customer and so on, but we did get an opportunity because we could serve customers that other people couldn't serve, so we did get that benefit. But I would like to turn it over to Melissa to expand on that, Melissa? Yes. So thank you. So from a volume perspective in the Americas, that agreement was about 3% of the increase in the volume. Now we will see that over the next four quarters, be pretty consistent. So that's what we would see attributed to 2023. Thanks very much. In the NEOM ammonia production project, did the net present value of your one-third ownership stake, in your mind change that is you had a net present value assessment? Is it different now? Or is it the same or lower or higher? Good morning, Jeff. We're saying that we had a net present value which was the discounting of all of the cash flows that we expect in the few years and now with the project financing is that higher or lower, I think it should be about the same or even better because we are doing project financing, Jeff. Right. Because you're using more capital or the whole -- there's more capital that's going in. The second question is, have you determined how much ammonia you're going to make in your Louisiana project? And does that project -- is it necessary for there to be a substantial amount of ammonia for that project to go-forward. Jeff, that's a very good question. We have disclosed publicly that, that project will produce about 1,850 ton a day approximately of partnership. That project is literally next to our pipeline. So we are assessing how much of that we can put to the pipeline and sell because 1,850 tons of hydrogen is not that huge compared to the total sale of hydrogen that we have on our pipeline because our pipeline over there can do significantly more than that, significantly more than that. Therefore, one scenario is that all of the customers on the pipeline due to environmental regulations or the registration develops and so on decide hey I want blue hydrogen. Then we can just [indiscernible] out of the hydrogen into the pipeline. Then it is possible that not all of them would convert. Some of them would say, no, I was still okay, with gray hydrogen. Then we did have excess hydrogen to put and make it into ammonia. Therefore, what we are doing is that in terms of the actual building of the plant, we are building the plant to have ammonia facility that means you can build the ammonia plants. And then we will have ultimate capacity to an ultimate flexibility to use as much of the hydrogen in the pipeline and whatever we can use, we make into ammonia. There are ammonia plants themselves, Jeff, in the context of the overall. Don't cause that much. The ammonia plant, once you have the infrastructure, putting a 1.2 million ton ammonia plant by itself is only $250 million. So we are not going to lose anything significant by having basically cycle spare capacity. And then the other thing is, obviously, how the demand for blue ammonia developed as we go forward in the next few years. So we are building a plan to give us the flexibility, and this is the beauty of the situation that Air Products has that nobody else has. Is that we can make through hydrogen, and we have total flexibility, but that we can send it as hydrogen or we can sell it as ammonia. Because of the unique situation because we have the pipeline. And as a result of that, I think we can maximize the profitability of that better than anybody else then possibly can. Good. Seifi, on the NEOM project, you had inflation and then you also had that $1.2 billion of increased sort of financing costs, et cetera. What is that -- and that is -- not the financing cost I'm sorry, there's the additional cost --additional scope, I should say, and you're going to build transmission lines yourself, et cetera. What does that mean? Does that additional scope mean that the project could get delayed? Or do you think it's still on time for 2027? [Indiscernible] on time for 2027. The additional scope is something that we have been thinking and planning on it and then -- the progress on this project is that at the beginning, you go over there and you say, okay, I'm going to build the plant. All of the infrastructure is already there or it's going to be there, and therefore, we can draw on that. As the project goes forward, you will start getting a little bit concerned about the ability of other people to build teams that you need. Therefore, with the project finance, we decided that we are going to do all of that that increases the capital, but it saves us operating costs, as I mentioned before. Thank you. And there was earlier discussion about hydrogen price. The IRA gives $3 per kilogram benefit to green hydrogen. But how much of that you think you and the industry will have to pass it on to customers, so they get lower hydrogen price. And I think that's the ultimate goal of the government is to lower the hydrogen price. So do you have any thoughts on how the industry or the hydrogen price evolves over time? Thank you. P.J. Obviously, that will be the case because if you are building a plant and we are going to get $3 for the green hydrogen. And as I said, that $3 is actually more because if you build an integrated facility once we are doing, that means that the wind and the solar is part of the project. You also get a benefit for the wind and solar. So the total I think translated to per kilogram of hydrogen is more than $3. So we obviously -- when we do projects, we expect that we turn if you are getting the subsidy that improves the returns. So we will pass-through some of that to the customer and we will achieve the goal of the government, which is the goal fundamentally the price of hydrogen so that people can convert. That is exactly the goal, and that is exactly what we have P.J. Hey, good morning. So on Slide 30, you talk about downstream hydrogen supply chain is about $2 billion between 25 to 28. Is that $2 billion a number that could go up as new projects or you look for new opportunities in the supply chain? And any thoughts in terms of the timing between 25 and 28 ? Well, that was our estimate before about the $2 billion. But that number could be best, could be more, and let me just explain. It depends on the customers, it is possible that you can have -- because when you look at the customers, there are some customers that are like the mobility where you need a lot of infrastructure to serve it. You have to bring the hydrogen to a port, have an ammonia tank, crack it, liquefied have the trucks to go and deliver to the gas stations and sell it today. That is one way of selling the hydrogen. Another way is that somebody develops ships that can use ammonia and they've on green ammonia. And in that case, there is no infrastructure because the ship can dock in NEOM, put ammonia in it and then use it as fuel then there is no infraction cost. Another customer could be somebody that you bring the ammonia to a port, you crack it and then you put it in a pipeline and that goes into a chemical plant or some other kind of a plant, and they use all of that, then you don't have to liquefy, you don't have to build the infrastructure for trucks and so on. So because of that infrastructure is very much dependent on the exact kind of customers. Right now, our best estimate is that with the $2 billion, we will be able to build an office infrastructure to use the capacity of new. But that could be significantly less or it could be more depending on exact infrastructure. But if it is more than that means that the infrastructure needed for the trucking is obviously more expensive, which means that the price of hydrogen at the fund is a lot higher than the price of selling if we didn't have to be qualified. So it will all adjust for itself. Is that okay? Hi. This is Steve Haynes on for Vincent. Thanks for taking my question. Just wanted to ask a quick one on the other cost line and your EPS bridge, it was about $0.11 of headwind in the quarter. How should we kind of be thinking about that going forward? Thank you. Yes, absolutely. So the other cost line, we had a number of components this quarter play into there. We had a sizable maintenance, both in the Americas as well as north India joint venture or India segment. So that added additional costs this quarter. We should see that go down in the next quarter. Fixed cost inflation, however, is a driver and at 11%, and that will be consistent throughout this fiscal year. Yes, hi. Thanks for taking my question. Just on the near-term, when I look at your next quarter guidance, and close based on your math, maybe to add $0.12 or so sequentially. I was thinking there's maybe some merchant benefit as energy prices come down, maybe those volumes down a little bit, but December quarter wasn't super strong from a demand perspective. So I guess why wouldn't earnings be up sequentially given some of the tailwinds? What am I missing? I don't think you're missing anything. Your logic is very correct. The only thing is that when we make guidance, we have to kind of be cautious to make sure that we deliver it. The part that we are very concerned about, and we don't have any visibility is what is going to happen in the Chinese and European economy. I don't know how the Chinese economy is going to come out of the New Year holiday. And we don't have much visibility currency and how energy prices are going to develop in Europe. That is why we are a little bit cautious, and you are very correct to kind of say, maybe you're being conservative, maybe you are, but we just wanted to make sure that we don't get ahead of ourselves. Sorry, if you had more go ahead, but I was going to ask a second quickly, the Canada project financing, was that expected that anticipated in your economics? Does that change your cash [indiscernible]? I'm sorry, I didn't understand. Yes. So thank you for asking that. So just to be clear, on our Alberta project, we have no project financing associated to that project. Exactly. On the project financing, we do the [indiscernible] project by project. [Indiscernible] because it's a very complicated project and so on, difficult to finance. NEOM was pretty easy because there's an offtake price and so on, and we can calculate that. Now with our project in [indiscernible], the $4 billion project that we announced, we will most probably look at project finance on that. But we made the decision a step by step, the options that Air Products has, which is [indiscernible] is that we have the option of using our own cash because we have the cash. We have the option of raising money by going to the market as Air Products and raising bonds and then they have the option of project finance. So we take everything into consideration and come up with the best possible solution. So with new, with the partners and so on, we decided project finance was the best thing. Obviously, for project finance, we are going to pay a higher interest than if we have gone and increased bonds, but that was a joint decision with other partners. Now for the project in Texas, we will probably do project finance. For the project in Louisiana, we probably would. It depends -- and this is something that keeps our finance department and our treasury department busy trying to assess all of these things, and we do ask all of those questions. and we make the most optimum decision. Okay. [technical difficulty]. Okay. Hello. Good morning, all. My question is on inflation or the inflation risk for the rest of the backlog. So if we take one from the $19.4 billion, there's about $15 billion less. I was wondering if you could talk about the risk that there. We also see billion or $1.5 billion of extra costs and whether you have flexibility on selling prices to adjust for that to maintain returns? Thank you. Well, thank you. The rest of our projects, obviously, some of them are the other projects that we have announced are actually in a much more advanced stage than new. So we have a pretty good feel for their cost and all of that. But I don't want to deny decide that there is inflation. But we just don't think that the inflation thing is something that we cannot manage or it will significantly caused a struggle because with some of the projects, I mean, let's take the project in Louisiana. The project in Louisiana, if there is inflation on our capital cost goes up, then they will price the ammonia and the hydrogen out of that facility accordingly. So there is not a type of project that we have committed to a sales price for the product and now we have to keep the additional projects.[indiscernible], but most of those things are just about that. So that's why the thing we can manage. Hi. This is [indiscernible] on for Laurence. Thank you for taking my question. Just given a forecast that we'll be likely entering a recession. I just wanted to get a sense of how merchant volumes and pricing fared during the last recession. If you can give [indiscernible] overview of that, I would appreciate it. Thank you. Thatâs a fantastic question. Good question. The quick thing is I can answer that very definitely because you have seen our results during the last -- the last recession obviously was in 2008, 2009 and the second one was during COVID. And you saw what we have always said that Industrial gases business, we have another resulting industry because half of our business is on top. That doesn't get really affected by recession because they are [indiscernible]. And our picture volumes usually go down, but they do not go down significantly. We take action to control our costs, and therefore, you can take a look at our actual results during 2009 and 2010 and 2008 over results in 2020 and2021, and you'll see that we held up pretty well. Thank you very much and [indiscernible], I would like to joint everyone for joining our call today. We appreciate your interest, and we look forward to discussing our results with you again next quarter. As I said earlier, please stay safe and healthy and all the best to all of you. Thank you.
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EarningCall_619
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Good morning, everybody, and welcome to Banco Santander's conference call to discuss our financial results for the fourth quarter of 2022. Just as a reminder, both the results report and presentation we will be following today are available to you on our website. I'm joined here today by our Executive Chairman, Ms. Ana BotÃn; and our CEO, Mr. Héctor Grisi. Following their presentations, we will open the floor for any and all questions you may have in the Q&A session. Before I hand over the floor to Ms. BotÃn, let me remind you that on February 28, Santander Investor Day will take place in London where our top management team will present the group's strategy and mid-term outlook and plans. You can find all relevant information on how to register on our corporate website in case you have not done so already. We look forward to your participation. So thank you, Begoña, and good morning to everybody. Thanks for joining us. So 2022 was marked by the tragic return of war to Europe. It has not been an easy year and certainly very different to what we all expected 12 months ago. Clearly, this has impacted, in a big way, the economic and macro environment. I believe we're in a new era that these conditions of high inflation and higher rates will be here for a while. Central bank, of course, tightening monetary policy, increased rates. Remember, we had 6 years of negative rates in Europe and quite a few years in the U.S. The result of all of this is that we have a lot more uncertainty, and Santander has shown with the results we published today that we are well prepared to deal with this. We're actually quite accustomed to dealing inflationary environments for many years, including the last ones, of course, in Latin America. We delivered record results, and -- I want to stress, and achieved our 2022 commitments that we set before the war in Ukraine started. This is thanks to our customer focus, our scale, both in market and global, and this is what's driving the profitable growth that you have seen. We actually increased loans by -- and deposits by nearly EUR 140 billion. We welcomed 7 million new customers to the bank. We increased revenues and profits by double digit. This is a record profit. And I want to stress also that most of this increase is driven by the improvements in the operational model that we have been executing. And profitability, of course, increased again with a RoTE of 13.4% and a strong EPS growth of 23% in the year. Last but not least, we continue to strengthen the balance sheet, not just capital but our overall balance sheet. So let me give you some details of that. If you look at the income statement, you can see continued progress in the execution of our strategy reflected in the revenue growth. I said already that this has a lot to do with more customers and more volumes. There is also some impact from higher rates, especially in Europe and North America. And as you've seen in Q4, this should continue into the new year. Net interest income rose 16%, improving quarter-on-quarter. We increased fee income. Very importantly, fee income supported by our global businesses, i.e., by our global scale businesses, by payments and increasing network benefits across our geographies. We managed to grow our costs below inflation in all regions, improving the efficiency ratio, and the focus on improving operational performance led to a record net operating income of EUR 28 billion. This is equivalent to 2.7% of loans. We are proud of the sustainability and the low volatility of our results across the cycle. This is something which is not new. But it's really important to highlight why this happens. This happens because 95% of total revenues is net interest income and fees. This compares with 80% in our global peers. And this is incredibly important because of the sustainability of our results and the quality of our results. We really believe that, again, in challenging times, our model is better. The cost of risk ended the year at just under 1% as per our target, which we set in January of last year. And this all results, of course, in the record profits -- attributable profit of EUR 9.6 billion. Héctor Grisi, who is here with me, our new CEO, will give you more details about all this later. So I want to now focus on our shareholders. The increased profitability -- and this is not new. This has happened year after year with the exception of COVID allowed us to increase shareholder value creation. Our RoTE of 13.4% was exceeding our year-end target, exceeding our European peers' profitability. And as I said, this is on the back of both strong profit growth but also the reduced number of shares following the buybacks. We've bought about 5%. Our earnings per share grew 23%, which, again, is ahead of our peers. We delivered 6% growth in shareholder value creation, even with the negative impact this year from interest rates, which affected the balance sheet. And of course, part of this has already begun to reverse in January. If we exclude this temporary impact, growth would have been close to 10%. We expect a 16% increase in cash DPS against 2022 results. In the next few weeks, we will announce the second dividend, which will include, again, cash and buybacks. And at current prices, share buybacks, we believe, are still one of the most effective ways to generate shareholder value. In the last 2 years, as I said, we've repurchased 5% of outstanding shares. This doesn't include the one we will be announcing soon. And the return on investment is about 18% for our shareholders. So just looking at our balance sheet, and I think here it's important to give the message that we -- this is a holistic management of the balance sheet. Capital, of course, is important, but so is credit and liquidity, and the overall risk profile including credit remains medium low. It has once again proven to be predictable based on our diversification and the control we have of our portfolios delivering on the guidance we set 12 months ago. And the NPL ratio improved cost of risk in line with target. Liquidity, extremely important for us. We have a very conservative position. It's not just that the balance sheet remains funded by very high-quality liabilities based on stable customer retail deposits in core markets where we are market leaders or top 3. It's also that our liquidity ratios remain well above requirements. And this is even after the TLTRO accelerated through payments. As you can see, the LCR ratio stood at 152% in December. And last but not least, we again delivered on what we said at the beginning of this year of having a CET1 above 12% every quarter. Our capital performance this year was better than many of our peers. Our capital levels have again shown the strength of our model. They would -- maybe amongst the least volatile in the latest European banking stress test. Very importantly, we have continued to be very disciplined in how we allocate our capital, and we have reached the target we set a year ago of keeping profitability of 80% of our RWAs above cost of equity. This compares with 70% last year and improved the front book RoRWA, this is really important, to 2.6%. The back book is at 1.77%. So if you ask me what is the biggest progress we've made this year is really leveraging what is unique about Santander, which is that we have both in-market scale and global scale in large markets with growth potential. And again, these numbers show the success and the strength of our model and our strategy. First, in-market scale in each of our core markets, here, you have it run by lending. It's a strong competitive advantage. We're among the top 3 lenders in 9 out of our 10 core markets. In the U.S., we have an at-scale U.S. auto business that benefits from the network -- Santander network in terms of OEM relationships. And compared to our local peers, we are already leaders in profitability in 4 out of these 10 markets. And in a fifth in Brazil, we've been #1 in profitability in 2 of the last 4 years. But really where the biggest opportunity lies is in that our global reach and our global scale and divisions like CIB, Corporate Investment Banking and Wealth Management, I'll tell you about this now in a few minutes, and further leveraging our auto and payments capabilities generates a differential revenue and growth -- profitable growth opportunities. And these 4 segments, and this is important, today represent more than 30% of total group revenue. In 2022, 30% these 4 divisions of total group revenue and over 50% of the profit, much of which would not be possible without this collaboration and network that Santander provides. We will explain more about this in Investor Day. But just to share with you what we've done this year because we've been working on this, not just in '22 but before that. So again, this in-market scale in each of our geographies has proven that it's a key competitive advantage. Héctor will cover that in more detail, and we're still working on that, by the way. But our global scale is already providing us with this value-added network, which is unique -- a unique combination. And let me just share some examples. The best example this year, as I said, the proof is in the pudding, is Santander Corporate Investment Banking. We are leaders in Latin America. We've built a strong franchise in Europe, and we're strengthening our position in the U.S. We are recognized as global leaders and have been in the top 3 over the last 10 years in businesses related to energy transition and infrastructure, both of which are expected to grow in a significant way in the next few years. Here, we got not just in our footprint but globally. We've created a global network for CIB customers that generates revenue that local countries cannot generate a loan. And this cross-border collaboration revenue, not achievable by local banks and which we measure, we've measured for several years, was EUR 3.4 billion in '22 and represents 50% of CIB total revenue and is growing at 33% last year. Again, this is a differential performance versus our peers. There's no other bank that has this combination of being very strong in market and very strong in certain verticals globally. So we've outperformed peers, as you can see in revenue and profit growth, efficiency and profitability. The other global division that has made huge progress in the last few years is Wealth Management. This is a very high-return business. We are executing on -- same as we've done for CIB for the last few years, on our global platform plans, and again, already, we have a better efficiency ratio compared to peers. What we are doing in terms of private banking services for our customers that purely local banks cannot provide by connecting this service to our private banking customers, we brought in more than EUR 51 billion of AUMs. And again, in 2022 was not an easy year for this business. Our revenue growth and our profitability outperformed both in private banking and asset management. And the last one would be insurance, where we have achieved gross written premium growth of almost double our peers. We have 2 other network businesses that are really increasingly being used by the countries. And just very briefly to say that even though this is not a global division, we are actually a worldwide leader in auto financing. We are clearly #1 in Europe in terms of both volumes and profitability. We've built -- we are building proprietary platforms with a competitive edge, leasing, subscription, buy-now-pay-later, digital tools for our OEM partners. And our U.S. auto business is already benefiting from this competitive edge. We've started to replicate this model in South America, building common tech to deploy leasing activities and other products. This is not the only network effect, but let me just focus on the global relationships with OEMs and our knowledge of this business means that, for example, in Chile and Mexico, we went from no presence to about market share in just 3 years. And in Mexico, congratulation Héctor, by the way, we broke even in March 2022. But the key number is that today, around 40% of our business in the Americas is related to our OEMs partnerships in Europe. This business would not be available to local auto finance companies. In payments, we managed 97 million cards globally. This would make us 1 of the top banks or top 3 of 4 banks in the world by number of cards. And of course, customers that have a car tend to do more business with the bank. We're expanding our merchant capabilities. Again, our acquiring business, Getnet, was ranked among the top 3 merchant acquirers in Latin America. Getnet, again, has rapidly grown in Mexico. As we left a third-party provider, we moved from a market share of 14% in 2020 to 20% in '22. And as you know, this is a key product to engage our customers and be able to do more business in the bank. We are currently #2 by total payment volume. Again, we would not have been able to do this in Mexico without our network and the Santander value added as a group. Very importantly, there is no immediate effect, but that's going to be seen in the next few years. We are bringing all of our customer payments globally into a single cloud-based modern payments platform, which will deliver, in future years, many more benefits. We are executing on this plan, and it will generate savings already these 2 years as well as having a much more modern, agile platform. So again, all this is supported by our tech investments as a group, which are many of them you're seeing in the numbers we deliver at a high level. Much more on this and how we're going to continue delivering not just great results for customers but for shareholders, we will cover that at Investor Day. So let me just end with saying that the strong position of our local banks and this progress we've made serving our customers is seen in the growth in customer numbers. We now -- we've grown 7 million up to 160 million customers. That's an 8% increase. We're making strong and very clear advantage in the digital space, which is accelerating. Our digital customers already reached 51 million digital transactions, are -- at 80% of the total, exceeding both our customer and digital activity levels. We're improving customer experience, and very importantly, we're delivering these results in the right way. We're taking a very important step to integrate further our environmental, social governance issues into the day-to-day. We created a green and energy transition finance team, which reports to the CEO, to the CIB and the CEO to embed consistent practices in green finance across all our business units, including how we help our retail customers, not just our big customers, transition. We see a huge opportunity here as well as a huge responsibility to support the transition of our customers to a green economy. You have here the targets. We are ahead of our targets. We committed to do EUR 120 billion of green finance. We are at EUR 91 billion. We are -- we remain a global leader in renewables financing, #2 in the world by deals and volumes. We're moving forward in a net-zero ambition. We have 3 new interim targets to decarbonize our portfolios. Importantly, we are now accelerating this in consumer. We did EUR 5 billion mainly electric vehicles but also bicycles and others. And in Wealth Management, we're also making progress. We had achieved EUR 53 billion of our commitment of EUR 100 billion AUMs in socially responsible investment. None of this would be possible without the work we are doing with our teams and our culture. It's something which is maybe not evident in the numbers, but it is behind the numbers. And to me, it's at the core of our success. And I'm very excited about what Héctor brings to the table here. No pressure. It's our ability to build a culture of teamwork, attract and retain the best team members and, of course, work as one Santander but, very importantly, also our work to help financial inclusion. And again, you can see the results of these efforts, both internally and externally. We have highly engaged employees, where we are within the top 10 of the financial sector. We measure this. We are very proud of the progress in gender quality. By the way, we were named again #1 bank in the world, and #2 company globally in terms of diversity -- gender diversity last -- I think 2 days ago, by Bloomberg, and really closing the gap to 0 hopefully soon on the pay gap. We have many more women in top management roles. We set ourselves a 50% increase from 20% to 30% a couple of years ago. By 30 -- sorry, by 2025 to be at 30%. We're very proud to be at 29% this year. Financial inclusion is a hugely important goal for us. It's also good for the country. It's good for the economy and, of course, will help us down the road. But we reached the 10 million financial inclusion actually 3 years ahead. We set it for 2025, and we've been named the world best bank for financial inclusion by Euromoney. And of course, we continue to be a benchmark in the sector with women representing 40% of the group's Board of Directors. We believe strongly that diversity is not just the right thing but leads to better business outcomes and better decisions. So I would like to leave it here, and then Héctor will now go into more detail into the group's performance. Thank you, Ana. As you say, no pressure. So good morning to everyone. Let's go back into the income statement for a little bit. As usual, we are showing the growth rates both in euros and constant euros, okay? As you can see, there was a positive impact from exchange rates from around 6 -- 5 to 6 percental points. These are partially offset by the FX hedge and the corporate center, okay? We're including gains on financial transactions here as well. In constant euros, revenue grew at a faster pace than previous quarters, as you can see, and cost faced to inflationary pressures but continued to increase below the rate of inflation. Thanks to this performance, net operating income exceeded EUR 28 billion, which is, as the Chair said, a new record. In loan loss provisions, there are different forces impacting the year-end performance. There were COVID-19-related LLPs releases in 2021 and additional LLPs in 2022 relating mainly to update macro assumptions and some of the normalization that we have had. I'll explain this later in much more detail. This year also registered higher charges related to regulatory funds, new resolution schemes and lower minority interest and tax burden. Q4 was impacted mainly by the deposit warranty fund. The bank levy charges of approximately EUR 300 million after tax and EUR 127 million because of the AML settlement we did with the U.K. authorities. All in all, it's a record year in NII, revenue, preprovision profit and profit supported by our geographic business diversification. As I said, diversification is resilience. During the year, in all regions, as you can see, we increased volumes, specifically deposits, okay, quite strongly and also revenue while we reduced cost in real terms and maintained our credit quality under control. Regarding profit and profitability, South and North America ended 2022 with outstanding profitability levels. There was a notable recovery in profit and RoTE in Europe. DCB, with its strong presence in Europe, improved its profitability and profit, showing the benefits of consistent execution of our strategy. In CIB and Wealth Management, we also produced excellent performance, with profit growth of 31% and 15%, respectively. In addition, revenue growth in our payments businesses like PagoNxt and cards increased at high double digits and above the target. Our diversification and scale are key to improving results and profitability as well as being essential for stability. I will go now through the main P&L items in much more detail. As you can see in this chart, starting with the quarterly trends in constant euros, a strong revenue improvement quarter-on-quarter supported mainly by all regions and global businesses. The last quarter of this year was EUR 1.4 billion higher than in Q4 '21, boosted mainly by NII, EUR 1.2 billion exactly. Looking at Q4 versus Q3 in detail, NII maintained a consistent upward trend. Q4 increased 6% versus Q3, mainly driven by Europe, 13%, mainly in Spain with a 25% growth and another strong quarter in North America after record NII in Q3. South America also rose 6% due to Argentina and Brazil, 1%, while Chile continued to be impacted by the negative sensitivity to interest rate rises and the lower inflation. As you can see also, net fee income continued to recover with positive trends, mainly South America, DCB and in the global businesses. Trading income increased last quarter, driven mainly by Spain and the corporate center, the FX hedge. And as you can see in the chart, as the Chair has already mentioned, this is in line with a very small portion of our total revenue. Finally, other income decreased in Q4 affected by deposit warranty fund charges that I already explained and detailed. Moving on to the full year. NII rose 16% in constant euros. NII rose 9% with growth in Europe, plus 19%, North America, 7% and South America, 6%. If we look at the main drivers of the NII and NIM improvement, we have broad-based growth in loans and deposits. Loans were up in all regions, low single digits in Europe and high single digits in North America and DCB, with double digits in South America. The global businesses grew also. Of note, CIB plus 11%. Likewise, deposits also increased strongly in all the regions. Interest rate hikes mainly benefited the U.K., Poland and Mexico and are not yet fully reflected, as you have seen in Spain, Portugal and the U.S. But Brazil, Chile and DCB are still affected by the negative sensitivity to the interest rate rises. The group net interest margin increased to 2.5 -- 2.53% from 2.41% in the fiscal year '21. It's mainly supported by our cost deposit management. Given that there was no economic benefit in maintaining most of our TLTRO positions following the change in conditions announced in October, we were able to accelerate TLTRO repayments and have repaid EUR 61 billion to date, mainly in Banco Santander, which has repaid EUR 56 billion out of the EUR 61 billion in total that we had. We expect this positive NII performance to continue in 2023 as we still have room for improvement as interest rate increases have not yet been fully passed in some of the countries. We are also rebuilding our ALCO positions from their current low exposure, mainly in Spain, and we are taking advantage of the higher yields by doing that. The rise of interest rates would generate an increase in NII over a 12-month period of around EUR 2 billion to EUR 2.5 billion, considering the forward curves that we have in the interest. On fee income, we have positive performance in all regions. Europe is up 3%; North America, 6%; and South America, around 11%; DCB also up by 3%. This performance was supported mainly by greater activity in high value-added products and services, as you can see on the right-hand side of the slide. Let's move on to cost. The sharp increase in inflation led to an overall increase in cost. However, in real terms, costs fell by 5% as we continue to improve productivity and cross-border collaboration. Our efficiency ratio is one of the best in the sector: 45.8%. We improved this year, and we were able to end 2022 close to our target despite the inflationary pressures and the lag in some regions between its impact on cost, almost -- which is almost automatic mainly in Latin America, and the uplift to revenue from higher interest rates, which will continue to fit through the coming quarters. Structural changes in our operating model are driving new productivity gains. An example of this is Europe, which have better efficiency ratio and where we have significantly reduced the cost base over the last few years. Also, we are working transformation, simplification and on reducing the cost to serve while maintaining service quality. For example, in Spain, the cost to serve per customer fell around 7%. Turning to the risk performance. LLPs grew year-on-year due to, first, COVID-19-related provisions released in 2021, as I previously said. The additional EUR 1.4 billion of macro provisions in 2022, mainly Spain, the U.S. and the U.K., part of which results and part against the fund already constituted. Brazil and Poland -- and Q4 was also impacted by the normalization that we had in the U.S. and a one-off that we had in CIB in Brazil. In terms of cost of risk, we are not seeing significant deterioration. We have improvements in Brazil to 0.61% and Mexico, 1.95%. Normalization continued in the U.K. and the U.S. from extremely low levels in 2021, and Poland was impacted by the mortgages. In Brazil, quarterly cost of risk peaked in the year in Q2, having declined in Q3 and Q4, excluding the one-off. The full year also will have been in line with our previous estimates. In summary, in an uncertain environment, we met our 2022 cost of risk target, and we have taken measures over the last few years to improve the risk profile. Moreover, there is no significant worsening of the variables that have the greatest impact on credit deterioration in the countries where we operate, mainly unemployment. This performance was supported by a high quality of our portfolio. The NPL ratio was 3.08% better year-on-year, with improvements mainly in Europe and DCB. It fell 145 basis points in Spain year-on-year, in part due to the portfolio sales we executed. Total loan loss reserves stood at around EUR 23 billion, and the portfolio distribution by stage remained mostly stable. On the right-hand side, there is a brief overview of our loan portfolio structure. 65% of the total portfolio, as you can see, is secured mostly with real estate collateral. 80% of loans are mostly concentrated in mature markets. In developing markets, Brazil accounts for just 9% of the group total exposure. And if you see it by segment, our mortgages have low average LTVs. The consumer lending portfolio is very well collateralized short term and has high returns. The SME and corporate portfolio is covered with around 50% warranties. Lastly, 2/3 of the CIB portfolio is investment grade. In other words, a very portfolio. It's important to address that the loan portfolio has a medium-low risk profile and is very predictable. The main economic variables that most affect our business are expected to remain resilient across -- along all the footprint. This, coupled with the group focus in recent years on balance sheet strength, has allowed us to improve our credit risk profile and face the current environment with really great confidence. Let's look at the main countries. In Spain, we have significantly reduced the average LTV of the mortgage portfolio. It's around 62%. Our corporate portfolio improved its rating and the ICO portfolio performed better than expected. The macro environment also is better than in previous crisis, and employment, as our Chair said, is much more resilient. In the U.K., 12% of the portfolio is floating. The simple average LTV for mortgages is around 40%, and less than 5% of the portfolio has LTVs below 80%. New business vintage delinquency rates are stable and without any sign of deterioration, and from a macro perspective, the U.K. has a very low unemployment rate. We are also very positive in Brazil and the U.S. as we are very well positioned to face the context of the normalization that we've been having. Let's go in detail to Brazil, okay? We have -- as you can -- as you have seen, a very different economic environment. We have demonstrated, first of all, that our risk management capabilities are strong enough to face a very challenging scenario. Our cost of risk in Brazil has remained below 5% over the past 7 years and, on average, closer to 4%, with greater stability than our local peers. Additionally, during these last years and lately starting last quarter of 2021, we have taken cautionary actions in order to improve the structure of the portfolio. Let me explain it in detail. We have been very more selective in origination to increase exposure basically to lower risk collateralized portfolio like mortgages, agro or payrolls. As you can see in the graph on the bottom left side, we have increased the secured loans by weighting by more than 10 percentage points. We have also enhanced the profile of our customers. The weight of the new vintages with best ratings has increased from 79% to 84%. This has been reflected in 90-day delinquency ratio, which has improved from 4% in the old vintages to 2% in the new ones. Finally, in the right side of the slide, you can see what the cost of risk increase in the last 2 years was, mainly driven by personal and auto loans portfolio, which has recently improved very much in the trends. All in all, given our risk management, the enhanced portfolio mix and the new lending profile, we don't expect a deterioration of the cost of risk on a like-for-like basis in 2023 in Brazil. Now let's go and focus on the U.S. With regard to credit in 2022, performance was better than initially expected. As you know, most of Santander U.S. provisions come out of our auto businesses, where the anticipated credit normalization began later than we would have thought but is now materializing. When looking at the slide, a key variable for 2023 performance will be loan loss provisions performance in auto Credit. Here, we see in detail. First, the normalization of credit performance will continue to do -- throughout 2023 and increase the cost of risk driven by 2 years of loan losses due to COVID stimulus and the pandemic-related factors. Number two, the portfolio mix shift towards better quality. The percentage of the prime FICOs in the loan portfolio has increased since 2016 from 14% to 41%. The higher mix of prime loans implies better credit profile and decreases the cost of risk. It is important to note the significant progress made in establishing a full spectrum out of business funded by our consumer deposits. Currently, 30% of the portfolio is retail-funded versus 17% in 2019. As the risk profile normalizes in the U.S., European regulation is more demanding with regard to classification by stages, thereby requiring greater provisions. All combined, we expect cost of risk to increase in 2023 but remain below prepandemic levels of in -- that we had -- of 2.85% in 2019 as the improved portfolio mix will support the asset quality. Now let's discuss capital. We are very comfortable with our capital position. We are in line with our target to be above 12%. And once again, the numbers show the strength of our organic capital generation. During the year, there was 138 basis points of gross organic generation, of which 62 basis points were assigned to shareholder remuneration. This increase was partly offset by impacts from markets and models. We have embedded a culture across the organization that puts capital efficiency at the heart of all decisions and from key strategies at Board level to the day-to-day origination process. As a result, we have an enhanced portfolio management and increased our balance sheet rotation. Levers that have been implemented are securitization, asset sales or risk transfer through credit protection and also using warranties. The group return on risk-weighted assets of 1.8% was boosted by higher margins, spend discipline and efficient capital deployment. And front book, the return on risk-weighted assets was 2.6%, with all regions meeting or improving their profitability targets. RWAs with positive EBA increased from 70% to 80%, with key improvements in the company segments in Spain, the U.K. and the U.S. mainly in 2022. Thank you. Thank you very much, Héctor. And let me now -- allow me to sum up before we go to the Q&A. And just to briefly summarize our results for '22 and our targets that we are setting for '23. As I said, 2022 was a year that again surprised us and was unexpected on many fronts. We faced many things, and I want to emphasize this, out of our control. But we did deliver with our focus on what we do control, and the proven success of our strategy and business model and focus on execution enabled us to deliver these excellent results. We continued to grow customers and met all our targets, improved customer experience. You can see this in the growth in revenues and profits. We continued to improve our businesses and operating model and profitability as we invested for the future. We continued to deliver strong risk performance and capital generation. And again, all of this is reflected in greater shareholder remuneration and value creation. I'm not going to dwell on this, but I just want to reiterate that when we said the 2019 medium-term plans, we were not counting with COVID, we're not counting with the war in Europe, and we have delivered in spite of that on every single one of our targets and almost delivered on efficiency in spite of the high inflation. And this is really important because we have done this at the time -- at the same time as we've strengthened our business and operating model and our cultural transformation. So again, I want to stress that we have not just delivered in the medium-term plan in '22. We have set the foundations to allow us to grow profitably into the future and deliver for our shareholders' increasing returns. As we look ahead, we are confident that all of this places us in a very unique situation vis-à -vis peers. We are confident we can continue to increase profitability and that this will be done at the same time as we drive growth, double-digit revenue growth, again supported by both greater activity and the change in our model, more customers and also the higher interest rate environment. We have significant tailwinds in Europe, with the current curve -- this is a significant amount, over EUR 2 billion. Maybe Héctor wants to give some more details later. Further improvement in our efficiency ratio. We do expect cost of risk to pick up during the year, in part driven by the normalization of provisions in the U.S. that Héctor covered, and you can see in the slide he shared. Again, based on current economic consensus, we are seeing the cost of risk remaining below 1.2% in '23. But very importantly, we are confident that revenue growth will continue to outpace growth in provisions and costs. And of course, this is what leads us to a projection of -- and the guidance we're giving on return on tangible equity above 15% already in '23. Last but not least, I've said it before, I am absolutely and we are absolutely convinced that it's our purpose and how we want to be different, that it's going to enable Santander to deliver today and into the future. This has been our guide since 2015 and is still our guide. It's part of our culture. It defines how we do business and, again, will allow us to continue progressing together as a team. We are here to help people and businesses prosper. Our aim is to be the best open financial services platform by acting responsibly and earning the lasting loyalty of our people, customers, shareholders and communities. And this is what will drive future growth and customer loyalty, increase profitability and drive greater shareholder remuneration and value creation. Congratulations for the results. Two for me. First, cost of risk. In Brazil, I wonder if you can comment the coverage ratio that you have now provisioned for the one-off NPL in CIB that you mentioned. And what is the calendar of provisions left for this single name in '23? And in this context, if you can give guidance on the cost of risk that we should expect for Brazil with and without this one-off just to assess the underlying trends in asset quality. Second in cost of risk is the U.S. business. You're guiding for a net charge-off in '23, below pre-COVID levels. Are there listed peers in consumer finance there in the U.S. are already above recovery in '22? So I wonder if you can reassure us why SCUSA will outperform in this cycle. How much are internal reasons because of the derisking? And how much is because you are more optimistic in the macro and interest rates? So on Brazil, cost of risk. First, we do not comment on single customer names. The provisions we've made in '22 are, we believe, prudent and follow both our internal and auditor's guidance. We believe we are covered sufficiently for now. What's important is that we are guiding for cost of risk for the group to be below 1.2%. And excluding the one-off in '22, we are expecting cost of risk in Brazil to be stable. I would let Héctor maybe or José in terms of coverage and other trends in Brazil. In the U.S. And again, I will pass over to Héctor also, but I just want to stress something which is really important. Since 2016, we have derisked our consumer business in the U.S. We have worked together with the group, and we have worked together with our retail bank. So 2 very important data points is because thanks to this combination where we see our business in the U.S. to be very different from our retail peers, we are now at 41% of our auto business being prime, 41%. It was 14% in 2016. That's one of the big reasons why, yes, we expect normalization but not to the previous levels. By the way, 30% of our business in the U.S. is now retail-funded because we do have retail deposits and leveraging on OEM relationships. We won Mitsubishi and others -- actually Mitsubishi only in the U.S. recently. So this is really important. And not an important point, as in Héctor's slide you can see this, is we sold the riskier portfolio we had in SCUSA, which was Bluestem. We've done many more things to simplify the business the last few years, but these are the 2 bigger points. Again, I don't know if Héctor would like to add something. On capital, our guidance is very clear. We expect to continue to build capital. I believe Héctor mentioned we do not have any significant regulatory headwinds in '23, but please comment on that again. I think on capital, what's important is we have been building capital for the last 7 years. We raised a big amount of capital when I arrived in 2015. We reached the level of capital of 12% last year. We said it will be above 12% every quarter. We are now in line with peers. And what's important, we've shown again this year, it's less volatile than other peers. So Héctor or José, would you like to add on -- Héctor on cost of risk in Brazil? Anything else on coverage on the U.S.? Cost of risk, I mean in terms of Brazil, Ana as you have said, I mean, it's quite clear. We have changed a little bit the mix what we were doing. We took the decisions where we needed to take them. And I know I see it very stable, and that's exactly the guidance we're giving that we've in that. And in terms of the coverage, as we -- as I have said, we have EUR 1.4 billion of overlays that we did both in the U.S. and Brazil to cover . So I will feel very comfortable with what we have done and with the amount of reserves and provisions that we have in both of them. In terms of the U.S., you have explained it perfectly well. The change of mix basically changes the outlook of what we used to have before. So we don't believe that the cost of risk is going to go back to '19 levels. And actually, what we have seen is the trend is a little bit positive than we expected at the beginning. And in terms of the capital, I don't know, José, if you would like to comment, but what I have seen is . Exactly. We don't expect any significant supervisory charges in 2023. The charges in 2022 were very much in line with our expected 25 basis points or so for the year as a whole. In this quarter is when we had the impact of the new models in mortgages Spain and SME Spain. And again, most models or all significant models have already been updated. So we don't expect any significant charges going forward. In terms of coverage provisions, et cetera, the EUR 1.4 billion macro provisions we made in 2022, for the group as a whole, we believe, are sufficiently prudent to support the guidance of a cost of risk of below 1.2% for next year. The first one is on the U.S. If you can give us a little bit of color on the difference in terms of loan yield and the cost of risk of the different FICO buckets to get some flavor basically on how relevant that is that you have increased significantly in the weight of FICO above 640 versus below 600. So if you can give some numbers basically again to get a better reference on that. The second one is if you can clarify the tax rate you're using for your guidance in '23 on a group basis. Ignacio, I mean the FICO yields on the portfolio, as we say in Spanish is [Foreign Language], and maybe Héctor can answer that. But what I can tell you is that what really is important is that we have sold Bluestem. That was a source of significant risk, which we sold, I have to say, exactly the right time. Second, that independently of the margins, which come up and down depending on competition, clearly, 41% in prime or above, it's a very different risk profile. And to be honest, I mean, I don't know, Héctor, if you can add a bit more color on that in a few minutes. In terms of taxes, in -- our effective tax rate was 33% in '21. We have still -- I think in '22, we'll be somewhere around 29%. And in '23, nominal taxes -- right, nominal taxes were not expected to change. Yes, you will have this tax on revenues from Spain, which we estimate, and we were instructed by our accountants and market authorities to put it in '23, and I think that's EUR 225 million, but that's not going to be seen at the tax level. It's going to be seen on the revenues. But yes, we are not expecting any change in nominal tax rates. Final implementation Basel III. We -- as you all know, we still don't have the final proposal -- regulatory proposal. We have had some positive news for us, like the multiplying factor ILM equal to 1, which was finally included. As you all know, also, we are not affected by the output floor. We are going to be affected by some other items like the operational risk. But until the final legislation is written and approved, it's difficult to give an accurate estimate. But what I can tell is that is not going to be significant, and we should be able to build plenty of capital in the next 2 years to compensate for any impact that we may have. Ignacio -- sorry, Ignacio, just very quickly on your first question. Okay, I don't have the exact detail on the FICO of what you're saying. But if you go to the page on the U.S. on the presentation of the left-hand bottom side, you can see there exactly what's the mix that we have. So you have the rates that are basically 41% in the portfolio, that this is prime and near prime, which is basically what we have done in changing the mix that we have. And we couldn't have done that unless we had the funding from SBNA that is basically now funding a big percentage of the portfolio. So this portfolio is mainly funded for that, and I can give you later the details on that. But that's basically the change of the mix that we have at this point. So the risk is a lot less than we had before. You can see how it has been growing and changes completely. And 30% is funded with our own deposits, okay? So it's quite important to understand that. I have two questions, 1 a bit more focused on costs. If we look at the performance of the bank in developed economies, it has definitely been able to control inflation quite well. It has not been that -- the case probably in Lat Am. Just wanted to see if there is any kind of additional initiatives that you can push forward to control a bit more cost growth in the region. And the second question is linked to the deposit franchises. Given your global footprint and the different experience that you have had in different interest rate cycles, how do you see banks performing or behaving in terms of deposit betas? I mean so we expect a material acceleration of deposit betas in Europe, or based on your Lat Am experience, you think that, that should be more controlled. So let me just give a high-level question. And then maybe Héctor, you can help me here. So in terms of cost control in Lat Am, let me just say that within the cost of risk -- sorry, cost guidance we're giving, to , we expect to be -- in the U.S., we're making structural changes. We started this a year ago. As you know, we're not able to change the model until 12 months ago because of minorities and other issues. So we believe that cost will be flat or down in the U.S. Again, please confirm this for me. In South America, there will be stable. We are focused on cost control. Given the lingering effects of inflation, we believe that, that will be more or less flat. You will see some increase in Mexico. Again, in Europe, we expect to have cost. But again, we are giving cost-income guidance because of inflation and uncertainties there. So there's some space. But as you saw, Spain, for example, cost came down around 5%, if I remember correctly. It was 5% for the whole group. In the U.K., we had good cost control. We expect that to continue going forward. So it depends very much on the countries. And in Lat Am, South America, I believe, is sort of flattish. U.S. is flat to down, and Mexico will be up, but Héctor, you can help me here. Deposit franchises. I mean this is important, and we have grown deposits in many of our core markets, including in the U.S. This is really important. We do believe increased competition. But again, here, what's important is the net interest margin. We expect that to expand, not just because of the fact that we are not paying a lot of our deposit franchises. Remember, we're retail. We're not paying retail franchises when rates were negative. At some point, yes, we will start paying for deposits, but we're in a strong competitive in-market position, and we believe the structural changes in the model with better service and better digital capacity will help us to do better there. So I don't know if you want to add anything there on the cost control in Lat Am, Mexico, U.S. or other countries, Héctor. Yes. Just in cost control. I mean, as you can see, I mean, Latin America is much more difficult, given that people are used to it and a lot of it is indexed of what we do, but we have been able to maintain it below inflation in most of the countries. The important fact here and the important change of what we used to do is that we're working together much more. And we are developing a lot of our software together and decreasing the amount of risk that we are -- sorry, the amount of expenses that we are generating in all of the countries. As our Chair has explained, for example, I mean, the acquiring platform was developed by Getnet and is being used in the rest of the countries. Also, the important fact is that the way we are handling the different expenses is very much controlled, and we have implemented one of the main drivers that is basically all what we do in infrastructure, and we're maintaining it to the minimum. So in that regard, we believe that we're going to be able to control costs below inflation, which is, I believe, the most important point and to maintain, as we have said, under the guidance that we have given. In terms of the deposit franchise, I can give you some of the beta deposit that we have. In Spain is around 25% to 30%. The U.K. is around 30%. The U.S., around 40%, and Brazil is around 80%. It's very automatic. But what also we can tell you is that in the last quarter, we have been able to also increase deposits in some of our most important markets. Take a look, for example, deposit growth in the U.S. was 20%. Mexico in the last quarter outpaced our competitors in that sense. And we have been -- we're going to be very much focused on that in the whole franchise and in the different parts of the bank to really enhance our deposit-gathering business. I apologize I've got a follow-up on U.S. and one on -- a new one on Brazil. On the U.S., I'm looking at your charts on the right-hand side on Slide 25 that you showed the delinquencies -- early delinquencies. My understanding is that the vintages of the second half '21, in particular, the vintage of 2022 were the ones that deteriorated most. It shows yours and from competitors, but it looks like you're showing an improvement. So maybe you can comment on apart from the general comments you've made, specifically on the latest vintages. Is that what's giving you confidence? Or maybe some commentary there. And within that guidance of the cost of risk in the U.S., maybe you can share what the car price assumption you're using for this year. I know your competitors are expecting mid-teens reductions, but I don't know what you're factoring in that cost of risk. And then on Brazil, just some commentary maybe on the NII growth that we can look forward to this year. It's obviously been slow as you had already guided to in the second half of '22. I don't know if with the latest sort of rate expectations, should we expect only growth in the second half, as you were saying before, or any updates on the Brazilian sort of dynamics. So thanks. I've actually -- just give another high level -- apologies for that. I think it's important to put vintages and more specific questions in the U.S. in the context of the country. I think it's really important to understand that our U.S. business is fundamentally much stronger than it was 3 or 4 years ago, including the consumer business. It's a business we understand, we know how to manage, we are in control. The cost of risk this year was better than guided. The leases is what linked to car prices, maybe that's lease sales that may be Héctor can address that. But what is important is we're very confident that we can deliver 15% through the cycle returns in the U.S. I also want to point out that in the last 3 -- 4 years, actually '19 to '22, medium-term plan, the U.S. was the country that added most value to the group in euros. Actually, the combination -- and this is after all cost to TNAV, FX in euros for shareholders. U.S. and Brazil were the top 2, delivering 50% of the total shareholder value creation. This is really important as you think about where we put our capital. It has proven to be anti-cyclical because of the 2 extraordinary years we had in the U.S., almost EUR 5 billion in dividends last year and more coming this year. And we've looked at this business inside and out. It delivers very good returns to shareholders way over the cost of equity through the cycle. So again, it's important to put this in the context that it's a business we know. It's a business we understand. It's a business that is leveraging the group, that is leveraging the retail funding, which we are using to derisk and compete successfully with U.S. banks in prime and near prime. We won Mitsubishi, as I mentioned, and hopefully more to come. Having said that, Héctor, could you address the latest vintages, please, and car prices in a minute? Brazil, again, as I said, U.S. and Brazil the 2 countries that have generated 50% of the value creation in euros after everything is assigned, 50% of the value creation in euros to shareholders in the '19-to-'22 year plan. Brazil has a negative exposure, I mean, negative sensitivity to rising rates. I believe this should reverse once rates stop going up in the second half of the year. Sure. Look, I don't know without specificity exactly what's going on in the vintages. But what I can tell you is what we have seen, and the trend is that the new vintages are performing much better than expected. And why is that? Because first of all, we changed, as we have said, a little bit the mix but also the risk profile in the sense that we -- since we were very much focused on profitability in that regard, the risk that we are seeing in those vintages is a little better because profitability was of the essence in what we did, and we were very much focused on that, and profitability based on the model that we have is based on risk. So in that sense, what tells you is that we were very much focused on that. And also, as I told you before, the trend is much better than we have seen. And we could see that it's going to perform better than it did in the past. In the second one, we should see growth in Brazil in the to for NII. So in that sense, we see that this is going quite well. We are being very cautious in Brazil in the way we manage risk. And in that sense, as the Chairman already said, I mean, we have negative sensitivity in the interest rates, but the growth of the portfolio basically offsets that. So as you have seen, I mean we're going to continue expanding the NII in that sense. The first one is regarding your real estate exposure in Spain. Would you say a restructuring is due? And would it make sense to use some of your extra NII to clean up? The second question is about the U.S. top line. It has been somewhat weak moving backwards. Your customer spread is moving backwards. We're seeing competition for deposits in the U.S. So can you give us some color on what to expect for NII and fee growth in the U.S. for 2023? And the last quick question, what's the tax rate you expect in Brazil for next year? It's been quite low this year at just 30%. Yes. So in terms of real estate in Spain, I'm going to need a bit of help here from Héctor and José, but we are not expecting -- so our main exposure in Spain today has nothing to do with what we had back in 2008. So the developer's exposure is at very low levels. Remember that Spain has not built many homes for the last 12, 14 years. So one of the most resilient housing markets in Europe or definitely in our 10 core markets, we expect it to be Spain. There's been a big deleveraging of families. Employment remains very high. And at the end, our real estate exposure is mostly in the individuals, in mortgages, and that is -- we expect it to be resilient. And again, as in the U.K., very much based on employment levels, which will fall but from historic highs. So in terms of restructurings in real estate, there's nothing that is anything material that would affect our guidance or our performance in Spain. If you go back, for example, where were the earnings, not just Santander, but as a sector in 2008? A big chunk of this was in real estate developers. Today, that is, I'd say, minimal, very small. And we have restructured these. These are listed companies that is a mark-to-market, and it's actually doing pretty well. So there is nothing there that would cause any concern in terms of the numbers, again, in Spain. There is one important point, Marta, that I think is important I didn't say. I'm sorry about that. The important and the top line what you're saying, you're right. And the main problem is the leasing, okay? What's been happening in the market, we used to get a lot of the cars back, and we used to make a lot of money on the leases because the car prices and the Manheim were up, and we were making a lot of money. And what happened is 2 situations. First of all, people saw that car prices -- used car prices went up. So some of the people did an exercise the lease option, and that basically eliminated a huge amount of the profit that we were making on that. On the second hand, what were happening, there were no new cars. So people basically exercised the lease option due to the fact that there were no new cars to get a new one. So those 2 things hit us hard last year in terms of the top line because leasing is a great profit center in the U.S. So those are the 2 particular things that hit us, and that's why you look at the top line in a different way. It's not loan loss provisions. It's mainly the lack of revenue because of the leases, okay? So it's quite important to understand that. And just to give you a piece of detail in Spain. As the Chair has said, I mean, we don't have a huge amount of exposure in developments or anything like that. It's mainly EUR 60 billion to EUR 70 billion in -- around there in terms of mortgages, okay, that is individual mortgages. And what is important to say is that 75% of those mortgages are on floating rate and 25% only on fixed rate, okay? So the portfolio will start resetting mainly in April through the end of the year. Carlos from SocGen. One is on the ALCO book in Spain. If you could quantify how much of the increase in NII this quarter coming from the top-up in the ALCO portfolio and what would be the existing size and the total target. Also, if you have similar plans for the other Continental Europe balance sheet to grow the ALCO. I think that's it. I mean the other questions have been answered already. If you could specify -- it's not a big issue, but the double-digit growth in revenues, the target for 2023, would that be in constant euros as well as 2022? Or that would be a nominal. Sorry. Let me -- just 1 second, and yes, I'll let you José and Héctor. But I just want to say on the ALCOs that the effect in Q4 is minimal from the euro ALCO. I think we explained in the past, we had a very small position. We have rebuilt some of that, and I'll let Héctor and José address that. But there's another issue about the other ALCO is that we have a much higher proportion than other peers in terms of the hold-to-collect -- much smaller, sorry, much smaller, which means that this has hit our capital and our TNAV this quarter, but this should come back in the fall. I would've been more conservative in how we account for that. In terms of the euro ALCO, it's still very small relative to a, say, neutral hedge position. So there is space to continue building that. But maybe you want to address that, Héctor or José. Yes, very quickly. At the end of the year, we had EUR 11 billion, more or less in euro ALCO. We've been building that in the fourth quarter. So as the Chair said, the impact of that in the NII in the quarter was really not significant. Our plan is to gradually build an ALCO, reaching a neutral position, not this year, maybe in 2 or 3 years. We know that we have a very, very low ALCO portfolio, and we want to gradually increase the size of the ALCO portfolio. We will do it, not only buying Spanish government bonds. We want to have a diversified portfolio, German, Italian, French bonds as part of that portfolio going forward. This is a significant difference relative to the way we built our ALCO portfolios in the past. Yes. In terms of the double-digit revenue growth that is in current in euros. So we are guiding to double-digit revenue growth in euros. I think that was the other question that you asked, yes. Let me just say -- just to expand on that. I mean one of the reasons that our TNAV hasn't grown as much as we believe it will grow in the future is that for the reason I said before. So if you look at '19, '22 period, 50% of the value creation was from Brazil and the U.S., and I'm talking in euros after all the effects. Reason for that is, of course, that the U.S. and Brazil did really well but also that Europe did not do as well. And you're beginning to see that change in '22. I was just checking numbers, and please take this with a grain of salt. I know Begoña will say and others. But if you look at 2008, Santander made about EUR 800 million in Banesto and somewhere around EUR 2 billion -- it was a different criteria, but just for orders of magnitude, EUR 2 billion, close to EUR 2 billion in the Santander network. In 2022, Spain is back to . I know conditions are very different and everything -- and of course, how we delivered those profits, a big chunk of that was with real estate developers. Today, that is minimal to the previous question. So there is a big opportunity to continue improving not just in Spain, as I said, but also in Europe, and that's why we're guiding to double-digit revenue growth. And again, as you've seen this year, the big delta will continue to be in Europe for different reasons: operating performance as well as the tailwinds in interest rates. Firstly, on loan growth in the U.K. It feels like the mortgage market is about to go through a very sharp downturn. Can you give some guidance on loan growth that you expect in the U.K. for 2023? And then secondly, on Swiss franc mortgage and Poland. Can you just update us on the assumptions you're listing for the provision there, please, and how those assumptions compare to peers? So I will let Héctor with the Swiss franc. But just on the U.K., it's a market that I'm very familiar with. We're expecting to improve profitability in 2023. We are focusing more on margins than volumes because there is a very competitive and challenging environment. Our cost of risk is minimal. Right now, we come out, I believe, if not -- I think, the best on stress test. And so we have a lot of focus on quality of the portfolio, with a 40% loan to value. And it is important, as I said before, the macro context on employment. And this is the key one for us in terms of how we will perform, not just net interest income and revenues but also overall profitability, including in the U.K. So I don't know if -- by the way, the U.K. is the only country where, as you know, both the IMF but also in our numbers, we are expecting a recession, a negative growth for the whole 2023, okay? But again, unemployment, even if it -- so GDP contracting, I think our numbers are 1.3% but from very low levels. So we are monitoring very carefully our portfolio. Again, the return on mortgages is still very attractive above cost of equity. And I don't know if you want to complement that Héctor and address, please, if you can, the Swiss franc mortgage question. Swiss franc. We increased the coverage of the Swiss franc portfolio to over 40% at the end of last year, around 45%, which is very much in line with the figures we have for our competitors at the end of the third quarter. Probably we are basing that on our experience of the recent court rulings locally. So it's important to stress that we are already above the KNF-recommended level in Poland. So we feel comfortable with that level. And again, we will be assigning provisions to this portfolio in the future based on the experience of court rulings. We are, as you know, still expecting a very important ruling from the European Court of Justice, particularly related to the capital returns. So again, this is a very fluid situation. Future provisions, again, will be assigned depending on court rulings locally. Yes. Could you please provide more geographical visibility for the main countries behind the double-digit revenue growth for 2023? And we got that this targeted in euros, the question before was if it's in constant euros or if it is adjusted for the future FX. The second question is on your EUR 2 billion to EUR 2.5 billion rate sensitivity. Can you please elaborate the assumptions behind that, i.e., which forward curve are you using and what date? And what deposit betas are you assuming in each country for your guidance? And just finally, if you could give us the detail of the structural hedge on the U.K. portfolio. Yes, please, let me just correct something in terms of revenues. I said current euros. Now it's in constant, the double-digit revenue growth. In terms of the -- but it is the same, right? We also -- we're guiding -- actually both should increase, both constant and also current. The EUR 2 billion to EUR 2.5 billion rate sensitivity, that's based on the current forward curves. I mean, I think that was the date we did the presentation, but my team can -- and the IR can give you more detail on that one. In terms of deposit betas, actually, Héctor went through that in another question. Maybe you want to repeat it, the deposit betas. I'll leave you go through that again, but he answered that. And in terms of geographic visibility and guidance, we will give detail on that in Investor Day, but I do want to stress one thing. This is not just about geographies. This is also about the global businesses and the Santander network, which has been one of the key advances we've made in the last few years, and there's a lot more opportunity to leverage these global businesses as we're already doing and showing with CIB, Wealth Management and payments and auto to a lesser extent. So we will give you more visibility how this benefits the individual geographies in the coming Investor Day. Yes, the betas, as I said, are 25% to 30% in Spain; in U.K., around 30%; in the U.S., around 40%; and Brazil around 80%. And as you know, very automatic due to the fact that is indexed. Yes. So the way we've done the interest rate sensitivity is on the static balance sheet at the end of December running the forward rates on the 31st of December for each currency with the betas that Héctor just mentioned. So no assumption on volume growth or repricing. So when you look at our double-digit revenue growth, double-digit revenue growth for next year means roughly EUR 5 billion increase in revenues. And what we are saying is that between EUR 2 billion to EUR 2.5 billion of that will come just from interest rate sensitivity, most of which is in euros, obviously. So I mean the structural hedge in the U.K., which was the final question, it's pretty stable at around GBP 100 billion, so GBP 100 billion, more or less, structural hedge in the U.K. Just a follow-up question on Brazil and the outlook for the cost of risk in 2023. I think you said you expect it to be stable. Is that relative to the actual number reported in 2022, the 4.8% or the underlying one of 4.6%, which excludes the one-off that we saw on Q4. And then a second question on Spain and the outlook for NII. Maybe just if you can give some sense of what kind of magnitude of NII growth you're expecting for next year. And to what extent do you think that NII growth, maybe not just for you but for the industry as a whole in Spain, will generate more political risk in this year of elections? And then finally, sorry, just a quick question on the European consumer finance or the Digital Consumer Bank. It's probably one of the unique businesses in the group, which relies more on wholesale funding or group funding. Maybe just if you could give a comment on your outlook for how that funding will reprice in 2023 and the impact you see on margin for that business over the next 12 months? Okay. So the first one is easy. It's excluding the one-off. So excluding the one-off, so around 4.6% is the number that we published. That's -- the stability is roughly stable. We're not saying a number. I'm saying roughly stable, excluding the one-off. Investor Day probably will give a more detailed guidance or not. We have to decide exactly how much we give. I just want to go back to the group because, again, what Santander offers is a group. It's not just a specific country. And I think what matters is that we delivered less than 1% cost of risk in spite of one-off, in spite of inflation, in spite of things being very different, please. This is exactly the work we have been doing, and we are increasing, and Héctor is fully focused on how can we combine this unique global scale with in-market scale so that Santander, as a whole, makes more money, is more profitable and creates more value. So -- but again, 4.6% is roughly stability. Net interest income in Spain. Again, details will be given in Investor Day, but I do want to reiterate what I said before. We are still below the levels -- way below the levels, again, very different market but a much better quality of earnings to date and what we had before. Spain is growing the number of customers. Spain is gaining market share in deposits. I think Héctor mentioned that, I think, around 15% last year. Spain has grown 700 -- or 600,000 new -- 700,000 new customers last year. So what you're seeing in Spain is a combination of very important, a change in the model already, and we will tell you more about where that is going in the next few years. And also the tailwind in interest rates and, as the CFO explained, a very conservative ALCO in euros, which, of course, mainly benefits Spain. DCB, that's one I know well. So DCB is obviously like our consumer business in the U.S. These are businesses that are more hard-hit by higher rates. In spite of that, we've actually improved our return on tangible equity to 14%. We, as you know, joined up DCB with Openbank. So we have now a digital bank helping to fund our business in DCB with very good growth in deposits. And by the way, very cheap deposits. So if I remember correctly, the EUR 10 billion, EUR 11 billion of Openbank is at around 5 basis points cost. So that is helping. In terms of cost of risk, and I can say that. So if you look at -- so we're seeing a normalization of cost of risk with all the caveats and less risky portfolio and so on that Héctor explained in the U.S. We are seeing a normalization again in the U.K. from very, very low levels, and we will see some normalization in DCB. And all of that is included within the less than 1.2% cost of risk. More details to come. I think any... Just a couple of things. On NII Spain. As I said, the EUR 2 billion to EUR 2.5 billion is mostly in euros and, to a great extent, in Spain. And quarter-on-quarter, fourth quarter over third quarter NII in Spain was up 25%. So I think you can have a pretty good idea what NII is expected to do in next year in Spain. Funding in DCB. DCB has around 1/3 of its balance sheet funded with deposits. As interest rates go up, that offers a great opportunity to improve the funding structure of DCB. And we have plans to grow deposits at DCB in Germany and in some other countries but mostly in Germany over the next couple of years by a significant amount. So this should help keep our spreads in DCB at very attractive levels. Thank you. We have around 10 minutes remaining on the call. So let's try and make this brief. Next question comes from Sofie Peterzens. Yes. This is Sofie from JPMorgan. Sorry to go back to Brazil asset quality. But if I look at your NPL ratio in Brazil is now over 7.5%, but also coverage in Brazil has weakened quite significantly. In the past, you always had over 100%. Now it's below 80%. I'm just wondering -- and then in addition, you have 20% unsecured. Why do you feel comfortable with 80% coverage in Brazil? Shouldn't it be closer to 100% and also considering that you have 20% unsecured lending in Brazil, is it fair? And most of these loans seem to have been originated when rates were kind of in the low single-digit range. Isn't it fair to assume that NPLs probably will continue to trend up in Brazil? And if not, why not? And then my second question would be on the hedging policy. Could you just remind us how much of your FX is hedged? And how much is it costing Santander per year to hedge the P&L and capital? So we're very comfortable with our provisions in Brazil. Let me remind you that provisions are now forward-looking. We've made a macro overlay, for the whole group, that a lot of our portfolio in Brazil is secured and is actually really resilient. We've seen the deterioration already, and 80% is more than enough. Again, we follow IFRS, which are now very much forward-looking provisions. So the provision doesn't mean that, that is the cost of risk. Provisions is the expected cost of risk. We had a big discussion if we should not change the cost of risk to expected cost of risk because of the way the accounting now is very forward looking. So we are very comfortable with our provisions in Brazil for the existing risk. Let me also say that our cost of risk in Brazil has been between 4% and 5% over the last 7 years. That includes 3 years with almost 10% decrease in GDP. Today, Brazil, we're expecting growth in the GDP next year, employment to be very resilient. So we're actually quite confident that both Brazil and Mexico would grow more. You've seen it in the recent IMF, and employment levels in both countries have been very resilient. Again, that's one of the main factors in the final loss of the cost of risk. In FX, we cover -- José or Héctor? Yes. As you know, we have basically the following strategy. So we hedge the capital ratio. The 12% of using group risk-weighted asset and CRR calculation. So what is -- at 12%, we don't hedge. The hedge is done at forward rates. So for TNAV impact, which is what I guess you're asking the question, Sofie, is indifferent how much we hedge because for TNAV impact -- to predict a TNAV impact, you just take the equity invested in non-euro countries and apply forward rates on a yearly basis. And by doing that, you can estimate the impact on TNAV because, again, we hedge the excess over 12% at forward rates. And obviously, we have tactically hedges for our P&L, but those flow through P&L. So when we hedge expected profits, those hedges come through the P&L. Thank you very much. We're going to have time for 1 last question. Don't worry. We can see that there are 3 pending that IR will take care of after this call. Can we have the next question from Britta, please? So thank you, everybody, for joining us. As you've heard, we are very confident that we've built a very, very solid base for delivering future growth and profitability for all our stakeholders, including increasing shareholder remuneration. We look forward to seeing you at Investor Day. We'll provide more details as to how we're going to be delivering over the next 3-year plan. Thanks again for joining us and see you soon.
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Hello and thank you for standing by. Welcome to the Canada Goose Third Quarter 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] Thank you, operator, and good morning, everyone. With me are Dani Reiss, Chairman and CEO; Jonathan Sinclair, EVP and CFO; and Carrie Baker, President. Our call today, including the Q&A portion, contains forward-looking statements. Each forward-looking statement, including our financial outlook is subject to risks and uncertainties that could cause actual results to differ materially from those projected. Certain material factors and assumptions were considered and applied in making these forward-looking statements. Additional information regarding these forward-looking statements, factors and assumptions is available in our press release issued this morning, as well as the Risk Factors section of our most recent annual report filed with the securities regulators. These documents are also available on the Investor Relations section of our website. The forward-looking statements made on this call speak only as of today, and we undertake no obligation to update or revise them. Lastly, our commentary includes certain non-IFRS financial measures, which are reconciled at the end of our press release. Thank you, Amy, and good morning, everyone. This quarter showed us overwhelmingly that our brand strength globally remains strong even in the face of short-term pressures. In Mainland China, consumers returned in full force to shop with those falling a period of significant disruption in December. We also saw solid top line growth in the United States, driven by strong performance across our store network. And our gross margin expanded year-on-year for the third quarter in a row, up over 160 basis points, with margin improvement across all product categories. With that said, we did face challenges during a seasonally significant third quarter. The largest being in Mainland China, where disruptions were worse than we had anticipated, impacting our performance significantly. And in North America, we saw a softening of demand towards the end of the quarter. In a few moments, I'll dive deeper into both of these trends. These short-term pressures will not change how we think about our business. We are and have always been building this brand for the long-term. Now more than ever, we are focused on building deeper relationships with our customers, strengthening our DTC network and continuing to expand categories, all while staying true to our luxury DNA. And we know that our strategy is working. We continue to be recognized for it as well. We are proud that for the fifth year in a row, Deloitte has named us in their Global Power of Luxury Goods Report as one of the world's fastest-growing luxury brands. Our competitive advantages remain strong. Our Made in Canada vertical integration has enabled us to so far, offset many of the cost pressures and supply chain delays facing the industry. And we have continued to deliver a steady stream of new and carryover products to our global distribution network. Turning to the quarter. We posted revenue of $577 million, down 1.6% from the prior year period, which included a 53rd week. Using the same trading weeks from the comparative quarter in both periods, revenues grew 2.5%. Before we dive into our results in more detail, I want to spend a moment discussing the pressures that impacted our earnings. It's really important to note that we firmly believe these trends, disruption in China and softness in North America are temporary, and our brand strength remains incredibly healthy. Starting with Mainland China, where the region was largely locked down for most of the quarter. We did expect a certain level of disruption. What we did not anticipate was the sudden reopening in early December. This led to a surge in infections, which had a significant impact on our business during what is typically our most productive trading month. Consumer traffic decreased dramatically and staffing levels were impacted due to illness. We are proud of how our local teams were able to navigate difficult circumstances that they faced. On a more positive note, the reopening did give us a clear message from our consumers in Mainland China, Canada Goose's brand remains strong. Traffic and transaction growth jumped immediately following the disruptions in December. In January, same-store traffic was up approximately 30% year-over-year. And in Hong Kong, traffic has tripled from the same period last year, and that strong progress has continued. Stores are fully staffed, consumers are back shopping in person, and the familiar lineups have returned to many of our stores. We are confident that our brand has retained its full strength. We also have the added benefit of Lunar New Year in the fourth quarter, which for the first time in three years, was celebrated without restrictions. Traditionally, we see a pickup in store traffic and transactions over three weeks prior to the holiday, and this year was no different. And we hit another milestone in January, surpassing the 1 million follower mark on WeChat, another example of our brand's strength in the region. All of this clearly shows that our best days are yet to come. In North America, we are seeing a continuation of mixed results early in the fiscal. Both in Canada and the United States, store traffic is up more than 30% year-over-year as more consumers are choosing to shop our experiential store network. With that being said, conversion in the North American DTC business is lower than we expected early in Q4. As I said, we believe these pressures to be temporary, and we continue to focus on driving brand heat and relevance through our exciting partnerships and collaborations. On that, I'm very excited about our upcoming collection with NBA All-Star as part of our long-term partnership with that organization. The new collection, which will be our third so far, launches next week, and it had always created a lot of buzz and hype per our brand. And in January, we celebrated our 11th year as an official sponsor of the Sundance Film Festival in Park City, Utah. This year, we returned to Main Street with our exciting Canada use base camp experience and pop-up retail store. Sundance is a perfect backdrop for our brand, truly the intersection of performance and luxury, and an opportunity for our brand to celebrate our authentic decades-long relationship with the film and entertainment industry. Looking ahead, we are also moving forward with our store expansion program much earlier in the calendar year than in past years. We plan to open three new permanent stores early in Q1, one in each Seattle and Los Angeles, as well as a second store in Las Vegas. So let's turn back to the quarter. In our DTC channel, our stores had the strongest monthly comps of the quarter in December, with total company DTC comps at 9.3%. In fact, every single geography posted positive DTC store comps in the month of December. North America was a notable growth across categories, specifically, apparel grew 61%, compared to last year, reaching 5% of total sales in the quarter. And for the full-year, non-heavyweight down grew considerably, up 20% to nearly 42% of revenues year-to-date, up from 36% in the prior year. As you can see, we continue to make progress against our category expansion strategy. Importantly, our gross margins have remained strong, expanding 160 basis points. We are particularly proud at this point, considering the enhanced promotional activity that dominated much of the consumer retail behavior this holiday season. We bucked that trend. Our gross margin reflects the strength of our non-promotional DTC network, as well as our exclusion from much of the promotional activity in wholesale this quarter. As we look ahead, although we continue to make significant headway on our key growth drivers, we are cautious about the fourth quarter. The softness of demand in North America, along with China's weaker than anticipated third quarter, has led us to lower our fiscal year 2023 expectations. We now feel that these align better with the current environment. Jonathan will give more details on this in just a bit, but I want to emphasize that our long-term expectations for our brand remain unchanged. We are well positioned to see tremendous upside in both the medium and long-term. Before closing, I want to share some progress that we've made on the core pillars of our strategy. First, growing our DTC network. There is a substantial amount of room to grow as we continue our Quest West. In the quarter, we opened two permanent stores, one in Las Vegas and another in Denver; and two pop-up stores, one in Aspen and the second in Detroit. All four locations included the full breadth of our assortment in our Las Vegas location includes our award-winning no room experience, which has been a big hit in the desert. Beyond these four store openings in North America, we also opened new stores in China, Japan and the U.K. this year. At the end of the quarter, we now have 51 permanent stores, roughly a 25% increase from last year. As well, in partnership with our new South Korean distributor, Lotte, we've opened five permanent and 12 temporary pop-up shops in only nine months. Our progress in South Korea has exceeded our expectations and on the beginning of the story there. We still have a long runway ahead of us, and I'm looking forward to sharing more of that with you in the future. And we continue to focus on expanding our product offering, reaching more consumers in more seasons. We see opportunity to expand our offering for women and building on our already strong residents of eager generations. We are innovating in our women's offering to focus on stylists for futility and it's working. In the third quarter, we saw a strong reception to our Aurora and Marlow Parkas both achieving approximately 70% sell-through, a fantastic performance for two new styles. Our pastel collection continues to be hit with women, particularly in APAC, with the region driving around a third of global sales of the collection. And lastly, we launched a beautiful collaboration with reformation in the quarter, which resonated particularly well in the United States. The reaction of the collaboration generated across our social channels, especially with women and Gen Z was overwhelmingly positive. On a final note, and one that I'm particularly proud of, in November we donated over 10,000 parkas, jackets and accessories to UNHCR, United Nations Refugee Agency in support of their humanitarian efforts in the Ukraine. The products went to Ukranians, who have been impacted by the war and needed protection from the onset of winter. In conclusion, I want to once again thank our teams around the globe, who have continued to put our customers first. Our brand remains as strong as ever, and we are better positioned than ever to execute against our strategy and accelerate our growth. Look forward to sharing more with you at our Investor Day next week. Thank you, Dani, and good morning, everyone. Today, I shall be comparing the third quarter ended January 1, 2023 with the prior year quarter, which ended January 2, 2022, unless I say otherwise. In order to highlight the impact of the incremental week in last year's results, we have also provided figures that use the same trading weeks in each period. So turning to our results. In the third quarter, total revenue declined 1.6% and 2.2 % on a constant currency basis to $576.7 million. Using the same trading weeks, revenue grew 2.5% and 1.8% on a constant currency basis. The third quarter fiscal 2023 revenue fell below our outlook range of $580 million to $660 million. As you heard Dani discuss, the majority of this can be attributed to Mainland China. Since we last spoke to you in early November, COVID restrictions in Mainland China worsened that month. Then when the country suddenly reopened in early December, which is our busiest trading month of the year, a wave of infection suppressed traffic and reduced store hours due to staff illness. And in some cases close to the stores altogether. We estimate the impact was about $60 million in lost revenue. In North America, particularly in the U.S., despite store traffic in line with our expectations. We saw lower conversion in our DTC network against a tough macroeconomic backdrop, and we estimate this represented about $25 million in lost revenue. Now turning to our revenue channels. DTC revenue increased 1.5% to $450.2 million. Using the same trading weeks, the increase was 4.6% and 8.2% excluding Mainland China. DTC comparable sales declined 6% and grew 0.5 excluding Mainland China. Total revenue growth was strong, but was somewhat offset by lower e-commerce revenue. Consumers shopped more in our stores during the quarter and you may recall COVID restrictions in EMEA and in Canada were prevalent in the comparative quarter. Taking this in the round, our strong store performance in our most important quarter reflects brand heat. And importantly, we saw this in Mainland China with the reopening toward the end of the quarter and up until today. Looking forward, we believe we have the opportunity to further enhance store sales productivity and we remain very focused on identifying and executing on the drivers to do so. We also believe e-commerce is a significant area of opportunity. We are excited to tell you more about our plans for DTC growth at our upcoming Investor Day. In the Wholesale segment, revenue declined 17.3% to $114.4 million in the third quarter. Using the same trading weeks, the decline was 11%. As we explained in our last earnings call, we fulfilled wholesale shipment request from customers in Q2 fiscal 2023, which was earlier than in the comparative quarter. This has returned us to normalized shipping patterns pre-pandemic. Now for the performance by geography, Revenue increased in North America, driven by growth of 11.3% in the U.S. from retail expansion and existing store revenue growth. Using the same trading weeks, U.S. revenue grew 17.4%. Revenue decreased in Canada and in EMEA, largely due to earlier wholesale order book fulfillment and lower e-commerce revenue. This was partly offset by strong store sales growth. Asia Pacific's revenue decline on account of Mainland China was partially offset by strong performance from stores in Greater China, as well as the new DTC and wholesale business in our Japan JV. urning to our profit metrics. We grew consolidated gross profit by $2.6 million to $416.4 million, primarily due to gross margin expansion. Q3 gross margins increased 160 basis points to 72.2% with margin improvement in every product category and in both channels. DTC and wholesale gross margins expanded to 78% and 53%, respectively. Gross margins were favorably impacted by pricing and that was partially offset by higher duty costs, product mix and the impact of the fair value inventory acquisition adjustments on sales related to the Japan joint venture. True to our track record to-date, we expanded gross margins despite the ongoing diversification of our product mix, away from a concentration in heavyweight down. This continues to give us confidence in our model going forward as we accelerate product category expansion. As a region, Asia Pacific skews to more heavyweight down sales as a percentage of total sales. And of course, the region sales were heavily impacted by COVID disruptions. Operating income declined largely due to the unfavorable foreign exchange fluctuations on working capital and on our term loan, as well as investments in technology, higher costs related to retail expansion and running stores at full capacity, as well as costs associated with the Japan joint venture. These were partially offset by higher gross profit and the timing of marketing spend, which occurred earlier in the year, compared to fiscal 2022. Adjusted EBIT decreased to $197.1 million, primarily due to the higher costs I just described, and came in below our outlook range of $220 million to $250 million for the quarter. This was largely due to lower-than-expected revenue, especially in DTC, the donation to assist refugees from the war in Ukraine, higher-than-anticipated strategic investments, as well as negative FX impacts. In addition, starting in quarter three fiscal â23, we have included pre-store opening costs as an operating expense in the calculation of adjusted EBIT. We use non-IFRS measures to help us evaluate the performance of our business. And as we expect to accelerate store openings as part of our growth strategy, we felt it made sense to factor in these costs. As such, comparable periods have been restated to reflect this change and our latest Q4 and annual guidance also reflect this. I will discuss guidance shortly. Net income and adjusted net income were lower than the comparative quarter, largely as a result of the factors impact operating income and adjusted EBIT, as well as a higher income tax expense. Turning to our balance sheet. Inventory was $482 million, compared to $368 million at the end of the comparative quarter. Japan represented about $25 million of the inventory balance at the quarter end. Higher inventory levels are primarily attributable to lower-than-expected sales in the Asia Pacific region. We monitor the levels of inventory in each of our sales channels and across geographic regions, and we align that with demand that we forecast in each region. Whilst it's slightly higher than we would like, we are comfortable with the health and makeup of our inventory. During the third quarter, we renewed our share repurchase program in relation to subordinate voting shares. We purchased about 745,000 shares in the quarter and we will continue to be opportunistic alongside investing in the business, which attracts the highest ROI. We ended Q3 with cash of $344.2 million, compared to $407.6 million at the end of the prior year quarter. Net debt including capitalized leases was $419.2 million, compared to $238.1 million at the end of the prior year quarter. We're very comfortable with net debt leverage of 1.6 times adjusted to EBITDA at the end of the quarter. The increase in net debt was primarily due to increased lease liabilities on retail expansion. The financing needs of the Japan JV and the impact of FX on our U.S. denominated term loan. Turning to our outlook. With worse-than-expected COVID disruptions in Mainland China, in our most important trading months and slower momentum in North America towards the end of the quarter and in quarter four to-date, we have revised full-year guidance. We now expect fiscal 2023 revenue to be between $1.175 billion and $1.195 billion, compared to our previous guidance of $1.2 billion to $1.3 billion. For DTC, this assumes a comparable sales decline in the low single-digits, compared to our previous assumption of a decline in low single-digits to growth in the high single-digits at the top end of the range. DTC sales are now expected to comprise the high-60s as a percentage of total revenue, compared to our previous assumption of 70% to 73%. Wholesale revenue growth is maintained at 6% for the year. We now assume $45 million to $50 million in revenue from the Japanese market, which compares to our previous assumption of $60 million to $65 million as our new stores have had a slower start than we anticipated. Moving to profitability. We expect adjusted EBIT of $167 million to $182 million for a margin of 14.2% to 15.3%, compared to our previous guidance of $215 million to $255 million for a margin of 17.9% to 19.6%. This revised outlook assumes strategic investments will continue into Q4 at a higher rate than previously planned, including key leadership hires, digital investments and strategic initiatives. We continue to expect a lower underlying SG&A growth rate, compared to growth in fiscal â22. We assume consolidated gross margin will be in the high-60s as a percentage of total revenue. Gross margin benefits from our vertically integrated Made in Canada manufacturing model, as well as from the conversion of our Japanese business from a distributor arrangement to a joint venture. Flowing through, we now expect adjusted EPS per diluted share of $0.92 to $1.03, compared to the previous outlook of $1.31 to $1.62. This revised assumption assumes share buyback activity. Lastly, I will cover our outlook for the fourth quarter. We expect total revenue of $251 million to $271 million. Adjusted EBIT of $19 million to $35 million with SG&A used in the calculation of adjusted EBIT assumed to be in the low-50s as a percentage of Q4 revenue. This flows down to adjusted net income per diluted share of breakeven to $0.12. In summary fiscal â23 hasn't been nothing short of eventful. We're extremely pleased with the easing of restrictions and the very strong signs of a retail rebound in Mainland China. Including Q4 to-date, undoubtedly reflective of the brand strength. We are well positioned to significantly benefit from our DTC network expansion in the country. We have 6 times as many stores as we did when the pandemic began. We know the macroeconomic environment is challenging, but we're confident that our luxury brand positioning, our DTC and product expansion plans, as well as our focus on the consumer make for the right strategy. And critically, we are focused on executing our strategy to drive profitable growth. As Dani mentioned, we look forward to taking you through our plans at Investor Day next week. Thank you. [Operator Instructions] Our first question comes from the line of Michael Binetti with Credit Suisse. Your line is open. Hi. Thanks, everybody, for taking our questions here and for all the detail. I guess just the first one, I'm just looking at the shape of the P&L in the quarter. You -- I think revenues came in the quarter, a little down by a few million, but EBIT missed by more than $20 million, maybe walk us through a few of the components that have caused that amount of deleverage, just high-level thinking? And then I am curious what do you think is causing the pressure on the conversion rate in North America direct-to-consumer? I mean, I donât- you said traffic was good, so I don't know if you felt like weather was an issue, but wonder what your early diagnostics are on the conversion issue? Thanks, Michael. So let me take the first part of that. As you said, revenue was lower-than-expected. And that was DTC, which obviously is our highest margin segment and best quality of revenue. And as a percentage of total, that was less than we expected for the reasons I detailed in my prepared remarks. And both in Mainland China and North America, and that's dilutes gross profit, and that was worth about $5 million just to put an order of magnitude down there. We also made decisions to sustain our marketing investment in support of the brand, as well as investing in strategic growth initiatives. And as I said, we'll talk a bit more about those next week, but that's another $3 million. We experienced some negative FX impact, and that was worth a further $3 million within adjusted EBIT. The move of pre-opening costs into adjusted EBIT added a further $3 million and of course, we made conscious decision to donate around 10,000 jackets that exist refugees from the war in Ukraine. So that's really what made up the vast majority. Yes. Just Dani, just to add on us a little bit, I think notwithstanding the challenge we faced specifically in China's quarter and the pressure we face, we run this business for the long-term and when we feel that we have an opportunity to make an investment for attractive return and to drive growth in the future, that's what we do. As oftentimes, we look forward to discussing our plans in that regard further in our strategy -- at our Investor Day next week. But I think it's important to remember this -- our trajectory is strong and we continue to invest in future growth. And Michael, just on your question around conversion. So I think couple of points here. One, we saw great traffic in stores, so there was a shift from online back to stores, which we have continued to see through the full-year. So traffic was up, I think the convergence specifically was a challenge on e-comm. And so [Technical Difficulty] little bit of a problem, weâre happy with what we are seeing, but it's just in general that shift in the lock and conversion just caused the overall play. The reason for that, I mean, I think you'll see that across the industry. I think people were a little more nervous in December about spending, I think they saw layoff, I think looming recession, I think all of that contributed to just like lower consumer confidence overall. Thank you. Please standby for our next question. Our next question comes from the line of Brooke Roach with Goldman Sachs. Your line is open. Good morning and thank you so much for taking our question. I was wondering, if you could speak to the reacceleration that you're seeing quarter-to-date in China? I know you spoke to traffic levels rebounding. But can you help quantify the rebound that you're seeing in dollar sales and store productivity levels? Based on what you're seeing today, how does that form the range of outcomes for your China business contribution for the fiscal fourth quarter and into calendar 2023? And some of the medium-term opportunities that you see in terms of brand health and momentum? Thank you. I just want to start - yes. Thanks for the question. Brooke, I just want to say the re-acceleration in China, I think is a really strong proof point of our brand health overall. And in China, we did see that. As mentioned in December, we saw that the lifting of zero-COVID had a negative impact in the short-term and unfortunately that was driven -- our most supportive month of the year. But once that passed and a lot of people recovered from COVID in China, our sales have rebounded there. Sales are currently very strong, there is long lineups outside of our stores and we feel really good about our brand health in China and around the world. Yes. And if I can just add to that, we're really seeing very strong growth, virtually every store quite in Mainland China and I'll count that is up. None of those increases are measured in single digits, some of those increases are measured in triple digits, and equally outside of Mainland China; in Greater China, we're seeing very strong growth, in Hong Kong, we're seeing great growth in Macau, and we're seeing very strong growth in Taiwan. Thank you. Please standby for our next question. Our next question comes from the line of Adrienne Yih with Barclays. Your line is open. Good morning. Thank you for taking my questions. Just sticking on the topic of China, Jonathan, I was wondering if you can help us sort of bridge the gap between the short -- many of the stores were opened during this kind of three-year period. Hong Kong stores in front of protests and then COVID. Can you talk about the planned sales and EBIT, kind of, the initial plan where those stores are as a group now? And what the recapture opportunity is over, say the next 12 to 18-months in both sales and then EBIT margin for that segment? And then secondarily, just any color on North America, the comps that were just reported and what those comp quarter-to-date in the North American market look like? Thank you very much. So, thanks, Adrienne. Let's start with China. Clearly, the stores have been performing below what you would expect them to be doing in normal circumstances, particularly during most of calendar â22 and that's something that we've seen. We've seen great rebounds, we've seen the numbers coming back very strongly, as I've just said, in this quarter. But we still got a substantial runway before weâre back to normal operating levels for full-year. We've come through nine months here. This year where frankly the stores were either closed or very, very impaired traffic. So we think that there is a significant uptake there and you can see that from the scale of reduction that we've made, that's been attributed to China performance both in the previous quarter and the amount that we've particularly articulated in this quarter. I think when it comes to our performance in the current quarter in North America, the stores -- there is definitely a macro impact. There's no doubt about that. But I will still say that the stores are performing better than they were a year ago. We got more stores up than them. But what we are seeing is less conversion happening on the website. And I think we just -- we can see a natural level of hesitance in consumers at the moment, which seems to permeate the sector from what we can see. Thank you. Please stand by for our next question. Our next question comes from the line of Ike Boruchow with Wells Fargo. Your line is open. Hey, good morning. Jonathan, I was wondering, kind of, piggyback on Brookeâs question, just more specifically in terms of the dollars and productivity in China. I think you said that there was a $60 million shortfall in China this quarter specifically. I guess, if we could just zoom out high level? If you look at the store base you built out in China, what you normally would have planned, I know it's hard to think this way whether ânormalized revenue stream out of the regionâ. Can you talk about the revenue dollars that are not currently in the P&L that if things are to revert back to normal could come back? I mean, clearly like you said, it's $60 million just this quarter, but I'm kind of curious on an annualized basis, how maybe you guys are thinking about that? So if I take it at its most, I'm going to reiterate a little bit the point I just made, but remind you of the numbers. We are talking about $100 million reduction previous cycle and a further $60 million this cycle. So absolute minimum, we're looking at $160 million that's attributed to weakness and performance in China. And that assumes that we were actually assuming a normal year this year and which we were not. So in broad terms, we would say that there's upside greater than those two reductions. Thank you. Please standby for our next question. Our next question comes from the line of Oliver Chen with Cowen. Your line is open. Hi. Thank you. Regarding the U.S., what are the opportunities that you have within your control to improve conversion and what might you see happening ahead with that customer? And then as we think about Asia and China, the inventories and the traffic build, I would love your highlights on how you'll manage inventory in a pretty dynamic reopening period? A third and final is investors often ask about brand heat. You have a lot of momentum and a lot of the metrics look really strong. Would love your thoughts on the key things that prove your brand heat is really robust as we go forward? Thank you. Thanks, Oliver. For the U.S., conversion, I mean, generally, I wouldn't even say this is just to the U.S. I mean conversion is something that we're looking at day in, day out. I think we're putting a lot of investment in terms of what is that Canadian warmth experience that we deliver. So making sure anyone who comes online, comes in to our store, is greeted warmly, understand what we have to offer, see the full breadth of our offering. And again, in the U.S. in particular, they're seeing us as a lifestyle brand, don't just think about it as whole lot of parka brand. And then getting guided expertise from our brand ambassadors in stores at least. And I think that combo is what has helped us win. I think it's helped us grow our conversion already, but obviously, that's continued to be a focus. Online, I think it continues to be an evolution. I mean, as we better understand our consumers in every market -- every region. What are they looking for? What is that personalized journey? How do we make it an experience that is directed just at them? Offering up the right product at the right time and then make it seamless and easy for them to check out. So I think there's nothing specific as a new program, I can say specifically, but this is definitely a focus for us. And again, we'll talk a lot more about it in our five-year strategy next week in Investor Day. When it comes to inventory, and particularly when it comes to Mainland China, it takes us a reasonable while to get product into the country and ready for sale. So as a result, a lot of the product that we were expecting to sell in Q3 was already staged in China in that quarter. Therefore, actually, as we've come into Q4, the inventory is all there, we can respond to demand pretty immediately. And we're not concerned, therefore, about our ability to meet demand in short order. And our numbers are proving that. Yes. And just to speak to brand health for a moment. Sorry. Just to comment on brand health question, I think outside of China, Oliver, as I mentioned before and that we've seen in Q4 that our store sales have accelerated quite dramatically lineups outside of stores again, which is great. We continue to see great progress on our strategy. We continue to see our new products. We adopted a very -- a new product with a -- at a faster rate than our existing products. And the demand was here -- from our consumers is there. And I'm just understanding the macro backdrop. We're seeing lots of demand for our products that we are making. Thank you. Please standby for our next question. Our next question comes from the line of Jonathan Komp with Baird. Your line is open. Yes. Hi, good morning. Thank you. I want to just follow up on inventory, if I could. Could you maybe just share a little more detail on the state and positioning of the current base, if you have any plans to reduce inventory, how you plan to do that? And then just a broader question. When you presumably reduce the utilization at your factory, does that have a material impact on the COGS of any new production? Just maybe if you could walk through the dynamics there? Yes. That's no problem. I think that -- let's start with the macro. First of all, within the inventory number, just as a reminder, Japan is non-comparable because obviously, it wasn't there as a JV a year ago, and that's about $25 million of the balance. Obviously, we've got somewhat more inventory than you would have expected at this point in the year, probably a little bit more than we'd like. But the health of it is not our concern. So we -- as a brand with a strong record of sell-through and the vast majority being continuous of core products that we're able to carry that overseas on season. And so inevitably, therefore, and you rightly anticipate, we may tune our forward production volumes according that's accommodated within our gross margin algorithm. And so it's not something that we expect to cause a distortion to forward margins. Thank you. Please standby for our next question. Our next question comes from the line of Mark Petrie with CIBC. Your line is open. Hey, good morning. Thanks, a question around the strength in the non-parka categories. Just wondering if you could talk a bit more about that. Was that consistent by region? Consistent through the period? And is that sort of continuing into Q4? And then I also just wanted to ask about the performance in Japan and if there are any specific circumstances that drove the reduction in the expected contribution of some increase? For sure. Let me talk about the expanded offering. So we did see it across the category -- or sorry, across regions. In North America specifically, sales grew 51%, compared to last year, so just now sitting at about 5% of the total sales in the quarter. Heavyweight -- non-heavyweight down grew 20%, so that's up to 42% of revenue year-to-date, up from 36% per year prior. And we're seeing that in EMEA as well. Obviously, itâs a little bit skewed in terms of APAC region just for the reasons we've all been talking about, but we're very happy to see that new categories are growing faster-than-expected, faster than traditional core parka. Then again, that idea that people are buying into this brand as a lifestyle brand, not just as a parka brand or a cold weather brand. That's what we've been working hard on, and it's working. It's resonating. I think when it comes to Japan, what I'd say is that as a reminder, the strategy there obviously is a switch from wholesale into retail. As you know, we've opened a couple of stores there, one in Osaka, in Shinsaibashi and one in Ginza in Tokyo. And whilst we're very happy with the locations, the initial take-up of business was a bit slower than we might have expected. And hence, we've seen that business be a bit softer and we've revised the ranges accordingly. Thank you. Please standby for our next question. Our next question comes from the line of Jay Sole with UBS. Your line is open. Great. Thank you so much. I just wondered if you could elaborate a little bit more. I think you touched on this in other parts of the call, but if you elaborate a little bit more on the footwear business and sort of how that played out this season, what you're expecting for next season to beyond, that would be helpful. Thank you. Thanks, Jay. Absolutely. Footwear has been doing that quite well. I mean, obviously it does well in nascent category for us. It's grown almost 175% overall and since -- on this quarter. And we have big plans for it, as you know. We're very pleased with the way our consumers have taken to our new products. Some of our first two products launched were very strong. And the follow-up products to that were even stronger than those. And we continue to build momentum and strength behind that category. And super excited about future growth. And just one thing to add on that is the one thing I'm particularly been watching is just the uptake with women. And so our -- we have a really standard size with our pull-down topper boots. Women have been, taking those up like they're very excited about those categories and we're selling out often and having to replenish quite quickly. So that's great in terms of both category growth, but also in terms of how we're reaching women, which is obviously a key focus for us. Thank you. Please standby for our next question. Our final question comes from the line of Omar Saad with Evercore. Your like is open, with Evercore, Iâm sorry. Your line is open. Thanks for squeezing me in. Most of my questions have been asked. I just have a couple of cleanup questions. I want to confirm, it sounds like you don't think weather, the warm weather, was an impact in North America slowdown, number one. Maybe dive in a little bit. Do you think in Japan, do you think there's just a brand awareness and recognition issue? Do you have that kind of presence with the consumer mind where it needs to be for the store footprint? And then lastly, in China, what gives you confidence that the strong recent trends are not just the Lunar New Year? Thanks. Thanks, Omar, for your question. Weather -- I don't believe that, in particular, weather has ever caused us -- to caused strong performance or cause performance. I think we've been able to perform well regardless of weather. I think weather is -- and cold is a relative thing. And also, there's weather events -- extreme weather events are more common and localized around the border. That said, like when there is snowstorm, people do want more stuff like it. So there is an impact, but I don't think that over spread over the year from a macro point of view, there's a significant impact on that, I think. So that's to address the weather question. In Japan -- I think our brand is really strong in Japan. I've been really excited about this JV for years, and I'm very excited to have an operating entity that we own there now. And I think that -- our stores just opened. The Japanese economy is -- so our stores are new to the marketplace. They didn't have an established customer base, and it's just going to take some time for them to gain some traction there. But I'm very confident in the strength of our brand in Japan. I know the size of it, I don't know how big it can be. And there's no doubt that it could be significantly better than it is today and will be with time. And those stores will be part of the reason for that. I think when it comes to the Chinese business, I mean, there's clearly the Lunar New Year, but the real driver is pent-up demand from consumers. And that's what we've been seeing. That's what drives the lineup. And you're seeing business -- you're not just seeing business at the weekend; you're seeing every single day of the week. And it's really been very marked and very strong. Yes. I'll just close with agreed on all that. And I think that -- if the reopening happened one month sooner, I think we would have seen the same behavior in December. And had we seen the same behavior in December, I think the conversation of the quarter would be a lot different. But it just -- it's an unfortunate matter of timing for us, and we are fortunate that -- during Chinese Lunar New Year, our Chinese consumers were able to shop in our stores and online and the performance speaks for itself.
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EarningCall_621
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Good afternoon, ladies and gentlemen, and welcome to Kemper's Fourth Quarter 2022 Earnings Conference Call. My name is Jason Erne and I will be your coordinator today. [Operator Instructions]. I would now like to introduce your host for today's conference call, Karen Guerra, Kemper's Vice President of Investor Relations. Ms. Guerra, you may begin. Thank you, operator. Good afternoon, everyone, and welcome to Kemper's discussion of our fourth quarter 2022 results. This afternoon, you'll hear from Joe Lacher, Kemper's President, Chief Executive Officer and Chairman; Jim McKinney, Kemper's Executive Vice President and Chief Financial Officer; Matt Hunton, Kemper's Executive Vice President and President of Kemper Auto; Duane Sanders, Kemper's Executive Vice President and the Property and Casualty Division President; and Tim Stonehocker, Kemper's Executive Vice President and President of Kemper Life. We'll make a few opening remarks to provide context around our fourth quarter results, followed by a Q&A session. During the interactive portion of our call, our presenters will be joined by John Boschelli, Kemper's Executive Vice President and Chief Investment Officer. After the markets closed today, we issued our earnings release and published our earnings presentation and financial supplement. We intend to file our Form 10-K with the SEC within the next week. Our discussion today may contain forward-looking statements with the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, the company's outlook and its future results of operations and financial condition. Our actual future results and financial condition may differ materially from these statements. These statements may also be impacted by the COVID-19 pandemic. For information on additional risks that may impact these forward-looking statements, please refer to our 2021 Form 10-K as well as our fourth quarter earnings release. This afternoon's discussion also includes non-GAAP financial measures that we believe are meaningful to investors. In our financial supplement, earnings presentation and earnings release, we've defined and reconciled all the non-GAAP financial measures to GAAP where required in accordance with the SEC rules. You can find each of these documents on the Investors section of our website, kemper.com. All comparative references will be to the corresponding 2021 period unless otherwise stated. Thank you, Karen. Good afternoon, everyone. Thanks for joining us today, and welcome to our fourth quarter conference call. I want to start by saying that I'm optimistic about Kemper's future. The quarter included improving underlying profitability masked by a few infrequent items impacting financial results. Our top priority remains returning the company to target profitability. Further, our initiatives to enable greater capital return while reducing volatility in earnings and cash flow are well underway. We are observing continuous improvement in the underlying profitability of our core businesses. Our recent strategic actions are already delivering results. I'm bullish about achieving adjusted consolidated net operating income during the first half of 2023 and producing underwriting profits during the second half of the year. The strength of Kemper's differentiated capabilities, market focus and enhancement initiatives positions the company to provide attractive near- and long-term returns to shareholders. In the fourth quarter, we made progress on each of our initiatives. Highlights include the following: rate-taking activities exceeded the third quarter forecast, rate approval for California specialty personal auto, cost structure enhancements aligned with third quarter commitments, continued strong profitable Commercial Vehicle growth and improved Life profitability. The current operating environment remains dynamic. This requires us to be agile, use quality and timely information and have a team that can quickly ingest adapt and respond to these changes. We have the right team in place to navigate through this period and capture the opportunities that will emerge on the back side. As a reminder, we'll be holding an Investor Day in New York on Thursday, March 9. This will be a great platform to discuss Kemper's journey to date and the road ahead. The event will include presentations from myself and Jim as well as Matt Hunt, who leads our Specialty Auto franchise; and Tim Stonehocker who's responsible for our Life business. As a result, Matt and Tim are joining our usual speakers today. I'll now turn the call over to Jim to discuss additional details on our operating results and an update on our strategic initiatives. Thank you, Joe. I will begin on Pages 4 and 5 with our consolidated financial results. For the quarter, we generated a net loss of $0.87 per diluted share and an adjusted consolidated net operating loss of $0.41 per diluted share. This included unfavorable prior year reserve development of $8 million and $9 million of catastrophe losses in the quarter. The ongoing environmental challenges facing the P&C and life insurance industries continue to impact Kemper's financial results. Significant factors include severity trend inflation, seasonality and modest adverse development and while moderating elevated mortality. Our energy and efforts remain concentrated on restoring the business to profitability and the inputs that will enable us to achieve our target returns. These include filing for additional rate, implementing further underwriting actions and reducing expenses. The combination of profit actions earning in -- at an accelerated pace, improvements in expense run rates and reduced mortality in our Life business will lead to continued improvement in our financial results. Turning to Slide 6. To enable greater insight into our underlying results we have included an underlying reported to normalized combined ratio walk. It details the biggest items impacting our P&C ratios. This includes seasonality and modest reserve development. Normalizing for these items, we saw approximately 1 point of sequential improvement in Specialty's underlying combined ratio and approximately 3.5 points of improvement in preferred P&C. Moving to Page 7. This quarter, we had modest prior year and intra-year development. It was driven by elongated settlement time lines for third-party claims, additional defense costs driven by an increase in litigated PIP claims and a decline in salvage values relative to used car prices. Consistent with our reserving philosophy, we react quickly and provide operating transparency into trend changes. Despite the challenges today's environment creates, we are able to accomplish this due to the quality and speed with which we gather and act upon information. This allows us to maintain appropriate reserves. Recall that for the year, we had favorable prior year development of approximately $17.4 million. Moving to Page 8. Last quarter, we announced several operating model enhancements to improve productivity and growth including expense reductions. These initiatives are on track, and we expect to deliver on each of our commitments. During our fourth quarter, we secured approximately $61 million in run rate savings. This included 0.6 points or $34 million improvement in our LAE ratio, approximately $18 million in enterprise expense reductions and $9 million in savings from real estate optimization. Turning to Page 9. We highlight the strength of our balance sheet. We have appropriately capitalized insurance businesses and a healthy liquidity balance of $1.3 billion. Further, we continue to have the capital needed to navigate this environment and appropriately invest in the advancement of core capabilities. In addition, as previously disclosed, we are committed to reducing debt outstanding by $150 million and bringing our debt-to-capital ratio back to our long-term target of 17% to 22%. Moving to Page 10. Net investment income for the quarter was $106 million. New investment yields are up 250 to 300 basis points over the prior year, leading to a pretax equivalent annualized book yield of 4.6%. We estimate $275 million to $325 million of our fixed income portfolio will be subject to reinvestment in 2023. This will provide incremental improvements to future investment income. On Page 11, we provide an update on our strategic initiatives. During the quarter, we submitted our initial filings with the Illinois Department of Insurance to establish a reciprocal exchange. We also formed Kemper Management LLC to serve as the reciprocals attorney-in-fact. The project is on track, and we expect to write premium in the structure during the third quarter of 2023. Additionally, we completed the sale of Reserve National Insurance Company and its subsidiaries otherwise known as Kemper Health to Medical Mutual of Ohio on December 1. Finally, as indicated on our third quarter call, we initiated a strategic review of Kemper Personal Insurance, our preferred home and auto business. We continue to explore options and we'll share additional details when available. Thank you, Jim, and good afternoon, everyone. Moving to Page 12 and our Specialty P&C business. Aligned with Joe's earlier comments, we are laser-focused on restoring the business to target profitability. Our actions are outpacing loss cost trends and underlying profitability is improving. As noted on Page 6, during the quarter, the specialty auto book reflected a sequential normalized underlying combined ratio improvement of approximately 1 point, driven by the realization of earned rate exceeding loss trend. Let me comment on the 2 components of Specialty Auto business. Since the third quarter of 2021, on a weighted average basis across our entire personal auto book, we have filed for approximately 43 points of rate. Through the fourth quarter, 21 points have been approved and are effective in the market with 8 points of that having been earned. As we move forward, we will continue to file rate aligned to loss cost trends. Shifting to Commercial Vehicle, the business continues to perform well. For the year, the underlying combined ratio was 93.8%, year-over-year net written premiums grew 33% and policies in force grew 17%. To reaffirm, the segment is expected to see additional improvements in the first quarter and deliver underwriting profits in the second half of 2023. Thank you, Matt. Now we'll turn to Page 13. Similarly to the specialty auto business, the preferred segment is focused on restoring profitability. As noted on Page 6, preferred quarter was impacted by a few unusual items. This includes seasonality and modest prior quarter reserve development. On a normalized basis, the underlying combined ratio improved by approximately 3.5 points. As we look forward for the next couple of quarters, we expect the rate and non-rate actions we have taken and will continue to take to keep pace with trend, and we will deliver profit improvement in the second half of the year. Thank you, Duane. Turning to our Life & Health business on Page 14. Despite higher levels of inflation impacting our market segment, the business continues to see strong sales demand and good persistency. New business sales are aligned with prepandemic levels and profitability continues to improve with pandemic-related headwinds subsiding. . Excess mortality has declined for the last 3 quarters, and we are nearing prepandemic mortality levels and expect continued improvements. In addition, the business continues to benefit from new investment yields at or above our pricing assumptions. The combination of these items will lead to additional improvements in our financial results. Thanks, Tim. Turning to Page 15. In summary, I continue to be optimistic about our prospects. You should leave this call with a strong understanding of the following: first, the financial benefits of our initiatives will earn into the book on an accelerated basis. We expect to be profitable in the first half of the year and make an underwriting profit during the second half. Second, the inputs that drive profitability continue to trend positively, including rate in excess of loss trend, improving mortality and interest rates above pricing assumptions. Third, restructuring and integration efforts are on track to produce targeted expense savings. And lastly, our reciprocal and Bermuda capital initiatives provide short- and long-term opportunities to further optimize capital and reduce risk. We are confident in the actions we have taken in response to increased loss costs seen over the last 18 months. We are trending in the right direction. Enhancements in our operating model will further advance profitability gain. To start off with, Joe, thanks for the guidance that you've provided regarding expectations for operating income in the first half of '23 and underwriting profitability in the second half of '23. I'm wondering how the rate actions that we're seeing that you filed for the first quarter '23. How those come into play and intersect with the guidance that you provided? Or is the guidance you provided really a reflection of the previous rate action you've taken? Greg, thanks for the comments. The bulk of it is going to be driven by -- particularly the first half of the year is going to be driven all by actions that are already taken. If we file for something in the first quarter, the likelihood of it being approved and effective and then working into the written rate and the earned rate, it will have a de minimis impact on the first half of the year. It could, if it were approved early enough in the year, start to be written in and have some impact on the back half of the year. So those could affect it. You should assume, though, that our statement that we're expecting to make profits in the first half and an underwriting profit during the second half to be regardless of whether or not we get an approval on the first quarter numbers. Okay. That's appropriate. Can you pivot and maybe this is a good opportunity for Matt to chime in, Duane, but it seemed like you're calling out Florida PIP again? And then I look at the policy count growth and the decline, can you give us a sense of where is this across the network? Or is this regionally specific or some color around where the problems -- where the real hotspots are at this moment in time? Sure, Greg. And I'm going to start with a quick comment then I'm going to actually ask Jim to because I would tell you this is a function, maybe a little less operational and a little more of how it's working through some of the reserving numbers. Maybe, Jim, you offer some comments and these guys want to add? Yes, Greg, thank you, Joe. I think the big element that what we see kind of in this quarter, and again, maybe it's some of the changes in the assignments of benefits or other elements is we've seen an additional amount of litigation activity associated with PIP claims, obviously, in Florida. That change caused us to take -- revisit a little bit when we look back across this year and in prior years and then going forward, what we think that litigation rate is going to be. We don't importantly see a difference in terms of what we're seeing from a severity side that's notable. This is purely about the defense cost and making sure that we've got the right dollar amounts that are associated with that here kind of given, again, that increased frequency with which that's occurring. And again, I'm not 100% sure I can tell you kind of some of these changes in that kind of more revealed here. Maybe it's a little bit related to some of the -- again, the property changes in that where folks can go. But overall, we took care of it here this quarter and nothing here really to note more than that. Yes. This is Duane. Only one thought beyond that. I think it's important to recognize that in that space from a litigation perspective, not all litigation is created equal. And a lot of times there's, what I would prefer or call, frivolous or meritless type litigation, but you still have an obligation to defend. And so to Jim's point, you probably don't see a lot on the severity piece and it's more on the defense side. And we were just truing that up, making sure that we're in a position to handle those as they come through. Got it. Last question just is going to pivot to the catastrophe reinsurance renewals. It's obviously pretty topical in the industry. And maybe you could -- I was looking at the Slide 19, where you talk about your program. It doesn't look like your retention on cat ex a loss change, but you did drop the ag program. Maybe you can just give us some color on what's going on there. Yes. No. Thanks, Greg. Jim again. big picture-wise, obviously, I think everyone's aware of kind of the trends in the reinsurance market, obviously, with inflation and other elements and some of the uncertainties that have gone on there. Over the last couple of years, we had been close to essentially where we were breakeven from a crossover perspective, from a pricing [indiscernible]. Again, we haven't had a claim or used anything since like 2018. And so when you think about that relative to kind of the increased pricing that was out there today, it's just no longer penciled both with the shrinking book and that we have in the property or the diversification that we've added with inside that book at this stage from an economic perspective, just to maintain it. So again, kind of the net historical value to us was a couple of million dollars, again, once you include kind of capital considerations of this. It would have been $3 million, $4 million if you kind of think about it the other way. Not a big element in terms of the total change to us. But we -- our framework and that have us make sure that we're always solving for what we think is the best answer for our shareholders and our stakeholders. And with the changes that are inside the market, we updated kind of our program thoughts accordingly. A couple of them for here. Just a quick clarification. When you say profitability in Specialty P&C, do you mean Specialty Commercial and Specialty Personal will both be profitable underwriting wise in the second half of the year or just in total? Got you. Because Specialty Commercial is already profitable. So I got you. Okay. And then the second question on that -- got you. Got you. And then on that, I'm just curious, what is your kind of loss trend assumption in making that type of a statement. Are you assuming that we're going to continue at these double-digit levels that we're seeing right now? Are you assuming it goes down to single digits? What's your assumption? So we don't disclose our assumptions on that standpoint other than what we can give you is what we have been seeing more recently is something that's much more comparable to kind of some of the historical norms. There's still some inflation inside there. We see a higher level. You might think about low double digits on some of the things that we're seeing from a commercial perspective, but auto may be running more in that kind of 5%, 6% kind of area. Any way you look at it, this does take into account what we think is the mix component that would be there, both from a state perspective, a coverage perspective and other. And so what we're trying to give you is kind of the net answer. It includes what the earned rate and other elements are going to come in. If you think about kind of the framework that we outlined before, where we talked about jumping off of kind of that normalized underlying, think about sequential improvement as it relates to the -- basically the additional earned rate coming in and underwriting actions offsetting effectively some of the trend. What I would suggest is, you'll get -- maybe you're adding at this point in time, 1 point -- 1.5 points inside there for a trend just because some of the underwriting actions on a sequential basis aren't going to continue to materially increase from that perspective. So they won't fully offset trend. So sort of giving you any advice, maybe you got a little bit there. But you should basically kind of be coming to that outcome where you're baseline way to kind of think about improvement and begin to think are we going to be a little faster, a little slower than that would be, again, kind of that earned premium change earning in, maybe 1 point, 1.5 points difference from effectively trend kind of exceeding those underwriting actions and then essentially your answer begins to fall out and then you can appropriately adjust up or down relative to you think the additional progress we'll make against that. Got you. Got you. That's -- my point I was just trying to get to is that if you missed your thought of like getting to that number by the end of the -- underwriting profit by the end of the year, it's going to be because trend is running hotter than you have expected. It would be. We obviously would corresponding update guidance as we went, but it would be -- this would be something unforeseen, right, and significant, to some degree, not -- it should not be -- if we're talking about 1 point or 2 throughout the year, a little higher, a little lower, we're comfortable relative to the guidance in that, that we're -- we provided here. So again that's been something [indiscernible]. We're pretty comfortable with thinking -- with the thought of profitability. I get it. So we've learned in the last 2 years, nothing surprising, right? So second question -- Yes, I get it. I get it. I get it. The second one, I'm just curious, California, it looks like you all filed for and were approved for 6.9%. I know a competitor of yours actually achieved a lot more than that. I think it was north of 17%. Does that make you kind of reconsider -- rethink your strategy with respect to getting rate in California? I'm going to answer it in sort of 2 ways, and then I'll let Matt offer some comments, too. That's not making us rethink our strategy because you haven't outlined our entire set of tactics at this point. We filed for that 6.9% that was approved, some time ago. We have since filed for additional rate in those programs, and that's at roughly 30 points. . It will show up on the state side and I think at roughly a 37% because it combines the 2 and the state is actively working those with us. So we're aware of what's going on in the marketplace. We're aware of what's moving. And we're several months past that being filed and working. So it's not new. I'll let Matt comment on sort of where we are. So this is Matt. Just a couple of quick thoughts on our ongoing conversations with the California Department of Insurance. So we have a great relationship with them. We have a good conversation flow back and forth. As we navigate through the filings, one thought I would add is we file generally what our experience supports, and we're confident in the data, right, as we submit that to the California Department. And as we go back and forth, we'll work it as expeditiously as possible. But our expectation is that the current filings that we have, we'll work them through the filing. Hopefully, we'll get them through and effective sometime in the near future. Especially to this point have been productive and active. They're not sitting dormant and they're not moving. And I would maybe just make the general comment that the larger filing you referenced gives us -- gives us confidence as an industry, I think, that things are moving. I was wondering if you could talk a little bit about auto claim frequency. And I would imagine, please correct me if I'm wrong, that a lot of your non-rate effects would -- had a beneficial effect on that frequency, and I'm just wondering if there's any way that you can think about or you can tease out how the frequency you're seeing might vary depending upon -- if you sort of adjust for all of the pretty significant non-rate actions that you're taking? Yes, Matt, maybe you start taking a shot at specialty auto. I think that's the biggest place, Paul, on that. And Duane, you can you add some color to it. Yes. So just quick comments on frequency. As a function of our underwriting actions and our pricing actions in the marketplace on a year-over-year basis, on the PPA side, we're seeing sort of pretty significant negative frequencies come-through. They're as expected in the negative sort of 10% range. On the Commercial Vehicle side, we're seeing a slight elevation, but that's also a function of our mix that we're pushing through. So it's a plus 2 plus , plus 3 in that range on the frequency side as we shift towards a more preferred segment on the commercial space. And so again, generally in line with our expectations and nothing is out of pattern for us. And I think, Paul, when we think about the story, I know at one point in time, you had a question in terms of -- from an underwriting perspective, I think the key element of what we take away from this is we continue to see frequency down from the prepandemic levels that we had. And certainly, it returned in certain pockets or came up, but as a whole, frequency down the real outcome that's come through our financial statements is the severity factors that we've referenced before. And again, we're working our way through that. I think the positive thing is the environment, at least at this point in time. While there's still increasing trend, it is moderating and returning more to normalized levels. And the early kind of visibility that we might have to where those trends are going, continue to kind of pace in that direction. Something changes, obviously, we'll take note of it and react accordingly. But right now, if you're thinking about trends, think about us, continue to make further enhancements on the underwriting front and frequency gains or maintaining what we have here. And then hopefully a continued normalization of the severity environment with, again, the significant rate that we've taken to match up to the severity environment earning in, in an accelerated way here to kind of return us to the traditional target profitability levels that are appropriate for the business. That makes a lot of sense. I just -- what I was trying to think about was you're obviously trying to significantly improve the quality of the book, not just put-through pure rate. and whether or not that decline in the frequencies, primarily because of the mix change to a better book than versus sort of an environmental change. I think, Paul, when, I think, Matt gave you a roughly 10%, 11% decline in private passenger auto, I don't think you've heard anywhere a suggestion that frequencies are down 10% or 11% environmentally. I'm trying to be careful not to be exactly precise which one is which. But if you add up all the conversations you've heard about frequencies and other spots, you have to assume it was something other than an environmental issue working under there, wouldn't you? Indeed, that's good question. Just any thoughts further on sort of the competitive environment and how that works into your thinking about profit expectations next year. I would guess that we're still in an environment where people are doing basically the same kind of things that you are. But just anything on -- you're seeing more recently from what your competitors are doing versus you guys? Sure, Paul. I'll make a comment overall, and I'm pretty sure it covers all of PI and our Specialty Auto business. The bulk of the industry is still dealing with profit challenges. In some cases, they're still recognizing that they have them and responding to them. We expect this will be the commercial equivalent of a hard market for a while. . We're not -- it's not factoring into our calculus at this point to do anything other than be driving to restore the profitability. And I don't see anything that impedes in the near term, our ability to make that focus. There's not anything wonky going on from a competitive perspective that would restrict it. I'd like to drill down a little bit more on Paul's frequency question because I'm thinking about Progressive's call last quarter, and they talked about frequency potentially beating down as much as 20% at that operation. The question for you is gas prices. Is that potentially the reason for lower frequencies? Or is it just a permanent change in driving behaviors? So I think I want to separate a couple of things. One, I want to be careful about our internalization of Progressive items. I think they were maybe referencing coverages or other elements in between. The number that we're providing just to avoid confusion is the sum total in terms of the impact on our book. When we think about that, there's probably -- I wouldn't say that we don't -- when we look across, you see people driving at a different periods potentially in the day or, but you don't really see miles driven from a perspective down material in fact, in many cases, it's up from the prepandemic norms. Associated with that, I think on a baseline component, if you're just comparing -- trying to compare as much apples-to-apples, I think the benefits from frequency from a pandemic perspective have largely been neutralized or gone away. And so I think you're actually at a really normalized kind of environment from a frequency perspective. And so differences from a frequency perspective, from there -- our underwriting actions and other things that we've done both from a mix perspective and a segmentation perspective to continue to enhance the potential outcomes that we have and refine the book. And so I think the way to think about this is that this is us moving forward, we think that we're going to continue to build off of these elements. We're always looking to enhance those and that might be the way to kind of think about where at least we're at and how we're thinking about them. Look, the gas prices are there. I think what Jim was trying to say, and I'll echo it, you had a big, big movement of frequency down relative to the pandemic lockdowns. Then you had a big year-over-year relative moving of frequency up as people start going out. Then depending on your book, you continue to sort of gradually see that get back to a prepandemic level. . We never, in our book, saw as much of a drop as many folks saw with our Specialty Auto focus. And we popped back up to prepandemic levels earlier. We have continued for several quarters to report that our frequency is below our prepandemic level and has been declining. I think what you would see from a pattern is that most folks have been saying that theirs was going up a little bit as they were returning to that prepandemic level, so they've been directionally different. We're a little bit -- again, that pattern was not exactly the same for us because of the Specialty Auto nature of our book and the geographic concentrations, but we're watching those big issues. Yes, if you're looking at elevated gas prices from 1 quarter to the next or 1 year to year, they can have some impact. I think the other forces at play of the pandemic shutdown and reopening and the underwriting pieces are bigger. If we're matching from today, say, for the next 9 months, we might see that elevated gas prices for a longer period of time and the inflationary offset and pressure on disposable income might cause people to drive less, but I would be watching -- that if I were you, I would be watching miles driven because if miles driven are flat, it's not like because gas prices are higher, people are driving safer. If they're still driving the car miles driven, you're still going to see losses. I think that would be a good thing to match if you're trying to use that as a proxy is track gas prices and track miles driven, and that will give you a forward thought process. When you get to an individual company, you're going to find different issues that may be a function of their underwriting or geographic mix? Does that help? Thank you, operator, and thank you, everybody, for joining the call today. I'll just leave you with 2 final thoughts. One, just another quick reminder. We'll be holding an Investor Day in New York on Thursday, March 9. We're excited about that opportunity to spend some more time with you, let some of our leaders get a little bit deeper into our core businesses and talk about our opportunities going forward. . So we look forward to seeing you there. Details on attendance will follow. And just a reminder of the key takeaways that we had on Slide 15. We're bullish about where we are in our opportunities going forward and the fact that a lot of hard work going back into enhancing and restoring the company to target profitability and executing our strategic initiatives will really bear fruit over the course of 2023.
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Good morning, and welcome to the Moog First Quarter Fiscal Year 2023 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Aaron Astrachan. Please go ahead. Good morning, and thank you for joining Moog's first quarter 2023 earnings release conference call. I'm Aaron Astrachan, Director of Investor Relations. With me today is Pat Roche, our new Chief Executive Officer; Jennifer Walter, Chief Financial Officer; and Ann Luhr, Manager of Investor Relations. I'm excited to join Anne as we serve the information needs of the investor community. We have taken Pet's first investor call as an opportunity to update the format of our prepared remarks. Pat will share his perspective on our strategic direction, priorities and the businessâ performance, while Jennifer will provide further commentary on the quarter's results and guidance for the year. You may notice our prepared remarks are shorter than it had been in the past as we are now focusing on the key drivers of our results. We released our results earlier this morning. Our results and our supplemental financial schedules are available on our Web site. Our earnings press release, our supplemental financial schedules and remarks made during our call today contain adjusted non-GAAP results. Reconciliations for these adjusted results to GAAP results are contained within the provided materials. Lastly, our comments today may include statements related to expected future results and other forward-looking statements. These are not guarantees as our actual results may differ materially from those described in our forward-looking statements, and are subject to a variety of risks and uncertainties that are described in our earnings press release and in our other SEC filings. Hello, and good morning to you all. It is an honor and a privilege for me to lead our amazing company. I look forward during this call to share my thoughts on the future and together with Jennifer reflect on a great quarter and a year that is holding together nicely. Before I proceed, I would like to acknowledge John's leadership. Over the last 11 years, John has led with passion, conviction and integrity. Under his guidance, we have become financially stronger with sales growth from $2.3 billion to $3 billion and more innovative, which has led to new startup opportunities. John's compassion for our people shunned through in his leadership through the global pandemic, with a focus on protecting the well being of our employees and the financial health of our company. On behalf of all Moog employees, thank you John for your wonderful contributions. Now turning to the future. I want to highlight my thoughts on our vision for the company and my key priorities. Over the last 23 years with the company, I've been inspired by the energy, passion and creativity that our talented staff apply in solving real world problems for our customers. It all started with a spark of inspiration, Bill Moog's innovative server valves and an application to defend naval ships and crew members. Over the last 70 years, our positive impact on people and our planet has grown significantly. At heart, we are a technology company with deep capabilities in motion control, systems and critical components. Our highly collaborative culture delivers innovative solutions for our customersâ most difficult technical challenges. We target applications when performance really matters across a range of end markets. Today, our people, products and technologies affect the lives of millions across the globe. Moog solutions are critical to our national security, to safe transportation, to reducing factory emissions and to enhancing patientsâ lives, just to name a few. To continue on our path of growth and success, I see our talented people making a difference together by building a sustainable Moog for current and future generations. We will do that by concentrating on three areas: customer focus, people community and planet, financial strength. I'll share some brief details on each. First, customer focus. Customer focus is about meeting our commitments, delivering programs on schedule, shipping products on time. It's about creating value now and in the future by being responsive to changing needs. It's about having a clear advantage over our competitors and being able to sustain that advantage. Second, people, community and planet. Our culture defines us as a company. It enables great collaboration with customers and across the company. Our culture is a competitive advantage for Moog and a key attraction for our employees. I want to ensure that we remain true to our values that we have a clear sense of purpose across the company and that we create the opportunities to challenge and develop our people. Furthermore, I believe that our workforce should be more diverse and reflective of the communities that host us. I'm convinced that this will strengthen our company. Turning attention to our planet. I believe that we all share a moral responsibility to be good stewards of our planet for the next generations. The solutions we develop for our customers are part of our contribution to a better planet. And in addition, we will do more to reduce emissions from our own manufacturing operations. Third, financial strength. I believe that we must do better financially and that we have a clear view of how to do it. Our focus is on enhancing our operating margins. We will simplify our business. We will focus on businesses, customers and products where the value that we create is reflected in the profits we make. We will focus our manufacturing capability by end market located as necessary to serve our customers and of sufficient scale to be economically sound. We will drive further profitability through continuous improvement activities and the convergence of systems and processes. We will grow revenue through established businesses and new areas of activity. We have a solid core with positive growth drivers, higher defense spending, the recovery of commercial travel, more investment in energy efficiency and ever increasing health spending. In addition, we have really exciting growth opportunities beyond the core. We are entering new markets and redefining our position within existing markets. We will also focus on our cash generation. We will work to reduce the amount of cash it takes to run the business. For example, we see opportunities to increase our inventory turns. Now let me briefly summarize. We are building a sustainable business, that has a positive impact on people and planet for generations to come. We have three areas of focus with our immediate priorities in each being as follows: customer focus, enhancing our operational performance, people community and planet, driving employee engagement and workforce diversity, financial strength, driving business simplification. I look forward to sharing more specific information on our key initiatives and on our long term goals during an Investor Day to be held later this year. Now let me turn our attention to the quarter. First, from a macroeconomic perspective. The war in Ukraine, close to one year on, has strengthened the result of western governments to support Ukraine and to increase domestic spending on defense. The deployment of increasingly sophisticated defense systems to Ukraine, could boost sales of our existing defense components and systems. The planned increase in defense spending long term will lead to increased sales of existing platforms and increased development activity. The recovery of global air travel continues. Wide body aircraft flight hours are already above pre-pandemic levels, demonstrating the value of these efficient aircraft to the airline industry. The opening of travel to and from China should further accelerate that recovery. We were pleased to see the resumption of 737 MAX flights in China and on another note, COMAC C919 achieved flight certification in China during the first quarter. The potential impact of recession in our major industrial markets appears to have lessened, being either less severe or less imminent than first anticipated. Several risk factors have diminished. European economic activity appears more resilient to the pressures of inflation, high interest rates, energy constraints and war. China could rebound now that it has abandoned its zero COVID policy. Inflation appears to have peaked in the US, UK and Europe. On the other hand, industrial markets have begun to soften following a post pandemic surge with the Manufacturing Purchases Managers Index for our main industrial markets indicating contraction. On balance, given our increased backlog quarter over quarter, we are confident in our FY23 forecast. Next, from an operational perspective. Winter storms in Western New York led to the closure of our manufacturing operations for a few days in the quarter. We estimate this had a $0.07 EPS drag on our performance. We managed to overcome that impact through other operational gains. Supply chain challenges are a continuing cause of uncertainty that is no better or worse than 90 days ago. While some component constraints have eased, sporadic decomits interfere with production shipments and productivity. We continue to diligently work these issues in order to meet customer commitments but recognize the impact on both past due and inventory. We anticipate that supply chain constraints will begin to ease later in FY23. Labor attrition has slowed over the last number of months but we do see some specific hiring challenges. As supply chain constraints are resolved the ability to quickly clear past due is somewhat constrained by labor. Turning our attention to notable events in the quarter. Bell Textron won the future long range assault aircraft award from the US Army on December 5th. We have been part of the Bell Textron team for nine years and we are excited by this success. The award was protested by Lockheed and we look forward to a favorable ruling by the Government Accountability Office in April. FLRAA will drive development activity over the next few years and substantial production orders throughout the 2030s and beyond. Hopefully, we can start to ramp our activities in April of this three months later than originally anticipated. Our customer, NASA successfully launched the uncrewed Artemis 1 on November 15th. This restarts lunar exploration with many more launches anticipated over the next decade. Moog components play a crucial role in thrust vector control of the Artemis rocket and environmental control within the Orion crew module. Face market expansion is driven by exploration, commercialization and defense and we are seeing growth in our core components business and space vehicle business. Our partner, Komatsu, exhibited a full electric wheel loader in October at Bauma, the world's largest construction trade show held every three years in Germany. This demonstrates another original equipment manufacturer in the construction industry turning to Moog for solutions as electrification and autonomy continue to disrupt that market. We see construction as a significant growth opportunity for Moog. Finally, financial headlines. I would now like to turn our attention to the strong performance in the quarter. Organic sales grew 9% and adjusted EPS grew 14%. We delivered in line with our forecast due to strong operational performance. Our sales growth was driven by robust commercial aftermarket, higher reconfigurable integrated weapons platform production and stronger industrial automation activity. Adjusted margins improved 130 basis points year-over-year. This was supported by increased industrial systems volumes, sales mix in aircraft and operational improvements. Adjusted EPS was in line with forecast at $1.25, an increase of $0.15 or 14% versus prior year $1.10. Our cash flow was pressured due to continuing supply chain challenges already mentioned, leading to increased past due and higher inventory as we purchased additional stock in certain circumstances to partly mitigate material lead time and availability issues. Now I'll hand over to Jennifer for a more detailed analysis of our performance in the quarter and the outlook for the year. Thank you, Pat. I'll begin with a review of our first quarter financial performance. I'll then provide an update on our guidance for all of FY23. It was a great start to the year from an operational performance perspective. We achieved our adjusted earnings per share guidance of $1.25, overcoming the negative impact from the storms in Western New York. Operating margins were up nicely over last year. Sales in the first quarter of $760 million were 5% higher than last year. Excluding the impact of foreign currency movements and divestitures, sales were up 9%. Sales increased in each of our segments. The largest increase in segment sales was in Industrial Systems. Sales of $232 million increased 9% over the same quarter a year ago. Excluding foreign currency movements and the divestiture of an offshore energy business last year, sales were up an impressive 17%. Sales increased in each of our markets, most notably in industrial automation and simulation and test. The growth in sales reflects the recovery from the effects of the pandemic on our business. Demand for our industrial products remain solid while we continue to face supply chain challenges. Sales and Space and Defense controls of $218 million increased 5% over the first quarter last year. Adjusting for the divestiture of a security business last year, sales increased 8%. The sales growth was driven by the ramp-up in production on the reconfigurable turret program, which is now running at full rate production levels. Aircraft Control sales were also up this quarter, increasing 2% to $310 million. Adjusting for the sales of the navigation aids business and foreign currency movements, sales were up 5%. Commercial aftermarket sales in the quarter were particularly strong, driven by market recovery in wide body platforms. Airlines are bringing the most efficient airplanes back into service first and we're seeing higher utilization of the 787 and A350 aircraft fleet. We expect this trend to continue throughout 2023. We also benefited from retrofit activity for the 787 program, boosting aftermarket sales this quarter. Military aircraft sales declined in the first quarter compared to the same quarter a year ago. The military sales decrease largely reflects supply chain pressures as incoming materials were delayed. In addition, V-280 development activity on the FLRAA program decreased due to the timing of starting the next phase of the program post awards. We'll now shift to operating margins. Adjusted operating margin of 10.4% in the first quarter increased 130 basis points from the first quarter last year. Adjustments this quarter consisted of a $10 million gain on the sale of two buildings and $2 million of restructuring and other charges. Adjustments for last year's first quarter consisted of a $16 million gain on the sale of an offshore energy business and $2 million of an inventory write down. Adjusted operating margins increased in Industrial Systems and Aircraft Controls and decreased in Space and Defense controls. Industrial Systems generated a significant improvement in margins, increasing over 400 basis points to 12.3%. Incremental margin from strong sales drove the increase along with a favorable sales mix. Operating margin in Aircraft Controls increased to 9.6% in the first quarter from 8.5% in the same quarter a year ago. The 110 basis point increase resulted from a favorable sales mix driven by strong commercial aftermarket sales along with lower R&D expenses. Operating margin in Space and Defense Controls was 9.4%, down from 11% a year ago. We incurred charges on space vehicle programs for the second quarter in a row and continue to feel supply chain pressures. Interest expense is another area that's impacting our financial results. In the first quarter, interest expense was $13 million, up $5 million over the first quarter last year. The increase in interest expense relates to higher interest rates and is consistent with our forecast from a quarter ago. Putting it all together, adjusted earnings per share came in at $1.25, in line with our guidance from a quarter ago. The $1.25 adjusted earnings per share this quarter is up 14% over the same quarter a year ago. Let's shift over to cash flow. For the quarter, we had a use of free cash flow of $22 million. The negative free cash flow this quarter was driven by working capital growth. Working capital grew this quarter related to supply chain pressures, our production decision on the 787 and delayed milestones for billings. Supply chain constraints continue to impact our inventory level. We purchased certain components in advance of requirements to reduce the risk of shipment delays. Despite that, we've experienced situations in which we couldn't ship products because the necessary component wasn't available. We continue to prioritize meeting customer commitments. Also, we're maintaining a steady level of production on the 787 program to ensure our supply chain remains healthy and to keep our facilities operating efficiently. This level of production exceeds the rate at which Boeing is taking deliveries, which puts pressure on our working capital. In addition, reaching milestones in our space vehicles business was delayed associated with our challenges in that business and caused a growth in our receivables. Capital expenditures came in at a relatively like $30 million, which is about 4% of sales. Over the past several quarters and as we look to the rest of this year, we're spending closer to 4.5% of sales. Our focus continues to be on investment in facilities and infrastructure to support our growth and investment in next generation manufacturing capabilities to drive efficiencies. The lighter quarter simply reflects timing of these major activities. Our leverage ratio calculated on a net debt basis was 2.3 times as of the end of our first quarter. Our leverage ratio continues to be around the low end of our target range of 2.25 times to 2.75 times. Our capital deployment priorities, both long term and near term, are unchanged. We are committed to our dividend policy and as just announced, we're increasing our quarterly dividend by 4% to $0.27 per share. We look to have a balanced approach to capital deployment, growing our business both organically and through acquisitions, while also returning capital to shareholders in the form of dividends as well as share repurchases. Our current priority and where we see the greatest potential return is investing for organic growth. We're building up new businesses that we believe have huge potential, like the electrification of construction equipment. We're also investing in our core businesses. Capital expenditures are part of these investments. We'll continue to look for strategic acquisitions to complement our portfolio, and we will continue to be disciplined from a financial perspective. We'll now shift over to guidance for the full year. We are reiterating our fiscal year 2023 guidance for sales, adjusted operating margin and adjusted earnings per share. Our backlog is strong and our performance is on track to achieve these results. Let's take a more detailed look at our guidance. We're projecting sales of $3.2 billion in FY23, that's a 5% increase over FY22 and 6% when we adjust for divestitures over the past year. We expect sales growth in each of our segments with the biggest drivers being Commercial Aircraft and Space and Defense. Aircraft control sales are projected to increase 6% to $1.3 billion. The increase is all on the commercial side of the business. Commercial OE will be up across the board with growth on Boeing aircraft, Airbus platforms, business jets and the Genesys business we acquired a couple of years ago. We'll also see growth in an already strong commercial aftermarket business. To account for our very strong start to the year, we're increasing our commercial aftermarket forecast sales by $15 million. We expect a modest decline in military aircraft sales with not too much of a change in mix from last year. We're projecting $25 million of sales for the FLRAA program, down from our previous forecast of $40 million due to the delay associated with the protest. Space and Defense control sales are projected to increase 5% to $920 million. Adjusting for the divestiture of a security business late last fiscal year, sales will be up 8%. When looking at our numbers within the segment, it's helpful to remember that we shifted a product line from defense into space at the beginning of our first quarter. Adjusting for the shift, we're expecting nice increases in both space and defense. The increase in space sales relates to launch vehicles and our growing integrated space vehicle products. The increase in defense sales reflects a production ramp for the reconfigurable turret and growth across all major areas of the business. Our sales forecast reflects a $10 million decrease from our previous forecast. Industrial Systems sales are projected to increase 2% to $925 million. Adjusting for the sale of the offshore energy business, the increase is 3%. Growth will come from each of our submarkets, reflecting our strong backlog. Our sales forecast is up $10 million from our previous forecast on our strong start to the year. We're forecasting an 11% adjusted operating margin in FY23, up from 10.2% in FY22. We're expecting stronger performance in each of our segments. Industrial Systems will increase 140 basis points to 10.9%, largely due to capturing efficiencies on the higher level of sales and realizing benefits associated with our portfolio shaping activities. Space and Defense Controls will increase 110 basis points to 12% on higher sales. Aircraft Controls will increase 20 basis points to 10.3%. We'll benefit from factory utilization of sales in the Commercial OE business increase. However, this benefit will largely be offset by an unfavorable mix with the relative increase in Commercial OE. Higher interest expense and a higher tax rate will depress earnings per share by $0.64 relative to FY22. For FY23, we're projecting adjusted earnings per share of $5.70 and plus or minus $0.20, which is up 3% over FY22. Adjusting for interest and taxes, EPS would be $6.34, an increase of 14%, reflecting strong operational performance. We're forecasting earnings per share for our second quarter to be $1.40, plus or minus $0.15. We're projecting free cash flow for FY23 to be $100 million representing a 55% conversion ratio. Our cash flow generation reflects working capital requirements associated with an increase in sales and a deliberate investment in capital expenditures. It also reflects the reduction in working capital associated with operational improvement. We've decreased our free cash flow forecast from a quarter ago by $30 million as we've changed our assumption related to the repeal of the R&D expense amortization law. While there still seems to be bipartisan support for innovation, the challenges of Congress getting a bill passed are becoming more evident. As always, our aim is to share a forecast that represents a balanced outlook for the year and we're assuming that supply chain disruptions continue but moderate in the back half of the year. Other external factors such as the geopolitical landscape could also impact our performance. Overall, we had a good start to the year and our outlook for the rest of the year looks strong. We're positioned nicely from a liquidity and leverage standpoint, enabling us to invest for future growth in our business. Pat, congratulations in your role. So maybe one of the things that you mentioned in your press release and also in your prepared remarks, you touched on optimizing the business to expand margins. In the past few years, most has been restructuring costs and improving the supply chain to mark higher margins. Can you provide a little bit more color on how you think about cost optimization and how your approach is different? I mean this -- as you know, I've been in the Chief Operating role for the last year, and I've had quite an opportunity to work with the leaders of each of the businesses and get to understand where these opportunities might be. I believe that we can simplify how we work within the organization and through that simplification, we can drive improved operational performance and improved margins within our business. And so our focus is to continue many of the initiatives that we have talked about in the past, portfolio shaping, footprint optimization, focused factories, and they add on to what we have been doing for years and continuous improvement in lean. So where you have seen progress being made on taking businesses out, such as the Navaids business back in quarter, I think that was quarter one of fiscal '22 to the offshore business that we divested in this current quarter, we have begun to take out businesses that we feel are not strategically aligned. So there are examples of that, that will continue into the future. We continue to review the portfolio of businesses that we have. When I think about the footprint that we operate we have grown over the years through acquisition to have quite a diverse collection of operations around the world, and we have an opportunity to do things more efficiently, and we are working on that. That involves product line transfers from some sites to other sites so that we can consolidate volumes of like products, so we get all our defense products into a defense factory. We have our industrial products in an industrial factory. And through that focus, we believe that we can drive efficiency in those manufacturing plants. So it's a collection of different approaches, Kristine, which altogether will help drive the margin improvement. I think if we think about our approach to it as a leadership team, it is our number one focus as a leadership team to improve those margins. We're looking at how we organize the business and how we get decisions done within each of those business to allow us to drive that margin improvement forward at a quicker pace maybe than in the past. And it's a focus of all our internal review activities to see what progress we're making on those margin enhancement programs. So part of it is behavioral, part of it is continuing some of the initiatives that have started before and driving those to fruition. I'm looking forward to learning more about that at your Investor Day. Maybe if I could do a follow up on cash. Jennifer, on free cash flow, you mentioned that there was a change in milestones that kind of put pressure free cash flow generated in the quarter. Can you provide more details on that? Was that a contractual change in milestone payments on when you get the cash, or was that just your ability to pick these milestones? And as the 787 ramps back up to 10 per month, how should we think of the flows of cash? So actually, the biggest driver of cash flow is actually inventory. And so we described that before, and that's very similar is just the buying ahead or missing components that things get caught up in inventory. So that was the biggest driver. But we also did have unbilled growth on the 787 production. We are continuing to have on that same level forecasted for the remainder of this year for ours. But as Boeing ramps up, we will ramp up at a slower rate and so that will provide us the opportunity to liquidate some of those physical inventories that we've been building up over the last two years or so. So that's definitely a benefit when we're able to do that. We will see some benefit on that as we move forward in the year. You started off with the delayed milestones in space vehicles. That is basically due to some of the progress that we have been making on those contracts where we've just achieved them later than we had anticipated achieving them. So we will meet those milestones and be able to collect cash for those. As we look for the year, we are holding our guidance, there's a few things that are going into that. We're holding our operational guidance. We did make the adjustment for the cash taxes for the R&D amortization. But we will see benefit in receivables as we move through the year. There's another thing that there, it's actually a growth up that shows up in receivables and customer advances. So we were able to build a significant customer advance but it got collected at the very beginning of Q2 as opposed to in Q1. And so we didn't see any benefit from that in Q1, but we will see that benefit in Q2. So that's another thing that's going for us. So overall, we're feeling that things will be better for the remainder of the year. We're going to see less pressure from less growth in receivables from supply chain pressures, but still making sure that we've got commitments to our customers as our number one priority. And then we'll also see some benefit in receivables related to supply chain and as some of these other receivables are collected in their contractual terms. So Jennifer, maybe give us a little more color, the $0.07 hit from the storms in the Buffalo area. Where did it hit sales, earnings, rough color? So we had storms, we actually had storms in the Thanksgiving and right before Christmas time. And so different facilities were closed for a different amount of time. But on average, I would say we had three days in Western New York that we are basically shut down in operations. And so basically, if you think of it as production basically stops. During that time, there's no work that is being progressed, so you still have costs associated with that. However, you're not moving product forward. And so it's really just a loss of that gets delayed into the next period, but those are things really just hard to catch up on. So it does impact what sales because of our input that goes through, and we've quantified it from a margin perspective. Well, we've quantified it from an EPS perspective, but it goes into our margins. And it's in aircraft and space and defense because that's where we've got more of a concentrated effort on our Western New York campus. And then as I look at your numbers, you kind of mentioned the commercial aftermarket being stronger, and you had good numbers there. But if I look at your numbers, it looks like you're assuming things slow down as we go through the year. So I mean, what -- was there anything special to get to that $50 million in the first quarter? And is that a conservative number, or what are you assuming there? So with respect to commercial aftermarket, it was really nice. We've got a really good growth in that business right now. We did have some retrofit activity. It's about $5 million that we had in the quarter, and that's expected to continue at a much lower level in the next couple of quarters. So maybe it gets to maybe a total of $10 million for the year or something like that. But this quarter, we did have a nice strength there. Remember, last year, we did have some retrofit activity as well as some onetime test equipment. But overall, we're seeing some nice recovery in the business. The aftermarket is sometimes very hard to predict because it comes in, in short lead times. But we're really happy with what we're seeing in the commercial aftermarket business. And then, Pat, you talked about more portfolio shaping footprint adjustment, you've done a fair amount already, certainly compared to Moog's history. Can you give us some sense as to where are we in this process? Have you done two thirds of it, have you done 10%? And I don't know if you could give any sort of rough color in terms of the operating margin potential you could get out of that? I referred to the portfolio shaping as an ongoing process for us. It's not a once and done activity. I think we've been at it for a number of years now, as you've referenced. Over that time -- over the last three years, actually, we've divested about seven businesses or product lines, which had a combined annual sales of about $80 million. And my expectation is that we continue that process. You were asking how far are we through it? I wouldn't characterize it at the low end, but we're 10% through. I think we have taken quite a broad look at our business when we started into this process and made some decisions around that. There are a number of others that remain open that we're working through. But I would say we're more further through it maybe than at least halfway. And then what sort of -- can you give any color in terms of you mentioned the potential to improve margins? Any sort of rough sense how we should think about that? I'm hoping to get the opportunity, Cai, during the Investor Day to lay out all of the initiatives and how they contribute to driving that margin improvement. I think that's the time I'd like to really share the goals that we have for the company overall over the next three years and the means by which we're going to get them. And I think that will help give a good holistic picture at that time rather than giving parts of it now. I think it would answer maybe some of the questions Kristine was asking earlier as well of how each of these elements contribute towards the overall goal. And then the last one, so you generate more cash as a result if you achieve that. Maybe give us some color in terms of relative priorities of what you do with the cash? So in the short term, we would be looking to just pay down debt. But besides that, we want to make sure that we're optimized from a capital structure as well. Right now, we're still seeing the opportunities in our organic business. There's facilities, there's things of that nature, next generation manufacturing really sets us up for the future as we grow the business. So that's definitely where our priority is. We will continue to look for acquisitions as well, so that we are complementing our business with other opportunities to -- and then certainly, we said the dividend policy, as we announced today, we just increased 4% from where we were before. So that's a planned part of our capital structure and when it makes sense, share repurchase as well. But overall, right now, our focus is on growth in our core businesses. And just building on those comments, Cai, we continue to have a funnel of acquisition opportunities that we review. I think my interest is to try and find ways in which we can accelerate growth within those new markets and new businesses that we're pursuing. And so if we find acquisition targets that help boost or accelerate our progress there, that would be my focus. Iâm on for Mike Ciarmoli this morning. First, I was just wondering if you could parse out, how much of the year-over-year margin decline that you saw in Space and Defense in the quarter was driven by supply chain pressures? It looks like from the guidance that margins should be recovering in that segment going forward. Is supply chain recovery is the main driver of your expectations there, or is there anything else you could call out there? The biggest driver in space vehicle is when we look at this year's margin compared to a year ago is due to the challenges that we had on our space vehicle program. So that's the main driver when we're looking at that. We did have challenges. They were actually much larger in the previous quarter, two quarters ago. We have made progress on those jobs. So we have had -- as I said, we've had some challenges. It's been on kind of some specific things that we've had in the development and testing areas on that. We've progressed further on that. So we're feeling confident that we're making progress and heading in the right direction on that front. We are seeing supply chain pressures, that's not the biggest part of the reason for the marks and things, but we certainly are having long lead components and challenges from that standpoint that we need to make sure that we're focusing on as we move forward. I think the space vehicle business is a real opportunity area for us, but we're repositioning ourselves in the value chain here. We're doing -- taking on more of a system responsibility in these satellite buses. And there's, I would say, a learning curve associated with that. We're further through the programs now that with this quarter behind us. And we're getting towards the end line with these development activities. And so the risk associated with the diminishes as we progress through the project. And what we are seeing here are some things that I might describe as our tuition fees as we're getting into a new business area. And then I just wanted to get an update on commercial aero production rates. Are you still generally aligned with the underlying OEM build rates aside from the 787. And are you planning to continue producing at a rate of four a month on the 787 for the rest of the year? For the 787 through fiscal '23, we are continuing at four ship sets per month and for the other programs we're in line with the OEM production rates. So thanks, everyone, for listening in to our quarterly call. We had a strong quarter. We're very pleased with our performance over the course of the quarter, and we look forward to giving you an update again in 90 days' time. Thank you.
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EarningCall_623
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Good afternoon, ladies and gentlemen, and welcome to the presentation of the BNP Paribas 2022 Full Year Results. For your information, this conference call is being recorded. Supporting slides are available on BNP Paribas IR website invest.bnpparibas.com. [Operator Instructions] Thank you. So, good afternoon, ladies and gentlemen. I trust you are well and welcome you to the presentation of full year 2022 results, and update of the Group's 2025 targets. As usual at the end of the presentation, we'll be pleased to take some questions. So jumping to our key messages on Slide 3, you can see that 2022 marked again a year of strong growth in business activity and earnings for BNP Paribas. Our 2022 results confirm the key ingredients of a successful execution of our strategic plan and Growth, Technology & Sustainability 2025 and the relevance of our business model. Indeed, the Group's solid model and its ability to support customers and the economy globally continued to deliver a very healthy growth in net income of 7.5% compared to 2021 and 19%, excluding exceptional items at â¬10.2 billion. The Group delivered a strong revenue growth of 9% year-on-year, stemming from all three divisions with a significant increase by CIB, up 15.7%, a strong growth at CPBS, up 9.3% and the rise in Investment and Protection services up 3%. Our growth is disciplined. We delivered a positive jaws effect of 0.7 point, 1.5 point excluding the contribution to the Single Resolution Fund. If costs increased up to 8.3% at historical scope and exchange rates, 55% of this increase is due to exchange rates and scope effects, as well as the impact of the Single Resolution Fund increase and specific adaptation needs, Bank of the West in particular. So a strong confirmation of our ability to grow organically at marginal costs. The Group continues to benefit from its long-term prudent and proactive risk management. Hence cost of risk was low at 31 basis points of loans outstanding. Group core Tier 1 ratio increased by 20 bps, thanks to organic growth and clocked in at 12.3% as of December 2022 and will go up to 14%, now that the sale of Bank of the West is closed. On the back of our solid results and as per our commitment of a return to shareholders of 60%, we will return â¬5.8 billion in ordinary distribution. This ordinary distribution is split between a cash dividend of â¬4.8 billion or â¬3.90 per share, equivalent to a 50% payout and the share buyback program of â¬962 million, equivalent to a 10% payout. In addition, and as we closed the sale of Bank of the West a few days ago, we confirm â¬4 billion additional share buyback program to compensate for the dilution related to the sale of Bank of the West. Hence, an overall share buyback program of â¬5 billion globally for 2023 to be executed in two equivalent tranches, given its size and time needed to execute buybacks of this magnitude. The first tranche of â¬2.5 billion has already been submitted to the ECB for approval. The second one will follow with a view to be fully executed before year-end. So in a nutshell, very solid results and a good start to our '25 strategic plan. Going to Slide 4, '22 has been marked by the sale of Bank of the West and I would like first to warmly thank Bank of the West and BNP Paribas teams who have been working closely with BMO these last months in order to prepare the closing of the transaction and the transition to BMO. This closing on February 1st, '23 opens a new page in our history. Let me remind you some figures which illustrate the value created with this transaction. First a fixed price transaction for total consideration of $16.3 billion, representing 1.72 times the tangible book value. The transaction which results in a net capital gain of around â¬3 billion to be accounted for in the first quarter '23 and the release of common equity Tier 1 capital of roughly â¬11.6 billion or an equivalent of 170 bps in core Tier 1 ratio. As indicated, on one side we will compensate the EPS dilution with a share buyback of â¬4 billion. On the other side, the remaining â¬7.6 billion or equivalent of 110 bps in core Tier 1 will be invested over time in a disciplined way with the aim of accelerating long-term shareholder value creation through BNP Paribas diversify that integrated model. We benefit from a unique positioning with strong and leading platforms and client franchises and shown track record of increasing market shares in key European businesses. So our priority will be to boost on organic growth. This is what we do best with limited execution risk and immediate return on equity. Then we intend to do some targeted investments in technologies and innovative and sustainable business models. Finally potential bolt-on acquisition in priority sectors. Should redeployment of the proceeds put BNP Paribas in a unique position to accelerate and step up long-term growth. Now on Slide 5, you can see that it provides the first lever allowing the Group to accelerate its growth with approximately â¬3 billion additional revenues by '25. The redeployment will be disciplined on the basis of a cost income ratio of 60% and a return on tangible equity of 12%. Moreover, the second lever will be the positive impact of higher rates. We expect to see a â¬2 billion plus positive impact on NII across the Group by '25, stemming from interest rate hikes, having taken place in '22. In particular, CPBS will benefit from it to the tune of 80% and we expect to see around 40% of it in '23, mainly in Commercial and Personal Banking in the Eurozone. On the strengths of our '22 results and with an additional growth potential of â¬5 billion, BNP Paribas reaffirms and confirms the importance and relevance of the strategic pillars of it's Growth, Technology & Sustainability '25 Plan and revises upwards its ambitions, we are thus significantly revising upward our initial target for compound average annual growth in net income of more than 7% to a target of more than 9% between '22 and '25. We're also anticipating a stronger and steady compound average annual growth in EPS of more than 12% or a 40% increase over the '22-'25 period as it will be boosted by the execution of share buybacks each year and particularly in '23. Of course, the growth will remain disciplined with positive jaws effect each year and averaging 2 points. \ On this backdrop, switching to Slide 6, you will see that '23 is a pivotal year. As such, we have decided to adjust upward the '23 distributable result to reflect our new trajectory, resulting on one side from the sale of Bank of the West and on the other side from the end of the ramp up of the Single Resolution Fund. As a matter of fact, looking forward, first, we anticipate our organic growth in '23 to offset more than the perimeter effect related to the sale of Bank of the West. Second, our unique positioning permits us to do as if the ramping up of the Single Resolution Fund was behind us and not impacting '23. And to do that we have decided to adjust the distributable income upwards by â¬1 billion in '23. Furthermore, the Group has also decided to exclude from the distributable results, the negative impacts of the adjustments in hedging positions, which will occur during the first half '23 as a consequence of the ECB decision in the fourth quarter '22. And as you are already aware the capital gain linked to the sale of Bank of the West will be also excluded. So basically all this should mechanically enable us to deliver a '23 adjusted result increasing in line with the Group net income target of an average growth of more than 9%. On top of that, it showed result in a growth in EPS in '23, higher than the objective of a CAGR of more than 12% that will be boosted by the â¬5 billion share buyback executed in '23. Last but not least, as this '23 adjusted distributable income will serve as a base for the 60% return to shareholders, it should result in a growth in EPS to the same tune. Moving now to Slide 7. As a wrap up and to take away for this first part of our presentation, you can see that not only we anticipate delivering an average strong growth in net income by '25 on the back of our annual growth, an additional potential, but that in addition, our unique positioning in '23 allows to deliver a steady growth year after year with an even higher growth in EPS boosted by the execution of our share buybacks each year. Finally, ladies and gentlemen, I will now take you through the record '22 results, which form the base for our updated '25 objective. An objective that you have seen with the distributable income growing by at least 9% every year, even in the pivotal year '23. So let's now look at Slide 9 and let's turn to '22 and actually let's turn to '21, where you can see in '21 that the capital gains largely compensated exceptional cost. And for 2023, so this year and actually over the whole GTS 2025 plan, we also anticipate each year capital gains to compensate these exceptional costs for around â¬400 million for restructuring adaptation and IT reinforcement. However, in 2022 as a consequence of the very specific circumstances in Central Europe, this compensation was not the case, enhanced exceptional items were atypically negative overall. And this is then - I'm not mentioning the increase in taxes that you also see on this slide to the so-called IFRIC 21, which was entirely booked in the corporate center, which was up â¬300 million on the back of the final year of the Single Resolution Fund. I remind you in 2023, so this year being the last year as the fund will be ramped up. And so if we, with this, we turn to Slide 10, which illustrates the strong performance of the Group as detailed by Jean-Laurent from the revenues, all the way down to the bottom line with a healthy return on tangible equity at 10.2%. If with this, I can ask you to turn to Slide 11 with the revenues of the operating divisions. They grew by a solid 10.4% year-on-year, 7.8% on a like-for-like basis. If we look at our divisions, CIB revenues grew sharply by 15.7%, thanks to our diversified and integrated model, ensuring to capture the buoyant client activity in - in particular in '22 at global markets and security services and also at global banking with a strong rebound towards the end of the year '22. A level of activity, which has strengthened by the complete coverage of clients needs, leading to the gains in market share. If we take the second division, a strong momentum was also seen at CPBS, up 9.3%, driven by the strong performance of Commercial and Personal Banking activity with the improvement of net interest income and fees on the back of a favorable positioning in corporates and private banking, but also in cash management and trade finance. Moreover, an increase was also seen in our specialized businesses and Arval in particular, so they are the car fleet leasing business, sustained by the growth in a fleet of more than 8% in the year ''22. Last and third, activity was very good at IPS with strong asset inflows and better resilience versus peers and assets under management, illustrating our commercial outperformance versus peers over time. Hence IPS delivered an increase in revenues at 3% on the back of a strong rise in private banking businesses despite a lackluster market environment which weighed on asset management and also insurance revenues. If I can now ask you to flick to Slide 12, we look again at the operating divisions the same ones, but now at the costs. Costs were up 8% generating strong positive jaws of 2.4 points for those operating divisions and this is for the full year. And if you would look at the fourth quarter, also delivering 1.9 points of jaws. So we - you can see that we continue not only to benefit from our industrialize and materialized platforms, but also from additional initiatives generating this year more than â¬500 million in cost savings. CPBS delivered very positive jaws of 3.3 points, thanks to the ongoing rationalization of our operating model. For CIB as well, jaws were positive at 2.1 points as basically what else can I say a tribute to the high operational efficiency of our leading platforms. And then at IPS, costs were up 3.5% supporting the business with a close to nil in jaws effect on a like-for-like basis, despite the impact of an unfavorable market environment. So we have looked at the topline, we've looked at the costs, let's now look at the cost of risk. So if you could turn to Slide 13, and there you can see the confirmation of a low cost of risk at Group level at 31 basis points over outstanding, well in line with our guidance of a cost of risk every year below 40 basis points. And this as a result, not of luck, but of our prudent risk profile as it can be or as it is illustrated by the lowest level of cost of risk over gross operating income, so revenues minus cost and this through the cycle compared to Eurozone peers and continuously improved risk profile. And if you look at the stages 1 and 2 in the cost of risk of around â¬6 billion and they basically cover 2.4 - that stock is basically covering 2.4 times, the stage 3 provisions of this year. So in '22, the cost of risk is due in particular to the combination of one, low impairment of non-performing loans, the so-called stage 3 provisions and also an excellent prudent provisioning of so-called stage 1 and 2 on performing loans. And this for â¬463 million simulating the side effects of - side effects and simulating I cannot stress it enough, of the invasion of Ukraine and higher inflation and rates, partially offset by released of provisions that we took that were linked to the COVID crisis a year and a half ago. And this also with some releases in provisions that we had to align us to the European standards and which in turn are less conservative than ours. So with this, if we now move on from the businesses that we have seen, you will basically see and I skipped those next two pages, but you see the evolution of the cost of risk for our divisions and basically it is always a variation on the team of low cost of risks. So allow me to take you through the financial structure on Slide 16. You can see first of all that the common equity Tier 1 ratio in the last quarter improved by 20 basis points and so clocking in at 12.3%. As in the past, if you look over the full year of the '22 there has been an organic contribution to the common equity Tier 1 of 30 basis points. Moreover, as you've seen and the beginning of the year, there has been a reduction of 40 basis points, again over the year through the OCIs that are basically impacted by the market environment. And also, as we told you at the beginning of the year, there was an update to models and regulations that had an impact of 30 basis points. So if we now look forward and basically you see that the benefit related to the sale of Bank of the West, which represents as Jean-Laurent said in basis points, 170 basis points, which kicked in on February 1 and so that basically takes us to 14% common equity Tier 1 ratio. Going forward we should continue to grow organically our CET1 ratio by approximately, let's say, somewhere around 50 basis points over 2023 and 2024 and we anticipate as well the ratio to be impacted. Well, as one thing, you know we're going to do a buyback of â¬5 billion. So, over and above the return in dividend in cash and share buyback of the results, there is also the return related to Bank of the West. So in total, a share buyback of â¬5 billion. The first 2.5 done before the summer will reduce the common equity by 20 basis points and at the second tranche that we will do around the summer will basically reduced by 40 basis points. And then there is also the implementation of IFRS17 in insurance that were lower and a one-off, the common equity Tier 1 by 10 basis points. So this is a bit the view on common equity Tier 1. So you see we are very well capitalized. And if you also look at the leverage ratio, it clocked in at 4.4% at the end of the year, well above the requirement. And also this ratio will be further boosted by the sale of Bank of the West by 40 basis points. And as Jean-Laurent said, if you see this, there is a remaining excess of capital that will be redeployed very frugally and mainly by accelerating organic growth. So if I can top that off on Slide 17 that with no surprise, you'll see our net tangible book value per share continue to grow, clocks in at â¬79.3. The rest of the slide is basically crystallizing the level of our return to shareholders, we have signed into different elements for '23. So this is then basically the Group. So this group presentation would not be complete without mentioning what has been achieved in terms of operational efficiency, technology and company engagement. So please turn to Slides 18 to 21. You know that optimization and cost discipline are the heart of the 25 plan. First, we have leverage, while leveraging on our internal platforms, enhancing shared centers to better allocate resources and to further outsource and neutralize technical offers with external partners with an objective of a 20% increase in resources in demand shared services centers. Second, we integrate new work usages and methods to optimize premises costs, lowering our mutualization ratio down to 0.75 to flex offices and through inner-city locations. Last, while ensuring a strong discipline on investments with the proactive management of external spending. All these levers are proven to be quite effective, bringing more operational efficiencies. As a result, we have revised our initial recurring savings over the duration of the plan by plus â¬300 million, up to â¬2.3 billion over the plan. It will sustain our ability to deliver positive jaws in addition to end of the ramp-up of the SRF representing a decrease of â¬1 billion in operating expenses between '23 and '24. Investing in technology to support operational performance innovation and growth is a top priority at all GTS plan. Our global IT strategy is built on four major pillars aiming at creating value. First the safer and more resilient IT with the cloud with the objective to embark more than 60% of our apps by '25, we're actually halfway. Second, an open information system to create value through sharing IT assets and simplified consumption. Launched in December '21, it has proven its effectiveness, should a widespread adaptation of APIsation, bringing interoperability and rationalization of our information systems. We've already largely exceeded our '25 objectives, with more than 660 apps available assisting more than 620 million transactions per month. Last but not least, we intensively deployed AI with already 670 concrete and value creative use cases rollout in 2022, plus 57% more than last year on the back of strong data science in-house capabilities. Contributing to a responsible and sustainable economy is a major foundation of our strategic plan as described in Slides 20 and 21. Engaging with our clients to support that transition, we have set ourselves three key sustainable targets for '25. First â¬150 billion of sustainable loans; second, â¬200 billion of sustainable bonds; third, â¬300 billion of a sustainable investments and in addition we commit to target of â¬200 billion of - to support our clients to transition to a low carbon economy. Our action are concrete and illustrated by significant achievements and the figures we provide. While worldwide leader in green bonds with $19.5 billion raised for our clients. We've have also been recognized the European leader in combating climate change and protecting biodiversity. We're strongly committed to a net zero trajectory and take concrete steps. As recently announced, the Group is now embarking on a new phase of acceleration in financing the energy transition. The Group has already pivoted with outstanding to low carbon energy production, 20% higher than those to fossil fuels. And we are accelerating in financing the production of low carbon energies with a target of â¬40 billion in financing outstandings by 2030, primarily renewables. We are also accelerating in reducing financing to fossil fuels with a commitment to reduce financings for oil extraction and production by â¬1 billion in 2030. So decreasing by 80% in comparison with the current level of â¬5 billion. By 2030, we will have completed the transitioning of our financial - financing activities to the production of low carbon energy by more than 80% in less than 15 years. All right, ladies, gentlemen, let's now look at the operating divisions. Let's start with CIB, basically I'll let you through Slide 24 to 27, and let me give you the main takeaways. So CIB had very good results in '22, supported by strong client activity, leveraging on a diversified integrated model and confirming its leadership positions in EMEA in particularly in financing and bonds, in transaction banking, but also on multi-dealer electronic platforms. On the back of these strong platform, CIB today benefits from a top 3 position in EMEA and confirmed its strong and resilient growth year after year. First, if we look at the divisions within CIB, first, very good performance in global banking with a strong rebound in the fourth quarter, despite an unfavorable context and decreasing primary markets. If we take global banking revenues, they were up 2.6% year-on-year. Secondly, as reported by a very robust client activity and a reinforced setup with strong positions in FICC and equity business, global markets saw a very strong increase in revenues. Very strong in the sense up 27% year-on-year with a very good performance of FICC, up 32%, and a strong increase in revenues, up 19% in equity and prime services. Finally, the performance of Security Services. So the third part within our CIB illustrated the relevance of a diversified model, benefiting from high transaction volumes and major new mandates, but also from positive impacts of the interest rates environment. Revenues went up 11%, a solid performance. So as a result, a remarkable increase in CIB revenues up by 15.7%, with the crystallization of market share gains and the confirmation of a change in scale in the European landscape. That's the top line. If you look at costs, they accompanied the growth and they were up 13.6% or up 8% on a like-for-like basis with positive jaws of 2.1 points. All in all, and considering the low cost of risk, CIB generated a pre-tax income of â¬5.4 billion in '22, a very good level of results, up 16% year-on-year. So what's next for CIB? I'll let you peruse what makes our CIB strategy so successful on a recurring and a long-term basis. This is what you can see in Slides 28 to 30. A strong differentiator versus competition as the model of CIB platforms flow-driven, client-centric and integrated approach, ensuring a solid performance throughout the cycle with regular gains in market shares. Why? Because we are uniquely positioned to address the needs of our corporate and institutional clients in all environments and in particularly when they need to be accompanied in their development or transformation. How? Well first, thanks to our broad product offering and our long-term relationship approach. Our complete coverage combined with transforming initiatives means that we are always relevant to our clients. Second, our strong client franchise being further enhanced by the proximity derived from our leadership in flow businesses. Third, thanks to the capabilities of our origination and distribution platforms. If you can flip to Slide 29, you can see that '22 - the year '22 is a tribute to our ability to go one-step further by one, improving our operating model for example in security services; two, further strengthening our equity franchise with its comprehensive global and integrated offering; and third accelerating in the financing of the transaction - transition of our clients. Thanks to these initiatives, CIB financial targets have been revised upwards for 2025 with a revenue CAGR above 5%, relatively well balanced between global banking, global markets and security services. Average jaws effect is targeted at 2 points over the period. So what else can I say, in a nutshell, consolidating on '22 strong performance and keeping on its strong discipline, CIB is embarking on a growth at above market with continued market share gains, expansion in volumes and franchises, thanks to favorable product and client positioning and a very good business drive. So that's wrapping up CIB. If we now go to the second division, Commercial, Personal Banking and Services. So this is Slide 31 to 39. So I'll refer to this as CPBS, the short end. And as you can see, CPBS continues on a robust trajectory with a sustained business drive. When looking at activities, loans were up 7% due to a positive pickup in demand across all businesses. Depositors increased similarly by 6.6% across all customer segments on the back of its favorable positioning. If we look at private banking, net asset inflows continued to grow solidly up â¬10.7 billion. Here again, you can see our model at work supporting the shift into products addressing the savings needs, hence, triggering a further shift into fee business and attracting strong inflows through external client acquisitions and synergies with entrepreneurs. Moreover, the division continue to partner with fintechs to better service clients. For instance in enlarging its offering with an automated foreign exchange risk management platform for corporates, a cash flow forecasting solution for treasurers and the development of quote-unquote beyond banking services. Having said that, how does it translate into the P&L? Well, results for the year going up sharply with variety of positive jobs, what else can I say. So let's look at the revenues. They clocked in â¬28 billion, up 9.3% driven by the strong performance for Commercial and Personal Banking and steep growth from the other part, called Specialized businesses. First, let's look at Commercial and Personal Banking, revenues were up 8%, thanks to the favorable interest rate environment with net interest income, up 9.7%. With a good momentum on deposits collection on the back of a strong client franchise with corporates, private and mass affluent clients, Eurozone networks performed particularly well. If we look at France, net interest income increased by 4.9% with a low relative exposure to regulated savings, while in Belgium, it increased by 8.9% and in Luxembourg by 20.4%. At BNL, the positive impact of interest rates on deposit margins remain somewhat offset by the progressive repricing on loans. So that's interest income. If you look at fees, we continue to get the full benefit from our leading positions on flow businesses and our favorable client mix, despite the negative impact of financial markets, fees increased share of 5% with a steep rise in France, up 8.5% supported by buoyant activity on cash management and trade finance. So that's the Commercial and Personal Banking side of CPBS. Second, let's look at Specialized businesses. Revenues, they were up 12% and this on the back of the continued expansion of the finance fleet, up 8% as well as the benefit of a high used car price combined with new partnerships. And that basically means that Arval and Leasing Solution saw a sharp increase in revenues, up 28%. If we look at personal finance, revenues were up 3% on the back of volume growth, while strong pressure on margins are weighing on the performance. The business is transforming its activities to foster its growth and profitability. So if we synthesize back at CPBS, these are the revenues. If we look at the costs, they were up - accompanying this growth, they were up 6% or if you look on a like-for-like basis at 4% and reflecting the gains in efficiency across networks with a very positive jaws effect of 3.3 points. These are the banks. Similarly the Specialized businesses confirmed their capacity to grow at marginal cost with what else can I say, huge positive jaws effect at 21 points for Arval and Leasing Solutions. Given the significant reduction in cost of risk, pre-tax income increased to a suite rounded number of â¬8 billion, up 24%. To sum up, what else can I say that CPBS has seen a strong year with a very good momentum across all its businesses, thanks to its favorable client mix and supportive interest rate environment. On top the transformation and digitalization of its model is leading to a sustainable rise in income for '22, paving the way for an outpaced performance. If we now turn to Slide 40 and let's look at the two main levers of development for CPBS, which have been confirmed in the year '22. So first, our leadership positions on the corporate and private banking segments. This is key in light of CPBS client mix as I mentioned before. As you're already aware, 60% of the gross operating income of CPBS is generated on corporate and 20% on private banking clients. So the total corporate private is 80%. This positioning allows for an enhanced cooperation with the rest of the Group, hence the material 16% growth in cross-sell on corporate client revenues. In addition, our number one position on flow businesses in the Eurozone is reported by a broad transaction banking offer and increased capabilities and payments. Acquisition transactions are up 16%. So that was the first part. The second part, our retail activities, which benefited from a favorable positioning with more than 20% of mass affluent clients and if we look at retail 20% of mass affluent. And they are adapting their operating model, accelerating the digital and technological transformation and their service model, while enhancing the operational efficiency, leading to a better quality of service and variabilization of cost. So these are then basically the networks. And if you look at Europe Mediterranean, after the exit of our activities in sub-Saharan countries, we will focus on Europe and its periphery and will strengthen our position on corporates, private banking and mass affluent clients in line with our global strategy and that I just commented on in Commercial and Personal Banking. With this we switch to the Specialized businesses. Arval, Nickel, Floa, Personal Investors see their development strategy confirmed with ambitious growth targets and this at marginal cost. All these businesses, built solid platforms in growing markets and grew significantly faster than competition. Meaning, for 2025 an impressive set of targets if I can say so. More than 2 million vehicles for Arval, more that 6 million of accounts opened for Nickel and twice as much for Floa. So transformation will be needed when we look at personal finance in a complex environment with strong pressure on profitability. Personal finance in particular where we focus a geographical footprint on core Eurozone countries, where the portfolio structure tilted towards more exposures to the automotive and mobility sectors, having a better risk profile, given they asset backed. Our objective for '25 plus â¬10 billion of additional outstanding and ongoing improvement in cost of risk towards 120 basis points over outstanding and leading to an improvement of the return on notional equity. On leasing, priority to new partnerships and financing to energy transition with a focus on productivity gains to improve the cost income ratio by more than 2 points in '25. As a result, we have raised our targets 2025 for CPBS with an average revenue growth of around 5.5% including a positive impact on the interest rates of around â¬1.6 billion by 2025, benefiting mainly the Commercial and Personal Banking in the Eurozone. As such, and benefiting in addition from a strong ability to develop fees, Commercial and Personal Banking should deliver an average revenue growth of 6%. If we turn to the specialized businesses, their ongoing growth at Arval and Leasing Solutions will be partially offset by the transformation and adaptation at personal finance. Combined, it should nonetheless deliver a revenue growth with a CAGR at minimum of 4.5% for the specialized businesses. Last but not least, if I can say, thanks to improved efficiency gains. The targeted jaws effect for CPBS is anticipated at around 3 points on average over the period embedded recurring savings above â¬1.2 billion. So we've done two out of three. So stay with me and let's move to Investment and Protection Services, Slide 43 to 46. IPS witnessed an overall positive momentum in business activity, delivering profit growth in a lackluster environment. In difficult market conditions, net asset inflows were good at â¬32 billion, sustained by good inflows at Wealth Management supported by our commercial and peripheral banking in Europe and particularly in France, but also in Germany and Asia. Post assets inflow also in asset management, driven by medium and long-term vehicles and the rebound in the money market funds towards the end of the year '22. So these are volumes. If we now focus on the P&L, IPS revenues stood at â¬6.7 billion, up 3%. And this is the result of a good performance of the whole wealth and asset management plus 6.8% with a solid increase in wealth management revenues driven by the growth in net interest income as well as the growth contribution at personal investments and the progression of real estate. Impacted by an unfavorable market environment, insurance revenues showed resilience with a solid momentum in savings and protection activities as well as the continued development of new product offering, offset by decreasing financial results. So revenues decreased by 1.9% on a year basis. So these are the revenues at IPS and if you look at the expenses, they clocked in at â¬4.4 billion, up 3.5% year-on-year, driven by the business developments and targeted initiatives. If we look at constant scope and exchange rate, the jaws effect was close to zero. And so IPS pretax income came to â¬2.6 billion, up 4.8% compared to a year ago, a good performance given the context. So this is the results for the third division and now let's look at the plans Slides 47 and 48. So IPS aimed at becoming a reference European player for protection, sustainable savings and investments as well as a key European player in real estate services. To achieve this there are three main objectives. First, accelerating in financial savings; second, capturing growth in private assets; and third, strengthening our leadership in CSR. And this using three key levers. First, BNP Paribas integrated and diversified model as you know, and as you've seen all the benefits of; second, digitalization as well as new ways of working; and third, operational efficiency. And we can leverage our strong and diversified distribution model, a close proximity with CPBS combined with a strong ability to develop efficient partnerships and JVs outside of the group. If with this, we turn to Slide 48, you can see that '22 is a tribute to the outperformance of our Wealth and Asset Management business and strong ability to attract assets. We will build on this commercial outperformance and anticipate a sustained average growth rate in assets under management with a CAGR of more than 7% over the period '22 to '25. We will capitalize on this good momentum generated by the plans launch with continued extensions and product offering for instance in private assets of production - protection products and strong developments of partnerships. Last but not least, IPS is an area where we have growth opportunities to seize for instance with targeted acquisitions and expansion in specific capabilities. This reconfirm the growth trajectory of IPS over 2025 with a CAGR in gross operating income of 6% - 4% for insurance and 9% for wealth and asset management in the period '21 to '25. So this basically synthesize the businesses. So BNP Paribas '22 results confirm the key ingredients of a successful execution of our strategic plan Growth, Technology and Sustainability '25. We benefit from a strong growth with a strong mobilization and commitment of the teams. We delivered a solid performance in '22, disciplined and well balanced between businesses. We'll benefit going forward from a unique positioning and an additional growth potential of more than â¬5 billion. As such, we have revised upward our target in net income from a CAGR over 7% to CAGR of over 9%. We will execute â¬5 billion of share buybacks in '23 in each year and an amount equivalent to 10% of our distributable net income, which should lead to an average increase in EPS over 12%. These growth will be strong and steady. To do so, we will increase the '23 distributable result up to â¬1 billion to provide to shareholders a clear and coherent growth trajectory in line with our potentials for the period. Finally, we will continue to confirm - to affirm our leadership in financing the energy transition, as such we're entering in a new phase of acceleration in financing the production of low carbon energies and reducing the financing for fossil fuel. On Slide 51 and 52, you will find in brief, the main objectives under the plan, which have been substantially improved. Yes, good afternoon. The first question I wanted to ask you, goes back to the Slide 6 please, and more specifically on the building block called organic growth. Just if you could just explain to us in terms of the net income '23 versus '22, where you expect from what P&L line and what business do you expect that organic growth to be driven? And then on the Slide 5 for the second question please, first of all just checking that I understand correctly that you now expect revenues will be â¬5 billion higher than what you initially planned in the GTS plan? And then specifically on those â¬3 billion additional revenues you discussed in the slide on the back of the redeployment of the capital from the BancWest sale, how quickly and in what division, can we expect to see those please? Thank you. So on Page 5, it's written, so on one side â¬2 billion coming from the new rate scenario and on the other hand â¬3 billion coming from the reinvestment of the proceeds from Bank of the West, so â¬3 billion plus â¬2 billion, equals â¬5 billion. So this is basically the momentum. And then looking division by division as Lars mentioned it, you have the detailed impact of this pickup in the different pages that I presented within CIB and CPBS and IFRS. IFRS is - it's not linked to the top line, it's linked to the growth of the - gross income after - after cost. So I hope, I answered correctly your question about the â¬5 billion? No, look, I mean that's clear. I think some of the target you presented are the ex the redeployment, so just wanted to check, where exactly you see the bulk of the revenue growth, including the redeployment, but that's fine. And then just on the organic growth in the question on the Slide 6, but this one the net income growth '23 versus '22, basically is that revenue driven, is that cost provision that was the idea here? Yes, I'll take that question. So, yes Slide 6, it's not a riddle, but there are indeed a lot of information in it. So if you look at it, we basically start from the bottom line in '22, so the â¬10.2 billion. Then we basically say, listen, Bank of the West has gone, so this is a reduction and that is more than compensated by the fact that we consider that the â¬1 billion, which is the last contribution to the Single Resolution Fund is excluded from this distributable income. So then there is the remaining growth. And as you've seen in the overall targets, the growth we aim to continue on the levers that we started. So 2022 is a tribute to the model working to the top line basically evolving and so that is basically what we anticipate to do. Of course, the cost will be very much contained. You've seen our jaws, you know, our focus on jaws and you've seen the cost of risk. The cost of risk, we really are careful in the clients we attract and that's why we are comfortable to guide a cost of risk well below 40 basis points. By the way of what we know in customers, but also given the Stage 1 and Stage 2 provisioning that we have in the balance sheet. So that's basically how we see that evolution. And if you do the math, the â¬10.2 billion and all of that, you can clearly see that the distributable income will end up well above â¬11 billion. Yes, good afternoon and thanks for taking my questions. First of all, I just wanted to check on the capital impacts that there is nothing more that you need to take in terms of regulatory impacts on ECB inspections or reuse or anything like that, just basically IFRS17 at 10 basis points you flagged? And my second question is really on the other way growth, you talked about the additional â¬3 billion that you're getting from the investment of BancWest proceeds, but what does that mean in terms of underlying other rate growth getting that big relief in terms of capital from the proceeds and RWAs, but there has been an acceleration clearly of the organic RWA growth. So just wondering what we should expect in coming years? Thank you. Delphine, so on your two questions. So on the capital impact, there's basically nothing right. We explained, well, a year ago in '22, there were a series of new rules that were impacting and so on and so forth that we announced upfront and you had the impact. On this one, the only thing that we see in doings is the arrival of IFRS17 as of - that we will clarify in May, and that is what we expect on 10 basis points, and that's basically the only thing that we expect in capital to be taken away from the common equity Tier 1. That's out. And when it comes to your question RWA redeployment, so one of the things when we look at the further redeployment of RWAs and particularly the redeployment of the proceeds of Bank of the West, I jokingly, but not jokingly say, we're not going to buy a bank, because we're not going to buy a bank, but in particularly, we want to grow into activities, in activities that are in particularly also fee and commission generating. So it could be insurance, it could be asset management, it could be private banking, all of these kinds of elements. That is why we feel comfortable to guide on a higher growth, while increasing the ROTE, because the ROTE goes from 11% to 12% and this is basically reflecting the lower average consumption of RWAs. That will be my answers, Delphine. Hi, thank you. So I have two questions. The first is to do with the redeployment of the capital. And I just wanted to get a sense of, to what extent has some of that â¬7.6 billion already be redeployed into the business? And is there a sense of the kind of revenue run rate that's already being achieved at the end of 2022 from that? I mean and related to that, whether you're thinking that beyond 2025, you can realize more than the â¬3 billion? And the second question is just to do with the distribution of that capital into the business. Just thinking on the CIB side, how do you think about it in terms of whether or not that could push you above roughly a third of capital within the CIB, whether that's a constrain or not? Thank you. Sure. If you look at the equity to be reinvested show the different divisions, so starting with 110 bps roughly, basically in 2022 we have already invested up to 20 bps. So let's assume that every year, we will redeploy 20 bps, or four years, this is 80 bps, close to 20 bps for bolt-ons and then the remaining 10 bps for, I would say, new business model kind of Kantox type of investment. So this is in a nutshell the roadmap. All those decision, reinvestment, bolt-ons are based upon the very strict financial discipline and to some extent only I would say top - top business lines, the best position within the BNP Paribas Group can benefit from that. So we can even - I would bring those businesses at an even better level. So this is the current situation. Looking at CIB roughly speaking, one short of the equities kind of maximum of the amount we could allocate to the CIB. There is no, I would say intention or would say purpose to challenge this balance. We like the diversification of the model and that's it. And looking at bolt-on clearly, it will come more for I would say specialized businesses, could be car fleet leasing, personal finance, insurance payments. So typically non-CIB businesses. Yes. Thank you. And just [technical difficulty] so some of that investment is going to be in '24-'25, are you thinking that the â¬3 billion can grow from there as well as some of those later investments come through? If you - of course, we have to really prove this equity in the current systematic and progressive way. As an assumption, we've picked up an average cost income of 60%, but knowing that we're investing in businesses in which we have already, I would say a cost based, most of those investments they are run at marginal cost. So in reality, it explained why progressively, even if it - I would say spill over the period, you get average â¬3 billion, top line cost income 60% and then return on tangible equity 12%. So there is no hurry. Well, we have a very strong ability to redeploy equity just because we have a number of very competitive and very well positioned business models and this is really the way we're going to look at the situation and you never know. But there is a very high probability that we were going to be a successful doing so and we're not interested at any kind of major transaction, banking aggregation, domestic bank whatsoever, just about growing service model that is bringing value-added products and services to the franchise. Yes, thank you. I'm sorry, just one more on the â¬3 billion of revenues. If you don't find those annual opportunities or the bolt-on deals, would you consider doing a further buyback with the proceeds or would you carry forward the excess capital into 2026 and carry on looking? And then a second question, please. I think Jean-Laurent, you said that the â¬2 billion of additional revenues from higher interest rates was from rate hikes that have happened in 2022. So just to confirm that would be consistent with a 2% through terminal deposit rates by the ECB because I guess the market forward path is for rates to go up and then come down again? Thank you. John, I'll take your first question on the â¬3 billion. So the â¬3 billion, the idea that it - actually, it would not be bolt-on. So what we assume is that 80% can be redeployed within the business, so we can accelerate servicing our customers, that's - 80% we will do. So there is 10% of that, that we have basically earmarked for bolt-ons. So while if it wouldn't be possible to have that 10% done in three years, then we'll see what we'll do. But it looks like the way we have been already doing, if you look at 2022 with what we've been able to do with Kantox, with Floa. So we feel quite confident. But the amount of bolt-on is relatively small and so we feel comfortable with redeploying it into accelerated organic growth. On the net interest margin, yes, so what we basically have that evolution that we see ramping up to â¬2 billion goes with the 2% that you mentioned. Hi, good afternoon. Just two questions from me please. First of all on the volume growth, could you please give us a bit of overview of where do you see volume growth in this year and next in the retail and the corporates, because clearly we are seeing better than expected environment and assumptions built in beginning of - that of last year was - we're much more conservative. So where do you see the retail or mortgages growth and then on the corporate - the corporate side? And secondly, I will come back on the capital deployment. I mean, I'm surprised, because when you announced the deal, you were very clear that one-third will go for organic, one-third for technology and the rest is bolt-on and then the share of the bolt-on has really shrunk a lot and your profitability is improving. So you organically generate excess capital because it distributes only 60% and you're already proforma compliance Basel IV and so on. So where this significant growth is coming from - where you have to allocate this extra â¬7 billion? And would you consider for example, buying back your share from the Belgium government, if that would be earning accretive as well? Thank you. Tarik, let me take those two questions on the - on your volume growth, as you know, we are basically a bank focused on corporate institutions, and so that's where the growth comes from. We are relatively small player when it comes to retail. So for us the focus is accompanying the businesses that we see on the other aspect. And of course if this one is going faster, we will be very pleased to accompany them. And then on the redeployment, the redeployment what we said is, we basically said, there are three drivers. So there is the organic, there is the technology and there is that. And as we mentioned, as you know me, we are basically frugal, and we observed that when there is this opportunity to do it organically, that is the one that is bolted on immediately, that is the one that we know well, that is the one that we serve well, and that's the one that hits the bottom line immediately. So even if there are three levers, I think you can really see that the organic one is the preferred one. Sorry Lars, my question on volume was more kind of the volume you see now organically on the retail. How is that recovering given the uncertainty in the market in the retail and the corporates? What do you see on the ground basically? Well, listen, we don't give an update in the middle of the quarter. So if you look what you rightly so in the fourth quarter, you saw that on the corporate side, the volumes were still going up very well. If you look at the retail side and particularly if you look at the mortgages, it was somewhat slowing down. So that's basically where we stand. Yes, good afternoon. Thank you very much for taking my questions. I wanted to come back to the reinvestment point, please. If I take your â¬7.6 billion reinvestment plan and I gross it up at a capital ratio of let's say 13%, we're getting to about â¬60 billion incremental risk weighted assets that this reinvestment will generate and â¬3 billion incremental revenue is just 5% revenue margin on that, which I think is quite low, given your current business mix. I mean you're making well north of 10% in your asset gathering businesses and you said that you want to - you want to focus on fee-generating activities in this reinvestment effort. Could you maybe add a little bit of color on how the revenue number and the implied risk weighted asset budget hang together. And is it may be possible that you're guiding very carefully on the revenue benefit of this reinvestment? And the second question goes back to the personal finance division, where you suggested that you are thinking about the retrenchment towards the Eurozone. Could you give us a rough sense of how much of your loan book at the moment is actually outside of the Eurozone, please? Thank you very much. So on the second part, I can tell you the following. We're not retrenching. We're focusing the business model, let's say around the Eurozone including the Nordics and UK for a number of good reasons. When you are outside the Eurozone, we said the funding of those businesses is slightly more competitive, if you're not a domestic bank, which is the case for us in Brazil, South Africa, Mexico, countries in Central and Eastern Europe. So there is a huge, I would say incentives to concentrate in that geography in which you benefit from a very strong liquid abundant access to the local currency to typically for us, which is the Eurozone, especially when rates are going up. This is for a second, it happened that in a number of those non-European countries, western countries to some extent, we have - let's say, not really the critical mass. And if we want to upgrade long-term platform personal finance, bringing in new services, new technology, Buy Now Pay Later type of approach. If we need to have, we want to clock very performed competitive partnership for example in the automotive industry, aligning car fleet leasing, consumer finance insurance, we have to be in Europe. So it's - it's a way to manage the business model slightly differently in an area where we can access the local currency in a very efficient way. And where we can't have complementarities with other businesses like our fleet and insurance, all this is around the mobility concept. And at the end of the day, would have a better, stronger and more efficient personal finance platform, which probably less out standings in volumes, but a better return and above all and newer lower cost of risk. So this is really the story for personal finance. Lars, from the first part? Yes, maybe as one complement. I don't have the fraction handy of volumes, but we'll come back to you. It's - 15% is basically - then the other thing, which is important to know is that the pre-tax income of this is basically shuttling around zero. So it is not something - once it's been divested that it would impact that. And the second thing is on your question on our guidance, Stefan, you do know us for a while, right. And so, yes, we tend to be a bit conservative on what we guide. And talking about conservative, I hear that there are some people saying that also not only we are conservative, but we can sometimes be a bit [gridlish] and particularly when we talk about Slide 6, and so to avoid any misunderstanding on 6, so basically Slide 6, starts from the results published in 2020, the â¬10.2 billion, basically says Bank of the West will be gone. But that will be more than compensated by the organic growth and then there will be â¬1 billion, that will be added to it as the base for the distributable income, that's why that base will be - of distributable income will be well above â¬11 billion. So I hope with this I answered your question on your conservative question. Good afternoon. So a couple of boring numbers questions first and then a longer question on the personal finance division. So on the numbers, could you give some guidance for the AT1 cost this year, given you've issued quite a lot recently? Should we expect that to go up meaningfully from the kind of â¬500 million, â¬600 million of recent years? Second question is on the Single Resolution Fund cost for 2023, am I right that you're guiding that to come down to â¬1 billion from â¬1.3 billion last year, is that a like-for-like comparison? And then on the personal finance division, you mentioned in the slides, increased margin pressure, but it really seem to accelerate a lot in the fourth quarter versus the kind of more gradual pressure of recent quarters. Was there anything in particular in the fourth quarter that meant you saw such a drop is TLTRO related or something? Any commentary there on why it came down quite so much? And then - Okay. Just the pace of the decline in revenues, fourth quarter compared to the third quarter in the personal finance division really accelerated. So I'm just wondering why there was such an acceleration and it seemed to be margin pressure related in the fourth quarter compared to the trend before them? Matthew, if I take your questions. So on the AT1 - the AT1, what we - as a reminder, we were basically issuing around â¬2.5 billion a year and what we're doing now is basically stepping that up to â¬4 billion, but that will be basically compensated by stepping down other instruments. Why is that? Because in total capital, we're very happy campers, but we want to step up the AT1 because the AT1 is used in the leverage ratio. The leverage ratio is the leverage exposure that is considered towards the AT1. So, that is basically what we do. And so, yes, we stepped it up a bit, but again we lowered it on others. So it should not have a material impact in our overall funding cost. Then when with respect to your drop in the Single Resolution Fund contribution, I don't know if I understood you well, but let me tell you, so we basically contribute BNP Paribas â¬1.3 billion. This is in 2023, this is the last year. So this is a fund that is regulated by law and that should be completely constructed at the end of this year, which it should be and then basically that â¬1.3 billion would fall away. We anticipate that there will be something remaining what is the fact that fund will continue its life and maybe in some other countries, it will continue its life. So it's basically we anticipate in 2024, a drop of â¬1 billion. Okay. And then when it comes to your question on personal finance in the fourth quarter, what you see is - as you mentioned, the margin pressure is picking up in that business, and that's basically what you see as the main impact in the fourth quarter. Can you elaborate a bit more on that. I mean, why is that coming in the fourth quarter harder, do you expect it to continue to decline, is it the trough, I mean? No, the thing is, what you basically see is you have the average life of the production that you do. So you basically have a bulk, which is being refinanced and that is what you see. And it is one of the things why we focus even more our personal finances. So we don't want to have it fully dependent on the interest income, that is why we are ramping down or ending our activities in the countries that we just mentioned. And we want to focus on the financing related to the asset backed, which are also generating a set of fees around it. So that is the whole part of the transformation that we are undertaking with personal finance. Yes, good afternoon. I have a question regarding, what you said on bolt-on acquisition. Of course, we have clearly understand what you're focused on this kind of strategy, but my question is more general. When you think about the fact that the monetary landscape is changing, plus the accelerated progress of industrialization and the stabilization of regulation, how do you see the evolution of the European banking landscape? And if you as BNP, CEO, does not like big operation, do you think that there is something here, which is changing and that some of your competitors may think differently and thinking that it's time now for bigger operation in remaining fraction European banking landscape? That's my first question. And my second question is regarding corporate center. Could you give us what we have to wait for in 2023? Do we - do we have compensation of restructuring cost with capital gains, for instance like in 2022, not exactly like in 2022, but we were supposed to have that. Could you give us more color on that? Thank you. So on external growth, our belief at least from for being BNP Paribas is that the future is on, let's say organic consolidation with bolt-ons, meaning, building a global integrated platform where you deliver integrated I would say setup, high value services. So this is our vision and we don't believe that is the regulation in Europe or a number of other factors converging so rapidly that we can envisage structure up something that could be, what's going on in the U.S., for example, consolidation in between regional banks from different states who are not there, may be Europe would be there in 10, 20 to 25 years. We don't know, but we see it is not this. So again we stick to our vision that is creating a pan-European platform is value-added services, integrated comprehensive that can address, let's say, value-added franchises. So this is the strategy. It's possible that some competitors are not looking at the situation that way. One reason being the fact that maybe they do not benefit from this situation very highly diversified business model. So, probably this is the main difference. And again, there is still room for, let's say, local consolidation in certain domestic market, cross border. We don't see it, but we do not say that one is going to look at that situation, that this is not BNP Paribas. Lars? Yes, Pierre. On the corporate center, so indeed over the plan our ambition was to have the restructuring and adaptation, which gravitate around â¬400 million a year to have then compensated by capital gains and you saw it in 21 and we basically have that in the wings for this year and next year. Yes, good afternoon and thank you very much. Two questions please. The first one is on the CIB, you mentioned that you seed one-third as a maximum capital allocation to division. Just wondering if you expect perhaps somewhat higher allocation within CIB towards global banking and perhaps global market capped at current levels or there is no specific dynamics in mind or implying? The second question is just a clarification regarding the distributable income and the planned capital distribution. Do I understand correctly that only 2023, you will use adjusted distributable income in 2024 will revert back to stated? Thank you. So when it comes to the one-third, one-third, one-third, let's now - let's not overdo it, right. We basically have these kind of levers at the group level and we typically grow them all three of them, and so that's basically it. And within CIB, it's a bit the same thing. At the beginning of the year, our global banking was a that slower because the markets where it was and then it picked up again. So it's not a dogma, it basically what we see and the way we grow and the way the demand in the business growth, they typically move on at the same - at the same speed. When it comes to the distributable income, listen the way - why we did this 2023, we consider it an extraordinary year, a pivotal year. Extraordinary in the sense that it will be the year of Bank of the West is gone, and it will not yet be fully redeployed. And at the same time, it's the last year of the contribution to the Single Resolution Fund. And so that's why we basically said, we - as this is extraordinary, we basically take that away. And so if you then look at the growth going into 2024, there will be the further growth, which will be there. There will be the redeployment of the first part of what we're seeing with respect to the capital redistribution of Bank of the West, which will be kicking in and of course our platforms will continue to grow as well, and so that is why, when we basically guided for the CAGR of the bottom line, we really said, it is a CAGR of 9%, and it's a 9% that we should get every year. And that's actually why we had those extraordinary effects in 2023 because otherwise you would have had a hockey stick. You had a bit of a slower growth in '23 and then a hockey stick in '24. And so what we've basically done is in '23, we ironed out to have a coherent growth, bottom line of 9%, EPS of 12%. And so that's what we do. Of course, so the CAGR will be growing 9% a year. On the EPS, which has further boosted by the share buyback, the EPS will be in particularly boosted this year because over and on top of the recurring around â¬1 billion share buyback of the earnings, there will be the â¬4 billion share buyback related to Bank of the West. So that's basically the growth rates. Yes. Thank you very much for taking my questions. Two follow-up questions. On your - previously you had a 2024 ROCE target of 11% and let's assume that could be now about 11% considering the 2025 upgrade. And then on CIB, the cost growth in'22 over '21 at 14%, obviously, you are not FX adjusted is quite high. And do you think like if revenues come down '21 versus a very, very strong 2022, you will still be able to deliver positive jaws, so that investments will be a headwind? Thank you very much. So, yes, on your first point. Yes, it's highly probable that the return on tangible equity in '24 might be higher than the one initially anticipated. So this is - I would say for sure. CIB, especially looking at global market, there is a certain seasonality let's say cyclicality. So looking at the diversification of that platform, we know that depending on the different situation from financial markets, we can readjust, relocate. So tangentially, yes, we believe that based on the current platform that has been completed - complete in those researchers, we can manage to assist kind of regular growth and that's it. This is not retail. It's a different type of business, of course, but tangentially mid and long-term, we believe this is now a quiet, very resilient platform. Yes, afternoon, everybody. So, just another one on the dividend. And I think this is probably a yes/no answer. So the 2023 evolution is clear, essentially pulling forward that SRF benefits that move the dividend profile. But just to clarify, for 2024, the plan I think from your comments is to maintain that 50% payout ratio and deliver growth again in '24, in line with or above the 9% embedded in the plan? So that's the first question on the dividend. And then secondly, on Slide 79, it looks like the spike in cost of risk in personal finance in the quarter was partly due to Brazil, and I just wondered if there any one-offs in there that we should be aware of? Should we be expecting that cost of risk number for personal finance overall to settle back at around 130 bps in 2023 and beyond, assuming sort of constant perimeter? Thank you. Chris, so yes. On the dividend, listen, let's be clear. So the dividend, there is distributable income and that is growing basically with 9%. This is what we said in particularly 2023, we iron that out to have 9% kind of every year is that's what you wish. And then we basically said on that bottom line that's basically 55.0% that will be paid in cash and 10% that will serve for a share buyback. So that is how you should read 2024. And then when it comes to the personal finance, as we mentioned, personal finance, there are some - in some zones, where we are selling, there are some zones that we are basically ramping down and in that ramping down, yes, there is - in Latin America, there is a one-off kind of effect that you - that you spotted correctly. And so our overall trend, with all the things that we are changing, the way we are focusing personal finance on the asset-backed kind of services, it is clear that we are tapering that off towards over the cycle of 120 basis points. Gentlemen, at this time there are no more questions registered. May I turn it over to you for any closing remarks. Thank you again for your attention. And again, you can count on us very much. We're very much - I'd say committed to delivering that plan and it's to some extent a great cycle for BNP Paribas. Thank you so much. Take care. Stay safe. Ladies and gentlemen, this concludes the call of BNP Paribas 2022 full year results. Thank you for participating. You may now disconnect.
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EarningCall_624
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Good day and thank you for standing by. Welcome to the Dassault Systèmes Fourth Quarter and Full Year 2022 Earnings Presentation Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be the question-and-answer session. [Operator Instructions] Please be advised that todayâs conference is being recorded. Thank you, [Nadia] [ph]. And thank you for joining us on our fourth quarter 2022 earnings conference call with Bernard Charles, Chairman of the Board and Chief Executive Officer; Pascal Daloz, Deputy Chief Executive Officer and Chief Operating Officer; and Rouven Bergmann, Chief Financial Officer. Dassault Systèmesâ results are prepared in accordance with IFRS. Most of the financial figures discussed on this conference call are on a non-IFRS basis, with revenue growth rates in constant currencies unless otherwise noted. Some of our comments on this call contain forward-looking statements that could differ materially from actual results. Please refer todayâs press release and the Risk Factors section of our 2021 Universal Registration Document. All earnings materials are available on our website and these prepared remarks will be available shortly after this call. Thank you, Beatrix. Good morning and good afternoon, everyone. Thank you for joining us. It is always a great pleasure to be with you today. We had a strong fourth quarter, wrapping up a very good 2022. We met or exceeded our financial objectives across the world. For the full-year, revenue increased 9%, driven by continued momentum in subscription, which is up 15%. Our strategic growth drivers performed well, with both 3D experience on the Cloud revenue rising 22%. We delivered strong profitability, with earnings per share up 19%. At the same time, we continued to invest to support our long-term growth, increasing headcount by 10%. Looking to 2023, we are on track to achieve our 2024 EPS objective of â¬1.20, almost a year in advance. The governance evolution we announced last April is now in effect. Iâm confident we have laid a strong foundation to support our growth well into the future. We are delivering on our financial commitments, Pascal and Rouven will discuss our performance further, in a moment. And just as important, we advance our purpose, creating sustainable value for all stakeholders. With generation of architecture, Dassault Systemes has been the catalyst and enabler of scientific, industrial, ecological and societal transformations. Every decade, we have disrupted the status quo. We have unflattened the world replacing growing by 3D representation. We have removed physical prototyping, thanks to digital market. And we have connected products and processes, virtually with product lifecycle management. And now with the EXPERIENCE platform, we expand beyond the product and the service to the experience, which is, in fact, the final use by the consumers. Virtual Twin Experience of Humans is the next big step that you are all aware of. We are expanding from things to life. Virtual Twin Experiences for a Sustainable World must be part of this journey. As we look to our next horizon, letâs say 2040, we believe fostering the connection between the experience economy and the sustainable economy requires going far beyond a transformation. We think it is a real metamorphosis which is required. In fact, we can learn so much from life and apply what we learn back to things. While Virtual Twin aims at representing reality, experiences requires deep science. Our science-based experience rely on a range of multiscale disciplines, biology, chemistry, material science, mechanics and electromagnetic, for example, allowing our AI engine to transform the gigantic unorganized data into structured knowledge and know-how. These virtual assets are becoming the enabler of new products and services to the end consumer, to citizens at large, which is what consumers are expecting, not just the virtualization of the product, but the virtualization of the product in context of its usage. This is what we call the experience economy and this is what experience is all about. The growing adoption of Virtual Twin, being able to experience it is mission critical for our clients across all sectors to address the customers' needs with differentiated experiences and to reimagine their portfolio on service for sustainability. It's very linked to the purpose that we have in 2012 when we articulated our company mission, harmonized product nature on life, the real purpose of Dassault Systèmes. At that time, many did not fully understand our deep commitment to leveraging science and technology to benefit society, but today, I think it's well understood. We need to change the way we produce and consume. With virtualization, we have transformed the processes of creation, the processes of production with a holistic approach to circularity, incorporating frugality on end of life into the design stage. We enable companies and society at large to measure a balance and balance what it takes and what it gives back to the planet. We call this the eco-bill. Working together, we can imagine new horizon and improve the work for consumers, passion, and citizens. We have this quarter a good proof of that. We received an outstanding ESG Evaluation from S&P Global and our outperforming the tech sector, as well as the overall market. So, I think it's a clear indicator. We walk the talk. Before I conclude, the governance evolution that has been announced, that we crafted over many years to support the company's long-term strategy is now in effect. As Charles Edelstenne, our founder and significant shareholder of Dassault Systèmes, take the role of Honorary Chairman and remains a Director, I look forward to continue our collaboration that we illustrated for 40 years, the entire history of Dassault Systèmes. We will replicate or plan to replicate this successful tandem with Pascal Daloz, who have been leading many of the activities of Dassault Systèmes for the past years from brand, R&D, strategy and many domains, a great experience, 20 years of experience already. And we share the same conviction, the power of science-based virtual universes drives value and progress for humanity, for all stakeholders. Together, we will continue to advance the company's legacy onset valuable ambition to realize our purpose. Thank you, Bernard. Hi, everyone. It's a great pleasure to be with you today. I'm very thrilled to take this new role. And at Dassault Systèmes, we are focused on the long-term that include our teams, and thank you for having invested in me and prepare me well. So, we have enjoyed a successful collaboration for the 20 years, and I look forward to the next 20. So, in fact, we are just getting started. Are we, Bernard? So, it goes without saying that in my new role, I will remain deeply committed to helping clients overcome challenge and realize their ambition with game-changing innovations. So, in 2022, we unveiled the 3DEXPERIENCE loop, IFWE Loop representing the company unique ability to seamlessly link the value creations with the value experience. And I think this strategic fit opens up a significant opportunity to expand the value proposition on one hand, but also to reach new audience on the other hand. So, let's zoom on a few proof points we have this quarter. In manufacturing industry, the transition to sustainable experiences is impacting all the subsectors from the new mobility to the clean energy. And we are leading the change as we have done for half a century, with both the large incumbent transforming, but also the new entrants. I think the science and technology we provide are the foundation for electrification, battery development, and manufacturing. And this is a true race to innovate. Scale and speed are really crucial in this game. But at the same time, today, operating environment is incredibly challenging with unprecedented volatility in the raw material costs and availability, and this is reshaping the supply chain and value networks. So, to adapt, customers are expanding the way they use our technology, building the virtual twin of their company with 3DEXPERIENCE platform and the cloud. So, it's not anymore the virtual twin of the products, it's the virtual twin of the company how we make things. And to do this, they are combining the virtual twin with the real-world evidence, the data science and AI to lead the transformation of the entire organization. We have an excellent example this quarter with Renault, continuing to foster the company groundbreaking revolutions announced last year by the CEO, Luca de Meo. With 3DEXPERIENCE and cloud, Renault is utilizing the data science and AI to project the impact of the raw material costs and also the [part cost] [ph] variations in real-time to secure resourcing on one hand, but also the margin. And this is replacing 100,000 documents exchanged every week with all the suppliers. With the agility of the cloud, we have been able with Renault to execute the go-live with over 2,000 employees in just one month and reaching new audience such as procurement, finance, costing, FP&A. And with this initiative, I think we are also preparing Renault very well to measure the energy and the environmental impact of each vehicle in real-time. That's the first example. If we turn now to Life Sciences, this sector is also transforming extremely rapidly to accelerate the drug development, improving efficiency, and scale to precision medicine. This poses a particularly unique challenge in biologics because it's derived from the living cells and biologics are highly complex and sensitive to minor differences in environments and processes and often require smart injectors. Needless to say, developing and producing biologics require deep scientific technology. In the fourth quarter, Amgen, one of the world's leading biotechnology companies using already MEDIDATA, BIOVIA, and SOLIDWORKS, is deploying the 3DEXPERIENCE platform and the cloud to unify three things. The first one is all the applications we are providing, but also all the custom applications have developed by themselves with a single source of truth. The second thing they are unifying is the life cycle management of the APIs, the ingredients for the drugs, if you want, the drug itself, the devices and all the processes to accelerate the tech-transfer to manufacturing. And the third piece is a unifying approach of the chemicals and the biologic manufacturing to ensure the quality and improve the regulatory and compliance. I think we are extremely pleased to continue to support Amgen as it advanced the patient journey. And driving this transformation in Life Sciences is a long-term opportunity, and we are not even in the first inning. I think we are pioneering the innovation with durable competitive advantage, and we are really the one changing the game for clients and also for the patients. This is the second example. Third example is coming from the infrastructure and cities and especially energy. As you know, the geopolitical events of last year brought sustainable energy supply cost and independence to the front-end of the global community, especially in Europe. And the solution to the crisis has been pursued with urgency, and interest in the nuclear energy long forgotten is seen as a resurgence. And in fact, I was checking some numbers. The International Energy Agency expects the global nuclear power capacity will need to double by 2050 in order for the world to reach the net zero emissions. So, to unlock this potential of carbon-free nuclear power, we need to achieve a new scientific breakthrough and ensure, at the same time, the collaboration of the entire value network from the operators to the suppliers and the regulators. And I think with the science-based Virtual Twin Experiences, we are the leader in this industry, working with nearly all the nuclear energy players from the incumbent like EDF to the new disruptors such as Neha or to the government agency like CEA. And this quarter, we have another proof point, which is Framatome. And Framatome is adopting this 3DEXPERIENCE platform to ensure the quality and the safety, and at the same time, reducing the cost and capitalizing on innovation. As you can see, many of our example we are using and proof points, in fact, using this 3DEXPERIENCE platform and the cloud. And this adoption is really broad-based across the geographies, the industry and the product and by both the new entrants and the incumbent. And I think this is reflecting our strong cloud offering. I think we have now more products available on the cloud than we have on-premise though the scope of solution is extremely broad. We are operating at the highest standards of global security and availability, and with 3DS OUTSCALE, we have a unified cyber governance offered to three level of trust cloud; the dedicated one, the private one, and the international one. Now, let's say a few words about the performance and we start by the geography. In the Americas, growth accelerated to 11% driven by a good performance in Life Sciences, High-Tech, and Aerospace, and we see also a continuous strong preference for the subscriptions. And Rouven will come back on this. In Europe, I think we have demonstrated the resilience, increasing 6% ex-FX, driven by an excellent result in France and the south part of Europe and also driven by transportation and mobility and aerospace from an industry standpoint. Asia Pacific rose 7%. India and Korea were up double-digit this quarter and year-to-date. And Japan performed extremely well with up mid-single digit for the quarter and double-digit for the full-year. This is, in fact, offsetting the slowdown we have seen in China. China is growing single digit as extended shutdowns continue to weight on the activities. Now, let's zoom on the different product lines and I will start by industrial innovation. We delivered strong growth with the software revenue, up 11% driven by CATIA and extremely with having a good momentum with revenue up mid-single digits in Q4. And this growth is coming from different pieces. The first one is the cyber systems, which is one of the domain of CATIA, which has been adopted by the large industry starting with aerospace, and we're expanding more and more in the auto sectors and also in energy, but also the new generation of CATIA, the one being based on the 3DEXPERIENCE platform. And this quarter, again, we have a good momentum and good demand coming from Aerospace & Defense, High-Tech and Transportation & Mobility, specifically on Electrification. ENOVIA had an outstanding quarter, also reporting a very high, I should say, double-digit revenue growth, driven by the 3DEXPERIENCE platform. And SIMULIA also displayed very good growth, up double-digit, driven by high-tech sector specifically. Now, I want to say a few words about the competitive landscape. I think we continue to expand our market share and leadership positions. And we computed that in 2022, the win rates in average was above 80%, if not 100%, in some specific cases, right. For example, we are replacing Agile largely in the High-Tech sector, especially in the tech giants of the Silicon Valley. In Life Sciences, software revenue rose 12%, and we continue to have an excellent performance of MEDIDATA this quarter and BIOVIA is back. We have a mid-single-digit growth, thanks to the customer adoption in both Life Sciences, but also material science because you remember with BIOVIA, we are also serving the material science, and this is extremely core for the sustainability. We continue also to expand the broad portfolio, including ENOVIA and DELMIA and other leading brands. As you have seen with Amgen this quarter or Sanofi or Boehringer Ingelheim and Novartis recently when the press release we communicated the last few quarters. Now, let's turn to the mainstream innovations. The revenue increased 3% this quarter and during the fourth quarter, but also throughout much of the year, the mainstream market was impacted by the macroeconomic uncertainty, particularly by the high level of inflations, which basically delayed the decisions to invest, but also by the China COVID shutdowns, which continue to be a headwind for us affecting the SOLIDWORKS results, specifically in the upfront license growth. And again, this quarter, that's what we have seen. In terms of potential reopening, we are hopeful for the full-year, but still cautious for H1. I think now it's time to hand over to Rouven, who will give more detail about the revenues of profitability, but also our 2023 objectives. Rouven, you have the floor. Thank you so much, Pascal, and thank you, Bernard. Welcome from my side as well. Good morning, good afternoon. Simply put, we had a very good fourth quarter and total revenue is growing 16% as reported and 10% at constant currency. And this is relative to a high comparison base. These excellent results reflect the confidence and the trust that our customers have been working with Dassault Systèmes, especially in times when volatile macroeconomic challenges require to accelerate change. Software revenue rose 9% at constant currency in the quarter, driven by strong recurring revenue up 11% and subscription revenue growth accelerated to 18% in Q4, while license revenue recognized upfront grew a healthy 5%. The combination of subscription and upfront license revenue together rose 12% at constant currency during the quarter. The combined growth of both revenue streams is a good measure to look at the new business growth, irrespective of the contracting model, and the customer preference. And as we continue to increase our share of subscription revenue, it is our conviction that aligning with the business models of our customers across the geos and industries by offering the flexibility of both subscription and the CapEx-oriented license model, creates a unique differentiation of our platform. Now, rounding-off the good performance of the quarter, services revenue increased 15% at constant currency during the period. Fourth quarter operating margin was 34.9% and earnings per share rose 20% to â¬0.34 as reported. This strong finish complemented very good results for the full-year 2022, well in-line with our revenue objectives and demonstrating the resiliency of our model with total and software revenue up 9%. Recurring revenue grew 10% at constant currency and averaged now 78% of software revenue for the year, an increase of 70 basis points relative to last year. While upfront license revenue was up 6%, we continue to deliver strong subscription growth for the full-year, which was up 15%. And here, I want to highlight an important takeaway and milestone for you. Because for the full-year 2022, subscription revenue was 1.5x the level of license revenue and is growing significantly faster. This is an important milestone, as I said, and as you will see in our 2023 outlook, it is the foundation of our growth model in the future. Together, subscription plus upfront revenue was up 11%. In 2022, we fully executed our strategic investment plan, aligning us with our long-term growth initiatives. We capitalize on these investments in 2023 and beyond, and I will elaborate further on this point in a moment when I talk about the 2023 outlook. At the same time, as you can see from the numbers, we delivered on our profitability objectives. For the full year, earnings per share grew 19% to â¬1.13 as reported. This was well ahead of the objectives we set at the beginning of the year. Now, let's move to our growth drivers of 3DEXPERIENCE and cloud. They both delivered excellent results again this quarter. And as you heard from Pascal and Bernard, clients from large established enterprises to also new players and disruptors are adopting 3DEXPERIENCE and cloud to unlock the full potential of virtual twin experiences to accelerate innovation, scale operations, and propel growth. 3DEXPERIENCE revenue grew 24% at constant currency and accounted for 37% of software revenue in Q4, an increase of 4 points relative to last year. On a full-year basis, the growth was 22% with a share of 33% of software revenue, which is up by over 3 points. Cloud revenue was 22% ex-FX, driven by continued strong MEDIDATA performance, up 13% on top of a strong comparison base and a very healthy growth in 3DEXPERIENCE and cloud. For the full-year, the cloud revenue is up 22%, and it's improving its share by 3 points to 23 points of software revenue â to 23% of software revenue. Now, let me turn to the fourth quarter financial results and how we performed relative to the objectives we set. Total revenue of 1.584 billion was 36 million higher than the midpoint of our target range, reflecting the resilience of our model and strong execution by our team. We reported software and service revenue above the midpoint by 7 million and 10 million, respectively. As well, we benefited from FX impact of 19 million during the period. We reported an operating margin of 34.9%, which is in-line with the objectives, relatively stronger revenue growth, partially offset by higher expenses, resulting in a net negative small impact of 0.5 points. There was no FX effect on the margin as revenue and expense impacts offset one another during the period. It is clear from the numbers we delivered on our profitability targets. And at the same time, we hired 400 net new team members in Q4. And we fully completed our strategic investment plan. As you heard from Bernard, we grew headcount by 10% year-over-year overall and with more than 50% of the new R&D hires in India. And of course, a significant portion of these hires continues to fuel MEDIDATA's momentum. Now, turning to the fourth quarter earnings per share. We delivered strong growth of 20% to â¬0.34 as reported, well aligned with our objective range, which was 12% to 18% growth. The growth in Q4 EPS benefited from two topics: first, a lower tax rate and higher financial income contributing â¬0.012; and secondly, a slightly more favorable U.S. dollar-euro conversion rate, which had an impact of â¬0.005. The non-IFRS tax rate for the quarter of 19% versus our guidance of 21.4% was driven by a continued benefit from higher FDII tax reductions in the United States. Now, let's turn to the cash flow and balance sheet items. Cash and cash equivalents totaled 2.769 billion, compared to 2.979 billion at the end of last year. This reflects a decrease of 210 million. Our net financial debt at December 31, 2022, decreased by 662 million to 227 million, compared to 889 million at December 31, 2021. This keeps us well ahead of schedule on our deleveraging objective. Now, let's take a look at what is driving our cash position at the end of 2022. First, the operating cash flow is slightly down year-over-year by 5%, mainly due to two effects. First, let's look at the changes in operating working capital. The timing and seasonality played a critical role in the second half of the year as collections in Q4 were impacted by lower Q3 activity. At the same time, in Q4, we signed large deals and renewed invoice before the end of the year, and this resulted in a strong increase of receivables. And as you expect, we will see the corresponding positive impact at the time of collections in early 2023 in Q1. Secondly, as it relates to the change of nonoperating working capital and the evolution of noncash items, the largest impact is related to higher tax payment in the United States in 2022. And as discussed in previous quarters, this is due to the mandatory capitalization of R&D expenses for tax purposes. And consequently, the deductibility of this expense is delayed, resulting in an increase of cash taxes we pay. The total of one-time net cash impact for the full-year was about 130 million. Adjusting for this amount, plus an unfavorable impact from the delay of tax reimbursements, cash flow from operations would have been up 5% on a strong 2021 baseline. As we've said before, we are committed to returning value to our shareholders through innovation, strategic acquisitions, stock repurchases, and the prudent use of debt and our dividend. Consequently, in 2022, we used operating cash for share buybacks, net of proceeds from stock option exercises at a total of 379 million. We paid our dividends of 224 million, and we repaid debt at the level of 886 million, net of proceeds from 250 million commercial paper issued in the second half of the year. Lastly, of note, we had a benefit of 71 million from FX during the year, which is much less than at the end of Q3, due to the strong increase of euro versus U.S. dollar in December of 2022. Now, let's turn to our fiscal 2023 objectives. Looking to 2023, my key message is that we are on track to achieve our long-term financial objective of â¬1.20 earnings per share well in advance. This underscores, again, the resiliency and the focused execution to double EPS according to our long-term plan. Total revenue is expected to grow between 8% to 9% at constant currency to a range of 5.925 billion to 5.975 billion. Software revenue growth rates are in-line with 8% to 9% growth. We anticipate recurring revenue to increase by 10% to 11% and license revenue recognized upfront to grow between 2% to 5%. As such, we expect the share of recurring revenue to increase by 100 basis points for the full-year to now 79% by the end of 2023. We are forecasting subscription revenue to accelerate growth by over 200 basis points to a range of 17% to 18% for the year, driven by continued strong 3DEXPERIENCE and cloud growth of approximately 20%, which keeps us on track and on trajectory to achieve our target of 2 billion by 2025. As we always said, it is our objective to progressively increase the share of recurring revenue from subscription and cloud. At the same time, we continue to leverage our leadership position to capture more of the market and increase our growth rate of new business. Now, this is reflected in the combination of the growth of subscription and upfront revenue from licenses, which is expected to accelerate by 200 basis points to a range of 11% to 13% in 2023. For services revenue, we are targeting 5% to 7% growth, reflecting robust activity, delivering innovation to clients across all segments and this good margin. Now, let's turn to profitability. Our 2023 operating margin objective is 32.3% to 32.7%. This is 60 basis points below last year and reflects the carryover effect from our 2022 investment plan. Last year, to compensate for the relatively lower levels of investment during the pandemic, we accelerated hiring engineers, sales and services resources to sustain our long-term growth. As I mentioned earlier, this investment plan has been successfully completed. This year in 2023, we will capitalize on the previous investments and reduce the hiring rate significantly to absorb the run rate and reduce the expense growth, which will allow us to snap back the margin level of 2022 by 2024. Before closing, let me briefly share our objectives for the first quarter to give you some color. We are targeting revenue growth of 7% to 9% at constant currency, with recurring revenue increasing 10% to 11%. Again, this is driven by strong subscription growth in the range of 12% to 16%. We are forecasting upfront license revenue growth down in the range of negative 7% to negative 2%. The reason for the soft start in the year is simply a very strong comparison base of Q1 2022 and the high potential of continued headwinds for our business in China. While we are hopeful for a return to more normal operations, we want to be cautious at the same time. For service revenue, we are predicting 11% to 12% growth in Q1. In terms of profitability, we are forecasting operating margin of 30.7% to 31.3% and diluted EPS of â¬0.27 to â¬0.28. This reflects the seasonally lower margin profile in Q1 and higher expense levels from the carryover effect mentioned above, which will improve throughout the year. And also, please keep in mind that Q1 last year was exceptionally low in terms of expenses as many COVID-related restrictions were still in place. And of course, for additional information and to review what we've just discussed, I refer you to today's earnings presentation. Now, I would like to conclude. 2022 was a year of highlighting the resiliency. We continue to advance our strategic priorities, gaining market share, and strengthening our leadership position. You see this reflected in the acceleration of both the recurring revenue and the subscription revenue growth, which is driven by 3DEXPERIENCE and cloud. We completed our investment plan to support our long-term growth opportunities, while delivering on our profitability targets with an EPS growth of 19% for the year. For 2023, we are providing a strong guidance despite the challenging macroeconomic backdrop, positioning us to advance towards our EPS objective of â¬1.20, which puts us ahead of the schedule. And therefore, we invite you already this year to our next Capital Market Day this coming June at our headquarter in Paris to talk about the next long-term financial plan, and we hope that you can all join us. Thank you. [Operator Instructions] Now, we're going to take the first question, and the question comes from the line of Nicolas David from ODDO BHF. Your line is open. Please ask your question. Yes, hi, good afternoon. Thank you taking my questions. I have three. The first is related to the mainstream business and the growth we can forecast for 2023. Because on the one hand, it seems that some of the SMEs in the industrial equipment might be postponing some investments, and also the weakness of the business in 2022 might probably impact the recurring revenue for 2023, but on the other hand, China could bounce back. And you mentioned earlier today that the pipeline in Aero and Mobility is good. So, all-in-all, could you give us some color? And all-in-all, could we expect the main three segments not to be dilutive for the group growth in 2023 or is it too optimistic? And my second question is regarding your assumption on price increase for 2023. What are the assumptions on your guidance? And my last question is, we talked this morning about the impact of cloud on your margin and it's pretty clear that it has no impact, but we didn't talk already about cash flow, potential cash flow impact to other cloud and subscription. Should we be aware of some structural change on your working cap implied due to the move to subscription? Thank you. So Rouven, I take the first one, right, and you will probably cover the two others. So Nicolas, in fact, for â to help you to modelize and to predict the trend for the mainstream market, you should start from where we landed in Q4, right? And progressively over the year to be back to what we are targeting, which is 8% to 9%. And there are two reasons for that. One is the base effect is not helping us on the first half. It's really helping us much more on the second half. And as you say, we still have uncertainty on the reopening for China. And I think at this stage, we just want to be cautious because we do not have the evidence that it's so easy. And remember, the reason, which is â the main reason why the growth is sometimes constrained by the confinement is, in fact, the people cannot travel within the country, it's a huge territory. And it's one of the region of the world where we do business by visiting the customers, by coming on their premise, demonstrating the products. So, we are still doing the business this way, and that's the reason why, before to have the clean situations, I think it will take certain times. So, that's how you should modelize it, so from 3 to 4, right to 8 to 9. Okay, and Iâll continue. On the price increase, Nicolas, the situation is, we successfully implemented a price change in 2022. And this comes in effect when clients renew, when clients purchase new software from us. We typically have annual renewal cycles. So, you will see even some of those come into effect in 2023 from the price increase in 2022. And when we will adjust our prices in 2023, you will see the same effect as this â it's an ongoing effect. And the average price increase was â that we put in place within the range of our inflation rate and how we adjust it, for example, for salaries. Again, this doesn't come into effect immediately everything in one-year. We have it over two to three years where you see that increase reflected. So, we always have, I would say, an uplift of 1 to 2 points of growth potentially per year from price adjustments. And this, of course, can vary across our customers because we have â a customer who's on maintenance, they renew their maintenance contract, which has an inflation uplift included. So, it's a combination of many topics. Now, to the margin and the cloud impact on the subscription. I mentioned this, the subscription today is already 1.5 billion. And it is 1.5x of the license revenue. So, it's already reflected significantly in our P&L and in our cash flow model. And the cloud of this is 1 billion. So, our objective is to get from 1 billion to 2 billion. The cash flow was, in 2022, not impacted from the accelerated growth of cloud and subscription. The reason of the delay and the timing effect we had, had nothing to do with the accelerated growth in cloud. And it is hypothetical to compare this if everything would be upfront. This is not the case. So, I do not expect from our plan to get from 1 billion to 2 billion in cloud and accelerated growth in subscription that there will be an impact on our cash flow model, right, as we have it in place. And again, 2022 was impacted by some unfavorable timing effects. The one-time cash tax payment for the U.S. taxes that we had to account for, which was a one-time impact. And in 2023, we will see, you know as a counter to that, the benefit of that in the comparison. So, we expect good cash flow growth in 2023 to summarize that. Thank you. Now, we're going to take our next question, and the question comes from the line of Jay Vleeschhouwer from Griffin Securities. Your line is open. Please ask the question. Thank you. Hello everyone. Bernard, let me start with you. In the press release and in the slide deck, you referred to your multi-scale strategy and capabilities. And this, to me, for the last number of years has been an implicitly interesting potential for DS to distinguish itself, but some of the examples we've had of your doing so over the last couple of years, it seemed somewhat anecdotal. So, perhaps you could speak about what the strategy is to manifest that multi-scale capability or capabilities in your product road map and how you see that capability manifesting itself in terms of go-to-market and/or your services, investments, and requirements. And then after that, I just have a couple of follow-ups for Pascal and Rouven. Hello Jay. I think today, the reality is when we sell SIMULIA solutions. In most of the case, it's multi-discipline, at least depending at least two or three disciplines like stressed thermal or thermal on electromagnetic. Most of the case, it's less on less sales with one type of discipline. So that's for the multi-disciplined approach. And I think the more â this is especially the case for people having â customers having adopted the platform itself. On the multi-scale aspect, it depends about the nature of what customers are doing, of course, but for example, you might be aware that we do a lot in Life Sciences & Healthcare for simulation of airflows, battery, and the level of battery, it goes at the cell level or at the crash test level or structure level. So here, we see a multi-scale too, which, by the way, includes material science in the case of the battery. We have a lot of activities going on with a lot of battery players around the world in this area. So, basically, those are the two dimensions. And I think it differentiates. I think that there still are certain specializations, which are missing in the preprocessor or post-processor, but this is in the â as you mentioned, the product [roll-out] [ph], this is being addressed. And some of our competitors have been good at preprocessor or the post-processor, but I think this will not last. And I think we'll evolve with that because sometimes there are announcement, as you may know, with competitors where they are announcing to be selected, but it's only because of preprocessing or because of post-processing mainly. So, it's really a systematic application for us. On the go-to-market, our teams now are really well trained to approach customer engagement with solutions. Last point I would mention is, we have a very strong win success with simulation cloud for SOLIDWORKS customers. In fact, as you know, it's only cloud solution available. There are a lot of replacement of existing competitors installation connected to SOLIDWORKS, adopting now our solid â our integrated platform approach even with SOLIDWORKS desktop because it's simpler for them. They can have multi-discipline like electromagnetics on structure. And it works quite well. And I believe we will see more of that coming this year and the years to come. We are pleased with the dynamic, and I don't know if you want to add something, Pascal, but I think the dynamic there is very good. And as you know, just to not take too much long time, but we left that plate open for so many years, I mean, the SOLIDWORKS installed base. This is over. Well, that leads to my next question, which is about SOLIDWORKS. A couple of things there for you, Pascal. Would it be fair to say that the new unit volume in 2022 was perhaps only about flat at best with 2021 and was not yet back at the record you've set back in 2018? And then relatedly, on a couple of prior calls, you recall, we spoke about 3DEXPERIENCE WORKS and the contribution from that. Would it be correct to say that the contribution from the various components of 3DEX WORKS amounts to perhaps a single-digit percent of SOLIDWORKS total revenue? Maybe you could comment on that. Okay. So, the first point is, you're right. I mean, it's a little bit, in terms of units, it's slightly better compared to last year, but it's flattish, let's say this way. And the reason is, the gap is coming from China for us in terms of number of units. You know it's a market where we have a lot of momentum and the consignment hurt us. And over that, we quantify almost the amount and it's in the range of 25 million, 30 million new license missing, right, coming specifically from China. It does not mean we are losing the market against the competitors. Just say it's a mis-opportunity for 2022, and we do expect to recover progressively in 2023 and 2024. Related to the WORKS family, I think we are happy with what is happening. Again, many of you are still focusing on the SOLIDWORKS 3DEXPERIENCE, the new generation, but the WORKS family is much more broader than this. Just to give you an indicator, the DELMIA WORKS family is growing higher than 30% this quarter. And you remember, when we did this move, it was a bet that we will be able to address the mainstream market with one single product covering EFP and [indiscernible] at the same time, targeting company being almost 100 million in revenue, having two production sites and going indirect to make it happen. And I think this is really happening, and it's really taking off. And this is changing the nature of what we do for the mainstream market because the point is not only to address the design, but to start to link all the different domains from the design, the simulation and tests, the life cycle management and the productions altogether with a comprehensive offer. And that's what is at stake. And to make this happen against the cloud is really the way. And we won almost little bit more than 20,000 new customers this year, and more than 25% of them are on cloud. And the vast majority are relying on the WORKS family, right? So, that's where we are. And in terms of contribution if that was the question, yes, we are still below 10%. Okay. Finally, with regard to Auto and Aero. In Auto, we've had some examples of you being adopted by some of the newer EV companies, one of whom, for example, presented at your analyst meeting, but could you comment on DS adoption by the more traditional car companies moving into EV like BMW and so forth? I mean, I would have to imagine there's a substantial opportunity there for incremental adoption. If you could talk about that, not just â in fact, the startups. And then in Aero, Boeing has said that they don't expect to have a major new commercial aircraft program for the remainder of the decade. How might that affect your growth with what has traditionally been one of your largest customers and a supply chain if there is no new program of that kind? You will take Boeing. Okay, good. So, if you look at the Auto landscape at large, the reality, thanks to the good reference we have with the newcomers almost for the last decade. If you remember, we started with Tesla more than 10 years ago, right. All the incumbents are moving along this way. And we have enough proof point, for example, in the U.S. for this moving, right, on the entire electrification programs and EV programs. In Germany, you were mentioning Porsche is one of them, Volkswagen is another one. I think BMW is moving also slowly, but surely, let's say this way. JLR is done, 100% is developed on top of [indiscernible] also because it was â remember, when at the time of the PSC and open merge, one of the reasons why they're able to do this fast integration because they were using 3DEXPERIENCE platform. Toyota is also adopting the 3DEXPERIENCE platform for the new EV cars. So, I think Honda. So, I think we are clearly taking the benefit of this. And to come back to your point, we start to see the benefit also in the supply chain. And that's something which is visible in the pipeline for 2023. The resellers, the one addressing the Auto and Aerospace supply chain, but specifically the Auto, we see the pipeline in a much better shape compared to last year. Bernard? There is a lot of things going on at Boeing. Boeing Commercial is one thing, but even in the commercial side, we have done a lot of 3DEXPERIENCE activities, especially for systems, for enterprise modeling. That's on manufacturing. On the â but the defense side, there are also a lot of programs going on. We have a global contract multi-year that we renewed with Boeing, which is aligned with what was announced in the past generation of contract. So, it's a strong dynamic there. And the most â the biggest driver is probably CATIA System with this 3DEXPERIENCE platform. More to come, but I cannot speak about that program. Now we are going to take our next question. And the next question comes from the line of Michael Briest from UBS. Your line is open. Please ask the question. Yes, good afternoon. A couple of small ones from me. Appreciate the detail on Slide 22 around the recurring software. Just taking the guidance for this year, it implies the support element is growing around 5%. And I calculate last year, it grew 7%. Are you seeing or factoring in perhaps more of a transition? Because given the comments on pricing, I would have expected a bit more robust growth on that side of the portfolio. And then just another question on cloud. Is there any, sort of consumption-based revenues flowing in there or is it all 100% subscription? Because when I do my estimates of trying to cut out MEDIDATA from the rest of it, I do find a little bit of lumpiness from time-to-time. And that's understandable, maybe SIMULIA, there are some peak periods of consumption and that's more â less ratable. Thank you. Michael, thank you for the questions. Let me try to give you some clarification. Maybe let's start with the subscription first. On the Page 22, you see that for the full-year, the subscription number is over 1.5 billion. And for the full-year, the growth in subscription revenue was 15%. So, I don't know where you are referring to the 5%. I don't know where... The guidance for this year in subscription revenue implies an acceleration of 200 basis points to 17% to 18% [growth] [ph] for subscription. So, there â we continue... You assume support growing around 5%, that is right, yes, but it's not part of the subscription line, it's part of the recurring line. But on a more normalized rate, I think when you think about the license growth that guided to the 2% to 5%, I think 5% support growth is a decent assumption. And Michael, if you remember, we had an outstanding 2021 year in terms of license because it was a rebound after the COVID period. So, automatically, you have extra growth points on the maintenance and support. And last year, the growth for the upfront license was much more in-line with usually what we do. So, we do not have â we are not yet at the point where â which could be a good question, to the point where we are progressively substituting, if you want, the maintenance and support by subscription. What we do right now are much more expanding existing customers, existing deployments with additional footprint, if you want, using the cloud. That's what we do in the large install base we have. On the consumption part, I think one part that we have is SIMULIA with the token, it's consumption based. It's based on simulation consumption and usage. MEDIDATA has also some kind of consumption. We have a pricing model where it's a single study model and depending on the growth of the study â that's in a way of consumption, but those studies are multi-years and you can consider them a subscription at the same time. So, there is some element of that but it's not a dominant model we have. It's really driven the majority by subscriptions. I think with that, thank you very much for participating to this call. Thank you, all of you, who participated this morning. And we will continue, of course to be here with you to discuss about any further questions you have. It's an interesting perspective, 2023, and we'll see at least each other probably or talk in April for the Q1 and then in June for the Capital Markets Day. Thank you very much again, and all the best to all of you for the year.
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Greetings. Welcome to the Evans Bancorp's Fourth Quarter Fiscal Year 2022 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. Thank you, and good afternoon, everyone. Certainly appreciate you taking the time to join us as well as your interest in Evans Bancorp. On the call, I have with me here David Nasca, our President and CEO; and John Connerton, our Chief Financial Officer. David and John are going to review the results for the fourth quarter and full year of 2022 and provide an update on the company's strategic progress and outlook. After that, we'll open the call for questions. You should have a copy of the financial results that were released today after markets closed. If not, you can access them on our website at evansbank.com. As you are aware, we may make some forward-looking statements during the formal discussion as well as during the Q&A. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ from what is stated on today's call. These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed by the company with the Securities and Exchange Commission. Please find those documents on our website or at sec.gov. I'll start with a review of the past year and then hand it off to John to discuss our results in detail. I'm once again proud to report on the outstanding efforts and responsiveness of our teams in successfully adapting to rapidly shifting economic conditions and environments during 2022. Evans delivered solid fourth quarter results with $6 million in net income and 14% annualized commercial loan growth, which added to strong performance for the full year of $22.4 million and 9% commercial loan growth ex-PPP loans. These results approach prior year record earnings despite a significant swing in our provision for loan losses and having to replace nearly $9 million in fee income received in 2021 from extensive participation in the Paycheck Protection Program. As you know, the economy opened 2022 with tremendous liquidity from government stimulus remaining at financial institutions and very little opportunity to invest this liquidity in an extremely low interest rate environment. Given inflationary pressures and macroeconomic challenges from ramping supply inputs such as labor, oil, building supplies and housing as well as the Russian invasion of Ukraine, the Fed embarked on an historic level of interest rate tightening that raised short-term interest rates 425 basis points in seven actions taken from March to December. This unprecedented level of tightening resulted in an inverted yield curve which has historically indicated potential recession. Margins expanded as rates for loans increased and deposit costs stayed modest until late in the third quarter. At that point, competitive options mirrored rate increases and money began to flow to alternative investments such as U.S. treasuries and higher rate deposits putting pressure on banks to match or lose funding. On the asset side of the balance sheet, loan yields rose and outstripped the levels of deposit increases for a couple of quarters until interest rates reached a level that challenged CRE projects and residential mortgages. Overall, the bank successfully weathered and performed in this environment by delivering record commercial loan originations of $95 million ex-PPP at significantly improved rates, driving the yield on earning assets for the loan portfolio to 4.88%. In relation to non-interest income, it was a solid year in our insurance business with 6% commercial insurance growth and 2% personal lines growth, offsetting the loss of revenue from the discontinued operations of our insurance claims service business. We saw strong account retention, price hardening and a good level of new business attraction. While we continue to make investments in strategic focus areas, we also worked hard throughout the year to pursue efficiencies and deliver disciplined expense management to enhance returns. This included further utilization of technology to refine back-office processes along with greater customer-facing solutions centered on speed, flexibility and efficiency. We completed our branch optimization project in the third quarter which included consolidating two branches in the southern area of our footprint, closing a branch in Rochester and converting a downtown Buffalo location to a loan production office. The anticipated employee savings were realized through normal attrition. The merger of the two branches has been very successful with excellent morale amongst the team as the combined larger branch is more efficient. Importantly, there has been no material customer defection as a result of these changes. Additionally, we have received a purchase offer for the closed location in Derby. The net result of our efforts can be seen in the efficiency ratio, which was 62.9% in the fourth quarter, which is our lowest level in more than 10 years. This past year was also our largest yet on the philanthropy side as we made $400,000 in total charitable contributions. This included $100,000 to the Buffalo Together 5/14 Community Response Fund established in collaboration with local funding organizations, 100 local and national foundations and corporations, and over 2,000 community members after the mass killing of 10 innocent people in a racist attack in East Buffalo. The fund was created to address systemic and structural issues related to racism and a lack of investment that harmed communities of color. Of our total contributions last year, nearly 80% was directed towards underserved communities and organizations serving low and moderate income residents. Another area of focus and where strides were made this past year were our efforts and commitment towards inclusion, diversity, equity and awareness. The bank appointed a Chief Diversity, Inclusion and Community Development Officer responsible for driving the overall development, implementation and communication of our inclusive strategic plan. Overall, a 13% increase in ethnic minority associates was realized through concentrated recruitment efforts. As part of our inclusive culture, we continue to achieve pay parity between genders for those who identify as male or female and across race and ethnic backgrounds. We have also been successful in expanding our supplier diversity program to ensure that minority and women-owned businesses were bidding on and securing business from Evans and are ahead of our 5-year goals in all initiatives. The bank has continued to focus on its return of capital to shareholders and total shareholder return. For the year, dividends totaled $1.26, which was up 5% over 2021 and equated to a yield of 3.2%. As we enter 2023, the focus will continue to be on loan growth, customer acquisition and relationship management, along with optimizing operational efficiency and expense management to deliver returns. This will play out against expected headwinds of margin pressure caused by rising interest rates and pricing competition, and potential recessionary effects impacting the economy and our customers. We believe our value lies in our community-based customer-centric model, which allows us to support, serve and grow our customer base in all economic environments. With that, I'll turn it over to John to run through our results in detail, and then we'll be happy to take any questions. John? For the quarter, we delivered earnings of $6 million or $1.09 (sic) [$1.10] per diluted share, which was up 3% from the sequential third quarter and last year's fourth quarter. The increase from the 2022 third quarter was largely due to a reduced provision and lower non-interest expenses, partially offset by lower non-interest income. The change from the prior year reflected lower non-interest expenses, partially offset by an increase in provisions. Full year net income reached $22.4 million or $4.04 per diluted share compared with the record level set in 2021. As David mentioned, our annual results were strong considering the higher provision compared with the release of allowance during 2021 along with the significant level of PPP fees during the prior year period. Net interest income was up slightly from the sequential third quarter as higher interest income due to federal funds rate increases of 125 basis points was largely offset by an increase of interest expense given the cost increase of interest-bearing liabilities due to competitive pricing on deposits. The decrease in net interest income since last year's fourth quarter reflected the benefits that impacted the prior year. Those included $2.4 million of PPP fees, $800,000 of amortization of fair value marks on acquired loans and $700,000 of interest recognized from the payoff of non-accrual loans. The year-over-year increase in provisions was largely due to strong loan growth. Also reflected was an increase in criticized loans and an increase in a specific reserve for a smaller commercial loan previously in non-performing. Our balance sheet benefited from rising interest rates, and given the recent Fed actions, we saw a 5 basis point lift in net interest margin in the fourth quarter to 3.77%. I will talk to our NIM expectations at the end of my remarks. Non-interest income was $4.5 million in the quarter, down approximately 5% from prior year fourth quarter, primarily due to an insurance claim from BOLI (bank-owned life insurance) and a reversal of an earnout relating to a small insurance agency acquisition in the other income line, each recognized in the prior year. Insurance, which is the largest contributor within the category, was up 5% year-over-year due to higher premiums and new commercial clients. Insurance was down from the linked quarter largely due to typical seasonality in commercial lines insurance commissions. As we mentioned last quarter, the competitive landscape and regulatory environment have brought to the forefront changes to overdraft fees in terms of how they are handled and assessed at and at what levels. We did implement changes during the fourth quarter, which resulted in the reduction in fees of approximately $100,000. The full year impact for 2023 is estimated at $400,000. Total non-interest expense decreased 6% or $900,000 from the sequential third quarter. It was down $1.4 million or 9% from last year's fourth quarter. The primary driver over both comparable periods was lower salaries and employee benefits, which reflects prudent expense management efforts, our efficiency initiatives and lower incentive accruals. Our expectation for expenses run rate for the full year is between 2% and 3%. Turning to the balance sheet. In comparing since last year end, investment security balances were up $62 million and total loans increased $100 million or 6%. Excluding the decline in PPP loans, total commercial loans increased $95 million or 9%. PPP loan balances, which are included in commercial and industrial loans were less than $1 million at the current year end. Looking at the recent fourth quarter, total loans increased $46 million. Of that, commercial loans grew 3.6% or more than $39 million net of PPP, and net originations were $71 million. That compares with $68 million of net originations in the linked quarter, which continues to be higher than last year's average originations. We have seen a slowdown on commercial real estate side given the rising rate environment, whereas commercial industrial has strengthened and is making up the bulk of our pipeline, which stood at $69 million at year end. We expect total commercial loan growth to be between 5% and 7% in 2023. Our credit metrics remained sound with a slight decrease in non-performing loans on a sequential basis and low charge-offs in the current quarter. Almost 60% of our hotel portfolio has been upgraded or paid-off, leaving $30 million in criticized status at the end of 2022. While trends for this industry have improved, a change in status for the remaining criticized hotel credits is dependent on continued positive payment performance. Total deposits of $1.77 billion decreased $102 million or 5% from the sequential third quarter and on a year-over-year basis were down 9%. Deposit betas began to accelerate during the quarter, and some of our more sophisticated commercial and municipal clients with larger balances have moved their excess funds to other investment options. Of the decline in deposits, approximately 60% was due to less than 10 commercial and municipal customers. These customers continue to be operating clients of the bank but have moved excess funds to treasuries. We have maintained consumer funding balances with the use of competitive pricing of our term products. We will be proactive with pricing and maintain competitive rates in our markets. We expect these market conditions and pricing pressures will have an impact on our margin for the first quarter and full year period next year. The fourth quarter was a high point in this current interest rate cycle, and we expect our NIM to experience approximately 10 basis points of compression in the first quarter of 2023. The bank does have $350 million of variable loan portfolio and expects approximately an additional $200 million of maturities and repricing on loans and investments in 2023 to benefit from 2 additional 25 basis point increases from the Fed, including the 1 at yesterday's meeting. These are expected to stabilize the margins for the remainder of 2023. At this time, we will be conducting a question-and-answer session. [Operator Instructions]. And our first question comes from the line of Alex Twerdahl with Piper Sandler. Please proceed with your question. I wanted to start, I guess kind of where you're ending your comments, John, on funding and I'm just curious, after the declines that you saw in the fourth quarter attributed to the larger customers, if you think that that's kind of the extent of your "at risk" larger chunkier customers or if you can give us some sense for what you are seeing in the first quarter, just thoughts around the different ways to support the loan growth. Yes. That's kind of what we're seeing. We kind of went through with more of that larger flow out probably in the latter part of the fourth quarter. And for the first quarter, we've seen kind of a stabilization of that flow out. And obviously, our pricing is keeping the consumer side. On the commercial side, we think the most sensitive have moved away. And we think that as far as there is some seasonality on the municipal side, we'll see some of that come back in the first quarter as the towns receive their tax receipts. But we've seen the larger, again, there was only a very a small handful of those customers, and we've kind of ring-fenced them. Our total borrowings should actually come down a little with the municipal dollars that'll come in, Alex. So we would expect it to come down slightly. Okay. And can you talk a little bit about the pricing that you're seeing on some of that new C&I paper that is in the pipeline? Yes, most of our C&I paper is coming at our cost of funds plus 250 or so. So we're keeping our spreads, which at this point is anywhere 6.5 and above. Okay. I'm just curious, I guess in terms of some of the moving parts in fee income. At least, we read about from where we are, some pretty large snowstorms up in the Buffalo market. I know that historically, those types of things have impacted your insurance revenue. I'm just curious if that's something that you think we might see in 2023 or be prepared to see in 2023. Or any other thoughts around whether or not the 5% growth that we saw year-over-year could continue into the new year? Yes. So you kind of referred to some of the claimâs adjustment that we have with our claims adjusting company that we went away from last year. So we don't expect to see any spikes due to kind of the weather-related issues. But we still do see that the market's hardening from a premium perspective, and we do expect that our new business growth should be consistent with what we experienced this year. Okay. Great. And then, on the overdraft, I think last quarter you said the total year effect would be around $500,000. So you're now saying that's around $400,000. Or is it $400,000 more than what -- Okay. So we are going to be maybe a full quarter's impact, if you compared it to a year ago, would be around $125,000? So wanted to circle back to the margin discussion. It seems like the deposit flows are starting to stabilize in the first quarter. Can you talk about what you guys are putting out there on deposit pricing in order to keep your current customers and gain new customers and how you see that progressing over the next couple of quarters? I think on the term, Chris, so CDs from our consumer perspective that's anywhere between 3.5% and 4% depending on what market we're in. Then on the savings side, where we're talking about commercial savings, we can utilize kind of our geographic footprint a little bit where we don't have some business, can be a little more aggressive and go with some promotions on business accounts that could be as high as 3.5% to attract new business. Got it. Given the margin guidance down 10 bps in the first quarter and then stable. Given where your deposit costs are now at 51 basis points and where those new deposits and deposits are repricing throughout next year, I would think, given the variable loan portfolio that the first quarter should be the least amount of impact and then there should be pressure thereafter as the deposits continue to get repriced. Can you just talk about like why that may not occur? And I guess like what goes into the margin outlook and the trajectory after the first quarter. Sure. I mean the difference between the fourth and the first quarter is just the level of borrowings that we had spiked at the end or during the fourth quarter. And it's the categories of where we had some dollars move out, so that the fourth quarter had some demand deposits move out, in particular, some of our larger clients. So that's going to have kind of an oversized impact from fourth to first quarter, and then we do expect that stabilization. So we've said in the past, the last cycle, we had about a 37 to 39 beta, and we still expect that. So if you kind of calculate that through, as the year goes through here, we'll get closer to a 2% cost of interest-bearing liabilities with an average somewhere between 1.65% and 1.85% during the year. Okay. And I guess but still, given that the deposits are going to be repricing throughout the year, not just in the first quarter and a variable portfolio is going to stop repricing after the first quarter for the most part, how does that fit with the flattening trajectory? Well, I mean, we have some funding that's going to come in the first quarter and stick around. So fourth quarter is a low point and the beginning of the first quarter is a low point, so we expect our borrowings to shrink and reduce. And so the first quarter is kind of oversized from that NIM compression. Okay. Got it. And as far as cash balances still pretty low here at like just $6 million or so, is there -- how do you guys see that progressing over the next couple of quarters? I think our cash balances will stay fairly tight because any opportunity we can, we'll pay down on our borrowings which are more towards the short end at this point. Okay. Got it. And for the expenses, the outlook is a little bit better, I think where it was last quarter. Can you just talk about any seasonality that you expect in the first quarter versus the remainder of the year and maybe where your FDIC costs will start off in the first quarter given the higher assessment rate? Yes. So that 3% does include a higher expected FDIC rate. The biggest impact on our expenses that are kind of holding down in relation to prior year is our expectation in our salaries and our expected incentive that will pay out just based on the levels of goals that we have and the payout that were assumed. So the fourth quarter is actually kind of a good run rate moving forward and then with that 2% to 3% kind of impact as the quarters move on from linked quarter to linked quarter. Great. And then, lastly, credit metrics all around seemed great this quarter. Can you just talk about, given the moving rates and kind of overall economic activity, what you guys are seeing in your market areas and within your portfolio and maybe where you're pulling back on or see additional risk as well as what the critical factors are to keep the hotel portfolio criticized coming down over the course of next year? I'll answer that one, Chris. Couple of things. One is, in the marketplace, we're still seeing strength and good credit, especially in the manufacturing and the C&I side. Commercial real estate has slowed down with the increase in rates. Mortgage, obviously, has really tightened up in terms of slowing down. So from an activity standpoint that's kind of what we're seeing. We've offset commercial real estate growth last year. We've offset that with our C&I expectation this year. Obviously, when you are in industry, whether it's service or manufacturing, if we head into a recession here, there could be impacts there. We're watching that. At this point, credits are fairly benign. We're seeing that across the industry and we're feeling the same way. You are hearing that, I'm sure, across all your discussions here. We are trying to stay very close to our customers, though, because if we get into a recessionary environment, demand is going to matter. Most of the people have worked through the supply chain issues that they had, and that actually is resulting at least in the manufacturing side improving. We're not seeing any deterioration at this moment on a credit side. So I think we're feeling pretty constructively positive in terms of going into this. We're not chasing it. Certainly, we always talk about that. We maintained our credit standards. We're not loosening those. John talked about the margins earlier. We are getting paid for the risk we're taking. We're not shrinking too much on the margin here. So I think, overall, we're feeling okay going into what we're seeing right now and we're watching it. The only thing I would add just, Chris, we're going to be on CECL in the upcoming year. And the provision will be a little more at risk with forecast on the economy, so that's something to kind of consider. I guess you also asked the question about the hotels. I'll go back to that. 60% of the hotels have come out since we originally criticized them. You have probably $30 million still left. Of those, one of them will stay in there, call it, $8 million to $10 million. The rest of those, we are continuing to watch for performance at their given cycles, different prime periods. They are performing. We don't see anything that will preclude them from continuing to repair themselves and come out over the next period of time. And we have reached the end of the question-and-answer session. I'll now turn the call back over to management for closing remarks. Thanks, Shamaly. I'd like to thank everyone for participating in our teleconference today. We certainly appreciate your continued interest and support as we go through the years. Please feel free to reach out to us at any time. We look forward to talking with all of you again when we report our first quarter 2023 results. And we hope you have a great day.
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Thank you for standing by. This is the conference operator. Welcome to the OpenText Corporation Second Quarter Fiscal 2023 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] Thank you, operator. Good afternoon, everyone, and welcome to OpenText's second quarter fiscal 2023 earnings call. With me on the call today are OpenTextâs Chief Executive Officer and Chief Technology Officer, Mark J. Barrenechea; and our Executive Vice President and Chief Financial Officer, Madhu Ranganathan. Todayâs call is being webcast live and recorded with a replay available shortly thereafter on the OpenText Investor Relations website. Earlier today, we posted our press release and investor presentation online. These materials will supplement our prepared remarks and can be accessed on the OpenText Investor Relations website, at investors.opentext.com. Iâm pleased to inform you that OpenText management will be participating in the following upcoming conferences: Bernstein's Technology, Media, Telecom and consumer one-on-one forum on March 1 in New York and Scotiabank's TMT Conference on March 7 in Toronto. And now on to our Safe Harbor statement. Please note that during the course of this conference call, we may make statements relating to the future performance of OpenText that contain forward-looking information. While these forward-looking statements represent our current judgment, actual results could differ materially from a conclusion, forecast or projection in the forward-looking statements made today. Certain material factors and assumptions were applied in drawing any such statement. Additional information about the material factors that could cause actual results to differ materially from a conclusion, forecast or projection in the forward-looking information, as well as risk factors that may project future performance results of OpenText are contained in OpenTextâs recent Forms 10-K and 10-Q, as well as in our press release that was distributed earlier this afternoon, which may be found on our website. We undertake no obligation to update these forward-looking statements unless required to do so by law. In addition, our conference call may include discussions of certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measures to their most current -- most directly comparable GAAP measures may be found within our public filings and other materials, which are available on our website. Thank you, Harry, and welcome, everyone, to our fiscal 2023 Q2 call. Madhu and I are delighted to be hosting today's call from Ottawa. Tomorrow, we ring the opening bells to NASDAQ live from the nation's capital. It is NASDAQ's first opening from Canada and tomorrow is a recognition and celebration of Canadaâs and OpenTextâs leading role in global technology innovation. We're a differentiated young company and we're just getting started. Let me get right to the most important points today. OpenText had a truly superb Q2, achieving overall constant currency revenue growth of 7.8%, which reflects very strong cloud revenue growth of 16%, excellent renewals performance and continued focus on efficiency with 37.7% adjusted EBITDA margin, even as many of our team members also worked very hard to prepare for the close and integration of Micro Focus. Many of the same secular factors that contributed to our growth have only increased our confidence and the potential that we see in the acquisition of Micro Focus. Specifically, in an increasingly connected and data-intensive world, our customers need actionable insights and information, strong security and continuing innovation and the tools that they need to accelerate, the digital evolution of their complex business environments, in order to securely deliver on their customers' expectations and do so efficiently. We are on track to deliver on every commitment we made at the time of the Micro Focus acquisition announcement. I'll elaborate later, but we are more confident than ever about the value we can create for our shareholders, customers and our employees and the performance we can realize by applying the OpenText business system at very experienced integrators. We have a proven track record that has been refined through the course of integrating many large acquisitions over the last decade. In addition, you'll hear today that we're on a path to deliver $6 billion in annual revenues, a $2 billion cloud revenue business and over $2 billion in adjusted EBITDA dollars with upper quartile free cash flows based on the trust of our customers. There's five specific topics I want to cover today. One, our vision, our differentiation and how we plan to win in our markets, two, delivering on our expanded information management mission and growth programs; third, multiyear financial milestones and aspirations, including our superb Q2 results, fiscal '23 growth markets -- we discussed today our preliminary F '24 growth targets and even stronger F '26 aspirations. We'll also talk about our strong capital allocation approach and plan and how we intend to create value with the OpenText business system. Let's get into it. First, our vision, our differentiation and how we plan to win in our markets. Markets are never static. Through time, we've expanded information management, to include many types of content experiences and business networks. With a Micro Focus acquisition, OpenText Corporate Mission expands again, this time to help enterprise professionals secure their operations, gain more set into their information -- more insight into their information and better manage increasingly hybrid and complex digital fabric with a new generation of tools that include cybersecurity, digital operations management, applications automation and AI and analytics. Digital Life is life, and this is generation digital. We call this business 2030. Organizations can only achieve their strategic aspirations by becoming digital leaders and top economic performers are already investing disproportionately in digital capabilities. We're on the cusp of a new world era, driven by digital, new productivity and harnessing the world assets, unlocking human potential, the reshaping of economies by the frictionless flow of goods, people, capital ideas and the new uses of technologies that will drive the next big arena of value and competition. Business 2030 will be achieved through 4 digital transformations. Total enterprise reinvention. â every industry totally transformed by digital, a new workforce led by Generation Y and Z and only a digital mindset, new digital paradigms and sustainability, climate, trust and social justice and new digital requirements and extended reality, voice and facial interfaces, diverse and AI. Organizations will continue to be the process advantage, of course, which they receive from ERP and CRM vendors, but the process advantage requires data and actionable insights. Customers need the information advantage, which they receive from OpenText forged by digital. I speak with a lot of customers and their business operations are getting more complex as they operate across many countries, many regulatory authorities, platforms, endpoints and cloud, including the rocketing security and industry compliance requirements. Process and information for is increasing for business information and automation that spans commerce, supply chain, service management, asset management, payment systems, financial systems, communications and service management. The more connected business becomes the more complex of business operations. At OpenText, we have the end-to-end software and cloud capability to help customers make this transformation rapidly and cost effectively. This is why I like to say we are the platform of platforms for information management. Customers need a single real-time view of information across these complex business infrastructure, that is intelligent, connected, secure and responsible, that is what we do, and it is unique. This is the OpenText Information Advantage. Specifically, we believe there are six-key markets required to enable the Information Advantage and deliver the high-impact digital transformation required for business 2030 and winning in this new digital era. The six markets are these. Number one, content services, which include experiences; number two, business networks; third, cybersecurity; fourth, application automation, which includes ADM and AMC; fifth, digital operations management, formerly ITOM; and sixth, analytics and AI. We are organizing around this strategic and growing totally addressable market of $200 billion plus, and we'll keep you updated on our progress in these six market areas. Second thing I want to talk about today is delivering on our expanded information management vision and growth programs. It's been a great first week speaking with Micro Focus, employees and customers and we have already completed our leadership, structural and key people integration. There's an enormous amount of energy and excitement. Please recall the transactional financial highlights are as follows. We paid an enterprise value of $5.8 billion financed with cash and debt. This equates to a revenue multiple of approximately 2.3 times and an adjusted EBITDA multiple of 6.7 times, a very attractive multiple and the business is immediately accretive to adjusted EBITDA dollars. Moreover, we love the amazing talent, marquee customers and great products, including idle in the content space, Vertica and AI, Fortify, Voltage and Security, SMAX in digital operations and load runner and Value Edge and applications automation, including critical maintain technologies that power the Global 10,000 today and tomorrow. We also intend to fix the things that need fixing, accelerate to the cloud, reinvention of the customer engagement with the OpenText love model, centralizing renewals and implementing OT best practices and rightsizing the organization for speed, impact and growth. On growth, let me summarize a few key programs. OpenText delivered a 95% renewal rate for off-cloud in Q2. We expect to make steady progress in transforming the customer experience with Micro Focus products and raising their low 80s renewal rates to ours by the end of fiscal 2025 or sooner. Rapid innovation, the highest correlation to high renewal rates as product value, and we are taking several actions to accelerate innovation to all our customers. Specifically, we are immediately engaging customers to migrate to the OpenText private cloud for all major Micro Focus offerings and transitioning Micro Focus to our 90-day release cycles to accelerate innovation. Within these Zix markets, customers will benefit from some fantastic new product value. Our growth strategy is to win the Zix market and go deep in each space with select and strategic cross-market integrations that include cloud, AI and security. Let me highlight some of those growth areas in our Zix markets. In the content space, we intend four programs to help customers expand the areas of digital potential. We're going to leverage our new idle capabilities to incorporate new business workloads that leverage voice, video, imaging and facial recognition. These are all new workloads we can bring content into. We're going to offer the OpenText private cloud capabilities to all Micro Focus customers to accelerate innovation. We're going to deliver the most secure content platform in the market with our new voltage. And with Titanium gain larger share in SaaS ECM market. We're on track with Titanium. In the business network space, integrate our new Vertica advanced analytics and machine learning capabilities and to the OpenText trading grid to provide massive data analytics to drive the next generation of supply chain transformations and leverage our new digital operations management capabilities to increase the speed of change, the rate of change within the supply chain. Security is job number one. In cyber security with the acquisitions of Carbonite, Zix and Micro Focus security products, OpenText is now one of the largest cyber security businesses in the world. We've created a single go-to-market motion covering enterprise, SMB and consumer, providing a complete cyber security stack in the marketplace from endpoint, forensic, identity, encryption and cloud-based application security. We intend to invest in cybersecurity, gain share and ensure this is a top driver of customer value from OpenText. With our applications automation space, we've added significant new DevOps capabilities and performance, quality and application testing within our -- with our cloud scale and experience, we will turn up the volume in helping customers use these new tools to migrate and modernize into the cloud even faster. And our new digital operations management space will help customers increase service levels and customer experiences by integrating extended ECM and digital operations. We ran this play very successfully with SAP applications, we'll run it again with ECM and digital operations. And in Analytics & AI. We believe Vertica is a gem. We have two per value plays. Integrate Magellan in our new Vertica for stand-alone AI and analytics and the two products already have their initial integration, and we demoed it live this week and embedded Vertica and all our major offerings from content, business network and security. Information management in the cloud, secured intelligence and at scale. Customers will benefit from some fantastic new product value. On our cost reduction programs, we confirm our approach to removing 400 million of combined company costs over the next 18 months, by reducing overlapping work, removing inefficiencies, eliminating redundant facilities and automating work. Madhu will speak more about this in a few moments. Earlier this week, we announced our plan to rightsize our combined workforce from 25,000 employees to 23,000 employees or an approximate reduction of 8% within fiscal 2023. This reduction is solely driven by the acquisition and we still plan for strategic hiring of key roles in select geographies to help us drive growth and innovation. This is going to be a rapid value-accretive integration. Thirdly, I want to talk about today is our growth plans, financial milestones and aspirations. As I said at the start, we had a superb Q2, and we're integrating Micro Focus from a position of strength. Let me walk through some of our Q2 highlights and year-over-year constant currency. It's our eighth consecutive quarter of cloud and ARR organic growth. We delivered $945 million in total revenues or 7.8% growth, $423 million of cloud revenues or 16% growth, and with Micro Focus, our cloud revenues are going to approach $2 billion a year. We reported enterprise cloud bookings growth of 12% and our adjusted EBITDA was 37.7%. On a reported basis, we delivered $163 million of free cash flow and adjusted EPS of $0.89 or $0.94 in constant currency. I couldnât be more pleased about what we have accomplished with and for our customers this quarter. We have strong customer adoption of cloud additions within the quarter RR. Donnelley, Lear, Royal Bank of Canada, Los Alamos National Laboratory, AMD, The US Defense Health Agency and Transport of London. We're excited to partner with these leaders as they accelerate their digital transformation and look to own their digital capabilities. In an uncertain environment, we continue -- we see continuing high customer engagement and strong demand for our solutions. Last quarter, I talked about the current and compounding challenges in the world, inclusive of currency, wage and goods inflation, fuel prices, Russiaâs war in Ukraine, supply chain constraints, skill shortages and more. Many of these trends continue. The only answer is digitalization to deliver insights, improve efficiency and lower costs and our strong Q2 results reflect the corresponding increasing need of businesses to partner with OpenText. It is clear that technology is playing a significant role in boosting productivity in the face of these challenges and technology is a greater portion of GDP today. IDC's research makes it clear that technology budgets are growing. They forecast IT spend will grow 5% in 2023 this year, software spend at 8% and Software-as-a-Service spend at 15%. Transitioning to our financial outlook, we promised more visibility, and we are providing it today. In our investor presentation, we have provided our updated F2023 target, F2024 preliminary targets and our F2026 aspiration, each include Micro Focus. Let me summarize in year-over-year terms and in constant currency. Our F2023 targets include total revenues up 28% to 30% or $4.47 billion to $4.55 billion with Micro Focus contributing between $870 million to $920 million continued enterprise cloud bookings growth of 15% plus. The total company is expected to grow organically. Adjusted EBITDA dollars between $1.46 billion and $1.52 billion, or adjusted EBITDA margin of 32.5% to 33.5%. Reported cash flow of $500 million to $600 million impacted from integration spend. It will be a year of cloud acceleration and onboarding Micro Focus. Let me provide our preliminary for F2024 targets. Total revenues, up 33% to 35% or $5.7 billion to $5.9 billion of total revenues. Enterprise cloud bookings growth of 15% plus. The total company is expected to grow organically. Adjusted EBITDA dollars between $2.1 billion to $2.24 billion or between 36% to 38%, approximately $800 million to $900 million of reported free cash flow. And let me spend a moment on Micro Focus and fiscal 2024. We are baselining Micro Focus revenues to our financial quarters in to our standards and expectations. We want to make this simple and clear for you. They ended their last fiscal year at approximately $2.5 billion in revenues and declining mid single-digits. Our revenue baseline for fiscal 2024 is approximately $2.3 billion in annual revenues and that is what we've modeled into our F '24 preliminary targets. The F '24 baseline includes transitioning from IFRS to US GAAP, transitioning to our reporting periods, our seasonality and the complete exiting of Russia, their previous sale of Digital Safe and stopping some non-strategic items. To be clear, that is all history now. The baseline for fiscal 2024 is a stable $2.3 billion, from which we intend to grow organically in fiscal 2025. Now if you want to do the forward metrics on the purchase price, that is 2.5x forward revenues that the midpoint of adjusted EBITDA 6.8x. This is an outstanding value purchase. We are replacing our F '25-year aspirations with our F '26 aspirations. Total company organic growth up 2% to 4%. Enterprise cloud bookings continue at 15% plus adjusted EBITDA margin expansion to 38% to 40% and reported free cash flows of $1.5 billion plus. Fourth thing I want to talk about today is our capital allocation approach and plan. We have a strong three-year plan, and we have the leadership, talent and tools to deliver. We're on a clear path to build a $2 billion cloud revenue business and $2 billion plus in adjusted EBITDA dollars. Based on this, our capital allocation approach can be summarized as following: a rapid delevering program. Starting in fiscal Q4, we expect to pay down our debt by a minimum of $150 million a quarter in over eight quarters until we are under 3x leverage, continuance of our dividend program. We intend to grow our dividend as our free cash flows grow. The OpenText Board approved a cash dividend of $ 0.24299 per share with a record date of March 3 and a payment date of March 23. Share count, our long-term plan is to hold our share count constant. Our business model is being designed to have a 20% plus conversion rate from revenue to free cash flow. This is upper quartile performance and we're on that path. Before I wrap up, let me just speak to how we create value with the OpenText Business System. The company is focused on growth, profits and creating value. We see three key stakeholder groups in the OpenText Business System, customers, employees and shareholders. For 125,000 enterprise customers with 1 million SMB businesses and 8 million home users, it starts with world-class delivery, trust in our products in cloud and the OpenText love model, land, operate, value, expand and creating a customer for life. For employees, we invest in three areas: performance, achievement and learning. And for our shareholders, total revenue growth that includes organic and acquired revenues like our superb Q2. A reinvestment strategy for growth with customer-informed R&D and sales and marketing, building a digital business that removes cost, improves productivity via higher automation, upper quartile adjusted EBITDA margins, strong free cash flow with a yield of 20% plus our capital allocation plan, as I previously noted, and continued acquisitions. We intend to acquire strategic assets that create value, leveraging the OpenText business system as we just did with Micro Focus. This is our virtuous cycle, how we create value using the OpenText Business System. Let me express something beyond our numbers in our business system. I have strong confidence in our business, team and plan. And I'll keep you updated in the coming quarters as to our progress. I've always liked the model from the great state of Missouri, the ShowmeState. Our results will speak for themselves. In summary, OpenText is a unique company as we understand the complexity of our customers, and we help them reliably manage that complexity. As a result, we have earned their trust every day, and we delivered the market value with the information advantage. I'll end my prepared remarks by reviewing the comments we made at the time of the Micro Focus acquisition announcement. One, we are reaffirming returning Micro Focus products to organic growth. The five months of fiscal 2024 will be on-boarding, F 2024 a year returning to constant and F 2025 organic growth. Accelerate cloud growth on a combined basis, expect enterprise cloud bookings growth of 15% plus. We expect to transform the Micro Focus customer engagement and renewal model, as previously noted. The acquisition is dollar accretive from Day 1, and contribute significantly more as we integrate, take cost out, improve renewal rates and return to organic growth. Upper quartile adjusted EBITDA margin of 36% to 38% in fiscal 2024 and 38% to 40% in fiscal 2026. Upper quartile free cash flows of $800 million to $900 million in fiscal 2024, $1.5 billion plus in fiscal 2026. Rapid de-levering, continuation of our dividend program and enhanced visibility as we're doing today and we'll continue to do so. We're on track to deliver on every commitment we made. Let me express my deepest gratitude to our customers that place their trust in OpenText every day. My deepest gratitude to our OpenText colleagues who â who did outstanding work over the last six months completing the acquisition, delivering an amazing Q2 and strong momentum into the second half of this fiscal year and doing the hard work to prepare for applying our proven integration playbook. And finally, a huge and warm welcome for 11,000 new colleagues from Micro Focus customers and value-added partners. We will grow and innovate as United OpenText. We the one that brings peace â bring peace for all. Thank you, Mark, and thank you all for joining us today. All references are in millions of USD and compared to the same period in the prior fiscal year and are on a reported basis unless I state otherwise. During Q2, at OpenText, we redefined one more time what consistent and solid execution means. We delivered a superb quarter of results better than the expectations of our target growth strategy shared with you on the last earnings call and proceeded towards closing Micro Focus acquisition on the 31st in line with our planned timing. OpenText is entering an exciting new phase acquiring Micro Focus from a solid position of strength with momentum and confidence in our total growth and integration plan. On Q2 results, we are very pleased with our Q2 revenue performance. On a year-over-year basis, Enterprise cloud bookings of $145 million, up 12% year-over-year. And foreign exchange in Q2 was a revenue headwind of $48 million, approximately 45% in customer support and 31% in cloud. Cloud revenue of $409 million, up 12% as reported and 15% in constant currency. Strong renewals was 94% Enterprise Cloud, and 95% in off-cloud. ARR, annual recurring revenue of $725 million up 3.6% as reported and 8.7% in constant currency and representing 81% of total revenue. Total revenue of $897 million, up 2.4% as reported and 7.8% in constant currency. Q2 was the eighth consecutive quarter of organic growth in constant currency for both Cloud and ARR. And moving to other financial metrics. GAAP net income of $259 million, up from $88 million due to a non-cash mark-to-market benefit are micro focus-related derivatives and lower debt extinguishment cost. Note that the mark-to-market benefit in Q2 is a reversal of Q1 loss, partially reflective of the significant currency movements of euro and GBP to the US dollar. GAAP gross margin of 71% and versus 70%, led by improved cloud margins. Adjusted EBITDA of $341 million or 38% of revenue versus $344 million or 39.2% down 0.8% as reported up 3.7% in constant currency. Cost of sales and operating expenses were up $24 million on a non-GAAP basis, all related to revenue growth, integration of Zix and growth-related investments in R&D and sales and marketing. Our organic growth rate trends are a testament to the benefits of truing from continued investments in products and go-to-market. On operating cash flow, we generated $195 million in operating cash flows in Q2. Free cash flows in the quarter of $163 million or 18% of revenue. DSOs were 47 days versus 44 days in the prior year. Q2 DSO is reflective of December quarter seasonality and with high annual billings relating to our renewal business. Our working capital performance remained strong. Year-over-year, FCF was also impacted by front-end loaded CapEx investments. On enterprise cloud bookings, our trailing 12-month cloud bookings were a strong $511 million, up 25%, the highest in our history. We continue to see steady demand in large cloud deals and average minimum cloud contract value increases. In content, we saw strength in insurance, engineering, construction and telecommunication. In business network, we saw strength in wholesale, retail and banking sectors, experience saw strength in telecommunications. Regionally, our international markets such as Bill [ph] and APAC saw key cloud wins. Our full quarter cloud pipeline growth is trending strongly upwards with solid growth in key industries such as government, healthcare and banking. And moving to balance sheet and liquidity, please do refer to page 15 of our investor presentation. We ended the December quarter with $2.8 billion of cash, which includes $990 million in net proceeds from the senior notes offering completed on December 1, 2022. Our net leverage ratio was two times for Q2. Turning to outlook, targets and aspirations. We plan our business in constant currency and present our business on a constant currency basis for our quarterly factors, total growth strategy and medium-term aspirations. The financial visibility that Mark provided earlier, it reflects our integration and business planning. First of all, the Micro Focus financial consolidation starts on February 1 and will be included for five months during our current fiscal year ending June 30, 2022. The means micro focused revenues are included for two months in our March quarter and three months of full quarter for the June quarter. In our outlook, we have fully aligned IFRS to GAAP and reporting periods. I will share more details. Given the partial year inclusion, we are providing insights for five months relating to Micro Focus, which we have provided on the slides 17 to 21 of our investor presentation. And looking at fiscal 2024 and beyond, we view OpenText in aggregate and will speak to entire company, as well as our products in the six markets that Mark outlined in his commentary. So regarding Micro Focus' adjusted EBITDA profile, we acquired a high EBITDA margin business. Converting from IFRS to US GAAP will burden Micro Focus adjusted EBITDA due to the following items; the revenue timing relating to license renewals, R&D capitalization and lease accounting. Our base line for Micro Focus commencing February 1 a financial consolidation, it fully includes the IFRS to US GAAP conversion. During our integration period and beyond, we expect to gain operational efficiencies in the combined company. As you can see, the margin target for the combined company are at 36% to 38% for fiscal 2024 and a solid $2 billion plus in adjusted EBITDA dollars. Next, let me provide details with respect to significant items in our outlook that relate to the overall expense structure, cost reduction, interest expense, integration expense and special charges. First of all, on cost reductions. We remain confident to execute towards our $400 million cost reduction plan. Earlier this week, on January 31, we announced a restructuring plan that will impact our global workforce following the Micro Focus acquisition, in an effort to further streamline our operations. The total size of the plan is expected to result in a reduction of the combined workforce of approximately 8% or 2,000 employees, with an estimated cost of $70 million to $80 million. We expect to complete the plan by the end of our current fiscal 2023. We also expect to eliminate redundant global facilities with the acquisition of Micro Focus, and we will provide further details when they become available. Lastly, we have several programs to optimize the usual duplicative efforts, including automation and procurement vendor consolidation, all as part of our operational integration. These savings span several quarters and are fully reflected in our outlook. Turning to interest expense, is based on our debt service arrangements, and are included in our free cash flow outlook. Our capital structure and initial mix between fixed and floating debt was very intentional to have the ability to make repayments, delever and reduce interest expense over time. Our integration expenses, approximately $80 million are included in the outlook for our non-GAAP or adjusted results of fiscal 2023 and 2024. Special charges and alignment of global entities for an organization and our scale, they require significant investments and ranging from $380 million to $420 million are also included in our outlook for fiscal 2023 and 2024. These estimates will continue to be refined as we start the integration efforts. So let me draw your attention to the free cash flow, slide number 10, in our investor presentation. You will notice our targets of $500 million to $600 million for fiscal 2023 and $800 million to $900 million for fiscal 2024, and a rapid growth trajectory to $1.5 billion in fiscal 2026. The expenses and investments I just outlined play significant role during fiscal 2023 and 2024, while our cost reduction programs and continued working capital improvements will drive a highly efficient organization at scale with upper quartile adjusted EBITDA and free cash flows. So let me transition to our debt levels and delever plan. With the closing of the Micro Focus acquisition on January 31, we will finish March quarter with approximately $9.3 billion in debt, excluding cash. This pro forma debt structure reflects the senior secured note financing, the acquisition terminal amendment completed December 1, 2022, and the subsequent drawdown from our revolver of $450 million during January. Our pro forma debt structure has a 5.9-year weighted average maturity and a 6.3% weighted average interest rate and a net leverage ratio of 2.8 times. Approximately half our debt is fixed. We are planning a debt repayment of a minimum of $175 million per quarter, a $175 million per quarter, commencing Q4 fiscal 2023 ending June 30, 2023, over eight quarters to bring the leverage to lower than three times. As shared, since the initial announcement of the Micro Focus acquisition, we remain committed to within eight full quarters to bring the net leverage ratio to less than three times. We have a solid delever plan. I would also refer you to slide 15 and 23 in our investor presentation for details on our debt towers and our deleveraging program. So with respect to outlook targets and aspirations, let me amplify Mark's commentaries on the same topics, and I will highlight on Q3 quarterly factors and Q3 fiscal 2023 target model. On Q3 quarterly factors in constant currency, page 18 of the investor presentation. We expect revenue of $1.18 billion to $1.22 billion, inclusive of $310 million to $325 million of Micro Focus revenues; ARR of $0.96 billion, to $1 billion, inclusive of $245 million to $260 million of Micro Focus revenues. Our exchange rates being forecasted, FX would be a headwind of $30 million to $35 million, adjusted EBITDA on a year-over-year basis, margin percentage down 600 to 700 basis points, reflecting Micro Focus integration costs. Excluding Micro Focus, adjusted EBITDA dollars and margin would be constant. As shared in our communications, Micro Focus remains immediately accretive from an EBITDA dollar perspective. Expect FX to be an adjusted EBITDA headwind of less than $5 million. On Q3 fiscal 2023 target model, our target model ranges are usually provided for annual and fiscal years. For this quarter only, we are providing a Q3 fiscal 2023 target model to reflect and assist the Micro Focus onboarding. Please refer to page 19 of the investor presentation, all figures in constant currency and as a percent of total revenue. We expect cloud revenue to be 35% to 37% of total revenue, ARR to be 82% to 84%, our license revenue 9% to 11%, non-GAAP gross margin of 74% to 76%, R&D of 17% to 19%, and sales and marketing of 21% to 23%, G&A of 9% to 11%; total operating expenses 52% to 54%, interest expense of $115 million to $125 million. With respect to preliminary fiscal 2024 financial targets, please refer to page 17 of the investor presentation and the commentary shared earlier by Mark. With respect to our fiscal 2026 medium-term aspirations, please refer to page 22 of our investor deck and the comments shared earlier by Mark. As you can surmise, our targets and aspirations are strong and at scale. The horsepower of the combined company to generate upper quartile cash flows is strong. Our fiscal 2026 aspirations of 38% to 40% adjusted EBITDA and free cash flow of $1.5 billion plus, they fully reflect continued OpenText growth, particularly cloud growth and return to organic growth by Micro Focus, completion of the cost reduction program and the integration program with its related investments. In summary, consistent and solid execution are core to the OpenText business system and our operating DNA that came to life, as people and operations delivered a superb Q2 and achieve an unprecedented readiness to close the transformative acquisition of Micro Focus. During the last 48 hours since we announced the close, our teams have kicked off a highly successful onboarding of a global organization of 11,000 professionals to OpenText, another testament of the OpenText execution engine that is well poised to continue the momentum. On behalf of OpenText, I would like to thank our shareholders, our loyal customers, partners and team members as we embark on the exciting journey ahead. Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Paul Treiber of RBC. Please go ahead. Hello. Thanks very much and good afternoon. Just a couple of open-ended questions. Just first, on the product road map, you sound very excited about the combined product road map. Among all the acquisitions that you -- that OpenText has done, how would you rate the product fit in the potential revenue synergy opportunity just coming from products alone between these two companies? Yes. Paul, thanks for the question. Great to hear your voice. The -- well, this is the largest expansion of information management that we've done. Documentum effectively bought market share and some capabilities in a couple of industries. GXS certainly put us in business networks, and we've added to that over time, like Liaison. And our acquisition of Carbonite and Zix put us -- gave us a footprint, a solid footprint in cybersecurity. So this is the largest expansion of our mission, large expansion of information management. As I noted in my remarks, this has created a cybersecurity business of scale that will rival our content business in terms of scale and resources. We're entering a whole new application automation space, which we think is essential for the needs of digitalization, digital operations management. And we're bringing on Global 10,000 critical technologies. We're the market leader in EDI. We're going to be the market leader in Mainframe technologies and bringing those workloads distributed. So Paul, and then, of course, Vertica and some other tools. So it's the large expansion, brings our TAM up to over 200 billion. And at this scale, I'll bridge back to what I said on our fiscal 2024 plan. We'll -- on this growth rate, we're looking to generate $2.1 billion to $2.24 billion in adjusted EBITDA. So it's also the largest expansion of being able to generate profit and EBITDA. So it's the largest step forward we've made. The -- that's good to hear. The -- there's a lot of work, obviously, with the integration that you need to chew through over the next couple of quarters or maybe years. What are the most important factors that need to happen in your view for this acquisition to workout very well for shareholders here? Yes. Again, thank you, Paul. We're off to a great start. I mean the energy and excitement internally has -- in week one has just been electric. And look, we wanted to put out there our F '24 preliminary plan. And I asked -- and look, it's -- I have confidence in what we're doing and the results are going to speak for themselves. And in our F '24 plan, we're looking to deliver $5.75 billion to $5.8 billion in total revenues, $2.1 billion to $2.24 billion in adjusted EBITDA and up to $900 million of free cash flow. Supporting that are the beginning of the transformation of how they engage customers and getting their renewal rates are -- and underneath that is an accelerated product road map every 90 days underneath that is long-term value, accelerating customers to the private cloud than more public cloud. So it's just as we outlined, Paul, of -- the gameplay we outlined pre-closed is the same post close. And it's relatively straightforward. Get the renewal rate up, how do you do that, high correlation, itâs product innovation. The piece where we feel that OpenText can add the most value is our private cloud, accelerate innovation and then more public cloud services. We know how to run this play. It's the same preannouncement as it is today, and we have the confidence to present to you today our F '24 plan of $2.2 billion to $2.24 billion in adjusted EBITDA, 15% Enterprise Cloud bookings growth and revenue is up to $5.8 billion. Hi. This is George on for Steve. Congrats on closing the deal. It's very exciting. I wanted to talk about the FY '23 guide. I'm understanding correctly, the organic revenue growth guide came down a couple of points despite a really strong quarter. So I guess I'm wondering how much macro is potentially baked in there? How much conservatism, if you could just talk through that change. Thank you. Thank you again for your comments. It's Madhu here. So when you look at fiscal -- when you look at fiscal '23, the OpenText growth trajectory, there's no change in it, right? As we bring micro focus on for the five months, and when you look at it in aggregate, we are bringing Micro Focus on at a baseline in fiscal '24 of $2.3 billion we shared, and we've also given you the five-month numbers. I would also urge that we -- it's not going to be reasonable to annualize the five-month number, just given their own seasonality and how their license and other aspects operate, which we understand quite well and then able to provide the baseline for fiscal '24. So I would say OpenText organic growth rate is strong. Our cloud revenue growth rate remains strong, and it's really the micro focus piece that we're incorporating to the five months. Got it. That makes sense. Thank you. And then one quick follow-up. You announced this headcount reduction cost savings plan. I'm just wondering, is that fully just according to your acquisition preplanned cost out or is there any element of kind of responding to some of the same pressures that some of your peers are facing that are going through similar programs? Thank you. Yes, sure, George. Thanks for the question. We announced conjunctive with our announcement of our intent to acquire Micro Focus. We said we'd take out $400 million. And after closing here, we're confirming we're going to take out $400 million of expense. And our 8% reduction, rebalancing of the workforce is completely due to the acquisition. Our cloud bookings growth is growing 15% plus, as you can see. We had a stealth superb of Q2. And it's interesting when you look at the economy and the factors out there, my best way to describe it is it's uneven. There are very specific issues to companies and they need to all talk about their own companies. In relation to OpenText, our demand is strong. Digitalization is the only answer. And you're seeing that in our 16% cloud revenue growth, near 8% total revenue growth and our increased confidence in growing enterprise cloud bookings at 15% plus. The factors exist out there, for sure. But it's uneven and disproportional. And digitalization is the only answer, and we're doing well in this volatile time. Yes. And thank you, Mark. I was just going to add that before COVID or during COVID, the OpenText operating model has always been very thoughtful and measured adding the resources that is very conjunctive with growth and innovation. So the factors you hear outside are absolutely not applicable to us. Even now the rebalancing the workforce, as Mark shared in his comments will continue to hire in the sales and the product innovation areas. Hey there, good evening. Congrats on the deal. Very exciting times. Just a question for you on the -- your outlook, 2024 to 2026 itâs an improving organic growth profile there. I'm just wondering, a lot of different moving pieces there, but how do we think about the contributions of, say, call it, straight-up cross-sell versus helping Micro Focus be maybe better cloud-enabled when it gets on to your cloud, private cloud platform versus renewal rate improvements. Just walk through the different pieces and what might be the bigger contributors to the improving organic growth rates over the next few years? Yeah. Thank you, Kevin. The first is, as I outlined in my remarks, we want to win each of the markets. And so I don't think of that as cross-selling per se, but winning that stack. We want to win the cybersecurity full stack. It's suite selling. Win the cybersecurity suite, win the content suite, win the business network suite. And that is a straightforward growth on-ramp for us to win the stack in each of those six markets. Second is select strategic integrations across the six markets like Vertica and Magellan across the six, security across the six, private cloud, our cloud APIs across the six. So it's a very straightforward play for us, and we've actually organized the company around that. Ted in enterprise, sales apprentices or we're giving cybersecurity, a lot of focus, apprentice leading cybersecurity. We have James McGourlay leading Enterprise Sales, Paul Duggan running all worldwide of renewals through Customer Success and Kristina leading our Corporate Sales. Now there's, some very select things that we think are going to stand out, Idle and Content Services. Our ability to compete against FileNet, Fox, Highland and others by incorporating facial recognition, voice immitery, we're going to take a big step up with this capability. It's a gem. And they would like to integrate security, voltage into content and having the most secure content platform. So play number one is, win the stack. Number two, select integrations; and then three, fixing the things that need fixing Micro Focus, Acceleration in private cloud, get the renewal rate up as we outlined. And Kevin, it's a pretty straightforward run of plate, easy to articulate, and we're putting it all in motion. Okay. Thanks for that color, Mark Maybe just a follow-up there then. Microsoft integrations sound really unique and interesting. I'm wondering, how do we think about once they're integrated and up and running and being offered to customers, is the opportunity more that they're opening up new TAMs or in your use cases? Or are these -- are you being are these better competitive products and you're displacing? Just how do you think about where and how the wins are coming when you're looking at the other end? Yeah. I mean, the -- these markets are bringing us to a galactic TAM of $200 billion, right? So we don't need to TAM expansion. This says we got a big playing field in front of us at $200 billion plus. Its two things, we have new use cases we can go after. Smart cities, smart transportation, as we move, X and Y move from using their fingers and using more voice, we're in a great position to capture that. So there's, just new use cases and I'm just giving one in content, new market, cybersecurity for us. We'll be larger in some brand names out there like RSA, which is a comprehensive stack that we have. And our competitive position is going to increase. It's the same competitors out there. Our positioning at FileNet just got stronger. Our position against Box just got stronger. Our position against Sterling Commerce just got stronger. Our position against some of the security providers just got stronger. So it's new use cases. We love the TAM, don't need to expand it, win the full stack, stronger against our competitors. And we'll spend more time on that, at an Investor Day and another presentation to lay out that competitive landscape. But it's a really interesting question, and thanks for it. Hi. I wanted to just focus in on that fiscal 2023 and fiscal 2024 target markets oh, sorry, target model. And maybe talk a little bit about where you potentially baked in some conservatism and what you think kind of get you to exceed potentially the targets that you've set out, especially on the margin side? Yes. If there's any model questions of Target, I hand that to Madhu first, and then I can take maybe the second part. Any questions on the model you want to go through, Steph? Just more generally on where you might have baked in some conservatism in that fiscal 2023 and fiscal 2024 target model. Just thinking about upside from here. Yes, for sure. I'll take that Stephanie. So, a couple of things, whether it's conservative or not, we have a very educated baseline for Micro Focus, right? That's actually number one. And we've shared very exclusively the five months, there's plenty of seasonality to support us and to support you, we've shared where we see since you're asking about fiscal 2023, the Micro Focus numbers come in. Vis-Ã -vis the historical adjusted EBITDA, it is getting burdened by the three items I outlined, including some of the license and second, lease accounting and also the R&D capitalization. So, the entry point Micro Focus coming in is definitely from IFRS to US GAAP, and we've made sure we've aligned that as well. In fiscal 2023, as you look at our annual model ranges, we continue to have enterprise cloud booking the 15% plus. And our cloud revenue, including Micro Focus is actually at 11% to 13% and -- previously, it was 8% to 10% from an OpenText only. So, I mean, so again, as we see the demand strong about the cloud bookings and cloud revenue, the target model, I would say, fully represents what we see in the market and integration begins. And I've shared color on some of the integration costs that we are going to incur and we factored and we factored all of those in. And Stephanie, and I would amplify -- or rather not amplify, I'd add two things, right, to the great comments from Madhu. Things I think about to deliver these great targets, right, are they conservative or exceed them. But to deliver these great targets we put out there, I'm very confident in the pace and speed given our track record over the last decade of many large acquisitions. But to the extent we can go faster, the results would thus be accelerated. I'd be very pleased with landing between $2.1 billion and $2.24 billion in adjusted EBITDA for 2024, but it's a little faster. These results should improve. Second thing, I actually like our euro exposure of our business. And with OpenText and now the Micro Focus customers, part of OpenText, a rising euro rises OpenText. And so I also like the mix of business that we have geographically and so to the extent that the euro goes up, we're in a good place. Thanks for that. Just one final one for me. Just curious about the R&D and how you think about the combined R&D in the business. What areas are you looking to prioritize post the -- post Micro Focus acquisition? Yes. Well, on -- as we bring the two -- as we brought the two organizations together already, you'll note in fiscal 2023, on our target model range, our engineering investment is between 14% to 16%. On the partial year. And you can expect it on a combined basis to pick up from the previous OpenText model, right? So, it's not just up on a combined basis, it's up because we're going to be investing to accelerate cloud. Continue to accelerate cloud 15% plus bookings growth. And you can see our F 2026 aspirations of obviously to the organic 7% to 9% organic cloud revenue growth in F 2026. That's a big number, very important number, a strategic set of initiatives for us. So you can see that R&D percent up 15% plus cloud bookings growth, and 7% to 9% organic cloud revenue growth as we approach at 26%. So where is that investment going to go? It's going to go right to where I highlight it in my script today. I won't repeat it, but we'll go back to the transcript I outlined quite precisely where the priority is going to be. And Mark, I was just going to add and certainly amplify definitely the global footprint of R&D, new professionals we at acquiring to add to the OpenText team is quite incredible. Then it's going to be somewhere to 8,000 people. We have a huge concentration in India now and including Canada, Germany, et cetera. So I mean I was just going to add the quality and caliber of the skill sets of the R&D professionals I mean, it's really going to be very strong. Hi. Good afternoon. Madhu, can you clarify the difference between IFRS US GAAP that you referenced on the licenses? Is it that they were booking upfront license on multiyear terms and you're going to recognize it ratably or what's the dynamic there as you go from Micro scale? Yes, of course, happy to. I specifically mentioned the license renewals, which means the IFRS allows you to take it upon signing of a renewal contract, whether it's in the U.S. GAAP, you start to take revenue obviously on a ratable basis upon the official date of the renewal when you start delivering the services, so that's the big difference. And the other two pieces, as I mentioned, IFRS allows a higher rate of R&D capitalization than US GAAP does and lease accounting in US GAAP is treated as rent, so it goes into the operating expense model, as a full appreciation. Great. And then just to clarify since it's hard for us to do an apples-to-apples comparison, if we look at your FY 2023 revenue contribution from Micro Focus, apples-to-apples, does that sort of imply a single-digit type of organic decline or might it be larger than that initially because of some of the near-term integration? Yes. Is that question, Thanos to Micro Focus? Because if you look at our target model, OpenText, the organic growth is still making 1% to 2%, was your question specific to Micro Focus. Yes. Yes, I would say the best reference for the Micro Focus contribution is what we shared in 870 [ph] to 920 [ph] and then calling the baseline at 2.3 billion for fiscal 2024, sort of taking the negative out of like how much is it over or under, and this is our completely educated estimate of 870 to 920 for the year -- for the partial year and then 2.3 billion baseline for revenues for fiscal 2024. Yes. Thanos just to add to that, look, I'm expecting solid performance from Micro Focus on these five months. It's really tough. And I don't actually think it's meaningful to look at those five months a year ago because they didn't run the business that way. And they don't have an end of March, right? They didn't have an end of March had an end of April, we have an end of March. They didn't have an end of June, right? They had an end of October. So we're going to get them on board to our periods, and we're going to drive performance hard. The team is quite motivated, right? So I'm expecting solid performance, as Madhu highlighted $870 million to $920 million do not annualize that number, because they didn't run as an IFS reporter every six months to our period. So we get all that period stuff out of the way, immediately, we can get all that noise out of the system. We've aligned to our calendar. And we wanted to make it easy for you and say, it's 820 â I'm sorry, $870 to $920 million. And next year, the baseline is 2.33. But we expect strong performance, strong customer wins. I can't wait to shout some out when we close the quarter. Yes. Thanks for providing all the color. That's super helpful in terms of kind of helping us forecast the outlook. I just have one question. It looks like a great transaction from a valuation standpoint, everything. If there were any potential blind spots, where would they be sort of based on your kind of past experience with previous acquisitions? Yeah, it, fair enough. Look, I always thought to the house is our talent, which we're off to a great start on understanding customer needs, and that's going to be a big outreach for us. On the system side, in this case, we're integrating to our systems. And I appreciate all the work that they've done historically, but we're taking their product line, and we're integrate into SAP, or integrate into our sales force. We'll integrate into our M365 teams environment. We'll integrate into our information system. So typically, there could be surprises on the system side, but we'll be integrating into our world-class tech stack that run and scales OpenText. So I think it's the usual markers that we're going to continue to pay, obviously, very close attention to people, customers and systems. Hey. Mark. Now that the deal is closed, I'm hoping you can give us more color on how some of those early conversations are going with Micro Focus' customers on being able to cross-sell cost services into the installations? Yeah, early days, feedback from customers, I've obviously a busy week. I've spent, I've spoken to almost a dozen customers this week. And the overarching theme is we love where the products have landed, incredible talent, incredible products. We love where Micro Focus products landed. But two, lots of joint opportunity on integration. So, a lot of interesting use cases and potential coming out. And a real reaffirmation of where we feel the value drivers are faster integration. Now mind you, they haven't had this innovation culture per se, right? We have a CEO and CTO. We have a great Head of Engineering. We organized one of our -- heart has four valves, one of those valves is innovation and getting to our every 90 days accelerated innovation. They have an amazingly talented engineering organization and now they have more tools to leverage as do all parts of engineering. So real affirmation of great people, great products move faster, which is our 90-day cycles and provide more cloud options. Private cloud for many is the destination, more API work as well. So Dan, I'd say this is a -- it was a very strong affirmation of our strategic rationale. Sounds good. Thanks for that. And then maybe switching gears to the renewals business. Based on our prior conversations, it sounds like you had some pretty big structural shifts in changing micro focuses renewals business. So what's the time line on completely revamping that business? And how long do you think it will take before we start seeing those renewal rates start to improve? So their renewal rates are in the low 80s. You saw ours in the mid-90s for Q2. Our business practice has taken our renewal rate over time to an expansion business. And I do hope over time to talk expansion rates versus renewal rates. And that's the big prize on the hill, right, is advancing as we get more and more -- as we approach this $2 billion cloud business and beyond, our narrative will change from renewal rates to an expansion rate. But that said, for a moment, we have strong performance in the mid-90s. They're operating in low -80s. We're in full motion on deploying the OpenText love model, land operate value expand, centralization of renewals, new procedures, new authorities, APA doing this direct, not through partners. And we expect to uplift them to our renewal rates by the end of FY 2025 and make steady progress along the way, right? Renewals happen in one-year cycles. We'll start to integrate. And it's really the things below that the renewal rate is a lagging indicator. It's not a leading indicator. So as we get on our 90-day release cycles, as we get private cloud, as we accelerate public cloud, as we build more confidence, we put all the procedure in place -- things in place. We will see steady progress, but that landing zone of getting to, kind of, our rate, we believe we'll land there by the end of F 2025 with steady progress along the way, and we'll keep you updated along the way. Hey, guys. Hi, Mark. Hi, Madhu. So I understand IFRS to GAAP has an impact on it. But the free cash flow also looks a bit off. So what I'm looking at is OpenText on its own TTM generated $800 million. The free cash flow with Micro Focus for 2023 is below that and for 2024 is $800 million to $900 million. And I already had OpenText in that range. So my question is why is Micro Focus not additive to free cash flow for the first six quarters? Yes. So it's a good question. Thank you, Steve. So if I could just refer back to the category of expenses I talked about, right? So, certainly, the $400 million cost reduction is at play, again, when we think of fiscal 2023 and fiscal 2024. And add on to that is the special charges, the integration charges. I want to clear what is non-GAAP or otherwise, all of these costs impact free cash flow. And we are having about $80 million in integration expense, somewhere in the $380 million, $220 million on special charges, cash outflow as well as how we rationalize global entity. The combined company is going to be pretty large and complex in terms of its global operations. And sort of rationalizing that is usually -- it requires investments and expenses, right? So there were no -- like, whether you think the OpenText ledger or the Micro Focus ledger. And, of course, you have like significant interest expense as well. So during fiscal 2023 and 2024, if you put aside interest expense, that is the period of time when all of these charges are coming into the cash flows. And then, we recover pretty quickly from there to get to the $1.5 billion plus, you'll start to see the recovery coming in the early part of fiscal 2025. From a working capital perspective, it's important to note that throughout this process, the model assumes that we're actually improving Micro Focus working capital very steadily from day one and we're maintaining the OpenText -- like, OpenText working capital performance as well. Right. And Madhu, just to clarify. Micro Focus when they acquired HP, the HP assets, they had this reverse moving structure. Is that in your numbers, but which year does it go away? Does it -- is it already expired? Right. I was just going to add that our efforts on this is going to be grounds up brand new taking what they have today and looking at the opportunities for optimization ahead. But I agree with Mark on the divers more a tough question. Yeah, absolutely gone, doesn't exist. Stephen, if I can. I just want to note something, right? So we're being crystal clear on what our free cash flow targets are, right? $500 million to $600 million in F '23, $800 million to $900 million F '24 and $1.5 billion plus in fiscal '26. So I know you can see that place will be crystal clear, right, that we're providing that visibility today. As Madhu noted, I do want to make kind of three pieces of emphasis that in fiscal '24, we're not reaching our free cash flow potential yet. We're reaching our EBITDA potential of $2.1 billion in EBITDA to $2.24 billion in adjusted EBITDA, but we have three things going on that are really important. One is the integration expenses, as Madhu spoke about. We're going for a rapid integration, and we're going for simplification, right? We are going to simplify this business and we're going to do it upfront. Legal entity structures, all the things Madhu talked about, the word simplification and three, we're investing in our cloud. 15% plus cloud bookings growth, 7% to 9% organic cloud revenue growth in F '26, and that takes investment. Those are the three things that we've decided on to make, as you say, over the next six months, six quarters. All right. Thank you, everyone. I know today's call ran a little longer than usual, and our script is a bit more fulsome than most. But Madhu and I felt it was very important to provide this level of visibility and simplification to how we're looking at the Micro Focus business and the -- and their products combined into OpenText. And I hope you'll join us live tomorrow as we open the NASDAQ from the National Arts Center here in Ottawa. Have a good evening. Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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EarningCall_627
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Good morning ladies and gentlemen. Thank you for attending today's Fourth Quarter 2022 The Hartford Financial Results Webcast. My name is Alex, and I'll be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to your host, Susan Spivak, with The Hartford Group. Susan, please go ahead. Good morning, and thank you for joining us today for our call and webcast on fourth quarter 2022 earnings. Yesterday, we reported results and posted all of the earnings-related materials on our website. For the call today, our participants today are Chris Swift, Chairman and CEO of The Hartford; Beth Costello, Chief Financial Officer; and Jonathan Bennett, Group Benefits; Stephanie Bush, Small Commercial and Personal Lines; Mo Tooker, Middle & Large Commercial and Global Specialty. Just a final few comments before Chris begins. Today's call includes forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and actual results could be materially different. We do not assume any obligation to update information or forward-looking statements provided on this call. Investors should also consider the risks and uncertainties that could cause actual results to differ from these statements. A detailed description of those risks and uncertainties can be found in our SEC filings. Our commentary today include non-GAAP financial measures. Explanations and reconciliations of these measures to the comparable GAAP measure are included in our SEC filings, as well as in the news release and the financial supplement. Finally, please note that no portion of this conference call may be reproduced or rebroadcast in any form without The Hartford's prior written consent. Replays of this webcast and an official transcript will be available on The Hartford's website for one year. Good morning, and thank you for joining us today. Today, I will start with a summary of our fourth quarter and full-year 2022 results and accomplishments. Then I will turn the call over to Beth to dive deeper into our financial performance and key metrics, after which I will close our prepared remarks with a review of expectations for 2023. We will then be joined by our business leaders as we move into Q&A. So, let's get started. The Hartford is pleased to report an excellent fourth quarter, capping an outstanding year of financial performance in progress against our strategic objectives. Quarter-after-quarter, we are delivering strong financial results demonstrating the power of the franchise and the depth of our distribution relationships. Our commitment to superior customer experience, the benefits of significant investments made over the last few years, and superb execution by our 19,000 employees drive our success. These competitive advantages helped us deliver exceptional results in 2022, including core earnings growth of 14% with core EPS growth of 23%, top line growth in commercial lines of 11% with an underlying combined ratio of 88.3. Group Benefits fully insured premium growth of 6% with a core earnings margin of 6.5%. Strong investment results with excellent limited partnership returns and increasing fixed income portfolio yields, and core earnings ROE of 14.4%, while returning 2.1 billion of excess capital to shareholders. Now, let me share a few highlights from each of our businesses. In commercial lines, written premium growth for the year was driven by strong exposure growth, pricing increases, higher policy retention, and continued strong new business. Underlying margins improved by nearly a point driven by earned pricing, exceeding loss cost trends across most lines in growing expense leverage driven in large part by our Hartford Next program. Across commercial lines, our brand, depth of distribution and enhanced underwriting capabilities combined with excellent customer experience, have positioned us well to capture market share, while maintaining or improving already strong margins. Small commercial results continued to be exceptional, consistently producing sub-90 underlying combined ratios with industry leading products and digital capabilities, all of which drove record breaking written premium in new business levels in 2022. Going forward, small commercial will remain a growth engine for The Hartford. For example, beyond our traditional product lines, we will continue to expand our addressable market with capabilities in the excess and surplus binding lines. This portion of the E&S business is in about an $8 billion market serving small business owners, property, and liability exposures. With current written premiums exceeding the $100 million, and the evolving innovative capabilities within our broker quoting platform, we expect to become a leading destination for E&S binding opportunities and a strong complement to our existing admitted retail offering. In middle and large commercial, our team has done a tremendous job improving underlying margins by approximately 7 points since 2019 with a written premium compounded growth rate of 6% over the same period. In 2022, written premiums grew 10% for the year with improved quality retention and solid new business. Advancements in data science capabilities industry leading pricing segmentation analytics and exceptional talent had delivered healthy margin, which I believe positions us well to continue driving profitable growth in this business. In Global Specialty, I'm extremely pleased with the team's accomplishments since the strategic acquisition in 2019. Their tireless efforts have enabled us to meaningfully increase the size and scale of our specialty business to 3.6 billion of gross written premium, including over 800 million E&S premium. We are leveraging the global specialty franchise to further grow and expand our capabilities across commercial lines in this [$82 billion] [ph] E&S market. Global Specialty results in 2022 were outstanding with an underlying margin of 84.6 improving over 4 points from prior year and over 11 points from 2019, demonstrating our execution financity, enhanced underwriting tools, and the expertise of the team. Our competitive position, breadth of products, and solid renewal written pricing, drove a 9% increase in gross written premiums for the year, including 41% in our global reinsurance business, 19% in Ocean Marine, and 27% in international casualty. Turning to pricing. Commercial Lines renewal written price increases for the quarter were 4.9%, flat compared to the third quarter. Underneath, U.S. Standard commercial lines renewal written pricing, excluding workers' compensation accelerated from the third quarter to 7.9%, up 1 point primarily driven by auto and property lines. Workers' compensation pricing remained positive benefiting from average wage growth. Within Global Specialty, excluding public company D&O renewal written pricing remained stable in the mid-single-digits and in aggregate in-line with loss cost trends. Wholesale property, auto, primary casualty, all saw higher pricing increases over the third quarter as did U.S. and international marine. Additionally, the public D&O market continues to be competitive with rate pressures, which requires new business discipline and a focus on retaining profitable current accounts. Moving to personal lines, pricing is accelerated across auto and home, resulting in written premium growth of 4% for the fourth quarter and 2% for the full-year. Like others in the industry, auto underlying combined ratios remain elevated as we continue to experience inflationary pressure. We have been actively responding with rate filings throughout the year. In the fourth quarter, filed auto rates averaged 8.3% increase, up 3.4 points from the third quarter. In Homeowners, we have kept pace with loss cost trends through net rate and insured value increases reflected in renewal written pricing of 10.7% for the year and 13.3% for the fourth quarter. Turning to Group Benefits, the core earnings margin of 8.3% for the quarter and 6.5% for the full-year represents significant increases from last year as excess mortality has materially declined. Meanwhile, long-term disability trends are stable and within our expectations for incident rates and recoveries. Fully insured sales for 2022 were 801 million, up 5% and employer group persistency was approximately 92%, a strong result for the year. First quarter is off to an excellent start with persistency modestly higher and outstanding new sales results. We expect the Group Benefits marketplace to remain dynamic as digital transformation, product innovation, and customer demand accelerate. As a result, we are making significant investments today and have a clear roadmap for the future that I am confident will only strengthen our market leadership position going forward. Thank you, Chris. Core earnings for the quarter were 746 million or $2.31 per diluted share with a 12-month core earnings ROE of 14.4%. In commercial lines, core earnings were 562 million. Written premium was up 9%, reflecting written pricing increases and exposure growth along with an 18% increase in new business in small commercial and 6% in middle market. Policy account retention also increased in small and middle market. The underlying combined ratio of 87.4 improved from the prior year fourth quarter with both a lower loss ratio and expense ratio. Small commercial continues to deliver superior operating results with an underlying combined ratio of 87.5 and middle and large commercial delivered a solid 90.2. Global Specialty's underlying margin improved 5.8 points from a year ago to an outstanding 83 as it benefited from strong earned pricing increases. In Personal Lines, core earnings for the quarter were 42 million. The underlying combined ratio was 96.2, reflecting continued auto liability and physical damage severity pressure driven by elevated repair costs, as well as increased bodily injury trends and includes 2 points of losses related to prior quarters in 2022. Written premium grew 4% for the quarter, largely reflecting pricing increases in both auto and home. In home, overall loss results were in-line with our expectations. Non cat weather frequency continues to run favorable to long-term averages and together with the effect of earned pricing increases mitigates material and labor costs, which remain at historically high levels. The expense ratio decrease of 3.5 points was primarily driven by lower marketing spend. Current accident year cat losses in the quarter were 135 million, which includes the benefit of a 68 million reduction in estimates from catastrophes that occurred during the first three quarters of 2022, including 31 million related to Hurricane Ian. Winter Storm Elliott losses were 167 million net of reinsurance, of which 150 million was in commercial lines. Total net favorable prior accident year development within core earnings was 46 million, primarily related to reserve reductions in worker compensation, catastrophes, and bond, partially offset by reserve increases in general liability and commercial auto. We completed our annual asbestos and environmental reserve study in the fourth quarter, resulting in a 229 million increase in reserves comprised of 162 million for asbestos and 67 million for environmental. All of the 229 million was ceded to the adverse development cover, leaving 256 million of limit remaining. The increase in asbestos reserves was primarily due to an increase in the cost of resolving asbestos filings and a modest increase in the company's share of loss on a few specific individual accounts. The increase in environmental reserves was mainly due to an increase in the estimates for PFAS exposures, one large account settlement and higher estimated site remediation costs. Before turning to Group Benefits, I would like to review the January 1 reinsurance renewals. Overall, we are very pleased with the placements and terms and conditions for our program against the backdrop of a challenging renewal season. Our [indiscernible] current and aggregate property catastrophe protection were renewed at an approximate 20% increase in cost and 28% on a risk adjusted basis, which based on publicly available information, compared favorably with overall market increases and speaks to the quality of our book of business and favorable experience. Overall, the structure of our property cat program did not change significantly. We increased the attachment point on the 200 million aggregate cover to 750 million, up from 700 million. There were also some changes in the treaty that provides coverage for certain loss events under 350 million. We have summarized these changes in the slide deck. In addition to our property catastrophe program, we also successfully renewed several other reinsurance treaties, which also experienced rate increases with limited changes in terms and conditions. The rates we charge insured already have been incorporating these higher costs and therefore we do not expect any significant adverse combined ratio impact from these renewals. Turning to Group Benefits, core earnings in the fourth quarter of 141 million and the 8.3% core earnings margins reflect a lower level of excess mortality losses and growth in fully insured premiums. The disability loss ratio improved 6.1 points from the prior year quarter, which had elevated estimated long-term disability incidence trends. In addition, COVID-19 related short-term disability losses were lower this quarter. All cause excess mortality was 43 million before tax, compared to 161 million in the prior year fourth quarter. The group life loss ratio, excluding excess mortality increased 4.7 points, primarily due to higher accidental death losses as compared to very favorable experience in the fourth quarter of 2021. Turning to Hartford Funds, core earnings were 390 million, reflecting lower daily average AUM, primarily due to equity market declines and higher interest rates over the past 12 months. And lastly, investment results were strong in the quarter with net investment income of 640 million. Our fixed income portfolio is continuing to benefit from the higher interest straight environments. The total annualized portfolio yield, excluding limited partnerships was 3.7% before tax, a 40 basis point increase in the third quarter. We anticipate our portfolio yield, excluding limited partnership returns will increase by approximately 50 basis points to 60 basis points in 2023, compared to the full-year 2022 before tax yield of 3.2%. Our partnership returns of 16.8% in the fourth quarter and 14.4% for full-year 2022 were exceptional. Performance was primarily driven by income from opportunistic sales within our commercial real estate JV equity portfolio, which generated annualized returns of 31% in the fourth quarter. Our private equity holdings were also resilient, delivering a 7% annualized return in the quarter. For the full-year, real estate generated a 22% return and private equity generated a 14% return. As we enter 2023, we expect continued volatility in markets. Given outlook for a slowdown in consumer consumption, corporate investment and M&A activity, we expect our private equity returns to be below our long-term target. At the same time, the increase in financing costs and the reduced availability of real estate financing is expected to impact sales activity in our real estate JV equity. With this backdrop, we expect a 4% to 6% return for partnership and other alternative investments in 2023. Turning to capital, as of December 31, holding company resources totaled 1 billion. For 2023, we expect dividends from the operating companies of 1.5 billion from P&C, 400 million from Group Benefits, and 125 million from Hartford Funds. During the quarter, we repurchased 4.9 million shares for $350 million. As of the end of the year, we have 2.75 billion remaining on our share repurchase authorization through December 31, 2024. To wrap up, our businesses performed strongly in 2022 and we are well-positioned to continue to deliver on our targeted returns and enhance value for all our stakeholders. Thank you, Beth. Let's [take it forward] [ph] where I'd like to share a few thoughts about 2023. Underpinning the outlook is our commitment to disciplined underwriting and expanding or maintaining margins, while prudently growing our book of business. In 2023, we are expecting a commercial lines underlying combined ratio in the range of 87% to 89%. Total renewal written price increases in commercial lines, excluding workers' compensation are expected to be fairly stable, compared with 2022. Meaningful increases in standard commercial property, auto, and general liability pricing are somewhat offset with competitive pricing headwinds in parts of our financial lines business. In our global reinsurance book, we expect meaningful written price increases, including over 30% for U.S. and European property coverage. Commercial loss cost trends are expected to remain fairly stable with some moderation in property severity as inflation is expected to ease during the second half of the year. Before I get into specific trends for our market leading workersâ compensation business, let me remind you of its current margin strength and stellar contribution to our overall commercial line results. Looking back over the last 25 years, our loss ratio results have outperformed the industry on average by approximately 5 points, reflecting our significant competitive advantages in pricing sophistication, underwriting analytics, [and claim] [ph] management. In addition, our scale and wealth of data allow us to anticipate, identify, and quickly react to emerging trends as we manage retention and growth in this line. Over the past 10 years, our standard commercial lines workers' compensation book that's produced combined ratios averaging near 90, while our premier small commercial book has performed even better with an average combined ratios in the mid-80. Also impressive, is a 6 point underlying loss ratio improvement since 2019 in middle market accomplished by equipping our underwriters with advanced risk segmentation tools. We expect workers' compensation to remain a highly profitable business and an important earnings contributor to The Hartford. Turning to a few specifics in our forecast. Workers' compensation renewal written pricing, which is comprised of net rate and average wage growth is projected to be flat to slightly negative. Loss costs are expected to be up slightly as long-term frequency and severity selections remain unchanged from 2022. We will continue to use our market leading tools in underwriting expertise in risk selection and book management to minimize any margin compression. In 2023, we expect workers' compensation returns to remain attractive with deterioration equating to roughly 0.5 point on the commercial lines underlying combined ratio. In summary, for commercial lines, we are extremely confident in our ability to manage our book through a variety of economic and market environment, an underlying combined ratio within a range of 87 to 89 will be an outstanding result and reflects our ability to execute consistently and deliver superior margins. Turning to Personal Lines, we expect a 2023 underlying combined ratio in the range of 93 to 95. In auto, renewal written price is expected to accelerate into the mid-teens by the second quarter and remain there for the balance of the year. By mid-year, we expect new business to be price adequate. Loss cost trends, primarily driven by severity, are expected to remain elevated during the first half of the year before returning to more normal level in the second half. In Homeowners, we expect earned pricing to generally keep pace with loss cost trends throughout 2023. As we navigate this inflationary period across Personal Lines, we are focused on balancing re-adequacy, quality of new business, and marketing productivity. Overall, I am confident we have the right execution plans to return this business to targeted profitability in 2024. In Group Benefits, we expect the 2023 core earnings margin to be between 6% and 7% consistent with our long-term margin outlook for this business. With COVID shifting from pandemic, to endemic state, excess mortality losses are expected to improve versus 2022. However, we expect mortality trends will settle above pre-pandemic levels and we are pricing business accordingly. [All-in] [ph], group life loss ratios are expected to improve versus 2022 and in group disability, we expect some moderation of recent favorable incidents and recovery trends. Before closing, I'd like to share a few recent ESG achievements. This year, The Hartford will be honored as one of two global catalyst award winners for advances we have made in diversity, equity, and inclusion. The Catalyst Award is the premier recognition of organizational DE&I efforts, driving representation, and inclusion for women. The Hartford was also named to The Bloomberg Gender-Equality Index into America's most just companies list for 2023 having earned both honors every year since their inception. The recognition we continue to receive is a testament to our long standing commitment to sustainability and the dedication and hard work of our teams. In closing, let me summarize why I'm so bullish about the future for our shareholders. One, our 2022 financial results demonstrate the effectiveness of our strategy and the benefits of continued investments in our businesses, resulting in strong growth in margins in commercial line, group benefits operating at targeted returns, and a personal lines business tracking back to target margins. Two, we have the capability to sustain superior returns as a result of our performance driven culture, outstanding underwriting, and pricing execution, exceptional talent and innovative customer centric technology. Three, investment income is increasing supported by a diversified portfolio of assets and credit quality remains healthy. And finally, we are proactively managing our excess capital to be accretive for shareholders. All these factors contribute to my excitement and confidence about the future of The Hartford. Our franchise has never been better positioned to deliver industry leading financial performance with a core earnings ROE range of 14% to 15%, while creating value for all our stakeholders. Thank you. [Operator Instructions] Our first question for today comes from Brian Meredith from UBS. Brian, your line is now open. Please go ahead. Yes, thanks. Good morning. A couple of questions here. First one, just curious if I look Hartford Next, it looks like you got another 65 million to recognize an expense saves coming through in 2023. It gets to about 0.5 point on the expense ratio. Are there some offsets we should think about in 2023 that will maybe make it so we don't see that half a point? Brian, thanks for the question. Thanks for joining. You are right. I mean the Hartford Next program is contributing to our overall efficiency and effectiveness and it does have about a half a point benefit in â as we head into 2023. The second part of your question is, do you see any challenges to executing on that as we sit here today? No. I mean, I think that's a good assumption, if I understood your question correctly. Yes, yes. Exactly. That's it. So, I mean the 0.5 points should be beneficial. Okay, good. And then Chris, I'm just curious. Obviously, a really strong property market right now from a pricing perspective. It sounds like you took advantage of some of the property pricing in the reinsurance marketplace. I'm just curious, could you maybe talk a little bit about your capabilities, capacity, willingness to kind of lean into the property markets right now and see some good growth in that business? And perhaps margin accretive for your 2022 results? I think Brian you picked up on one of our key strategic initiatives over really the last five years to be a bigger property writer. Maybe it's not known by you, sort of firsthand, but we have about $3 billion of property premium, including homeowners premium of about 1 billion. So, it is an area of focus. It's an area of growth for us. We do operate on the small end with a [bi-product] [ph] in middle and large, and we also have developed an E&S property capability. And as I mentioned in my prepared remarks, we have some assumed reinsurance property exposures around the world. So, it is on a primary basis an area we're leaning into. That will ultimately help continue to diversify our book of business so that we're a more balanced organization going forward. So, yes, it is a focus of ours going forward. Great. Thanks. If I could just squeeze one more in. Group Benefits, are you seeing any impact yet from some of the layoffs that we're seeing at large corporations? I would share with you and then Iâll ask Jonathan Bennett to comment. Generally, no. I mean, we have a book of business that range from obviously large global organizations to small and middle size organizations, but the trends in our book are fairly stable, Jonathan. What would you add? I definitely agree with what you said, Chris. Point out in the fourth quarter, we had growth of earned premium and fees of about a little over 8%, so strong fourth quarter. And as you pointed out in your comments, we're off to a great start in January with good new sales and strong persistency. So, we're on the watch. We are aware of all the announcements happening as well. But where we sit today, we're in pretty good shape and looking forward to 2023. Thanks, guys. Good morning. I had a question on workers' comp. I'm just curious what you're assuming around underlying losses and how big might you say the headwind is to the year-over-year underlying combined ratio? Yes, thank you for the question. Michael. I alluded to some of this in my prepared remarks, so I will try to connect the dots maybe a little bit better. But as we define, sort of renewal pricing combination of pure net rate and then exposure growth with additional workers, I mean that's likely to be flat at best to slightly negative. And if you overlay, sort of our consistent long-term medical cost inflation of five points and a frequency assumption that is generally consistent with our longer-term trends, I mean that will have a negative impact on our combined ratio. And I sized it about a half a point in relation to our overall commercial lines, new combined ratio. I think the other hand, though, you've got to connect the dots, again, as I said in my prepared remarks, we are getting good net rate in auto property, particularly and the expense efficiencies that more than offsets that half a point of decline. And really at the point, if I really measure it more precisely, we see 0.5 point of commercial lines improvement year-over-year. Okay, great. And thank you. Maybe on the cat loss guidance, curious how are you able to keep it relatively similar to last year? Just thinking about inflation and modestly higher retentions under the reinsurance treaties? Yes, I would â again, good question. I think the gist of it as Beth said in her prepared remarks. Our reinsurance treaties have not changed dramatically from a risk side. We're very pleased with the overall renewal. And that's consistent, sort of with our modeling and expectation, particularly given the exposures that we enjoy today. So, would you add any other color, Beth? Yes. The only other thing I would add, I mean, it is up just a tenth of a point, if you look at what our guidance was last year. And as a reminder, we've been talking about we've been taking rate in the property book. So that obviously is there to mitigate some of the cost pressures that you referred to. And then again, as Chris commented on, our structure of our cat program not changed significantly. Thank you. Our next question comes from Greg Peters of Raymond James. Greg, your line is now open. Please go ahead. Great. Good morning, everyone. For the first question, I would like to focus on the retention stats that you put in your supplement both for commercial and personal lines. In listening to the comments of others, it seems like the trends of retention might be moving up in commercial and down in personal. Yet when I look at your numbers, it looks pretty stable. Can you talk to us both in commercial and personal about what you're seeing on policy retention and how that factors into your outlook for next year or this year, I should say? Sure, Greg. And then I might ask Stephanie and Mo to add their color in their respective businesses. I would say at the outset it's, sort of been our priority to really take care of our book of business, principally because we work so hard to improve it, so hard to acquire the right new customers. And I mean, you see the margins and the returns that we're generating. So, the number one priority we have going into the year is, taking care of customers, trying to do everything you can to prevent a piece of business going out to bid and creating a shopper opportunity. And that's good to retain. It's obviously not so good when you're looking to see if there's new business opportunities. But generally, it's the most profitable strategy to just take care of your existing customers with the necessary rate increases that keeps pace with loss cost trends. So, Stephanie, what would you say in small and personal lines? Sure. Good morning. So, in small commercial, what I would share is that it is very strong and stable, which I really believe is a testament to our entire business model. And I've shared these comments before in other forums. Everything that we do across the entire business model really lives into three key principles. Being easy to do business with, being accurate when we provide that pricing and that overall experience and then being consistent, particularly when you come from a renewal perspective. We have been consistently, particularly in the BOP and the auto lines been taking rate, measured rate over an extended period of time. And so, we continue to build confidence with our agents and our small business owner. So, I would expect that you would still continue to see healthy and strong retention in small commercial. When I go over to the personal lines space and I'll start with auto, you know, as we all know, the market is â there's a bit of disruption going on. And as you can see in our results, we've been very stable. We have been taking rate for 12 quarters straight and will continue to take rate. And so, it gives us confidence in terms of our overall offering. We're continuing to step up the rate changes that Chris and Beth referenced in their prepared comments. But overall, I would expect personal lines to be somewhat stable potentially a very modest decline in auto this year in 2023, but overall stable. Yes. Iâd echo many of Stephanie's small commercial [teams] [ph]. I think we feel really good about both the middle and large commercial and the global specialty books in terms of the quality of what we have. And as such, the retention will play an important role in our strategies. We are watching closely as Chris has talked about. We're watching closely the workers' comp and the public E&O. We feel really good about the quality of those books, but there's a little bit more pressure there. So, I think retention and rate is a little bit more tactical there. But again, we feel great about the quality of both books and we'll protect them. Thanks for that detail. Just as a follow-up and I know you addressed it in your opening comments and Stephanie just mentioned it again, but and I'm looking at your guidance for personal lines for 2023 of 100.5 to 102.5. And then I'm looking at what happened in auto, particularly in the combined ratio really spiking up in the fourth quarter. I know there's rate coming, is it your sense that we're, sort of beginning to approach, sort of like the peak or trough profitability for auto in the next couple of quarters or do you expect it to remain at these elevated levels as we see in the fourth quarter? Yes. What I would say, Greg, is that at least the first half of the year, I think you're going to see an elevation, maybe a modest decline from where we are today. Remember, we have about [indiscernible] five points of seasonality and sort of the auto results this quarter. So â but if you leave a look at the full-year, auto results of 101, 102, yes, it's got some improvement to do. We're focused on it, but I think that improvement will accelerate in the second half of the year to the point where we could actually see margin improvement during the fourth quarter. But we're going to have to execute hard on rate plans, work with all our government relations and regulator friends to get those approved, which we know how to do, but it's a â there's a magnitude of volume of activity that does need to happen. Thanks. Good morning. Appreciate all the color on the call. My first question, Chris, it sounds like you upped the ROE guidance, right, 14 to 15 as it previously been 13 to 14. When going through the pieces of everything, it sounds like it's more a reflection right of just improved investment income and on the fixed income portfolio, but am I missing something in making those observations? Thanks for joining us, Elyse. I would say, you're right. The NII is a big component, particularly coming off just â if the interest rate moves in our fixed income portfolio, but as Beth also said, we do expect lower alternative returns this year. But I do think that there is underlying margin improvement in our commercial book of business that maybe is underappreciated. And I would explain that the guidance that we set, I think is prudent as thoughtful, as reactive of the conditions that we have, but we have a high degree of confidence of achieving, particularly at the midpoint. So, from there then, we played to outperform. And I think we've got a good track record of outperforming over time. And that's the mission next year. So, the guidance says what it is and it does imply really when I really measured on a refined basis, about 50 basis points of improvement, but I don't think we're going to be done from there. And all that goes into our views of what our overall ROEs will be next year, including our buyback and programs. Thanks. And then my second question, you guys are the dividends to the holdco are going to be higher this coming year. [Group] [ph] did go up and I know you guys have, kind of targeted a balanced level of capital return, but given the extra dividends to the holdco, could we expect capital return to pick up in 2023 via share repurchase? Yes. So Elyse, yes, you're right. The dividends from group benefits are increasing. I would characterize that as, sort of kind of getting back to normal. The last couple of years they've been lower because obviously the statutory results have been impacted by the higher mortality losses. So, we're kind of getting to more of our normal run rate, which we had contemplated when we evaluated the size of the update that we did to our share repurchase authorization. So, I would call the increases just totally in line and we're going to continue to execute on the plan that we have. Thanks. Good morning. I had a question on workers' comp following up on some of Chris' comments earlier. Obviously, margins have been pretty good and seems like you're expecting that to continue through 2023. Is it reasonable to assume that there's going to be a lot of pushback from regulators in allowing price hikes over even if you look beyond this year until margins get a lot worse from where they are or do you think that at some point over the next one to two years that the market could begin to show signs of an uptick in pricing? Yes, thank you for joining us today, Jimmy. Again, as I said in my opening remarks, I mean, the trends there are some modest level of deterioration in our combined ratios, principally due to the pricing environment set by various regulators in the experience that the industry has had, I think you're really asking is, when do you see a turn and that's a hard question to ask. But I think the components of a turn in pricing are starting to emerge, particularly as we get through the pandemic period where frequencies were just down due to less economic activity, less work in general, and those usually, the look back period is three years on rate filing. So, if you think of experience in 2019, 2021 that starts to leave your rate filings in 2024. So, I'm optimistic that there can be some at least reversal of negative price trends coming out of NCCI or other rating bureaus to allow maybe modest price increases sometime in 2024 heading into 2025. Okay. And then on personal lines, obviously, the loss ratio picked up at the expense ratio declined considerably this quarter, should we assume a similar expense ratio given lower marketing until the loss ratio begins to improve or what are your thoughts on that over the next [year] [ph]? Well, let me just start and then I'll ask Stephanie to add her planning. Again, this year, we really cut back on marketing, particularly in the fourth quarter to make sure that we had opportunities to add new customers that were really â could be profitable with us as we earn that in and we just really, sort of slowed down marketing at this point in time. And as we head into 2023 though, as I said, I think we've become rate adequate by the middle of the year and gives us an opportunity to think about marketing slightly differently, but Stephanie, what would you say from a strategy side and then really an expense perspective? I think you captured it well, Chris. A couple other points I'd either underscore add is that, yes, our marketing and media change was intentional in the late third quarter into the fourth quarter. We moved really more to more targeted and very marketing sources. So, I want to confirm that we were still marketing. It's a very dynamic process, marketing source by marketing source, but as Chris mentioned, we believe that we will be new business rate adequate by mid-year in majority of the states and you should expect to see our media spend continue to build throughout the year. And then finally, with that new business rate adequacy, I would expect that we'd begin to start to see new business PIF count growth in the back half of the year. So, think about how all of those components work together. But Jimmy, just to tie it all together, I would expect on a year to year over basis expenses to be relatively flat. Thank you. Our next question comes from Andrew Kligerman of Credit Suisse. Andrew, your line is now open. Please go ahead. Great. Good morning. Looking at Slide 16 of your presentation, I see that the annualized investment yield ex LPs has really picked up nicely just Q-over-Q from 3.3% to 3.7%, and we're seeing a little bit of pressure now on rates, but can you talk about where you see that annualized investment yield ex LPs going over the next few quarters? And any insight you could provide there? Yes, I'll start with that. So, as I said in my prepared remarks, when you look at that number, and you think about for the full-year or on an annualized basis of 3.2, expecting that 50 basis point to 60 basis point increase. When you look at fourth quarter, just a couple of things I think to highlight on that. Is that included in the yield ex partnerships. It's not just fixed maturities, it's also some other items as well. Think about dividends on equities securities and things like that that can sometimes be a little bit lumpy. So, when I think about where we're ending the quarter at 3.7 and sort of going into Q1, probably not expecting to see a big increase quarter-over-quarter, kind of on a run rate basis and that kind of continues as we go through 2023. If you really look just at the fixed maturity yield, we're definitely seeing some increases there and we'd expect to see that as we go through 2023 on that line. And you can see the details in our investor financial supplement of fixed maturities versus some of these other asset classes like equity securities and mortgage loans. So, we see it as a nice trajectory. We obviously had a nice lift this quarter. Our average purchases that we did, the yield was around 6%, which was a bit elevated. I wouldn't expect that to be the norm as we, kind of go into Q1 was a little bit elevated just because we ended the quarter â ended the third quarter with some excess cash because we had divested of some treasury securities and pretty opportunistically invested at pretty high points from a yield perspective, which drove that up. And I'd expect like looking at January, that 6% is probably more like [5.1%] [ph]. Was that helpful? Got it. Yes, very helpful. And Chris, I'm just I'm trying to get my arms around this workers' comp issue and when it's going to temper. I know you've already gotten two questions on it. Maybe you could give us a sense of how much â you mentioned renewal written premium slight negative. What was the rate component for that? Was that a pretty heavy negative? Was that four points down, three points down and with the stellar ratios that Hartford â and I get that Hartford is probably best-in-class period in workersâ comp. The second part of that question is, with ratios that have been around 90% small and mid, even better than that. Will the regulators allow you to raise rates or will they penalize you for being best-in-class? So, I'm just trying to get my arms around that. Two questions, the rate and then again maybe a little more color on that outlook for getting rate in the future? Again, thanks for the question. Andrew, I would say it's always better to be best-in-class at anything. So, I'm going to disappoint you and say that look, there's a lot of detail we provided. There's a lot of metrics that you could try and get laid on to just focus on a sub line with really nuanced details from an operating side. All I said is, I really do think the rate, the net rate and the rate then that we get from increasing exposures. So, the exposure that acts like rate is going to be negative next year, slightly negative. And that's all I was saying. Okay. Maybe I'll just throw a quick one. I was hoping â I wasn't expecting a detailed answer, but fully insured group benefit sales up 52%, maybe a little color on the products that were quite strong in the quarter? Sure. In terms of our sales, good numbers in there, yes. Sometimes late in the year you get opportunistically a sale or two. A lot of our business trades in the first quarter. And then some other big numbers will happen oftentimes in at the beginning of the third or maybe the fourth quarter, but so some nice numbers for us in the quarter. Strong disability results for us, I would say, primarily and we continue to see really good response to our voluntary, our supplemental health product set. So, those would include critical illness, hospital indemnity, and accident. And that book has been building for us steadily now for a number of years and had our highest sales numbers in 2022 since inception of those programs. So, I think those are the ones that are really driving at disability and sub health. We continue to compete effectively on the life side, but definitely a stronger mix on the disability and self-help side. Great. Thanks. Good morning all. Broadly speaking, can you talk about your [appetite] [ph] for allocating more investments to LPs and alternatives over the next few years given the higher interest rate environment? Meyer, I had a hard time hearing your question. I don't know if Beth, if you heard the question. Were you asking about the investment philosophy of alternatives or dollar amounts? So, really just the plans. I was thinking about it on a percentage basis, whether there is more or less appetite for current cash flows to go to alternatives in LPs? I would say generally we have our targeted portfolio that we update every year. And I would say generally we had a slight increase to our targeted alternatives. Think of a percent. So, not a meaningful change, but it's something we have really deep skills in. And I think if you look at our performance over a longer period of time, Meyer, you'll see that I think we've outperformed consistently with just lower volatility. So, from a pure sharpen ratio side, I think it's a great trade and we got great partners in that area, particularly in the real estate area, Beth. But what would you add? I think you captured it well. I mean, it's an asset class that we've been slowly increasing allocation to. And as Chris said, continue to look to do that, but really not in a meaningful change in the overall construct of our portfolio, but as you said, it's an asset class that we've been very pleased with. Okay. That's helpful. And obviously, this is overwhelmed by positive news, but we've had a few quarters of adverse development for commercial auto liability, I was hoping you could talk us through that. Yes. So, we have experienced some large losses that have come through in that book that as we've closed the last several quarters we've decided to increase our reserves there. It is a line also that we're looking very closely at from a rate perspective and continuing to re-underwrite and look at the risks that we're putting on. So, nothing specific that I'd point to, but we have had just a few large losses that weâve reacted to as we made our quarter-end judgments on reserves. Hi, thanks. Good morning. Just had a question on the workers' comp loss cost. Chris, I think you said that you expect loss cost to be slightly up, but that includes 5% medical cost severity. Could you just talk about what you're assuming on frequency? Are you assuming negative frequency there? And maybe how we should think about that in the current environment? And then maybe just talk about on the indemnity side as well. Yes. Thank you for joining us, David. I will just be clarifying â the trends that I talked about on the loss cost side were relatively flat and stable year-over-year. Medical severity at 5, I didn't give you a frequency number or not, but those trends are fairly consistent. What changed though is, sort of net rate and exposure, that [excess rate] [ph], that is going to be down slightly year-over-year into a slight negative territory. On the wage indemnity side, it's sort of a self-balancing equation from my perspective. We charge more. We collect more as salaries go up and it's sort of a natural hedge for increasing indemnity payments that we get to collect upfront. And then there's a little bit of medical severity benefit because only 50% of loss content in workers' comp is wage. So, that's what I would share with you. Yes, the only thing maybe I'll â just to clarify, one item as Chris said, it's a [pretax trend] [ph], right? When we think about the trend relative to loss, we're not making a change year-over-year, but again, as you said, medical severity with 5 points, some of the other items that he referenced wouldn't result in negative trend. So, from a pure loss cost perspective, you'd expect some increase, but all the other components that Chris talked about then also affect overall results. Got it. Okay. That's helpful. And then just on, I guess, Chris, you had said, you expect 50 basis points underlying combined ratio improvement in commercial lines and you gave a lot of detail. Just it sounds to me like you expect most of that come from the expense ratio as opposed to the loss ratio, just given the headwind from workers' comp obviously offset by expansion on other lines? Is that the right interpretation? I would say half-and-half. So, the point of buying ratio improvement in commercial lines year-over-year at the point from expense, at the point from margin. That's what we're confident we're going to achieve. [In place for upside] [ph] in the quarter as we execute during the year. David, sorry, I was on mute. I was going to say no. I think you've misinterpreted a half a point of expense ratio improvement and a half a point of loss ratio improvement and feel highly confident on that. Half a point of, I'll call it loss ratio improvement. And we're going to play for upside from there. Again, highly confident of achieving, sort of those midpoints and we're going to aim to overachieve during the year. Got it. So, half a point on the underlying loss ratio. So, I guess that would imply I guess you're assuming [1.5 to 2 points] [ph] of expansion on everything excluding comp, I guess. If I just take â if I just do a weighting, 33% of your book is comp and then the balance I would expect you to get 1.5 points of improvement. Is that the right way to think about it? Yes. I don't remember having a tough time communicating. I think the overall expense ratio improvement is going to be driven by again expense and then pure loss ratio improvement over the years. But in total, David, I'm expecting a half a point of combined ratio improvement in commercial lines year-over-year, but we start with a negative 0.5 point because of comp. So that means you got to get a point elsewhere. And that point elsewhere, as I said to you, half of it comes from expense and half of it comes from pure loss. And we feel highly confident on achieving that. And we're going to play for upside meaning my language of communicating to you is, I think we're going to outperform that point estimate I just gave you. Is that clear? Thank you. We will take no further questions for today. So, I'll hand back to Susan Spivak for any further remarks. Thank you, Alex. I apologize to those we didn't get to your questions, but we are here all day and we'll reach out and follow-up with you. And thank you all for joining us.
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EarningCall_628
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Hello, and welcome to the Hub Group Fourth Quarter 2022 Earnings Conference Call. Phil Yeager, Hub's President and CEO; Brian Alexander, Hub's Chief Operating Officer; and Geoff DeMartino, Hub's CFO, are joining me on the call. [Operator Instructions] Any forward-looking statements made during the course of the call or contained in the release represent the company's best good faith judgment as to what may happen in the future. Statements that are forward-looking can be identified by the use of words such as believe, expect, anticipate and project and variations of these words. Please review the cautionary statements in the release. In addition, you should refer to the disclosures in the company's Form 10-K and other SEC filings regarding factors that could cause actual results to differ materially from those projected in these forward-looking statements. As a reminder, this conference is being recorded. Good afternoon, and thank you for participating in Hub Group's fourth quarter earnings call. With me today are Brian Alexander, Hub Group's Chief Operating Officer; and Geoff DeMartino, our Chief Financial Officer. I'm honored and privileged to be able to serve as Hub Group's third Chief Executive in our 52-year history. I wanted to thank our Board of Directors for their support, but in particular, our Executive Chairman, Dave Yeager, who was the company's CEO for 26 years with vision, integrity, determination and humility. He has been a phenomenal leader and I look forward to continuing to work with him to deliver on our long-term goals for the organization. I wanted to also thank all of our team members for their continued commitment and focus on supporting our customers in a constantly evolving environment. Our team delivered a record year in 2022. We're able to grow all of our service lines in both revenue and profitability, reaching $1 billion in revenue in both logistics and brokerage for the first time as an organization, while eclipsing $3 billion in intermodal revenue. We continue to execute on our strategy to deliver world-class service and invest in our core business and technology, while diversifying our service offerings through organic and acquisition-driven growth. We delivered on that strategy, while maintaining a phenomenal balance sheet, generating strong free cash flow and returning capital to shareholders. As we look ahead to 2023, the freight economy has changed from this time last year. Inventories have elevated and we have seen capacity loosened. However, we anticipate another year of variations in demand with a stronger second half of 2023 based on continued consumer strength and a need for inventory restocking. While this backdrop may create short-term challenges, we believe that Hub Group is well positioned to grow in this environment given the many improvements we have made to our business over the past several years. In Intermodal, we anticipate increased conversion to rail from over the road resulting from an improved and more consistent rail service products that along with our rapidly increasing into a straight percentage, improved rail agreement and lower outside drayage costs will help our customers reduce costs while driving efficiency and sustainability in their supply chain. Our dedicated pipeline is strong, and we have improved our processes and leadership team, which we believe will help us deliver another year of profitable growth, driven by our high service levels and engineered solutions. We have also provided our revenue streams to be more non-asset-based, which now represents 40% of our annual revenues. In brokerage, we are offering more diverse capacity alternatives that increase scale and have enhanced our technology to drive improved purchasing, efficiency and service levels, which is enabling continued cross-selling wins with our customers. Our logistics business continues to develop into the premier end-to-end supply chain solutions provider with our investments in people and technology as well as acquisitions like TAGG Logistics. We are helping our customers pay money through our continuous improvement, while providing a world-class customer experience that is able to bring the analytical, technological and execution benefits of managed transportation to fruition for our clients. All these enhancements to our business model will allow us to continue to grow while maintaining strong profitability and returns. We will continue to invest consistently into the business through cycles, in order to ensure we can support our customers in a variety of environments through both capital investments and technology and capacity as well as acquisitions that help us deliver more value, while maintaining our strong financial position and utilizing our buyback authorization to reward our shareholders. Our team is focused on delivering another excellent year in 2023. And with our aligned strategy as well as focused on execution and efficiency, we feel we are in a position to deliver another strong performance. I also want to thank our entire team for delivering a record year as they support our vision for growth, while also providing our customers a best-in-class service experience. I will now discuss our service line performance, starting with Intermodal. In the fourth quarter, ITS revenue increased 5%, driven by a 19% increase in Intermodal revenue per unit as well as continued growth in dedicated trucking. With the lack of the traditional peak season, Intermodal volumes declined 12% in the fourth quarter, with a 9% decline in the Local West, 9% decline in Transcon, and decline of 17% in the Local East. Gross margin as a percent of sales decreased 266 basis points year-over-year. We are actively offsetting this decline in margin with an increase in in-source trade, up in year-over-year fourth quarter from 47% to 65%, improved rail agreements, lower outside drayage costs and several other operating cost improvements. In addition, we've already started to experience improvements in efficiency with rail service, which will help drive conversion volume and improve our box turns. These improvements in Intermodal efficiency have us well positioned to grow our volume and maintain operating margin discipline. Now turning to Logistics. Logistics revenue increased 9% in the quarter as we continue to deepen our value to our customers through our integrated approach to supporting their end-to-end supply chain needs. We are well positioned for growth in our consolidation and fulfillment business, taking advantage of capabilities that TAGG has brought us, which have already enabled several large transportation and warehousing wins. Gross margin as a percent of sales increased 217 basis points as we maintained our focus on operational discipline, yield management and customer continuous improvements that drive organic growth. We have a great pipeline of new onboardings and have improved our Logistics field size in close ratio as we offer more integrated supply chain solutions. In addition, our Logistics offering has continued to grow the volume that contributes to our other lines of business to support multimodal capacity. With these enhancements, we are in a great position to continue our trajectory of profitable growth. And now I'll conclude with Brokerage. We are very proud of our Brokerage team as they performed well against challenging market conditions in the fourth quarter. We remain focused on service to our customers in leading with a competitive price and capacity. This generated an 8% increase in year-over-year fourth quarter volume and an increase in gross margin as a percent of sales was 61 basis points, but a revenue decline of 11% year-over-year. Our acquisition of Choptank helped drive discipline in our purchasing as well as cross-selling growth in our LTL and dry offerings. Transactional moves represented 52% of our volumes throughout the quarter, while our contract business provided consistent volume and margin expansion as we improve purchasing. We are well positioned to continue our growth through our integrated approach to our customers, high service levels and expertise and our capacity types, including reefer, dry, LTL and drop trailer. Our business had a very strong 2022 with revenue up 26% to over $5.3 billion and $1.3 billion in Q4. ITS grew revenue to over $3.3 billion with Brokerage and Logistics each at $1 billion. Our diversification and focus on transportation cost containment, yield management and operating efficiency, led to gross margin of 16.7% of revenue for the year and 15.9% in Q4 with operating income margin of 8.9% for the full year. We continue to leverage our gross margin against operating expenses, which were equal to 7.8% of revenue for the year, down from 8.5% in 2021. Operating expense dollars in Q4 increased from last year due to incremental expenses from TAGG and less gains from the sale of equipment, offset by lower compensation expense. Our diluted earnings per share for the quarter was $2.42. We generated $148 million of EBITDA in the quarter and ended with $287 million of cash on hand. We are introducing guidance for 2023. Demand conditions softened in the second half of 2022 due to macroeconomic factors and rising retailer inventory levels. We expect these conditions to persist for the first half of 2023, but are anticipating a slight improvement in demand in the second half. For the year, we expect to generate diluted EPS of between $7.00 and $8.00 per share. We expect revenue will range from $5.2 billion to $5.4 billion. For Intermodal, we're forecasting low single-digit volume growth for the year, with strength in the second half. We anticipate gross margin as a percent of revenue of 14.5% to 15.0% for the year, driven by softer pricing and less surcharge and accessorial revenue, partially offset by lower purchase transportation costs. For the year, we expect costs and expenses of $420 million to $440 million, increasing from 2022 due to a full year of TAGG and less gain on sale. We will continue to invest in our business in 2023 with capital expenditures of $170 million to $190 million, targeted for containers, trackers, warehouse investments and technology. As we enter into a new year, we thought it would be important to recognize the changing profile of our business. Over the last five years, we have grown our top line by over 70%, both through organic growth in our asset-based Intermodal business as well as through acquisitions in our non-asset businesses that have brought us new capabilities in areas such as fulfillment, consolidation, final mile and refrigerated transportation, while also adding scale to our business. We've expanded our operating income margin from 2% to nearly 9% today with a similar large improvement in our return on invested capital. Despite this, we traded a lower valuation than we did several years ago and continue to trade at a large valuation gap relative to our peers. While we intend to use our pristine balance sheet to invest in the business through capital expenditures and acquisitions, we also have the flexibility and authorization from our Board to take advantage of this inefficiency in the equity market. Hi, everybody. I'm assuming it's for Todd Fowler at KeyBanc. Thanks for taking the question. So maybe to start with the guidance, I certainly understand that this is a volatile environment, but a pretty wide range for 2023 that $7.00 to $8.00 wider than what you typically guide to. I guess maybe can you talk to what would put you at the high end of the range versus is the low end of the range and some of the moving pieces is it mostly just where the bids come in, how much is dependent on the underlying environment and just some thoughts around kind of the range here to start? Sure, Todd. This is Geoff DeMartino. The range is wider than usual. I think just appropriate given the macroeconomic conditions. We are certainly anticipating conditions will tighten in the outlook to improve in the second half of the year. We saw retailers' inventory levels really elevate off the bottom in the last few months of 2022, which impacted performance. We're continuing to see that today. But I think what we're hearing - from our customers is they're expecting inventory levels to be worked down throughout the year. So we're anticipating some increase in demand towards the end of the year and that's what really would get us to the high end of the range. You've followed us for many years. We tend to be pretty conservative in our guide. The last couple of years, we've ended up beating by north of 50% I'm not sure we're going to do that quite that well this year, but we tend to be conservative on our overall guidance initially at the start of the year. Yes and Todd, this is Phil. I just wanted to add in, we did want to be conservative on the economic outlook. I think it's a little early to tell exactly if that snapback and demand will be large or small and we didn't really want to make a call on that given that it's a few quarters out. And so, we tried to remain relatively conservative in that outlook. Okay, got it. Yes, that's helpful. So it sounds like you've got pretty good line of sight into this and the bias would be upwards. Maybe for my follow-up, maybe this is for Brian. When I think about the 12% volume decline on the Intermodal side during the fourth quarter, that seems to be maybe a little bit worse than what we've heard from some peers and maybe some of the industry data that's out there. I don't know if you want comment or share any thoughts on maybe the volume decline here in the fourth quarter seems like local East was down quite a bit. Maybe just how you're thinking about your kind of the environment and share right now? Thanks. Yes, Todd, this is Phil. We watch our share very closely. Our strategy has been to really focus on maximizing our margin per load day, which has guided us towards longer transit and longer haul business, which I think led to some of the volume decline especially when you take into account the longer customers as well. So when we look at it, we actually feel like - and revenue per load is up 19% that we actually gained share on a revenue basis even though volumes were down. Our focus is going to continue to be on maximizing that margin for low days that's what generates the highest return on capital. As we look at January, volumes were down 8% on a year-over-year basis, but actually up 9% sequentially. So also feel good about the momentum that we have to start the year. Thank you. Good afternoon. Phil, I also was going to ask about the quarter-to-date, that you just brought it up. The 9% sequential increase was that a function of December being substantially weaker than you anticipated, maybe kind of earlier, I don't know, slowing down ahead of the holidays, given some of those inventory situations? Or do you feel that you have a little bit of a tailwind now as it relates to the start of this year? And also just to tie this in, are you seeing significant service improvements that give you some optimistic views that type of momentum to be continued? Yes, Jon. I think that's a great question. And I would agree with the comments that you made. I think December was lighter than we anticipated, but I think January and the improvement that we've seen sequentially has been stronger than we actually anticipated. So we feel very good about the progress that we're seeing with wins that we're having with customers and a return to overall demand. We're actually seeing import volumes improved sequentially and seen ordering patterns normalize. So a lot of good signs and that momentum really carried throughout the entire month of January with each week sequentially improving and we're seeing that really carry into February as well. I think a big piece of that is around rail service improvement as well. We do feel as though that's going to be sustainable. We're out promoting that very aggressively with our customers around both the service and improvements and sustainability of that, but also the cost savings that they can have associated with that as well when you take into account fuel costs. I think the last piece that we've highlighted to a lot of our customers is derisking of their supply chain and their capacity as we look into the back half of the year and a normalization of ordering patterns capacity will be tighter. And so by locking in more capacity now, they're going to be de-risking their overall supply chain, so all those factors are coming into play, but we do feel very strongly we have some good momentum starting here. I'll just add to that too, Jon. We're confident in that rail service being sustained throughout the year. So we've actually been tightening our transit and looking to promote more of that conversion from over the road to our intermodal volume. That's great. And then Brian just to have you, on the pricing front so, it sounds like your demand outlook is a tale of two halves a little bit weaker in the first half, hopefully some recovery in the second despite January is pretty good start sequentially at least. On the pricing side, is it almost flipped off? I mean, do you have some kind of legacy pricing momentum from last year when the market was still kind of incredibly tight? And how do you kind of think about that as we go through the year on competing with truck trying to get that model conversion. But on the other hand, having your shippers lock in capacity for it does get tighter? Yes Seth [ph] this is Phil. I think it's a little early for a determination on bid season, but I can give you a little bit of color. Obviously, it's a different environment than we were in this time last year. But we do feel as though and this has been the historical norm that intermodal will outperform truck by a pretty strong margin. We are continuing to show our customers strong savings towards truck, especially when you take into account fuel and our focus is going to be on that maximization of margin per load day. We have a significant opportunity to better balance our network and take out empty repositioning costs that can create more density and fluidity with our driver base as well. So we're really focused on - we have a sustainable service products, we have savings. And you're able to de-risk your supply chain and all that is coming together I think very well to see a strong bid season for us. And just - in general for over the road conversion to intermodal. Yes, I'll also add to that to Jon. I mentioned in some of the prepared remarks too, but we're putting in those cost disciplines and really bending that cost curve down in every possible way. And I mentioned a few of them, but that insource dray is a big piece for us we hit 65% in Q4, which was a substantial improvement. But have I set on 70% as we go into 2023, as well as our third-party dray taking that cost out. And then as that service improves, the fluidity of our overall network gets much better from a cost perspective as well. Thank you, operator. Hey, gentlemen, how are you? Two quick things one, I was talking to another large IMC and they mentioned that they think now and going forward, there's going to be a lot of market share taken from the smaller and mid-sized items seize. I mean one, would you agree with that statement and two, why would you think it would occur going forward now? And I have a follow-up about sort of East Coast, West Coast. So long chance of the first one and I'll get to the second one. Yes, this is Phil. I feel very strongly. We feel strongly that asset based players are going to continue to take share from the non-asset based IMC both around an overall access to capacity, but also drayage economics. And our rail partners are building their network and their service product around an asset based carrier with better integration on technology and overall just a better service product we think perhaps based players. So I think that's going to continue. I think the last couple of years have shown a lot of the weakness in the non-asset based IMC model particularly around driver availability and capacity availability. So yes, I would agree with that assumption. Makes a lot of sense. And thinking about sort of, the shift that went on last year as the West Coast ports had a problem saw a lot of container traffic flow to the East. There's going to be a, certain percentage of that, probably large percentage flow back to the West. Are you guys agnostic to that or would you rather have it on the East Coast or on the West Coast? Yes, this is Phil. We typically see higher margin per load day off the West Coast because it is typically a Transcon move. We also see higher transload volumes off the West Coast and so typically for us, West Coast business is going to be better and higher profitability. I agree with you. I think we typically see our shippers switch their ordering patterns from coast-to-coast on kind of annual basis. And so, we believe that with some of the labor issues getting put to rest that we're seeing a strong year off the West Coast, and that will create a strong peak season, we hope, and we'll see volumes continue to get back to growth on the West Coast. So that's very beneficial to us. Hey good evening, thanks for the time. So Geoff, you mentioned the big disconnect with the valuation the stock and versus peers. You're active with the buyback in the third quarter, but it didn't look like there was any activity on the fourth quarter. So maybe you can give us some thoughts on how you expect to deploy some of the extra capital going forward throughout the rest of the year with the still remainder on the recent program authorization? Sure. Our priorities for capital deployment have always been invest in the business, first and foremost, through CapEx. We've been growing the container fleet 5% to 10% a year. We've had a really nice benefit from our tractor cycle upgrades. We've taken the average age from four years down to about 2.5 years now and a really nice return on that investment in terms of lower M&R and better fuel economy. So we'll continue to do that. We've had a great experience with acquisitions really with TAGG, the most recent one, improving our offering, expanding our offering and allowing - with that, and we saw this with CaseStack a few years ago, too. Those companies are really good at what they do, which is operating inside the warehouse, and then we marry that up with what we do, which is managing transportation and really put together a really nice offering for the customer and take out some costs there. So very pleased with that and the ability - and the cross-sell abilities that came with several of our recent acquisitions. So we're looking to do more of that. M&A has been part of our growth path. We've been averaging one deal a year. We'd like to probably accelerate that. We think we have some good - a good pipeline out there now, and we're working on that for 2023. So that's kind of why we didn't pursue - share repurchase in the fourth quarter as we wanted to kind of run out some of the M&A opportunities in the pipeline as well as invest in CapEx. But given the really strong financial performance for the last two years, we've got a balance sheet that is pretty much net debt zero. And so, we'll look to deploy that capital in certainly probably all three of those channels in 2023. Okay, I appreciate that. So just to follow-up on maybe what's also embedded in the guidance. You talked a lot about how this time is a little bit different in terms of flexibility with the rail contracts. Can you talk about how much of that is reflected in the guide you can get the full benefit of those? It did seem like maybe these aren't really linear it will take a little bit of time, obviously, you have different partners. So I just wanted to see how much of a benefit you'd expect to get in 2023? And if there could be even a bit more in '24 if the truck market continues to be as soft as most of us expect. Sure. We have great rail partners, both of which I think you've seen you follow them and you know what they're doing. We've really seen them embrace intermodal over the last few years, deciding to work with channel partners like us, investing in their fleets. I think UP [ph] invested $600 million last year in terms of new terminals and equipment. And then I think we've seen a really - we've seen them embrace better economics for us is a way for us to drive growth and convert freight off the road. And so, there is - to your point, there is more flexibility than we've had in the past. There is a little bit of a lag that's built into the way those contracts reset. So that will carry through beyond 2023. And I think I'd just add there are opportunities, I think, as well for us to be more efficient in our network, creating more balance also, as Brian mentioned, insourcing more drayage, reducing our third-party costs. So by getting back to more of a high-velocity network, we think we can reduce cost there as well. I think Geoff mentioned earlier, we are conservative in our guidance. And so I think your point that perhaps we're being a little conservative, it's probably right, but we also don't want to build in a significant kind of economic bullwhip that maybe some others have. And so we're trying to just make sure we stay conservative on that economic outlook. When we think about the guidance and the cadence, is there a quarter or a period in the year where a couple of negative things line up, be it the roll-off of accessorials and pricing or really anything like - or even the rail increase, where - you're just going to feel kind of the maximum part of the pain based on things you have some visibility into. I think that would be helpful as we set expectations for how the year plays out? Thank you. Yes, great question, something we thought about when we were putting guidance together. It's going to be a little balanced. We're going to be entering the year with a nice price tailwind coming out of a strong bid season in 2022. About 75% of our volume will reprice in the first half. So, we're expecting stronger pricing in the first half, stronger accessorials, but the second half, we'll see a pickup in volume. The accessorials probably roll off as we see more fluidity and price - we're not anticipating will be quite as strong in 2023. So we probably will start off the year a little bit stronger. I think there is upside, though. We've had really two really strong years of peak season surcharges that really kind of went on throughout the year. That has gone away. And but to the extent the upper end of our case is realized, that would come with a tightened - a tightening in the second half of the year, which we would expect would come with more surcharge. And to follow-up on an earlier question, you've kind of pushed us towards the higher end and talked about conservatism. What scenario has to play out to get you to $7 or below? Just want to understand how dire the dire case is in your mind? Thank you. Yes, we think with respect to intermodal, if there's no retailer inventory levels stay low or the recession is severe impact in consumer spending and volumes don't kind of pick back up, that would certainly impact the second half. We haven't talked much about it, but we do have our other lines of business that account for 40% of our revenue, that tend to be less cyclical and less price and volume driven and more kind of longer term in nature. That will - that's one of the things that's changed if you look back at our history, those non-asset-based businesses are 40% of our revenue today. That's up from about 30% five years ago. And it does provide more of a cushion. As a housekeeping item, what sort of free cash flow outlook does the midpoint of your range get to? Thank you. Hey thanks afternoon guys. Just following up on the last question it sounds like pricing better first half volume better second half. What does that mean from like the earnings cadence sometimes in the past, you've given us some sort of directional color. What person of the earnings do you think first half, second half or even quarters or however you think about it? Yes, I'd say at this point, it's probably pretty balanced with those two offsetting one another, maybe a little bit stronger in the first half, but we'll have more to say, obviously, as we get further into the year and what the rest of the year looks like. But at this point, that's our best guess. Okay. And then you talked about the margin - the operating margins have gone from 2% to 9%. I think I want to trying to understand the sustainability of these margins at this level. When we look at intermodal, I know you don't report intermodal margin, but where is that relative to the other big guys that are low double-digit margins right now? We don't kind of bring it down to that level, but I would suggest we're probably in the same range as them if not higher. Our business tends - price is a pretty strong driver for us, and we certainly saw the benefit of that in 2022. And I think what Geoff was trying to stress in his prepared remarks is also that it's a far less capital-intensive model as well. So, we have very strong margins without the capital intensity, and we're generating a lot of free cash flow that we can put back into the business. And as we insource more and we've got new rail contracts, what do you it's like, is the range of intermodal margin ultimately going to be a lot narrower like maybe those guys look like, maybe a little bit more capital intensive if we're doing some more of our drainage, but a tighter band of margin? How do we think about that? Yes, I think it's certainly an improvement from where we've been historically. There is obviously some level of cyclicality in the business when capacity is tightened and demand is strong, you're going to get result like - 2021 and 2022. But we think we've reset at a higher base than where we have been in the past. One of the really nice things about our drayage insourcing is we've been able to really increase the amount of insource without adding a lot of capital to-date and that's through better efficiency where we've improved our driver to truck ratio and improved our loads per driver per day and really been able to see a nice pickup without a lot of capital. If I can just squeeze one more just to that point, is there any way to quantify what like every 10 points of insourcing means for operating margin earnings however you think about it? 100 basis points movement, but your goal is to go from like 60% to 90% or something. Is that right or? We're targeting 80% insource. We're still the largest purchaser of third-party drayage. We think that's important and it's a good lever actually to have through cycles. Allows us to flex up more quickly to service our customers in high demand environment and create a more variable cost structure as we see demand dwindle. So we want to remain in that position as for that 20%. We think it's kind of optimal. And we'll maintain a focus on that. We're running to start the year in kind of the 70% range, which is great. Obviously, it's on lower volumes. So we need to continue to hire as we see volumes pick up to maintain that share. But I would tell you I think that 65 to 70 number for a full year is really a good target that we have set which would be some pretty strong growth on a year-over-year basis. Yes, hi good afternoon guys. Can you just talk about maybe your plans for container adds some IMCs that are reported talked about holding off on container additions this year just wondering what your thoughts are on that? Thank you. Yes, thank you. I think it's a really good question. In our preliminary CapEx planning, we have planned a call it, 5% to 6% sort of - net increase in our fleet. We think that it is very important to maintain consistency in capital expenditures and investment into the fleet that allows us to support our customers as we see returns of demand and maintain service levels at a better level. So, we want to keep that consistency and we said that in our prepared remarks. And so, you will see us net add some this year. It would be less than the 11% that we did this year. But we will have a net add to our container fleet. Hi, good evening. Just want to turn to M&A. I know you talked about the pipeline being active, but could you maybe give us a little color on what that pipeline is looking like in terms of our multiples becoming more reasonable out there? You did talk maybe doing more than one just management capacity to handle sort of an increase in M&A, just any thoughts there? Sure, yes we've been pretty active the last several years - kind of averaging around one a year. And so, we feel like we've got a really good playbook developed and we've got the disciplines in place to be able to handle more than one. For us, we've kind of targeted anywhere from $100 million to $300 million in deal size historically. I think with the success we've had, we'd like to actually go a little bit larger, if it makes sense. We're conservative company and we're cognizant of maintaining appropriate levels of leverage. So we could do two smaller ones or maybe one larger one as part of our M&A strategy. I think multiples are probably going to come in to some degree. And in 2023, I think the last two years saw a pretty strong bid from private equity buyers and seems like the financing markets have sort of dried up for those types of transactions. So we would expect a little bit of a more reasonable level of evaluation. But we're encouraged by the success we've had with cross selling the TAGG acquisition was a good win for us. It gave us an e commerce fulfillment capability. It also improved our nationwide footprint of warehousing space and gave us really nice balance of asset and non-asset based warehousing and we'd like to really replicate that with those types of acquisitions. No, that's great. And then just on the tag logistics, what are you seeing in terms of the dispensability that model just given is exposed to e-commerce? And then in terms of organic CapEx into that business, is that part of that this year or is it sort of a wait and see? No, it absolutely is. Allison, this is Brian. And we're off to a great start with TAGG. The e-commerce has fit really nicely into our retail and CPG verticals and really since bringing them on in late August, we've already achieved $30 million in wins in cross sells that are onboard throughout 2023. We've got two new buildings opening in the West that have already opened this year and then adding two more in the Midwest in the second quarter. And really as we fill those buildings to digest some of that growth, but then it's also to help us optimize deployment of our space with our 3PL partners and very similar to our drayage model, we balance and feel it's important to run and operate our own assets, but then have that 3PL partner there as well to flex when we need to. So, off to a great start with more to come. And to your point on - or to your question on CapEx, so the facilities are all leased. We do make some investments in equipment and racking that's maybe 5%, 6% of our overall CapEx. And I would just add, I think one of the great things about the e-commerce portion is when with our CaseStack acquisition, a lot of those customers had a e-commerce program that we couldn't effectively serve. So we're cross selling very well into our existing CaseStack customer base. And I think the other piece that's been very exciting is we are building multipurpose warehousing space. So we can use it for cross stacking, for storage for e-com fulfillment for consolidation. And I think that's going to be a very effective strategy as we look ahead. We're going to be at probably $12 million square feet of warehousing space with a lot of room to grow this year so very excited about it. Hi, good afternoon and congrats to you Phil on the new role. I just maybe want to stick with the fulfillment business here. You mentioned some cost inflation in the release. I'm wondering if we're starting to see that roll off at this point. And also maybe whether you've got any contract mechanisms there claw some of those back. And then you also talked a little bit about exited business there, so maybe just some color on that. Was that just residual attrition, I guess, post-acquisition or was that something else? This is Phil. We haven't had any large customer changes. We typically do have some churn within our consolidation programs as customers are acquired or they get large enough to insource their own warehousing footprint, but nothing really material there. I think we've done a really nice job of setting a long-term warehousing space plan with our partners both on the 3PL side as well as some of our real estate partners. We don't really foresee any out of market sort of increases in overall costs. Obviously, industrial capacity remains very tight from a warehousing perspective, not at historic levels, but coming off of those. We're going to - as we look at new space and renewals, try to take that into account, but we also want to take a long-term view and continue to grow and invest in expanding that footprint. So we feel like we have a great team that works on that, very pleased with the process thus far and feel very good about our ability to keep growing there. As Brian noted, the cross selling has been phenomenal to start and we've exceeded our expectations already. And Bruce, I'll just add to that as well. With that, it's helped us retain our customers. So we're adding and Phil mentioned this our existing contract new service offerings and that helped us with customer retention and contract renewals. But it's also really in that strong pipeline. I mentioned it before just to elaborate to it as well is that it helped us improve our deal size and we've seen that deal size really increase. Our close ratios are improving. And while shippers are still priced, very focused on price, they're less sensitive to it when we have diverse service offerings that we can offer to them. So we'll continue to see growth there. Okay, great. And just to follow-up real quick, what sort of renewal rates do you typically see in that business if you can comment on that? Yes, we're seeing mid-90s for that renewable. And there's, some of those factors and some of the items that I think Phil mentioned as well that there may be some acquisition components that are more uncontrollable, but we're typically in that mid-90s. Yes. Great. Thanks, good afternoon. I'm not sure if I missed this, but you talked a little bit about December volumes, but I didn't hear kind of by month. Can you give us what the Intermodal volumes were year-over-year by month in the quarter? Okay. All right. When I think about the, I guess, the 12% down for the full quarter, it's -- obviously, it's a weak market. But I'm wondering, how do you think about pricing -- your approach to pricing against that backdrop? Is it something where you say, okay, we can kind of stay reasonably disciplined pre down 10%, down 12%. But if we end up going down 20% and someone else pushes harder on price, then we got to kind of push back more. I'm just trying to think about what happens with the Intermodal competitive environment and just how we think about the pricing dynamic in the contract season for '23. Yes. And that's where we utilize that margin per load day model. We really focused on how can we maximize that based on what's going on in the broader market. I think you saw that our revenue per load was up 19% in Intermodal. So we feel like we're staying very disciplined and really trying to pick our spots to create better balance and velocity in the network. We're seeing a pretty disciplined start to overall bid season, obviously, more competitive than what we've seen before, but not anything different than what you'd expect in this environment. And so we're really focusing on winning volume in the places where it benefits our network, benefits our drivers and ensuring that we maintain incumbency as well. So we're really making sure that we lock in that incumbency in advance of RFP events, which we think will benefit us as well. So I guess when you put that together and you say the guide is $7 to $8, do you assume like a kind of a mid-single-digit decline in Intermodal pricing? Do you assume low single digit? What's the kind of ballpark without being overly precise? Right. Do you think -- okay. So I think that market view as kind of truckload down high single digits. So maybe something in mid-single digits or what something better than truck? Thank you. Good evening, everyone. Sorry to revisit the whole midyear inflection topic again, but if I were to ask that question in a different way, what are your customers telling you is going to happen kind of in the back half of the year once we do have that mid-year inflection? Is it a case of we get inventories back down to normal and then we sort of bounce along the bottom here waiting for macro to improve? Or if like the macro conditions that we see right now remain reasonably the same, do they expect an actual restock and a real up cycle in the back half of the year going into '24? Yes, Ravi, this is Phil. I think that's the unknown with our customer base is how fast do inventories bleed down? And what does that require from an ordering for peak season. I've heard a myriad of different thoughts on that. I think what we've seen historically is a bleed down probably too far in overall inventories, and that leads to more snack sort of ordering and rush ordering, which typically leads to more West Coast transloading and really supports intermodal growth. And so we didn't build that into our guidance, but I think that, that might delay the increase in ordering, but it also might exacerbate the extreme of the capacity tightness, if that makes sense. Got it. No, that is helpful. And I agree kind of that. That's probably the biggest unknown out there. And maybe as a follow-up, kind of obviously, you said that you expect over-the-road conversion which is understandable as rail service improves. But again, your conversations kind of over the last few years, how has the kind of the rail service you've seen kind of has that kind of permanently shifted any customers towards truck? And also in the last couple of up cycles, when shippers are looking to restock, they look for service and speed and so they tend to kind of bias towards truck versus rail. Are you confident that will not happen in the next up cycle, hopefully, that's in the back of this year? Sure. Maybe I'll start with truck capacity where I think that CapEx has been limited at replacement levels really for the past couple of years. So the ability to really net add to the overall truckload capacity has been limited. And I think you're also starting to see with spot market rates at these levels, small and midsized carriers really starting to exit the market. And so it's our estimation that truckload capacity is going to continue to tighten, which will make intermodal a more conducive sort of path to be able to move freight. And I think with improved rail service, which we're very confident that's going to be maintained, a lot of folks are going to be looking at transloading solutions to be able to get into big box and really move that freight inland through the West Coast ports. So that would be our view. We're out really promoting right now, as Brian mentioned, tighter transits and a mid-90s sort of on-time performance. We obviously need to prove that as volumes continue to pick up, but we feel very good about the investments we're making as well as our rail partners to sustain that service. Thanks. I wanted to ask about the guidance for gross margin percentage. Is there any additional color you can provide on the quarterly cadence of that metric? Just curious where you're expecting to start the year in the first quarter versus finish the year in the fourth quarter? And I know you talked about Intermodal price earlier, but anything you can share on the pressure you're anticipating in accessorial. Sure. And those two would kind of go hand in hand. I think we -- from a margin percent perspective, we'll start the year stronger probably in a similar spot to where we finished 2022. And we would anticipate that those -- that margins would decline as a percent in the second half with softer pricing and with less accessorial revenue, but then offset that with increased volume to drive the dollars. Does that makes sense? Got it. That makes sense. And then are buybacks factored into the guidance for 2023. And I just wanted to clarify the comment earlier around container ads that you made, Phil. It sounded like you're modeling a 5% to 6% increase this year. Was that on a growth basis? And then, I guess, on a net basis, you're assuming something less than that, but still positive. Just wanted to clarify. That's correct. Yes. It's 5% to 6% on a net basis. We didn't -- we've got some containers that have reached end of life that we've held off on retiring, but we are going to pursue that this year. Great. Well, thank you for joining us on our call this afternoon. And as always, if there are any questions, please feel free to reach out to Brian, Jeff or I, and hope you have a great evening.
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Greetings. Welcome to Columbia Sportswear Fourth Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's fourth quarter results. In addition to the earnings release, we furnished an 8-K containing a detailed CFO commentary and financial review presentation explaining our results. This document is also available on our Investor Relations website, investor.columbia.com. With me today on the call are Chairman, President and Chief Executive Officer, Tim Boyle; Executive Vice President and Chief Financial Officer, Jim Swanson; and Executive Vice President and Chief Administrative Officer, Peter Bragdon. This conference call will contain forward-looking statements regarding Columbia's expectations, anticipations or beliefs about the future. These statements are expressed in good faith and are believed to have a reasonable basis. However, each forward-looking statement is subject to many risks and uncertainties, and actual results may differ materially from what is projected. Many of these risks and uncertainties are described in Columbia's SEC filings. We caution that forward-looking statements are inherently less reliable than historical information. We do not undertake any duty to update any of the forward-looking statements after the date of this conference call to conform the forward-looking statements to actual results or any changes in our expectations. I'd also like to point out that during the call, we may reference certain non-GAAP financial measures, including constant currency net sales. For further information about non-GAAP financial measures and results, including a reconciliation of GAAP to non-GAAP measures and an explanation for management's rationale for referencing these non-GAAP measures, please refer to the supplemental financial information section and financial tables included in earnings release and appendix of our CFO commentary and financial review. Following our prepared remarks, we will host a Q&A period, during which we limit each caller two questions, so we you can get to everyone by the end of the hour. Thanks, Andrew, and good afternoon, everyone. I'm incredibly proud of the financial performance and accomplishments that our global workforce delivered in 2022. For the year, net sales grew 11% to a record $3.5 billion. On a constant currency basis, net sales increased 14%. I'd like to thank our dedicated employees whose tremendous efforts enabled these results. We achieved these results, while navigating numerous supply chain challenges. We know there's a strong demand for our products, and our recent financial performance could have even been higher absent the product delivery delays we experienced. Columbia and SOREL had to charge with both brands generating record net sales and double-digit constant currency growth in 2022. Geographically, we have broad-based momentum. Our largest market, the US, grew 12%. On a constant currency basis, International growth highlights include Europe Direct surging 31% on the year and Canada growing 19%. By channel, our growth in 2022 is relatively balanced with both our wholesale and DTC business generating double-digit constant currency growth. Our global DTC e-commerce business grew 10% constant currency and represented 18% of total net sales. I believe these results are proof that our strategies are working. Looking at the current environment, the threat of a recession is weighing on the market. In these times, our strong financial position is a strategic advantage. We exited year with over $400 million in cash and no bank borrowings. We're entering 2023 in a position of strength with positive momentum in many markets around the world. The Columbia brand's iconic innovation, value proposition and democratic product offering are enabling us to capitalize on the popularity of outdoor activities. Differentiated innovations like Omni-Heat Infinity and the recently introduced Omni-Heat Helix are separating Colombia from the competition and fueling its growth trajectory. SOREL's function first fashion footwear is resonating with consumers. We believe SOREL is on its way to $1 billion in sales and becoming the next global footwear force. Our products have earned us a loyal base of consumers and we're making focused demand creation investments to create even deeper consumer connections and unlock growth. We have amazing strategic wholesale partners and a powerful direct-to-consumer business that's helping us create the marketplace in the future. As we begin the year, one of our top priorities is to reduce our inventory position and align it with demand. I'm confident in our ability to perform this task effectively and profitably over the course of the year. Our business model, strong financial position and strategies are well-suited to manage this process. Our product offering includes a large percentage of evergreen styles that do not change season to season. This reduces our exposure to promotional pricing. Given our strong balance sheet, we can be patient as to when and where we sell our product. We expect to continue utilizing our fleet of outlet stores to profitably liquidate remaining excess inventories. Columbia Sportswear is positioned to deliver another year of profitable growth in 2023. The top end of our financial outlook contemplates 6% net sales growth and a 12.2% operating margin. I will provide more details on the key drivers and assumptions influencing this outlook later in the call. I will now review our fourth quarter 2022 financial performance. Net sales grew 4% or 8% on a constant currency basis. This was within the financial outlook we provided in October and reflects strong execution in a challenging environment. Gross margin contracted 180 points and was -- assuming 180 basis points and was roughly in line with our outlook. The largest driver of contraction was higher promotional activity in the marketplace as we lapped an exceptionally low promotional environment in the prior year. SG&A expenses increased 5% and represented 34.6% of net sales compared to 34% and in the prior year. We incurred $35.6 million in non-cash prAna impairment charges during the quarter, which impacted diluted earnings per share by $0.43. Diluted earnings per share decreased 15% to $2.02. I will now review fourth quarter and full year net sales growth by region and brand. For this review, I'll reference constant currency net sales growth to illustrate underlying growth in each market. All regions outside the US were unfavorably impacted by foreign exchange rates. US net sales increased 2% in the fourth quarter and 12% for the year. In the quarter, we generated high single-digit percent DTC growth balanced across our brick-and-mortar and e-commerce businesses. US wholesale net sales decreased mid-single-digit percent. Wholesale performance in the quarter was unfavorably impacted by a greater portion of Fall 2022 orders shipping in the third quarter this year relative to last year. Looking at the third and fourth quarters combined, second half US wholesale net sales increased high single-digit percent, reflecting healthy retailer demand for our products. With that said, we know [ph] supply chain disruptions resulting delivery delays tempered our Fall 2022 performance. We were unable to maximize early-season full price sales, and we experienced higher order cancellations resulting from the late receipts of inventories. As we move into Spring 2023, our on-time delivery percentage is greatly improved and is approaching pre-pandemic service levels. US Fall 2022 retail sell-through trends were generally positive. With the season almost complete, sell-through is tracking roughly in line with Fall 2021, which was exceptionally strong. Turning to our international business. Latin America/Asia Pacific region or LAAP, net sales increased 11% in the quarter and 13% for the full year. China was up mid-single-digit percent for the quarter led by strong dtc.com performance. For the year, China declined mid-single-digit percent, primarily reflecting the impact of government efforts to contain COVID-19 outbreaks. I'd like to thank our team in China who overcame numerous supply chain and COVID-related challenges. I'm encouraged by the emerging momentum I see in this market as we started 2023. I believe the investments in talent and operational improvements we've made over the last several years position us to accelerate the business as China reopens. We know we have powerful brand recognition in China and that this market represents one of our largest geographic growth opportunities. Japan increased high single-digit percent in the quarter and high-teens percent for the full year. For the quarter, net sales growth was led by DTC as traffic recovered and consumers embrace Columbia's products. Korea grew low single-digit percent in the quarter and high single-digit percent for the full year. There is sustained interest in outdoor products and activities in that market, and we are positioned for growth -- continued growth in 2023. Our new leadership in Korea is focused on managing the marketplace to optimize our DTC store fleet and retail partners distribution to further elevate the brand and drive productivity across all channels. The LAAP distributor markets were up low 80% for the quarter and high 70% for the full year. Growth in the quarter reflects higher Fall 2022 and Spring 2023 orders as well as favorable timing of shipments. With robust growth in 2022, our LAAP distributor business has returned to pre-pandemic sales levels. Europe, Middle East, Africa region, or EMEA, net sales increased 32% for the quarter and 26% of the year. Europe Direct grew low 30% in the quarter and for the full year, including strong demand across all channels. I'm extremely proud of our team and the progress they've made growing our business in Europe, while improving profitability. If you'll remember in 2015, Europe Direct represented just over â¬100 million in annual net sales and generated an operating loss. In 2022, we surpassed â¬300 million and its profitability is accretive to our consolidated operating margin. Our products, marketing and marketplace strategies are yielding powerful results. Europe Direct is expected to be one of our fastest-growing markets in 2023. Our EMEA distributor business was up high 30% in the quarter and up low-teens percent for the full year. Growth in the quarter was driven by favorable timing of Fall 2022 and Spring 2023 shipments compared to last year. As we previously noted, we've paused taking any new advanced orders for the Russian market for early last year. Our outlook for our EMEA distribution business does not include sales for Russia, but contemplates healthy growth in other distributor markets which will help offset a portion of these lost sales. Canada net sales were up 23% in the quarter and 19% for the full year. In the quarter, growth was led by wholesale, which benefited from favorable time Fall 2022 shipments compared to last year. We are well-positioned for continued growth in Canada. Colombia and SOREL have high brand awareness and excellent market positions. In fact, Colombia has been voted the number one trusted sportswear brand for seven years in a row in the University of Victoria Brand Index. Looking at performance by brand. Columbia brand net sales increased 13% in the fourth quarter and 16% for the full year. During the quarter, growth was relatively balanced across apparel and footwear. Following last year's launch of Omni-Heat Infinity, we were able to build on the momentum this season, launching an expanded collection for Fall 2022. Our worldwide marketing campaign focused on how the technology works and why it matters. One campaign featured a partnership with Eagle Star [ph] quarterback, Jalan Hertz. Jalanâs timely content was also featured in a number of NFL broadcast pods. Good luck in the Super Bowl Jalan. We also utilized micro to macro influencers like YouTube sensation Dude Perfect [ph] in the campaign. The Dude Perfect team visited the Columbia store at the American Dream Mall, tested out the Omni-Heat Infinity jackets on the slopes and the content was featured on the Jimmy Kimmel show. The Omni-Heat Infinity technology received numerous accolades during the quarter. Several styles, including the Platinum Peak and Ballistic Ridge jackets were featured in this season's best of lists from Outside Magazine, Gear Patrol [ph] and Ski Magazine. We successfully introduced Omni-Heat Helix, our new disruptive poly fleece visible technology. Helix was a small targeted launch in our DTC business for Fall 2022, and we're excited to build on this unique technology in the seasons ahead. On the product collaboration front, we saw the successful launch of our newest Star Wars collection, inspired by The Clone Wars animated series. Our latest collaboration includes references to Obi-Wan Kenobi and Anakin Skywalker among others. The collection incorporates Omni-Heat Infinity thermal reflected technology to help fans overcome the harsh winter elements wherever in the Galaxy they are. Shift to our emerging brands. SOREL brand net sales decreased 9% in the quarter and increased 11% for the full year. In the quarter, net sales were unfavorably impacted by a greater portion of Fall 2022 orders shipping in the third quarter as well as higher order cancellations. Early season sell-through was challenged given delivery delays. As product availability improved, consumer demand for the brand was evident on sorel.com, which generated robust growth in December. Growth categories, including sneakers and sandals, were top performers in the quarter. SOREL's consumer base is passionate about the brand. The SOREL team remains laser-focused on bringing a relentless growth of compelling products to this unstoppable consumer. In 2023, the brand is exciting product partnerships and shop-in-shops planned with key retail partners. We expect SOREL to be our fastest-growing brand in 2023. While supply chain constraints help that growth in 2022, we are confident that SOREL can grow even faster in the years ahead. prAna net sales decreased 6% in the quarter, but were up 1% for the full year. Sales declines in the quarter were driven by softness in the wholesale business, which was impacted by late product deliveries partially offset by DTC growth. The clients, the HBO Max reality series sponsored prAna debuted in January. Hosted by Jason Momoa, and product ambassadors, Chris Sharma and Meagan Martin, the series features climbers taking on various challenges as they compete for $100,000 prize and a prAna sponsorship. We believe this series has a unique opportunity to raise awareness for prAna as we reestablish the brand's roots in key activities like climbing. The prAna team remains focused on repositioning the brand in the marketplace to energize growth. Mountain Hardwear net sales decreased 9% in the quarter, but increased 5% for the year. Similar to our other emerging brands, net sales were impacted by late product deliveries, which drove higher order cancellations. I will now discuss our initial 2023 financial outlook. This outlook and commentary include forward-looking statements. Please see our CFO commentary and financial review presentations for additional details and disclosures related to these statements. We remain focused on achieving the long-term growth algorithm we laid out at our Investor Day in September. As we noted, growth will never be perfectly linear and we are not immune to near-term macro headwinds. Our 2023 outlook contemplates 3% to 6% net sales. The positive momentum weâve experienced in 2022 is expected to be tempered by consumer spending headwinds and retailer caution as they manage their inventory positions. While our initial 2023 outlook is below the three-year growth CAGR we outlined at the Investor Day, our confidence in our long-term growth opportunity has not wavered. Since our IPO in 1998, we've generated a 9% net sales growth CAGR and look to improve this into the future. We anticipate gross margin expansion of 60 basis points to approximately 50%. We expect SG&A expenses to grow faster than net sales growth. While others are cash constrained and limiting their investment spend, we're using our strong financial position and profitability to strengthen our competitive position. We will continue to invest in our strategic priorities to support the long-term profitable growth. On the digital front, we're investing in consumer data and analytics that will ultimately fuel membership enhancements and build stronger connections with our consumers. More broadly, we're investing in digital capabilities across the business to be more agile and adaptive. When it comes to supply chain capabilities, we are investing in people, processes and systems to improve supply and demand planning, drive inventory efficiency and support growth. This outlook contemplates maintaining our demand creation spend as a percent of sales at 5.9%, consistent with 2022. We may adjust this level of band [ph] depending on market conditions. We expect operating margin to be in the range of 11.6% to 12.2%. Operating margin performance will not always be linear year-to-year and we remain firmly committed to improving operating margin over time. This operating performance leads to a diluted earnings per share range of $5.15 to $5.55. We anticipate strong operating cash flow of at least $500 million in 2023 as our inventory levels normalize. In summary, I'm confident we have the right strategies in place to unlock the significant growth opportunities we see across the business. We are investing in our strategic priorities to accelerate profitable growth; create iconic products that are differentiated; functional and innovative; drive brand engagement with increased focused demand creation investments; enhance consumer experiences by investing in capabilities to delight and retain customers; amplify marketplace excellence that is digitally led omni-channel and global; and to empower talent that is driven by our core values. Absolutely. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Bob Drbul with Guggenheim. Bob, please proceed. Two questions. I'll stick to the request, Andrew. On 2023, Tim, can you talk more about your order book visibility, the cancellations that you had in the spring, just sort of how much of the book is termed up for sort of Fall of 2023. So that's my first question. And then the second question is just could you spend a little more time on China. Curious in terms of monthly trends or the reopening trends and how you feel like category inventories are overall and sort of how you think about 2023 in aggregate within the guidance that you gave us today. Thanks. Certainly, yeah. Thanks Bob. Well, as it relates to the order book, as you know, we concluded our spring much earlier in the year, and we're in the process of shipping it now. In fact, we're in great shape. We've brought our service levels nearly back to pre-pandemic levels, and we're shipping like crazy right now. We've had no substantial cancels and don't expect any, the spring book. As it relates to the fall book, that's also nearly complete, and we're buying -- well, we're matching the fall order book against our inventory levels that exist today, style-by-style, color-by-color, and we've done some purchasing to map to balance the book and our inventory so that they're in sync. And we don't expect fall cancels. Frankly, the only reason we receive such significant cancels this year versus prior periods is because our deliveries from Asia were significantly later than they had been in past periods. So we're expecting great things. We're approaching the business appropriately from an investment standpoint and we're excited about the possibilities that are before us. As it relates to China, if you remember, we've been pretty open that we've underperformed there historically. We've come from a great position and we lost our way a bit. The team that we have there today is exceptional in building a great business. And so we expect that, that business will -- once we get fully opened here, and that's where we're headed, certainly, that the business is going to really, really grow. And I'm convinced it's going to be, if not the greatest geographic sales area we have certainly among the best. So in general, as it relates to 2023, I'm bullish. We've always said that we expect high levels of growth. We're a growth company. And I think this gives us the opportunity with our balance sheet and weakness of certain of our competitors that will have a great opportunity to grow in 2023 and beyond. Good afternoon. Thank you very much for taking my question. Tim, it's great to hear that you're bullish for 2023. In the CFO commentary, it talks about Colombia, the brand itself being up high-single-digits for the year as part of the guidance. And then you have some other commentary saying that footwear is going to grow faster than apparel, excuse me. Within Colombia, the brand growing high-single-digits, can you maybe parse out how much do you think apparel is going to grow this year versus footwear overall? Laurent, this is Jim. We do anticipate that footwear as a category is going to outpace the growth of apparel. And that would be inclusive of both the SOREL brand and Colombia. And then when you think about the high single-digit rate of growth for the Columbia brand, by and large, is that -- thatâs the case across all markets except the EMEA distributor market, which, of course, we'll be lapping the Russia shipments that we had in 2022 that we did not have contemplated in our outlook for 2023. Okay. Very helpful. And then -- it's good to see, Jim, that you have first half commentary, your top-line is expected to be mid-single-digits. So in line with the full year, any puts and takes we should we think about first quarter, second quarter is like any shifts there that we should think about? Because, I think, you're calling out gross margins to be down in the first quarter. Just curious to know -- sorry, Andrew, it's three questions now. But how do we think about gross margins being down in the first quarter? Can it be in the magnitude of 100 basis points to 200 basis points? Yes. I think the way I would think about Q1, Q2, the key call out is what we've included in the CFO commentary, and that's that we would expect gross margin to be down in Q1, that in part being reflective of the fact that we're lapping the exceptionally low promotional levels from a D2C perspective last year. Aside from that, Laurent, I would expect that the first quarter from a growth standpoint should outpace the second quarter related to what Tim was describing earlier the fact that our spring inventory receipts for 2023 are much more timely than they were a year ago. And so we're getting those wholesale shipments out sooner as well. So that will drive a little bit of a timing variance on the top-line. But those should be the biggest variables. And then also included in the CFO commentary, we did make a comment that Q2 is typically our lowest volume quarter. And given that being a low volume quarter, we do anticipate Q2 being roughly breakeven. So that will -- if you do the math, you kind of back into what that would imply in terms of Q1 earnings. Yes. Thanks for taking my questions. Maybe just a continuation on the gross margin discussion. So you expect it to be up 60 bps for the year. I would imagine that better freight has a big impact on that. So is there any way, Jim, you could just kind of walk us through the year-over-year impact in timing of the freight improvement that you expect to see over the course of 2023? Yes. We -- just big picture, Mitch. We've been looking back at 2022, inbound freight had nearly a 200 basis point -- 170, 180 basis point impact unfavorably to our gross margin. Part of 2021, the tail end of 2021 was also impactful from an unfavorable standpoint. So the weight of the inbound freight is probably a little bit more heavily weighted Q1, Q2, Q3, and then it will start to abate a bit in Q4 and normalize. So that's the way I would think about that. I think the offsets to keep in mind why you're only seeing 60 basis points of gross margin improvement relative to what those inbound freight benefits are, are the fact that we are continuing to lap the early part of last year in which the promotional environment was extremely low. And so we anticipate that normalization. And then with the elevated inventory levels that we have and as we work through that inventory through the combination of our outlet channels and from a wholesale closeout perspective, that will have some impact on margin as well. So those are effectively the two major offsets to the inbound freight benefit. Okay. And then secondly, on the late deliveries, the delays -- delivery delays and order cancellations that kind of became of that. Is there any way to either kind of quantify the impact that, that had on the fourth quarter or maybe back half combined? Or maybe better yet, I mean, as you lap that, and I think, Tim, you said that youâre not expecting any order delays or any real cancellations for Fall 2023 as you lap those delays with an order book that doesn't have cancellations to it. Is there any way to kind of quantify kind of what you pick up as you lap that kind of easy comparison? Well, I think the easiest way to think about it in terms of the incremental cancellations that we incurred above and beyond what we expected. I think if you just look at the high end of the revenue guidance that we provided in October relative to where we landed. The delta there is going to be entirely related to cancellations in North America across our US and Canada business. Aside from that, trying to quantify the full effect of cancellation, it'd be tough to get that into that level of detail, obviously youâre seeing in the inventory balance because by and large, the increase in our inventory is effectively that cancellations plus to some degree, earlier receipt of our spring inventory. And then as we get into this next year, Mitch, we're planning for kind of more of a normalized shipping pattern knowing that from a supply perspective, as Tim touched on, we're in much better shape going into 2023 now. Hey, thanks. It's Tracy Kogan filling in for Paul. My two questions. I guess the first is on your inventory. If you could just give us a little more detail there on where you think you have too much in terms of brands and categories? And then I guess, secondly, what are you seeing on the AUC side for this year, the product costing side? And are you expecting any additional price increases? Thanks. Yeah, I'll let Jim talk about the specifics around the inventory, but I can tell you maybe begin with the costing expectations. About half of our inflationary pressure was inbound freight. So we've seen healthy degree of moderation. In fact, even rollbacks costs there. So that's a tailwind for us. Additionally, there appears to be a moderation in these cost increases we were experiencing in raw materials in the components of our products. Labor rates have also increased some substantially, but those are not going to roll back. So, I think our expectations are that the price increases at the higher rate that we saw them in 2021 and 2022 will moderate, and there'll be some opportunity for us to expand our gross margins as we've guided. Jim can talk a little bit about the components of the current inventory. Yeah. Tracy, to talk through the composition of inventory a bit. And certainly, we're more elevated than where we ordinarily like to be from an inventory perspective. I think when you get under the hood of our inventory and look at the actual composition of the inventory, we're still comfortable with overall quality. There's certainly more of it, but by and large, the predominant side of it, its current future season-based inventory, we're much earlier received on the spring season. We are carrying over a fair amount of inventory as we've previously spoken about. There's a large proportion of our product lineup that is evergreen product that carries over season to season. And much of that has been offered as part of our Fall 2023 product mix that we've sold into our wholesale customers. So we're in good shape as it relates to having sold in a lot of that inventory already. And then to the degree there is aged or excess inventory that's remaining, we've adjusted our inventory buys for our outlets and shifted that back more towards moving through excess and liquidation as opposed to made for product. And then more specifically around composition of inventory, the focal point in terms of where we're seeing the growth in that is predominantly in North America. And I think that's a good thing in that we've got -- that's where we've got the greatest ability from an outlet perspective to be able to move through that inventory profitably. Hi. Good afternoon. Thanks for taking my questions. I just wanted to ask if we could get maybe a little bit more detail on the US growth expectation for the first quarter, maybe in terms of the wholesale versus D2C. What are you seeing also like in the D2C trends of your business so far? And maybe you could provide a little bit more detail on the rationale of what cost you guys to take that impairment charge on the prAna business? Just a little more detail on that would be very helpful. Thank you. Yes, certainly. Well, when I think about the first half of 2023, I'm mindful that we had some of our largest customers had almost no Columbia inventory in their stores during the first several months of 2022. Our deliveries were that impacted. So the expectations are that we'll have a nice solid Q1 few of these stores up to where they should be, and we'll have a good start up to Q3. Our DTC growth should be solid as well. Although if you remember, we're really focused on being a wholesale company. So we don't give a lot of detail around a normal retailer would give. It's just not as much a focus for the company as the wholesale portion of the business. And then as it relates to the rationale of the prAna business, we're very bullish on the prAna brand. And as you know, we talked a lot about the reset going on in their product. We just believe it's taking longer than we anticipated and wanted to make sure that we were prepared to give ourselves the time to turn that brand around. Yes. And I'd just add, there's a lot of factors that go into the impairment. Some of it is what Tim is describing in the form of the brand's underperformance in our minds relative to the plan that we set upon acquisition. And then to a degree, looking at market multiples, looking at interest rates, certain of those factors have also influenced the impairment charge that we took in the quarter. Hi. Thanks for taking my questions here. Just first, can you maybe talk through what is embedded in your guidance in terms of wholesale versus D2C? I think at the Investor Day, you talked about modest 1H wholesale growth. Is that sort of the case and how you're thinking about the full year? Thanks. Yeah. I think to the degree we provided detail from a channel perspective, it's a little bit higher level, Alex, but we are anticipating after an incredibly solid year from a wholesale perspective in 2022 that the D2C business would outpace wholesale growth in 2023. So, a couple of factors there. One, continued investment in what we're making in from a digital and e-commerce perspective. And then as you think about the brick-and-mortar side of our business, we did add a fair amount of new stores in 2022. So we'll be lapping the opening and the annualization of those stores in 2023 plus we've got a handful of new stores also planned from a growth standpoint. That's really helpful. And then I think a lot of people have asked about your sort of balance sheet inventory, but I wanted to ask sort of about your -- how you're thinking about channel inventories. How are you sort of viewing that both for you and others that you compete with? Do you feel like channel inventories are in a good place? Or do you think that retailers will be carrying over inventory into sort of Fall 2023? Thanks. Yeah. So we monitor something in the range of 85% of our North American retail customers' inventories, so we can gauge how we're doing there from a sell-through perspective on our brands. And what we're seeing is generally average to slightly better than average sell-through performance when you compare with prior periods, including pre-pandemic prior periods. So we can't see visibility on other brands, but as it relates to ours, we're in a good position and when that would be approximately where we've been in the past. So weather plays a big portion in the second half business and the residual inventories. So, as you can see in the great cold weather that's going through North America today, it's making up a very big impact on the liquidation for our retailers. So our expectation is once the winter is done, that will be a good, solid, clean position with our merchandise. So I just wanted to go back to the question on Fiscal 2023 gross margins and maybe how that's broken down. Is there any more detail that you could provide on maybe specifically the impacts from freight and promotions and maybe kind of cadence throughout the year would be very helpful? Thank you. Yeah. And if you reference the CFO commentary we provided, there's a bullet point list there, but I can speak a little bit in terms of the relative weighting of these. So, lower inbound freight costs, that will be a -- we anticipate, we've built into our guidance a very significant element of benefit there. And in 2022, I mentioned it was about 180 basis point headwind to us in gross margin. And that was also a headwind to us in the latter part of 2021. And with freight rates being down basically where they were in advance of the escalation we saw in those costs, we should be getting most of that back in 2023, and that's built into the outlook that we've provided. To a lesser degree, there is some favorable channel mix shift as our D2C business is anticipated to outpace growth across the rest of the business. And then the big offset in here is going to be the expectation around promotional levels coming back down to more normalized levels and is also working through getting our inventory clean. So, there's a sizable benefit from an inbound freight standpoint it's going to be offset to a pretty good degree given promotion levels and clearing through the inventory. We have reached the end of the question-and-answer session. And I will now turn the call over to management for closing remarks. Great. Thank you very much for listening in. We're looking forward to a great 2023 and being able to update you as we go along during our next quarterly call. So thanks for listening. We'll talk to you soon.
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EarningCall_630
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Good day, and welcome to the Essex Property Trust Fourth Quarter 2022 Earnings Conference Call. As a reminder, today's conference call is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs as well as information available to the Company at this time.A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found on the Company's filings with the SEC. It is now my pleasure to introduce your host, Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you, Mr. Schall, you may begin. Good morning, and welcome to our fourth quarter earnings conference call. Angela Kleiman and Barb Pak will follow me with comments, and Adam Berry is here for Q&A. Today, I will touch briefly on our full year results, expectations for 2023 and why we believe that our West Coast rental markets are positioned to outperform over the next several years. I will conclude with comments on the transaction market and the upcoming CEO transition. Overall, 2022 was a positive year for Essex as we generated full year core FFO per share growth of 16.2%, our highest year-over-year increase in a decade and 9.3% above pre-COVID levels. We attribute these strong results to relentless execution by the Essex team, improved efficiencies from the implementation of our property collections model and the strong recovery in our West Coast markets for the better part of the year. Our positive results were achieved despite the challenges associated with COVID-19 regulations in our markets. Our near-term results will remain impacted by elevated delinquency, which we estimate will represent a $0.60 per share drag on FFO in 2023 compared to our pre-COVID levels of delinquency. Notwithstanding the impact of delinquency in 2023, we believe we are entering the final phase of these challenges and that our COVID-related headwinds will be behind us in 2024. For 2023, we reaffirm our 2% market rent growth expectation across the Essex markets as shown on Page S-17 of the supplemental package, which is predicated on consensus assumptions for a slowdown in the U.S. economy driven by higher interest rates. Macroeconomic visibility is limited by a variety of factors, which translates into a wider-than-normal range of potential outcomes this year. Recent economic data highlights continued resiliency in the labor market with solid reports for job growth and unemployment claims even with elevated layoff announcements. In Essex markets, preliminary job growth for December was 3.8%, and the recent unemployment rate was only 3.2%, both outperforming national averages. Looking ahead, layoff announcements and lower job openings among large tech companies signal a softer employment outlook for 2023, which we incorporated into our forecast assumptions shown on Page S-17. Our primary challenge since early 2020 relates to the massive layoffs that occurred as a direct result of the government's response to the pandemic, which eliminated nearly 3 million jobs in California alone and force people out of densely populated areas in search of work. It has taken over two years to recover those jobs lost during the pandemic, and I'm pleased to say that the Essex markets have now fully recovered those losses. It is notable that each of the eight major metros in the Essex portfolio have now recovered from 98.8% to 100.9% of the jobs lost in the early part of the pandemic, leading us to believe that most of the slack in the housing supply-demand relationship from the pandemic no longer exists. We believe that this is a major milestone which should lead us back to our pre-pandemic growth profile once the economy stabilizes. As with past economic slowdowns, a frequent concern involves the tech companies that dominate Northern California and Seattle with nearly daily reminders of tech layoffs amplified in the newspapers. The tech sector is often volatile yet over longer periods, the industry has reliably generated top paying jobs and wealth creation that are at the foundation of a strong rental growth. A core strength of the tech industries is their ability to evolve in a cyclical process of reinvention, where the groundwork for new rounds of innovation are laid while the prior cycle is slowing. I am confident that this is what is occurring today. Going back to the 1980s, Big Tech was focused on IBM PCs and R&D efforts to improve semiconductor manufacturing, and that phase ended with the recession in the early 1990s. Growth of the Internet and e-commerce soon emerged and then later boomed and busted capping the dot-com era from which many believe tech would never recover. Instead, a wave of social and mobile products emerged 20 years ago, including Facebook, YouTube and the iPad and iPhone, setting up a much larger and more profitable era of growth. Then following the Great Recession, cloud computing and machine learning added to the next period of rapid growth, both for new start-ups and for sector leaders like Amazon, Google and Microsoft. And now despite a very similar set of concerns, many of you will have followed the explosive recent adoption of new AI products such as ChatGPT and DALL·E.Consistent with the transformative technologies of the past, the innovators and investors in artificial intelligence are overwhelmingly concentrated in our markets including OpenAI in San Francisco and Google Brain in Mountain View. And despite a broad BC slowdown last year, funding for AI increased 70% and is now poised to grow vastly more in 2023. In a recent search of the leaving 100 start-ups in artificial intelligence, we found that more are headquartered in the Bay Area than in the entire rest of the United States. Thus, it is a combination of entrepreneurial spirit, financial capital and technical talent down on the West Coast as well as housing supply constraints that drives our expectation for the West Coast to generate superior rent growth over the long term. Turning to the apartment investment markets. We continue to see muted deal volume in our West Coast markets as buyers and sellers seek to compromise on their expectations for property values and yields. A relatively small number of apartment sales indicate that property values and cap rates have not changed materially since last quarter, and cap rates generally are in the mid- to high 4% range for high-quality suburban apartments. At this point, we've seen pockets of distress mostly focused on owners subject to variable rate debt and maturing short-term loans. It's possible that an extended period of elevated interest rates and slower rent growth could create new opportunities to generate FFO and NAV per share. We sold 1 property in the fourth quarter, and we are working on other potential sales. In conclusion, assuming my math is correct, this is my 115th consecutive conference call on behalf of Essex, which will be my last given my pending retirement as CEO at the end of March. I am incredibly grateful for the opportunity to be part of the highly skilled, disciplined and focused leadership team for this great company. I'm taking a step back with full confidence in Angela's ability to lead the Company along with her determined and like-minded team. Thank you all. Finally, I have enjoyed working with so many of you in the investment community, and I thank you for your trust and support over many years. I remain confident that many great years for the Company are on the horizon. Thank you, Mike. The evolution of Essex under your 37-year leadership has been remarkable. I and the senior team are grateful for your mentorship and we'll continue to diligently serve this company as we move forward. My comments today will start with brief operational highlights of our fourth quarter performance followed by our current operating strategy and updates on key operational initiatives. Essex had a productive 2022, which included optimizing the strong leasing momentum heading into our peak leasing season, addressing delinquency and recapturing units from non-paying tenants while transforming our operating business model. These accomplishments are the results of the exceptionally hardworking operations and support teams thoughtfully executing our business strategy amidst highly dynamic market conditions. Great job, team. Moving on to the fourth quarter. We shifted to an occupancy-focused strategy in late September in anticipation of softening demand and elevated move-outs related to eviction activity. The confluence of these factors created a challenging operating environment in the final months of 2022. Our switch to favoring occupancy helped us moderate the seasonal weakness and the elevated turnover caused by higher evictions. Excluding L.A. and Alameda Counties, I am pleased to report that we have made significant progress recapturing approximately 50% of delinquent units compared to one year ago. In addition, as we start the new year, demand fundamentals have improved in line with our expectations. Our net effective new lease rates troughed at the end of November, and we have been able to reduce concessions while gradually increasing new lease rates from December to January on a sequential basis. In the near term, we will maintain our occupancy-focused strategy as we continue to make progress on eviction-related turnover. Our portfolio sits at a healthy 96.4% financial occupancy today, and we are well positioned to increase rents if demand exceeds our expectations. Turning to key operations initiatives. We continue to make progress with our property collections operating model. Phase 1 is now complete, which centralized administrative and leasing functions, which combine nearby properties into onecentrally managed business unit. The efficiency benefit can be seen in our financial results with administrative expense growth of only 0.7% last year. And for 2023, we anticipate only a 3% increase despite inflationary pressures. Phase 2 expands the same operating principles to the maintenance function.We expect numerous benefits, including savings from reduction in third-party vendor contracts in unit churn efficiencies. The maintenance collections pilot is progressing well and is expected to conclude midyear. At that point, we will provide additional details on the rollout. Lastly, on the technology front, we continue to make excellent progress, most recently with the launch of our proprietary revenue management software. We have been developing this capability over the past two years and are excited for a platform with an integrated pricing and operating strategy tailored for the nuances in our markets. Thanks, Angela. Today, I will focus on our 2023 guidance, followed by comments on investments and the balance sheet. Our 2023 guidance assumes same-property revenue growth of 4% at the midpoint on a cash basis. Overall, we expect healthy top line growth and stable occupancy to be partially offset by 70 basis points of higher delinquency. The reason we believe delinquency will be higher than 2022 is due to uncertainty around the timing of evictions in all of our markets. In addition, we do not expect to receive much in the way of Emergency Rental Assistance as compared to $34 million we received last year on a same-store basis. As it relates to operating expenses, we are forecasting a 5% increase at the midpoint, which is above our historical run rate. There are a couple of reasons for the higher-than-expected increase. First, controllable expenses are forecasted to increase 4%, which is driven by wage inflation and elevated eviction-related costs, partially offset by savings we achieved via the rollout of our property collections model last year. Second, we are experiencing elevated cost pressures within utilities and insurance. In total, we expect same-property NOI growth of [3.6%] at the midpoint. In terms of core FFO, our midpoint assumes 1.6% growth. The primary reasons for the modest increase include higher interest expense and delinquency and lower structured finance income, which are outlined on Page 6 of the earnings release.In total, these items equate to a $0.57 per share headwind, representing nearly a 4% reduction to growth on a year-over-year basis. Turning to investments. Given the challenging investment environment and our elevated cost of capital, we have not provided specific estimates for new acquisitions as it is difficult to generate accretion today given the significant disconnect between public and private market pricing. Given this disconnect, the best way to create value today is through asset sales and share buybacks or via preferred equity investments all of which we completed in 2022. It should be noted that we have a long track record of finding ways to create NAV and FFO per share in all environments, and we will maintain that discipline going forward, while at the same time, match funding our investments on a leverage-neutral basis. As it relates to the structured finance portfolio, during the quarter, we completed a comprehensive review of our investments performing a wide range of sensitivity analysis on a variety of key metrics. The analysis confirmed the portfolio is performing as expected with the exception of two investments, both located within the Oakland submarket. One of the investments was redeemed in the fourth quarter, resulting in a $2 million impairment. For the other investment, we took a conservative approach given the uncertainty around fundamentals in Oakland due to high apartment deliveries, which is leading to an elevated concessionary environment. As a result, we stopped accruing on this investment during the fourth quarter, resulting in a $0.06 reduction to our 2023 guidance. Overall, we have a long successful track record of investing in structured finance investments. Over the past 12 years, we have invested approximately $690 million in structured finance investments that have been fully redeemed, achieving a 13% average annual return for our shareholders. Lastly, on to the balance sheet. During the quarter, we saw a continued improvement in our credit metrics with net debt-to-EBITDA returning to pre-COVID levels at a healthy 5.6x, with no debt maturing on our consolidated balance sheet until 2024, limited development funding needs and ample liquidity, our balance sheet remains in a strong position. First of all, congratulations again, Mike and Angela. Mike, I appreciate the comments on kind of the tech cycle and future thoughts there. But what gives you the comfort that the benefit for any recovery or the eventual recovery, I guess, in tech will accrue mostly to the West Coast markets like we've seen in the past versus maybe some of the more newer tech markets or Sun Belt markets given population and job growth trends that we've seen there? Well, thank you for the congratulations. I appreciate it. I think tech is just growing in terms of its share of the overall employment base. So we expect tech to grow throughout the United States and certainly wouldn't exclude the Sun Belt. But I think that as with the past, most of the cutting-edge technology and the people that are really driving innovation will be located as they have been in the past here on the West Coast. So that gives us a great deal of comfort. And I went through that relatively long description of my career here and what tech has done really because of that because we've seen it reinvent itself so many times over and over again. And I would have a hard time believing that, that is anywhere close to being at an end. And -- and finally, I guess I would add that the prospects and the importance of AI to almost any -- every application from businesses to consumers, et cetera. is pretty extraordinary. So I think this is going to continue onward. And I think that we'll be right in the center of that innovation here on the West Coast. Yes. AI innovation is pretty exciting. And then just on the structured finance program, I guess two questions. Just number one, for the asset in Oakland that you're not accruing income. Can you walk through how that potentially could play out going forward in terms of your role there? And then it sounds like you're in an analysis across everything and everything -- all the other are performing as expected. But are there any on the watch list or potentially maybe could become issues? Hi, Nick.It's Barb. Yes, we did a comprehensive review. And on the rest of the portfolio, we don't have any other assets that are on the watch list. Keep in mind, we leaned-in heavily in 2020 and prior when cap rates were higher, NOI has grown significantly since we started this portfolio. And so none of the other properties screened high on the capital stack. The one in Oakland is really a function of the high concessionary environment right now. Net effective rents are lower, NOI is lower than how we underwrote it. And so we're higher in the stack than what we'd like to be. So that's why we took a conservative approach to stop accruing. We have constant dialogue with the sponsor and they're very engaged in our participating rating checks as needed. And so we don't see any other fall out at this time from that asset. Thank you. And add my well wishes and congrats to you, Mike, as well. First question is I think last quarter and at NAREIT, you talked about a week of free rent, I think, in Seattle, in a couple of weeks in San Francisco. And just wondering where those numbers sit today? And whether or not you feel like you've seen the effect of all the layoffs that have really been announced since the fall? It's Angela here. On the concessions, we have seen it essentially taper off throughout the portfolio since December, which is basically I've mentioned earlier that our portfolio trough late November and it significantly improved as an overall average in the fourth quarter, particularly in December. We were running about two weeks concessions. And right now, it's a portfolio average, we're running less than a week. So that gives you an indication of directionally how things have improved pretty quickly. Okay. And then just one follow-up for Barb. You gave us the bad debt, like the per share drag and the 70 basis points on growth. But if I look at the fourth quarter, it was 1.1%, I think,is there a way to express it in those terms in terms of where your expectations are for 2023? Yes, Tony. For 2023, we're expecting bad debt as a percent of schedule rent to be 2%. Now keep in mind, we don't expect any Emergency Rental Assistance in 2023 as compared to the $34 million we received on a same-store basis in 2022. And so that's why the net number is going to increase. We were at 1.3% in 2022, and it's going to 2%. Now the underlying gross delinquency is improving because we are able to evict. It's just taking longer than we had initially expected, but we are making progress on that front, as Angela mentioned in her script. Good morning, everyone, and congrats again, Mike. I'm curious how the supply pressure changed throughout the year? And at what point did you start to push rate? Wes, thank you for the congrats. I appreciate that. In terms of supply pressure, there are pots of supply in a few places. We noted Oakland earlier, I think there are multiple lease-ups in Oakland, which are really having the effect of pushing down price. Seattle has more supply deliveries this year and especially the fourth quarter because it's generally a seasonally weak period, and Seattle tends to be weaker than the California markets, primarily because demand goes to zero in the fourth quarter or close to zero, and Seattle has more supply of apartments. But going forward, the supply picture looks like it's declining. And this is a result of obviously lack of rent growth for the last few years. So the ability to produce housing at an accretive level is pretty challenged, and we see that in our preferred equity book as well. And so I think it's going to be -- we're going to be in a period where there's relatively not a lot of supply. And if we get any demand, we'll be in good shape. Got it. And then just curious, what happened to all these people that are evicted, if you have a new tenant coming in, say, in June, will you know if they were a nonpayer if they're a prior apartment? Or is just everyone going to swap non-paying tenants? Well, on the tenants renting front, we have a pretty robust process there. Having said that, we, of course, will do credit checks and that will let us know if they are not -- or they have any prior debt that needs to be paid. And so that's our best indicator on that front. Okay. So that would be a relatively timely event. I guess there's like the ties that are not paying -- it's already in the books for you as a delinquent tenant? Right, right. And in fact, even for us, for tenants who have left, we have -- we immediately have updated the credit report as well on our end. And there is, of course, ongoing report on ongoing debt. So there are various resources that we can use and we have used. I wanted to revisit the delinquency. I think last quarter, you referenced L.A. County was, I believe, 40% of the overall delinquency. What is that figure today? And then I'm curious on the $0.60 per share, what is the annualized run rate that you'll be running at or that you're assuming by the fourth quarter of 2023? I'll just touch on the delinquency population.Itâs Angela here. In the past, L.A. is about 40%, and it's ticked up to about 50% L.A. delinquency, and that doesn't surprise us given the eviction moratorium has not been lifted. We had expected L.A. to continue to accrue under the delinquency basis. However, the good news is that the new tenants coming in, we're not seeing those tenants [indiscernible] prior tenants. And then Austin, this is Barb. On the $0.60 that Mike referred to, that is compared to our pre-COVID historical run rate for not only the revenue piece, but also the expense piece because we have elevated eviction and turnover costs associated with the delinquency. And so it's both pieces. What we are expecting in the back half of the year is our delinquency.Our gross delinquency will be around 1.5% for the second half of the year, 2% for the full year. So we do expect to make progress, but given the timing on these evictions is very difficult to predict at this point. We don't expect to be to our normalized run rate by the end of the year. That's fair. Just trying to understand what sort of the earnings power going into 2024 is, but we'll haveto revisit that later this year. Second question, you referenced your shift to favouring occupancy late last year. And you highlighted some month-over-month improvement from December to January. I guess what would it take for you guys to pivot towards going back to pushing rate? And would that mean that the 5.5% renewal rate growth that you are at in January could stabilize or even reaccelerate from here or would the benefit accret more towards new lease rates? That's a good question. In terms of the occupancy strategy, and when we would shift, it's going to be a little bit different in each of the markets. So for example, we actually are seeing great strength in our Southern California portfolio. However, we are running a little bit higher occupancy in anticipation of the eviction and the opportunities to vacate non-paying units that's coming our way. So we're building that not because we're seeing a market softness issue, it's more of a strategic play to ensure that we are well positioned. And so for example, in places like Seattle, which is, as we noted, highly seasonal, when we see demand come back as it typically does during peak leasing season. We would expect that we should be able to switch back to favoring rent growth, especially now that we've been able to reduce our concessions in a meaningful way. And is it safe to assume that Northern California has a similar setup as Seattle in terms of some seasonality, maybe and the opportunity being to be able to push a little bit harder as we come out of the seasonal low, if you will? Yes, that makes sense. And the one caveat is, of course, the supply conversation that we talked earlier, right? So for example, places like Oakland that will continue to probably take a little bit longer, because of the supply. But in areas where we are not trying to manage through pockets of supply, there are some good opportunities there. Mike, offer my congratulations as well to you and to Angela on the transition. I guess the question, when you think about the cadence and timing of revenue growth, can you maybe just talk about how you think that progresses throughout the year and maybe what the first half looks like versus the second half? I realize there are some shifts in the delinquency numbers that Barb just spoke about. But when you kind of look at that sort of midpoint, say, 4% on a CAC basis, how heavy is that in the first half? And I guess, how light is that in the second half? Yes, Steve, it's Barb. I would say the first half we expect to be higher than the second half. We're about 5% in the first half. The first quarter will probably be north of that, and then it will trend down throughout the year with 3% on average in the second half of the year. And that's really a function of the year-over-year comps because last year, while rents accelerated, it didn't fully hit our revenue growth line.And so, we expect to capture that this year. First half will be higher than the second half. Okay. And you talked a lot about -- well, I guess, let me just say on occupancy for kind of the second question. But when you think about some of the potential soft points that Mike talked about in tech, I guess how are you thinking about maybe some of the potential occupancy loss in either Seattle or San Francisco or what have you baked in, I guess, specifically for the Bay Area and Seattle from an occupancy perspective? So from an occupancy perspective, we're not running at a whole lot different than prior periods. The one caveat is really more focused on Southern California particularly L.A. because we're anticipating some vacancies there from eviction. So for example, we saw the similar headwind in Northern California in the fourth quarter, and we anticipated that. So we employ the same strategy. So it's really more focused on some of these unique situation as we come out of COVID related legislation really to position us for better growth. Yes. Let me just add one more quick thing. Steve, a big question here is what is going to happen to the pace of employment. As I noted in the prepared remarks, job growth has been really strong. However, maybe some of the layoffs or the warm notices haven't actually showed up in job growth yet. So our expectation for the year -- just to remind everyone, on S-17 was for minus 2% -- 0.2% job growth for the U.S. And so, we're going to be watching job growth over the next several months. But it seems like we are running stronger than we expected, certainly with respect to January's job growth number. And if that continues, then you get to a point where maybe our U.S. job growth estimate on S-17 is too conservative. So we'll watch that closely. Good morning out there and just joining in. Mike, congratulations on your tenure,on your last earnings call; and Angela, best on taking the helm next quarter. So two questions. First, maybe just sticking with that job rebound, Mike, you had mentioned early on in COVID when everything in California was shut down, a lot of the service industries, those jobs literally had a fleet because they were closed down. They could work whereas a lot of tech people could work from home. As you talked about that really strong job rebound in December in the benefit, California has recovered all of its jobs. How would you rate -- when we see these headlines of the layoffs versus it sounds like there is pretty good job growth. Is it more of the job growth coming from the service jobs and maybe that's what you're seeing more demand in your apartments? Or as you look at your resident mix profile, you're like, look, our resident mix profile today is really no different than it was back in 2019. Yes, Alex. I think things are normalizing from the pandemic period. And -- but I would say, yes, we are recovering leisure, hospitality and other service jobs at a very high rate, and that continues onward. And -- but it appears to be normalizing. But also the tech job growth during the pandemic was incredibly strong. And we think that some of the more recent tech announcements are just sort of giving back a small portion of the job gains that occurred during the pandemic. So we don't even considered tech to be all that weak at this point in time. I think it's just transitioning from what it was and taking the next step or the next chapter of things. So overall, we think jobs are on the right track. Again, our S-17 was based on the consensus estimates of all the big economists in the U.S. and it's possible, and it almost seems like whatever weakness we might have is be a pushback because we're stronger earlier, which would probably be a net benefit for this year if that continues. And so we'll be paying close attention to that. And I want to maybe go into the -- two more things actually. One is the warn notices, and we had our data analytics team do an analysis of the major, the largest layoffs announced and what portion of them are in California and Washington versus the total. So this is Amazon, Google, Meta, Microsoft, Salesforce and Cisco. They globally have 1.6 million employees and the layoff rate is about 4% or 64,000 announced layoffs. In the California, Washington market, the employees of those companies in these markets are about 335,000 people, and there's about 10,000 layoffs. So the percentage of layoff is lower actually in California and Washington as compared to the broader enterprise. So I think that is important. And finally, it's interesting, the unemployment rates are so low. San Francisco, 2.2%, in San Jose, 2.4% and everyone under the U.S. average, except for Los Angeles, which is at 4.5%, no doubt that's because people are drawing benefits and able to stay in our apartment subject to the eviction moratorium. Okay. And then the second question is just getting back to the delinquencies, I think you guys have highlighted obviously L.A. and Oakland. Is that the bulk of what's driving delinquencies this year? And then as a consequence, especially in L.A. with the good cause of eviction, should we assume that you guys will look to pair your exposure to L.A. County? Yes, let me talk about that and Angela or someone else may have a comment. But the two really difficult eviction moratoria are in Alameda County, which is Oakland and L.A., L.A. City expired. However, L.A. County extended to March 31. Actually, L.A. City was a really horrible ordinance. L.A. County is not nearly as restrictive. For example, it only applies to 80% median income tenants, for example. And so there's a little bit of relief in L.A. And in terms of exiting L.A., I think that, that is -- it depends. I mean, we will exit -- enter and exit markets as we deem necessary using a much broader set of criteria for supply-demand analysis, rent growth expectations, cap rates, et cetera. And so that will drive that discussion as well as jobs and some of these other issues. Yes, Alex, on the delinquent unit front, L.A. and Alameda are the bulk of our delinquent units over 60% our delinquent units long term greater than three months or in LA Alameda. And so that's a factor as well as the slowdown in the court, courts are really bogged down. It's taking longer to vice in our other markets, and that is a factor as well in the '23 guidance to recapture those units. Mike, last quarter, you said that the 2% rent growth forecast seemed pretty dire at the time, and it was more based on what the Fed was doing and projections from economists and what you're actually seeing on the ground. I know you reiterated the 2%, but your commentary around employment seems to suggest that you still think it's a somewhat pessimistic outlook. Am I interpreting that right? I think Angela and Barb will kick me if I do anything that I say anything that's inconsistent with our published position. I mean the reality is, I don't know. And in the comments I referred to a range of outcomes that's broader than historically we've been able to triangulate in the past for most of the past, the relationship of supply and demand much more -- much better than we can this year. So, there are more moving pieces and given that inherent uncertainty, I still think that is within the range of potential outcomes. But again, we'll be watching job growth and more notices and all those various items for better visibility. Notably, a warm notice out there may not have hit the layoff part of the reported job growth. So, there's a lag there. And so it's a little bit unfair to comment on that until we see how that plays out. Okay. Fair enough. And then non-revenue-generating CapEx seemed elevated in the fourth quarter. And I think the 2022 total was up about 40% year-over-year. What's driving that? And can you give any expectation for where '23 will shake out? Sure. It's Angela here. The -- I think it may be helpful to just talk about how we look at CapEx because looking at a one-year number can be misleading. Our CapEx program is for each property on a 10-year plan. And so, on years where there is a large improvement that we made in replacement, for example, it's going to show up and it's going to look lumpy. So -- but having said that, in 2022, we also had to catch up from the -- when we paused the activities in 2020. So for example, pre-COVID, we're running closer to about $1,700 per door. And in 2020, we were down to like $1,300. So, over 20% increase. And so you play that forward a couple of years later, there is that lag effect. So that's what you're seeing as well. If you look at a, say, 10-year average, our CapEx per door is pretty similar to where our peers are. Now we do have a little older portfolio on average. So, it naturally we should run a slightly higher CapEx per door. So that's -- sorry for the long winter answer, but there's just a little bit more to it than just one number per year. And next year, we're evaluating the expectations you have also inflation. So, it's probably going to be similar to 2023, I mean 2022, but like I said, over a period of time, over a long period of time, it should revert to a long-term average. Congrats to everyone. I wanted to ask about the pricing of Anavia, which seemed better than expected given the interest rate environment. Any commentary you could provide on this pricing if it's reflective of other asset sales that you're working on? And sort of on a related topic, the matching tax in L.A., what do you think that's going to have the impact that we'll have on both the transaction market near term and pricing? Sure. John, this is Adam. So, beginning with Anavia. Anavia was, I'd say, an opportunistic sale to -- there was a very specific buyer and which -- that's reflected in the pricing. Generally speaking, we're seeing cap rates kind of trading in the market in the mid- to high fours. So Anavia, I'd say, outperform that by a bit again just because this very specific situation. Regarding the mansion tax in L.A., so we've seen a slight elevated potential transaction volume in L.A. due to the mansion tax coming into effect April 1. For the most part, I think most of those deals probably won't trade just given they were all on very short runways and pricing expectations just doesn't seem like they are being met. Going forward, I think we've seen this in Washington when they their transfer tax up. It actually did not affect transaction volume generally at all. I think the one thing that may be an outcome of the L.A. management tax is, it could potentially hinder development within Los Angeles, any significant headwind to development returns, especially from merchant builders, that's just going to affect their back end and make it that much harder to build. Okay. My second question is just a follow-up on delinquencies. It looks like it's going to be $40 million on a gross basis this year. How does that compare to last year? We estimated at about $57 million just based on your disclosure. I just wanted to make sure that was accurate. And as part of that, can the ERA surprise to the upside, there's not much baked in guidance? John, I may have to follow up with you on those numbers. I want to get back to my office and have the model in front of me. So I don't know if I want to quote the numbers here on the call. In terms of ERA, that would be upside if we were to collect some, but we've exhausted most of that so that we don't expect much in the way of ERA. The one thing I would keep in mind though, is we do have $90 million uncollected bad debt cumulative since the start of COVID. We only have a $3.4 million accounts receivable balance. We think we'll collect more than $3.4 million. It's just a timing of when we're going to collect that. So that is upside to the numbers. It's just -- we don't have that baked into our forecast given the inherent nature of when we're going to collect that. But that's really the upside is on that front more so than even ERA, I would say. Okay. Just -- I'll follow up with you off-line, but that $57 million we calculated from the change in cumulative plus the ERA you received last year, but I'll follow up offline. It's Angela here. No, we haven't talked about that. Our new and renewals are sending out somewhere between say, 4% to 5% depending on the market. So this is for very March. But keep in mind that does get negotiated. So if we're sending a renewal, say, north of 5%, we assume maybe 100 basis points negotiation depending on when and in some of these markets, we're sending out well in advance. So for example, Seattle, it goes out six months in advance. So hopefully, that gives you a better sense of the range of outcomes. Okay. Yes. No, that's helpful. And then Fiber, I wanted to touch base on -- you mentioned prediction costs and same-store expenses and I guess those from being elevated. I guess how are those showing up in same-store expenses? And then if you kind of normalize for those, what would your same-store expense look like? Yes. So, eviction costs show up in our administrative line. And obviously, we have elevated turnover as well, and that's in the R&M line. So it's in both lines. So, I would say in total relative to our historical average. Our controllables are forecasted to be 4% this year, but without the elevated eviction and turnover costs, we think we'd be closer to 3%. So it's about 100 basis points impact to the controllable line item for the year. First question is just in terms of when you're looking at some of your data on move-outs, maybe you could talk about how that's trending in terms of reasons for move-outs, job losses versus rents being too high or even move out to other regions? It's Angela here. That's interesting because we keep expecting big shifts coming out of COVID under the move-out reasons. And moving out to buy home really still hasn't changed from long-term average. I think because the cost of housing here is just a lot less affordable job transfers or other reasons, pretty darn similar and to our historical averages. And so, we have not seen any material change on move-out. Okay. And then just other question is on move-ins. Whether you're seeing any benefit from return to office, which has been a little bit of a slower process in some markets on the West Coast. I mean are you seeing any benefit from that in recent months, whether it's specific cities in the portfolio or even from your move-in data, if you are seeing any instances of people relocating back into your markets because we're now required to be in some sort of hybrid job in an office in your markets increasingly. And I'll just as well, congrats Angela and Mike as well. Congrats and once again, another good question on the in-migration. It's -- so I have mentioned that in the third quarter, we saw a pretty big uptick on the immigration to our market, 30% to 35% on average between Northern and Southern California. And of course, part of that is attributed to return to office. We have seen that trend continue in the fourth quarter. But keep in mind, fourth quarter is typically just a low demand period. So it's really difficult for us to be a particular trend. The only thing I can tell you is that compared to the first quarter, the in-migration is still better marginally, we're not talking huge numbers from that perspective, once again, fourth quarter is just a tough time to trying to get an indication of that. Mike, do you have anything you want to add? Yes. I just wanted to maybe add, we do some work, again, data analytics team that deals with micro com-patterns. And I guess I want to make a comment that it seems to be normalizing as well. Again, you had that mass exodus early on in the pandemic. And we been making progress and just back to the point where we've effectively placed all those jobs, but the places where people are coming from and going to, again, using LinkedIn data, not our own data appear to be pretty similar to what they were in the past. So generally speaking, the migration pattern here is we give people from the large Eastern and Midwestern metros. And actually, more recently, Dallas and Atlanta are on that list of incoming in the top and the place where people go, typically, people will retire, sell their house in California, their expensive house a new part of their retirement plan. And so, they go to a less expensive West Coast cities, notably Phoenix, Denver, Las Vegas. I'm staying and I'm looking forward to spending some time with the grandkids and that type of stuff. And I'm still going to be around, if Angela will have me, a role to be determined. So I love the Company and love what I do here. So not ready to completely check in this whole thing is really driven by Angela being ready, and that's what's important. And so do a great job. I'm very confident. And congrats again. Look, I just wanted to ask about, obviously, tech markets overall, right, where you guys are located, but maybe just kind of specifically, the tech exposure among your tenant base, if you have that number. Look, I get that they're kind of secondary, secondary tech jobs and secondary exposures to kind of tech jobs within your markets, but maybe just kind of explicitly tenants who are employed by tech employers if you kind of have that percentage for your residents. Yes, that's a good question. What we do is we track the top six because everything else is just too fungible on that number. So currently, we're about 7% of our tenant base is linked -- directly linked to the top six tech companies. And of course, it's much more concentrated in Northern California and Seattle relatively speaking. But that's a very manageable base. And of course, in certain assets or properties are -- that has a much closer proximity to the headquarters, the percentage will be disproportionately higher. Not a big change. We tend to kind of run between, say, 5% to 7%, and it kind of hovers around there? Got it. That's really helpful. And maybe just switching gears, wondering kind of the new versus renewal trends new lease kind of modestly negative and then kind of still in the 5% range for renewals for January, look, I think conceptually, if I understand correctly, if that trend kind of continues maybe would form kind of a game lease. So wondering maybe your thoughts on that, if you could kind of see that happening or maybe kind of renewal and new converge over time and kind of that gain to lease is informed? Yes, A couple of things. I just want to give you a little background first on the new lease rates. That, of course, is heavily impacted by our concessionary strategy, which is related to our occupancy strategy. And so part of that is not as much a market issue versus a strategy issue, and of course, that is something that we shift quickly away from the concessionary environment in January. And so, I don't want you to think that this is something permanent here to stay. And so -- but ultimately, with the renewal rate in an environment where new leases are on our S-16 expected to be about 2%, there is going to be a convergence of new lease and renewal rates and it'll probably take this full year to have that play out. My first question is when is FX current exposure to corporate housing? And then how do we reconcile the impact of job losses with a return to the office? Corporate exposure. Got it. Got it. So our current exposure is about 3%. And what's interesting about that number is during COVID, it actually went down to zero. And so we've been building that up. So last year, it was around -- got up to about 2.5%. Now keep in mind, in Seattle, it's going to move around because they -- it's a temporary nature, right? It comes in pretty heavy during the seasonal peak around July, and that can ramp the portfolio up to 7% and then goes back down around October as they leave. So, there's inherent -- there's an inherent cyclicality to that tenant basis. Got it. And my second question relates to the regulatory environment. Obviously, the markets that you operate and have gotten increasingly difficult -- increasingly difficult, whether it's rent controlled, Prop. 13, Seattle and Washington State potentially becoming an issue. So maybe can you walk through kind of your updated thoughts around this? And then whether you would look to diversify your portfolio over time, just given some -- given the more challenging operating environment? Yes. No, that's a great question, and I'll handle that one. Yes, we have been maybe a little bit surprised just how aggressive some of these actions are. We have a pretty strong advocacy effort that is driven by CAA in California and the local -- one of the local groups up in the Washington area. And so, we spend a lot of time working with those organizations and trying to advocate against those policies. Almost always those policies are sold on the basis of being good for the housing industry. And when, of course, we all know that, in fact, is exactly 100% wrong. It's the exact opposite. So, unfortunately, it's something that we have to deal with, and it is concerning to us and we spend a lot of time on it. The proposal in Washington is still very early on in the process. It's in the house, and it hasn't come out of committees. And as a result of that, I think there's still a long way to go. Again, we will be monitoring that. And -- but all of these different proposals tend to make California less appealing to a landlord and increase the risk of that occurring. So, to your point about other markets, I think I want to reiterate what I said before, which is we are tracking more markets now, 25 major metros across the country. We are looking for specific things. The things that essentially attracted us to California 30 years ago, let's say, and trying to rank those markets in terms of appeal and whether they can compete with the California markets. And we have some interest in some of them. I don't want to get into great detail at this point in time. But as I've said before, and I think actually, this last couple of quarters has played this out why this is important, it's about timing, and it's about making a shift at the appropriate time when our cost of capital is appealing, and we can enter at a point where we can feel like rent growth is going to continue in any of the markets across the country, including our market, San Diego, notably, Orange County, et cetera, if you get 30% to 40% rent increases, you're going to have a lot of supply that we'll hit. And you just can't keep growing. There has to be some change. The markets become unaffordable. The average person can't afford the rent in that location that causes people to move further out to find more affordable housing. The markets, in a certain sense, have a self-correcting mechanism in them. And this has always been the case. It's true here, it's true everywhere. And so we're going to thoughtfully make that decision at the appropriate time. Does that help? Adam, I wanted to follow up on your transaction market comments. Just curious, how you see the depth of the bid at the cap rates you throw out there. It'd be brought a substantial number of assets to the market, do you think they would trade in those then to high four cap rates you suggest? We're still seeing a gap between the bid and the ask. But we are we are seeing, I'd say, a muted volume of deals going down in that mid- to high 4s. So yes, if we got back to, I'd say, kind of normal volume, I think that's where we shake out today. Okay. Just so, I understand those cap rates, are those kind of initial buyer cap rates? Or are those your disposition yields? Well, so for Anavia specifically, what we quoted in the statement was disposition yield. What I'm saying the mid to high 4s, that's more of a buyer cap rate. Okay. Last question for me. Just Angela, curious for your thoughts on just the topic of just COVID impacts fully reversing. So as COVID in the rearview mirror, would you expect market rents in any of your Southern California markets that have seen huge cumulative rent growth to actually see absolute declines in market rents over the next few years? Keep in mind that market rent growth is a function of demand and supply. And so at this point, even looking out the next couple of years, supply is still relatively muted in Southern California and pre-COVID environment Southern California have performed really well. And so Southern California has similar employer base as the broad U.S. market. That's why we like it. It's less volatile, but it has a higher level of professional services, so better earning power. And for that reason, Southern California continues to be stable. And so, we wouldn't expect that because of COVID, absent the fact it's going to just suddenly fall apart. Just a question on the impact of return to work on the outlook in the -- on the West Coast. A lot of the technology firms have announced the office space rationalization, office space sales, could that be a headwind for rent growth in the next couple of years even if you have higher job growth, fewer people are in the cities because they're doing more hybrid work as these firms kind of reduce their footprint? Yes. Anthony, it's Mike here. Most of our portfolio actually is suburban in nature. So we have relatively little in cities -- and but we're thinking that return to office is something that will slowly evolve -- and there will be -- maybe we go from an average of two days a week in the office to three days a week in the office. And that will all -- anything that is more office-centric will pull people closer to our apartment community. So that would be a positive impact in our view. And so at this point in time, because people have moved further from the offices and that has cause us to readjust sort of our template for looking for potential acquisitions and other things. But over time, I think that all of us, including, I'd say, here at Essex, we have some of the same issues that we're better off. We're more productive. We make better decisions when we're together as a management group -- senior leadership group and super important to the overall results of the Company. So we think that return to office will be ultimately a tailwind. Maybe one more in terms of just been on buybacks, you made some good promise there last year. Do you think if fire-sell starts to agree that you can maybe increase the buyback amount year-over-year as you sell more assets? Yes. This is Barb. We'll assess that based on deal volume and whether we can create NAV and FFO per share. It's hard for me to tell you right now that we can do that in this environment. But it is something that we're cognizant of we have shown that we can run the machine and reverse many times over many different cycles. And so we'll be willing to do that if the right opportunities present themselves. And my congratulations on a fantastic career and all the best of your next chapter and best of luck Angela. So I just had a couple of follow-up questions left here on our list. I guess, first, I want to go back to expenses. Barb, I think you mentioned controllable expenses, you're expecting to be at 4% this year as part of the 5% guide, which I think is higher than a lot of us expected. So maybe can you go through a bit more of the building blocks of that 5% expense growth and maybe if there is any contrast versus say, Seattle, which doesn't have the Prop 13 benefit that California does? And if there is any benefit from the rollout of the property collections platform you mentioned earlier? Thanks. Yes, Haendel, on the expense growth, the 5%, really the biggest driver of that is non-controllables. That's up 5.5% to 6%. And really, the key factors are in utilities, were up 10% this year. We do expect high single-digit increases next year. Insurance is expected to be up 20% next year, is a very difficult insurance market. And then on real estate taxes, we've budgeted a 4.25% increase and that's really being driven by Seattle reverting more to our historical norms. So, those are the key building blocks on the non-controllable piece. On the controllable piece, 4% at the midpoint, and we do expect admin to be up only 3%. Once again, we do have elevated eviction costs in that line, which is masking some of the benefits from the rollout of the central services or the property collections model that we rolled out last year that centralized some of those functions. So, it's masking it a little bit this year. But overall, that should give you the major building blocks for why we have a little bit elevated expense growth. No, that's helpful. I appreciate that. But just so we're clear, how much impact in a more normalized environment would that property collections platform have? Well, so I said the eviction costs are about a 1% impact to controllable. So that's the factor you can use is it would be 1% lower. Occupancy, we've assumed is stable year-over-year, so flat, no change there. And then in terms of turnover, we did see elevated turnover in the fourth quarter. And given the eviction headwinds that we expect to face in getting the delinquent units back, we do expect turnover to be a little bit more elevated than historical norms. But it's good because then we get tenants in that are paying rent. So, we think that's actually a good thing. I just want to go back to a comment you made earlier in the call about distressed acquisitions, distressed acquisition opportunities coming up with some owners with floating rate debt. Can you talk more about what you're seeing, the magnitude? And do you think that's going to be something that pros as an opportunity set? Jamie, this is Adam. So we haven't seen much of that to date. We are -- it's more on the structured finance platform where we're seeing more opportunities on existing deals with maturing debt or with expiring rate caps. We do think this will accelerate into the year and provide potentially more opportunities like I said, probably more focused on the truck and finance platform versus acquisitions, but looking at it from everyday. Okay. And then I guess, sticking with structured finance, the impairments you took, how should we think about that, the risk profile of those investments versus the rest of the book or even deals going forward? Like was that just kind of at the higher end of your risk profile? Or the market conditions really just change that quickly that led to the impairments? Yes, I would say it's the latter. We didn't change our underwriting on that investment. We didn't go out wider on the risk spectrum or the curve. It really is a function of the Oakland market highly concessionary the developer wanted to sell, and we ultimately agreed to the sale. Now keep in mind, we actually made money on our investment for shareholders. We invested $11.5 million in this project, and we got redeemed $14 million. So, we made 7% annually for our shareholders, the coupon was 10%. So, we didn't quite earn what we thought we were going to earn, but we thought it was in the best interest of shareholders to take their money back and redeploy elsewhere. And so, we didn't lose money. And I think it is a unique function of that market. Right now, given I think there's 16 lease-ups in the market right now. Okay. And then finally, just thinking about the -- just in terms of the moratoriums, like how much of that is actually baked into your guidance, the upside, potential upside from LA and Alameda County? Well, what we have in our guidance is we do assume that gross delinquency will continue to trend down throughout the year as we are able to recapture our delinquent units. So right now, we have about 3% of our units are delinquent. That's down from 5% at the start of the year of 2022. And we expect that to continue to trend down. By the back half of the year, we expect to be in the 1.5 or lower range for the second half of the year. So, it is a function of the guidance. We do -- we have baked that in, that we'll get more of our units back this year. Okay. But in terms of the revenue upside, you also have that in really -- I'm just thinking if maybe they get extended past March 31. Is that a downside risk to the guidance or no? I don't -- we don't see that as being a downside risk because keep in mind what Mike said earlier about L.A. County, which is the new eviction moratorium is actually more strict than L.A. City was. And so, we don't see that being a hindrance to us. In addition, we are making progress. It's just -- it's taking a little longer than we expected. So, we don't see that as a significant downside at this point. Thank you, operator. I want to thank everyone for joining us today. Hope to see many of you at the Citi conference, and we definitely appreciate all the well-wishing for Angela and me. I want to note that it's been an absolute honor to work with so many of you. And so have a great day. Thank you for joining. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at the time and have a wonderful day.
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EarningCall_631
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Good day and thank you for standing by. Welcome to the BXPâs Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, thereâll be a question-and-answer session. [Operator Instructions] Please be advised that todayâs conference is being recorded. Iâd now like to hand the conference over to your first speaker today, to Helen Han, Vice President of Investor Relations. Please go ahead. Good morning and welcome to BXPâs fourth quarter and full year 2022 earnings conference call. The press release and supplemental package were distributed last night and furnished on Form 8-K. In the supplemental package, BXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G. If you did not receive a copy, these documents are available in the Investors section of our website at investors.bxp.com. A webcast of this call will be available for 12 months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although BXP believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in yesterdayâs press release and from time to time in BXPâs filings with the SEC. BXP does not undertake a duty to update any forward-looking statements. Iâd like to welcome Owen Thomas, Chairman and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Ray Ritchey, Senior Executive Vice President and our Regional Management teams will be available to address any questions. We ask that those of you participating in the Q&A portion of the call to please limit yourself to one question. If you have any additional query or follow-up, please feel free to rejoin the queue. Thank you Helen and good morning everyone. Today I will cover BXPâs continued strong operating performance as demonstrated in our fourth quarter and full year 2022 results. Iâll discuss key economic and market trends impacting BXP and finish with BXP's capital allocation decisions and activities. Despite increasing economic headwinds, BXP continued to perform in the fourth quarter and had strong overall operating results throughout 2022. Our FFO per share this quarter was above both market consensus and the midpoint of our guidance. Our FFO per share grew 15% in 2022 due to development deliveries and strong leasing activity. We completed 1.1 million square feet of leasing in the fourth quarter and 5.7 million square feet of leasing for all of 2022 which is 95% of our average annual leasing over the last 10 years. The weighted average term for leases signed in 2022 was 9.2 years. This success can again be attributed to not only BXP's strong client relationships and our team's execution, but also the increased share of tenant demand captured by premier workplaces, which are the hallmark of BXP's strategy and portfolio. BXP raised $1.2 billion in additional liquidity through a $750 million unsecured green bond offering and the extension and upsizing of a bank term loan ensuring funding for our sizable and substantially leased development pipeline in a challenging capital markets environment. And lastly on 2022, BXP continues to be a decorated industry leader in sustainability having most recently won Nareitâs Leader in the Light Award named the highest ranking real estate company and 29th overall on Newsweek's list of Most Responsible Companies and one of only eight property companies named to the Dow Jones Sustainability Index. Notwithstanding the running debate on whether the U.S. economy will experience a hard or soft landing, commercial real estate markets are currently in a recession. Many of our clients are experiencing a slowdown in growth or reductions in top line revenue and as a result are focused on cost control including moderating headcount and space use. We all read the daily headlines of layoffs which have been most significant in the technology industry, but are migrating into other sectors. Many companies, particularly in the technology sector are halting new requirements and/or giving back space to the market. The key culprit for the current economic slowdown is inflation, which sparked unprecedented federal reserve tightening measures last year, including rapidly increasing interest rates, quantitative tightening measures, and more regulatory scrutiny of banks. The better news is inflation is starting to come down. The federal reserves is expected to moderate further interest rate increases with the Fed funds rate possibly peaking around 5% and the capital markets with a 10 year U.S. Treasury at 3.5% and rallying equity markets are much less hawkish on inflation than the Federal Reserve. We are not able to predict the depth or length of the current economic slowdown, but its trajectory is coming into clearer focus. Our goal is to position BXP for success regardless of the economy's trajectory by carefully managing leverage and liquidity. The leasing activity is declining due to corporate earnings pressure. The premier workplace segment of the office market continues to materially outperform. Users are increasingly interested in upgrading their buildings and workspaces to attract their workforce back to the office, resulting in an accelerating flight to quality in the office industry. As described previously, CBRE is tracking the performance of premier workplaces in the U.S. and for the five CBDs where BXP operates, premier workplaces represent approximately 17% of the 700 million square feet of space and less than 13% of the total buildings. As of yearend 2022, direct vacancy for premier workplaces was 9.6% versus 14.7% for the rest of the market, also for all of 2021 and 2022, net absorption for premier workplaces was a positive 7.1 million square feet versus a negative 25.4 million square feet for the balance of the market. Rents and rent growth are higher for Premier workplaces and we believe the segment captures well over half of all leasing activity. Including two buildings undergoing renovation 94% of BXP's CBD space is in buildings rated as premier workplaces, which has been and will be critical for our leasing success. Moving to real estate capital markets for office assets, U.S. transaction volume slowed materially to $12 billion in the fourth quarter down 40% from the third quarter. Transaction volume across all real estate classes was down 36% over the same period. Mortgage financing is very challenging to arrange and available for only the highest quality leased assets and sponsors. First mortgage financing costs have risen materially over the past year based on both higher rates and credit spreads. Given the dearth of transaction activity, office asset pricing is difficult to determine, but it is clear cap rates have risen. There were a handful of BXP comparable transactions of note in the quarter. In the Route 128 quarter of Boston, two separate lab sales were completed for a total of $375 million, one sold to a REIT and another to an institutional investor. So one of the transactions is a redevelopment pricing parameters indicate a stabilized yield of at least 6% and pricing per square foot in the mid-900s. In Sunnyvale, California, two separate and fully leased office complexes sold for $415 million, one to a private real estate company and the other to an international fund. Initial cap rates ranged from 4.8% to 6.2% and prices per square foot from 1140 to 1230 [ph]. Regarding BXP's capital market activity in the fourth quarter, we closed both the previously described acquisition of a 27% interest in 205th Avenue in New York City and the sale of The Avant, a luxury residential building in Reston. For all of 2022 we acquired $1.6 billion of lab and office assets and completed over $860 million of dispositions of office and residential assets. So we have additional asset sales in our targeted pipeline. Completion of the dispositions will require more liquid capital market conditions. New acquisitions will be opportunistic and solely focused on premier workplaces, life science and residential development. BXP's volumes for acquisitions and dispositions are very difficult to predict for 2023 given current market conditions. Our development pipeline continues to be active delivering growth to our current and future financial results. This past quarter we fully placed into service the 1.1 million square foot Reston Next premier workplace, which is 90% leased on a long-term basis to Fannie Mae and VW of America. This project was delivered below budget on costs and is projected to yield 7.7% upon stabilization. We also placed into service 880 Winter Street, a 244,000 square foot, very successful office to lab conversion project located in Waltham that is 97% leased. We purchased the office building in 2019 for $270 a square foot, spent approximately $500 a square foot on the conversion and delivered the project at an initial cash yield of 10%. We also commenced the conversion of 105 Carnegie Center, a 70,000 square foot suburban office building in our Carnegie Center asset in Princeton to lab use. This is our first attempt at Life Science at Carnegie Center and we have life science clients reviewing the opportunity. There are two projects, 290 and 300 Binney Street in Cambridge that do not appear on our fourth quarter construction and progress schedule that we are commencing in the first quarter and have an impact on our current 2023 financial projections, which Mike will discuss in greater detail. As described on our last call, Biogen is in the process of vacating the 300 Binney Street office building and we will commence the conversion of the asset to lab use for the Broad Institute, which has agreed to lease the building for 15 years. We have also completed the necessary pre-development hurdles to commence the development of 290 Binney Street, a 570,000 square foot 16 story lab building leased to AstraZeneca for 15 years. We estimate that the project will cost approximately $1.2 billion and expect it to be delivered in 2026 at an initial cash yield in the mid-6% range. Given the annual escalations in the AstraZeneca lease, the initial FFO yield is materially higher. 290 Binney Street is a complicated development entailing the demolition of a 1136 stall parking garage, the temporary relocation of parking capacity from this garage, the construction of a subterranean vault, which will house an electrical substation currently being permitted by Eversource and other facilitating agreements. Commencing 290 Binney Street also creates an obligation for BXP to build 121 Broadway, which is a 37-story, 4,440 unit residential tower which will likely commence in 2024. In addition to these two buildings, BXP also has remaining rights for an additional 580,000 square foot life science building in our Kendall Center development, which due to upfront infrastructure costs carried by the first two projects has the potential to be developed at significantly higher yields than 290 Binney Street. These projects demonstrate the skill of BXP's development team in identifying an opportunity to creatively solve a community problem of locating a new electrical substation and having the expertise to bring the project to reality by solving problems for multiple interested stakeholders, thus creating a highly accretive development opportunity for BXP. After all of these movements and including the 290 and 300 Binney Street projects, our current development pipeline of 13 office, lab and residential projects as well as View Boston, the observation deck at the Prudential Center aggregates approximately 4 million square feet and $3.3 billion of BXP investment that we project based on delivery date and lease up assumptions to add more than $240 million to our NOI over the next five years at a 7.3% average cash yield on cost when stabilized. The commercial component of our development pipeline is 51% pre-leased. So in summary, despite adverse market conditions, BXP had another very successful quarter and year with financial performance above expectations, strong FFO growth, significant leasing success and robust investment and capital reallocation activity. BXP is well positioned to weather the current economic slowdown given our premier workplace market positions, our strong and increasingly liquid balance sheet, our significant and well leased development portfolio in progress, and our potential to identify additional investment opportunities in the current market dislocation. Thanks Owen. Good morning everybody. So Owen really spent some time describing the totality of what's going on at BXP. I'm going to be a little bit more concentrated today and talk about demand. Every day seems to bring another announcement of staff reduction from some large or medium sized employer. And while the cons -- these announcements have been concentrated in the technology industries, as Owen described, primarily big tech, we're also seeing them in the finance industry, the legal industry, and broader corporate America. Now I can point to examples of companies in our portfolio that are growing, but we are the first to acknowledge that the pool of clients overall demand that we serve is unlikely to be growing their overall footprint in 2023, aka hard to see much in the way of positive absorption. If there's a silver lining in the job reductions that are being announced, it's an improvement in the labor availability is manifesting itself in encouraging ways. Fewer job listings being offered for remote work. Forms of hybrid work seem to be sticky, but the power dynamic between employers and employees is shifting. Companies are stepping up the days that workers are asked, required, cajoled to come into the office. In our portfolio, we're seeing a steady increase in the number of unique occupants that are in the office each week. We measure the unique number of card swipes on a daily basis where we have turnstiles. These numbers vary day-to-day and if I compare the best day in March of 2022, which is after the last sort of COVID omicron surge versus the best day in January, so a week ago, across the BXP portfolio volume is up almost 40%. I don't know how others measure their usage. BXP measures against the number of seats we have in our spaces. On a daily basis utilization ranges from between 34% in San Francisco, 48% in Boston, and 58% in New York City. And if we look at the number of unique users coming into our buildings on a weekly basis relative to the number of seats, we're currently seeing as much as 82% in New York City, 76% in Boston, and 70% in San Francisco. Our clients are using their space, they're just not coming to the office every day. As Owen said, we've spent a better part of 18 months redefining our business with you as being developers and operators of premier workplaces. As Owen described in his comments, the bifurcation between premier product and general office space continues to widen. The availability rates published by the brokerage firms and reported as headlines in business publications and newspapers, track all of the space. A meaningful amount of the existing office inventory may have a higher and a better use as an alternative product and it's not relevant to users searching for space today. Conversions will happen and we are studying non-BXP buildings in our markets, but this process is going to take years. So the published statistics are going to be sticky even though much of the availability is not attractive to users at any price. In fact, it's hard to see a potential client looking at a BXP offering that would consider many of the buildings captured in the broad market surveys. Again, we have to acknowledge that there continues to be additions to of new sublet or soon to be direct opportunities in premier space from technology companies, 181 Fremont Street in San Francisco being the latest example. Availability in premier space matters, but other issues matter even more. The floor plate size matters. The build out configuration matters. Amenities matter. In markets like Boston or San Francisco, parking availability matters, and the specific location matters. As we explained in our press release last night, while our reported in-service occupancy has declined in the quarter as we said it would on our last call and in our Nareit meetings in November, it is simply due to the addition of new in-service buildings that have leases that have not commenced and are reported as vacant. This includes Reston Next that is 69% occupied and 90% leased and 880 Winter Street that's 85% occupied and 97% leased. Excluding those assets our occupancy was actually up this quarter from 88.9% to 89.1%, and if you do the math a little bit differently and we include those buildings at their least percentages, the portfolio would still be at 89.1%. So our in-service portfolio is picking up occupancy. As we sit here today, we have signed leases on our in-service vacancy totaling 1.5 million square feet. In the fourth quarter we completed 145,000 square feet of leasing in our development portfolio, which is now up to 1.6 million square feet leased when we include 300 Binney and 290 Binney, which is Owen said are not yet on our development pipeline. We completed two transactions totaling 90,000 square feet at 2100 Penn in the CBD of DC, which now stands at 81.3% leased. We executed 1.1 million square feet of leases in the fourth quarter with New York, Boston, and the DC regions leading the way with about 300,000 square feet each, in San Francisco is 200,000 square feet. 48% of the square footage came from new clients, 39% were renewals and 11% were expansions. Some of the renewing clients did reduce their footprint as part of the extension. Even in the midst of a slowdown in business activity and job reductions, there are still businesses that are expanding their footprints. The mark to market on the leases we signed this quarter were up 7% in Boston, 9% in San Francisco, flat in New York City and down 11% in DC. It should come as no surprise that we think BXP's premier workspace portfolio is highly differentiated, but on top of that, our operating teams are the best in the business. I want to describe three transactions we accomplished in the fourth quarter that illustrate our team's creativity. In Boston we were getting a 100,000 square feet block of space back in one of our assets. The team identified a client that typically does not do direct deals with landlords, but generally looks at sublet space. We engaged the principles in a tour of the space. The space was in great condition and we were able to secure a lease that met the tenant's desire to have an attractive annual rent as possible in a premier building with limited capital outlay and make a long-term commitment. The lease was executed in late December. In San Francisco a client with a fast approaching termination option in its existing non-DXP building wanted to move to View space. They toured the market in early in December and then identified two spaces in the 34% available market that met their needs. On December 26th, we signed a binding letter of intent. The client understood they were not taking any counterparty risk with BXP and we signed the lease for 50,000 square feet or two and a half floors that were vacant on January 16th. In October, our New York team identified a client that had a lease expiration and no ability to renew in place in mid-2023, which is a very tight timeline. We sent an unsolicited proposal for two vacant floors in our 53rd Street campus. With some persistence we were able to arrange a tour. We mobilized our construction department to deliver the space per their needs and in December we signed a lease for two vacant floors and an option for a third. Owen mentioned that we delivered our life science project at 880 Winter Street this quarter. We also completed our first lease at 651 Gateway. We have available space as well at our two developments in Waltham. The life science market is also experiencing a slowdown in demand. At the present time, we have not made any commitments to build additional projects other than 290 Binney Street, which is a 100% leases to AZ and the 70,000 square foot project that Owen described at Carnegie Center. It's a challenging market. There is not going to be positive market absorption in the near-term. We believe that BXP will outperform the market and we will lease our available space because our portfolio is fundamentally comprised of premier workspaces and the demand that is in the market wants to be in these types of properties. Medium and small financial and professional service clients will make up the bulk of the leasing we complete in 2023. We completed 72 leases during the fourth quarter. Only one lease was above a 100,000 square feet. Tour activity continues to be strongest in the Boston CBD and New York City markets where the concentration of technology users is less pronounced and the weighting market occupancy leans more heavily towards traditional, financial and professional services firms. Not surprisingly, the most active buildings in our portfolio are the GM building and 200 Clarendon. Great, thanks Doug. Good morning everybody. I plan to cover the details of our fourth quarter performance and the changes to our 2023 earnings guidance. However, I would like to start with a summary of our recent capital raising activities. We've been very busy in the capital markets and have substantially bolstered our liquidity heading into 2023. In the last 120 days, we've executed on three transactions in three different markets. We sold one of our residential buildings in Reston Town Center for $141 million and a 4.3% cap rate. We issued $750 million of five-year unsecured green bonds, and in January we extended and upsized our corporate unsecured term loan to $1.2 billion, an increase of $470 million. In aggregate, the net proceeds raised from these deals is $1.35 billion and we now have liquidity of $2.6 billion, which puts us in an extremely strong position to complete our development pipeline, including our recently commenced 570,000 square foot fully pre-leased, 290 Binney Street Life science project, as well as provide additional capital for other opportunities that may arise. We've also reduced our 2023 loan maturity exposure to $930 million, which is comprised of $500 million of senior unsecured notes that expired in September and five expiring mortgages totaling $430 million at our share. The majority of these mortgages have embedded extension options and we anticipate renewing or refinancing all of these facilities. Given the challenging state of the current debt markets, particularly with respect to the mortgage markets, we are very well positioned. Now I'd like to turn to our fourth quarter earnings results. We reported fourth quarter FFO of $1.86 per diluted share and full year 2022 FFO of $7.53 per diluted share. This is a penny ahead of the midpoint of our guidance and $0.02 cents ahead of street consensus. The improvement was primarily from better performance in our portfolio with our NOI of about $4 million or $0.02 per share ahead of our forecast. The outperformance was a mix of higher lease revenue, stronger results from our hotel in Cambridge and higher building service income, especially in New York City where we see the highest space utilization. The portfolio outperformance was partially offset by a penny of higher net interest expense related to our $750 million green bond offering that was not part of our original guidance. Although not part of FFO I do want to describe that we took a $51 million or $0.29 per share non-cash impairment charge in the quarter, reducing the book value of our equity interest in our Dock 72 property located in Brooklyn, New York. This building is owned in a joint venture where we hold 50%. The building has suffered from weekly leasing conditions in Brooklyn and last quarter the primary client contracted by two floors. It's currently just 25% occupied, although it is 42% leased, including leases that have not yet commenced. Overall, we had a strong year in 2022. We increased revenue by 8% and our FFO by 15% over 2021. Our growth came from our same property portfolio as well as our developments and our acquisitions. Our same property NOI increased 4% over 2021, which was the high end of our range, and on a cash basis it was even stronger with cash NOI growth in our same property portfolio of 6.5% over 2021. Our development deliveries added $0.24 per share to our 2022 earnings and our acquisitions net of our dispositions added $0.10 per share. Now I'd like to turn to an update to our 2023 guidance. As we detailed in our press release, the two most significant changes to our 2023 FFO guidance are the impact of commencing our 290 Binney Street development and the interest expense associated with our new financings. We did not incorporate 290 Binney in our guidance last quarter due to several significant contingencies we needed to clear prior to starting the projects that were outside of our control. Our team successfully closed out these items late in the fourth quarter and we were able to start the project in January. The development plan includes closing and demolishing the existing Binney Street garage. That garage produced $8.6 million of NOI in 2022, and we will lose this income in 2023 and going forward until the completion of the development, which will include a new underground parking facility. As Owen described, the project is projected to be highly accretive to our future FFO, and by the way, all the lost garage income is incorporated into those development returns. We are also required by GAAP to expense the garage demolition costs of approximately $3.2 million. We expect to incur the demolition expense in the first and second quarters of 2023 with no impact thereafter as the demolition will be complete. These two items related to 290 Binney Street will result in $11.8 million of lower FFO in 2023 or $0.07 per share. With respect to our financing activity, we disclosed in our press release in November that our $750 million green bond offering would add $0.08 per share to our 2023 net interest expense and reduce our FFO guidance. As a result, we expect the aggregate impact of starting 290 Binney and issuing incremental debt capital will reduce our 2023 FFO by $0.15 per share. Despite this, our new guidance range for diluted FFO of $7.8, to $7.18 per share is a reduction of only $0.09 per share at the midpoint from our guidance last quarter. That means we've increased the projected contribution to FFO from other areas. Also, we previously communicated the impact of our bond offering, so the reduction is really only a penny per share from our November adjusted guidance. The projected increases come from three places; first, excluding 290 Binney Street, our assumption for incremental contribution to NOI from acquisitions and development is up $0.02 per share. The increase is from higher contribution from our 205th Avenue acquisition and better than projected leasing in our development pipeline. Doug described the increased leasing this quarter in the pipeline and some of that will generate revenues in 2023. Second our revised assumption for net interest expenses are lower by $0.03 per share net of the impact of the bond offering, and this improvement is primarily from higher earnings on our cash balances and higher capitalized interest from changes in our development spend and higher interest capitalization rate. And last, we've increased our guidance for development and management services income by $2 million or a penny per share, reflecting higher projected construction management fees. So to summarize, we've modified our 2023 guidance range for diluted FFO to $7.8, to $7.18 per share, a decline of $0.09 per share at the midpoint. The changes are the result of costs from starting 290 Binney Street of $0.07 and higher interest expense from our bond offering of $0.08. And these reductions are partially offset by higher contributions to NOI from acquisitions and developments of $0.02 cents, higher interest income and capitalized interest of $0.03 and higher fee income of a penny. Our 2023 forecast result in a projected reduction in FFO of 5% from last year after growing 15% in 2022. The reduction is wholly due to the significant increase in interest rates as our portfolio NOI continues to grow and we have a significant pipeline of accretive developments that are delivering over the next few years. As Owen described, it appears that we are close to the end of the Fed's tightening cycle, so interest rates should not be the same headwind going forward. The last thing I would like to mention is that we intend to change the timing of our initial issuance of annual guidance starting next year. We plan to provide guidance for 2024 with our fourth quarter earnings release similar to the other companies in our sector. Thank you, sir. [Operator Instructions] I show our first question comes from the line of Camille Bonnel from Bank of America. Please go ahead. Hi, good morning. Your guidance mentioned higher contributions from acquisitions and development activities, but it looks like a few initial occupancy dates for offices and life science projects got pushed back a quarter into next year. Can you just provide a bit of color on what's contributing to this outlook and any comments specifically on how the leasing pipeline is going for your construction properties would be very helpful? Thank you. So we did a significant amount of leasing at 2100 Penn and a portion of that will contribute in 2023. We did push out by one quarter 360 Park Avenue South based upon where the leasing activity and the development activities are on that asset. And then the other place that we had a little bit of an increase was at 205th Avenue, which is an acquisition we made and we finalized the kind of accounting of straight line rents and fair value rents for that asset. So that's flowing through into our straight line rents next year, which our guidance is up for straight line rents. Doug, I don't know if you want to talk anything more about the development leasing. I mean, you talked about it a little bit on notes. Yes, I think in my comments I described sort of where we are, which is big picture we're about 50% leased on our, the totality of our development assets one. And by the way we'll be including next quarter 300 Binney and 290 Binney on our CIP schedule. The leasing is slow at 360 Park Avenue South. The leasing picked up as Mike said at 2100 Pennsylvania Avenue. We're very well leased at the other assets that that got brought on this quarter. So relative to 2023, I donât think youâre going to see much in the way of changes. Thank you. And I show our next question comes from the line of John Kim from BMO Capital Markets. Please go ahead. Thanks. Good morning. You spent a lot of time at your Investor Day talking about the occupancy upside potential given your near-term expirations. And I know a lot has changed since then, but you have leased 1.1 million square feet in the fourth quarter. And my question is, how does that compare versus your expectations at the time? And as you sit here today, is 1.1 million square feet, is that a good run rate for the rest of the year? Well, youâre asking if I described how we were thinking about the world in September versus the way weâre thinking about the world today, I would tell you that thereâs been a material change in the overall economy relative to the risk of recession and I think there is less demand in the overall environment than there was then. We still feel really good about the overall quality of our assets and the ability to capture incremental demand in the marketplace due to the nature of the tenants that are looking for space. And so again, we actually exceeded our own internal projections at the end of the year because we thought we would be slightly below where we were in the third quarter. And again, if you sort of adjust for bringing these new assets into service and simply put them in at their actual leased occupancy or remove them, we actually increased our overall occupancy during the year. And so I would tell you, if you look at our exploration schedules for 2023 and you look at the 1.5 million square feet weâve already leased, and we will, again, hopefully be leasing somewhere in the neighborhood of 750,000 to 1 million square feet per quarter, we should again be increasing our occupancy as we move through 2023. Yes, John, and just to add, I mean, weâve maintained our guidance for our same property portfolio and for our occupancy. So our kind of outlook is similar to what it was when we gave guidance last quarter. I think that our occupancy in the first quarter, so three months from now will likely be lower or flat than what it is today. But weâve got a lot of leases that are already signed that Doug described, the 1.5 million square feet that are coming into play. And I think thatâs starting in the second quarter we're going to see our occupancy grow from there through the rest of the year. And a lot of this occupancy is in coming in some of the major markets like New York City, we've got a number of leases that are signed that weâll be starting in the second quarter. Doug described a deal in Boston that we did just in December, and that deal is going to start in the second quarter. And we also have some deals in Reston starting. So I think that we feel weâve been conservative in our approach to our guidance based upon what we see future leasing activity as, but we feel good about the guidance that we provided. Yes, thanks, good morning. I didnât know if you could talk a little bit about maybe Platform 16 and 360 Park Avenue South. And I know both of those buildings were sort of geared towards tech tenants and Doug given your comments about slowing tech demand and even some of these tenants subleasing, Iâm just curious how youâre maybe altering the marketing program there or do you just need the macro environment to really get better to see traction on both of those buildings? So let me ask Hilary Spann to talk about 360 Park Avenue South, and Iâll ask Bob Pester to comment on Platform 16. Thanks, Doug. Hi, Steve, how are you doing? So at 360 Park Avenue South, the redevelopment is underway. We are very far along in discussions with a retail tenant that is going to be very exciting when weâre able to announce it. I think itâs fair to say that the demand for 360 Park Avenue South is diversified, but tilted toward tech and media firms because of its location in the Midtown South submarket. And to the point that everyone has been making on this call, that leasing velocity has slowed dramatically starting probably in the end of the second quarter of last year, maybe early third quarter of last year. And so weâre proceeding at pace with the development, and we expect to deliver it as per our original estimates. And some of the demand that we have seen for that building is actually in a more traditional industry groups, finance, the industries that support finance, et cetera, but no question that the leasing has slowed there. And so weâre thinking that rather than looking at 150,000s, we may be looking more at 50,000 to 75,000 square foot tenants to fill the demand for that building. Yes. Hi, Steve. So on Platform 16, the project doesnât deliver until 2025. And as weâve told them many times before that San Jose Silicon Valley market is a build and they will come market that typically tenants donât look at the buildings until they can walk the building or get a feel that this deal is going up. We still see it as a tech building. Itâs the only building thatâs going to deliver in that 2025 timeframe in the Silicon Valley itâs new. So weâre still optimistic that over the course of the next 24 months that tech user will materialize for the building. Thank you. And I show our next question comes from the line of Blaine Heck from Wells Fargo. Please go ahead. Great, thanks. Good morning. The fourth quarter seemed to be a slow leasing quarter in the overall market. U.S. BXP did relatively well compared to the market. But can you talk about whether you think youâve seen a change in the level of demand or leasing activity thus far this year? And maybe more importantly, what do you think needs to change to get some of the tenants that have been reluctant to sign longer leases to meet those longer-term commitments. So Blaine, I am -- and Iâll let Owen make a comment as well. I hope that my comments were both honest and thoughtful regarding what I think we think the demand picture is, which is there is less overall demand in the market today due to the nature of the business economies changes. And we donât think thereâs going to be much of any positive absorption occurring. We think we will lease more space than our peers because we have premier work places that are geared towards the tenants that are in the market and then that are making decisions. And I donât actually believe that the tenants that are looking for space are concerned about making long-term decisions. They are, in fact for the most part, making long-term decisions, and we are still doing longer-term leases in all of the leasing that weâve been doing in the last couple of quarters, some of it hasnât hit the lines yet in terms of our occupancy numbers. But so, I canât tell you how long the economy is going to be where it is, but as the economy recovers, traditionally jobs and/occupancy are second derivative events associated with that, and so it will be a period of time before tenants are "growing" again. But Owen, maybe you have some other ideas? Thank you. And I show our next question. Our next question comes from the line of Alexander Goldfarb from Piper Sandler. Please go ahead. Hey, good morning. Good morning. First as a comment, maybe Dock 72 would be good for resi conversion, if youâre taking suggestions from the cheap seats. A question for Ray, is in D.C., itâs good to see the politicians and including in Congress addressing the work from home endemic thatâs with the federal employees. My question for you though is, how much does work from home for government workers really affect like Reston Town Center and the private office market? I would guess that one, GSA doesnât really sign high-priced deals; two, just given whatâs been going on Iâm guessing more of the private investment market is focused on private companies or DoD or other security tenants who have to be in office. So just sort of curious your take on whatâs going on in D.C. and how much we need government workers to come back for the market to flourish? Well, first of all, Happy New Year, Alex. Thanks for the question. Itâs living here in the district, itâs really kind of frustrating to see the federal workforce not fully engaged in the return to work. The real estate roundtable has been very effective in reaching out to Mayor Bowser and really stressing to her the importance for the federal workforce return not only just in terms of consumption of office space, but the social fabric of the city is completely deteriorating with the workers not coming and weâre also very concerned about the impact upon metro. Before the pandemic, there was almost 800,000 riders a day on the metro. Now thereâs less than $300,000. And that will have an impact on the public transportation system here. As it relates to Reston, specifically, we have a very large portion of our tenants who are engaged in government contracting support to the federal government. And the policy of the federal government not to return to work also is impacting occupancy in Reston. And while many of them have the requirement to be in the office because of the security nature of their work, it still impacts the more traditional office support tenants for the federal government contractors. So itâs impacting Reston from presidents of the retail, it impacts things like the fitness center and other support activities we have in the building. So even though weâre a diverse tenant base there, the lack of the federal government coming to work is still impactful. We're really assisting to the leadership in the district, the importance for the federal government to return to their offices. Great, thanks. It seems like relative to your East Coast peers as West Coast markets continue to lag, I guess what sort of concern do you have for the long-term viability of a market like San Francisco? And if there were a bid, would you look to maybe allocate capital out of there? And then, Doug, one thing I wanted to clarify real quickly on your leasing comment. I think you said 39% of the leases this quarter came from renewals, some of which took the same amount of space versus some amount that downsized? What percentage of the same space versus downsized? Thank you. So Michael, I donât have all the data in front of me. When I actually looked at it the other day, in terms of the number of tenants, there were two or three tenants that downsized, but they were larger. I mean, the biggest example being, we had Zillow/Trulia, which renewed on two out of six floors at 535 Market Street, but there were one or two tenants like that. The majority in terms of the number of tenants that signed leases that did renewals actually were staying in basically the same number of square feet. And then it's Owen, to answer your question about West Coast and capital allocation, you are right. The West Coast is lagging from a return to office perspective and also from a leasing perspective, is driven by the fact that thereâs a much higher percentage of technology users in those markets and those users are not using their office to the same extent that their industries are. And so far, theyâve led other industries in terms of layoffs, which impacts space use as weâve described. Look, weâre going through a cycle and word cycle means it goes down and it comes back up. This has happened before. Every cycle is different, but they all look somewhat the same. And Iâm convinced this is a cycle as well and we will have a recovery. And I think the technology industries, the institutions that exist in California are not going to go away, but we are going to have to work ourselves through the recovery that we see ahead. Michael, one thing Iâd like to add is on the kind of tenants expanding versus contracting, we have done an analysis of the rent leases that commenced in 2022 for renewals. And we had about 4 million square feet of leases that commenced and we had actually those tenants expanded by 6% or almost 300,000 square feet. In the fourth quarter, it was a reduction of about 100,000 square feet, but overall, some expand, so contracting. Again, this is only tenants that renewed in our portfolio or they took on additional space before their lease came up. It doesnât have doesnât count tenants that either left our portfolio, and I donât know what they did before that or they came into our portfolio and we donât know what their size was before that. But thatâs a signal that not every tenant is contracting. There are many tenants out there that are continuing to take more space. Thanks. Good morning. If I could just play a little devil's advocate on the premier office, excuse me, Premier Workspace Motif that youâre talking about here. In a deep recession type of environment, is it potentially an outcome where you could see a reversal of the trends that youâre seeing relative to conventional more cookie-cutter office, where people are looking for cheaper alternatives and maybe your premier office product becomes more vulnerable in a deep recession type of scenario. Is that something that has happened clearly, itâs happened in the past, but I mean what gives you comfort that wonât be an outcome for you this time around? Yes. No, I certainly understand the logic of your question. Iâd answer it simply that history has not shown that to be the case. Higher quality buildings have outperformed in recessions in the past. And I think this recession is different because of the work from home and the flexibility that technology is providing for workers. And therefore, I think this flight to quality and change of how we describe our business from office to premier workplace is more important. I think the market share that the premier workplaces are getting in this downturn is actually much higher than it has been in previous downturns. And itâs important when you look at our business to not look at the overall market statistics but to focus on the premier workplaces because thatâs actually the market that weâre competing in. And I would just add, Rich, that two things. One is most, I think, of the economists pundits would say if we hit a recession, weâre not going to go into a clinical deep recession. But if you had a deep recession, and weâve had deep recessions in the past, typically, what has happened is there has been a compression in the pricing between Class A and Class B, meaning Class A has come down to a level that makes it so attractive that it squashes Class B demand. And people look at the relative opportunity set and jump at taking additional space in great buildings because there has been a dramatic reduction. We donât believe weâre any going to see "deep recession" but that is what has historically happened. Yes, thank you. I was wondering if you could comment on dispositions. And in terms of anything you might have in the market right now or expectations for this year and whether or not you think that could be additive or dilutive to where you put guidance at this point? Yes, we have assets that we would like to dispose of non-core assets. But as I mentioned in my remarks, the capital markets are very liquid just generally, but also, Iâd say, for office assets. And therefore, we didnât put out a guidance on what we thought dispositions were for this year because we donât -- the market is not cooperating at the moment. Hopefully, that will change, but we canât forecast that right now. And Tony, if something -- if we were to be in a position to sell something, unlikely that weâre going to put anything on the market in the beginning of 2023, which means any transactions that are likely to be weighted towards the far back end of the year. Thank you. And I show our next question comes from the line of Ronald Kamdem from Morgan Stanley. Please go ahead. Hey, just looking at the 1Q guidance of $167 million, when I compare that to the 4Q number of $186 million, any sort of -- thatâs a $0.19 delta, any sort of high level, how much of that is sort of the G&A seasonality versus this sort of onetime charge you talked about versus interest cost would be helpful? And if I could sneak another one in, just on the View Boston opening up in April, just sort of curious sort of how the marketing, how the interest and an update there would be helpful. Thanks. So while Mike looks at his numbers, Iâll let Bryan Koop just describe sort of where we are with our plans from a marketing perspective on the Observatory in Boston. And we havenât officially announced the date yet. So... Yes. The great news is, given what we worked during the last two years in construction, weâre actually ahead of schedule and turned out beautiful. Weâre doing marketing tours with people that would like to look at events in the future. Iâd say weâre oversubscribed on that, and weâre determining how we want to execute that because as each of these observatory locations are fairly highly bespoke and different. And we have a good deal of space that we can do the events. Pre-marketing is going really well. The City of Boston is gearing up for tourism and weâve seen a big response from that sector in call-ins to our team. And in general, weâre just focused on hiring people and getting staffed up for F&B and the overall staff, but we feel really great about it. We feel awesome about how itâs turned out. Itâs just spectacular. So Ronald, on the first quarter, youâre right, itâs obviously down because itâs seasonal. We have a hotel that is seasonal that because itâs located in Massachusetts it has very few people that come to it during the winter. So it actually loses money in the first quarter and that it has profit to the other three quarters of the year. And then our G&A expense is front-loaded because of vesting and payroll tax issues. And then obviously, we borrowed more money in the fourth quarter. So we expect our interest expense to be higher in the first quarter than it was in the fourth quarter. The portfolio itself is actually -- we expect it to be up slightly. And then going out for the following quarters because if we started $1.67, right and our guidance is much higher than that for the full year. Obviously we see pretty significant increases in the following quarters. And as I mentioned, we expect our occupancy to start to move up in the second quarter. Bryan just talked about View Boston, we expect that to open up in the second quarter. So there are several things that are occurring in the second and third quarters that are going to push the FFO up later in the year. Thank you. And I show our next question comes from the line of Dylan Burzinski from Green Street. Please go ahead. Hey guys. Thanks for taking the question. Just curious, I think the story thus far has been that office landlords have been able to hold base rents and theyâre giving up more on the concession side of things. But just curious, Doug, given your comments about not expecting positive absorption in 2023, is this the year that we start to see landlords sort of deal up on the face rent side of things? I guess, I donât think landlords, at least this landlord is never going to give up on anything. And we -- look, we have situations in our portfolio where we have very little space in a particular building. And weâre very comfortable and able to handle both relatively modest concession packages and strong face rates. We have other pieces of our portfolio where we have vacancy or availability where we are trying to be aggressive about increasing our occupancy. And so in those cases, we are thinking about all the arrows in the quiver and figuring out what the right approach is for a particular client that weâre trying to serve. Some of those clients would prefer to have free rent. Some of those clients would prefer to have more CapEx in terms of transaction costs. We might even agree to do turnkey builds in certain cases, and some of them may be looking for a lower "annual run rate" and sort of use the concessions in a different way. So I think itâs very hard to sort of try and articulate a particular component of an economic deal that is being done with a client of ours and sort of say, weâre going to gear towards one thing or another because we try and meet the needs of those clients. In general, transaction costs are higher. Why? Because there is more available space and itâs still very expensive for a company to move or relocate or grow, and the landlord is contributing capital for that, and itâs coming in the form of either additional free rent or additional TI, itâs generally not in the form of the "face rent" on the deal. And I donât think thatâs going to change much as we approach 2023. Hi, yes. Thank you. Just do you have any comments or commentary you can give around the restructuring announcement from Salesforce from about a month ago. I think they said theyâre both looking to divest their own real estate holdings, but also reducing their footprint, where they lease space. Any conversations youâve had with them and any impacts to your portfolio? Yes. So Iâll just make a comment, and then Iâll turn it over to Bob. So we have one building, which has a long-term lease with Salesforce.com, which is Salesforce Tower, which is to some degree, their preeminent building and is the preeminent building in San Francisco. And Bob, why donât you comment on any conversations weâve had with Salesforce regarding their utilization of space? Yes. Theyâve got multiple buildings on the market. Theyâve got 53 miner across the street that they own with 400,000 feet. They had several 100,000 square feet per lease in 350 Mission; they got space available, the space that was occupied by Slack. All the indications weâve had so far is, theyâve indicated no interest in subleasing any of the space in the tower. But if they do, weâve got 9-plus years existing weighted average lease term on their lease in that building. So weâre really not too concerned about it. We do get calls constantly about major tenants. We just had one this past week for 100,000 feet, that would like to be in the tower, but we donât have any space available. Hi, good morning. Just a question on acquisitions, what you target in terms of [indiscernible] space changed in the past few months given the environment, would you be less willing to do deals like 360 Park Avenue, given the leasing there and more targeted sort stabilize or financial tenants. Maybe just comment on what youâre looking for would be great. So as I mentioned at the outset, we have the capital in the balance sheet to make additional acquisitions but we are in -- the market is repricing. And so, yes we are going to be very focused on valuation for any acquisitions that we would look at in the coming year. Yes, I would also say I would add to that. We are, as I mentioned in my remarks, our focus is going to be on premier workplaces, life science and residential development. Yes. And I would just add the following, which is if weâre looking at an existing asset, theyâre obviously, if we canât make it a premier workplace, weâre not going to spend time on it. If we think we could, then itâs going to be a question of what our views are on how long it will take us to lease up the space. And I would say that weâre constructive about our markets, but we are realistic as I think all of our comments this morning were about the overall absorption of space in the marketplace. And so, Iâm not sure our underwriting is necessarily going to match with the sellerâs expectations for what they think their buildings are. We will look at stuff. We will be thoughtful about it. We will make offers. But whether thereâs inability ability for there to be a meeting of the minds, I would say weâre skeptical that will happen in 2023. Thanks. A question for, I guess Owen or Doug, I was hoping to get a feel for -- as youâre having conversations with your JV partners, pension funds or other potential institutional partners, what is their attitude right now towards office space, particularly in relation to investing incremental capital into buildings? What types buildings are still possible, what arenât? And ultimately, how you think this is all going to affect office building values? Yes, I think generally, institutional investors in real estate, not just the office are cautious at the moment given higher interest rates, slower leasing volumes that Doug just described and what the repricing is. And so, I think investment volumes generally from institutional investors have gone up â have down materially. So as it relates to office, I think itâs going -- I think there is capital available from institutional investors for premier workplaces that are underwritten with the new cost of capital as well as the leasing dynamics that Doug described in the last question, which is we have a slower leasing environment and the assumptions when youâre underwriting a deal need to reflect that. But assuming you have all those pieces, I think thereâs capital available for premier workplaces. I also think the other thing to think about here too is the -- we talked about the institutional investment world as its some homogenous group of investors. Well, itâs not. They all come from different geographic locations. They all have different funding sources. They all have different funding obligations, and so they donât operate in a unified fashion. So my comments are not targeted to any one group, but I would just point that out. Thank you. That concludes the Q&A session. At this time, Iâd like to turn the call back over to Owen Thomas, Chairman and CEO for closing remarks.
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Welcome to the OMV Group's conference call. [Operator Instructions]. You should have received a presentation by e-mail. However, if you do not have a copy of the presentation, the slides and the speech can be downloaded at www.omv.com. Simultaneously to this conference call, a live audio webcast is available on OMV's website. At this time, I would like to refer you to the disclaimer, which includes our position on forward-looking statements. These forward-looking statements are based on beliefs, estimates and assumptions currently held by and information currently available to OMV. By their nature, forward-looking statements are subject to risks and uncertainties that will or may occur in the future and are outside the control of OMV. Therefore, recipients are cautioned not to place undue reliance on these forward-looking statements. OMV disclaims any obligation and does not intend to update these forward-looking statements to reflect actual results, revised assumptions and expectations on future developments and events. This presentation does not contain any recommendation or invitation to buy or sell securities in OMV. I would now like to hand the conference over to Mr. Florian Greger, Head of Investor Relations. Please go ahead, Mr. Greger. Yes. Thank you, and good morning, ladies and gentlemen. Welcome to OMV's conference call for the Fourth Quarter 2022. With me on the call are our CEO, Alfred Stern; and Reinhard Florey, our CFO. As always, Alfred will walk you through the highlights of the quarter and discuss OMV's financial performance. And after that, both gentlemen will be available to answer your questions. Thank you very much, Florian. Ladies and gentlemen, good morning, and thank you for joining us. After a very strong macro environment in the third quarter of 2022, the warmer-than-usual winter weather in Europe and rising COVID cases in China fueled demand concerns and drove oil and gas prices down in the fourth quarter. Brent oil prices decreased to around $89 per barrel on average for the quarter. European gas spot prices fell by around 50% due to the high filling level of storage facilities driven by mild weather and the prospect of increasing LNG importing capacity in Europe. Refining margins significantly increased quarter-on-quarter, supported by the diesel and jet fuel cracks in anticipation of the upcoming ban on Russian products in Europe. Olefin margins in Europe decreased compared to the third quarter driven by lower demand and ample supply. Polyolefin margins recovered from the low level of the third quarter but remained substantially below the strong prior year quarter when imports in the European market were constrained due to shipping bottlenecks. With around EUR 2.1 billion clean CCS operating result and EUR 1.2 billion cash flow from operating activities, excluding net working capital effects in the fourth quarter of 2022, we ended a year that was exceptional in many ways. In 2022, we generated in total EUR 11.2 billion in clean CCS operating result and [Technical Difficulty] despite huge negative working capital movements. Our strong underlying cash flow, disciplined capital spend and the strong balance sheet enable us to deliver on our progressive dividend policy and to continue with the transformation of the company. For the financial year 2022, we will propose to the annual general meeting a regular dividend of EUR 2.80 per share, an increase of 22% versus the prior year regular dividend, which marks a new record in OMV's history. This is in addition to the special dividend of EUR 2.25 that we already announced back in October last year. Looking at operations. Year-on-year polyolefin sales volumes went down slightly, while fuel sales volumes were flat. The utilization of the European crackers and refineries recovered, oil and gas production was lower year-on-year, but at a similar level quarter-on-quarter. We were very active in advancing the execution of our strategy with a strong focus on sustainability. We signed an MOU with Wood for the commercial licensing of OMV's proprietary ReOil technology for chemical recycling. We joined the consortium of the Methanol-to-Sustainable Aviation Fuel project in Germany, aiming to develop a new process technology to use sustainable aviation fuel as a drop-in fuel up to 100%. We signed additional MOUs with European airlines to supply sustainable aviation fuel. With these new agreements, the total sales volumes amounts to up to 1.3 million tonnes in the period 2023 to 2030. And we conducted a production and injection test to analyze the geothermal potential in the Vienna Basin, and the results were successful. Regarding the circular economy, we acquired an additional stake in Renasci, a Belgium-based provider of innovative recycling solutions in which we now have a maturity share because we are convinced of the potential of Renasci's patented smart chain processing concept. The concept enables the processing of multiple waste streams using different recycling technologies under one roof, resulting in the exceptionally high valorization of waste. By leveraging its market access know-how and innovative technological capabilities, Borealis will accelerate the implementation of the smart chain processing concept and will also explore opportunities for replicating the model in strategic locations. The acquisition will support our goals by providing increasing long-term access to chemically-recycled feedstock from Renasci's Austrian facility and by enabling access to key circular technologies. We are proud to have been recognized once again as a sustainability leader by S&P Global and were included in the Dow Jones Sustainability World Index for the fifth time in a row. We are one of the top 10 energy companies globally and one of Europe's 5 sustainability leaders in the energy industry, and we are still the only Austrian company listed in this prestigious index. Last but not least, as of January this year, we have introduced a new corporate structure to drive sustainable growth and innovation. In addition to the CEO and CFO areas, we have 3 business segments: Chemicals & Materials, Fuels & Feedstock and Energy. We are happy to welcome Daniela Vlad as the new Executive Board member responsible for Chemicals & Materials who joined us yesterday. Let's now turn to our financial performance in the fourth quarter of 2022. Our clean CCS operating result in the fourth quarter of 2022 rose by 5% to around EUR 2.1 billion. However, it's decreased by 40% compared with the extraordinarily strong third quarter of 2022, mainly driven by falling oil prices and the correction of gas prices. The clean CCS tax rate increased to 54%, which was 17 percentage points higher than in the same quarter of the previous year due to a higher share of E&P and the group profits. And therein, an increased contribution from E&P countries with a high tax regime. The solidarity contribution in Austria came in lower than expected at around EUR 90 million, and it was recorded as a special item. As a result of the increased tax rate compared to the fourth quarter of 2021, the clean CCS net income attributable to stockholders declined by 31% to EUR 700 million. Clean CCS earnings per share fell to EUR 2.14. Let's now discuss the performance of our business segments. The clean operating result of Chemicals & Materials dropped sharply to EUR 57 million. The result was impacted by a slowdown of the chemical sector reflected in weaker margins and volumes and substantial negative inventory valuation effects in polyolefins and the Nitro business as well as a lower performance of the joint ventures. We have seen a huge swing of around EUR 200 million in inventory valuation effects. While in the prior year quarter, the inventory effects were positive and supported the result. In the fourth quarter of 2022, we recorded negative effects of around EUR 100 million, which weighed on the results. The polyethylene indicator margin declined by 19%, while the polypropylene indicator margin decreased substantially by 42%. The ethylene indicator margin improved by 7% supported by reduced supply. The propylene indicator margin went down by 12% due to increased supply as a result of high refining runs. As a consequence in our European operations, we recorded a negative market impact of around EUR 100 million compared to the fourth quarter of 2021. Despite weaker propylene margins and lower cracker utilization rates, the performance of OMV's operated base chemicals business increased supported by the insurance proceeds related to the incident at the Schwechat refinery in 2022. The contribution of Borealis excluding the joint ventures turned negative to minus EUR 23 million impacted by a negative nitro result, lower polyolefin margins and sales volumes and substantially lower inventory effects in polyolefins. In Borealis Base Chemicals business, the weaker propylene margins and cracker utilization rates were, to a large extent, offset by slightly higher ethylene margins and increased light feedstock advantage and an improved phenol business contribution. The contribution from the polyolefin business saw a significant decline impacted by the large negative inventory effects and a drop in margins and sales volumes. As a result of cautious European buying sentiment, sales volumes decreased by 11% with a more pronounced decrease in polypropylene as it has a greater exposure to the more cyclical durable goods. The decline was seen in the Consumer Products & Infrastructure segments, Volumes in mobility and energy marginally increased. While the realized margin per tonne for the specialty products slightly improved, the realized margin for the standard products declined more than the indicator margin due to higher utility costs. The performance of the JVs decreased by EUR 119 million driven by a negative contribution from Baystar and a lower contribution from Borouge compared to the prior year quarter. Borouge results significantly driven by industry-wide pricing pressure and the lower share of OMV following the listing of the company in June 2022. Polyolefin prices in Asia fell due to new production capacities and depressed Chinese consumer demand caused by lockdowns and the real estate crisis. The negative market impact on Borouge could only be compensated for, partially by higher sales volumes driven by the full ramp-up of the new polypropylene unit. At Baystar, the ethane cracker recorded a low utilization rate in the fourth quarter of 2022 due to operational issues during the start-up and the hard freeze in Texas in December, which led to its shutdown. Combined with the weak market environment, the revenues at Baystar were limited, while costs increased due to the charge of full depreciation after the start-up and higher interest expenses. The clean CCS operating results in Refining & Marketing almost doubled to EUR 714 million due to very strong refining indicator margins, a significantly higher contribution from ADNOC Refining & Trading and insurance proceeds related to the incident at the Schwechat refinery in 2022. This was partially offset by a substantially reduced contribution from gas and power in Romania, higher third-party supply costs, increased utility costs and the low retail contribution. Total sales volumes were at the same level as in the fourth quarter of 2021. The divestment of the retail volumes in Germany was compensated for by an increase in jet fuel sales volumes following a recovery in the aviation market. The retail business performance declined, impacted by market price regulations in some countries and voluntary discounts in Romania, the missing contribution from Germany and higher costs. The contribution of the commercial business was similar to that in the fourth quarter of 2021 with constant volumes and margins. The contribution from ADNOC Refining & Trading rose from EUR 14 million to EUR 114 million, driven by higher refining margins and the strong performance of ADNOC Global Trading. The result of Gas & Power Eastern Europe decreased by EUR 87 million [Technical Difficulty] regulations related to the extended scope of Cap prices and overtaxation for both gas and power in Romania in the amount of EUR 150 million. gas and power margins could only partially offset this. The clean operating result of exploration and production increased by 15% to EUR 1.3 billion. The higher realized commodity prices and the stronger dollar more than offset the lower sales volumes caused by the exclusion of Russian volumes, higher operational costs, gas overtaxation in Romania of around EUR 90 million and the negative result in the gas marketing Western Europe business. Compared with the fourth quarter of 2021, OMV's realized oil price increased by 12%, in line with Brent. The realized cash price rose by 71% compared with the prior year quarter driven by the increase in gas prices in Europe and the exclusion of Russian gas volumes. Production volumes decreased by 106,000 to 385,000 BOE per day, primarily due to the change in the consolidation method of Russian operations. Higher production in the UAE after a revision of OPEC restrictions compensated for decreased production in all other countries. Production costs rose by 43% to $9.10 per barrel significantly impacted by the exclusion of the low cost Russian gas volumes and global cost pressures. Sales volumes declined to 367,000 BOE per day driven by the change in Russia consolidation compensated for by higher sales volumes in Libya and in the UAE. Depreciation increased by EUR 74 million, mainly driven by a higher asset base, partially following write-ups and increased production in the UAE. The gas marketing business in Western Europe recorded a loss of EUR 77 million due to supply curtailments from Gazprom. In the fourth quarter of 2022, we experienced significant volatility in the delivered gas volumes from Russia and market prices, which weighed on our efforts to adjust the hedged volumes and led to losses. This negative impact was partially offset by our LNG and Logistics business. OMV holds a throughput agreement in Gate an LNG reclassification terminal in Rotterdam. Given its key role in our operations of securing gas supplies, we decided to include its contribution in our clean operating results starting with the fourth quarter of 2022. Turning to cash flow. Our fourth quarter operating cash flow excluding net working capital effects was EUR 1.2 billion, significantly lower than in the fourth quarter of 2021 when we received a special dividend from Borouge of EUR 1.3 billion. In addition, our tax payments in Norway were around EUR 700 million higher than in the fourth quarter of 2021. Net working capital effects generated a positive cash inflow of around EUR 200 million, driven by lower prices and volumes in chemicals and materials and lower liftings in exploration and production, partially offset by negative working capital in refining and marketing due to increased stocks. Cash inflows related to gas storage withdrawals were only small as the weather was mild and gas was only withdrawn to a limited extent. As a result, cash flow from operating activities for the fourth quarter was around EUR 1.4 billion. The organic cash flow from investing activities generated an outflow of around EUR 900 million. This included the ReOil demo plant; the PDH plant in Belgium; the coprocessing unit in Schwechat; maintenance of European refineries; and E&P projects in Romania, the UAE and Austria. As a result, the organic free cash flow before dividends for the fourth quarter came in at EUR 534 million. Looking at the full year picture, cash from operating activities excluding net working capital amounted to EUR 9.8 billion, up by almost EUR 1 billion compared to 2021. Despite the cash outflow for net working capital effects of more than EUR 2 billion, cash flow from operating activities in 2022 was up 11% to EUR 7.8 billion. After payment of almost EUR 1.5 billion for dividends to shareholders, minorities and hybrid holders, the organic free cash flow amounted to EUR 3.4 billion. Moving on to the balance sheet. We have been able to further reduce net debt by around EUR 500 million to EUR 2.2 billion since the end of September 2022. As a result, our leverage ratio further decreased to 8%. At the end of December 2022, OMV had a cash position of EUR 8.1 billion and EUR 5.2 billion in undrawn committed credit facilities. We have updated our capital allocation priorities framework and included special dividends as a new additional instrument to the existing progressive dividend policy as announced mid-December. Special dividends are not a onetime event, but they are part of our principles of allocating capital and rewarding our shareholders. We are committed to delivering an attractive shareholder return. According to our new capital allocation policy, first priority is to invest in our organic portfolio; second, to pay progressive regular dividends; third, to pursue inorganic opportunities for an accelerated transformation; fourth, deleveraging; and fifth, to pay special dividends. When our leverage ratio is below 30%, we aim to distribute approximately 20% to 30% of our yearly operating cash flow, including net working capital effects to our shareholders through the regular dividend as a priority. And additionally, if sufficient funds are available, through the new instrument of a special dividend. Of course, when determining the levels of dividends, we will also take into consideration the company performance and the economic outlook. If the leverage ratio is 30% or higher, only our progressive regular dividend will be paid. The progressive dividend policy for the regular dividend is unchanged. We aim to increase or at least maintain our regular dividend at the respective prior year level. Ladies and gentlemen, we have delivered strongly on this promise. As mentioned before, we will propose to the annual general meeting a regular dividend of EUR 2.80 for the financial year 2022, an increase of EUR 0.50 per share or 22% versus 2021. This is not only a new record dividend but also the highest increase of regular dividends in a year in OMV's history. Together with a special dividend of EUR 2.25 per share announced already in October, our total dividend for 2022 will amount to EUR 5.05. Both dividends are subject to approval of the annual general meeting and will be paid in June 2023. Ladies and gentlemen, I think this is a strong testament to our promise to reward our shareholders. I would like to give you an update on the synergies program we announced following the acquisition of Borealis in 2022. By 2025, we expect synergies of more than EUR 800 million from operational cost savings, combined purchasing, debottlenecking, value chain optimization and tax benefits. The program is well on track. In 2022, once again, we achieved more than EUR 200 million. After 2 successful years, we have already achieved more than half of the targeted synergies. In the coming years up to 2025, we expect synergies in the range of EUR 150 million to EUR 200 million per year. I will now move on to the outlook and start with capital spending. We are expecting organic CapEx of around EUR 3.7 billion, in line with our strategic commitment of around EUR 3.5 billion per year until 2030. We have already included some inflation rate assumptions in our CapEx budget, and we are very disciplined in sticking to the plan when it comes to spending. In Chemicals & Materials, our organic CapEx is estimated to be around EUR 1.1 billion. If we exclude the noncash leases, our organic cash CapEx in 2023 in Chemicals & Material increases by around EUR 100 million compared to 2022. Major projects are the PDH plant in Kallo, the ReOil demo plant at our integrated chemical and refining site in Schwechat and the FID for the mechanical recycling plant in Austria. The ReOil plant is planned to start up in the second half of 2023 at the Schwechat refinery and will have a design capacity of 16,000 tonnes per year. Plastic waste that is not fit to be mechanically recycled and would otherwise be sent to waste incineration, will be turned into raw material, and later processed into virgin quality-based chemicals. The feedstock will be sourced in Austria in cooperation with local waste management companies. The startup of the demo plant is an essential step for the construction of the 200,000 tonne world-scale plant by 2026. In fuels and feedstock, our organic CapEx is estimated to be around EUR 1 billion. We will invest in finalizing the coprocessing plant in Austria, building a new unit for aromatic products and performing the necessary maintenance turnaround at the Petrobras refinery. The new coprocessing plant at the Schwechat refinery will have the capacity to process up to 160,000 metric tonnes of vegetable oil, waste products or advanced feedstocks, together with fossil-based materials into sustainable fuels. The plant is planned to start up in the second half of 2023. In energy, organic CapEx will increase to EUR 1.6 billion, given our plan to develop gas projects in Romania, the UAE, Norway and Malaysia. In Romania, we are working toward the FID of Neptun planned for the middle of this year. In Malaysia, we are progressing with the development of the Jerun field, which is scheduled to start production in 2024 with an estimated plateau production of around 25,000 BOE per day for our share. We will also invest in line with our 5% share to develop the Ghasha mega project in the UAE with first production expected in 2025. For the Berling gas field in Norway, where we hold a 30% stake, and we are the operator, we took FID for development in December 2022, and first gas is expected in 2028. Over the strategic period until 2030, we remain committed to spending around 40% of our organic CapEx on sustainable projects. Let me move on with an outlook for commodities and operations in 2023. Before I go into the details, as I mentioned, starting with the first quarter, we adjust our reporting structure of the 3 segments. Chemicals & Materials continues to cover the entire chemicals value chain. Fuels & Feedstock will cover the refining and marketing areas, excluding the eastern gas marketing business, which is now included in the Energy segment. The Energy segment includes the traditional exploration and production business, the entire gas marketing business and the new low-carbon business. 2023 will likely be another challenging year with only moderate global GDP growth, high inflation, lower confidence and tighter monetary policy. We assume commodity prices will come down from the exceptional level of 2022. We forecast an average Brent price above $80 per barrel in 2023. The DAG gas price is forecast in the range of EUR 60 to EUR 70 per megawatt hour, and the OMV average realized gas price is expected to be around EUR 35 per megawatt hour. In Chemicals & Materials, we believe the market environment will remain challenging at least in the first half of 2023. Inflation, low GDP growth, high energy prices, subdued demand and higher capacities are expected to weigh on margins. In Europe, we forecast the ethylene indicator margin to be slightly lower than the level of 2022 at around EUR 530 per tonne. The propylene indicator margin is expected to decline compared to 2022 to around EUR 480 per tonne due to an increase in European refining runs following the Russian diesel export ban. The European polyethylene indicator margin is forecast at around EUR 350 per tonne in 2023, while the polypropylene indicator margin is estimated to be around EUR 400 per tonne. The prior year margins had benefited from a strong first half year. The utilization rate of our European steam crackers is forecast to increase significantly compared to 2022 to around 90%. We have several planned turnarounds this year. The Borouge 2 cracker is underway until March. In the second quarter, the Schwechat cracker. And in the third quarter, the Porvoo cracker. The polyolefin sales volumes of Borealis includes JVs -- excluding JVs, are projected to be slightly higher than the 2022 level. In order to offset ongoing market pressure, we initiated a value enhancement program in chemicals and materials, which is expected to deliver around EUR 100 million in 2023, coming from cost efficiencies, commercial excellence, asset reliability uplift and energy efficiencies. We expect the Baystar ethane cracker to resume operations by the end of February, with efforts focused on stabilizing production and increasing utilization rate. The construction of the 625,000 tonne Borstar polyethylene plant is close to mechanical completion and commissioning activities are progressing. The plant is expected to start up at the end of the first quarter. Upon start-up, Baystar will run a 1 million ton integrated ethane to polyethylene production complex in Texas. Ethane prices in the U.S. are expected to be lower in 2023 due to strong gas production supporting the ethylene margins. The demand for polyethylene remains hampered by weak economic fundamentals. In Fuels & Feedstock, the refining indicator margin is projected to drop from the record level of 2022 to between $10 to $15 per barrel. The start to the year has been strong. However, we expect normalization in the quarters to come. We anticipate the utilization rate of our European refineries to increase to around 95% including a planned turnaround at the Petrobras refinery in the second quarter. Despite the divestment of the retail network in Germany, total product sales volumes are projected to be slightly higher than in 2022, supported by demand recovery in aviation. Retail margins are estimated to be around the 2022 level, while commercial margins are expected to increase following the removal of price caps. In Energy, we expect average production of around 360,000 barrels per day in 2023, following the exclusion of the Russian volumes and natural decline, in particular in Norway and Romania. Exploration and appraisal expenditures for the group is expected to be around EUR 200 million to EUR 250 million. Production cost at OMV group level is expected to be above $9 per barrel for the full year 2023 due to inflationary pressure. Looking at cash flow, I would like to mention that our outstanding tax liabilities in Norway for 2022 amounts to around EUR 2 billion due to significantly higher commodity prices and are expected to be paid in the first half of 2023. With regard to cash inflows, we expect to receive around $234 million from Borouge in the first quarter of 2023 as remaining dividends for 2022 and at least $468 million for 2023 to be paid in part in the third quarter of 2023 and the remainder in 2024. The divestment of the Nitro business with an enterprise value of EUR 810 million is expected to be closed at the end of March, conditional to the EU antitrust approval. Regarding the divestment of the Slovenian business, we are waiting for the buyer to obtain clearance from the EU antitrust authority. Closing is expected in the first half of 2023. The clean tax rate for the full year is expected to be around 50%. Yes. Thank you, Alfred. We now come to your questions. [Operator Instructions]. Today's Q&A session will start with questions from Josh Stone, Barclays. Two questions. Firstly, on -- focusing on the Chemicals division and the weak performance in the fourth quarter. You've highlighted some related to inventory effects and weaker margins, but you also highlight higher utility costs. Are you able to say just how much of the underperformance relates to these higher utility costs? Because presumably some of that's going to come out as we go into 2023 with the fall in power prices. And maybe on that, any other notable negatives that you'd like to highlight that you think will come out and unwind for next year? And then secondly, on acquisitions, can you update us on your appetite for acquisitions in the chemical space? Have you narrowed down the type of businesses you're looking at? And can you also talk about your preference for going to listed chemical companies versus buying assets? Yes. Thank you, Josh, for your questions. Let me start with the Chemicals & Materials performance, where we have seen compared to the last year, of course, a huge swing in inventory contributions last year in '21, so second half year '21, we had a positive contribution. And then in the fourth quarter of '22, it turned negative, which provided for quite a significant piece. What we have also seen then in the fourth quarter that we had a poor performance by the Nitro business also to a significant degree driven by inventory effects coming into that business. And last but not least, really the significant driver, also the start-up issues related and the winter freeze issues related to the Baystar cracker -- Baystar joint venture cracker, where we started the full depreciation after the startup, but then not enough production. So we are working hard in order to bring this back on stream and are expecting by the end of February, they should be working. On the M&A for chemicals, our strategy in Chemicals & Materials is continuing the same, where we said we want to use our strong basis of leadership position in polyolefins today. And in this polyolefins business, we want to drive geographic expansion. We want to drive the sustainability and transformation with a circular economy and recycling. And our organic growth projects there with PDH, the Baystar joint venture and Borouge 4 will provide already for about a 30% growth in monomers and a little bit more in polymers by 2025. What we also said is that we are open to acquisitions to accelerate the growth. And that was not only constrained to polyolefins, but also potentially do a diversification of the portfolio. But we also said it needs to be value accretive to our activities where we can do that. So this is still the same intention that we have, and we are always actively looking at the market for opportunities. Really, congratulations on the record dividend. I think it's certainly very welcome news to the shareholders. I had 2 questions, if I may. The first one, you're clearly accelerating your green CapEx. I was wondering if you could actually quantify under the EU green taxonomy what is your eligible number for revenues and for CapEx. And secondly, I wondered how your negotiations are going with the Romanian government over potential windfall taxes and if there's been any development there. Michele, regarding the green CapEx and the eligibility, we will come up with these numbers in the course of our sustainability report, which will come out in March. So therefore, I cannot give you the number today. So this is something that, of course, is very relevant for us. And as we are heavily investing also in those sustainability businesses in more or less all 3 of the segments that we have, this also has to be proven that it is EU taxonomy conformed. Regarding the windfall taxes, I think there are, if you take the legislation from EU, in principle, 3 countries under which OMV would be looking into this legislation. One is Romania, one is Germany, one is Austria. Both in Romania as well as in Germany, we see that under current legislation, OMV Petrom in Romania as well as OMV Germany -- in Germany are not due to this legislation. So it's not applicable there because the threshold simply regarding the total of the business are not met. When it comes to Austria, we have originally estimated a value up to EUR 150 million. We have specified that now in our results as EUR 90 million, taking into account that Austrian legislation only goes for 6 months of the year 2022. I just have one question. In terms of the news about the disposal of your E&P division, are you looking at the entire division? Or are you looking at the specific assets? If so, could you list those assets? And where would you use the proceeds on selling these assets from the E&P division, especially at such higher oil prices? Okay. I will try to answer that question. So in our strategy that we announced last year, we said that for the entire company, but for E&P in particular, a portfolio review will be part of our strategy execution. And the intent of that portfolio review was really to make sure that we always have a strong core portfolio of E&P assets. We do not intend to sell the entire E&P of the company. But we are -- as we have also in the past, we are continuing to always look at the portfolio of our assets and looking at what portfolio measures could be useful to further drive the transformation, but also ensure that we have a strong oil and gas portfolio. More than that, I do not have to report at this moment. I had two, please. The first was regarding the dividend policy. I was just wondering if you could expand more on that. You highlighted dividends. Regular and special will form 20% to 30% of the operating cash flow when the leverage ratio is below 30%. Now for 2022, dividends form 21% of the CFFO, and the leverage is also very low. So I was just wondering how we should be thinking about the dividends potentially moving to the upper end of that range, to the 30% of CFFO. And also, if you could explain the rationale behind the split of dividends between regular and special in 2022. What would constitute excess cash flow for OMV that feeds into the special dividends? And for regular dividend itself, is greater than 20% annual growth rate that we have seen for the last couple of years sustainable for next year? Should 2023 be in line with the outlook that you have presented today? The second was -- I have just a small question. If it was -- I was wondering if it was possible to isolate the financial impact of results in the gas marketing Western to overall E&P earnings. Just wanted to check how you would expect these earnings to evolve into 2023 as well. Sasi, I may take your question on the dividend policy. First of all, I think we are proud that we were able to announce a strong hike of our progressive dividend policy, our base dividend today, and in combination also with the special dividend announced in last year already of EUR 2.25. This amounts to a total of EUR 5.05 which is unprecedented with OMV. You're right that within the range of our percentage of operating cash flow, this still is in the lower end, around 22%, while we are having a range between 20% and 30%. Now first of all, I think we have to look into the total situation of the company. We have certainly seen in Q4 a slight decline of our profitability. Secondly, and as also Alfred has said in his speech, we are expecting from the year 2022 quite significant cash payments on Norwegian areas. And we are also exposed to the solidarity taxation that I have just in the previous question commented on. Now when you are looking into what is the rationale that this could rise, of course, if the ratio of cash flow from the outflow perspective to the next year is a very positive one, we will be now trying to also go to the maximum of this range. And we also have to look a little bit into the split of the regular and the special dividend. I think by giving the highest-ever increment that we had in the history of OMV dividends, we made it clear that the progressiveness also has something to do with the absolute result and with the absolute performance of the company in the year. So to say this potential increase of 22% will persist for the future, this is, I think, too much to promise because, of course, we have to look into the gradual development of our results as well. On the other hand, the special dividend always gives us the opportunity to then give additional return to our shareholders, which we will definitely appreciate. And when it comes to the impact of gas waste on the total energy sector, for 2023, it's hard to give a prognosis. It depends very much on the situation of the stable or predictable gas deliveries from Russian contract. So far, we were in the not so pleasant situation to have losses from hedges when there was volatility of these deliveries, and we were not in the position to on the spot hedge in a month ahead contract. So therefore, there have been this in average EUR 50 million or slightly more million per month losses. We hope that this will go down in 2023, but it is really today not entirely predictable what it is. On the other hand, we can see that the operations, both on the gas side, have been significantly successful, also through our LNG business. So therefore, part of maybe losses can certainly be offset by positive results that we have in the ordinary Gas West business. And Gas East is very profitable anyway. So in total, even in 2022, we made a positive result on gas in total. Just one left on my side. I want to check on the production outlook. You forecast quite a drop year-on-year to fewer than 360,000 barrels per day, so it's expected to be a steady decline over the course of the year and so you can exit 2023 around maybe 330,000 to 340,000 perhaps? And can stay around this level until the startup of Neptun Deep. Any additional color would be helpful. Yes, Henri, thanks for the question. I think it is clearly attributable to 2 factors that we have in 2023. On the one hand side, we have the natural decline. Natural decline certainly is quite stable, but significant in Romania, but also in Norway. We also see some decline -- a smaller decline in Malaysia as well as in Austria until the big projects come on, which is the Jerun project as well as the Neptun project. So then there will be major additions to that level. We, on the other hand, see the shutdowns and turnarounds that we have in 2023. So we have in second quarter, some turnarounds in Norway at Aasta Hansteen and Gullfaks. We have, in the first quarter, some smaller standstills planned for New Zealand. And in the third quarter, some standstills in Romania. So that is all included in this figure. This may be seen as onetime effects. But of course, this is reoccurring over the time as we have to, of course, maintain and keep in full operation all these areas. So about the exit rate, I would be a positive that the exit rate is at around 340,000 or higher. The first one is on the outlook you gave for polyolefin margins. They are not very dissimilar from the margins that you have obtained or at least the trailing indicators that you show in Q4 2022. So can you just maybe explain the -- how do you see those margins trending over the year? Based on what I see, you're not really yet able to call the trough of those polyolefin margins. It will be interesting to see what you see, especially for the specialty part of your business. Are there any pressure either on volumes or on prices from the negotiations you have with your clients? That's my first question. The second one is on the CapEx. You've mentioned some inflationary pressures. Have you already adjusted the CapEx budget for Neptun? Or is your EUR 3.7 billion CapEx budget still implying less than EUR 2 billion net to OMV just for Neptun? Thank you, Raphael. Let me start with the first question on the polyolefin margins. What we have seen in the polyolefin margins, or both polyethylene and polypropylene, we have seen that in the fourth quarter, we had a slight strengthening of the margins in last year. And when you now look at the -- so in the fourth quarter of last year, when we now look at the January outlook, we find more or less a similar situation that we found in December in this. And I want to maybe give a bit of a bigger picture there. So while in the fourth quarter, the margins have become a little bit stronger, we saw soft demand. We believe a part of this is also -- there's a couple of drivers for this. I think one part of it is inventory destocking that is going on due to the situation, the month before, in particular, by corona. People have stocked up on materials and the parts from it. So we see some destocking going on. We also saw fourth quarter in Chinese inland demand relatively weak because of corona infections being strong there. And as we go forward, we believe that both of these things will slowly come out and improve further. The first quarter of this year will not -- will continue to be a tough quarter. Like I said, we started January a little bit at December level. But we believe then second half of the year, we will see some improvements due to some of these drivers. You also -- and yes, you are correct, we are saying about EUR 350 per tonne for polyethylene and about EUR 400 per tonne polypropylene, which is similar to the Q4 levels that we had. The specialty question that you had is a bit of a differentiated picture because in automotive, we saw continued good demand. So even a little bit increase in volumes. It looks like there's a pent-up demand in the automotive industry, and we are hoping that this will continue through the year 2023. We have also seen good demand in our energy sector. This is our most profitable segment where we make wire and cable insulation, capacitor film materials, and we have actually seen increasing activities. And here, we have specifically the German corridor project, that is the North-South link basically for renewable electricity in Germany that will drive significant demand. And if you remember, we reported last year that we were able to secure the largest share of supply for these insulation materials for this project. So in specialty, we see the margins holding up good. And in segments like automotive, energy, but also health care, we have seen good demand compared to the quarter before, but also the year before. Now on the Neptun project and cost inflation, with Petrom took over the operatorship for Neptun in August. Since then, they have put a big team on it, that is now working on all the plans, how to develop that field, working with engineering companies, making the purchasing requests and everything and getting competitive bids. We should be able -- we believe today that by the middle of this year, we should then have all the information together that we can make the final investment decision. And by that time, we will then also have the final CapEx cost available for this field. And also here, you are correct, in our strategy presentation, we said that the 50% share of Petrom will be up to about EUR 2 billion of CapEx. Apologies if these questions have already been asked. I missed a little bit earlier. But just on the tax rate, as you look into 2023, how do you see that evolving given the sort of special contributions in E&P business? I guess that's the first question. And then the second question just on the gas marketing business in Europe, in Western Europe. Is -- again, is there anything -- what was it that really drove the losses in Q4? Was it lower volumes coming from Russia? Was it the hedges? Was it the price volatility? Or was it something else? Yes. Henry, regarding the tax rate, you have seen that tax rate has, of course, in 2022, increased significantly. This has, of course, to do also with a positive situation that we had much higher earnings on the E&P side due to the higher prices. And as we traditionally have higher tax rates on the energy sector side compared to the chemicals, respectively, refining side, the average tax rate was on the rise. We are also expecting in 2023 quite similar tax rate. First of all, as we also have a good anticipation regarding at least oil prices, but also relatively strong gas prices, but specifically, because we are paying the tax for the year 2022 with 2 quarters delay into also the next year. So the quarter 1 and quarter 2 will be a strong cash out also from the tax payments in Norway. Regarding the special contributions, we do not expect that the situation regarding 2022 and 2023 would significantly change. However, as I explained, Austrian legislation did only take into account 6 months for the solidarity tax whereas for 2023, it will be a full year. And of course, we have to see for 2023, whether anything changes regarding legislation in countries like Romania, but this is up to be seen. We are currently not expecting any major impact there. Yes. Second question was on gas marketing business and Wood were the reasons for the losses in Q4. You're absolutely right. It is the volatility of the supplies in -- from Russia. As this is a month-ahead contract, we do have some difficulties to find a sweet spot of a hedge. Of course, we cannot go without the hedge, else we would be fully exposed to the market dynamic, which is currently very high. And if there is over or under delivery, we run the risk that, of course, the satisfaction of the volumes that we have promised to our customers according to what we think we get can be then creating losses because either the prices go up and we get less, and we have to buy it on the market or the price go down and we could have more and then have to sell at the higher prices of the month ahead. So it is the combination of volatility of supply and the hedges we have to do that are currently causing these kind of issues. I have in my previous answer indicated that this can carry on in 2023, but we hope that the intensity also will decrease over time. Two, if I could, please. Firstly, on cash return. Could you talk about how you intend to manage the 30% leverage threshold in the renewed policy? Fully understand the logic. But given where inorganic M&A sits within the capital allocation priorities you outlined, I'm not fully clear how sustained the full 20% to 30% distribution range may be and how you deal with the scenario of a temporary M&A-induced period above 30%. Second, more big picture perhaps. I guess we're approaching 12 months on from last year's CMD. There's been a lot of moving parts since some of which wouldn't have necessarily been anticipated at the time. So can you just summarize how you see OMV's medium-term equity proposition here and the key milestones the market should look to through 2023? Headline free cash flow has clearly been very strong, but question mark appear to remain over the Chemicals outlook. And in some ways, repeated and mixed M&A-related headlines arguably create some degree of uncertainty on the mid-decade portfolio makeup and free cash flow drivers versus the prior CMD frame. So I appreciate if you could update the latest thoughts there. Maybe on your first question regarding cash return. There is a clear commitment that as long as the leverage ratio of OMV is below 30%, it will be a possibility for us to go into that 20% to 30% range of the operating cash flow, and that would then include a normal progressive dividend as well as a special dividend. Now if there would be a situation that by acquisition, by an inorganic growth, we would surpass the 30% threshold, our first aim is to bring the leverage down below 30%, and we have proven in the past that this can be quite fast. So we have, for instance, in the case of the Borealis majority acquisition, we -- it took only 3 quarters, 9 months to bring it back under the level of 30%. So I don't think that there is really a realistic threat that we would, for a multitude of years, fall out of that range. And therefore, I think this is a very strong promise that we are giving and the commitment that also special dividends can be sent out. Matt, I want to then comment on your second question around the strategic direction. And maybe I'll start with saying -- it's -- you're absolutely correct. I think a lot of things have happened in 2022 that were not completely anticipated in the way we thought. But I think realistically, making a 2030 strategy, one has to anticipate that there will be agility and adjustments needed on the way to get to 2030. Now that they would be this big as we encountered last year, maybe that is also a bit extreme. But I think we have done extremely well because we were able, in my opinion, to manage 3 different things that were quite remarkable. The first one was we reacted really quick to this Ukraine crisis. We made decisions quickly about our deconsolidation impairments, removing Russia as a core region and then also setting up a gas task force to manage both the liquidity but also the capability to supply our supply obligations to our customers. And where we stand today has shown that we did have to take some impairments, but I think we have done, overall, very good in managing this. The second piece is that the opportunity to take advantage of very special market situations, where in the year, we saw exceptional prices and margins for almost all 3 of our segments, with the Chemicals segment becoming -- softening in the second half of the year. But making sure and has led to overall record result in actually all profitability, cash drivers, and we are extremely satisfied that we can actually announce this record progressive dividend, but also there on top, the special dividend on that. Now -- but the third piece is that we also kept firmly our eye on our strategic direction, where we said, over time, we will develop into a sustainable fuels, chemicals and materials company. We will decarbonize net zero the company by 2050 with milestones in between. And on the energy sector, we maintain our position here that we say we will make sure that at any time, we have a strong E&P portfolio, but we will also look at portfolio optimization measures if they make financial sense and help us to accelerate our strategy. At the same time, in the energy sector, we have started to work on developing a low carbon business. I will just point out 2 things we have done there. In Romania, in Petrom, last year, we have announced a joint venture with Oltenia on a 450-megawatt photovoltaic plant that is very attractive because it receives significant subsidies. And then we have also completed the first geothermal test here close to Vienna for this low carbon business. On the Fuels & Feedstock sector, we are also committed to our journey in the direction of sustainable fuels and feedstocks. And it was actually very nice that already last year, we could supply first commercial quantities to Austrian Airlines, and we have actually received a significant interest from other airlines. And as a consequence of this, we were able to sign a number of MOUs for supply of sustainable aviation fuel with other big airlines such as Lufthansa Group, Ryanair, Wizz Air, just demonstrating that this market will be short and there will be a high demand because it is something that the airlines need in order to decarbonize their operations. So that transformation, we will continue to be committed to. On the chemical side, yes, we are seeing a soft part of the cycle here. But as I also pointed out, some of our most valuable business segments like in automotive, like in energy, health care, so our specialty segments, we see a rather stable and see continued very strong growth opportunities in those different segments, and we will make sure that we capture as many of those and on the transformation driver, the recycling activity also receives a lot of interest. We will be one of the companies that is first able to supply actual, real commercial quantities, both on mechanical recycled materials, but also on chemically recycled materials with our additional share purchase to get a majority of Renasci. We are actually able to already supply chemical quantities now. Our ReOil pilot plant will do that, and the next size is coming on-stream today. So I think we are on a good way with this. And of course, I've also seen significant cash delivery out of all 3 segments through the year. Hopefully very quick, just clarifications. Can you quantify the insurance proceeds included in the base chemicals result? And that's the first one. And then the second just is on the negative inventory effects in Borealis, excluding JVs. I'm just trying to understand how much of that, in theory, would unwind in a stable commodity price environment. Would that add back, be the EUR 100 million number rather than the EUR 200 million number you also talked about? Yes, the insurance part on the chemical. So that's the insurance part from the refinery incident, and this was distributed between the different business areas. The chemical part was about EUR 50 million. Sure. I'm just conscious that there's kind of a negative impact in Borealis relating to inventory effects. You have talked about 2 numbers, I think, EUR 200 million and EUR 100 million. I'm just trying to think how much we should assume kind of comes back. I think it's your EUR 100 million number because I think that was the loss in 4Q relating to inventory effects, but I just wanted to clarify that. Yes. So overall, the inventory effect of the total year was -- in the Chemicals area was actually a positive inventory effect. I think it was a higher 2-digit kind of million amount. The EUR 200 million that we reported was actually the difference between the Q4 '21 result and the Q4 '22 result. Q4 '21, positive EUR 100 million. Q4 '22, negative EUR 100 million, right? And you get that from this reduction now to -- of the prices from these extremely high prices that we saw during corona lockdown period. Two, if I may. The first one, coming back on your production guidance for 2023. Can you give us a bit of more granularity on the expected decline you expect both for Romania and Norway this year? And the second question is on working capital. You had in 2022, a large working capital outflow of around EUR 2 billion. Do you expect some of this to unwind in 2023 should commodity prices stay where they are today? Sure, Bertrand. Maybe to give you a little bit more on the production guidance. If we're looking at the biggest decline that we actually have, those are the more mature fields that we have in Romania and Norway. And specifically, where it is gas fields, we, of course, have a higher depletion rate and therefore also a higher rate of the expected decline. So this means there, we have some magnitude of above 10,000 BOE in Norway that we are expecting to decline. On Romania, it is also you have seen it that there have been some write-downs in Romanian assets due to the slightly lower expectation of reserves and also the higher decline rate. The decline rate, that is between 6% and 8% in some of these specific fields. That has, in total for the year, also about the same magnitude that we have in Norway. So I hope that helps to balance. Of course, this is not the only part of the picture because we are also having projects and developments that come online in parallel. So therefore, take that as the only negative contributing part, partly balanced by a positive contribution of the developments. Your second question was on the net working capital. Yes, you're absolutely right. We had a total delta net working capital of EUR 2.1 billion in 2022. And of course, taken as variables when we are looking into the year-end figures pertaining in 2023, we would expect some of that net working capital to come back. We have certainly not seen in quarter 3 and quarter 4, where we each had small positive net working capital contribution, the full of the impact that we had specifically from the gas side coming back. But please take into account that, of course, the next winter is coming. And in Q4, we will again have higher levels in our storage, and that is the main driver for building up the net working capital. However, if gas prices are lower, then also the net working capital in total will be lower. Yes. Two very quick questions. The first one is for Western Gas Europe. I think I understand that the results in Q4 was less negative than in Q3 because you included that for the first time the contribution from your LNG business, Gate. Will it be possible to have a bit more granularity on what was this contribution since you will be booking it this way going forward? And roughly similar question for ADNOC Refining & Trading. Would it be possible to have some feel for what came from refining in 4Q? And what came from trading? How much of a tailwind does this trading business has given you? Yes. Raphael, very detailed questions indeed. If you take the LNG business, of course, taking that into account was a consequence of the fact that we saw now with long-term contracts, with booking cargoes, with a long perspective also on a positive development of the LNG business after years of losses, now we are very glad that we are in this position. We took the impact for the year also into account, and this is what you have seen in quarter 4. So not the full impact of what you have seen in quarter 4 will be continued, but we will continue to have positive results from LNG, and I think this is the good news about the development of the overall gas business. When it comes to ADNOC Refining, I can confirm that we had both positive contributions from the trading as well as from the refining. Unfortunately, we do not split also in agreement with our partner here the results as there's a very strongly integrated operations on the production and on the trading side. So unfortunately, I cannot give you a split. This now brings us to the end of our conference call. Thanks a lot for joining today. And as always, if you have further questions, please contact the Investor Relations team. We're happy to help. Thanks a lot, and have a good day. Bye. That concludes today's teleconference call. A replay of the call will be available for 1 week. The number is printed on the teleconference invitation. Or alternatively, please contact OMV's Investor Relations department directly to obtain the replay numbers.
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EarningCall_633
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[Call Starts Abruptly] I'd like to go over the Fiscal 2023 Third Quarter Financial Results. First the summary overall sales increased due to increased sales of Automotive and Connect as well as currency translation. Adjusted OP has slightly decreased despite increased sales of Automotive and Connect due to the large profit decrease in Energy. OP and net profit increased due to improvement in other income and loss. Operating cash flows increased over FY 2022 despite increased inventories due mainly to improved working capital and other factors. We have revised the full year forecast. At the Q2 earnings briefing we touched upon the U.S. Inflation Reduction Act IRA. As detailed rules have not yet been announced as of today, the impact of the IRA in our value is not factored into the full year forecast. As with the Groupwide forecast, profit is revised downward, reflecting changes in the business environment. Overall sales remains unchanged, but sales decreased in real terms, excluding the effect of exchange rates. By segment, Automotive and Connect profit are revised upward while Lifestyle, Industry and Energy profits are revised downward. Now the details of the consolidated results for Q3. Here you can see the consolidated results. Overall sales increased to JPY2,160.6 billion, up 14% year-on-year. Sales on constant currency increased by 5%. Adjusted OP was at JPY85.9 billion, a slight decrease year-on-year. Other income and loss improved due mainly to reduced restructuring expenses and gain from the sale of assets. OP net profit and EBITDA increased respectively. This is the results by segment. I will explain the year-on-year variance analysis in the next few slides. First changes in sales by segment. In Lifestyle overall sales increased despite decreased sales of consumer electronics due to increased sales of growth businesses such as air to water in Europe and overseas electrical construction materials. Automotive sales increased on the recovery and automobile production of our customers. Connect sales increased on growth in rugged mobile terminals for overseas markets and in Avionics, reflecting market recovery in the aviation industry as well as increased sales of Blue Yonder, this in spite of decreased sales in Process Automation affected by the slowdown of investments by the PC smartphone customers. Industry sales decreased due to the market slowdown in ICT terminals and FA mainly in China and global automotive applications excluding green vehicles, and termination of semiconductor business. Energy sales increased EV battery production and sales and to price revisions, despite decreased sales of consumer use lithium ion batteries and power storage systems for data centers with downturn in market conditions. Among other eliminations and adjustments, sales of entertainment and communication and housing slightly decreased due to the market downturn. Next adjusted OP by segment. Lifestyle decreased due to temporary expenses in China. Despite increased sales mainly in growth businesses and price revisions in Japan and overseas, which offset deteriorating external conditions such as exchange rates and higher raw material prices. Automotive profit increased due mainly to price revisions to offset higher products and material prices, increased sales and cost reduction efforts, despite price hikes of semiconductors and others. Connect increased mainly on increased sales of rugged mobile terminals overseas and Avionics improved profitability of Blue Yonder on a standalone basis and the absence of temporary accounting treatment in FY '22 despite decreased sales in Process Automation. Industry profit decreased due to decreased sales with a sharp downturn in market despite such efforts as price revisions and rationalization to offset the impact of material price hikes. Energy decreased due mainly to raw material price hikes, decreased sales for industrial consumer and increased development expenses for future growth, despite increased sales of EV batteries. Results of Lifestyle by divisional company. In Living Appliances and Solutions sales decreased on constant currency due to decreased sales of consumer electronics. Profit decreased due to decreased sales and the exchange rate impact. In Heating & Ventilation A/C sales and profit increased on favorable sales of air to water in Europe. In Cold Chain Solutions sales and profit increased with increased sales for Japan and U.S. and price revisions. In Electric Works, sales and profit increased with continuing steady sales of overseas electrical construction materials. Next, various analysis of operating profit. From the left profit from sales expansion was positive JPY17.4 billion, fixed cost negative JPY17 billion due to the increased investment in Lifestyle and Energy for business growth. Price hikes in raw materials and logistics had a negative impact of JPY67 billion. The counter effective efforts such as price revisions and rationalization was positive JPY61 billion. The consolidation of Blue Yonder and temporary factors in Lifestyle positive JPY4 billion. Blue Yonder profit increased by JPY9.2 billion. The bottom right shows the breakdown standalone profit amortization expenses related to acquisition and temporary accounting treatment. The net effect of exchange rates was zero having almost no impact. By segment and negative impact in Lifestyle all a positive impact in Industry and Energy. Adjusted OP slightly decreased by JPY1.6 billion. Other income and loss improved by JPY13 billion. Operating profit increased by JPY11.4 billion. Next, free cash flows and cash positions. Operating cash flow was JPY313.7 billion for nine months an increase year-on-year due mainly to improvement in working capital and other factors despite increased inventories. As for inventories, a large number of businesses turned to a decrease since the end of Q2. Further efforts to reduce inventories will continue mainly by revising strategic inventory level. On the right, net cash was a negative JPY657.2 billion, a slight decrease from the end of FY '22. Next, the full year forecast. As explained at the outset, the impact of the U.S. IRA Inflation Reduction Act is not factored in the forecast. We have received many inquiries and have heard much interest from a number of stakeholders including the capital market since Q2 earnings briefing. So here I would like to elaborate on our assumption of its impact based on currently available information. This is an overview of the IRA information relevant to our business. Among the rules related to EVs Section 45X on the left stipulates a tax credit for sales of EV batteries. Section 30D on the right stipulates a tax credit for purchases of EVs. We expect Panasonic's EV battery business to be eligible for Section 45X on the left. According to section 45X for battery cells, a tax credit of $35 per kilowatt hour can be received for 10 years from 2023 to 2032. Eligible battery cells are those produced and sold in the U.S. The details of those rules have yet to be announced. But since the Q2 briefing for Section 30D additional guidance on tentative measures prior to rulemaking was provided, but no additional information on section 45X has been made available. This is an overview of our EV battery factories and ones eligible for IRA. The Nevada factory already in operation is eligible from this January. The new Kansas factory is expected to be eligible after the start of the production and sales. Factories in Japan are not eligible. On the right side, simple calculations for tax credit amount multiplying $35 based on production capacity at each factory is shown for your reference. The amount of impact on our financial results needs to be examined and quantified based on the IRS rules to be announced and other factors. Since detailed rules have yet to be announced, the scheme of monetization, PL recording and others have yet to be determined. Therefore we have not factored in the impact in our full year forecast. At the bottom is a summary of the incentive program by the State of Kansas for investment promotion, announced last July. The new Kansas factory is eligible for this incentive program aside from the IRA tax credits. Next is a revision of the full year forecast of fiscal '23. This slide shows the consolidated financial forecast. Overall sales remains unchanged. The sales in real terms excluding ForEx effect is decreased by JPY80 billion. As I said OP is revised downward to JPY300 billion, down JPY40 billion operating profit to JPY180 billion, down JPY40 billion. Net profit downward revision by JPY25 billion yen to JPY210 billion EPS, JPY89.98 down, JPY10.71, ROE 6.6%, EBITDA JPY710 billion. This is a forecast by segment. Adjusted operating profit, Automotive and Connector revised upward, but Lifestyle Industry and Energy are revised downward. Next I will explain the details of the revisions in particular for Industry in Energy segments with larger revision amounts. Starting with the industry, the major factor for revision is the lower sales due to the sharp deterioration of the market. The breakdown of the revised suggested OP amount of JPY20 billion is shown here. The market conditions deteriorate every areas. JPY11 billion for ICT terminals, including notebook PCs, JPY4 billion for automotive use, and JPY5 billion for FA in China. For ICT terminals, the outlook for the Notebook PC production in fiscal '23 is expected to show the significant downturn. While we expect this challenging situation to continue throughout fiscal '24, Notebook PC will capture the demand for data centers where the early recovery is expected. For automotive use the growth of the global automotive production is expected to be slower than previously anticipated due mainly to COVID-19 in China. We assume that production recovery will be different among the car manufacturers. For FA in China, investment demand in the semiconductor and others is weaker than expected continuing a year or in decrease. However, there is an optimistic view of the recovery after June 2023, reflecting expectations toward the new economic stimulus measures in China. We are carefully monitoring the market situation. Based on these we will prepare for the market recovery by enhancing our management structure with improved marginal profits such as rationalization and fixed cost reduction. In addition, we will improve the accuracy of [indiscernible] information and strengthen our pipeline. Energy, the major factors for revision are rapidly decreased demand in Industrial and Consumer and raw material price hikes for in-vehicle, the breakdown of the revised adjusted. The OP is JPY15 billion, is JPY8 billion for Industrial and Consumer and JPY7 billion for in vehicle or Industrial and Consumer and our market rapidly deteriorated, similar to industry. For example, demand for lithium ion batteries for ICT and power equipment has weakened. The sharp slowdown in IT infrastructure investment reflecting the economic slowdown has resulted in a weakened demand for power storage systems or data centers. For these areas we are expecting the demand recovery in Q2 of episode 24 and onwards. For in-vehicle price hikes for certain materials such as lithium, hydroxide have been higher than expected in the second half, temporarily pushing down the profitability. Price fluctuations of these materials can be reflected in the sales price, but there is always a time lag therefore input costs, look worse than we originally assumed. These are better sales price. We expect the impact to be mitigated in Q1 fiscal '24 and onwards with the market price becoming stable, being able to reflect in the sales price. Prices of the raw materials such as electrolyte, where we cannot automatically apply a market index to the sales price are continuing to reach the higher level than our assumptions. For these materials we expect the situation to be mitigated in fiscal '24 by revising contracts and multi-sourcing. For Indigo areas strong demand continues and our growth strategy remains unchanged. We will regard theses negative factors as temporary and we will take measures necessary, countermeasures. Now I will explain the revised factors by segment. In Lifestyle sales remains unchanged. Adjusted OP is revised downwards due to lower sales in leading appliances and solutions, as well as higher temporary expenses in China. In Automotive sales remains unchanged due to currency translation, despite expecting reduced automobile production of our customers from the previous forecast. Adjusted OP is revised upward due to the efforts in price revisions and fixed cost reductions despite lower sales. In Connect sales is revised upward due to the improved procurement issues in mobile solutions and Avionics. As I said, OP is also revised upward due to the improvements in Avionics and Blue Yonder. The factors for industry and energy, as I explained earlier, in other eliminations and adjustment, adjusted operating profit is revised downward, due mainly to lower sales of the TBs [ph] in entertainment and communication and if the effective exchange rates. It shows the forecast for the Lifestyle segment by division or company. This shows our analysis of the revised forecast of operating profit in fiscal '23 by factor and explains the changes made from the previous forecast of October 31st, last year. The upper graph shows the analysis of year-on-year increase and decrease factors from October forecast and the lower graph shows analysis of increased and decreased factors. In a DC February 2nd forecast figures in the middle shows the revised amounting each factor. As an overall picture so we're updating operating profit in fiscal '23. We expect improvements in the profitability of Blue Yonder and the effective exchange rates. But the impact of lower sales in real terms for Industry, Energy and raw material price hikes and Energy is larger than this improvement. Therefore, operating profit is revised downward by $40 billion. Finally, let me explain the initiatives in growth areas. In October '22 we announced the construction of new EV battery factory in Kansas U.S. Let me explain our current assumptions on how to fund this investment. As of today, the amount of the investment for the new factory is estimated to be JPY500 billion to JPY600 billion with a three-year period of fiscal '23 to '25. Please note that the various fluctuation could affect the disfigure, based on our capital allocation policy in principle. The operating company will make investments with its own cash generated by business for the amount beyond their capacity penicillin coding corporation will supplement the funding to Kansas factory investment. The amount to be funded by the group is expected to be below JPY400 billion, which is the amount allocated for growth areas as announced in April last year at the group strategy briefing. Groupwide funding will be in line with our capital allocation policy. That is to fund investment with operating cash flow and other measures such as sales of assets. Next is a progress of our initiatives in growth areas. In automotive battery business, Energy started limiting work for the new factory in Kansas in November last year, and he also signed a contract with lucid Group in December last year. And the supply chain software business Connect is continuing. Its transformation toward the feather growth. In Q3, '23 we saw some improvement in the financial results. In air quality and air conditioning business the growth in air to water business in Europe is continuing. Furthermore, in November last year Lifestyle announced acquisition of the commercial air conditioning business from system air at 100 million euro. Going forward, Panasonic Group will make announcements on the progress of these three growth areas in timely manner. This is the last slide showing the list of the announcements related to IR information in addition, after the launch of the new structure last year. In fiscal 24 Group strategic briefing is planned on May 18 this year and each operating company is planning to host its own strategy briefing in early June this year. Thank you from Nikkei Newspaper. So all I have two questions, my first question, in your presentation you talked about the electronic materials especially industry? Looks like you are really seeing a slowdown, significant slowdown and I take it that the impacts in china is a bit factor and I think there are signs of slowdown in the U.S. as well. So could you elaborate on the slowdown in China, why is that, is that because you do the manufacturing in China, could you elaborate on that? That's my first question. My second question, again in your presentation you stated the following regarding the battery production in the U.S., the incentive in Kansas as well as the IRA tax credit. For the incentive in Kansas I understand that that cannot be factored in for this fiscal year, does it mean that we can expect that impact next fiscal year? And regarding IRA 4.3 billion, how much profit increase can we expect from that? In other words, could you elaborate on the impact on your results next fiscal year? Thank you for your questions. First, the industry in terms of business, we have factories in China. We have lots of manufacturing jobs in China and we have many customers in China as well. So given that, in terms of the overall weight of China in our total business, China accounts for a large portion. And so the market conditions in China, when they have deteriorated rapidly, the decrease in sales had a major impact. The impact from the U.S. was limited in contrast. So that is the situation of industry business in China and the U.S. In any event, for next fiscal year, China in FY '24, after Q2 most probably, with the impact of the new economic stimulus packages to kick in, as is rumored we expect the impact. So we believe that what we are seeing now is a temporary slowdown. So we do expect recovery. And regarding your second question on the battery, the State of Kansas incentives, as was shown in the slide, the investments are being made, and when the buildings are complete, and when the production starts, that's when the incentives would kick in. And therefore we were not expecting to factor that in, in this fiscal year's results from the very beginning. As for IRA, since January, since this January, our operation is eligible for that tax credit. That detailed rules have yet to be announced. So the scheme for monetization is not clear. Once or we have to wait until that is clarified before we can calculate what cash benefit we can enjoy. The total amount has been calculated. I think we are around the ballpark when it comes to the total amount. But the details have yet to be assessed before we can project how much of that expected amount can be factored in. So the fraction, the exact fraction of what can be reflected in our results has yet to be identified. So although our operation is eligible, the accounting treatment cannot be made yet. That is all. So the annual production capacity, I think you made a simple calculation. So your timing would be when all the details are out. And that is the reason why you can't really factor in the exact amount. Well, 38 gigawatts capacity is already operating in terms of our production and that is eligible, but the way to utilize this cash credit has yet to be clarified. So we don't know. Accounting wise, we can recognize that tax credit. This is [indiscernible] of Bloomberg speaking. Thank you. About the battery I have one question. In the document, the plant in Kansas up to fiscal '25, the investment is shown. What happens after that after fiscal 26? At the Kansas factory after fiscal '26, do you plan to keep expanding or in Oklahoma, there has been some information on the new plant there. So would you be looking for somewhere else? So could you talk about the size of the investment in fiscal '26 and onwards? Thank you. Originally, in June, when we had the IR meeting from Energy 150 gigawatt hour to 200 gigawatt, that was -- the currently the capacity is 50. So three times higher capacity is what they're trying to work for. So this investment is a 30 gigawatt, so the total will be about 80 kilowatt hour. So what we pursue is actually the double of that level. Therefore up to fiscal '25 it does not mean that our investment will end in that year and we expect to continue this. As for the location, this time it is in the State of Kansas has been decided, but then afterwards, I suppose the location various possibilities are being looked into. So as of now, nothing has been decided. So we would like to make sure that 2170 [ph] our plant in Kansas, we can be started. So and at the same time, we would look into the further future after fiscal 2026 and onwards. Thank you very much. I apologize for that. China and C&I and different segments, I'm wondering if there have been any changes or deviations from your investment plants? The investment plan in China I am not sure what you mean by that, the investment plan in China. But for us, the China business is important. We have many factories, and we will work on streamlining and we will make investments, necessary investments to increase the capacity. There have been lockdowns. So in that sense, our activities were suspended. But we are about to see the resumption. So we will make watch closely the recovery in economy as we decide on necessary investment to be made there. Does that answer your question? Tanaka from Yomiuri Shimbun. Thank you. One question. The price revisions in Japan and abroad, I understand that you have made progress as of now, based on the percentage of those price revisions or the products that went through the price revisions. And what has been the evaluation of these price revisions designated pricing system, I'd like to hear from Umeda San. Yes, thank you very much. The designated pricing system, it is about the Japanese market. The percentage or the weight of it as [indiscernible] San talked about at the Lifestyle IR meeting, it is not so high, it's above 10%. So how is it evaluated? When you look at each product, we would basically need the price, but whether the final price decision or the final decision is made by the market and by the customers. So depending on the products, there could be some gaps between the two. We found that out. So we want to take -- utilize that in our price policy, and to make sure that we develop products, which has sufficient values. So in the medium term, this is something that that we have to take time to continue to work on. So it's difficult to give you a short-term evaluation. But there are some variability or differences based on products. But overall our -- the value of each product is becoming more visible. So what we are pursuing, the first step I think is, has been taken and we are making progress. That's all. Another point of question that I want to ask is as follows. So for the new wage hike, Spring Offensive, the wage hike and also the investment into the personnel, what are your views on this? This is my last question. Thank you. About the wage increase, our way of thinking is that to go beyond the prices and price increase and to increase the wage to that level is something that we have been continuing. So base increase is also a realized base wage increase. So because of the rapid increase of the inflation rate, the employees want to make sure that the employees will not feel any anxiety about their daily lives. So we want to go beyond the inflation rate and we want to increase the wage rate. So that's the basic view as a company. And the Japanese economy to end the deflationary period and to move into the normal cycle and we have our social responsibility to enable that as a company. So based on the current inflation, to increase the wage for the short term, that is not the only thing that we should do. But we should also realize a sustainable wage increase so that our employees can feel secure in working and making a living. So and to do that I think we have sufficient competitive edge in the industry to realize that and that is our basic stance or a way of thinking. Thank you. We are coming to an end, the time allocated for the Q&A session for journalists. So we'll take only one more question from journalists. So [indiscernible] from [indiscernible]. I hope you can hear me. Yes I have once Concordia Shimon O'Hara I hope you can hear me. Yes. I have one question about Russia and China. The geopolitical risks associated with these countries are getting more intense. What are your actions to respond to that? Are you thinking of changing the supply chain structure for example? Thank you for your question. Regarding Russia, our business is small in size. We don't have any manufacturing activities there. We export to Russia, to sell. In Russia, that was the only form of business that we were engaged in, which has been suspended altogether. For the customers in Russia, we provide servicing to our customers for our products. That's the only thing that we do in Russia. About China, people talk about the geopolitical risks associated with China. And, of course, doesn't mean that we're going to withdraw from that country. Yes, China is a very important market for us. But we are now seeing a clear demarcation line between what we do and we do not do, so have multiple supply chain pass, for example. And U.S. and China, are respectively launching various restrictions or sanctions, and we are paying close attention to those and responding accordingly, in what we do. Thank you. Thank you. Now we are ending the Q&A session for journalists and move on to the Q&A session for analysts and investors. [Operator Instructions] [Indiscernible] Securities. Thank you. Peter ______ from BofA Securities. Two questions, the Q3 our business results as a whole. So October, December, I'm sure that there have been a lot of external environmental changes. But when you look at the other players in the same industry, I think that your negative impact has been the biggest. And together with that, something that I have been repeating is that how to handle and respond to the changes in the environment. Probably there are some factors which are weak. So Q3 this means results, and evaluation and management, and also the evaluation of the results so far. And what kind of measures are you going to be taking based on their evaluation? That's my first question. Second question is that about the explanation on the U.S. IRA, section 45X, and the Automotive battery plant that will come under 45X. The Nevada plant is already in operation. So the possibility of getting that tax credit is quite high. But as for the new plant in Kansas, so JPY31 billion in 10 years is expected. What is your expectation vis-Ã -vis this tax credit from IRA? The monetization, I would like to hear from you about your thoughts on these points, including the monetization possibility? Thank you very much. The characteristic of the Q3 results is that if you look at each segment and there are differences. First, in the first half Automotive and Connect were in red, now, but in Q3 they made major improvements. So JPY10 billion and JPY20 billion profit increase was recorded. But at the same time, Industry and Energy, especially in Q3 Energy, have suffered much lower profit. And Automotive battery, the energy, the positioning of the energy, the cells have been quite strong. Therefore the materials that they handled increased. And so, the lithium hydroxide is the example that I talked about. And we expected the stabilization of the prices of those materials, but they stayed at the high level or went even higher. And of course, we will reflect that to the sales price, but it usually takes several months, so there is a time lag. And there are also other opposite examples. Of course, there is a time lag as I said, but there are materials which are not related to the market price fluctuation. So we want to make sure that impact on us is not so big. And that's what Energy is doing. Fiscal '24 and onwards, we expect the normalization of this. As for Industry, if you look at only Q3, the profit decrease was not so big, but in Q4 we expected even tougher situations. So, it is possible that it's going to go down further. And that's one of the reasons why we made the downward revision. So depending on the regions, and there are some differences, and the positive side was smaller, but the negative side or what we saw, but it's not something that will continue. Those are the market fluctuations that are not likely to continue. So as I mentioned in my presentation, in PC, we expect a slower recovery, but the data center business recovery is very strong. So we expect that quick recovery there. I want to make sure that we can receive orders. So we are currently developing products and preparing products and evolving our products so that we can capture that expected recovery. So that is a countermeasure that we are taking. IRA, the second question, the factory in Nevada I talked about already, and as for Kansas, during the fiscal '25 we plan to start the operation and 30 gigawatt hour is not something that we can achieve in fiscal '25, but the operation will start in fiscal '25. So it starts with 2170 and it is an evolved versus of the 2170 and we are actually making those so that we can have a smooth startup. And we believe that theoretically it will be eligible, so we want to make sure that we start up a well and so that we can get the tax credit. I hope that answers your question. Thank you very much. Thank you. Katsura from SMBC Nikko. First I'd like to thank you for much better materials that you have prepared, very clear, very helpful. I have two questions regarding the inventory level and December JPY1.4 trillion if I understand correctly, I think there are differences from segment to segment. So can you elaborate on the segment breakdown of the inventory level what your views are, and towards the end of March, what are you aiming at inventory level? My second question, more medium term programs for growth. Looking at the current portfolio there are many uncertainties and you're operating in this environment with lots of uncertainties. So, Mr. Umeda, what is your view regarding this? For FY '25 JPY2 trillion cash, and you have the target in terms of sales as well. Now, compared to this target you have set for FY '25 I'm afraid the expected results for this fiscal year the initial year is lower. So what do you think is the likelihood of achieving your ultimate goals? Thank you for your questions. First, regarding the inventory level, apparently, it's too high. All of the operating companies share that view. Since November, we see a number of operating companies decreasing their inventory levels respectively. The amount of inventory, conventionally, a little less than JPY900 billion was the appropriate level that was previously over JPY100 billion. Given the uncertainty in the supply chain today, we have to have a strategic inventory. We do see the need for that. And so JPY1 trillion to JPY1.1 trillion, we believe would be the appropriate level of inventory for our business. There are some impacts of foreign exchange as well. So that would result in different amount, but JPY200 billion to JPY300 billion reduction is what we'll be working on, which would have a direct impact on our operating cash flow. So, with that in mind, we will be working on reducing the inventory and this is the view shared by all operating companies and it is considered as a priority, one of the priority areas. The second question regarding the portfolio our CEO Kusumi said that during the first two years, the operating company is to work on enhancing the competitiveness that has been the instruction and each company is working accordingly. And towards the end of March, the end of that two-year period would come. So how are we to manage the portfolio afterwards? Well, each operating company would basically look at the business portfolio, including the future citing not just the current KGI, but the future citing needs as well, that will be the very basics. As for Panasonic Holdings, we have been suspending all activities regarding the portfolio revision for two years. But starting the new fiscal year, that period would expire. So Panasonic Holdings would be looking at ROIC and operating cash flow and other factors in assessing the portfolio age of each operating company. So there is a possibility of this top down portfolio revision from the holdings point of view as well. And three growth areas have been identified, as was shared in our presentation today as well, in Kusumi San's point of view, and we have to make sure that those high growth rates are achieved. So starting April, we are going to implement what we call the gear change. And on May 18, at the strategy meeting, I think Kusumi San will have some views that he's going to share about that. Nakane speaking, Mizuho Securities. I have one question about Blue Yonder, recently it is not so bad and it is the upward revision that you made. So on page 20, and 35, there are some data. At the time of the first half season's results in comparison to that, October, December, what happened? And were as you expected, and what were something that you did not expect? And the business environment qualitatively how is it and what is your expectation for the next fiscal year? And also, there'll be some new plans? And what are the discussions going on about the Blue Yonder? Yes. Q2 at the, our Q2 business results announcement, the Blue Yonder well page 35 is a good reference, especially they are focused on the SaaS and ARR. Especially this is a cloud based business. And the balance of the demand order is growing, but it's lower than our expectations, and nonconsolidated basis, Blue Yonder was in red. The reason for that, there were some temporary reasons, and that's how we explained it. And in Q3, those temporary reasons disappeared, and they have enhanced their management structure. And what we are showing you the recurring service percentage, and it's showing that for upward trend. So, this is what we look at as indices, and we are making steady progress. And at the same time, about the management structure, there some redundancies or inefficiencies. So to enhance the management structure, they will continue to take measures. And as for the resource, moving up the resources, the front end salespeople for the native SaaS business, and that is something that they need to work on and make improvements. So if you look at three month, quarterly trend, we see some fluctuations and we expect that to continue to happen. But the basic competitiveness is shown on page 35 and this is what we look at. So this will lead to the future of the Blue Yonder. So that's the image or the feelings that we are getting about the Blue Yonder. I hope that answers your question. Thank you. We see many hands raised. So we ask that you limit the number of your questions to just one. We'll take questions from three more people. First is Ezawa San from Citigroup Global Markets, Japan. Thank you. One question I understand, IRA and the battery company investment in the new Kansas factory. That's my question. More specifically, in IRA, not just tax credit, but cash monetization. Visibility has been clarified. So of the amount that will be provided under IRA, how much will be cashed and could be used for the investment necessary for Kansas? Is that JPY1.3 billion? Of that amount how much could be used for that? Because on Slide 22, you are talking about the operating company funding, which obviously is much smaller compared to funding by the group. So excluding the incentive plan by Kansas, looks like maybe JPY200 billion or so JPY1.3 billion tax credit provided. I think that would mean that over three years it will amount to JPY500 billion, or are you not expecting that kind of monetization or cashing out? Page 22, what you see there is our thinking regarding the capital allocation, not including the IRA tax credits. So this is the tax credits in the U.S. and so we investments, I don't think we'll be prepared, but it is going to turn positive. It will be in other words a positive factor incremental to what is shown here. Now JPY1.3 billion is a calculated amount. The use of that there are many customers, there are many suppliers. So as the industry what will be the best way to utilize this to maximize the battery production in the U.S. is the question. So what JPY1.3 billion, the whole amount come to Panasonic? Well, it will, initially come to Panasonic. But what -- how would it be used? That will depend on what the more detailed rules that have yet to be announced? Stipulate? So why is this not possible? By law, the accounting year that starts in accounting year '23, the use of the amount there has been specified, but our company, the accounting or the fiscal years, April to March, so for January, March, this period is not part of the new accounting year. So although it is eligible, we don't know how that could be used. So for FY '24, our FY '24. What use is allowed, and how much could be cashed. Those details have yet to be presented and that's why we don't know the details and therefore we cannot make the detailed projection. Thank you. Okazaki speaking from Nomura. About the Lifestyle business I would like to hear additional explanation. C&A in Q1-Q2 were doing well and has deteriorated in Q3. What were the reasons and you mentioned the temporary expenses and what were they? And also in other segments, the deterioration in China is reflected in the business. So as you mentioned in industry in June and onwards, you expect some recovery, so toward the next fiscal year, the improvement of the macro economy in China, is that something that you expect? Yes. First of all, about consumer electronics in Japan and China and Southeast Asia, the demand was lower than 100%. So that was one of the environmental factors. Because of that, that led to the lower sales and lower profit in China, October and December consumer electronics sales. So year-on-year, it was 77% of the year before, so major decline is something that we saw in China. So LAs living appliance in solutions and CNA there are some double counting there and that led to the struggle of this business. At a temporary expenses in China what were they is your question. And in China, the cold chain business. In November the CNA at the business IR, this was explained. The living and cold chain business, they're different businesses under CAN. But their resources are we want to shift toward the living. So in China, the cold chain business and direction of that is being looked at. And when you do that the temporary expenses were incurred. So that is the negative of factor in China, and lower profit, year-on-year lower profit. So the consumer electronics, lower demand, and the coach chain related temporary expenses in order to reset to reset direction. That's the answer to your question. I hope that answers your question. Thank you very much. Yes, we are already running over time, but we will take one last question. Ono San from Morgan Stanley MUFG Securities. Thank you. Just one question on IRA for clarification, on Slide 11. Well, I might be repeating what earlier questioner raised, but in terms of the budget allocated $31 billion. So if you include Nevada, and Kansas, Panasonic is going to take more than half of that, but there are some Korean manufacturers. If they start the construction in '25, there'll be eligible and therefore, they might start the -- or decide on the capacity expansion. So how much of this amount is uncertain? Could you elaborate on that? Thank you. The budget allocated the U.S. Congress and elsewhere, discussions are underway, but the bill has already been approved. In terms of conditions, terms and conditions, production and sales in the U.S., when that condition is met, it is provided. For our Nevada factory portion, we have been manufacturing, so for sure that factory is eligible and the assurance is rather high. As for Kansas factory, which is achieved started to production in FY '24, 2170 is the initial model that we'll be producing. So here again, we are rather confident that we can start the production and ramp up the production. And so in that sense, Panasonic is going to receive quite a bit of this total amount. As for the Korean companies, during 2025 what the news media are reporting is that the Korean companies are going to build your factories together with their OEM customers and should they start the production I think they would become eligible for that. So what the impact would be on this total amount is expected we understand that some European companies are thinking of entering this as well. So that's a lot, there's a lot of uncertainty, but in the initial phase we believe that we will take a lionâs share of this total amount. Thank you very much. That concludes our financial results briefing on the fiscal 2023 third quarter. Thank you very much for your attendance.
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EarningCall_634
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Good afternoon, and welcome to WEC Energy Groupâs Conference Call for Fourth Quarter and Year End â22 Results. This call is being recorded for rebroadcast, and all participants are in a listen-only mode at this time. Before the conference call begins, I remind you that all statements in the presentation other than historical facts are forward-looking statements that involve risks and uncertainties that are subject to change at any time. Such statements are based on managementâs expectations at the time they are made. In addition to the assumptions and other factors referred to in connection with these statements, factors described in WEC Energy Groupâs latest Form 10-K and subsequent reports filed with the Securities and Exchange Commission, could cause actual results to differ materially from those contemplated. During the discussions, referenced earnings per share will be based on diluted earnings per share, unless otherwise noted. After the presentation, the conference will be open to analysts for questions and answers. In conjunction with this call, a package of detailed financial information is posted at wecenergygroup.com. The replay will be available approximately two hours after the conclusion of this call. Good afternoon, everyone. Thank you for joining us today, as we review our results for calendar year 2022. First, Iâd like to introduce the members of our management team who are here with me today. We have Scott Lauber, our President and Chief Executive; Xia Liu, our Chief Financial Officer; and Beth Straka, Senior Vice President of Corporate Communications and Investor Relations. Now, as you saw from our news release this morning, we reported full year 2022 earnings of $4.45 a share. Xia will provide you with more detail on our financial metrics in just a few minutes. But Iâm pleased to report to you that we delivered an exceptional year on virtually every meaningful measure from employee safety and customer satisfaction to growth in earnings per share. Three major factors really shaped our strong results for 2022: favorable weather; solid performance from our infrastructure and transmission segments; and steady execution of our capital plan, as we paved the way for an energy future thatâs affordable, reliable, and clean. On the regulatory front, as you may know, we saw balanced and credit supportive results from our Wisconsin rate reviews in December, despite a little bit of noise in the process. New rates are now in effect for all of our Wisconsin utilities. And last month, on January 6th, we filed rate requests with the Illinois Commerce Commission for our gas utilities in Illinois. I would point out that home heating bills in Chicago are currently below those of other major U.S. cities, like New York, Boston, Baltimore, and Philadelphia. And we expect that to continue with this filing. Scott will provide you with more detail in just a moment. Turning now to our ESG progress plan that we updated for you in November. Itâs the largest five-year investment plan in our history, totaling $20.1 billion for efficiency, sustainability, and growth. We expect the plan to drive compound earnings growth of 6.5% to 7% a year over the period 2023 through 2027. The key part of the plan is a major commitment to renewable projects, both in our regulated business and in our infrastructure segment. In fact, earlier this week, we announced that our infrastructure group will acquire an 80% ownership interest in Phase 1 of the Samson Solar Energy Center. Located in Northeast Texas, Samson I has a capacity of 250 megawatts. It entered commercial service in May of last year and has a long-term power purchase agreement with AT&T. Pending final regulatory approval, we plan to invest approximately $250 million for our portion of Samson I. We expect to close the transaction late in the first quarter of this year. Samson I, as you may know, is the first of 5 phases being developed by Invenergy. Overall, Samson is the largest solar project under construction in the United States today, and weâre pleased to take part in Phase 1. Now, as you know, one of our goals is to help shape the future of clean energy. And today, weâre announcing an important pilot project with the Electric Power Research Institute and a company called CMBlu Energy. CMBlu is a German designer of long duration battery storage using common low-cost, environmentally-friendly materials. In simple English, itâs a green battery. This 1 to 2 megawatt hour pilot project will be one of the first of its kind on the United States electric grid. Our plan is to test the durability of this battery system. We believe it can store energy for up to twice as long as the typical batteries in use today. We plan to launch the project at our Valley Power Plant near downtown Milwaukee in the fourth quarter of this year when temperatures turn cold. The results will be shared in early 2024 across the industry. And now, letâs switch gears and take a brief look at the regional economy. Wisconsin added 52,000 private sector jobs in 2022, and in December, the unemployment rate in the state dropped to 3.2%. Thatâs well below the national average. We believe the current strength and remarkable diversity of the Wisconsin economy positions us well as we move forward in 2023. And with that, Iâll turn the call over to Scott for more information on our regulatory developments, our operations, and our infrastructure segment. Scott, all yours. Iâd like to start with some updates on the regulatory front. First, letâs review where we stand for the Wisconsin Public Service Commissionâs written orders this past December. The commission authorized return on equity of 9.8% for all our Wisconsin utilities. It approved an increase in the equity component of our capital structure to 53%. Weâll also continue the earning sharing mechanism to provide benefits to Wisconsin customers if our performance exceeds our forecast. And as Gail mentioned, we now have rate filings under review in Illinois for Peoples Gas and North Shore Gas. At Peoples Gas, we are not seeking an extension of the automatic bill adjustment rider known as QIP, after it expires at the end of this year. We plan to return to the traditional rate making process to recover the cost of necessary infrastructure improvements. Our rate request would continue to support those key capital investments. Peoples Gas operates one of the oldest natural gas delivery networks in the United States. And as you may recall, an independent engineering study found that over 80% of the iron pipes in the system are approaching the end of their useful life. We are modernizing the system to ensure safety and reliability and to reduce methane emissions. With natural gas prices declining, we project customer bills will remain largely flat as the new rates take effect in 2024. You may also recall we filed a rate review at one of our smaller utilities, Minnesota Energy Resources last November. We are seeking an overall increase of 8.1%, primarily driven by capital investments. Interim rates went into effect January 1st. Meanwhile, weâre making good progress on a number of our regulatory capital projects. Our Red Barn wind development is on track to come online within the next few months in Wisconsin with an expected investment of $160 million. This project will provide about 80 megawatts of renewable energy to our system. Work continues on the Badger Hollow II solar facility and the Paris Solar Battery Park. We still expect the solar parks to go into service this year, assuming timely release of the panels. We also received regulatory approval for our purchase of the Darien Solar-Battery Park, with plans for 225 megawatts of solar capacity and 68 megawatts of battery storage. We expect this facility to go into service in 2024. Of course, weâll keep you updated on any future developments. And just last month with an investment of approximately $75 million, we closed our purchase of the Whitewater combined cycle plant, a 236 megawatt facility. As a reminder, we previously received energy and capacity from this natural gas unit under a purchase power agreement. In the natural gas business we have been working to bring high quality renewable natural gas to our customers. We signed another contract in January, which brings us to a planned total of 1 billion cubic feet of RNG thatâll enter our system annually. We expect RNG to flow this year, supporting our aggressive goals to reduce methane emissions. Outside our utilities, we continue to make good progress on zero carbon projects in our WEC Infrastructure segment. The Thunderhead Wind Farm in Nebraska is now in service. In addition, we expect to complete the acquisition of Sapphire Sky in Illinois in the coming weeks as commercial operation begins. And as Gale noted, weâre excited about our plans to add the Samson I solar project in our infrastructure segment before the end of the first quarter. Weâre confident that we can deliver on our earnings guidance for 2023. As you recall, weâre guiding to a range of $4.58 to $4.62 a share. The midpoint $4.60 a share represents growth of 6.7% from the midpoint of our original guidance last year. And as weâve discussed, we expect to fund our capital plan without any need to issue equity. And you may have seen the announcement that our Board of Directors at its January meeting raised our quarterly cash dividend by 7.2%. This marks the 20th consecutive year that our company will reward shareholders with higher dividends. We continue to target a payout ratio of 65% to 70% of earnings. Weâre right in the middle of that range now, so you can expect our dividend growth will continue to be in line with the growth in our earnings per share. Next up, Xia will provide you with more detail on our financial results and our first quarter guidance. Xia, all yours. Turning now to earnings. Our 2022 earnings of $4.45 per share increased $0.34 per share or 8.3% compared to 2021. Our earnings package includes a comparison of 2022 results on page 17. Iâll walk through the significant drivers. Starting with our utility operations, we grew our earnings by $0.19 compared to 2021. Weather drove a $0.04 increase in earnings compared to 2021. Rate base growth contributed $0.41 to earnings, and lower day-to-day O&M expense resulted in a $0.02 improvement and achieved our goal for the year. These favorable factors were partially offset by $0.12 of higher depreciation and amortization expense related to continued capital investment and a $0.12 increase in fuel expense, mainly driven by higher natural gas costs. In terms of sales, on a weather-normalized basis, retail electric deliveries in Wisconsin excluding the iron ore mines, were up 0.1%. Small commercial and industrial sales increased 0.5%, while residential and large commercial and industrial sales stayed relatively flat. Overall, our sales mix was stronger than our forecast. Our sales projections for 2023 can be found on Pages 13 and 14 of the earnings package. Overall, we are projecting relatively flat electric and gas sales year-over-year. Regarding our investment in American Transmission Company, earnings increased $0.07 compared to 2021. If you recall, $0.05 related to the resolution of historical appeals that we discussed on our third quarter earnings call. As previously discussed, beginning with the third quarter of 2022 and going forward, we are recording ATC earnings at a 10.38% return on equity. Earnings at our Energy Infrastructure segment improved $0.14 in 2022 compared to 2021. This was mainly driven by production tax credits as a result of stronger wind production and the addition of our Jayhawk wind farm that went into commercial operation at the end of 2021. In addition, recall that we recognized a $0.03 earnings contribution earlier in 2022 from the final resolution of market settlements in the Southwest Power Pool. Finally, youâll see that earnings at our Corporate and Other segment decreased $0.06, primarily driven by rabbi trust performance and lower gains recognized on our investment in the clean energy fund. Remember, rabbi trust performance is largely offset in O&M. Overall, we improved on our 2021 performance by $0.34 per share. Looking now at the cash flow statement on page 6 of the earnings package. Net cash provided by operating activities increased $28 million. And total capital expenditures and asset acquisitions were $2.7 billion in 2022, a $324 million increase as compared to 2021. As you can see, we have been executing well on our capital plan. Finally, letâs look at our earnings guidance. In terms of first quarter 2023 earnings guidance, we project to earn in the range of $1.68 per share to $1.72 per share. This forecast takes into account the fourth warmest January on record since the 1880s and assumes normal weather for the rest of the quarter. Remember, last year, we earned $1.79 per share in the first quarter, which included $0.02 of favorable weather, $0.03 from the Southwest Power Pool settlement and $0.03 from our investment in the clean energy fund. And for the full year 2023, weâre reaffirming our annual guidance of $4.58 to $4.62 per share. Weâre also reaffirming our long-term earnings growth of 6.5% to 7% a year over the next five years. Xia, thank you. Overall, weâre on track and focused on providing value for our customers and our stockholders. Operator, weâre ready now for the question-and-answer portion of the call. Just two quick ones for you. Just on the transmission CapEx with ATC, which obviously just pretty healthy uptick. In the past, I know youâve said you were seeing increases as early as 25 for Tranche 1 with LRTP and additional investments even earlier in â24. I guess, can you maybe talk about the cadence of this current increase as weâre thinking about the spending profile? And do you see more opportunities? Any sense on how youâre thinking about Tranche 2? Yes. Great question, Shar. Let me unpack the second piece of the question first, if thatâs satisfactory. On the second piece of the question really about Tranche 2, and again, just to level set everyone, MISO is going through a very thorough and rigorous long-term planning process for transmission investment in the region. They have been through and have now completed Phase 1 Tranche 1 -- Iâm sorry, Future 1 Tranche 1. So now weâre into Future 1 Tranche 2. And itâs a little too early to tell you precisely what weâre seeing in the planning for Tranche 2. But I can tell you that what weâre seeing so far in the stakeholder discussions at MISO is that -- is I think a good probability that the amount of investment opportunity for American Transmission Company in Tranche 2 is potentially greater than what weâre even seeing in Tranche 1. So, weâre optimistic about that. I would expect that we will be able to give you more detail before the end of this year on kind of the broad numbers as they emerge in the planning process. And Scott, would you like to handle kind of the cadence question? Sure. So, when you look at -- and weâll hear the end of this year or the beginning of next year as Tranche 2, weâll just see how fast that process goes. When you look at the projects, starting to ramp up really in â24 and â25, and thatâs related to Tranche 1, but also, we saw a lot of entries here at American Transmission Company just looking at connecting renewables on the state. So, that was about half of our increase in the prior year along with Tranche 1. So, I expect weâre going to see more of that as we look forward over the next 5 to 10 years, too. Shar, Scott is making a good point. Not only are we seeing the need for additional transmission related to these longer term projects that are part of the MISO planning but just to hook in the significant number of renewable projects being built in Wisconsin, thatâs an additional uptick, if you will, in our plan from just the Wisconsin connections for many renewable projects under development here. Got it. Perfect. And then, just lastly, just Gale, on the current 5-year plan. I know you guys budgeted roughly $1.9 billion in the Infrastructure segment. Obviously, you had two recent announcements with investing in sort of PTC eligible solar projects, I think, for the first time, obviously, in this segment. How are you sort of thinking about the remaining $1.1 billion of capital, I think you plan to deploy in this business? And should we expect more solar, more wind, or perhaps can you open it up to other technologies, which are obviously now PTC eligible post IRA? Thanks. Shar, we certainly could open it up to other technologies, but the big likelihood, given what weâre seeing in the pipeline of projects that weâre doing due diligence on, the big likelihood is they will largely be solar and wind. And youâre referring to the announcement we just made a couple of days ago, the Samson 1 Solar Energy Center in North Texas. That project, weâre very pleased to be a part of. It is coming in a little earlier. I think internally, we all thought that we would probably add another solar project toward the end of 2023. So, thatâs actually good news that itâs coming in a little earlier. And as I mentioned, we hope to close on that transaction final -- given final regulatory approval late in the first quarter. I hope that helps, Shar. It always does. And Scott always makes good points, by the way. I appreciate it, guys, and Iâll see you soon. Oh, my God. Just you wait, just you wait. Iâll give you the update next quarter. Oh, my God. So, just coming back to Wisconsin really quick. Just reopen your filing, if we can talk about super quickly. Obviously, thereâs been a lot of attention of late. Perhaps just at the outset, any comments and reactions of whatâs transpired here and just how to think about that reopener? And then within that, just a couple of subpoints, just West Riverside, how confident are you that youâll be able to submit data to prove the benefits for WEC are greater or at least equal to LNC? And then with respect to Oak Creek, some of the same considerations around what are the unrecovered balances of scrubbers and other plant? And do you see any specific obstacles around Oak Creek retirement and recovery on that front? Okay. Well, letâs kind of -- Iâm glad you got it all out. Letâs try to kind of walk through that, if I forget, Scott and Xia, any of the elements of the question, Scott and Xia will help remind me. But first, I think you were asking about the "limited reopenerâ that was part of the rate decision in December. So the limited reopener is for 2024, and it truly is a limited reopener relating to the investment cost of several projects that will be coming into service over the course of 2023. All of them regulated projects -- I think virtually all of them are really the renewable projects, Scott, that we are underway with here. So, the limited reopener is simply to reopen and put into rates recovery of the investment costs for projects that have already been approved and are under development, Scott, got by the commission. Yes. Itâll be very specific. For example, the liquefied natural gas plants we have going on in our gas system, some of the renewable projects I talked about in the prepared remarks, and some of the new RICE units that we have going in, in Weston. So, itâs very specific projects. For instance, LNG goes in at the end of the year, weâll just factor that in for a full year then. So, those -- that should be very straightforward as we do that filing. Yes, exactly. Thereâs no reopener related to the equity layer or the ROE. This is simply related to capital investments in projects already approved. So, I hope that answers that question. And then, in terms of just the general backdrop, I think one of the things that I believe Julien you actually did an interview with the Chairperson of the Wisconsin Commission, I would just encourage everyone to listen and read through some of the additional comments that she has made related to her view of the future of regulation in Wisconsin, wanting very much to be credit supportive as the decision was of our Wisconsin utilities and wanting to maintain the reputation of the Wisconsin Commission is very professional and certainly carrying out day-to-day the concept of gradualism. So, I hope thatâs helpful. And then secondly, on Riverside, we have already provided on time, all of the additional modeling data that the commission asked for in terms of modeling the impact of us exercising the Riverside option and to level set everyone. Riverside is a natural gas combined cycle plant at Alliant built. During the construction process, we agreed with Alliant that we would have two options each for 100 megawatts per option to essentially acquire at book value, those megawatts over a certain period of time. So, this particular question that you have relates to the first option. And again, the modeling data that the commission asked for is in their hands right now. And we expect sometime in the next 45, certainly no more than 60 days for the commission to take up the matter. So, I hope that responds and I hope we didnât miss anything. A lot there. Just lastly, super quick. On Oak Creek, just the current unrecovered balance of scrubber and plant, just as far as getting recovery there and any obstacles in that end? That was the last one. Okay. Great. Thank you for reminding us. The current book balance for the older Oak Creek units -- remember, there are four older Oak Creek units. Theyâre labeled Oak Creek 5, 6, 7 and 8. Those units went into service, I mean, literally, I think the oldest one was 1959 and the others are 1960s vintage units. So, the base plant itself, thereâs almost no book value left. The major part of the book value is in the emission controls, the modern emission controls that we build and put on those units at least a decade ago now. And that is roughly about $400 million. But I would remind everyone that thatâs not a subject for the limited reopener in Wisconsin in 2024, because the retirement dates have been pushed out a bit, given the tight capacity market. Scott, anything youâd like to add? And remember, when we look at those retirements. We also -- when they do retire, when all 4 of them retire, thatâs like $30 million to $35 million of reduced O&M expense along with less fuel cost. So, weâll be looking at them. I think our current date is May of â24. So potentially, weâll be analyzing it, but weâve got to look at our capacity situation. But right now, that is the plan. So, maybe part of the limited reopener. When you look at the whole picture, it reduces O&M costs, it reduces fuel cost. And remember, weâre replacing a lot of this capacity, some of itâs with renewables and get that production tax credits there in the front end. Itâs going to be very good for customers. Yes. Scottâs right. Thereâs some immediate significant savings. And you think about $30 million to $35 million of O&M savings from the closure of the plant. And on top of that, you get fuel cost savings. I just wanted to pick up a little bit on the prior conversation there with regards to Wisconsin Commission. And are you hearing anything from the Governor or stakeholders about who the next commissioner might be if the Governor has any particular policy goals for the commission that could potentially be expressed in this next nominee? No. In terms of any particular change of policy goals, no. The conversations weâre hearing related to the concept of what the appropriate next appointee will be, really, in my opinion and from everything weâve heard, revolve around the major concerns that the Governor has had since he took office, which is reliability, affordability and the continued transition away from fossil fuels, but in a pace and in a manner that preserves reliability. So, nothing different in terms of our belief in the Governorâs policy objectives. And the other thing that I would say is I would be shocked if the vetting process was not already underway. We would expect some type of an appointment announcement, if you will, I would guess, in the next 60 days. The other point, I think, thatâs important to remember is all the governors appointees have to be confirmed by the state Senate. And the Senate is heavily Republican. And I think all of that leads to the type of an appointment thatâs really close to the center line in terms of philosophy and in terms of approach of continuing the same type of approach the commission has been noted for over the course of many decades. I hope that helps, Jeremy. Yes. No, thatâs helpful there. I didnât mean -- I donât think I said different. I was just more thinking just type of policy as far as -- we were under the impression that maybe some labor-oriented policy might be in focus here. So, I didnât know if that was something that had come across our radar, but we can move along here. Well, Jeremy, actually, to your point, we do know, and weâve had conversations with the Governorâs office. As more and more renewable projects are under development, under construction inside the state of Wisconsin, we do know the Governorâs office is very interested and making sure as many of those jobs as possible are Wisconsin jobs. So, what youâre saying would not be a particular surprise. I think thatâs been part of the Governorâs agenda from the very beginning. Right. Right. Great. Thank you for that. And then kind of moving along and recognizing itâs earlier in the PGS rate case process, but have you received any stakeholder feedback here, particularly in how the QIP rider impacts this? And any sense from the legislature on an extension? Well, as you probably recall, our filing position, if you will, and we announced when we filed the case on January 6th, that it would not be our intention to try to extend the QIP rider through legislation. Itâs pretty clear from conversations with a number of the policymakers, including the Governorâs office in Illinois, that the preference is to return to traditional rate making procedures for all the capital investments that PGL and North Shore are making, but in particular, the capital investments that had been part of the, what we call, the QIP rider program. So, when you think about it and actually -- weâve really talked about this a lot internally. First of all, important to point out that the Illinois regulatory process in these rate reviews utilizes a forward-looking test period. So, even with going to a traditional ratemaking process, youâre in a forward-looking test period. So, that should help in terms of eliminating regulatory lag. Number one. Number two, actually going through a rate review with all of the testimony and all of the different stakeholders being able to voice their opinions, actually, I think itâs going to be a positive thing because thereâs been noise about the method of recovery of the investment as opposed to the need for the investment. What this will allow us to do -- this process over the course of 2023, this will allow us to again make the case for why the upgrade of aging, deteriorating piping systems underneath Chicago is so, so necessary for the safety and efficiency and stability of gas distribution in Chicago. So actually, we kind of look forward to the debate. And we look forward to the whole process, which Scott will take probably through close to December. It would take most of the year. And theyâre just -- currently, weâll -- we havenât even seen a final schedule yet. So, that will be coming out. That is very helpful. Just one last one, if I could here. Just after this latest solar investment with the Samson announcement, how does the broader market interest currently stand? Anything notable to highlight here on this transaction? No, other than -- I mean, other than -- in this particular transaction, thereâs really no construction risk because the facility went into service in May of last year. So, we really have no construction risk here whatsoever. Weâve got a year of operating data that we can base our due diligence on. And again, weâre really pleased with this particular investment. And we think itâs going to, again, add really high, high-quality project to our infrastructure portfolio. Well, weâre using production tax credits instead of investment tax credits, and thatâs really what helps our economics here. I mean, obviously, with the Inflation Reduction Act, solar is now eligible, you can choose either ITCs or PTCs. And our choice here is clearly PTCs, which will be spread over, Scott, a 10-year period. 10-year period. And adding that second solar farm in our portfolio really adds diversity to portfolio, too. So, really happy to adding that second solar. Yes, actually. Anyways, I wanted to start with just the credit metrics. I think you all used to give a reconciliation of FFO to debt with year-end earnings. Do you have that off the top of your head? Are you able to give where that ended up shaking out for the year? Michael, we disclosed the longer-term credit metrics and -- but we have all the actual data, and weâll be happy to provide that to you. I think itâs all public information. Okay. And then I just wanted to check on the solar build out. Scott, I think you said like assuming release of panels, which has kind of been like a little bit of a moving target? Just any updated color there on where things stand with where the panels are and being able to get them? Yes. So, weâve been able to get them in the U.S. Weâve been able to get them in the warehouse. In fact, about 40% of the panels we need to complete Badger Hollow 2 in Paris are in Chicago warehouse, and another 30% of the panels are about in the U.S. So we have the panels. Weâre just working to get them through the paperwork to get through the Border Patrol. Weâre starting to see a few panels, not ours, but a few panels get through the Border Patrol, so weâre optimistic. But we have them in the States, and we just need to get them released yet. So, we think all the paperwork is good. Weâve gone back and worked with our suppliers and worked with our developers to get everything lined up. Itâs just a matter of getting it through the final Border Patrol. But, weâre already -- the sites serve -- the one site is ready, and we have a lot of the panels right here, just a few -- 100 miles away to be able to put them on. We just got to get them out. Got it. Okay. And then last one, just flipping to the Samson acquisition, I know like none of these projects are exactly alike. But just on like a $1 per KW basis, this actually was one of like the cheaper deals that youâve done. Is that just a function of location, current environment, anything like nuance there that we should be thinking about? No. I think when you look at the appropriate purchase price, one of the big factors is the particular elements of the offtake agreement or the purchase power agreement, in this case with AT&T. So, that was a heavy determinant of the overall value that we saw in the project. Xia, anything you want to add to that? Thatâll put you to sleep. Iâm not a great singer. But I will be singing after they actually win in a few weeks here. Okay. Thanks, Gale, for giving me time. I was going to ask you a question on the price of Samson 1 versus Maple Flats that youâve answered. So, thatâs good. Maybe just -- are you seeing -- weâve heard a lot about transformer shortage and just general material storages. I think you talked about the panels already being in-house. But can you just generally talk about materials, construction materials? And are you seeing some tightness there, specifically issues with transformers or any other equipment? Yes. Great question, Durgesh. Let me say this. A couple of years ago, we actually were in a position where we thought we would be very protective of our customers and our franchise if we did a double order of transformers. And that has served us pretty well. I think everyone is a bit tight. Itâs kind of we feel reasonably in good shape with where we stand. We feel like weâre in good shape. Weâve been working with our suppliers every week. Probably the one thatâs across the industry is more of those pad-mount transformers. But weâve been working and we are able to continue with all our construction and our capital work. So, we donât think thereâs any issues, but weâre watching it very closely. Hopefully, things will loosen up here. But the pad-mount transformers along with some meter sets have been probably the tightest things for us, but weâre watching everything. I guess, are you sourced for the balance of the year in â24? Is that how we should think about it when youâre talking about the two-year kind of preorder? I think weâre sourced through the year next year. What we did is some of our larger transformers that we need for substations, we went out and did some ordered way ahead of time, just to get into the queue. Those are the transformers that Gale was talking about. So, thereâs different sizes of transfers. Those real large ones, we get out there a year ago to put orders out ahead of time. And Durgesh, one of the reasons we did what Scott just described is the large economic development projects that were coming to fruition here. For example, I mean, weâve talked a lot about [indiscernible] but they are up and running and ramping up and Komatsu was finished and is now operating their new headquarters and manufacturing -- state-of-the-art manufacturing plant. So a number of the major economic development projects, which we knew would require large transformer sets we prepared for that in advance, which was really good. First question is another one on Samson 1 here. Itâs early, but how do you think about the potential to invest in some or all of the next five phases? I mean that alone could be more than half of the five-year budget, or would you prefer to diversify your projects? Well, weâve really followed a philosophy of diversification. However, you never say never. We will see if the performance on Samson 1 is as we expected, and weâre certainly open to looking at portions of future phases. But we have not made any decision on that whatsoever. Itâs certainly a possibility. And Iâm confident if we wanted to be a continued partner in any of those future phases, we would have the opportunity to do so. But, weâll balance that against what we see as the performance in Samson 1 and against our thinking about diversification, both solar, wind and region. Itâs under construction now, but I donât have an in-service date, but we know itâs under construction now. So my guess is itâs in the next 12 to 18 months max. Okay. Great. Next question on a similar front here. The year-over-year EPS walk shows positive $0.10 from PTCs. Are you able to quantify what percent of your total earnings relate to renewable tax credits at the Energy Infrastructure segment? Xia might be able to give you that. I can -- we can tell you what the earnings from our renewable investments were. We can start at $0.28, which is what we delivered in terms of the investments in our infrastructure projects. So, you wrap in the PTCs, you wrap in other revenues. And Xia, we got to about $0.28 a share for 2022 from the Infrastructure segment. Correct. And we donât have the breakdown between PTCs and operating revenue, but the majority of the $0.28 million is from PTCs. Okay. Great. Thanks. Then one last one, if I can. The new battery pilot sounds exciting, but Iâm interested in your other science project, the hydrogen blending. You briefly mentioned on the last call that initial results were encouraging. Are you able to give us any additional updates on that project? Yes, they were very encouraging. And within a matter of weeks now, I think before the end of February, the Electric Power Research Institute, which really was the main technical organization helping to drive the project and helping to analyze the project. The Electric Power Research Institute will have a full report available on all the analysis. And we expect that report to be out in the next few weeks. But, again, very encouraged from the standpoint of both the efficiency of what we saw, no degradation of the equipment, and you name it, and it was -- as Scott said, the engineers were giddy. And thatâs scary actually when the engineers⦠Absolutely. I saw some photos of you with Aaron Rodgers in a basketball game recently in one of the local papers. Yes. I was apparently seated next to him and some other folks. It was -- for some reason or another, when youâre sitting next to Aaron, there are a lot of pictures being taken. It was all of you, Aaron was very fortunate. I own one share, so I hope he wasnât out that late. I hate keeping my employees out late there. Just more housekeeping questions, I guess one on Illinois. I think you spoke earlier on the rate case. And maybe I think if I characterize it correctly, itâs good maybe to go through an entire case and the commission, and I think parties will see how much the company has invested. Iâm just curious when you see the timing of the QIP rider, expires, then also on the electric side, which I know you guys are not there, but on the electric side, the formula rate plan expired. So the commission right now has 6 or 7 pretty sizable rate cases. Does that make settlements maybe more likely to happen given the workload there? Itâs very difficult to say one way or another. But certainly, the commission will have a solid amount of work to get through. I believe every natural gas distribution company of any size has filed their rate case in Illinois and of course, as you say, the formula rate plans and the changes under the legislation on the electric side. So there will be a lot cooking in Illinois this particular year. Whether that leads to more settlements, I think itâs way too early to tell. But clearly, the Illinois has had a track record of settlements. We actually, I believe, had a very positive settlement with our North Shore case just a year or so ago. So, itâs certainly not out of the realm of possibility, Anthony, at all. Got it. And if I stay with the gas business, at least Henry Hub gas prices have really declined from the start of the winter until now, and weâre still have a couple more weeks of winter left. I mean, is the company able to maybe capture that in customer bills through contracts? Iâm just wondering, as maybe the companyâs buying, more hedging process kicked up with these lower prices to mitigate customer bill impact. Well, weâre clearly going to see -- I mean, gosh, I look today, and I think weâre around 2.60 [ph] per million BTU is amazing compared to where we were just about two, three months ago. But if you look at -- particularly for our natural gas heating customers, we have a set commission-approved strategy where we basically -- in advance of the winter season, we basically do a third, a third, and a third; roughly a third of gas and storage, a third of financial hedging and a third on the spot market. So, the extent that third thatâs being purchased off the spot market is materially better, itâs going to be helpful to customer bills. And we also have that process as we start thinking about next year as we put injection. So, we may be hedging a little bit right now, just following a very strict pattern to lock in some of those prices for next year. Exactly. And one thing that I would add to all of that is that when we filed our case for Peoples Gas in Illinois, and Scott mentioned this in his prepared remarks, just looking at the futures market for natural gas, we should be able to completely -- even with the rate increase in base rates, we should be able to completely offset that with lower commodity costs and keep customer bills flat in 2024 in Illinois. Great. And then, if I just -- last question, Iâd say with costs. Iâm just curious, it seems -- obviously, WEC large corporation in our space. Youâve been able to navigate a lot of the challenges of maybe higher rates, inflation headwinds. And is it the scale and size? I mean, how big of a factor is that navigating where some of the smaller utilities or smaller companies are really stumbling on navigating? I mean, is it that -- do you need that scale and size to handle these challenges? Anthony, itâs a great question and my view would be we are in a scale business. I donât think thereâs any question about that. And Iâm going to ask Xia to give you one statistic that I think underscores the benefits of scale. If you look back to the -- as a starting point, to 2016, which would be the first full year after our acquisition of Integrys, so from 2016 to the end of â22, Xia will give you a statistic that will blow your mind. I think Gale mentioned -- is thinking about the day-to-day O&M performance. You know we brought down over $300 million since the acquisition. The CAGR from 2016 all the way to the projected 2023, I think is about 2.5% reduction a year projected. So at the same time, if you think about the asset base growth over the same period, itâs been north of 7% a year. So, the growing rate base asset base, at the same time bringing down O&M. So, thatâs a pretty solid track record. Well, thanks so much. Thanks for the time. Iâm also not planning a dog anytime soon. I hope you guys have a great day. Okay. With all the focus on affordability and the regularity of rate filings and rate increases over multiple years, associated with investments, et cetera. Iâm wondering if you can maybe -- the topic talk too much about is the rate design and whether in fact there is any room or any ability to kind of work on that to perhaps balance some misalignment or to like somehow perhaps make things perhaps broadly more affordable. I know that in the past, it was always the industrial, large customers, subsidize residential and those used to be the thing to want to work it back through cost of service. So, Iâm just wondering -- I wonder if you can kind of give us your thoughts on that. And secondarily, one of the other things is about the fixed charge versus variable and whether thereâs been a trend mostly to moving towards a much larger fixed charge and away from being volumetrically exposed? Is there any thought or any duration or philosophy around perhaps using that as a means to make things more balanced into affordability? Okay. Well, I will ask Scott to give his view on this as well. Let me start off with one thing that immediately comes to mind. We have been, I think, pretty innovative in trying to help on the whole affordability issue. In fact, in the prior rate case and then it will be actually improved coming out of this rate case, we started something called the LIFT program for low income individuals where if you stayed on a payment plan, there was actually some forgiveness of bill arrears. And thatâs been actually an example again of how weâre trying to help and work on the whole affordability issue. So, thatâs one thing that comes to mind. And the other is, Iâm sure, as we continue to see adoption of EVs across the footprint, that we will be looking at time of use rates and things that can be helpful in terms of not adding to the peak demand and therefore, not adding to our investment cost because of the prevalence of -- as we continue to grow the prevalence of EVs. Scott? Youâre exactly right. Looking at like time of use rates has been very helpful, especially as people are starting to get the EVs and they charge at night. And weâre always looking at other opportunities, and we had -- weâve added in the past year some real-time market pricing programs, too, to encourage economic development. So, we really continue to evaluate whatâs good for the state of Wisconsin and our customers. Youâre welcome. All right, folks. Well, I think that concludes our conference call for today. Thanks so much for taking part. Always enjoy the discussions with you. And if you have any additional questions, feel free to call Beth Straka at 414-221-4639. Thank you, everybody, so long.
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Welcome to Alicoâs first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, todayâs conference is being recorded. Earlier today, the company issued a press release announcing its results for the first quarter ended December 31, 2022. If you have not had a chance to review the release, it is available on the Investor Relations portion of the companyâs website at alicoinc.com. This call is being webcast and a replay will be available on Alicoâs website as well. Before we begin, we would like to remind everyone that the prepared remarks today contain forward-looking statements. Such statements are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied in these statements. Important factors that could cause or contribute to such differences include risks detailed in the companyâs quarter reports on Form 10-Q, annual reports on Form 10-K, current reports on Form 8-K, and any amendments thereto filed with the SEC and those mentioned in the earnings release. The company undertakes no obligation to subsequently update or revise the forward-looking statements made on todayâs call except as required by law. During the call, the company will also discuss non-GAAP financial measures, including EBITDA and adjusted EBITDA. For more details on these measures, please refer to the companyâs press release issued earlier today. As we start fiscal year 2023, Alico continues to maintain a strong balance sheet which will enable the company to navigate through the lingering impacts of Hurricane Ian on our 2023 harvest season. As a reminder, at the end of September 2022, Hurricane Ian struck southwestern Florida with 150 mile per hour winds. The slow-moving storm moved across the state and caused substantial fruit drop at the majority of our groves. For fiscal year 2023, we will see lower levels of revenue because we have less fruit available to sell. Based upon our prior experiences with storms of this nature, we anticipate it may take up to two full seasons or more for our groves to recover to pre-hurricane production levels. The early and midseason harvest ended earlier with lower production volume than in the prior year due to the increased rate of fruit drop as a result of Hurricane Ian. We will start the Valencia harvest in mid-February. We maintain crop insurance and are working closely with our insurers and adjusters to determine the amount of insurance recovery we may be entitled to, if any, which is measured at the completion of each harvest. Although a small number of our groves were exposed to freezing temperatures in late December 2022 and early January 2023, based upon the limited duration of those freezing temperatures, our freeze protection protocols and our highly dedicated staff, our groves were able to avoid any meaningful impact from those freezing temperatures. We continue to pursue strategic sales opportunities for our ranch land and the company has completed several sales of ranch land during the first fiscal quarter ended December 31, 2022, and has closed the sale of another 200 acres of ranch land in January 2023. We continue to engage with interested third parties on certain parcels of the ranch and at prices we continue to believe are competitive. We still have 19,000 acres of ranch land remaining and we believe, based on the recent activity, that these remaining acres will realize attractive prices as well. For the first quarter ended December 31, 2022, the company reported net loss attributable to Alico common stockholders of approximately $3.2 million as compared to net income attributable to Alico common stockholders of approximately $10.1 million for the first quarter ended December 31, 2021. The first quarter 2023 results were negatively impacted by the decreased revenue due to the increased fruit drop from the impacts of Hurricane Ian on our early and midseason crop, and the higher cost of sales resulting from increased inventory costs and a higher percentage of production realized in first quarter 2022 versus the same period in the prior year. During the first quarter ended December 31, 2022, the company negotiated an extension of its $70 million working capital line of credit with Rabo Agrofinancing until November 1, 2025. As a reminder, based upon the actions taken over the past several years, most of our term debt is non-amortizing and matures in November 2029. In addition, our $25 million revolving line of credit with MetLife extends into November 2029. We believe that these credit facilities will provide sufficient liquidity while the company manages through the impacts of Hurricane Ian. We continue to move forward as well with our environmental, social and governance initiatives and most recently published our second sustainability report in December 2022, which is available on our website. Thank you John and good morning everyone. As our business is seasonal and the majority of our citrus crop is harvested in the second and third quarters of the fiscal year, with the majority of our profit and cash flows also recognized in the second and third quarters, the quarterly results for the first quarter are not indicative of our full year results. Total operating revenue for the quarter ended December 31, 2022 was $10.6 million compared to $15.3 million for the quarter ended December 31, 2021. Our citrus revenue was $10.3 million and $14.7 million for the quarters ended December 31, 2022 and 2021 respectively. The decrease in revenue for the three months ended December 31, 2022 compared to the three months ended December 31, 2021 was primarily due to a decrease in grove management services and a decrease in revenue generated from the early and midseason harvest, with such decrease in harvest revenues being in large part because of the increased fruit drop caused by the impact of Hurricane Ian. The decrease in grove management services is primarily due to a primary group of third party grove owners who are affiliated with each other, to whom the company was providing caretaking and management services, deciding to exit the citrus business at the beginning of the three months ended June 30, 2022. This decision to exit the citrus business eliminated the need for caretaking and management services. As a result, caretaking and management services and the accompanying reimbursement of caretaking expenses decreased during the three months ended December 31, 2022 when compared to the same period in the prior year. The decrease in the early and midseason fruit harvested for the three months ended December 31, 2022 was primarily driven by a decrease in pound solids per box and a decrease in box production. The company decided to accelerate the harvesting of the early and midseason crop to maximize the box production and avoid additional fruit drop as a result of the impact of Hurricane Ian on the early and midseason harvest. The pound solids per box decreased 4.5% and the processed box production decreased 2.7% as compared to the same period in the prior year. As John noted earlier, the company will complete the harvesting earlier in the current fiscal year as compared to the prior fiscal year for its early and midseason fruit and anticipates an overall decrease in the number of boxes harvested and revenues generated from the early and midseason fruit for the 2023 harvest as compared to the 2022 harvest. Although Hurricane Ian impacted the early and midseason harvest, there does not appear to be long term damage to the citrus trees. Total operating expenses were $14.3 million and $13.4 million for the three months ended December 31, 2022 and 2021 respectively. The increase in operating expenses for the three months ended December 31, 2022 as compared to the three months ended December 31, 2021 primarily relates to the increased cost of sales per box realized in the three months ended December 31, 2022 as compared to the same period in the prior year. The company experienced significant cost increases in fertilizer, herbicide and fuel in maintaining its groves. These cost increases coupled with the timing of the harvest and the expected lower box production for its early and midseason harvest resulted in a higher cost of sales per box for the three months ended December 31, 2022 as compared to the same period in the prior year. In addition, the company incurred additional costs related to the clean-up and repairs as a result of Hurricane Ian. General and administrative expenses for the three months ended December 31, 2022 totaled approximately $2.5 million compared to approximately $2.6 million for the three months ended December 31, 2021. The decrease was primarily due to a one-time incentive offered to employees during the three months ended December 31, 2021. In addition, the company realized a reduction in stock compensation expense based upon a reduction in the restricted stock awarded to certain executives, senior managers and employees, and a reduction in other administrative costs. Partially offsetting these decreases was an increase in professional fees. Other income net for the three months ended December 31, 2022 and 2021 was approximately $2 million and approximately $7.6 million respectively. The decrease to other income net was primarily due to the timing on the gains of sales of real estate, property and equipment, and assets held for sale. During the quarter ended December 31, 2022, the company sold approximately 609 acres in the aggregate from the Alico ranch to several third parties and recognized gains of approximately $3,189,000. By comparison, for the three months ended December 31, 2021, the company recognized gains of approximately $8,445,000 relating to the sale of real estate, property and equipment, and assets held for sale. In addition, the company recognized an increase in interest expense of approximately $247,000 for the three months ended December 31, 2022 as compared to the three months ended December 31, 2021 as a result of an increase in the overall interest rates on its variable term debt and the working capital line of credit and incremental borrowings on under the working capital line of credit. During the first quarter ended December 31, 2022, we received the last installment of the Florida citrus block grant program from the 2017 storm, Hurricane Irma, of approximately $1.3 million as compared to approximately $1 million for the first quarter ended December 31, 2021. The company received a total of approximately $26.9 million commencing in fiscal year 2019 through December 31, 2022 under the Florida Citrus Recovery block grant program. For the fiscal quarter ended December 31, 2022 and December 31, 2021, we reported net loss attributable to Alico common stockholders of approximately $3.2 million and income attributable to Alico common stockholders of approximately $10.1 million respectively. Our adjusted EBITDA was approximately a net loss of $3.4 million for the first quarter ended December 31, 2022 as compared to a positive $2.3 million for the same period in the prior fiscal year. We continue to maintain a strong balance sheet. Our working capital of approximately $27.3 million at December 31, 2022 represents a 3.6721 and a 1.9121 ratio at December 31, 2022 and December 31, 2021 respectively, and our debt to equity ratio of 0.51 to 1 and 0.50 to 1 at December 31, 2022 and December 31, 2021 respectively. While the Florida citrus industry has faced challenges with respect to box production over the last couple harvest seasons, we remain confident that the approximately 1.9 million new trees planted since 2017 within our groves will yield increased production as we recover from the impact of Hurricane Ian. We believe that we have the most productive citrus groves in Florida. We are continuing to work with land use planning professionals to frame a strategy that optimizes the long term potential values for our real assets. Alico wants to provide investors with the benefits and stability of conventional agricultural investment with the enhanced optionality that comes with active land management. Thank you, and our first question is from the line of Gerry Sweeney with Roth Capital. Please proceed with your questions. Just a question - obviously youâre going to be hunkered down here for the next couple quarters, but wanted to see if maybe you could provide a little bit of maybe detailed or calendar in terms of, A, when--I know crop insurance is after harvest, but is that sort of July-August time frame or a little bit later? Then two, visibility on the quality of the trees, the fruit production as we move out of next year into the next season, â23-â24, making sure thereâs no damage to trees, etc. If crop insurance does happen, and as you correctly point out, weâll be measuring the amount of damages from Hurricane Ian against prior periods, so we have to wait for this current season to end so we can have a measurement period. Relative to the trees and the damage, we donât think that thereâs long term damage to our trees, just based on looking at them every day. We are obviously harvesting our Valenciaâs coming up right now, and once that seasonâs over, weâll be spending a lot of time basically looking at the productive trees themselves, determining where we re-plant from a maintenance perspective so that we can optimize the full production coming off of the acres that we do own, and by early midsummer, we should have a very good view on where we think over the next season or two of Alicoâs production will be coming out. Obviously we take from past practice, we take an internal estimate and kind of the late August-early September time frame that helps us do our budgeting, but weâre watching it very, very carefully in the interim. The big news is we really donât see any permanent long term damage to the trees themselves, and as we pointed out, with 1.9 million trees planted since 2017, thatâs very good news for us because we believe that represents the source of the future production for us. As it relates to the crop insurance, as John mentioned, we have to wait for each of the harvests to be completed. We just completed the early and midseason harvest, and we are working with the adjusters now. Historically, weâve always received--for the freeze event and then for Irma, we received the crop insurance within the same year as the event. Itâs not guaranteed - the insurance company has their own process that they need to work through, but based upon the last two events with the insurance companies, weâve received them within the same crop year. Got it. Switching gears, ranch land sales, 19,000 acres, it sounds like you sold some acres not only last quarter but beginning of this quarter. If my memory serves correct, the value of those sales have been increasing over time. I think some of it is all the land that has been encumbered for different reasons has been transacted out. Just curious as to, one, demand; two, as best as you can talk to, the value or the indications youâre seeing for the available land. Buyer interest remains high. Weâre seeing primarily cash buyers that donât seem like theyâre financing-dependent, which is good news. I think theyâre being as selective as they have been in past years. It is a competitive negotiation process for each transaction that we have, and we are seeing smaller parcels being negotiated as opposed to 3,000, 4,000, 5,000 acre deals. Weâre seeing things in the 100s and the low 1,000 acre parcels right now, but the actual price per acre is continuing to hold in the high 4s, low 5s per acre, which is what weâd consider very encouraging for hopefully future realized value for us. I just want to say thank you to everyone for joining our call today as well as for your continued support of Alico. We look forward to speaking with you all about our second quarter results coming up in May. Hope everyone has a great day. Thank you. This concludes todayâs conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.
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EarningCall_636
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Ladies and gentlemen, thank you for standing by for Cigna's Fourth Quarter 2022 Results Review. [Operator Instructions] As a reminder, ladies and gentlemen, this conference, including the Q&A session, is being recorded. Great. Thanks. Good morning, everyone, and thank you for joining today's call. I'm Ralph Giacobbe, Senior Vice President of Investor Relations. With me on the line this morning are David Cordani, Cigna's Chairman and Chief Executive Officer; and Brian Evanko, Cigna's Chief Financial Officer. In our remarks today, David and Brian will cover a number of topics, including Cigna's fourth quarter and full year 2022 financial results as well as our financial outlook for 2023. As noted in our earnings release, when describing our financial results, Cigna uses certain financial measures, adjusted income from operations and adjusted revenues, which are not determined in accordance with accounting principles generally accepted in the United States, otherwise known as GAAP. A reconciliation of these measures to the most directly comparable GAAP measures shareholders net income and total revenues, respectively, is contained in today's earnings release, which is posted in the Investor Relations section of cigna.com. We use the term labeled adjusted income from operations and adjusted earnings per share on the same basis as our principal measures of financial performance. In our remarks today, we will be making some forward-looking statements, including statements regarding our outlook for 2023 and future performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. A description of these risks and uncertainties is contained in our cautionary note in today's earnings release and in our most recent reports filed with the SEC. Before turning the call over to David, I will cover a few items pertaining to our financial results and disclosures. Regarding our results, in the fourth quarter, we recorded after-tax special item charges of $17 million or $0.06 per share for integration and transaction-related costs. We also recorded an after-tax special item charge of $56 million or $0.18 per share for costs associated with the sale of businesses. As described in today's earnings release, special items are excluded from adjusted income from operations and adjusted revenues in our discussion of financial results. Additionally, please note that when we make prospective comments regarding financial performance, including our full year 2023 outlook, we will do so on a basis that includes the potential impact of future share repurchases and anticipated 2023 dividends. Thank you, Ralph. Good morning, everyone, and thanks for joining today's call. 2022 was a pivotal year of performance and growth for our company. Evernorth further expanded its health service reach and impact, and Cigna Healthcare demonstrated tremendous resilience in the dynamic market. Together, the breadth and complementary nature of our portfolio enabled us to exceed our revenue and earnings outlook and return meaningful capital to our shareholders. This provides us with momentum as we begin 2023 and we expect another year of customer and earnings growth as we innovate and expand our broad portfolio of services and capabilities. Today, I'll provide perspective about our key drivers for our 2022 performance and how we're positioned for sustained growth going forward. Then Brian will walk through additional details about our 2022 financial results and discuss our '23 outlook. Then we'll take your questions. So let's jump in. As we reflect on our performance for 2022, I'm proud of what the company and Cigna team delivered overall. We grew full year revenues to approximately $181 billion. We delivered full year adjusted earnings per share of $23.27 reflecting a 14% rate of growth. We returned $9 billion to shareholders through a combination of share repurchase and dividends, and we sharpened the health service focus of our international business through the divestiture of our life accident and supplemental benefits businesses across seven markets. This performance demonstrates how well our Evernorth and Cigna Healthcare platforms are strategically positioned for sustained attractive growth. In 2022, Evernorth delivered strong top and bottom line growth and also won, renewed and expanded several large multiyear client relationships for 2023 and beyond. The depth of Evernorth's capabilities and expertise is highly valued by our clients and partners and enables us to deepen existing relationships across our entire portfolio of businesses. Cigna Healthcare, our health benefits platform also had a strong year, delivering customer growth along with differentiated medical cost performance for the benefit of our customers and clients. Our U.S. Commercial business had a standout performance achieving outsized customer growth while maintaining pricing discipline and driving margin improvement. This reflects our ability of our Commercial team to work consultatively to help employers of all sizes manage affordability, all while we support healthy, highly engaged employees for the benefit of their businesses. Overall, we're pleased with the strength of our 2022 performance across our enterprise. As we look to 2023, we continue to deliver and capture meaningful value in multiple ways. First, we expect sustained growth through our foundational businesses, Pharmacy Benefit Services, U.S. Commercial and International Health. These are mature scaled businesses that have established core relationships with corporate clients, health plans and governmental agencies. The value proposition for these businesses continues to resonate very well in the marketplace. In Pharmacy Benefit Services, we expect continued contributions in 2023 through the strength of our unique solutions and partnership orientation. With the strong selling season across our employer, health plan and governmental agency portfolio, we will continue delivering greater affordability to more customers and patients. Additionally, we are investing meaningfully to put in place the teams and resources to make prescriptions more accessible and affordable for approximately 20 million Centene customers starting in 2024. In the U.S. Commercial business, we also had a strong 2023 selling season across all our market segments and across all funding types, self-funded risk and shared return arrangements. As a result, we anticipate driving another year of earnings, customer and revenue growth. And in International Health, we expect continued revenue and earnings contributions through our leadership in meeting the health and wellbeing needs in attractive growth markets and for the globally mobile. Second, we expect outsized growth from our accelerated businesses, Accredo Specialty Pharmacy, Evernorth Care Services and U.S. government. These businesses have differentiated capabilities and platforms addressing accelerated secular growth trends. With Accredo, we were able to lower cost for patients and plans while preserving choice and flexibility for those who could benefit from new drugs. This includes our work to increase the availability of biosimilars. We've seen a handful of these lower-cost alternatives for biologic drugs launched in the past few years and understand the exceptional value they deliver for the benefit of clients and customers. 2023 will mark the start of a growing market opportunity for biosimilars, a trend that we expect to continue ramping up in 2024 and beyond. This includes HUMIRA, a treatment for a range of inflammatory conditions and one of the top-selling drugs globally over the past decade. Now there's a biosimilar alternative that we've co-preferred on a national preferred formulary creating significant savings opportunities for clients and customers. We will continue our leadership in advocating for greater availability of biosimilars, which over time, we expect to drive even more savings and benefit for patients and clients. In Evernorth Care Services, we are continuing to enhance and expand our portfolio of capabilities in care management and care delivery. Last year, MDLIVE virtual patient visits grew meaningfully, including a substantial increase in primary care visits. Demand and satisfaction with virtual care is rising and we will continue expanding our MDLIVE platform to provide even more of these options for the benefit of our customers. Evernorth Care Services is also accelerating our value-based care capabilities through our recently announced partnership with VillageMD. Our wrapping Evernorth health service capabilities with VillageMD's network of physicians, we will help guide more patients to high-quality care experiences at lower overall total costs. We expect this partnership to begin rolling out over the course of this year. In the U.S. government, another accelerated business, we expect strong growth in 2023 as we expand services and our geographic presence across a large and growing addressable market. This includes Medicare Advantage, where we will introduce enhanced services and benefits, and we nearly doubled the size of our provider network over the last two years as we expand into new geographies. Additionally, as we have demonstrated continued consistent commitment to participating in the ACA exchange marketplace, in a dynamic environment, our Individual & Family Plan business, we will see outsized customer growth in 2023. The third growth driver for us in 2023 and beyond is enterprise leverage. This is where our businesses work together to create or capture more value than anyone could achieve on their own. Here, think about our ability to look across our enterprise and client relationships to broaden and deepen them by leveraging our entire suite of capabilities. A great example is a new large service-based relationship for Cigna Healthcare where we were able to expand our support for a long-served Evernorth client. Additionally, the depth of clinical expertise success in advancing innovation and breadth of solutions within Evernorth, all combined to help further improve Cigna Healthcare's value proposition. For example, in 2022, by harnessing Evernorth's capabilities and programs, Cigna Healthcare delivered exceptional affordability, a key reason it continues to be competitively attractive option for employers of all sizes. This ability to deliver meaningful value is what makes Evernorth a partner of choice to a wide range of health plans, large employers and other clients. Another way we generate enterprise leverage is with our longitudinal portfolio data, which enables us to accelerate innovation and create new solutions for our clients and customers. This is specifically how we developed our Pathwell programs where we're able to integrate Cigna Healthcare's high-performing provider networks and benefits management with Evernorth's analytical and clinical expertise as well as personalized digital support. This equips Pathwell to lower cost while connecting patients with the right care, anticipating their future needs and helping them recover more quickly. Pathwellâs focus in 2023 includes musculoskeletal conditions and patients who take injectable or infusible biologic drugs. Early feedback here has been very positive, and we expect to support millions of patients throughout these programs with better experience, clinical quality, costs, resulting in improved overall value. These examples illustrate just some of the impact we've already achieved with our cross-enterprise leverage, and we'll continue acting on additional opportunities in the years ahead to expand relationships, accelerate innovation for the benefit of our customers, patients and clients. Now I'll briefly summarize. 2022 was a strong year of performance and growth for our company. With our Evernorth and Cigna Healthcare platforms, and our durable growth framework, we are well positioned to meet the needs of our customers, clients and partners as we look to the future. We are delivering on our commitments to our shareholders with our 2022 adjusted EPS of $23.27 and returning $9 billion in share repurchase and dividends. And we are also responding to evolving needs of those we serve in the coming years in the Healthcare environment of accelerated change. We have a differentiated innovation pipeline that will allow us to build on our momentum and create value, continue to advance our growth strategy. We are confident 2023 will be another year of strong performance for our company as we expect to deliver customer and earnings growth. Our EPS outlook of at least $24.60 and the 10% increase of our quarterly dividend reinforced our commitment to sustained impact and growth for the benefit of all of our stakeholders. Thanks, David. Good morning, everyone. Today, I'll review key aspects of Cigna's fourth quarter and full year 2022 results, and I'll provide our outlook for 2023. We're very pleased with our strong performance in 2022, reflecting focused execution and growth across both Evernorth and Cigna Healthcare, with each segment achieving pre-tax adjusted earnings growth in line or above our long-term targets. This positions us well for continued growth in 2023. Looking at full year 2022 specifically, key consolidated financial highlights include total revenues of approximately $181 billion, and adjusted earnings of $7.3 billion after tax or $23.27 per share, reflecting 14% growth from 2021. This is above the high end of our 10% to 13% long-term average adjusted EPS growth target. Regarding our segments, I'll first comment on Evernorth. 2022 marked another year of sustained growth and profitability in Evernorth, as our innovation, market-leading clinical capabilities and proven track record of delivering for clients and customers continue to resonate in the market. Turning specifically to fourth quarter results for Evernorth, revenues grew to $36.2 billion, while pre-tax adjusted earnings grew 6% over fourth quarter 2021 to $1.7 billion. Similar to the first three quarters of 2022, Evernorth's strong results in the fourth quarter were driven by continued expansion of our accelerated growth businesses, led by our specialty pharmacy as well as our focus on affordability and delivering lowest net cost solutions for our clients and customers. We also continued to make meaningful strategic investments, which serve to strengthen our client relationships, expand our services portfolio and advance our digital capabilities. Overall, Evernorth delivered another strong year, focusing on driving value for clients and customers and expanding our partnerships and relationships, all while achieving strong revenue and pre-tax adjusted earnings growth in line with our long-term growth targets. Our recently announced collaboration with Centene that begins in 2024 as well as other large multiyear contracts we renewed for 2023 further demonstrate the strength of our value proposition and proven partnership orientation in the market, providing long-term opportunities to grow while driving lower costs for our clients. Turning to Cigna Healthcare. As we entered 2022, we shared with all of you our goals of both growing our customer base and expanding margins. I'm pleased to report we ended the year accomplishing both of these goals, as we grew our medical customer base by 5% or 923,000 lives to 18 million total customers, while improving full year pre-tax adjusted margins to 9%, a year-over-year improvement of 90 basis points. Fourth quarter 2022 performance contributed to full year results with adjusted revenues of $11.1 billion, pre-tax adjusted earnings of $500 million and a medical care ratio of 84%. Despite an elevated flu and RSV season, our medical care ratio was slightly better than our expectations, particularly within our stop-loss products. Our medical care ratio for full year 2022 of 81.7% improved 230 basis points compared to the prior year. Both full year and fourth quarter results benefited from pricing discipline and affordability initiatives, including our clinical programs. Overall, Cigna Healthcare delivered for our customers, clients and partners, all while driving a strong year of customer growth and margin expansion with full year pre-tax adjusted earnings growth of 13%, which is above the high end of our long-term target range of 8% to 10%. Turning to Corporate and Other Operations. The fourth quarter 2022 pre-tax adjusted loss was $382 million. As a reminder, this segment previously included earnings contributions from the international life, accident and supplemental benefits businesses that we divested to Chubb on July 1, 2022. Overall, Cigna's 2022 results were strong, reflecting focused execution for the benefit of our clients and customers. As we turn to 2023, we continue to expect underlying growth in both Evernorth and Cigna Healthcare, while continuing to make strategic investments to drive future growth. For the full year 2023 outlook, we expect consolidated adjusted revenues of at least $187 billion. We expect full year consolidated adjusted income from operations to be at least $7.33 billion or at least $24.60 per share, consistent with our prior EPS commentary on our third quarter earnings call. I'd like to remind you this outlook includes a headwind from costs we will incur in 2023 to prepare for serving Centene's customers. This contract starts on January 1, 2024, and we look forward to many years of partnership and collaboration as we drive affordability for their customers. Additionally, with regards to earnings seasonality, we would expect a different cadence this year when compared to historical patterns, with earnings more back half weighted, in first quarter representing slightly above 20% of the full year EPS. For full year 2023, we project an adjusted SG&A expense ratio of approximately 7.3%. And we expect a consolidated adjusted tax rate in the range of 21% to 21.5%. I'll now discuss our 2023 outlook for our segments. For Evernorth, we expect full year 2023 adjusted earnings of at least $6.4 billion. Tailwinds and headwinds are largely consistent with the points we highlighted on our third quarter earnings call. These include tailwinds from a strong selling season and value creation from the increased availability of biosimilars, building in the second half of 2023 and ramping in 2024 and beyond. These are partly offset by headwinds from additional costs to support future growth, including implementation costs associated with onboarding Centene prior to receiving revenue, strategic investments in our accelerated growth businesses and the expansion of our relationships with the Department of Defense and Prime Therapeutics. In consideration of these tailwinds and headwinds, we expect adjusted earnings within Evernorth to be weighted more towards the back half of the year, with low single-digit year-over-year earnings growth in the first half, followed by mid-to-high single-digit year-over-year earnings growth in the second half. For Cigna Healthcare, we expect full year 2023 adjusted earnings of at least $4.4 billion, representing growth of at least 8% year-over-year. We expect 2023 Cigna Healthcare earnings to be split closer to 50-50 between the first half and second half of the year. This outlook reflects the strength of our value proposition and focused execution in our business driven by organic customer growth and disciplined pricing. Key assumptions reflected in our Cigna Healthcare earnings outlook for 2023 include the following: regarding total medical customers, we expect 2023 growth of at least 1.2 million customers, with growth across each of our U.S. Commercial, Medicare Advantage and individual businesses. Within U.S. Commercial, we expect organic customer growth across each of our national, middle market and select market segments. And similar to 2022, the growth will primarily reflect fee-based customers. We expect Medicare Advantage customer growth of at least high single digits, and we expect growth in our U.S. individual business of at least 300,000 customers, driven by geographic expansion, strong industry growth and the exit of competitors from certain geographies. We expect the 2023 medical care ratio to be in the range of 81.5% to 82.5% in part reflecting an increased mix of government business, which tends to have a higher medical care ratio compared to U.S. Commercial and International Health. Additionally, we would expect the first quarter 2023 medical care ratio to be within the full year guidance range. As it relates to Corporate and Other Operations, this segment has evolved given the divestiture of a portion of our international business last year that had been a positive earnings contributor in the first half of 2022. As a result, we expect the full year 2023 pre-tax adjusted loss to more closely reflect annualized fourth quarter 2022 results. Now moving to our capital management position and outlook. In 2022, we finished the year strong and delivered $8.7 billion of cash flow from operations. We returned $9 billion to shareholders via share repurchases and dividends in 2022. Specific to share buyback, we repurchased 27.4 million shares for $7.6 billion. Additionally, our debt-to-cap ratio finished the year at 40.9%, an improvement of 80 basis points from year-end 2021. Now, framing our capital outlook for 2023. We expect at least $9 billion of cash flow from operations, reflecting the strong capital efficiency of our enterprise. This positions us well to continue creating value through accretive capital deployment in line with our strategy and priorities. We expect to deploy approximately $1.4 billion to capital expenditures. These investments will include substantial commitments to our accelerated growth platforms of specialty pharmacy, Evernorth Care, and U.S. government. We expect to deploy approximately $1.45 billion to shareholder dividends, reflecting our increased quarterly dividend of $1.23 per share, up 10% from 2022 on a per share basis. Year-to-date, as of February 2, 2023, we have repurchased 1.6 million shares for $510 million. And our guidance assumes full year 2023 weighted average shares to be in the range of 296 million to 300 million shares. Our balance sheet and cash flow outlook remains strong, benefiting from our asset-light framework that drives strategic flexibility, strong margins and attractive returns on capital. And now to recap. Our full year 2022 consolidated results reflect strong contributions and execution from both Evernorth and Cigna Healthcare. Our 2023 outlook reflects continued momentum across our segments as we invest to support long-term attractive growth. We are confident in our ability to deliver our 2023 full year adjusted earnings of at least $24.60 per share. And we continue to expect to deliver 2024 adjusted EPS of at least $28, consistent with our prior EPS commentary. I might ask a little bit more about where you're at in the rollout of the VillageMD value-based contracting arrangements. I know when the deal was signed, contracts had to be signed in the various markets with the VillageMD folks. Have you largely been able to do that? Maybe give us anything you can about how you see that business ramping up in terms of contribution to Evernorth revenue and operating income over time. I assume it will be not particularly material this year, but as you look out over the next few years. Good morning, A.J., it's David. So first and foremost, stepping back, we're pleased with the relationship and the ability to partner with a proven organization that has a nice growth track record. Two, you think about the work taking place collaboratively in phases, with the first phase of well underway working through and successfully securing approvals and contracts with building momentum, whereby we will put in place with Village, capabilities such that we could enable more targeted access to preferred or higher-performing specialists within the Cigna Healthcare Life portfolio and the direct serve portfolio of our relationships as Phase 1 and expand some of the capabilities to coordinate care, whether it's expansion of virtual capabilities, expansion of behavioral capabilities or otherwise. There's a second phase of work, so the innovation will continue, whereby we work with Village to codify and build some new products that have exclusivity relative to their proven physician leadership and physician-directed programs that have even a more targeted value proposition not just for the benefit of Cigna Healthcare on the benefit side, but offered for the benefit of health plans we serve in a broader sense and for Village. One of the wonderful parts of the way the relationship is built through leveraging the Evernorth capabilities, we'll be building a lot of the shared savings together with Village. And as such, be able to benefit from those shared savings through our Evernorth program. So to recap, good momentum already, good collaboration already, good progress already. You're right, we don't market as a significant revenue or earnings driver in 2023 for us, but we will see progress in 2023, especially through the second half of the year and a building contributor in 2024, and we look forward to providing you more of an update as we look to 2024. I also wanted to ask about VillageMD. So David, we'll keep you on that track just a little bit longer. My question -- I guess I have a couple of questions about it. One is, I know historically, your inclination was Cigna didn't need to own delivery assets even though your peers are increasingly moving in that direction, and this investment does obviously give you some ownership of a delivery asset. So just wanting to understand how much your thinking has evolved along those lines? And then secondly, I just kind of want to understand a little better long term. Village obviously has this large growth national expansion plan, how do you -- but payer agnostic. So does it really just become a important partner and a part of a preferred primary care network? Or how do we think about the next several years, like what that relationship means to the Cigna Healthcare and to Evernorth? Sure, Gary. A lot in there. Let me try to address the points, all important points, and I appreciate your question. First and foremost, to be clear, our strategy remains consistent. Our preferred approach on the core medical fulfillment of care is to partner and enable. I'll come back to that. As we've discussed before, there are parts of the healthcare delivery or service fulfillment equation that we seek to own, and we're very clear relative to that. Examples include virtual, behavioral, specialty pharmaceutical fulfillment and select aspects of home care, we deem them to be unique, highly differentiated and an ability to leverage over multiple geographies in an efficient way. Our notion of partnering continues through, we'll call it, core value-based care, where today, about 75% of our MA customers have a value-based care relationship. About 50% of our exchange customers have a value-based care relationship. And about 40% of our commercial employer business has a value-based care relationship. Now to the Village relationship. First and foremost, it's also a clear depiction as we discussed at our Investor Day, that we see the healthcare delivery system community as an addressable market for us. We see it as an addressable market to bring additional services to help to extend their reach, their care coordination, curation of high-performing specialty networks and overall continuity of care, including digital aspects of the care equation. So the Village relationship, we see as an extension of partnering we see that payer agnostic orientation that you articulated as a positive because Evernorth serves a broad portfolio of clients including most of the large health plans in America today in some way, shape or form. And we see the ability to grow collectively and collaboratively with Village as a positive, but through partnering set of relationships. So to reiterate, there are aspects that we'll seek to own. We will continue to use our current process of incentive alignment and care coordination to extend our core value-based care offerings. And now with Evernorth, we will seek to deepen those services with select provider partners for the benefit of the totality of the panel, not just for the Cigna Healthcare lives that go through. However, there may be some unique programs that are designed from a Cigna Healthcare standpoint. So we see this as a great win-win and an additional growth opportunity for Evernorth. Gary, I hope that helps. You mentioned some of the headwinds and tailwinds for Evernorth into 2023. And obviously, there's the Centene implementation cost. But you also mentioned some other strategic investments. And can you quantify those? Or what is that exactly? And in the back-end weighting across the segment, is that largely attributable to those associated costs? Or is that a little bit of the HUMIRA benefit has been or changeable comes available midyear? Erin, it's Brian. So as it relates to the headwinds and tailwinds you're right to call out the strategic investments. So we continue to invest an outsized amount of money in areas such as our Evernorth Care services platform to enable things like VillageMD that David just discussed alongside our specialty pharmacy business, which continues to grow at very attractive rates. And so, that's all been factored in alongside the Centene related implementation costs. But importantly, we have tailwinds that allow us to introduce our guide today with at least 4.5% income growth for the Evernorth segment, inclusive of those pressure points on the spending side. As it relates to the cadence of Evernorth earnings, you should think of the back half weighting that I referenced is primarily driven by the biosimilar ramp effect that I described, but not entirely, there's also some effect of the cadence of operating expense spending over the course of the year that also impacts the timing. But the biosimilar contributions, we do expect to be more back half weighted, which is a key driver of the difference in the cadence. I wanted to ask a little bit about the customer growth, that's a pretty strong number there. And so when you think about the enrollment growth, I guess, first on the ACA side, how comfortable are you about the risk profile and the pricing on that type of growth? And then as far as the commercial growth, is there -- I know it's ASOs so it's less risk -- worried about risk there, but just want to understand your thought process around how redeterminations impacted your growth expectations there? Maybe how much of that growth you expect there is in group versus kind of new customer wins? Good morning, Kevin, it's David. Let me start just frame it a bit more broadly and then ask Brian to peel back your question a little bit. First, we're pleased with the strong performance we delivered in 2022 and now being able to step into 2023 with a very attractive outlook. And it continues to reinforce that our Cigna Healthcare platform, including our Commercial employer portfolio continues to perform very well. I'd just highlight three areas quickly in terms of the underlying drivers or enablers of the continued growth for us. One, especially in the commercial employer portfolio is a consistent intense focus. We have, we are, we will continue to have a consistent intense focus on this segment as we see it as a growth segment. Hence, we focus and innovate for its benefit. Second is a track record of excellent total cost or total medical costs. That is resulting from very good work from our network management team our clinical programs and the returns they deliver and our growing suite of site of care optimization programs that all contribute to good clinical quality service and overall affordability. And then finally, what we've talked about before, but maybe it's sometimes forgotten, our orientation around consultation and putting solutions in place. So whether it's an employer of 100 or an employer of 10,000, we take an orientation of consultatively working to put the right solution suite in place for them. I'm going to have Brian peel back the drivers of our outlook, I will put one asterisk on it. We have not factored in an uptake relative to redeterminations as a contributor in our outlook for the year. We recognize that redeterminations present an opportunity for us, not a risk for us because we don't have that business to protect currently. But given it's still uncertain in terms of the rate and pace of state activity to adjudicate their redeterminations, we don't have that factored into this very attractive outlook. Of course, we'll present updates to you as the year unfolds as states go through the redetermination process. Sure, David. Good morning, Kevin. So maybe just a little bit more detail here in terms of how to think about the 1.2 million plus net customer growth. And then I'll hit your question on the ACA exchange profitability as well. So first off, I'd be remiss if I didn't say we're really pleased with another year of strong growth that we expect here in 2023 and following growing almost 1 million net customers or 5% in 2022. And as we mentioned earlier, we expect net growth in 2023 across all of our major U.S. business segments with the individual exchange business expecting at least 300,000 net customer growth. Our MA net growth has started strong. We expect at least a high single-digit percentage growth rate for 2023, in line or better than industry growth rates. And we expect at least 250,000 net new customers generated by core growth across our U.S. Commercial portfolio. So if you take those three components together, they represent about half of our expected full year net growth of 1.2 million plus customers. And then the balance of the 2023 customer growth, you can think of as the net effect of some moving pieces, including the larger client relationship expansion that David mentioned in his prepared remarks. I mean we have good line of sight into this 1.2 million plus to David's point, we are not banking on any meaningful amount of volume for Medicaid redeterminations. As it relates to the morbidity and/or risk pool of the IFP business or individual business that we're adding, our 2023 customer growth outlook reflects a combination of a few things being industry growth our own new market entry as well as competitors exiting certain geographies that we participate in. As you think about where our margin profile stands, in 2022, the margins on this book are below our long-term goal. Our long-term goal is to remind you is 4% to 6%. We took a step forward in '22 from where we were in '21, given that '21 was a depressed margin year. But we're still below our long-term goal. And for purposes of '23, we continue to expect the margins on this book will run below our 4% to 6% long-term goal in our Cigna Healthcare income and MCR guidance reflects this. Just given the substantial amount of new customers we've added, we thought it was prudent to assume margins will be below our long-term target for this calendar year. But this is a book of business that does represent a source of future embedded earnings power that will help to contribute toward the long-term growth in the Cigna Healthcare segment income I guess you guys get the first crack to comment on the preliminary 2024 MA rates and just interested in your initial observations on those. Obviously, we sell the final rates ahead and whether that influences your thoughts on your 10% to 15% long-term Medicare Advantage enrollment growth target at all, max? Good morning, Scott. Clearly, the initial or preliminary rate letter came out. But before I comment on that, just stepping back for a moment, it's clear that Medicare Advantage has represented and continues to represent a significant both market opportunity as well as a growth opportunity for the U.S. today serving about 30 million seniors continued growth and seniors reinforce the value, the clinical quality and the service quality they receive by continuing to renew and/or expand relationships in MA. The initial rate letter that came out does have lower or somewhat anemic revenue, we'll await the final rate letter that comes forward relative to that. Having said that, I think it's a little bit early to presuppose what 2024 growth outlook may look like because you compete on a relative basis. Having said that, this will create, if it stays in the range of what the rate letter looks like. It will create some revenue dislocation. So the sophistication of benefit management that's going to be necessary market by market. The leverage of value-based care relationships, which, as I noted earlier, about 75% of our MA lives are in a value-based care relationship will all come into play. I reinforce the fact that the 10% to 15% is our objective to have 10% to 15% customer growth over time on average. We're stepping into this year with a very good customer growth outlook already that we feel good about. And as a final note, I would remind you that while an attractive long-term growth opportunity for us, today, this represents or MA represents less than 5% of the enterprise portfolio. So any dislocation in 2024, we deem to be manageable with the strong performing portfolio that we have in front of us. Just want to follow up first on the membership guide. Just any color on the pricing of that membership, how much comes in Q1 versus the rest of the year? And then healthcare margins certainly been a lot better there in 2022. Just wondering what ballpark you're expecting to be in 2023 there relative to your long-term guidance? Justin, a little color relative to pacing and then I'll ask Brian to talk about more to your second question. As Brian noted, we have good visibility into the membership volume. And when you think about the -- outside of the individual exchange business, what we've seen growth across all of our funding types. Still the lion's share of it is ASO including the service-based relationship with a large customer. So in essence, a meaningful portion of that volume will be realized in the first quarter of 2023, and then they'll be puts and takes throughout the course of the year. We'll look forward to providing you updates on. Now individual lines of business will move throughout the course of the year. But by and large, if you think about -- our expectation is that we'll have good performance relative to that on the first quarter of the year and then some puts and takes throughout the course of the year with some additional growth and maybe some additional disenrollment as we factored in some impact in our outlook for a bit of an uptick in disenrollment as we look at the current fragility of the U.S. economy. So good visibility for Q1. I'll ask Brian to talk a bit more around the margin. Good morning, Justin. So as it relates to the Cigna Healthcare margin profile, we're first off, really pleased to have finished 2022 with the 9% Cigna Healthcare margin, which is 90 basis points of year-over-year expansion which allowed us to return to the low end of our target margin range of 9% to 10%. So this stronger-than-expected 2022 performance certainly increases our confidence in executing against our '23 margin goals. As I noted in my prepared comments earlier, we will see some product mix shift in 2023, specifically with the government lines becoming a slightly larger percent of premium within Cigna Healthcare, and these products tend to carry a lower profit margin profile than the U.S. Commercial and International Health products. So when you consider all of this and our continued investments in our accelerated growth platforms such as MA, we'd expect our 2023 Cigna Healthcare margins to land within our target 9% to 10% range, but at the low end. I just wanted to come back to the PBM. David, you made a comment that HUMIRA would be on the formulary and parity with the biosimilar. Just curious as we think about AbbVie potentially increasing the rebates around that product? Is it better for the PBM if it shifts to the biosimilar? Or are contracts now set up in a way that you're going to share in the overall cost savings where it doesn't really matter. And then secondly, when we think about plan design, anything of note when we think about pharmacy benefit for 2023? Lisa, good morning. So to your first question, the co-preferred position that we have taken on our national preferred formulary is a mechanism to aid the transition, preserve and expand choice with aligned economics back to our clients and for the benefit of our customers and patients. I'd also note that that's our National Preferred Formulary, which is our largest single formulary. We support and administer multiple formularies that are customized for individual clients from that standpoint and avail choice. I'd also suggest that this will be fluid. It will flex over time. Third, as we've demonstrated within our PBM and our broad pharmacy portfolio services, we have the tools to align the incentives whereby when we enable choice and create value. Meaningful portion of that value are passed back to clients, customers and patients and a sustainable portion of the value is retained by us and the current position that we have taken aligns in that way. So it's not -- we have to have a reason of our brand drug versus the biosimilar, we have the mechanisms to afford additional choice, additional flexibility and to align the incentives. As it relates to the second part of your question, I would just give you by way of trend as opposed to an individual benefit design configuration or change, buyers in the space, be they corporate buyers, health plan buyers, et cetera, are seeking to push for more what we talk about internally all the time, coordination of services and continue to challenge point solutions. That plays very well for us. So when you think about an illustration of that, the Pathwell program around biosimilars, the Pathwell programs around biologics, the Pathwell programs around injectables is a way to further coordinate services with precision or a subset of patients and deliver more value from that standpoint, you have to harness data, you have to harness clinical capabilities, you have to harness digital capabilities. You have to harness network and benefit management capabilities. And again, the combined organization is well positioned for that. So I would say more precision in benefit programs on a go-forward basis that bring more targeted coordination, harnessing data and harnessing specific sub-segments. And again, we are well positioned for that and Pathwell is an illustration of that direction. I want to go back to Village and the partnership there. And I'm just trying to think about how Village and Cigna Healthcare work together and sort of how you have impact on their strategy? And are there targeted growth strategies in markets that may be stronger than, say, your MA book? And then, Dave, I think you said 75% of the Medicare Advantage business is in some sort of value-based care. How much of that is actually full risk or full capitation relationships? Josh, good morning, good to chat with you this morning. So let me take your second question first. In aggregate, a small proportion is in full cap. As we've discussed before, our preferred approach typically has a shared risk relationship. Some of it is in global cap for sure, but a minority of it is in global cap, a majority of it is in a shared risk, longstanding shared risk program. And then another minority would be an upside only P4P in terms of new relationship pay-for-performance. So if you think about it in terms of a suite of capabilities, our sweet spot and our preferred approach is a shared alignment program, not a global cap program, but we have some global cap. To the first part of your question, you came back to the Village and CHE side of the equation. So I'd ask you to think about, first and foremost, the relationship with Village that was built out and expanded is an Evernorth relationship. That's not to take away from CHE, I'll come to the core of your question in a moment. And that relationship, as I discussed with a previous question, is around helping to broaden and target the reach, broaden the reach and then target with precision around subspecialty and then coordinate services in an even more precise way off of their already highly performing value proposition. Now that will be benefited to Cigna Healthcare, but also other health lands and broadly speaking, Village's patient panel over time. Now specific to Cigna Healthcare, this relationship presents the opportunity to design certain benefit alternatives or unique product alternatives in collaboration with Village because of our closer relationship. That will evolve over time, and those conversations are manifesting themselves already. And the positive there is that that's building off of an already positive relationship. So back to the main course here is an Evernorthâs relationship and further evolving their already strong performance in terms of reach, precision for the breadth of the panel. Cigna Healthcare will benefit from that. It presents the opportunity in targeted geographies and to bring specific benefit alternatives forward for the benefit of Cigna Healthcare and all that is on the docket relative to co-collaboration right now. That's why we're so excited about the partnership with Village. This is Nick on for Steve. I wanted to ask about the in-group trends you're seeing in Commercial, given the number of different data points we're getting on the labor market. I know the last time you guys spoke about it, you said that while you were starting to feel some of the headlines manifest employers were generally still in net hiring mode. I wanted to see if that was still the case and if there was anything to call out between select, middle market and national? Good morning, Nick, it's David. I'll just give you a little directional indicator here. So throughout 2022, broadly speaking, we saw the kind of net effect of hiring still the lead dimension in terms of playing through. Although as we've talked quarter-to-quarter throughout the course of 2022, we recognized there was a softening in the economy. As we get through the latter part of the year and the end of the year, that pretty much muted down and approximates canceling itself off. So the net hiring versus the net disenrollment moved to a slight negative. As I mentioned in a prior comment, our projection for 2023 assumes a further uptick or a further softening of disenrollment as we look at the economy, we don't -- within our book as we go case by case and relationship by relationship, we don't see large dislocations, but we think it's prudent to plan for some further softening throughout the course of the year, and that's fully factored in to our projection. I wouldn't call out one individual sub-segment. The National Press would say that small employers are continuing to hire in terms of fight to get to full levels of employment. So we can see some indicators relative to that. But broadly speaking, I would suggest you to think about -- we believe we've taken a prudent outlook in our full year membership outlook by further dampening the additional enrollment throughout the course of the year, and we think that's an appropriate approach. So just back on Evernorth again, within that context of the earnings growth being more back half weighted and faster growth in the back half. Just if you can remind us again how you're thinking about the cadence of recognition of the Centene PBM onboarding costs between the first half versus the second half? I'm wondering if that's still kind of fluid for you guys is how that might flow during the year? Or is that kind of set in stone as far as the weighting of that expense in the first half versus the second half? Good morning, Steve, it's Brian. So as it relates to the Centene related implementation costs in 2023, we do expect there to be an uptick over the course of the year in that spending. So you can think of it as growing from the first quarter through the fourth quarter modestly. So as you think about the total spend. So we've incurred a small fraction of the total we expect to spend over the course of the full year. But importantly, which if you think about that mathematically, it goes against the concept of back half income weighting. The magnitude of that is far outweighed by the other factors that I referenced earlier in terms of the contribution from biosimilars ramping in the back half as well as the other SG&A patterns that will emerge over the course of the year. But you should think of the Centene related costs for the course of the year and a small fraction of that already spent. I wanted to follow up on the biosimilar ramp and how you're approaching formulary changes this year and going forward. I guess specifically to the negotiations manufacturers. Is that something that we should think about happening once per year on an annual basis does the entry of additional biosimilars give you the opportunity to go back to all manufacturers and negotiate additional savings? And then could you also talk about how you and your clients are thinking about the extent you want to drive patients to the lowest-cost product versus kind of maintaining choice and kind of access to different therapies? Good morning, Nate, it's David. You should think about, broadly speaking, the formulated decisions are made in the latter part of the calendar year, so deep into Q4 of a given year for the next year with the best insights; two, there's always some fluidity relative to drug launches that manifest themselves throughout the course of the year. In the case of biosimilars, we know there are drug launches expected in the Q3 timeframe of this year, of 2023, that we've fully contemplated and factored in. And we have the ability to flex formularies in the course of the year with individual clients, individual health plans, et cetera, obviously, on a consultative fashion. So view the decisions are largely made in advance of the year. However, you have the flexibility to go back and make adjustments my comments are not specific to your specific question around manufacturer-specific contracts through that lens. To the latter part of your question, by and large, employers, health plans, et cetera, are focused on clinical efficacy and comparative effectiveness. So the fixation relative to first and foremost as it should be clinical efficacy, making sure when there's any alternative that's available in turning the best external validation of the clinical equivalent of the impact of a pharmaceutical is evaluated properly and then comparative effectiveness, looking at the economics and then getting to a total low cost of care or best value equation. And then the employer or health line may make some trade-offs in terms of which levers they want to use to achieve that, but ultimately, it comes down to the best total cost equation once the clinical efficacy hurdle is crossed. And as I mentioned in the prior question, we have the tools, we have the services, we have the flexibility to avail employer by employer, health plan by health plan to be able to get them to the right balance that they want. But ultimately, it's the low total cost equation with the clinical outcomes that are preferred from that standpoint that drive the net conversations and the net decisions by employers and by health plans. Just wanted to follow up, David, on the comments you made on the VillageMD relationship, which was really helpful to kind of frame that. And what I was trying to understand is from the Evernorth side, it would seem that Evernorth could be a distribution partner wherever Evernorth could be helping Village to enable itself to better manage costs, either through providing MD live or networks or Evernorth PBM services, et cetera. So maybe a little more color on sort of what is the primary role that Evernorth is playing there? And then just secondarily, for the MCO, how important and what is the opportunity for in addition to new product design for you to cross-sell in your ASO block, the VillageMD sort of value-based care source of services? Good morning, Lance. So I think your framework is quite helpful. If you think about the building blocks you articulated, you laid them out quite nicely. I just would play with the order a little bit. Job one for us with Village is to work in partnership, right? It's not to push a product. It's a work in partnership to avail additional capabilities off their already strong performing platforms to further improve affordability or clinical quality. So let's take an example. Take the opportunity to curate in an individual market or submarket for larger markets, the highest-performing oncology providers for certain tumor types or certain diagnoses. Our longitudinal datasets enable that in a very differentiated way, be able to bring a bit more precision. The net result of that is, therefore, for a Village patient, a higher probability of getting the best possible evidence-based care and coordinated care and therefore, best overall value. Of which then Village benefits from that. The patient obviously benefits from that. And what we've designed is the Evernorth enablement benefits from that. Point two is you want to distribution. We could bring more access in volume flow through the high-performing opportunities that exist here. There's no doubt around that, and we will seek to do so. And then third, where you came back to, we will absolutely help to enable these capabilities back, which is a subset of your distribution in a way back to our large well-performing portfolio of ASO clients by bringing yet even more precision of care coordination for their benefit. But in this case, we have through the Evernorth services and through the collaboration with Village, the ability to be rewarded in addition to the value we would be creating for their benefit. So there's multiple building blocks here, which is why we're quite excited. At the end of the day, if you put a big circle around it, Lance, it all comes down to how do we harness more data how do we harness more clinical coordination to bring even greater clinical quality and overall affordability, one patient at a time with a platform that is performing well, that is Village and then creating extenders and some care coordination that comes along with it. And through Evernorth, we have both the service mechanism and then the sharing mechanism built that will work in conjunction with Village for. Scott asked the rates questions. It's been a couple of more days since the RADV rule. I thought I'd ask you, David, to provide your thoughts on RADV and navigating through that in addition to a tighter rate environment for next year? Sure. Good morning, Dave. So relative to RADV and the new information that came out, first and foremost, we deem that risk adjusters are and remain an important tool for the program. And as I noted before, a program that has worked obviously for quite some time for the benefit of seniors and delivering excellent clinical quality, value and service. Additionally, from a Cigna perspective, we remain committed to executing, obviously, this program in a highly compliant fashion. Now specific to the RADV actions, we're pleased, the CMS concluded that they're not going to extrapolate their actions prior to 2018. We're concerned that we continue to question a couple of decisions. For example, the elimination of the fee-for-service adjuster that we deemed to be foundational to the program. And we await specifics relative to the methodology that is going to be used in some aspects of the extrapolation and work as we have in the past and as we always will, we will work closely with CMS to seek to get further clarity relative to the open items that are here. So a bit of a fluid environment but we see progress relative to the lack of extrapolation beyond 2018, and we see some open questions for the industry at large that still remain, and we will collaborate with CMS to get more visibility on that over the near term. Thank you. Just to briefly recap, 2022 was a strong year of performance, growth and positive impact that our company brought forward. With Evernorth and Cigna Healthcare, we demonstrated that we are serving the current needs of our customers, clients and partners, and we expect to deliver another year of customer and earnings growth in 2023. I want to recognize and more importantly, thank more than 70,000 co-workers around the world. It's ultimately their continued dedication and leadership that allows us to make a defining difference in healthcare and their demonstrated commitment to building on the momentum we've delivered to have a larger impact as we look to the future as we strive to improve the health and vitality that of those we're privileged to serve. With that, we thank you for joining our call today, and we look forward to our continued conversations as we go forward. Have a good day. Ladies and gentlemen, this concludes Cigna's Fourth Quarter 2022 Results Review. Cigna Investor Relations will be available to respond to additional questions shortly. A recording of this conference will be available for 10 business days following this call. You may access the recorded conference by dialing 800-839-2290 or 203-369-3607. There is no passcode required for this replay. Thank you for participating. We will now disconnect.
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EarningCall_637
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Greetings, and welcome to CSW Industrials, Inc. Fiscal Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note this conference is being recorded. I would now turn the conference over to your host, James Perry, CSWI's Executive Vice President and Chief Financial Officer. Thank you. Mr. Perry, you may begin. Thank you, Sheri. Good morning, everyone, and welcome to the CSW Industrials fiscal 2023 third quarter earnings call. Joining me today is Joseph Armes, Chairman, Chief Executive Officer and President of CSW Industrials. We issued our earnings release, presentation and Form 10-Q prior to the market's opening today, which are available on the Investor portion of our Web site at www.cswindustrials.com. This call is being webcast and information on accessing the replay is included in the earnings release. During this call, we will make forward-looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Actual results could materially differ because of factors discussed today in our earnings release and the comments made during this call as well as the risk factors identified in our annual report on Form 10-K and other filings with the SEC. We do not undertake any duty to update any forward-looking statements. Thank you, James. Good morning and thank you for joining our fiscal third quarter conference call. Once again, our team executed well in the face of economic headwinds. Our record third quarter results reflect the diligence and professionalism of our team members around the globe. Demand for our high value products remains strong. We are highly focused on managing our costs while pursuing market share growth. We have continued to deploy capital opportunistically while strengthening our balance sheet and liquidity through reducing our leverage ratio and proactively increasing our revolver capacity, thereby maximizing our ability to pursue future opportunities as they arise. We delivered impressive operating leverage, as EBITDA grew by 47% on 26% growth in revenue, while also generating $33 million in free cash flow equal to 19% of revenue. In the current quarter, all three segments contributed to organic revenue growth of $23 million, driven primarily by the numerous price actions we have taken over the last two years. While we are still experiencing inflationary cost pressure, we have been able to partially offset these with productivity gains. We have seen reduction in the cost of shipping containers from Asia, as well as lower costs for certain raw materials, but still face higher costs for certain line items such as domestic freight. We have successfully maintained our pricing, thereby expanding our margins. However, the net result of these variables is that we have not yet returned to our historical pre-pandemic margins, which remains a goal for all of us here at CSWI. During the fiscal third quarter, we consummated the previously announced acquisition of Falcon Stainless. This product line expands our offerings sold into our profitable HVAC/R and plumbing end markets. As a reminder, in our third fiscal quarter of last year, we closed the Shoemaker acquisition, which expanded our GRD offerings sold into the HVAC/R end market. During the fiscal third quarter, the Shoemaker, Cover Guard, AC Guard and Falcon acquisitions collectively contributed $12 million in revenue, all of which was reported in our Contractor Solutions segment. These acquisitions reflect the accretive nature of our capital allocation strategy and our focus on complementary product categories, and our existing end markets served. In the first nine months of fiscal year 2023, we deployed $105 million of capital via acquisitions, opportunistic share purchases, dividends and capital expenditures. We continue to pursue both internal and external opportunities for growth, consistent with our disciplined risk-adjusted returns methodology and to maintain a pipeline of acquisition opportunities. In prior quarters, we have discussed strategic investments we made in working capital in an effort to mitigate shipping delays and other uncertainties with the global supply chain. I am pleased to report that these delays have eased, and our business leaders have shifted focus to reducing inventory and accounts receivable as prudent. This focus is intended to free up cash and reduce the accompanying interest expense. And I'm encouraged by the progress in recent months and optimistic about our ability to see continuous improvement in this area. I want to touch briefly on our segments, then James will provide the details on our performance. Overall, I remain pleased with the performance of all three segments, and in particular with the leadership team's response to changes in their markets. We are entering the busy season for our Contractor Solutions segment, and our team is gearing up for another year of growth that exceeds the industry average. The strength of this segment lies in leveraging our distribution network, optimizing acquisition integration and bringing high value products to our customers. Our recent acquisitions have been well integrated and the focus as always remains on serving our customers well, as we add new products to our portfolio of offerings. Our Specialized Reliability Solutions segment continues to exceed expectations. The capacity utilization in our main facility continues to increase, and our team there remains focused on top line and bottom line growth by driving operational efficiencies and offering the optimal mix of products. Energy markets remain strong. And industrial end markets are stable. Our distributors remain cautious about their inventory levels, so we stay in close communication with them relative to demand. Our joint venture with Shell continues to gain momentum. And we expect to complete the previously announced capacity expansion project of our existing facility later this calendar year, which will allow for increased revenue and profitability. Our Engineered Building Solutions segment continued to grow with an increase of revenues of 7.6% year-to-date. And for a fourth consecutive quarter, this segment's backlog reached an all-time high. We are seeing a slowdown in biddings for new projects, in line with recent AIA data that are highly focused on pursuing those projects undertaken by the highest quality developers with the highest likelihood of completion. And our team is performing well in delivering on the current projects, albeit at a lower margin due to when those projects begin. Before I turn the call over to James, I would like to remind everyone of the demonstrated resiliency of our business model. Despite the expectation of many in the financial community of a recession this year, we remain well positioned. Strength of our business model include the diversification of our product portfolio and of the end markets we serve, as well as the consumable nature of many of our products that are used either in maintenance, repair and replacement applications or to extend the reliability, performance and lifespan of mission critical assets. Specific to our largest end markets, HVAC/R and plumbing, the products we sell and the value we provide are often non-discretionary, fundamental necessities for homeowners and businesses. We have maintained a strong balance sheet that allows us to withstand market headwinds with ample liquidity that affords us the ability to pursue growth opportunities across our portfolio of businesses. At this time, I'll turn the call over to James for a closer look at our results. And then I will conclude the prepared remarks with our strategic outlook. Thank you, Joe, and good morning, everyone. Our consolidated revenue during fiscal third quarter of 2023 was $171 million, a 26% increase as compared to the prior year period, driven by pricing actions and contributions from acquisitions. Consolidated gross profit in the fiscal third quarter was $66 million, representing 28% growth, with the incremental profit resulting primarily from revenue growth. Gross profit margin improved slightly to 38.5% compared to 37.7% in the prior year period, as strong revenue growth in the higher margin Contractor Solutions segment due in part to our recent acquisitions outpaced revenue growth in our other segments. Consolidated EBITDA increased by $31 million, or 47% as compared to the prior year period. Consolidated EBITDA margin improved 18% as compared to 16% in the prior year quarter, driven by revenue growth, which outpaced incremental expenses. Reported net income attributable to CSWI in the fiscal third quarter was $16 million, or $1.01 per diluted share, compared to $9 million, or $0.59 in the prior year period. The current quarter includes $1.5 million, or $0.10 per share of tax benefit related to the release of an uncertain tax position reserve upon the closure of certain Vietnam tax audits. Our Contractor Solutions segment with $112 million of revenue accounted for 65% of our consolidated revenue and delivered 29 million or 36% total growth as compared to the prior year quarter. This was comprised of organic revenue growth of $17 million and inorganic growth of $12 million from the Shoemaker, Cover Guard, AC Guard and Falcon acquisitions. Note that growth attributable to Shoemaker becomes organic growth starting with the current fiscal fourth quarter. Organic growth in the segment resulted from the cumulative benefit of pricing initiatives, partially offset by a slight decrease in unit volume as compared to last year. The strong revenue growth as compared to the prior year period was driven by the HVAC/R and architecturally specified building products end markets. Segment EBITDA was $28 million, or 25% of revenue, compared to $17 million, or 21% of revenue in the prior year period, as our margins continue to recover from the inflationary environment. We have started to recover a margin point as we've been able to maintain our pricing as certain costs in this segment have declined. Of note, however, outside of the decline in ocean freight rates, many of our input costs remain high. So we are managing our overall cost structure carefully. Our Specialized Reliability Solutions segment achieved another impressive quarter of organic revenue growth of $5 million, or 16%, due to the continued benefits from pricing initiatives, strong end market demand, including energy and general industrial, and improvements in our operations and execution. Segment EBITDA and EBITDA margin were $5 million and 14%, respectively, in the fiscal 2023 third quarter compared to $5 million and 15% in the prior year period. Of note, we incurred $0.5 million one-time charge in the quarter for the termination of a small Canadian pension plan in this segment. This is reflected in our EBITDA results. As Joe mentioned, with the ongoing addition of equipment in our Rockwall, Texas facility to support growth of the Shell & Whitmore joint venture, we are in a position to post a compelling exit rate as we progress through the fourth quarter and into our next fiscal year. Our Engineer Building Solutions segment revenue grew to $25 million, a 3% increase compared to $24 million in the prior year period. Bidding and booking trends remain strong. In fact, our year-to-date bookings and backlog increased by approximately 38% and 47%, respectively, as compared to the prior year period. As of the end of the fiscal third quarter, our book to bill ratio for the trailing eight quarters was almost 1.2 to 1. As Joe mentioned in his opening remarks, we ended December with the fourth consecutive quarter of record backlog in this segment. Transitioning to the strength of our balance sheet and cash flow, we ended our fiscal 2023 third quarter with $15 million of cash and reported cash flow from operations of $84 million in the first three quarters of our fiscal year compared to $69 million in the prior year-to-date period. Of the $84 million of operating cash flow in the current fiscal year-to-date, $37 million was generated in the fiscal third quarter as compared to an aggregate of $47 million in the fiscal first half. While the working capital levels will vary from quarter-to-quarter due to seasonality and other factors, we have made progress in reducing the levels of safety inventory that we have strategically held in recent quarters due to the uncertainties in the global supply chain. We have been and will continue to be committed to having the products our customers need. As supply chain constrains have eased, we have a laser-like focus on our working capital metrics at the business level and are committed to continuous improvement to free up balance sheet capacity and reduce our interest expense. As demonstrated by our cash flow this year, I am pleased with our progress and look forward to further refinement as we close out fiscal 2023 and enter fiscal 2024. Our free cash flow defined as cash flow from operations minus capital expenditures was $33 million in the fiscal third quarter as compared to $23.3 million in the same period a year ago. That resulted in free cash flow per share of $2.13 in the fiscal third quarter as compared to $1.47 in the same period a year ago. Through the first nine months of the fiscal year, our free cash flow was $75.8 million or $4.87 per share as compared to $61.1 million or $3.86 per share in the same period a year ago. The impressive level of free cash flow drives our risk-adjusted returns capital allocation strategy which in turn enhances shareholder value. An important component when assessing our generation of cash flow as compared to a few years ago is the non-cash amortization of intangible assets that arise from multiple acquisitions in the last few years. That amortization figure alone is $16.4 million or $1.06 per share in the first nine months of this fiscal year as compared to $5.4 million or $0.36 per share in the nine months immediately preceding the acquisition of TRUaire in December of 2020. During the fiscal third quarter, we were pleased to announce the expansion of our revolving credit facility capacity by $100 million through an exercise of the accordion feature. Of important note, this increase was effective with no change in terms or pricing despite an increasingly challenging credit market that many companies face. This additional capacity gives us increased flexibility to pursue investment opportunities without having to access the capital markets in the current uncertain environment. We are appreciative of the strong support shown by our bank group, a testament to our recent success and future opportunities for profitable growth. We ended the fiscal third quarter with $267 million outstanding on the now $500 million revolver, a $7 million increase compared to the prior fiscal quarter end. As a reminder, during the fiscal third quarter, we invested $34.6 million of cash with the acquisition of Falcon. Our bank covering leverage ratio as of the current quarter end was approximately 1.5x, an improvement from 1.6x as of the preceding quarter end due to our strong EBITDA growth. As part of our broad capital allocation strategy, we remain committed to opportunistic share repurchases guided by our intrinsic value model. During the fiscal 2023 year, we have repurchased 336,347 shares for an aggregate purchase price of $35.7 million under our prior $100 million share repurchase authorization. In December, we announced that our Board of Directors had approved a new $100 million authorization that is available through the end of calendar 2024. Our effective tax rate for the fiscal third quarter was 14.7% on a GAAP basis, due to the previously mentioned 850 basis point benefit we received when the tax audits for several years were closed in Vietnam and we were able to release the reserve on our balance sheet. We expect a 23% to 24% tax rate for the full fiscal 2023 year. As we look to close out fiscal 2023, we anticipate strong revenue growth across all three segments and at the consolidated level for the full year, which, when coupled with meaningful operating leverage, will result in strong year-over-year EBITDA and EPS growth as well as cash flow generation. We expect to benefit from continued stability in our raw material and freight costs. Thank you, James. During the fiscal year-to-date period, we delivered record revenue of $562 million representing growth of 24%. Operating leverage on this growth drove 30% growth in EBITDA and 39% growth in adjusted EPS. In light of the strength of our fiscal year-to-date results, we expect year-over-year revenue growth of approximately 20% with an EBITDA margin of over 22% for the full year. These full year expectations imply fourth quarter revenue growth of approximately 9% as compared to the same period last year, with an EBITDA margin of approximately 23% in the fourth quarter. We are currently working through our budget process for our fiscal 2024, which begins on April 1. While there are headwinds in certain end markets, we expect to deliver consolidated revenue and earnings growth for CSWI. We are focused on efficiency gains and cost reductions, but we plan to accomplish these objectives without involuntary reductions in our level of employment. We are committed to providing our customers with the high quality products and service that they expect from CSWI, and we will rely on the dedication of our team members to accomplish that goal. We are expanding margins and driving cash flow conversion. We are confident in our near-term and long-term opportunities with disciplined capital allocation, which is enabled by the strength of our balance sheet. We remain committed to enhancing sustainable growth and shareholder value, even in the face of economic uncertainty. By doing this in the past, we have consistently delivered outstanding financial results and we will utilize that same approach for the remainder of 2023 and beyond. I'm pleased to share that for the third year in a row, Cigna has selected CSWI as a recipient of their gold level healthy workplace designation for demonstrating a strong commitment to improving the health and well being of our employees through our workplace wellness program. This reinforces our distinctive employee-centric culture and affirms our intention to be an employer of choice. My colleagues here at CSWI hear me say this often. At CSWI, we must and we will succeed. There's no other option. But here at CSWI, how we succeed matters. Achieving these outstanding year-to-date results demonstrates our commitment to be good stewards of your capital and to our goal of driving long-term shareholder value. As always, I want to close by thanking all of my colleagues here at CSWI who collectively own approximately 5% of CSWI through our employee stock ownership plan, as well as all of our shareholders for their continued interest in, and support of our company. Hi. Good morning. Thank you for taking my questions and congrats on the nice results. My first question is, I was wondering if you could talk about how much change you've seen or discussed or experienced just in terms of your overall macro expectations and visibility over the last two or three months? It seems we've got [indiscernible] a bit by pretty much negative macro sentiments earlier in Q4, and things started to improve since then. Has that translated to any changes in your internal forecasts or discussions with customers as you go forward and heading into fiscal '24? Just help us think about your visibility in today's environment. Yes, John, as you know, visibility is tough these days. And so our goal is be prepared for whatever eventuality. We think the strong balance sheet, the diversification of our business, the strength of our brands and the low cost, high value kind of products that we provide to our customers are going to be popular and profitable and great products to offer and a great business model, regardless of the economic backdrop. March is a really important month for us, late February, March for the pre-sale season in the HVAC business. And so we've got our eyes focused on that. But we'll know more then. At this point, we don't have any indications of any major changes in our expectations. But that's a very important timeframe for us when the pre-market, pre-summer sales to the distributors who are stocking up will give us our best indication. So I would just say stay tuned. This is James, Jon. Good morning. Thanks for being on. As Joe said, we do expect revenue and EBITDA growth next year. We're certainly working to continue to push margins. As we mentioned in the call, we focused a lot in the last couple of years on container rates. They've certainly come down, and for now they stayed down. We know how quickly that can move. Some of the other costs are still high, obviously; raw material costs, domestic freight, shipping freight out between our facilities and the customers, those costs remain high. But we've done a good job with our pricing, been able to retain that. As we said, we're not back to our pre-pandemic margins. That's always a goal. That goal is tougher, because obviously when costs are higher and you have to move pricing higher, margins are more challenging. So we don't have a firm view yet on margin guidance yet, per se. But we certainly -- Joe and I and our business leaders have a goal to continue to push margin in the type of pace we've been able to recover so far. Understood. Thank you. You mentioned a little bit of a slowdown in the bidding markets and in architectural. Can you just talk about where you're seeing that? Number one. And two, is it expected to continue? And kind of the impact -- when you might see that in the P&L? Yes, it's a good question. As you know, that market, we've been through almost a couple of mini cycles in the last few years. COVID hit and things really slowed down. So we were kind of taking some lower margin projects. Then we had a period where things opened up again and things looked good. And now we're producing some of the lower margin projects, again, because with interest rate spiking and some economic uncertainty, some of the projects have been put on hold. Despite that, as we said, our backlog has grown. Biddings are very geographic, I'll say. We were talking to the leadership in that group just in the last couple of days and the Sunbelt remains pretty solid, as you would imagine. Toronto where we have a nice presence has some good construction going on. The California market, especially in Northern California, has been a little softer. And as you know our Smoke Guard part specifically, we have a good opportunity there, because we're the distributor and the manufacturer. So we kind of have that double dip when we fell into that market, and that's been a little softer. So there's geographic pockets here and there. So we've seen bidding slow down just a little because I think funding for these projects has taken a little longer to firm up because of where interest rates are and equity expectations are. But our team is doing a really good job, as Joe mentioned in his comments, focused on those high quality developers or projects with a high likelihood that they're going to get done. We know that our backlog right now is solid. The projects in there are out of the ground. And as you know, our parts are at the backend. So what's in the backlog now that we've been taking orders for the last quarter or two, that's 9, 12, 18 months out. So I think as we get deeper into fiscal '24, the back half and then even to fiscal '25, which is hard to say out loud, but that's a little over a year away for us, we'll really start seeing these newer entries into the backlog come through the revenue. But in the meantime, the group's doing a good job keeping busy, keeping the projects going. The margins are just a little softer, given the nature of those products. Jon, again, I think that interest rates rising will slow parts of the market. We have been focused on institutional projects. We've been focused on high quality projects that may have a little less entrepreneurial speculation in them. And so we're still a relatively small player. We think we can grow kind of in every market. But we do think that the interest rates remaining high will continue to have an impact on some of the more speculative projects. And so our focus on institutional, our focus on the healthier portions of that market I think is going to pay dividends for us. Got it. Thank you. James, do you have any more color on just price versus volume trends in the past quarter and kind of where you expect that mix to go as you continue growing into the future? Yes, Jon, the growth this quarter was really based on the acquisitions that we talked about, the four acquisitions over the last 12 months, and then pricing. Volume, overall, on a consolidated basis was pretty flat. Contractor Solutions down just a bit. Then we had a little offset with the other segments that helped, certainly in Specialized Reliability Solutions. But pricing is really the driver here in the organic growth. Where that's going from here? As Joe said, we're going to continue to have some year-over-year pricing pickup for the fourth quarter here and into the first fiscal quarter. The pricing kind of slowed down the increases the back half of last calendar year. So that will start lapping, so to speak. So you won't have that pick up, so to speak, opportunity, unless we see another step up in cost. And we need to take action outside of just our normal annual price increases which we implement this time of year. So pricing is going to continue to be a tailwind for us for a couple of quarters on the year-over-year. The volume, as Joe said, it's a little bit of a wait and see. The team is doing a great job talking to customers, understanding what their stocking levels are across segments. I think our distributors are being careful in overstocking. There's been a little bit of destocking, and I think that slowed down volume a little bit. And I think inventories continue to be right-sized. So as Joe said, the February and especially into March ordering and buying season for Contractor Solutions will tell us a lot. And on the call we have in May with our fiscal year results, we'll have a much better sense of how that looks, of course. Got it. Last for me just the working capital improvements as supply improves. How much excess are you carrying right now? What kind of cash can you throw off, assuming you get to your optimized levels? Yes, it's a great question, Jon. This is still James. It's hard to put a specific number on it, because it's going to vary week-to-week and month-to-month. Our teams do a really good job. When you look back, you use things like days on hand. And we know what those metrics look like. And they bump around a little bit. Part of that, like I said, is seasonality and just stocking down and up for the seasons. But we really have a forward look, and our businesses do a good job looking product-by-product, how much they think they need to hold, especially that product that comes from overseas. While shipping times have slowed down or have gotten shorter, I'm sorry, it still takes a while to get product. So you can't produce a lot of this overnight. So it's a few million dollars. How much that is, is probably hard to identify and get real precise. We certainly have some goals and metrics. And as we go through our budget season, we're going to work hard on what those goals need to be given a little easing of the supply chain constraints that we have. So I wouldn't put a hard dollar number out there. But there's still a few million dollars out there that we think we can turn into cash, kind of in a quarter-over-quarter basis. Again, this quarter, you start stocking back up. But when we think about days forward and days on hand, we have opportunity. Hi. Thanks very much. Good morning. Maybe to start off, if you could just talk about on Contractor Solutions, just talk about what's working well in this segment? I know you mentioned strong pricing gains and the inorganic growth as well. But just hoping for a little more detail on the strong segment profit, especially given that this is usually your seasonally weakest quarter for that segment? Yes, Julio, thanks. We got strength across the board. I would say that we're selling more of the ductless mini-split products than maybe we did a few months ago. There were some shortages by the OEM manufacturers that were slowing some of that down. That provides a good mix impact for us; and so strength across the board really. I don't know that I'd note anything in particular. I would say that we continue to be able to grow wallet share with our customers. There are particular customers that are continuing to grow. We're growing our GRD business. As you recall, after we bought TRUaire, we had kind of production slowdown in Vietnam because of the pandemic shutdown and all of that. We've had to rebuild inventory. And so some of the kind of wallet share gain that we had planned on for that acquisition were delayed a little bit. And now we're beginning to see some of that. And so there's positive things across the entire portfolio. The acquisitions, I think as much as anything, have really just performed well and the integration has gone well. And so we're very pleased with those new products that we can put through our distribution channels. Our customers like that. The end users, the professional trade likes to have new different products to sell. And that's an important part of our kind of increase, or our strong organic growth rate is to continue to bring new products into the market. And I would add just briefly, Julio, Joe mentioned TRUaire briefly. The Vietnam operations are performing at tremendous levels. The leadership team there that we've brought in has done a great job. Our people have been able to get over there now. Shoemaker and TRUaire are working really well together. So really pleased with -- from this commercial side to an operation side and everything in between. Okay, that's very helpful. That's good color there. Maybe just staying on the segment, just talk about how you're balancing your inventory reduction initiatives with kind of being ready for the busy season within the Contractor Solutions segment? Yes, absolutely. Really, as James said, it was a focus -- we've had a focus on a product-by-product looking at the weeks of inventory that we wanted to have on hand, not just historically but looking forward trying to forecast sales in each and every product type and trying to calibrate our inventory levels to make sense really for that March timeframe. And we talked about that I think at the last quarterly call is that you don't really want to measure that at the end of December, because that's a seasonally slowest time. And some products, if you buy them -- if they're manufactured in China, you may be getting some of those shipments even in December, getting ready for the February-March timeframe. And so inventories can look a little odd at that period of time. But boy, in the March high season for us, the selling opportunity is there. We want to have product on the shelves. We want to be the reliable vendor for our customers. And we don't want to miss sales, especially early on in the season like that. So we're making sure we have the right products on the shelves, the right amounts and just trying to properly calibrate that. At the same time, we've got a real focus on working capital reduction. But we're trying to do that in a very cautious, careful way so that we don't miss sales, we don't offend customers by not having product on the shelves and we don't take good care of our customers, which is our commitment to do. So it is a balancing act, no question about it. As interest rates rise, it becomes even more important. And so that's why we've been focused on that. But at the end of the day, we've got to take good care of our customers. Interest rates are not so high that we cannot afford to have the products on the shelves. And again, that's another benefit of a strong balance sheet. Our interest costs are not that high compared to the opportunity on the customer side. Okay, that's helpful. Maybe one follow up on Jon's previous question on the EBS segment. You mentioned some geographies, particularly northern California that's slowing, and you mentioned Sunbelt and Toronto is still solid. I guess any other geographies or product lines that you can point to that are either slowing or still holding solid, just any additional granularity there? Yes. I would say Florida got hit by weather recently. We felt that a little bit. And again, in Florida, like in Toronto, we not only fabricate but we install product there. And so some of the construction sites were shut down for a while. But now I think it really is kind of a Sunbelt story for the most part, and then plus Toronto. Southern California has been strong all the way across to Florida. So those are not surprising, the stronger growth areas for us. We're doing some nice work and picking up some business in New York, which has always kind of been a big target for us. But I would call it the Sunbelt plus in Toronto kind of a story at this point. Yes, it's interesting, very strong overall but that's geographic as well. Toronto has been very, very strong. There are some -- a ton of multifamily residential being built in the Toronto area and we're getting our fair share, that plus some at this point, and so very, very pleased with that. Backlog is very strong there and that bodes very well. Again, Florida has been a little more spotty with some of the weather issues and some other things. But yes, the bookings in the backlog on Greco are up I think the most as a percentage just because obviously it's off a smaller base, but their backlog has been very impressive. Just wondering what you think is the most effective place to be putting your cash to work at the current moment. The most, I'm sorry, attractive? Yes. It's interesting, Jon. As I think about it, repaying debt is kind of our risk free rate, right. We can save 5%, 6% on an annual basis, just by paying down debt. And so everything else is, as you know, calibrated off of that on a risk-adjusted returns basis. So all the return hurdles have gone up. And so it's become a little more challenging. Each opportunity has to be assigned a risk premium. And we think about everything from integration risk and all the other things that go into an acquisition. CapEx has got some execution risk, but less. And so we've always said that organic investments are going to likely be higher risk adjusted returns. So we would always prefer those over inorganic. But as James noted, our high level of free cash flow generation says that we can do a lot of investing and capital has not been a constraint for us. Opportunities have been a constraint. Every once a while, we're constrained by management bandwidth. But capital has not really been a constraint for us. And our cost of capital is low enough that when we find attractive returns, we're willing to pull the trigger. Got it. Thank you for that. Just another follow up. In the current guidance for Q4, just wondering what you're expecting to be the contribution from acquisitions you've closed? Yes. So as a reminder, Shoemaker won't be acquisitions anymore as we look year-over-year. That will become organic now, because that was bought on December 15, 2021. So your acquisitions are the Falcon, Cover Guard and AC Guard, and those are smaller, so you have a little contribution from that. So majority of the 9% kind of fourth quarter growth that we talked about in the release and Joe's comments is going to be organic. And how much of that is price versus volume, you're still going to lean towards more being price at this point the way we see things. But as Joe said, as we get to the back end of the quarter, we'll see what that brings us. But as we said here on February 2, we see that 9% growth with EBITDA of about 23% or so. We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments. Great. Thank you, Sheri. And thanks everyone for joining us today. Very pleased with the results and pleased to have the opportunity to visit with you about this. And look forward to talking again at the end of our fiscal year in May. So thank you very much. Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.
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Good morning, and welcome to the Markel Corporation Fourth Quarter 2022 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] During the call today, we may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They are based on current assumptions and opinions concerning a variety of known and unknown risks. Actual results may differ materially from those contained in or suggested by such forward-looking statements. Additional information about factors that could cause actual results to differ materially from those projected in the forward-looking statements is included in the press release for our 2022 results, as well as our most recent annual report on Form 10-K and quarterly report on Form 10-Q, including under the caption Safe Harbor and Cautionary Statement and Risk Factors. We may also discuss certain non-GAAP financial measures during the call today. You may find the most directly comparable GAAP measures and a reconciliation to GAAP for these measures in the press release for our 2022 results. The press release for our 2022 results as well as our Form 10-K and Form 10-Q can be found on our website at www.markel.com in the For Investors section. Please note this event is being recorded. Thank you. Good morning, everyone. As Brian-Doyle Murray said in Groundhog Day, ârise and shine, campers, donât forget your booties because itâs coooold outside.â Happy Groundhog Day from Richmond, Virginia, where weâre getting our first snow of the season, doesnât happen very often around here. So, I just couldnât let the occasion pass without saying something. This is Tom Gayner, not Brian-Doyle Murray. Iâm your CEO, and itâs my pleasure to welcome you to the Markel Corporation year-end conference call. Iâm joined today by Brian Costanzo, our Chief Accounting Officer; and Jeremy Noble, the President of our Insurance operations. On todayâs call, Brian will give you a rundown on the financial results we just reported and Jeremy will follow with some comments on our insurance operations. Iâll come back after them with a few thoughts about our ventures and investment operations, and then we will open the floor for any questions you might have. As a public company, the cadence of these calls is every 90 days. Each quarter, we share our financial results with you as we hold this call. While we update you one quarter at a time, let me assure you that is not the cadence we follow in managing Markel. Our North Star remains the dual time horizon of forever and right now. We believe that the combination of the long-term time horizon embodied by the concept of forever, coupled with the discipline and urgency of the right now provides a balance that serves us well. Quarters are like the rings inside the trunk of a mighty sequoia tree that give you a useful piece of information about one small chapter in the life of the tree, but any given ring is just one in a sequence of many. Given our long-term focus, one of the ways we monitor our results is to look at some key numbers in five-year buckets. We use five-year increments to gain perspective. We also tie our incentive compensation calculations for executive management to five-year results to demonstrate our commitment to long-term performance. For your consideration, here are some of the five-year numbers for the year that just ended: One, from 2018 to 2022, we reported total revenues of just over $50 billion, up from $26.5 billion in the previous five-year period. Thatâs an increase of roughly 90%. Two, we reported earned premiums from our insurance operations of $29.5 billion, up from $19 billion. Thatâs an increase of 55%. Three, we reported underwriting profits of $1.8 billion, up from $821 million. Thatâs an increase of 116%. Four, we reported ILS and program services revenues of $1.7 billion, up from $44 million. Thatâs an increase of 3,763.64%, and I wouldnât extrapolate that particular number if I were in your shoes. Five, we reported Markel Ventures revenues of just over $15 billion, up from just over $5 billion. Thatâs an increase of 200%. Sixth, we reported Markel Ventures EBITDA of $1.7 billion, up from $600 million. Thatâs an increase of 183%. Seven, we reported net investment income of $2 billion, up from $1.7 billion. Thatâs an increase of about 18%. Eight, we reported comprehensive income of $3.7 billion, up from $3.5 billion. Thatâs an increase of 6%. And finally, nine, the price per share ended at $1,317 up from $1,139 five years ago. Thatâs an increase of about 15%. I hope you would share my sense of forward progress at Markel of meaningful amounts measured in meaningful amounts of time. Weâre excited and pleased with most, but not all of those numbers, and weâre optimistic that as we grew the next five-year batch, weâll be pleased with each line of that report. In the next five years, if we make the same sort of progress on the first eight items on the list, Iâll be surprised if the ninth line doesnât follow. With that update and comment on the five-year numbers, Iâll turn it over to Brian for his comments on the 2022 results. Thank you, Tom, and good morning, everyone. Iâm happy to be with you all this morning to report the numbers from our 2022 results. Our insurance and Markel Ventures operations delivered strong operating results while navigating a complex macroeconomic environment, and weâre pleased with the steady growth weâre seeing in the investment income generated on the investment portfolio. While the volatility in the equity and bond markets created unrealized losses in the portfolio this year, we remain focused on long-term investment performance, which better reflects the quality and durability of our investment portfolio. Starting off with our underwriting operations. Gross written premiums surpassed $9.8 billion for the year compared to $8.5 billion in 2021, an increase of 16%. Our increased premium volume reflects new business volume, strong policy retention levels, continued increases in rates and expanded product offerings. Our professional liability and general liability product lines continue to lead the way, but weâve also achieved meaningful growth across many of our other product lines. Our consolidated combined ratio was 92% in 2022, which included $46 million of net losses attributed to Hurricane Ian and $36 million of net losses attributed to the Russia-Ukraine conflict for a combined 1 point impact to the combined ratio. In the fourth quarter, we reduced our initial estimate for losses attributed to Hurricane Ian by $24 million. Our estimate for net losses attributed to the Russia-Ukraine conflict were recognized in the first quarter and remain unchanged throughout the year. In 2021, our consolidated combined ratio was 90%, which included $195 million or 3 points of losses on natural catastrophes. Excluding these event losses from both years, our consolidated combined ratio in 2022 was 91% compared to an 87% for 2021. The increase reflects the impact of less favorable development on prior accident year loss reserves this year compared to last year, partially offset by a lower expense ratio. With regards to prior year loss reserve development, prior year loss reserves developed favorably by $167 million in 2022 compared to $480 million in 2021. In 2022, we experienced adverse development on certain of our general liability and professional liability product lines within our insurance segment in the 2016 through 2019 accident years, primarily arising from unfavorable claim settlements and increased claim frequency and severity trends. As discussed in the third quarter, the impacts of economic and social inflation have created more uncertainty around the ultimate losses that will be incurred to settle claims, particularly on our longer tail product lines. And as a result, we are approaching reductions to prior year loss reserves cautiously, particularly on more recent accident years. Consistent with our reserving philosophy, we are responding quickly to increased loss reserves following indications of increased claims frequency or severity in excess of our expectations. Whereas in instances where claim trends are more favorable than we previously anticipated, we are often waiting to reduce our loss reserves, and weâll evaluate our experience over additional periods of time. Turning next to our investment results. Net investment losses included in net income were $1.6 billion in 2022 and were primarily attributable to a decrease in the fair value of our equity portfolio driven by significant declines in the public equity markets during the year. This compares to net investment gains of $2 billion in 2021 attributable to an increase in the fair value of our equity portfolio, driven by favorable market movements. As youâve heard us say many times before, we focus on long-term investment performance, and we continue to maintain our investing discipline, understanding that periodic declines in the equity markets are to be expected and will result in variability in the timing of investment gains and losses. We will continue to measure investment returns over longer periods of time. At the end of December, the fair value of our equity portfolio included cumulative unrealized holding gains of $4.6 billion. With regards to net investment income, we reported $447 million in 2022 compared to $367 million in 2021. Itâs worth noting that these amounts are now comprised entirely of our recurring interest and dividend income from the investment portfolio. Previously, net investment income also included the income or loss recognized on our equity method investments, which are managed separately from the rest of the investment portfolio, the results from which are now included in other revenues. The increase in net investment income in 2022 reflects the benefit of higher interest rates on our short-term investments and cash equivalents during the last half of the year as yields on these investments have increased sharply from nearly 0% a year ago. We are also beginning to see the benefit of higher interest rates within our fixed maturity portfolio through recent purchases at higher yield rates. That impact will become more meaningful in future periods as lower-yielding securities mature and are replaced by higher-yielding securities. Beginning in the second quarter of this year, the book yield on new purchases of fixed maturity securities began to exceed the average book yield on the portfolio. Net unrealized investment losses included in our comprehensive income in 2022 totaled $1.1 billion net of taxes, reflecting a decline in the fair value of our fixed maturity portfolio, resulting from increases in interest rates. As a reminder, we typically hold our fixed maturity securities until maturity, and we generally expect unrealized losses or gains to reverse in future periods as the bonds mature. Our portfolio has an average rating of AAA, and there are no current or expected credit losses within the portfolio. Now, Iâll cover the results of our Markel Ventures segment. Revenues from Markel Ventures increased 31% to $4.8 billion in 2022 compared to $3.6 billion last year. This increase reflects the contribution of revenues from our December 2021 acquisition of Metromont, and increased contribution from Buckner, which was acquired in August 2021 as well as strong organic growth across many of our other businesses, most notably at our construction service businesses. EBITDA from Markel Ventures was $506 million for the year compared to $403 million last year. The increase reflects higher revenues and improved operating results across several businesses as well as the contribution of Metromont. EBITDA for 2022 was impacted by increased costs of material and labor across many of our businesses, which reflect the impact of broader economic conditions, including the impact of inflation on our operations during the year. Looking next at our consolidated results for 2022. Our effective tax rate was 32%. However, this is not indicative of our ongoing effective tax rate, rather, itâs a result of having a few immaterial items that combined for a net tax benefit that is being magnified by our small pretax loss for the year. We reported a net loss to common shareholders of $250 million in 2022 compared to net income to common shareholders of $2.4 billion in 2021, largely attributed to the year-over-year swing in changes to our public equity portfolio valuation. Comprehensive loss to shareholders for 2022 was $1.3 billion compared to comprehensive income to shareholders of $2.1 billion in 2021, driven by changes in both, the fixed maturity and public equity valuations. Itâs worth highlighting, once again, that given the magnitude of our equity portfolio, we believe generally accepted accounting principles, which require that we include unrealized gains and losses on equity securities and net income, creates volatility in revenues and net income that can obscure the strong operating performance of our businesses. Finally, Iâll make a few comments on cash flows, capital and our balance sheet. Net cash provided by operating activities was $2.7 billion in 2022 compared to $2.3 billion in 2021. Operating cash flows in 2022 reflected strong cash flows from each of our operating engines but most significantly within our underwriting operations given the strong premium volume in recent periods. Total shareholdersâ equity stood at $13.1 billion at the end of the year compared to $14.7 billion at the end of 2021. Again, this decline is driven by declines in both, fixed maturity and public equity investments, as I previously discussed. During 2022, we repurchased 233,000 shares of our stock under our outstanding share repurchase program versus 153,000 shares last year. Thanks, Brian, and good morning, everyone. Itâs great to be with you this morning to recap our 2022 insurance engine results. In short, we had a tremendous year, premium production in our underwriting divisions totaling just under $10 billion for the year and total revenues within the insurance engine eclipsing $8 billion. Although our combined ratio of 92% is slightly higher than our goal at the start of the year, overall, I am very pleased given the events and the economic uncertainties that played out over the course of the last year and continue today. Now, Iâll discuss our full year results across our collection of insurance businesses, which include our insurance and reinsurance underwriting operations, State National program services operations and Nephila insurance-linked securities operations. Looking first at our Insurance segment. Within our insurance operations, we produced a combined ratio of a 92%, while growing gross written premiums by 19%. Growth in premium production has remained strong in the fourth quarter and we continue to take advantage of new business opportunities in the specialty insurance marketplace as well as maintaining strong premium retention levels and capturing rate. We set out at the beginning of 2021 with our 10-5-1 goal within our global insurance underwriting operations to deliver $10 billion in annual gross written premiums in five years, targeting $1 billion in annual underwriting profits, or simplistically speaking, achieving a 90% or better combined ratio. We are well on our way. From a production standpoint, we have capitalized on strong market conditions to significantly grow our premium base in our preferred product classes. While our 2022 combined ratio was slightly above our target, the primary reason for this was related to prior accident year loss development from the softer years of the last insurance cycle. Despite these trends, we were able to produce just under $550 million of underwriting profits within our global insurance underwriting operations for 2022. And while this was an outstanding result, we are not planning to rest on these achievements. Our insurance leadership teams remain focused on profitable growth strategies and obtaining adequate pricing for our products in order to continue to deliver our market-leading capabilities and products to our clients. This disciplined approach is key to achieving our production and profitability goals in 2023 and beyond. Our underwriting profitability in 2022 benefited from our efforts to reduce volatility. 2022 will be one of the costliest years on record for natural catastrophe losses in addition to exposures we faced from the war in Ukraine, which once again validates our efforts in recent years to reduce our exposure to property catastrophe risk. Additionally, in 2022, we lowered our expense ratio by 2 more points, thanks to ongoing productivity efforts and leveraging the increased scale of our operations. That all being said, we saw a lower benefit from favorable development on prior yearâs loss reserves in 2022 compared to a year ago, particularly over the second half of the year. This was most notable within certain subclasses of our longer tail professional liability and general liability lines, where we have recognized adverse development past few quarters. Over the course of 2022, we faced significant headwinds in the form of economic and social inflation, and it became more evident that our claims trend patterns were impacted by delays in the reopening of the U.S. court system following the COVID pandemic. In reaction to these trends during the fourth quarter, we undertook a detailed actuarial and claims review around our brokerage contractors book within our general liability product line and our risk-managed E&O and D&O books in the U.S. within our professional liability product line. Weâve seen an increase in claims frequency and severity in these books in recent quarters, in particular across the 2016 to 2019 accident years, the incidence of claims being reported exceeding our expectations. Additionally, in the case of our risk-managed professional liability lines, where we deploy larger-than-average limits, we have experienced a higher-than-expected number of losses piercing through our attachment points, coupled with increased loss severity on these claims. Our professional and general liability product lines are being adversely impacted by the heightened levels of inflation currently being experienced, including increased social inflation. Litigation and defense costs are increasing as are the cost of settlements and jury awards. Further, as has been broadly reported, the delay in course reopening post the pandemic has introduced a change in development patterns, which are now becoming more fully understood. It is worth noting that most of the increase to reserves in the fourth quarter is sitting in IBNR. As we have discussed in earlier quarters, we continue to update and incorporate assumptions around inflation into our pricing, loss reserving and underwriting. We remain cautious given some of the uncertainty that exists around our longer tail product lines as these books of business take years to develop. Consistent with our reserving philosophy, weâre responding quickly to increased loss reserves following the indications of increased claim frequency or severity in excess of our previous expectations. I would also highlight that the increased reserves and claims reporting patterns in question were predominantly associated with the tail end of the last soft market. Since 2019, weâve experienced material rate increases, seen a tightening in terms and conditions; optimized our portfolios through underwriting action and risk selection; adjusted attachment points; managed limits and diversified our portfolios. While we are seeing size of these underwriting actions producing more positive loss experience, coupled with a decline in the number of security class action filings in recent years, we remain cautious in recognizing those benefits considering the uncertainties around the longer-term impacts of inflation. Overall, we feel we are very well positioned heading into 2023. Despite the challenging economic environment, we are pleased with our overall results for the past two years and remain focused on delivering consistent top financial performance to contribute to the growth and the value of the overall Markel Corporation. Turning next to the Reinsurance segment. We showed significant improvement this year, producing a 92% combined for the year compared to 105% a year ago. Our reinsurance team has done a fantastic job of re-underwriting our book and reducing volatility over the last few years, to focus on long-term profitability within our core casualty, professional and specialty product lines. Weâre starting to see more of the better priced business earned through the results. Gross written premiums within the Reinsurance segment were only down 1% for the year, demonstrating our ability to remix the portfolio away from property, which we serve through Nephila and growing our preferred lines. Ultimately, weâre not focused on growth for the sake of growth within our reinsurance operations, but rather our energy is aimed at being a profitable, durable reinsurer that is relevant to the clients we support. Next, Iâll touch on program services and fronting operations, and our insurance-linked securities operations, both of which are recorded as part of our other operations. Our State National program services and Nephila ILS teams continue to remain focused on capturing market opportunities and partnering with our underwriting divisions to take advantage of synergies available within our multifaceted insurance platform. As a reminder, almost all of our gross written premium within our program services and other fronting operations is ceded. Total premium production within our program services and other fronting operations totaled $3.4 billion for the year versus $3 billion a year ago. Premium growth was due to both expansion of existing programs and the addition of new programs. It was also due to growing within our other fronting operations generated from the transition of our Global Reinsurance divisionâs property business to Nephila and opportunities we see in the property cat space more broadly. Fee revenues were up 19% from a year ago, and the operations continued to produce strong operating margins. Despite increasing competition in this segment, we continue to see a strong pipeline of opportunities in the current market. In our Nephila ILS operations, revenues and expenses for the year were down due to the impact of selling our Velocity and Volante MGA operations in 2022. The net loss from operations in our ILS unit was driven largely by the costs incurred at Volante from launching a Lloydâs syndicate prior to disposition. A highlight this year from our ILS operations was our successful execution of the sale of Nephilaâs two MGA entities during the year, realizing gains of totaling $226 million and unlocking significant value created since our acquisition of Nephila in 2018. Assets under management in Nephila were $7.2 billion at the end of 2022. As we have previously discussed, the past several years of cat activity have been particularly difficult on both Nephila and the ILS market as a whole. The multiple years of event losses, coupled with recent volatility in the capital markets have impacted investor decisions to allocate capital to ILS, reducing our level of assets under management. Additionally, increases in the cost of capital during 2022, driven by a higher interest rate environment, further impacted the estimated fair value of our fund management operations. The combination of these factors ultimately resulted in a partial impairment of goodwill attributed to our fund management operations in the fourth quarter of $8 million. We remain confident that Nephila will produce more favorable results over the long term. Pricing in the property catastrophe market is strong and Nephila achieved significant rate increases at the 1/1 renewals and expects to continue to capitalize on improving pricing as the year progresses, which will lead to an improved outlook for investor returns. Our team in Nephila continues to identify new areas of opportunity to deploy capital to address the evolving areas of risk management needs, including the expansion of our climate and specialty product offerings. We also continue to look for opportunities to achieve synergies amongst our various insurance platforms, underwriting program services and ILS to provide customized insurance solutions, best matching capital risk to meet the needs of our customers. Turning to current market commentary and outlook. Submission activity and new business opportunities remained strong in the fourth quarter end at 1/1. Despite ongoing concerns around the economic slowdown and the broader macroeconomic backdrop, thereâs a strong need for insurance protection and risk management solutions across the wide array of products we offer. During the fourth quarter, we saw rate increases moderate in pockets of our broad portfolio. For example, financial institutions and large account risk managed excess casualty. We also experienced modest rate decreases in our public D&O portfolio. However, most lines maintained the level of increase experienced over the year. And within our property lines, as you might suspect, rates have begun to increase meaningfully given the recent loss activity, a supply-demand mismatch and higher reinsurance costs. As weâve been assessing in recent quarters, we have entered a more nuanced space of a broader insurance market cycle where different product lines have different patterns, and we continue to face uncertainty pertaining to inflation in all its forms. As such, we remain laser-focused on rate adequacy in each account that we write, looking at -- to our underwriter stack with discipline. Fortunately, there are a number of opportunities to grow profitably given our broad product range capabilities, global footprint, exceptional talent and strong trading relationships across multiple distribution channels. Therefore, itâs incumbent upon us to be discerning and only write business that meets our profitability targets. With regards to our outward ceded reinsurance placements, we anticipated a challenging environment that was experienced in the fourth quarter ended 1/1. Our team did an exceptional job putting together our placements. We avoided any surprises and importantly any delays in placement or gaps in our programs. Coverage, attachment and pricing were all within expectations, despite some changes year-over-year. Weâre well positioned to pass costs along and donât anticipate any meaningful changes to our margins or underlying underwriting strategies. In summary, I feel good about how we are positioned heading into 2023. Weâll continue to focus on the things we can control, and be aware of and react to the things we cannot. I want to take a moment to thank my 5,000 colleagues across our insurance businesses. Without their efforts and passion to serve our customers, these results would not be possible. Because of them, it is a joy for me to come and to work. Thank you. Thank you, Jeremy. As Brian reported earlier, reported revenues of $4.8 billion at Markel Ventures, up from $3.6 billion a year ago, and EBITDA reached a new record of $506 million, up from $403 million. I am delighted with the accomplishments of the team at Markel Ventures, and I hope you are as well. Between the ongoing pressures and strains of supply chain issues, tight labor markets, inflation and every other sort of challenge you can imagine, the people of Markel Ventures continue to serve their customers and each other and produce excellent financial results. We continue to diligently search for additional opportunities to grow by acquisition at Markel Ventures, but we did not add any new platform companies in 2022. I hope you see this as an example of the discipline with which we allocate capital. The rise in interest rates and the disruption in the equity and fixed income markets has caused the number of inbound calls weâre receiving to start to go up as 2022 progressed, and Iâm hopeful that we will find attractive opportunities in 2023 and beyond. Rest assured, we will remain disciplined as we see new opportunities and only deploy capital when we expect to earn attractive returns doing so. Our array of businesses at Markel Ventures gives us interesting insights and observation points about general economic conditions. Supply chain and inflation issues remain, and they continue to present challenges. I hope you share my sense that the results of 2022 provide yet another year of evidence that we have a talented team on the field and that they will continue to operate the businesses of Markel Ventures with excellence. In our investment operations, you can see the effects of higher interest rates and lower equity prices and the results that Brian reported to you a few minutes ago. Iâm very optimistic about our circumstances now. First, our recurring investment income continues to rise at a meaningful pace. Each day, when we invest the cash flows from our operations, weâre getting higher interest income than what is currently on our books. We also enjoy a position of capital strength such that we are regularly and systematically adding to our equity portfolio at more and more attractive prices. We also continue to repurchase Markel shares during the year at what we believe to be attractive prices. While we reported declines in the mark-to-market prices of our equity and fixed income holdings, due to the increase in interest rates and equity market declines, we did outperform the relevant indices. The long-term returns produced by our long-standing investment discipline remain outstanding, and Iâm optimistic that will continue to be the case. Interest income and dividend income, specifically, rose 22% in 2022 from the combination of higher earning fixed income securities, higher dividend payments and steady investment of our cash flows into additional equity and fixed income holdings. In fact, our repurchases of 233,000 shares, up from 166,000 last year and our purchases of equity securities were almost completely funded by these recurring cash flow streams. Those factors bode well for future results. Our three engines of insurance, ventures and investments provide diversification and resilience to Markel. We prepare -- we are prepared to operate in whatever environment we encounter and to continue to make forward progress over long periods of time as we do so. We thank you for your commitment as long-term shareholders. We look forward to seeing you at our annual meeting in May -- May 17th, and we now welcome your questions. If you could open the floor for questions, please? Yes. Thank you. Good morning. You suggested in the insurance business, most lines have maintained the pricing level that youâd seen for most of the year. Could you maybe provide some specific, where do you see pricing, and how does that compare to loss cost increases? Yes. Sure, Mark, itâs Jeremy. So, a few comments on that maybe to build off what I shared. So, I would say that in the fourth quarter across the total portfolio, the level of rate increases would have slightly dipped below the level of the trend that weâre applying. So that was a development. But driven by some of the lines that I called out specifically, like public D&O, like financial institutions, like risk-managed excess casualty, those sorts of lines. Many of the trends that have been talked about, say, for example, workersâ compensation, have been pretty consistent with regards to sort of modest levels of sort of price decreases. And many other areas of the portfolio have broadly held on to the rate, property and certainly one thatâs been improving. So, weâre starting to see different cycles and patterns, if you will, across each of our products. And while I think that is an interesting unfoldment of point to look at level of rate increases and to look at sort of how weâre thinking about trend in those product lines, I think what we are most focused on within each of our product lines is where we are with regards to rate adequacy. And thatâs sort of what we incorporate into our thinking with regards to how we come into 2023 and operate throughout this year. And weâll see. I mean, I think with regards to take casualty, more broadly speaking, I think thatâs one for the industry to watch very carefully. I think we should be very sensitive to whatâs happening with regards to rate and trend in that space. When you say dip below the trend that youâre applying, the inflation trend, is that what youâre saying that pricing is below loss cost trend? And those two things were moving the opposite direction. Over the course of 2022 loss cost trends, we were incorporating were increasing over the course of 2020, broadly speaking, and again, we write over 100 major product lines. The levels of rate increases were declining a little bit. And then, the adverse you saw in 2015 through 2019, do you think -- I assume thatâs a broader issue. You seem to be maybe a little more at the forefront in recognizing that. Do you think others will follow suit? Whatâs your sense on how you sit compared to your peers? Well, I canât possibly comment on what others may see. And what I would say for us -- two stories, right? So, if we take general liability with NGL, we had a specific look at our brokerage contractors primary casualty book. Last few quarters, we were seeing actual claims experience exceed what we expected in our models, and weâve been reacting along the way. And we decided to take a deeper look in the fourth quarter given there seems to be that trend emerging. Our main takeaway is that the ultimate claims reporting pattern may be a little bit longer than we initially anticipated. I think -- some of those causes can be the growth in the book that we experienced over the past 10 years. Thereâs some larger project work in that book. And ultimately, that may take longer to settle. And then thereâs no doubt that the court closures with the pandemic length in the tail. Those factors get exacerbated by the unfavorable legal environment that we face and a rising cost of inflation. And that is not going to be unique to us, but I canât speak to what others are sort of doing in that space. We were very cautious. We put up additional IBNR across those maturing accident years. Weâll see how things play out over time. In Professional, weâre speaking to our large risk-managed E&O and D&O accounts in the U.S. where we offer larger limits. We tend to play in an excess position in the years in question. We would often be in high access positions. What weâve begun to have some concern around is an emergence of a pattern where it may be more likely that our layers get implicated than we previously anticipated. And weâre seeing some of that already. Weâve seen that in recent quarters. The good news is, right, in that quote, thereâs not much of a claim reporting tale. Weâre talking a claims-made book of business. Itâs a finite claims universe. And so, we got our underwriting claims and actuarial teams together in the fourth quarter, took a deep dive, ultimately concluded that we would take a more pessimistic view with regards to how many claims we could be exposed to. Thereâs no doubt in my mind the rising costs to defend, increasing settlement amounts are linked with a more inflationary environment weâre experiencing, and thatâs the impetus for our development. Again, that isnât going to be unique to us, but I canât speak to how others are handling that. The years in question as well on the professional side, they correspond at the peak years for security class action filings, lower court dismissals and now thatâs kind of playing out. Importantly, I think across our books of business, those were experiencing on the tail end of the last soft insurance market cycle. Since then, weâve had the better part of four years of rate increases, and weâve done a lot on the underwriting side, terms, conditions, limits profiles, attachments. Weâve seen retentions increase from clients. So, weâve taken a lot of underwriting action and now weâll just take a very sort of cautious view on the most recent years, and weâll see how that plays out. As you know us, we react to bad news very quickly, and weâre pretty cautious with regards to the economic backdrop at the moment. Yes, sure. But on the reinsurance side, whatâs your appetite to grow as you see pricing here in your target line? Well, I think thatâs the part. Itâs a little bit down to the appetite. So, we certainly have the ability to grow and the capital to deploy supporting growth if weâre happy with the pricing and the terms and condition and the environment. I mean it is the case that while property got a lot of the headlines around 1/1, casualty, professional specialty lines where we play, definitely were firmer acting as a more disciplined market and we will see improvements with regards to coverage attachment and pricing in our portfolio as we move this year. We will opportunistically take advantage where it makes sense in that space. Yes. Good morning. I just had a few quick ones here. I wanted to ask about the other services unit that had higher revenues than normal. And I donât know if thereâs anything related to ILS or performance fees or anything in there. So, it was higher revenue and then higher operating income. Just trying to kind of break down whatâs going on there, just to look at whatâs -- any kind of unusual or non-recurring type items to get kind of a run rate there, if you have any additional color on that? Sure. And thereâs tables that will sort of break some of that detail out, Scott. So I mean, the -- I probably touched on some of the more unusual one-off nonrecurring items, like gains from the disposition of businesses or like -- moves. On the core operating earnings, driven more by our State National program services side and thatâs linked to just the profitability of that business. On the fund management side, I commented on sort of expenses -- revenue trends with regards to the sale of MGAs being in the period last year versus this year. Broadly speaking, our fund management operations are slightly profitable on the cat side -- property cat side, offset by being slightly unprofitable where weâre investing in sort of the climate and specialty space. But most of what youâre seeing in that space is coming through the strong performance on our program services side. Okay. And then the -- you mentioned the property rate increases, which is everyoneâs been talking about that thatâs improving. So, I know on the reinsurance side, but on the insurance side, is that something youâre going to have a significant appetite to start ramping up? How are you feeling about the property side of it, given where pricing is now? Yes. We worked really hard in the last few years to reduce -- so property has multiple stories to it, right? I mean thereâs obviously the catastrophe side and sort of the non-catastrophe side. We worked really hard over the last few years to manage our total aggregate exposure to natural catastrophes, our PMLs in that space. And I donât think weâre going to change or revisit that position to any great extent. But we do play in that space. We do have a meaningful property portfolio. We will benefit from the rate increases in our property portfolio, where we deploy capacity without a doubt. We can see and strategically grow in that area a little bit. And I think weâll also benefit from even on the attritional side, itâs whatâs happening in the rate increases. So, weâre really focused on sort of managing our aggregate exposure. Weâll opportunistically use this as a time to optimize our portfolio. I would not anticipate or expect any significant change in our underlying strategy with regards to property. Okay. Thatâs what I figured, but I also figured Iâd ask. The other question is switching gears a little bit, just on the venture side, pretty strong quarter in terms of revenue and bottom line. Any areas of strength you can call? I think you had mentioned construction in there, but anything else you can call out? And then, also in terms of just -- it seemed like the profitability was much better than it had been in the past few quarters, and I donât know if thereâs anything that drove that just kind of rate increases and maybe cost manager or anything else thatâs kind of played out there? Well, what I would call out is try to get a restaurant reservation, try to get a flight, try to get a hotel room, try to buy a car. And the economy is doing pretty well. The demand is out there. And I just think our managers do a very good job of running their businesses. And fortunately, no, itâs not some cost-cutting program or regime or big layoffs or anything like that. We donât have that going on. We have people who run their businesses every day, and theyâre pretty good at it. Just one last one, too, just on the expense ratio. You made significant improvement in 2022. And should you think we should expect any further improvement on that, or is it -- do you think itâs sort of leveled out there? I know a lot of that is driven by premium leverage. Yes, you nailed it right there at the end, Scott. Youâll have to see and observe it as we go through the year, it will depend on sort of the trend, I think, with regards to net earned premium, which will follow the trend with regards to how we see gross written premium play out. And a lot of that story for 2023 is going to be looking at kind of the pricing environment and the trend that we were talking about before. So, we are really pleased with the progress that weâve been making in the expense ratio, focused on productivity and the ability to scale off our expense base as weâve grown. I think we can continue to do that. I donât know it will be at the rate that weâve seen in the last couple of years. Yes. Thank you. I wonder, any thoughts on the 2020 and 2021 accident years, how those -- have those been subject to the same forces? I know the initial frequency and severity was low as a result of COVID, or I assume you would see it that way? Iâm just sort of curious whether they are also developing adversely maybe from a much better position to start with. A couple of things Iâd point to, Mark. So, when you start talking about in the longer tail lines, accident years like 2020 and 2021, and then clearly, the current one with regards to â22, right? It takes a while to see an emergence of claims activity. So, weâre not kind of at that sort of seasoning yet. So, weâre not seeing unexpected claims activity. Additionally, as I mentioned before, the improvement in the broader sort of specialty insurance marketplace, with regards to pricing, terms and conditions, underwriting actions, right, thatâs a contrast with the hardening and the improvement in the insurance market that started to take place in 2019 and carried through 2022. So, that creates, I think, a different dynamic on the more recent years in the past year. What I would suggest, and even sort of what we talked about this year with regards to the current accident year loss ratio, weâre taking a very cautious view, right, given the sort of the economic backdrop. Weâre not seeing anything thatâs unexpected or unpleasant on the most recent years. And this concludes our question-and-answer session. I would like to turn the conference back over to Tom Gayner for any closing remarks. Thank you very much for joining us. We look forward to hearing from you on the next call and seeing you in Richmond at our annual meeting on May 17th. Thank you so much. Bye, bye.
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Good day, and thank you for standing by. Welcome to the Parker-Hannifin Corporation's Fiscal 2023 Second Quarter Conference Call and Webcast. 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. And I would now like to hand the conference over to your speaker today, Mr. Todd Leombruno, Chief Financial Officer. Sir, please go ahead. Thank you, Chris. Good morning, everyone, and thank you for joining Parker's fiscal year 2023 Q2 earnings release webcast. As Chris said, this is Todd Leombruno, Chief Financial Officer speaking. And joining me today is Jenny Parmentier, our Chief Executive Officer; and Lee Banks, our Vice Chairman and President. Our second quarter results were released this morning and before we get started, I just want to remind everyone, we will be addressing forward projections and non-GAAP financial measures. Slide 2 of this presentation details our disclosures our disclosure statement to issues in these areas. These forward-looking statements detailed issues that could make actual results vary from our projections. Our press release, this presentation and all reconciliations for non-GAAP measures are now available under the Investors section at parker.com and will remain available for 1 year. We're going to start the call today with Jenny addressing some focus areas for the company as she takes on the role of CEO. She will then address some highlights for the quarter, which we just released this morning, and then I'll follow up with a brief financial summary and then review the increase to our FY '23 guidance that we issued this morning. Jenny is going to wrap up with a few summary comments. And then Jenny, Lee and I will take as many of your questions as possible. I now ask you to reference Slide 3. And Jenny, I will hand it over to you. Thank you, Todd. Good morning to everyone, and thank you for joining the call today. As Todd said, before we get into the quarter results, I'd like to remind everyone what drives Parker and give you some insight on where we'll be focusing. Moving to Slide 2. New CEO, same three drivers: living up to our purpose, continuing to be great generators and deployers of cash and achieving top-quartile performance versus our proxy peers. Slide 3, please. Safety, purpose and engagement are the foundation of top quartile performance. As I mentioned to all of you in the December call, we are committed to delivering the Meggitt cost synergies of $300 million, and we're very pleased with the progress to date. We've said before, it's still early innings for Win Strategy 3.0, and we will continue to utilize it to accelerate our performance. Our culture is one of continuous improvement as evidenced by past performance and results we will deliver well into the future. And we are fully committed to achieving our FY '27 targets that we rolled out at Investor Day last March. All of this will allow us to continue with the transformation and ensure a very promising future for Parker. Moving to Slide 4, please. You've seen this before, Parker has a proven strategy. The Win Strategy is and will remain our business system. It is a system focused on the fundamentals. We trust the process, and we'll continue to get results from it as we have in the past. Slide 5, please. So where will Win Strategy 3.0 accelerate our performance? Well, it always starts with our people. Safety number 1 and it always will be. Our goal is zero incidents, and we believe it is possible. We brought a lot of new people into the business over the last couple of years, and we have the opportunity to double down on the training and chartering of high-performance teams and leaders. This will further strengthen our culture of continuous improvement and our brand of Kaizen well into the future. Moving over to customer experience. We have an opportunity to do even better with the digital customer experience. Anywhere from how we interact with our customers on quotes and orders, to the availability of digital products and the use of artificial intelligence for demand forecasting with both our customers and our suppliers. It's early days for our zero defect initiative as well. This obviously drives better quality and overall customer satisfaction. This is the exact same approach that we took with zero safety incidents. Zero defects is possible. It starts with engaging our people around robust products and capable processes. Doing this right exposes the hidden factory, improves quality, reduces cost and thus expand margin. Best-in-class lead times have been part of our Win Strategy for many years. And coming out of the pandemic and subsequent increase in volume, we see even more opportunities to improve lead times and become supply chain leaders. Our customers deserve this level of service and all of these are strong enablers of growth. Profitable growth is a combination of performance and portfolio changes, which we have demonstrated. Strategic positioning is a tool used by our general managers to segment their business and position them best in their markets and with their customers. This process and cadence will continue to drive the critical thinking about growth in the division and closest to the customer. We are obviously seeing the benefits of the transformed portfolio, and we will continue to seek out those opportunities that will enhance the transformation. The most significant CapEx spending in decades will bring growth to Parker with all the technologies we have supporting the secular trends today and for many years to come. And we have an annual cash incentive plan, which incentivizes the right behaviors and drives a real intensity around growth. Moving over to financial performance. We have a proven set of simplification tools, which will continue to help us reduce complexity and cost. House in this area is our simple by design process, which you've heard us talk about a lot. This has become a fundamental -- a business fundamental across the Corporation. We have a robust process around value pricing, and we'll continue to strive for margin neutrality in these inflationary times. We will also double down on training the principles of lean. This is the foundation of our continuous improvement culture and it drives safety and productivity in all of our operations. You've heard us say many times over the past few years that while not immune to the chaos of the supply chain, we fared better than others due to our dual sourcing initiatives and our local-for-local strategy. The pandemic and subsequent increase in volume exposed some areas that we can further improve upon to ensure that we become supply chain leaders. Our teams are looking to further enhance the visibility of the changing demand picture and utilize some new scheduling tools that will drive efficiency in the operations and those best-in-class lead times that I just mentioned. Focusing on these areas and Win Strategy 3.0 will help us to achieve top quartile performance. Slide 6, please. Our capital deployment priorities remain unchanged. We will maintain our record on dividend payouts and target a 5-year average payout of 30% to 35% net income. We will target 2% of sales on CapEx to fund organic growth and productivity. The 10b5-1 share repurchase program will remain in place and our near-term and top priority is to delever post the Meggitt acquisition. We will keep our acquisition pipeline healthy and we'll continue to build relationships for future acquisitions. Slide 7, please. So Q2 was another quarter of excellent operating performance. We saw a 16% reduction in safety incidents versus prior year, further supporting our ability to reach zero incidents. Sales came in at $4.7 billion, a 22% increase to prior with organic growth coming in at 10%. Strong segment operating margin across all segments has led us to a full year guidance increase and we are very happy with the progress of the Meggitt integration. All activities and synergies are on schedule. Moving to Slide 8. We'd like to share some recent highlights on the integration. Key leaders from both Parker and Meggitt are leading over 20 teams that are creating a lot of value in integrating the functions. Engagement with the team members and the customers that had widespread activity in all locations and wind strategy training and implementation is well underway. Just to note here, we have a proven track record of delivering synergy targets, and this acquisition will be the same. The teams are following the integration playbook that has been developed over the last several acquisitions, and I am sure they will add some new best practices to it as well. Slide #9. So we are on track to achieve the $60 million in synergies by the end of this fiscal year, and the graph on the left illustrates our path to $300 million in synergies and adjusted EBITDA margins of 30% by FY '26. Synergies are represented in blue and the cumulative costs to achieve are in gold. On the right side of this page, this quadrant depicts the use of the overall Win Strategy to achieve the synergies and ensure operational excellence into the future. Starting with the top left, Safety, Lean, Kaizen, high-performance teams all make up our brand of Kaizen and will drive the engagement and continuous improvement well into the future. Simplification is a major area of focus for the integration teams. This is where we look at structure and org design. We use our 80-20 complexity reduction tool, and we implement simple by design principles. All of this drives real ownership and decision-making at the division level, further empowering the team to drive results. Moving over to SG&A. We've had the realization that there's a lot of opportunity moving Meggitt from a centralized structure to Parker's decentralized structure, driving that overall decision-making to the local level and improving overall speed. With this acquisition, footprint optimization is very minor. Remember, we have complementary technologies with this acquisition and not a lot of overlap at the plant level. And with supply chain will optimize pricing, terms and conditions, direct and indirect material spend as well as logistics. Again, off to a great start, very pleased with the performance on quarter end. Thanks, Jenny. That was great. Okay. So I'm going to begin on Slide 12 with the financial results. I can't tell you how excited the team is. This is the first full quarter that includes Meggitt in our results. It also is the first full quarter that we do not have Aircraft Wheel and Brake in our results. So the year-over-year comparisons are a little bit more complicated than usual. But you see the top line sales increased 22% versus prior year. That clearly is a record for us at $4.7 billion. Organic growth continues to be extremely healthy and was just over 10% in the quarter. That does extend our string of double-digit organic growth quarters. Although better than forecasted, the currency headwinds do continue. The currency impact to sales was unfavorable by 4% in the quarter versus prior year. And when you look at the net of the Meggitt acquisition and the Aircraft Wheel and Brake divestiture, that was a positive 16% to our sales in the quarter. Looking at adjusted segment operating margin, we exceeded our forecast, and we finished at 21.5%. And if you look at adjusted EBITDA margins, that was even stronger at 22.4%. And just as a reminder, we mentioned this last quarter, we do expect Meggitt to be just slightly dilutive to overall margins in this first sub-years as we generate those synergies that Jenny just spoke to. Looking at adjusted net income, we did $619 million or 13.2% ROS. That is an improvement of 6% versus prior year, and adjusted earnings per share were $4.76. That's a Q2 record and an increase of $0.30 or 7% compared to the prior year. Overall for Q3, we are extremely happy to have that first quarter of Meggitt in the books to see that sales increase by 22% and obviously, see the positive net income and EPS growth. So just really happy with the results of the quarter. If we jump to Slide 13. This is just going to be the visual elements of that $0.30 EPS improvement. And again, I'm really happy to say the driver of this is the additional segment operating income. We generated $180 million or 22% additional segment operating income versus the prior year. If you look at that, that added $1.8 to EPS for the quarter. Interest expense, as expected, is a headwind. It's a $0.51 headwind. That was a little bit higher than we were expecting just with the movement in rates, 100% of that entire $0.51 is related to the Meggitt transaction and what's going on in the rate environment. Other expense was $0.12 unfavorable. That was primarily driven by year-over-year changes in currency rates and income tax is a drag of $0.14, really because last year benefited from a number of discrete items that were favorable. And of course, this year, we have some of these transaction costs in the quarter that are not deductible. Everything else nets to just $0.01. And if you look at all those items, that makes up our $0.30 increase to that record $4.76 earnings per share, and we're really happy with that. If you jump to Slide 14 and just looking at the segments, once again, every segment was positive organic growth in the quarter. We exceeded our margins across the board. Every segment exceeded our expectations on margins. Orders remain positive despite some pretty tough comps in the prior year and for the total company finished at plus 3. And really, demand does remain robust across all the markets we serve. Our team members really are working hard to meet customer expectations. And the result is that record sales that we just generated in the second quarter. If you look specifically at the North American businesses, Sales are extremely strong at $2.1 billion. Organic growth in that segment is 13.5%. Adjusted operating margins did increase 50 basis points in North America. They finished at 21.8%, that is a record and just really healthy volumes and a gradually improving supply chain really helped drive performance in those North American businesses. Order rates are positive at plus 2 and that really matches our strong backlog and really that broad-based demand that is consistent across North America. So special thanks to our team members in North America for their record performance. Looking at the international businesses, sales were $1.4 billion. Organic growth there, almost 9% from prior year. And across all of our regions in the International segment, we were positive from an organic growth standpoint. Margins remained high at 21.9%. This is slightly down from prior year, really due to currency, a little bit of product mix and some China COVID-related headwinds, just specifically in China. Order rates are minus 4. They were positive last quarter, but that did have a bit of a rebound, if you remember, from the COVID-related shutdowns in China. So we're watching that very closely. Aerospace Systems, obviously, huge sales, up 84%. They did exceed $1 billion for the first time, and that obviously is clearly driven by the addition of the Meggitt businesses in our Aerospace Systems segment. Organic growth in aerospace was almost 5%. Really strong OEM and MRO commercial activity in that segment, both from sales and orders being mid-teen positive on the OEM side of it and military OEM remains negative as we expected. Operating margins were 20.6% in that segment. That is up 70 basis points from last quarter and better than we forecasted. And really, the Meggitt integration, the performance of the businesses, the synergies, like Jenny had mentioned, totally on track, and we're really happy with that. When you look at aerospace orders, they are plus 22. We talked for the last couple of quarters about that bad comp we had with the military orders we've now -- we've passed that comp. So you can see the orders are 22%. We're really happy with that. Great performance across all of the businesses this quarter. Great job, everyone. If we go to Slide 15, this is just cash flow. This is our performance on a year-to-date basis. The Meggitt transaction, we've talked about this last quarter, there's a drag to cash flow just based on some of those transactions costs. They did impact CFOA and free cash flow by roughly 2%. But even excluding that, if you look at the numbers as reported, cash flow from operations is 12.1% of sales. We did surpass $1 billion in cash flow from operations on a year-to-date basis and our free cash flow is 10% of sales. Our CapEx, as we have communicated, just slightly over 2% for the year, and free cash flow conversion is 114%. I think everyone knows us pretty well. Our cash flow is always second half weighted and we continue to forecast mid-teens cash flow from operations, and certainly, free cash flow conversion over 100% for the full year. If we jump to Slide 16, just a few comments on capital deployment. I think everyone saw that last week, our Board approved a quarterly dividend payout of $1.33 per share. That is our 291st consecutive quarterly dividend, and it is certainly in line with those targets that Jenny mentioned earlier. On leverage, we did make progress on reducing our leverage. If you look at gross debt to adjusted EBITDA, that was 3.6. Net debt to adjusted EBITDA was 3.4. Both of those metrics improved 0.2 turns from Q1. So that EBITDA is on a trailing 12-month basis. And just a reminder, that only includes Meggitt EBITDA from the date of close, so roughly 3.5 months of Meggitt EBITDA. And I'm proud to say we've now applied over $2.2 billion of cash towards that Meggitt transaction. And we're really fully committed to our deleveraging plan, and that plan remains on track. So good progress there. Okay. So moving to guidance on Slide 17. You saw we did increase our guidance this morning. We are providing this as usual, on an as reported and on an adjusted basis. And if you look at the sales range, we are increasing that. We're increasing the range from 14.5 to 16.5 or from, excuse me, 14.5 to 16.5 or 15.5% at the midpoint. More importantly, organic growth, if you look at our organic growth for the full year, we are increasing that to 7%. That is up 1% from 6% last quarter. That was 11% last quarter. And while currency is still a headwind, we expect that to be less bad. We now forecast that to be a 3% impact to sales, negative. And that's down from what we were forecasting last quarter at negative 4.5 and that is using spot rates as of December 31 like we normally do. When you look at adjusted segment operating margins for the full year, we are increasing that full year guide by 20 basis points to 22.1%, and that is at the midpoint, there's a range of 20 basis points on either side of that. And just a few additional items to note. If you look at interest expense, that is now up to $555 million. That was $510 million last quarter. That does include the changes in the interest rates that just were announced yesterday and really what we forecast them to do in the upcoming months. Corporate G&A is $204 million and other income is really an income of $18 million. Both of those numbers are virtually unchanged from our prior guide. If you look at our tax rate, just based on where we're at now, halfway through the year, we believe that will be 23.5% for the full year. And adjusted EPS is now raised to $19.45, that's a $0.50 increase from our prior guide and there is a range around that or plus or minus $0.25. Specifically, for Q3, organic growth is expected to be nearly 4%. We raised that from our prior guide and adjusted EPS is expected to be [$4.76] at the midpoint. And finally, adjustments in the forecast at a pre-tax level are listed here on this table for the remainder of the year, together with acquisition-related expenses incurred to date. So that's the details on guidance. If you go to Slide 18, this is again just a little bridge on that. You can see where we start. Our prior guide was $18.95, that strong performance in Q2. We're rolling in that $0.45 beat. We are increasing segment operating income by $0.35 for the remainder of the second half. And I just wanted to note that $0.25 of that is due to the less bad currency rates. If you remember last quarter, we knocked that down a little bit based on where rates were at the end of September. We've now moved that back a little bit, and there's a little bit more based on the organic growth increases, and that is $0.35. Interest and tax still continue to be a bit of a headwind. You can see the interest expense is a $0.20 headwind and income tax for the second half of the year is just $0.10. Add it all together, we get to $19.45 at the midpoint, and that is the changes to our guidance. So with that slide, I will ask you to focus on Slide 19. And Jenny, I will hand it back over to you for summary comments before we go to Q&A. Thank you, Todd. So we have a very promising future. We have a highly engaged team that's living up to its purpose. We'll continue to accelerate our performance with Win Strategy 3.0. We are seeing the benefit of our strategic portfolio transformation, and we will continue to be great generators and deployers of cash. Nice quarter. I guess two questions. One, can you give a little more color on the negative order growth in international and then the acceleration that you saw in orders in the Aerospace segment? That would be helpful. And then, Jenny, I guess, just a bigger question for you today. Obviously, Parker has been on a journey to move their -- through acquisitions, move their portfolio into higher value-add services, higher organic growth businesses, but it's been more really about acquisitions versus divestitures. I guess as you look at the portfolio today, do you still see Parker going down the path of looking at acquisitions? Or is there an opportunity to look at potential businesses that might not make sense for Parker over the longer term? Thanks, Jamie. I'll try to answer your second question, and then I'm going to let Lee give some color on your first question. So we always want to be the best owner of any business, right? So we have a regular process where we look at that every year. So that's something that's well in place, and we'll continue to do that. As we look to future acquisitions, again, we're going to be looking for the type of acquisition that is margin accretive. It has that resilience of a longer-cycle business and something that fits well with Parker. So obviously, short term, we need to pay down some debt for Meggitt, but that's why it's important for us to keep those relationships strong for the future. Jamie, it's Lee. Just commenting on international orders. The biggest story here is really Asia Pacific, and it's really around China. If you think about where we've been, I mean, we've had consistent COVID lockdowns, start-stop, and then really tight monitoring fiscal restraint by the government trying to get some of the real estate markets under control, et cetera. And we saw really that really play out specifically later in the quarter, things contracting and slowing down. The other thing quite frankly, the Chinese New Year is the first time in almost three years, the Chinese New Year has really been fully open. So the amount of people traveling and gone is a lot different than it's been in the past. Having said that, we're conservatively optimistic going on the second half of the year. I'm seeing low single -- flat to low single-digit positive growth in Asia Pacific, really led by China. The -- I think it's still going to be a little troublesome in China as they get their supply chains up and running, et cetera. But I'd like to believe that with the stimulus going in and everything else that we're going to see some positive momentum there. Yes. The big thing, aerospace was really the military OEM orders lapping. So we had some big pull forwards orders and then we've lapped that on that 12, 12 basis. So you're seeing the positive order entry rate in commercial OEM and commercial MRO right now. Yes. No, it's a pleasure not to be restricted. Yes, just more of a longer-term question. So a couple of companies are sort of talking about managing the operations, managing the backlog differently in this environment, maybe sort of accepting that lead times are going to be extended for a while, right, given that at the tail, there's still a lot of disruption in the supply chain. Are you guys thinking about sort of structurally adjusting your view on lead times? How much backlog Parker carries into the future? Just any insight would be super helpful. Yes. Thanks for the question, Andrew. So the beauty of the Win Strategy and the lean tools that are inside of the Win Strategy is really all about constantly looking at optimizing our lead times. So as far as restructuring the way we look at it, I wouldn't say we're going to do that, but I would say we're going to continue to look to have those best-in-class lead times. The supply chain, I would characterize it as it's healing. We are seeing some improvement. The one thing that we will really continue to do is increase our dual sourcing and our local-for-local model that has really helped us out. It also helps us that our teams are in a decentralized structure, and they're able to work closely with the customers. So I think that those are some of the keys that help us work closer with our suppliers and really help us have a good look into the future so we can best utilize our resources and our capacity. Got you. And just a follow-up question on CapEx when you talk about your capital deployment priority. You sort of said CapEx target 2%. I may be wrong, but I recall sort of having conversations where you sort of thought maybe you needed on the margin to have capacity in places like Mexico, et cetera, and maybe take it off a bit to deal with what's coming in terms of the cycle. A, have you changed your view? Is that a function of Meggitt? And just generally, maybe how do you think about capacity additions, given what you're seeing over the next couple of years in terms of broader CapEx cycle trends? No, we have not changed our position. We're doing exactly what we said we were going to do. We have a need to increase capacity in a couple of our operating groups. And obviously, we'll invest in Meggitt in the future as well. So that position remains the same. Andrew, I would just add, if you look at historically over the last couple of years, our CapEx has been about 1.4% of sales. So you look at it today, it's a 2.1%. That's a pretty significant increase for us. And of course, as the sales of the company increased, that's more CapEx dollars that we've got to spend there. So we think that 2% number is right, including Meggitt, including all the supply chain initiatives that we're looking for as well. And it might be a little bit bumpy, but you're not going to see it too far about that, too. I was hoping to dig into supply chain a little bit and not necessarily what's going on this quarter, but the longer-term fixes and priorities and such. And so when you think about supply chains, there's a notion of kind of localization and dual sourcing. Some of that, in some ways, feels almost inflationary. But then there's the other component of kind of streamlining supply chains and driving more productivity and it becomes kind of a cost tailwind. How do you guys think about the priorities that you're trying to -- now that kind of COVID is less of a problem around the globe? How do you think about those priorities and the puts and takes behind kind of costing you more but maybe saving you more? I'll just stop there and leave it open ended. Yes. No, thanks for the question, Scott. Listen, it really is all about driving efficiency in the operations. And we've had a long-term strategy of being local for local, right, being close to our customers, having our suppliers close and being able to give that good lead time and really provide a good customer experience. So we'll continue with that. And then with dual sourcing, I mean, I think some of it in the past has had to do with different things going on in whatever environment we're in. But it really is a good practice through different cycles in the business. So it's really something that we want to increase in all regions and make sure that we can be flexible and agile as demand goes up and down. That's the big key is being able to go to one source or the other and really respond to your customers' demand. So that is really the way that we look at it. I think going forward, we've learned a lot through the pandemic. That's the beauty of having a continuous improvement culture. Our teams are trying to recognize where there's opportunities. And we think we have opportunities to make sure we're more efficient and that comes through visibility and analysis of demand as well as really optimizing the schedule that goes to the production floor. So that's where we're focused. Okay. Makes sense. And then to back up a little bit, when you have a big CEO change, oftentimes any issues or problems or complaints or gripes kind of come up or kind of rise to the top of your desk file, but what are the big internal complaints or fixes or gripes that perhaps we don't see as investors, but things that you want to tackle and fix internally that maybe perhaps wasn't really something that Parker was good at in the past? Well, first of all, I just -- I'd like to say that I've had no big complaints or gripes or no surprises. Somebody asked me last week if I had any surprises. I know there's been none of those. I've been on this team for several years now and very aware of how we run the business. And what I talked about with my slide, that's where the focus is. I mean there's an opportunity to become supply chain leaders here. There's an opportunity to really make sure that we capitalize on the portfolio transformation and we continue to expand margins. So what you saw in those slides is exactly what we're going to work on. Scott, it's Lee. I would say the only gripe is the one I have. She's working me harder than time ever. Maybe just a first question on the industrial businesses. So I guess several other industrial companies who are more sort of short cycle in nature, have talked about maybe some destocking early in the year in the U.S. and also Europe. Doesn't sound like you're seeing any of that yourself. But maybe just talk a little bit about how you see customer behavior or distributor behavior if it's different on that front? And what do you assume Europe does in terms of organic sales in the international business, the balance of the fiscal year? Julian, it's Lee. I'm going to just take a step back a little bit and talk to what you're asking to, but a little bit commercial for the company. So sitting in front of me is a heat map from every country around the world and region of what the PMIs are doing, and it's a sea of red, and it's really turning a red since August or September. And the success we're having today, I think, really has to do with the portfolio changes that we've made inside the company and then really focusing on these key secular trends. So that's made a big difference as we navigate through what is forecasted around the world is a slowdown in different areas. On inventory, I would say, if I just break this down by region -- I was out with some of our large distributors here in North America. There's definitely some inventory balancing taking place. We were at a frantic pace there for probably 18 months. This things came out of COVID, there's people taking their breast balancing things out. But I would tell you their order book is still very strong, and they're still very positive about what's happening. And the other thing to test for me in some of the regions on distribution is what kind of CapEx projects they have going on with customers. And the CapEx dollars with end customers are still flowing. On the OEM side, I would say, broadly speaking, the order books are still good, especially on the mobile side and that inventory level, they try to get us true to adjusting time as they can. A little bit of disruption with microprocessors, et cetera, but really not a great deal. So that's still positive. I think I'll stop there if -- I don't know if I hit your question or not. No, that's good color, Lee. And maybe just a follow-up on aerospace, give us some insights as to how the Meggitt top line is trending at present? And I guess when you think of overall Parker Aerospace, a couple of large sort of aero peers, GE and Honeywell, for example, have talked about the headwinds, whether it's cash or P&L margin from the OE ramp at the airframers. Maybe help us understand if that's a big pressure point for Parker Aero on margins or cash in the next year or two? I'll start with your last comment first. We don't see that as a big pressure point for us. I mean we're pleased with the performance. We expect their full year sales to be $1.9 billion at about approximately 17% adjusted segment operating margin. As I mentioned earlier, we're on track to achieve the $60 million in synergies by the end of this fiscal year. We expect this to grow at or a bit faster than legacy aerospace. So we're real positive on this. Thank you. Good day, everyone. Jenny, just back to where you left off on Meggitt and synergies, probably very early to talk about changing those forecasts or anything. I'm actually a little bit more curious about cost to achieve and opportunities to sort of outperform there? Given that it's not a real heavy lift on factories and the like, there's some people costs associated with getting this right. But -- is that a potential lever here as you get into this and lean the company out to do this maybe even more cost effectively than you were originally thinking? So Jeff, you're right, it is too early to say that there's some upside to that number. We feel good about this year's synergies at $60 million. We feel good about the path to $300 million. But obviously, as I spoke about with the synergies and the operational excellence driven by the Win Strategy implementation, we expect to get this to a higher level of performance, and we'll update you along the way. Jeff, this is Todd. I would just add, this is a big complex acquisitions. The biggest one we've done to date. We've talked about the integration team. It's the largest team that we've had to date. Jenny had a comment. There's over 20 teams, both Parker and Meggitt team members working together across the board. A big chunk of this is SG&A cost, right? There's clearly associated with that. So I would say in the near term here, I'm pretty confident on those costs to achieve numbers. If there is maybe some upside, I think it's too early to tell, but maybe in the out years, '25, '26 maybe there might be some upside there. But again, I think we're going to have to talk about that when we get further into the process. And then maybe a follow-up for Lee. Lee, when you were addressing the international question, you mostly talked about what's going on in China, which is understandable. But can you give us a little bit of an update on what you're seeing in Europe and how you're expecting the balance of the year to play out there? Yes. So I think the balance of the year and kind of what's implicit in our guide is kind of flat to very low single digits negative. There's definitely saw a big slowdown in December. I mean you've got rate hikes everywhere. You've got the war going on, you've got the industrial business being affected by that. It's not -- so that's kind of how I would see it. Distribution is still hanging in. There's some inventory rebalancing taking place. So there's -- and there's some incredibly tough comps from previous year. I mean Europe was one area where we were at the benefit of some big COVID production type products that have kind of lapped and they're not coming back. So that's how I would characterize it, flat to slightly negative. Lee, maybe sticking with you here, you provided color on order trends by geography, but I'm kind of curious if you can comment by the various end markets within your industrial business, how -- if there's any variance there that we should be aware of? Yes. I'll give you kind of what our outlook is. That's implicit in our guide. And I think the key thing to think about is really 90% of our markets are still positive as we look forward. But I kind of look at the greater than 10% positive. Commercial aerospace is still really strong. Commercial military MRO is really strong. Electric vehicle passenger cars. That's one of those secular trends where we've applied product through our portfolio change that we're participating in. And then oil and gas, especially here in the U.S., land base and even some offshore now, it's really come back with a vengeance. I would call high single-digit positives, agriculture, heavy-duty trucks, passenger cars, and telecommunications. And then mid-single digits, the neutral construction markets, distribution, forestry, marine, material handling, mining, power gen, rail, et cetera, and semiconductor is still strong. There's a lot of infrastructure build on the semiconductor side that's still taking place. The big negative markets that kind of stand out a little bit of what we would categorize as life science, and that's really comps around coded equipment and drug dispensing stuff that we were supplying and then really military OEM that's really a timing thing, I think, long term, but that would be negative for the outlook. So at a kind of high level, not breaking it down by region, that's kind of how we see it. I appreciate that. Then I guess my follow-up would be, you talked about the fact that there is a divergence between the demand that you're seeing and PMIs in the industrial business, that's obviously obvious to everyone at this point. But I'm curious, as you're kind of analyzing your order intake, how much of that do you think can be attributed specifically to these higher-growth verticals rather than customers that have significant backlogs that are just now trying to increase production after normalizing the supply chain? I would be -- that's not something I can answer here on the call. I would just tell you anecdotally, some of the customers that we're participating with today are at a different level than we participated with them before, and that's due to the portfolio changes. But I can't answer that right off the cuff. Maybe I'll stick with you, Lee, here because as I hear you lay all that out, it sounds like the maybe even said, I mean, it was quite tilted to the positive. And yet I look at kind of what's embedded in your organic guide for the second half. And I guess it looks like the exit rate is going to be sort of close to zero on organic growth. Maybe you disagree with that, but I'm just curious, would you sort of characterize this as a little bit conservative or careful given the economic outlook? Or is this really kind of a bottoms-up kind of forecast that you have for the second half? Steve, this is Todd. I'll give Lee a chance to catch his breath a bit. There is a lot of positives. We see demand broad-based across the business. Obviously, we talked about North America. We did increase the North America organic guide basically doubled it, was 2.5 -- this is for the third quarter, I'm speaking, it was 2.5. We moved that to almost 5. For the third quarter, I think I was clear on the guidance. We think it's going to be about 4 organic growth. Q4, a little bit of comps come into play there. Your rough math is pretty close. We think maybe 1% organic growth in Q4, second half really is 2.5 when you look at the total. So there are some headwinds out there. I think we're being a little cautious in what we're seeing here. And at this point, it's the best look that we got. So the international piece, I think we gave some color on that. Currency is still not as bad, but still pretty hurtful. You look at the second half, it's about a 1.5% drag for the total company, but almost a little over 4 for the International segment. So that's kind of how we rolled up the numbers and that's the way we feel right now. Okay. Fair enough. Just to follow on to that, though. I mean, it would seem, Todd, that you could get that level organic just from kind of pricing rolling its way through. And any comment on that? Well, we don't give a lot of color on pricing there, but you could tell it's in the organic number. So that's totally in the guide that we just laid out. We've covered supply chain and some of this like inventory phenomenon for a while now in orders. But maybe just to put a bow on it a little bit. As your own lead times have improved, have you seen customers adjust the way they order to match that? So I'm assuming there was a point in time in which everyone was sort of scrambling a little bit more to get everything that they can and maybe it's a little bit more normalcy, that's changed. Anything that you guys have seen on that end? Yes. I think that's a really good question. We really haven't seen that yet, but we know that that's what happens, right? We know that when the lead times either reduced or just effect to normal, the order patterns usually follow that. We have really close relationships from the divisions to the customers. So we really work closely with the customers and looking at the backlog and making sure that it's healthy but I would also say, at the same time, we've seen a few pushouts. Nothing that I would characterize as being significant, but I do think it's a little bit of a leveling of demand as the supply chain heels, but really nothing that has drastically changed any order patterns yet. Got it. That's helpful. And then just as a follow-up in terms of what lessons, I guess, the last two or three years have taught you guys. How are you thinking about different ways you would pull levers in a downturn knowing the types of scarcity and tightness that might have waived on the other side as well as what you guys are doing today even without a downturn? Yes. I think we -- as we've talked about before, we're well positioned for changes. We have a recession playbook, right? We start pulling those levers way in advance at the first signal. So I think we do a really good job of that. Thinking about levers into the future, it really goes back to that increasing the dual sourcing and the local for local. What helps us reduce those lead times and ensure that we can give our customers the delivery that they're looking for. So that's why that's an area of focus for us going into the future. Josh, short thing I would add to that, too, is we've got an incredibly strong operating cadence around here. I mean we -- we are looking at orders, we're looking at businesses weekly, both at the division level and then rolled up to myself and Andy Ross. And as a team, we get together once a month look at the trend, making sure we are ahead of the curve on whatever is happening. And it's no different. It's the way we've operated in the past, and that's the reason we've been able to act quickly. Lee, just one quick clarification on your fee of red comment from earlier. You're basically implying that the outlook that your end markets are decelerating, but not necessarily negative because it sounds like you still -- you guys found still pretty constructive on most of your end markets. Is that correct? Yes, I think that's exactly what I'm trying to tell you. When I'm looking at this heat map, we've been in a contraction from a PMI standpoint almost around the world since August. And I think what's really holding us well are the portfolio changes that we've done inside the business, and the secular trends that are taking place that we're able to tap into inside our business today. So we're not immune from what's happening around the world. None of us are, but it's a different portfolio today when I started 32 years ago. Yes. Okay, great. That makes a lot of sense. And wanted to ask also on cash flow. Todd, obviously, I saw you guys -- you reduced your debt by about a couple of hundred million this quarter. I know that there's a lot more cash flow expected in the second half of the year. What can we anticipate from either a net leverage or debt reduction perspective as you progress through the year? Yes. We're really focused on that, Joe. It's a great question. I kind of mentioned it earlier, our cash flow is certainly more weighted to the second half. We just made the dividend increase. Jenny talked about the CapEx 100% of the cash flow that we generate in that second half will be dedicated to that debt pay down. And like I said, we've got a nice plan for it. We're on track, and the team is already focused on that. So we're pretty positive on that. Chris, this is Todd. I think we have time for one more question. So thank you whoever is next on the list. I've got a bit of a follow-up on the kind of orders backlog cadence as we see supply chains normalize here. Can you give us maybe a little bit more color on how elevated your backlog is relative to where it normally was, I guess, we haven't had normal for three or four years now? And as supply chains improve and lead times shortened, if you would expect to see backlog get worked down, the order cadence dropped down a bit. And we could get into a scenario where we see lower orders with that, that actually signaling any lower demand as we normalize order cadence in backlog. Okay. Nathan, this is Jenny. Just to kind of talk a little bit about the backlog. So right now, our backlog without Meggitt is 12% over prior year. It's roughly coming in at the same dollars as last quarter. When we answered this question, it's around $8 billion. If you put Meggitt on top of that, it's another $2 billion plus, so it's a little bit over $10 billion total. So when we look at the backlog and at the orders, I think the first thing to point out is that with the portfolio changes, it's different than it used to be. So we have longer cycle business. We're going to see what I'd like to call a demand sense, a longer demand sense, and we're going to see more orders out there. Thereâs been a lot of noise the last couple of years because of the supply chain. But we have seen with the transformation of the portfolio that this has gradually increased. So even with supply chain normalizing in the future order patterns changing. I don't think we're going to get this down to where it used to be pre portfolio transformation. I think we're going to see a higher backlog going forward. And I have one on price cost. Parker has a tremendous long-term record for being mutual loan price cost at the margin level and did a tremendous job through the inflationary period we've seen over the last couple of years. Do you expect that if we get to a deflationary period to remain price cost neutral? Or do you think that you could actually hold on some of that pricing and have that be a tailwind to mine? Well, Nathan, it's Lee. I think the first thing is a lot of our pricing isn't always price cost neutral. We're selling -- introducing a lot of new products every year. That based on the value delivered to the customers, these are margin accretive. So there's a big mix about what's happening. We've been through moderate deflationary periods in the past, and we've weathered it just fine. And when I talk about one of those operating cadences, when it comes to price cost, that's just kind of ingrained in all of us here on how we do that. And I think we'll be okay on the margin front. All right, everyone. This concludes our FY '23 Q2 webcast. We do appreciate your time, your questions and of course, your interest in Parker. If anyone needs any clarifications or follow-ups on anything we cover today, Jeff Miller, our Vice President of Investor Relations; and Yan Huo, our Director of Investor Relations, will be available today. So that's all we have today. Thank you for joining, and have a great day. Thank you.
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Welcome and thank you for standing by. [Operator Instructions] This call is being recorded; any objections you may disconnect at this time. Good morning, everyone. Thank you for joining us on Mueller Water Products' First Quarter 2023 Conference Call. We issued our press release reporting results of operations for the quarter ended December 31, 2022, yesterday afternoon. A copy of the press release is available on our website, www.muellerwaterproducts.com. Scott Hall, our President and CEO; and Martie Zakas, our CFO, will be discussing our first quarter results and outlook for 2023. This morning's call is being recorded and webcast live on the Internet. We have also posted slides on our website to accompany today's discussion which address our forward-looking statements and non-GAAP disclosure requirements. At this time, please refer to Slide 2. This slide identifies non-GAAP financial measures referenced in our press release, on our slides and on this call. It discloses the reasons why we believe that these measures provide useful information to investors. Reconciliations between non-GAAP and GAAP financial measures are included in the supplemental information within our press release and on our website. Slide 3 addresses forward-looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in our forward-looking statements. Please review Slides 2 and 3 in their entirety. During this call, all references to a specific year or quarter, unless specified otherwise, refer to our fiscal year which ends on September 30. A replay of this morning's call will be available for 30 days at 1800-876-4955. The archived webcast and corresponding slides will be available for at least 90 days on the Investor Relations section of our website. Thanks, Whit. Good morning, everyone. Thank you for joining us for our first quarter earnings 2023 call. I'm pleased with our solid start to this year. We again generated a double-digit increase in consolidated net sales as we benefited from past pricing actions taken to help offset inflationary pressures. The improved price realization was partially offset by a modest decrease in overall volumes in the quarter. Although our brass production levels did improve sequentially, lower production levels compared with the prior year contributed to the decrease in volumes. We believe the municipal repair and replacement market remains resilient and helped partially offset the slowdown in residential construction activity. As our end markets evolve in this economic environment, we are working closely with our channel partners to manage inventories and order levels. We sequentially improved gross margins in the quarter as higher price realization, combined with a lower level of inflation and better manufacturing performance more than offset lower volumes. While the inflationary pressures have eased, they are still elevated compared with the prior year, leading us to implement additional price increases. Our teams remain focused on delivering the benefits from our large capital projects, particularly the ramp-up of our new brass foundry. We are seeing operational improvements at our Kimball facility as our specialty valve products delivered the strongest year-over-year growth in the quarter. We believe we are on track to achieve the operational improvements needed to increase margins in the second half of this year. While we are pleased with our first quarter results, we also remain vigilant in this environment and are reiterating our annual guidance. After Martie discusses our financial results, I'll provide more color on our first quarter performance, end markets and outlook for 2023. Thanks, Scott and good morning, everyone. I will start with our first quarter 2023 consolidated GAAP and non-GAAP financial results. After that, I will review our segment performance and discuss our cash flow and liquidity. Our consolidated net sales increased 15.6% to $314.8 million compared to the prior year, with growth in both Water Flow Solutions and Water Management Solutions. The increase was primarily due to higher pricing across most product lines in both segments and volume growth across most products and Water Management Solutions. These benefits were partially offset by a decrease in volumes at Water Flow Solutions. Gross profit of $93.2 million, increased 6.4% compared with the prior year. However, gross margin of 29.6%, decreased 260 basis points compared with the prior year as benefits from higher pricing were more than offset by increased cost associated with unfavorable manufacturing performance, inflation and lower volumes. We sequentially improved our gross margin by 380 basis points in the quarter. The unfavorable manufacturing performance which includes the impact of outsourcing, machine downtime, supply chain disruptions and labor productivity, was primarily driven by our foundry operations. The negative impact of inflation improved sequentially. However, we continue to experience higher costs associated with raw and purchased materials, utilities, freight and labor relative to the prior year. Our total material costs increased around 8% compared with the prior year. Our price realization again improved sequentially, more than covering inflationary pressures for the fourth consecutive quarter. Selling, general and administrative expenses of $62.9 million in the quarter, increased 11.7% compared with the prior year. The increase was primarily driven by personnel costs, third-party services, inflation and T&E expenses, partially offset by foreign exchange gains. SG&A as a percent of net sales decreased to 20% as compared to 20.7% in the prior year quarter. Operating income of $34 million, increased 17.6% in the quarter compared with $28.9 million in the prior year. Operating income includes a net benefit of $3.7 million from strategic reorganization and other charges in the quarter. The net benefit primarily consisted of a $4 million pretax gain on the sale of the Aurora, Illinois facility. This gain was partially offset by transaction-related expenses. Turning now to our consolidated non-GAAP results. Adjusted operating income of $30.3 million, decreased $1 million or 3.2% compared with $31.3 million in the prior year. The benefits from higher pricing were more than offset by increased costs associated with unfavorable manufacturing performance, inflation, additional SG&A expenses and lower volumes. Adjusted EBITDA of $44.2 million, decreased 6.9% in the quarter, leading to an adjusted EBITDA margin of 14% compared with 17.4% in the prior year. As a reminder, adjusted EBITDA was also impacted by a year-over-year increase in pension expense of $1.9 million in the quarter. Net interest expense for the quarter declined to $3.7 million as compared with $4.3 million in the prior year. The decrease in the quarter primarily resulted from higher interest income. For the quarter, we generated adjusted net income per share of $0.13 which was flat compared with the prior year. Moving on to the quarterly segment performance, starting with Water Flow Solutions. Net sales increased 6.9% compared with the prior year, primarily due to higher pricing across most of the segment's product lines. We experienced lower volumes primarily for our iron gate valve and service brass products which were partially offset by higher volumes for specialty valve products. Adjusted operating income of $24.2 million, decreased 22.7% in the quarter. Benefits from higher pricing were more than offset by increased costs associated with unfavorable manufacturing performance, primarily at our foundry operations, lower volumes and inflation. Adjusted EBITDA of $31.9 million, decreased 17.6%, leading to an adjusted EBITDA margin of 19.3% compared with 25% last year. Turning to Water Management Solutions. Net sales of $149.2 million, increased 27.1% as compared with the prior year. This increase was primarily due to higher pricing across most of the segment's product lines and increased volumes, mainly in hydrant and water application products. Adjusted operating income of $19.6 million, increased 70.4% in the quarter. Benefits from higher pricing and volumes more than offset increased costs associated with unfavorable manufacturing performance, primarily at our foundry operations, inflation and additional SG&A expenses. Adjusted EBITDA of $26.6 million, increased 38.5% in the quarter, leading to an adjusted EBITDA margin of 17.8% compared with 16.4% last year. Moving on to cash flow. Net cash used in operating activities for the quarter ended December 31, 2022, was $6.5 million compared with $19.8 million of net cash provided by operating activities in the prior year. The decrease was primarily due to an increase in inventory. Average net working capital using the 5-point method as a percent of net sales increased to 28.2% compared with 25.4% in the first quarter of last year, primarily due to higher inventory levels. During the quarter, we invested $9.9 million in capital expenditures compared with $11 million in the prior year. Free cash flow for the quarter was negative $16.4 million compared with positive $8.8 million in the prior year, primarily due to the decrease in cash provided by operating activities, partially offset by lower capital expenditures. We did not repurchase any common stock. And as of December 31, we had $100 million remaining under our share repurchase authorization. At December 31, 2022, we had total debt of $447 million and cash and cash equivalents of $125.6 million. At the end of the first quarter, our net debt leverage ratio was 1.7x. We did not have any borrowings under our ABL agreement at quarter end nor did we borrow any amounts under our ABL during the quarter. As a reminder, we currently have no debt maturities before June 2029. At December 31, 2022, we had $288 million of total liquidity, giving us ample capacity to support our strategic priorities, including acquisitions. Thanks, Martie. I'll now comment on our first quarter performance, end markets and full year 2023 outlook. After that, we'll open the call up for questions. As mentioned earlier, we are pleased with our solid start to the year. While we sequentially improved gross margins in the quarter, our margins were below the prior year. We continue to be pleased with our price realization which more than offset inflationary pressures for the fourth consecutive quarter. As expected, unfavorable manufacturing performance, primarily at our foundries, partially offset the benefits from higher pricing in the first quarter. Unfavorable manufacturing performance was impacted by lower production, primarily at our Chattanooga and Decatur foundries, leading to under-absorption of labor and overhead. Our Chattanooga foundry which is focused on gate valve production, delivered lower volumes due to fewer production days relative to the prior year, primarily driven by increased planned maintenance over the Christmas period. Our melt production at our Decatur foundry increased sequentially. However, it was more than 30% below the prior year. Our teams made progress on the operational challenges at the foundry with improved machine uptime contributing to the sequential increase in melt production. The ramp-up of our new brass foundry is well underway. We have 2 lines working through the production parts approval process, prioritizing our highest volume parts, including parts used in our hydrants and gate valves. We are working through the new casting and machining processes and expect to begin shipping the initial parts using the new alloy later this quarter. I am pleased to share that Mueller product utilizing components manufactured at the new foundry will continue to be certified under NSF 61 for drinking water system components through underwriters laboratories. This certification is crucial to ship products containing parts with the new alloy to customers. With elevated backlogs, our teams remain focused on improving production levels, to reduce lead times and satisfy orders, especially for our hydrants and brass products. We continue to experience higher costs year-over-year, primarily related to outsourcing materials, machining and maintenance. We expect these headwinds to carry on into the second quarter as well as the second half of the year. Increasing brass production levels from both foundries will ultimately allow us to bring some production back in-house and lower costs. As backlog levels normalize and our new brass foundry begins shipping product, we anticipate decreasing the use of outsourcing. Additionally, we are working to add shifts at our Albertville Foundry to increase internal production for key hydrant parts. We've already mentioned the sale of assets associated with the closure of our Aurora facility. We are pleased that we now have completed the divestment of all the locations from which operations have transitioned to the new Kimball, Tennessee facility. Our specialty and large vial CapEx investments are continuing to ramp up this year and we expect the margin benefits to follow accordingly. During the first quarter, our specialty valve products delivered the strongest year-over-year growth of all of our product lines which resulted in a sequential and year-over-year improvement in gross margin. I will now briefly review our end markets. As mentioned earlier, we believe the municipal repair and replacement market remains resilient, helping partially offset the slowdown in residential construction activity. For the municipal repair and replacement market, we remain excited about the benefits of the Infrastructure Bill starting to take effect later this year. The first wave of distributions have taken place with additional guidelines from the EPA regarding the Build America Buy America domestic sourcing requirements. This further supports the strategic rationale for all 3 of our large capital projects. As domestic sourcing requirements for iron and steel products increase, we believe we will be well positioned with our increased domestic capacity for our larger valve and service brass products. Looking at the new residential construction market. Total housing starts were down 15.6% year-over-year during our first quarter with around 1.4 million seasonally adjusted annual rate in December. We expect construction activity to pick up in the spring relative to our first quarter which is the typical seasonality of our core products. For fiscal 2023, we continue to forecast that total housing starts will be in the 1.3 million to 1.4 million range. While we expect higher interest rates and economic uncertainty to continue to impact residential construction, we believe lot inventories remained relatively low. Moving on to our outlook for 2023. As expected, we experienced a slowdown in order activity during the first quarter. While our total backlog decreased sequentially, we continue to have an elevated backlog, especially for shorter cycle products like service for and hydrants. With product lead times and project timelines improving, we anticipate our backlog levels could normalize over the coming quarters, depending on end market activity. We expect to get a clearer sense of sell-through channel inventory plans and order levels as we move into the upcoming spring construction season. As mentioned earlier, we are reiterating our guidance for 2023 which we provided with our fiscal 2022 fourth quarter earnings. We anticipate that our consolidated net sales will increase between 6% and 8%. Our backlog at the end of the first quarter and the expected realization from higher pricing position us to deliver net sales growth again in 2023. We expect our adjusted EBITDA will increase between 10% and 14% as compared with the prior year, primarily driven by benefits from higher price realization and operational improvements in the second half of the year. In closing, our teams continue to focus on maintaining our strong customer relationships while executing our top priorities for the year which include achieving operational improvements, delivering benefits from our large domestic capital investments, accelerating development and commercialization of new products and generating ongoing price realization. We are on track with the ramp-up of our new brass foundry which will have significantly more capacity to deliver the best long-term manufacturing solutions and advance our sustainability initiatives with a new led-free brass alloy. We are in a transformational period for Mueller with our large capital projects in various stages of ramping up. We believe the benefits from these projects and ongoing operational improvements will greatly enhance our position in the market. These investments are especially important as water utilities increase needed repair and replacement projects supported by the Federal Infrastructure Bill and the requirements for domestically manufactured products. Our broad portfolio of products and solutions enable us to help water utilities address growing challenges from the aging infrastructure climate change and workforce demographics. While uncertainty from the external environment has increased, we are a much more resilient organization supported by a strong balance sheet. This gives us liquidity and capacity to continue to reinvest in our business while returning cash to shareholders, primarily through our quarterly dividend. We are confident that our growth strategies, capital investments and operational initiatives will deliver both further net sales growth and a return to pre-pandemic margins in 2025. Maybe we can start, Scott, with your perspective on the demand dynamics in the quarter with respect to some of the order slowdowns. We're hearing lots of commentary across the industrials about destocking and we can see what's going on in the resi side. And in particular, you had a -- there's a pipe manufacturer yesterday that was seeing some of the same dynamics and their outlook was a lot more dire than what you're talking about today. So just kind of frame for us the order slowdown, is this destocking? And I know there's going to be offset from the muni break and fix but just very specifically on the resi side. Yes. So I think that the dynamic is much as you described. But if you recall my comments in previous quarters, there is a big piece of this theme that is DRP driven or distribution resource planning driven. And it's this notion that as the lead times collapse that you'll kind of get here with this double whammy. One, the sell-through may have slowed as housing goes from that 1.5, 1.6 down to the 1.3, 1.4 range but lead times are coming down as well. And so the amount of material that's needed in the channel continues to decline. And so what's necessary and what's not. So I think the end market evolution work closely with the channel partners to look at sell-through and to manage inventory and order levels will be key. And I think that everybody is kind of looking at this spring construction season and saying, is it going to be even further down? Or will there be enough resiliency? I think that there is a tendency to be overly bearish once you start to see the negatives. But I would also point to the January jobs report which would indicate that employment levels and potentially income levels could be rising for the average American which I think would be kind of the counterpoint to the housing starts where these people enter the housing market. I think that remains to be seen. But what's most important to us in the last 6 months is watching the balance sheets of the municipalities and how flush they are with cash still 2 years later. And I believe that, that is the counterpoint along with the emergence of more interest in the drinking water stream from governments that is going to kind of offset the kind of demand profile reduction that we'll see from the housing market. So we remain, let's call it, cautiously optimistic. That's all really helpful. And we've heard that whole dynamic about the slowing the pace of orders as lead times normalize. So that's getting to be pretty familiar for us as well. All right. So a follow-up question for Martie. Can you talk about the impact of your inventories on free cash flow because that was really well below your typical free cash flow use? Is that inventory? Is it still buffer inventory? Is this a supply chain issue? Scott just talked about how there's less inventory in the channel, there's destocking going on but you've taken on more inventory. So just walk us through that, please. Yes. So I'll say certainly looking at the negative free cash flow that we had in the quarter, as you pointed out, was driven by the higher inventory levels. As we work through our 2023 and certainly consistent with the guidance that we have reiterated with respect to full year free cash flow being in the 40% to 60% of our adjusted net income, that improvement year -- through the year, we expect to be largely driven by working capital improvements and that's going to come from inventory turn. So I'm going to say, as we -- as our production teams are focused on improving the lead times, as Scott just talked through, lowering the backlog levels, particularly with the short-cycle products that we've had and with the outsourcing, I think that as you -- we've had more of that philosophy of we're going to bring any inventory in the needed parts just in case rather than just in time, all the supply chain disruptions. I think we're going to -- we are going to look to sort of transition to that as we begin to see some improvements in the supply chain. We're going to look to shift that focus and certainly look to bring down these inventory levels through the year which will help with that. There will be some -- as the new brass foundry is coming up, we will have some elevated inventory levels associated with that. Scott referenced in and around destocking activity and what we could see from distributors through the balance of the year. And I would say, certainly, if the destocking is greater than what our estimates are, that could impact our overall inventory levels and our free cash flow guidance. Martie, that's real helpful. And I probably should have prefaced it with that throughout the industrial reporting season, most of the companies have underdelivered on free cash flow, I think, versus expectations. So you're in good company here. It's just -- we're all anxious to see that working capital come down. But I think what we're all learning is it's going to take longer throughout the year to see it. It's not just a one quarter flush. So appreciate the reference about the time frame for you. And just last question for me. Scott, it's been a while since we had an opportunity about a potential guidance boost. So we saw nice results first quarter out of the year. It's still early, I get that. But when you're not boosting after a quarter like this, does that imply a lower outlook? Is this -- are you a bit more cautious? Just help us frame the idea of reaffirming guidance and not boosting it here. Yes. So I think that the -- there was some definite difference in how the first quarter came out external estimates to internal. So I think that our timing they have differed from the market's timing. So when we talked about on our last earnings call, when we provided the initial guidance for 2023, we talked about how the timing of the ramp-up of the new brass foundry was important to our improved margins in the second half of the year. And then, if you just were to take that improvement and say, where was your starting point for the year from earnings versus where the externals were? I can't really speak to that. What I can say is that the start to the year was solid with the sequential improvement in margins. But I'm mindful that we're still early in the year. And additionally, we're still in the ramp-up period of the new brass foundry improving those -- improving those PPAP processes. And I would also say there remains a fairly high level of uncertainty in the external environment. So residential construction has slowed. Product lead times and project timelines are improving. I expect that the backlog levels could normalize over the coming quarters, depending on end market activity. So, I expect to get a clear sense of the sell-through in the channel and the channel inventory plans as we move into the spring construction season. I think that will be a critical time being as we look at what happens with the sell-through in the channel inventories. And I think that will set the pace for the balance of the year. So I think we elected -- when we look here, certainly a little better first quarter than anticipated -- but we elected to kind of keep our powder dry as we look at the rest of the year, I think there's a couple of ways this can go. And I would speak to everybody and say, the most important elements for our guidance to be met is to hit our throughput numbers at our own facilities and not hit throughput by using other people's materials or outsourced materials. And those are going to be the keys for execution. And I think it's just too soon to say where we are on that path. Solid start to the year, good to see that price continues to outpace inflation being 4 quarters into that catch-up process. Are you now at a point where price/cost is margin accretive year-on-year? Or is that still pending? Well, year-on-year, I guess, you could argue that it is accretive. But as you know, Bryan, we don't measure it that way. We go back to the trough. We know that the entire inflationary cycle is multiple years on. So when we said in our prepared comments at the end there that we expect to be back to pre-pandemic margins in '25. We are looking at the rate of accretion. So we're still not accretive to inflation over the entire cycle going back to 2020 but we expect that we will be back to breakeven on the dilution effect at 20 -- sometime this year if the price that's trapped in the backlog and the throughput assumptions we have in there, we'll kind of get back the price piece sometime in 2023. We believe that we'll be at pre-pandemic margins in 2025. So the price piece of it is one part of it but the actual throughput and getting rid of the outsource and getting rid of the other things won't have us back to pre-pandemic margins until 2025. So I hope that answers it. We'll be accretive year-on-year but we still got a ways to go to get back to when the inflationary cycle began in 2020 and the headwinds associated with the outsourced and the other product inefficiencies or manufacturing inefficiencies, we won't have those out of our system until we can close that second foundry until we can hit all of our production targets internally and we anticipate everything to be back to pre-pandemic margins by 2025. Yes. I appreciate all the color there. I guess to simplify that progression, it would be getting back to recovering margin price/cost this year, stamping out inefficiencies into next year and then allowing for the read-through of the projects once you are past completion and at that full run rate, driving the -- I think it's $30 million or so in benefits that you've called that would be '24 into '25. Is that kind of the step forward? Yes, yes. So if you were to look at us to be at a high level, like 2019 19%, 20%, call it 20% in the EBITDA margin and now we're in the 14%, 15% range, we will get that 500 to 600 basis points in '25. And it's a combination of a lot of things. The biggest two things, as I've been saying repeatedly, is the brass foundry, the elimination to outsource and getting throughput levels back to -- at our own foundries. Those are the 2 big movers. It really is. And that's -- we will end up with as long as the end markets hang together, we'll be fine. I think the other thing I'd point out for everybody here is, I think the end markets are conducive to us to continue the growth but we're probably going to have to look to the IIJA timing to carry us through what will likely be a temporary housing slump. And that's actually a perfect segue there, Scott. Any other color you can offer on IIJA impact to date, I assume minimal. More importantly, your confidence in there being a tangible impact looking to the latter part of '23 into '24, '25. Just looking at SRF funding data and specifically the awarded funding and it's somewhat underwhelming right now seem to do a lot of administrative issues at hand and a lot of work that remains just to coordinates the project funding before moving forward with a lot of this. Just curious your perspective on that. And then again, level of confidence or incremental confidence in this being a real catalyst going forward. Well, I think it will be a real catalyst going forward. I think you're seeing whenever we have some of these government programs, you're seeing the sausage-making process. There's going to be all these new rule sets like give you an example like a fastener is a fastener have to be American made? Is it part of the American iron and steel? Or can we use imported fasteners? Well, how many fasteners are there being manufactured in the U.S. that meet the stainless steel, all these things. And so the EPA is working through all those rule sets to say what the exemptions are, what they're not, what materials have to constitute the bulk of the cost with the labor content. So all those kind of sausage-making has been going on for the last 9 months. And you saw some funds released to California, some of the bigger states. And as you said, it was a small piece of the $100-ish billion that we expected to see. And so I would say that the money is going to be set. I believe it will be a catalyst for '24 and '25 and beyond. But any project that got approved let's say, today even, let's say that today, none of those installs are going to happen in '23 or even the early part of the '24. By the time those jobs are engineered, those builds and materials are cut, the water system is in a position where the install could happen and the labor is available, these are multi-month projects, not to mention the size of the backlog in the specialty valve business or the large gate valve business. So I do think, yes, I'm very, very bullish as a result of the funding and we can see the need for where these dollars need to be spent in both the storm water, wastewater and drinking water investment opportunities. Yes, we think it's actually going to have a meaningful impact on the size of the served market for products that Mueller makes. No, I don't see it happening in the next 3 quarters. It's Paz [ph] on for Mike. So another question on backlog. So how are you thinking about backlog duration at this point versus normal? Obviously, a lot of puts and takes. The backlog levels are elevated. We talked about the numerous puts and takes on the manufacturing and outsourcing side. But then also on the flip side, we talked about an opportunity to normalize backlog levels this year. And then secondarily, based on the answers to Deane's question, I suspect I know the answer here but I'll ask anyway. How much if any backlog normalization is assumed in the current guidance? Let me hit the first how I think about it. I probably think about it a little differently than the analysts on the call because I'm keenly interested in knowing where our sector competitors are in their lead times. And I think we're advantaged in our lead time at gate valves right now. The Chattanooga plant has done a great job of plowing through the backlog there. But I believe we're disadvantaged in hydrants right now. I think our lead times are too long compared to our competitors. When I think about our specialty valve business, I think we're near par. But we should -- with the investment and we can get the throughput, we should be advantaged, we're domestic. And we're not as dependent on that China supply chain as some of the competitors in the specialty valve market. So I want to see improvement there on what that backlog reduced in terms of days of production because I think it's an opportunity to take share. So I know you're asking me and I'm kind of evading the financial answer to your question. But that is how I think about the backlog and I want to be honest with you about that. I don't think about it in the context of how much price is trapped there, although there's a considerable amount or what an optimal number is. What I do think normalization looks like though is that what we call the short-cycle business, the smaller gate valves, let's call them 4 6 8s and the 5.25% Super Centurion or the couple of the wet barrel size hydrants, those have to get inside 2 weeks because that has to be the rapid turn for the channel. Those are probably the most competitive markets for the channel and therefore, they need to turn that inventory rapidly. They don't want to be sitting on months of gate valves or sitting on months of hydrants. And so with our channel partners, we have to get that supply chain balanced out which is -- continues to be out of balance today. So ideally, we would see that continue to shrink and get back inside of a 30-day backlog by the end of the year for the short-cycle business. The project business, I expect that those lead times will continue to grow. But as IIJA money puts more of these bigger projects out there that we and our competitors will start having more and more, a, engineered valves and b, longer and longer lead times on those engineered valves. If anybody remembers back when we did the large casting foundry, we put in a 20-foot x 20-foot bed for a 3D printer for tools, so we can make large tools for Build America Buy American products. We expect that our cycle time to engineer will be better than the competition but that our throughput times will be on par. And so we hope to be advantaged there. So, I know that's a long-winded answer to say expect backlogs to continue to fall and it's more important, I think, in the market for us to be competitive or advantaged even than to worry too much about where we are in context of days. No, absolutely. That's incredibly helpful, Scott and a much better answer than it was question. So thank you. I'll switch gears a little bit. The balance sheet is in good shape. You called out ample capacity to pursue the strategic priorities. Can you maybe just provide a little color on what the M&A landscape looks like? Is there anything out there that has you excited right now? I mean, there's always properties that we're constantly evaluating our pipeline and, I would say, our pipeline is fulsome right now. I think that the opportunities that you see where the investment dollars are going probably over the next 6 to 8 years offers some adjacencies for the Mueller line valves or bolt-ons that perhaps we don't offer today that we think will gain money. I would say that if you look at the conversation in the country around what water retention looks like especially on the West Coast, you see the water crisis around Lake Mead, around these declining I think there's going to be massive amounts of investment needed to move water from where we have plentiful water to the areas where we seem to be moving and getting population concentrations. So all of those things, I think, drive and feed our acquisition pipeline. And we continue to be fairly bullish on our ability to get some of that done. But nothing is in the next quarter, that's for sure. This is Miguel on for Brian. We just had one question. I wanted to touch on the channel inventory dynamic again. Could you go into more detail possibly on the -- on that dynamic that you're seeing. Is there a way that you've been able to estimate how much is out there for the key products that you're monitoring, maybe in terms of number of weeks or months and to what level the channel is trying to get down to? Yes, it's a hard question to answer because I think if you were to ask the channel, they would say a lot of the inventory is committed inventory. And so if you look at what's happened with price, so you take your baseline going in and you add -- I'm making this up, don't take this by 30% to 40% of the increase in inventory that you've seen in the channel is just price driven. So units are constant. And the balance is the increase as a result of the inflationary pressures that we see in price increases taken in the water space. So you say that's 30% to 40% inflation. Then the balance of, let's call it, ballpark, 100% increase is units. That 60% or 65% of increase that's in units, there's a huge portion of that, that is committed. But waiting on pipe or waiting on labor or waiting on -- and -- but the -- when the distributor took the order for that contractor, for that municipality, it was earmarked. And so there's a fairly high backlog now measured in weeks of what's just logistics backlog. So the speculative inventory would be the balance, right? Let's call it 15%, 20% of channel inventories are on the speculative basis. I would expect that that's the piece that would get targeted quickly. And so I think that that's the at-risk. The other part for the channel to add value, they have to serve those contractors and those municipality jobs. Those are almost always delivered a job site. They're not going from the distributors' warehouse to some municipality work center and then being loaded on the truck again. Some of that -- a lot of that inventory and a lot of that backlog for the distributor is when we have the crew there, we want you to deliver this and this simultaneously for install here, here and here. And that piece of it, I think, has left because it's been -- the lease times between pipe valves and other fittings have become so disparate between one and other that we end up with a much larger inventory needed to support the logistics piece. And I think that, that -- as that shrinks, then you'll start to see that inventory shrink as well. And so if you use the 30% price kind of, let's call it, 30% logistics, 30% speculative, as you see the lead times trash, you'll be able to use one. As you see the prices increase, that will be an upward pressure. And as I said in my prepared comments, we increased prices last quarter again. And then, as you see the other part, though, it's -- it too will drive down channel inventories. And I think you have to look at all 3 elements and then make the timing piece what you can of that mix of their inventory, what's driven it? Can you talk about price realization in the quarter and what's embedded for the full year? I assume that like -- how much of the full year expectations like baked based on actions you've already taken? I assume it's probably a little bit harder to like incrementally do this, given inflation is like moderating sequentially, right? Yes. Look, I think the sequential increases in price realization in Q1 was something we were very pleased with. We're benefiting from the multiple price actions taken over the past year with price realization in the mid-teens for Q1. I think that improved price realization. As I said earlier, more than overcame the inflation and it was not dilutive but it's necessary in order to get us back to that kind of pre-2020 dilution that we've seen from inflation. I think in the first quarter, total material cost inflation, keep me right here, Martie but -- it included purchase price remains elevated and was somewhere around 8% year-over-year versus approximately 14% a year ago, while negative impact of inflation improved sequentially. We continue to experience higher costs associated with raw and purchase materials. So to answer your question, I'm not trying to -- there's a lot of pieces moving there to say will it be dilutive or -- and it really depends on how quickly we can ship the backlog, how much of the price that's trapped in the backlog. Obviously, shipping sooner is better as evidenced by our Q1 having kind of that mid-teens price in it. So I -- it's hard to say. I can tell you what's in our guidance is that we get back to kind of flat level with 2020 in terms of price to inflation. So it's no longer dilutive this year but that will not offset all of the inefficiencies and costs associated with outsourcing and the other problems that we talked about. So we won't be back to pre-pandemic margins contributed by price and then the efficiencies until 2025. But within that, like full year revenue growth guide, is it fair to say that the price contribution is higher than the overall growth guide? So I can in contemplate price? Perhaps you missed it. Yes. No, That -- when we did the guidance, we were explicit. The actual unit volume, we expect to be slightly down in all of our growth, all of the 6% to 8% growth that we talk about is being driven from price. Yes, that's okay. With respect to the new -- the ramp-up of Decatur and things like that, like -- what do you need to see to kind of know that you're on the right track? Like how far into the year or like what kind of trigger points along the way kind of give you comfort that, okay, like this is progressing, how we need to see like this is going to work? Yes. I mean we meet every week, how many parts are PPAP, where is that on our PPAP schedule? Of those parts that are PPAP, what's the machining trials going like? If you look at our 4K process, you start out kind of with a dimensional answer and Gate 2, you get into whether it's form fit function porosity, all of those things in machining and then your date free as a game around that some significant volumes and then Gate 4 is machining and significant volumes and looking at tooling wear or things like that. So we know where we need to be to get those top 170-ish parts that I talked about in our last quarterly call through by the end of March. In my prepared comments, I said we're on track for that. But there's a thousand things that can go right and wrong in these next 90 days. But at the end of the day, our exit rate at 2023 of pounds produced pass to approach somewhere between 50,000 and 70,000 tons a day. And we get into that 60 range at the new foundry and we can afford to then shut the existing founder and satisfy all of our customer demands and all our internal demand. So I don't know how to really answer your question other than to say, one thing gone right, another thing will go wrong. At the end of the day, you would react and adapt, react and adapt, react and adapt to ensure that you get to the capital project targets And that's what we're focused on. And so yes, there's a huge part of our margin improvement. It comes from avoiding the outsourced premiums we're paying because of our inability to produce brass. And that's job 1 in this project execution. Can you maybe speak to like what the cost differential is between these outsourced products that you have to bring into what at scale the cost would be internally? Absolutely not. And it's not because I wouldn't it's that, obviously, you have multiple partners and I don't want people trying to infer you're paying this premium here and that premium there. They obviously know what we're paying. So no, I'm not going to get into the spreads of premiums. I'm sorry. And last for me. You mentioned your expectation for housing starts for the year. Can you kind of maybe compare that to what you think lot development will look like this year? Yes. As I said in my comments, look, we still believe that a lot of inventories and even options on loss. I know a lot of the builders are talking about in their prepared comments now what their option portfolio looks like. It's still, I think, if you think about a 1.4 million housing start year and then you try and back into that which we try to do but it's more art than science, unfortunately, because people don't publish the numbers. We still think a lot of inventories are relatively low and that there's not a huge backlog of developed lots for the builders to sell either spec or custom order or homes into. And so I guess the way I would describe it is after living through the 2007 overhang as a business, I wasn't here but certainly, lots of people work and how long to work off that overhang, this one looks like it will be measured in days or even weeks but it's not going to be measured in years. And so the inventory is I think at a much, much lower level than it was in 2007 by a factor of 2 or 3. I wanted to go back to Deane's question about the -- where you commented about the forecasting and you said you had the internal forecast versus the sell-side forecast and that we were just -- they were wrong. So the question is, I thought that the first half was going to be weaker and then the second half was going to be stronger. And so I guess the question is -- so that this is helpful to everybody is, how are we doing on the second quarter like, seasonally, you typically have a pickup going into that spring selling season, are you expecting that? Are we going to see sort of a sequentially flat quarter? What are you thinking about? Okay. Well, it's hard to get it. Gross margin expectations around Q2 is kind of how I -- and I don't want to get into giving quarterly guidance but I will say this in general. Look, I think our annual guidance implies year-over-year improvement in adjusted EBITDA margins of around, I don't know, 70 basis points at the midpoint. I think it was driven by improvements in gross margins which are approximately 190 basis points with headwinds, I think, from the pension expense and higher total SG&A. And so you know that, let's call it, 70 improvement. I think the inflation pressures and manufacturing performance headwinds will have to continue in Q2. We certainly are going to be dependent on the outsource. And I think we're going to be dependent on third-party maintenance services indicator for all -- certainly all of the quarter. So, I think the timing issue with our capitalized variance and the inventory write-up associated with the inflation that took place believes that says that gross margins ought to be kind of flattish in Q2 with Q1. And then, you won't start to see the step-up of improvement that will generate the leverage on the volume growth until you're actually able to start impacting those 2 things. Yes, that does. And on the revenue piece for the quarter, the second quarter, I think what you're saying is that you've got to -- if you get that regular seasonal uptick, you've got to wait and see because you don't know how the channel inventory is going to be. Is that fair? Yes. I think we have a big enough backlog that we should be able to hit our sales number. I'm not as concerned about that. It's more concerned about the margin flow-through and getting the throughput up sequentially. So as I said in my comments, we had fewer days in gate valves in our Q1 because we took down the facility for an extended period of time versus the previous year so that we could do some and some other maintenance that needed to be done. And so we had fewer days in Q1. We expect that we'll be able to get gate valve volumes back up in Q2. We expect improvement in throughput in Albertville for hydrants in Q2. We expect the continued improvement in throughput from Kimball and they've been quarter-on-quarter-on-quarter improving since we've opened them. So pleased with that. So I think that's really where you think about that implied improvement in adjusted EBITDA. We're only going to get clawing back some of the inefficiency we had in manufacturing in Q2 but we still got the bulk of the heavy lifting to do in the second half which will only come when we remove be outsourced and we start producing meaningful pounds at the new foundry. Okay. All right, great. I guess another one for me is last quarter, I think one of the big takeaways was that activist that you guys are working with. You didn't comment on them at all. Are you still thinking about it the same way? Has anything changed? Yes. I mean we're still thinking about it the same way. I think that the committee is off and running with the 2 new Board members but I don't want anybody to be misled in. We don't speak to the activist. I mean, they got independents that were associated with the company. Part of our agreement with them was that we would have new Board members. And I think that the integration has gone well but we're not in contact with Ancora any more than we are with any other shareholder. And certainly, we don't comment about our discussions with shareholders. So I think the committee, though, is we've had our inaugural meetings and we've had our discussions about capital allocations, about operational improvements. And I think we have alignment in what the priorities for the business are. And those priorities are, as I've been talked about them from the large CapEx projects. So I feel good about it. Well, I think we're at the top of the hour, operator. And I just want to thank everybody to staying with us and sitting through the call and joining us this morning. Look, final thing, though, I want to remain focused on our customers while delivering and the benefits from our capital investments, we will continue to outsource not to preserve our to preserve our customers and keep our place with them because I think share is terribly important in these times of uncertainty. I'd like to thank our teams for their continued dedication, especially as they deal with the ongoing uncertainty in the external markets. I think the transformation that Mueller is going through and the water industry is going through at this time is going to be a remarkable and exciting time to be at Mueller and to be invest in Mueller. I think we are well positioned to continue to grow net sales and get those margins back to pre-pandemic margins in 2025. And I expect this improvement to be driven by the ability to get priced more than the -- in the inflation cycle, our increased volumes, primarily from growth in mini [ph] repair and replacement, improved manufacturing performance and the realization of the benefits from the large capital projects. And so I don't want to be pollyannish and rosy that it's nothing but blue skies from here because there's certainly a lot of work left to be done. But I want to thank you for your interest and I want to thank you for your continued support here at you.
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EarningCall_641
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Good morning. This is the conference operator. Welcome and thank you for joining the Publicis Groupe Full Year 2022 Results Presentation and Webcast. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Arthur Sadoun, Chairman and CEO. Please go ahead, sir. Thank you, Judith. And welcome to Publicis 2022 full year results. I am Arthur Sadoun and I'm here in Paris with our CFO, Michel-Alain Proch. Alessandra Girolami is also here and will be available to take all of your questions off-line after this session. I will start this call by sharing the main highlights of our performance. Then Michel-Alain will take you through the detail of our numbers. I will conclude with our outlook for 2023. After that, as usual, we will take all of your questions together. But first, please take the time to read the disclaimer as it is an important legal matter. 2022 was another record year for the group in what is still a challenging global environment. Thanks to our revenue mix, our go-to-market and our platform organization, we actually outperformed the market on every KPI. Reported net revenue was up plus 20%, including acquisition and ForEx impact. For the second year in a row, we delivered double-digit organic growth at plus 10.1%. Our operating margin rate reached 18% which is 50 basis points above 2021 while maintaining record high bonuses. Headline EPS came at â¬6.35, 26% above 2021. And lastly, free cash flow was at â¬1.7 billion, â¬300 million higher than 2021. Let's turn to the highlights of our performance. When it comes to organic growth, we posted a strong Q4 at plus 9.4%. This performance were ahead of expectations, allowed us to deliver double-digit organic growth in 2022. Once again in Q4 and actually throughout 2022, we continue to capture the shift in client spend towards first-party data management, digital media, commerce and business transformation. This is clearly demonstrated in the very solid numbers of Epsilon and Publicis Sapient. They delivered plus 13% and plus 18% organic growth, respectively, in the quarter and full year growth at virtually the same levels. Together, they represent 1/3 of our revenue and almost half of our growth this year. Our data and technology capabilities also had an impact on the rest of our business. This is particularly the case in Media which achieved double-digit organic growth both in Q4 and for the full year. It is also important to note that our Creative business gained traction, delivering mid-single-digit organic growth with another good performance from production. The overall momentum is actually visible is a very solid number of our key geographies. The U.S. which represents 60% of our net revenue, continued to perform very well at plus 10.1% organic growth in the quarter with Epsilon and Publicis Sapient accretive once again. For the full year, this led to 10% organic growth in the country, equaling the strong performance of 2021. Europe accelerated in the quarter to plus 13.2% organic. This included an outstanding performance in the U.K. at plus 38% led by Publicis Sapient and mid-single-digit growth in France and Germany. Europe finished at plus 12.3% organic growth for the full year. Asia grew plus 2.9% organically in Q4, with a notable acceleration in China to plus 8.1% despite lockdowns and finishing at plus 6.5% for the full year. Turning to our second highlight. We posted strong financial KPIs, thanks to our platform organization. Operating margin came at 18% in line with our upgraded guidance, up 50 basis points compared to 2021. This performance included an historically high margin in the first half as well as continued efficiencies from our shared global delivery platform through the year in the context of rising inflation. Very importantly, this margin was achieved while paying for the second year in a row a record high bonus pool to our teams and an additional 1 week salary in November to 45,000 of our people with no variable remuneration. Combining our strong growth in net revenue and our 18% margin rate, our free cash flow came at â¬1.7 billion. In line with our capital allocation, we invested over â¬500 million in bolt-on acquisition to complement our capabilities in data, commerce and digital business transformation with Retargetly, Yieldify, Profitero and Tremend, just to name a few. We did this while continuing to deleverage and reached an average net debt of â¬685 million for the year. Finally, our headline EPS grew to â¬6.35, 26% above 2021, also a record high level. This put us in a position to propose to our shareholders a â¬2.90 dividend per share, fully paid in cash. This is 21% higher than 2021 and represents a payout of 45.7%. Third highlight, our performance on a 3-year basis. As you know, we believe that comparing ourselves against prepandemic levels is the best way to truly measure our performance. Since 2019, we grew organically by 13%, notably driven by the very impressive performance of our U.S. operations at plus 18%. Epsilon and Publicis Sapient were strongly accretive over this period with plus 21% and plus 25% organic growth, respectively. It is also important to note that compared to 2019, H2 accelerated to plus 15% after H1 at plus 11%. Fourth highlight, our continued new business momentum. After a record 2021, we once again captured a disproportionate share of new business wins in 2022 which is a concrete result of our go-to-market. This puts us at the top of the ranking for the fourth time in 5 years. Thanks to the competitiveness of our integrated offer, we were able to secure the vast majority of our defensive reviews, extend our relationship with major existing clients and win some of the largest offensive pitches this year. This included Global Media for IBI and Mondelez, Stellantis Global CRM, McDonald's in the U.S., PepsiCo in Asia, LVMH in EMEA and the global creative business of Standard Chartered Bank and Siemens, just to name a few. Last but not least, we also continued to be an industry leader in ESG. Our efforts in sustainable business practices around D&I, responsible marketing and the fight against climate change, meaning we were ranked number 1 in the industry by far by most leading rating agencies. We have also recently been named for the first time into Dow Jones Sustainability Index for Europe and the world. I will now leave the floor to Michel-Alain, who will provide you further detail on our full year number and I will then come back to give you the outlook for 2023. Thank you, Arthur and good morning to all of you. Glad to be with you today. I will begin on Slide 14 with the evolution of our net revenue for the fourth quarter and full year 2022. In Q4, the group posted net revenue of â¬3,462 million. Q4 organic growth came at 9.4% versus 2021, ahead of expectation and 15% versus 2019. Reported growth in Q4 was at 18%. This included a â¬15 million positive impact from acquisition and disposal and a positive impact from foreign exchange rate at â¬215 million, mainly due to the USD to euro exchange rate. Full year net revenue was â¬12,572 million which is an organic growth of 10.1% and performance similar to the one of 2021 with a steady performance quarter after quarter. Compared to 2019, net revenue grew by 13% organically on the year. After taking into account a positive foreign exchange impact of â¬864 million in the year, mostly due to the USD to euro rate evolution, reported growth was at 19.9% in 2022. Let's move on to Slide 15 that details our Q4 organic growth by geography compared to prior year and to 2019. North America posted another very strong quarter. This was visible in the region performance on a 1-year basis and on a 3-year basis at respectively 10% and 20% organic growth. Europe posted 13.2% organic growth versus 2021, broadly in line with the 3-year stack. Asia Pac grew at 2.9% organic growth versus 2021 and the same versus 2019. Middle East and Africa recorded 2.4% organic growth and 4% compared to prepandemic period. Finally, Latin America posted a minus 4% organic decline versus 2021 but was up 5% versus 2019. I will detail the performance of each region in the following slide. So let's begin with more detail on North America on Slide 16. Our organic growth in the region was double digit this quarter after 9% in the same quarter last year. In the U.S., the group's largest country, all activities continued to perform very well at 10.1%. Media posted double-digit growth, fuelled by strong underlying trends and new business won in the last 18 months, notably in the TMT, health care and food and beverage sectors. Creative activities posted a solid mid-single-digit growth fuelled by production that materialized mostly in automotive and health care sectors. Publicis Sapient reached 15.4% organically on top of 22% last year as we were able to capture the very dynamic demand in digital business transformation, particularly in the retail and financial services sector. Epsilon grew 13.5% organically, with a particularly strong performance in Digital Media and in CitrusAd, fuelled by the success of our data-driven marketing and retail media solutions. The automotive and data divisions at Epsilon were positive again, while tech was broadly stable on a high comparable basis. It is worth noting that in Q4, in the U.S., both Publicis Sapient and Epsilon grew strongly compared to pre-COVID levels at 42% and 26%, respectively, compared to 2019, highlighting the relevance of our offerings to address the structural shift towards those capabilities. Let's turn now to the performance in Europe on Slide 17. As I mentioned earlier, Europe recorded double-digit growth this quarter after plus 9% in Q4 last year. Excluding Outdoor Media and Drugstore, our activities in the region grew by 17.7%. The U.K. which represents 9% of our net revenue, significantly contributed to the growth in the region by accelerated to 38% organic. This performance included a particularly strong quarter for Publicis Sapient, thanks to the ramp-up of large contracts in financial services and in retail but also notable was a double-digit growth both in Creative and in Media, largely driven by global clients. France which represents 6% of our net revenue, posted a 5.3% growth excluding Outdoor Media activities and the Drugstore, thanks mostly to a double-digit performance in Media, notably in the automotive sector. Germany which represents 3% of our net revenue posted a 7% organic growth with a very solid Media that more than offset a softer Creative, Publicis Sapient in the country accelerated with a double-digit organic growth in the quarter, driven by new business wins. Lastly, our operation in Central Eastern Europe recorded 7.5% on an organic basis. Poland, Romania, Hungary and Turkey all posted double-digit growth. This performance was achieved despite almost no activity in Ukraine. On Slide 18, let me give you some details on our performance in the rest of the world. In Asia Pac, representing 9% of group net revenue in Q4, we delivered 2.9% organic growth. This was led by a remarkable performance in China at 8.1%, especially considering tough comps and continued lockdown during most of the quarter. China benefited from new business wins, notably in the food and beverage sector as well as increased activity from global and local clients. In the rest of the region, the performance by country was more contrasted. Japan and Singapore recorded double-digit growth, while India and Thailand were down this quarter, mostly reflecting a very high comparable base at Publicis Sapient. Australia and New Zealand contributed positively to growth in the region. In Middle East and Africa, we posted a 2.4% organic growth, supported by continued strength in Media, while Publicis Sapient remained broadly stable due to a strong comparable base. Latin America representing 3% of the group, decreased by minus 4% organically this quarter, mostly driven by a negative performance in Brazil. However, the region faced a particularly high comparison basis of 23% last year and overall grew by 5% when compared to prepandemic level. Let's now turn to Slide 19 which summarizes organic growth by region for the full year. North America posted a consistently strong performance throughout the year, leading to 9.9% growth versus 2021 and 18% versus 2019. In Europe, our activities were up 12.3% for the full year with a particularly strong contribution of the U.K. in the second half of the year. Asia Pacific grew 6.5% organically over the year, mainly driven by China and, reached double-digit growth over 3 years. Middle East and Africa saw its net revenue grew by 7.5% organically. And finally, Latin America was up 10.4% in 2022, also double digit on a 3-year basis. On Slide 20, you can see the group performance by client industry for the full year. This is based on an analysis of our main clients representing 92% of our net revenue. It also excludes media transfer and the drugstore. In 2022, all of our client industry were positive for the second year in a row. Half of them recorded double-digit growth and half of them recorded mid- to high single-digit growth. Retail posted the strongest growth over the year at 24%, gaining strength quarter after quarter. Automotive was up 7% in 2022, growing almost twice as fast in H2 than in H1. The financial sector grew 12% in 2022, as did food and beverage. Healthcare recorded 11% growth for the full year with a strong end to the year. Finally, TMT and non-food, while decelerating in Q4, still posted respectively 8% and 5% growth for the year. Moving now to Page 21, our consolidated income statement. Our net revenue in 2022 was â¬12,572 million and our EBITDA was â¬2,801 million, up respectively, 20% and 21% on a reported basis. Operating margin was â¬2,266 million which is a margin rate of 18%, up by 50 basis points year-on-year. This actually represents a record high for the group, driven by an exceptionally strong first half. I will provide more details on this in the next 2 slides. Headline group net income was â¬1,611 million, an increase of 27% versus 2021. Headline net financial expenses came at â¬126 million while income taxes increased to â¬536 million, mostly reflecting higher profit before tax. Amortization of intangibles was up â¬24 million, reaching â¬215 million in 2022. Impairment and real estate restructuring charges further decreased to â¬80 million, reflecting the completion of the third all-in-one rationalization wave and an impairment in Brazil for circa â¬20 million net of tax. Main capital gain and losses included â¬87 million loss related to the exit of our Russian operation accounted for in H1. Taking all this into account, the group net income was at â¬1,222 million in 2022, up 19% versus 2021. Let's now turn to Slide 22 which details our operating margin performance. Our operating margin rate improved by 50 basis points overall or 20 basis points at constant perimeter and FX. This evolution includes 2 main items in line with our H1 performance, first, an increase in personnel costs that amounts to 210 basis points as a percentage of net revenue of 230 basis points, including restructuring, reaching in total 65.3% of net revenue, in line with the cost modeling we shared with you in July. This was more than offset by a decrease in other operating expenses, including depreciation, for a positive 250 basis points, reaching 16.7% of net revenue, here again, in line with our expectations. I will now detail the evolution of these different items in the next slide which is a bridge from 17.5% reported operating margin rate in 2021 to 18% that we are reporting for the full year 2022. So going from the left to the right, let's begin with the 17.5% that we reported in 2021. First, FX and perimeter had a positive impact of 30 bps on the operating margin rate, mostly due to the USD to euro rate. Taking this into account, 2021 comparable margin stood at 17.8%. Starting from this base, personnel costs represent an increase of 210 basis points, as I just mentioned. In those 210 basis points, fixed personnel costs represent an increase of 200 basis points, while freelance costs decreased by 10 basis points, in line with our commitment to reduce the use of freelancers in the second half, mainly at Publicis Sapient. As Arthur mentioned, we kept bonuses at a record high level, close to â¬500 million, rewarding our talent for the outstanding performance. This included an exceptional 1-week salary paid in November to our staff with no variable remuneration. Overall, the increase in variable remuneration meant an additional investment of 20 bps on the operating margin. Let me provide a bit more detail on the fixed personnel cost evolution. First, we added 9,700 net recruits, mostly in H1, to complete the resource catch-up of 2021 and support our strong growth in 2022. As I told you, we would do during our last call, we have fully stabilized our headcount in Q4 versus Q3. Second, salary inflation was in line with our initial assumption and mostly in the U.S., the U.K. and India, as anticipated. Thanks to our platform organization, we've been able to absorb a large part of these 2 effects by further expanding the footprint of our global delivery center and shared service centers. On top of this, we have also continued to delayer our structure. This led to a rise in our restructuring cost of 20 basis points from what was a historical low in 2021. All these actions allowed us to maintain in 2022 the average cost per employee at the level of 2021. Now let's turn to the operating leverage of the group. Other operating expenses, including depreciation, contributed to an improvement of 250 basis points. First, we posted an improvement of 160 basis points of other operating expenses, reflecting the strong cost monitoring of the group while growing the top line by over 10% on a comparable basis. Second, depreciation improved by 90 basis points, mostly driven by the continued benefit from our action to reduce our real estate footprint over the last few years. As we described in H1, other operating expenses and depreciation were adjusted by minus 75 basis points and plus 75 basis points, respectively, with no impact on the total operating leverage of 250 basis points in full year. This reflected the renewal of 2 French outdoor media contracts for 5 and 10 years in December 2021. This led to accounting them as right of use and lease liability leading to depreciation in 2022 rather than as in other operating expenses in 2021, all this in accordance with IFRS 16. As a result of all these different items, our operating margin rate in 2022 amounted to 18%, an increase of 20 bps compared to the previous year on a comparable basis. Let's move now to our headline net financial expenses on Slide 24 which are down by â¬34 million, beginning with the interest on net financial debt which has improved by â¬58 million reaching â¬17 million in 2022. This was largely due to an increase in interest income, reflecting higher interest rates as well as larger cash balances in the U.S., while our gross debt is entirely at fixed rates. Interest on lease liabilities increased by â¬17 million to reach â¬87 million, reflecting the renewal of the 2 outdoor media contracts I just mentioned earlier. The other lines are nonsignificant. This results in a â¬126 million headline net financial expenses of â¬34 million improvement versus â¬160 million last year. Now on Slide 25, income tax. Reported income taxes stood at â¬431 million, up by â¬124 million. The increase largely reflected the rise in profit before tax. To calculate the headline income taxes of â¬536 million, we are adding the noncash element of our P&L i.e., the tax effect and amortization of intangibles and impairment and real estate consolidation as well as other noncash items. Effective tax rate was 24.8%, up 140 basis points compared to 2021. That was exceptionally low and is now in line with the group's previous year ETR. On Slide 26, the headline earnings per share fully diluted is growing by 26% year-on-year to â¬6.35. This strong growth reflects not only the improvement in our operating margin but also a significant reduction of net financial charges. The average number of shares on a diluted basis was up only by 1% compared to 4% the prior year as we removed the scrip option and paid our dividend fully in cash in July. Moving to Slide 27, free cash flow. Our reported free cash flow before change in working capital was â¬1.8 billion in 2022 compared to â¬1.4 billion in 2021. The largest positive impact obviously comes from the increase in EBITDA by â¬484 million, reflecting the strong activity over the year as well as from the decrease in interest paid that I described earlier. This is partly offset by the following items: an increase of â¬39 million in our lease liabilities repayment linked to the 2 outdoor media contract in France I mentioned earlier; a rise in CapEx to â¬194 million at 1.5% of net revenue after a low point in 2021. Let me add that we expect CapEx to further increase in 2023, reaching around â¬250 million, reflecting the continued investment of the group in its platforms, particularly at Epsilon and Publicis Sapient. Finally, an increase in tax paid of â¬68 million, largely reflecting the rise in the group PBT. Let me explain you why we have deducted an extra â¬110 million from 2022 reported free cash flow, as you can see on the slide. The new tax legislation in the U.S. called the Tax Cuts and Jobs Act, in short TCJA, was confirmed by Congress late December 2022. According to this new fiscal rule which largely affects tech and IT companies, R&D expenses spent in the U.S. now need to be capitalized and amortized over 5 years instead of being fully deductible like in the past. I want to be clear that this has no impact on the ETR but only on cash tax payments from 2022. This additional cash tax payment will progressively run down to reach 0 by 2026. With our data and tech R&D activities, this has led us to pay an additional â¬110 million cash tax in January 2023 related to fiscal year 2022. Taking this into account, the free cash flow before change in working capital reached â¬1.7 billion, up â¬270 million compared to 2021. Next slide, use of cash, starting from reported free cash flow before change of working cap at â¬1.8 billion. As you remember, I told you that working capital at the end of 2021 was normalized and that our objective for 2022 was to have a variation roughly at 0. This has been effectively achieved. Acquisitions, including earnouts and net of disposal amounted to â¬558 million, in line with the capital allocation. This included, first, for about â¬400 million, the acquisition of Tremend for Publicis Sapient, Profitero in Commerce, Yieldify and Retargetly target for Epsilon; second, around â¬100 million of earnouts on previous acquisitions; and finally, we took, as you may remember, a â¬49 million cash charge in H1 for our exit from Russia that I previously mentioned. As planned, dividend was fully paid in cash on July 6, resulting in a cash-out of â¬600 million. Overall, as a result of this variation, we further reduced the group net debt by circa â¬700 million. Moving to Slide 29, net financial debt. With this improvement of about â¬700 million that I just described, we closed the year with a net cash position of â¬634 million at the end of 2022. The average net debt on the last 12 months is â¬685 million, an improvement of about â¬850 million compared to last year and better than our latest guidance. Including leases, this represents a leverage of 1.2x EBITDA, an improvement versus the 1.6x in 2021. Before leaving the floor to Arthur, a few words now on our 2022 dividend, our free cash flow forecast and cash allocation for 2023. First, on Slide 30, our dividend. We are pleased together with the Board to propose a dividend per share of â¬2.90 at our next AGM in May. This would represent a payout of 45.7%, in line with the group financial policy and an increase of 21% versus 2021 after an increase of 20% the previous year. Like last year, this dividend will be fully paid in cash. Now the cash allocation for 2023 on Slide 31. Our outlook for 2023 is a free cash flow before change in working capital of circa â¬1.6 billion. This includes all the transitional TCJA R&D cash tax payment that we anticipated in 2023 which consist of â¬110 million related to 2022 that we already paid in January, as I said earlier and an estimated â¬90 million related to 2023 which will be paid in tranches throughout the year. Let me add that these transitional cash tax payments will progressively decrease to reach 0 by 2026. For 2023, this means that excluding the â¬110 million exceptional payments related to 2022, free cash flow is expected to be stable at â¬1.7 billion compared to 2022. Going into the expected cash allocation now for 2023. First, we are planning, as I told you, a dividend of â¬2.90 per share, representing a cash out of â¬740 million. Second, we are continuing to invest in data, tech and commerce with the M&A envelope between â¬500 million to â¬600 million in 2023 which is broadly comparable to 2022. Third, we are planning a share repurchase of 3 million shares, representing circa â¬200 million to cover for long-term incentive in order to stabilize the total number of shares of the group as we've committed. And fourth, we will use the remainder of our free cash flow generation to pursue the deleveraging of the group by around â¬100 million in 2023. Looking at our performance over the last 3 years, we have emerged as a stronger group. Thanks to the profound transformation we've been through, today our business is firing on all cylinders. Our revenue mix, our go-to-market and our platform organization set us apart from competition and also make us confident for the year to come. In 2023, despite a challenging environment, we anticipate delivering another very strong performance ahead of current expectations. Concretely, this means organic growth of 3% to 5% with Q1 in this range, an operating margin between 17.5% and 18% and a free cash flow at circa â¬1.6 billion. Free cash flow is actually stable at â¬1.7 billion, excluding the exceptional U.S. and R&D tax that Michel-Alain has already covered. Let me give you more detail on that guidance. First, our differentiated revenue mix increases our resilience to business cycles. Thanks to the acquisition and the integration of Epsilon and Publicis Sapient, 1/3 of our revenue is composed of real-time third-party data and best-in-class technologies. This is precisely what our clients need in a tough macroeconomic context to continue to drive growth while optimizing their spend. This starts with first-party data management. With Epsilon, we are in a unique position to provide our clients with true identity resolution to fuel their entire marketing activities with the most accurate real-time customer insights in a soon-to-be cookie-less world. What makes us truly unique is our ability to combine our best-in-class data with our scale in media to build new digital media offerings and optimize our client spend. We are actually leading in the 2 major revolutions in our industry: Connected TV and retail media. On Connected TV, we created PMX LIFT to accompany our clients is the shift from linear TV. On retail media, CitrusAd has doubled in size since we acquired it in 2021. We have fully integrated its technology with Epsilon to create a new generation of retail media platform that provides clients with unparalleled customer knowledge directly linked to sell activities. Thanks to our recently announced JV with Carrefour, we will actually expand these capabilities beyond the U.S. and the U.K. into Europe and LatAm by 2024. Last but not least, with Publicis Sapient, we have the technology and 20,000 engineers and developers to create the platform experiences that our clients need for direct customer relationships and true personalization at scale in their own ecosystems. The strength of our future-facing expertise has been acknowledged by Forrester in 2022 with our assets being ranked number 1 in first-party data, loyalty, retail media and digital experience services. Consequently, there is no doubt that Epsilon and Publicis Sapient will be accretive to our growth in the year ahead. They will address the critical need of our clients to transform despite the current global pressure. Second reason why we are confident in 2023 is our go-to-market. It positions us as a key partner in our client transformation by seamlessly integrating data and technologies into all of our operations, we have been able to top the new business ranking again for the first time in 5 years and consequently boost not only our Media but also Creative agencies. This was already visible in our performance in 2022. Our Creative and Media activities together contributed to half of our growth over this period. Last but not least, our unique platform organization will allow us to sustain very solid financials while improving even more our competitiveness. Our country model with a single P&L and unified management per geography help us maximize resource allocation locally and encourage cross-selling utilization. Our global delivery centers and the access they give to our local team to scale talent pool makes our model unique. We have expanded this access since the acquisition of Publicis Sapient to support the entire group. For back-office needs, we also have resource, our shared services backbone. Together, they represent 25% of our workforce. Our model is increasingly supported by our platform, Marcel. With 83,000 unique user elements, Marcel has become not only central for fostering collaboration but also created significant development opportunities for talent. All of this makes our organization a real platform that is supporting growth while creating efficiencies. Well, as you have seen, thanks to our unique model, we have outperformed the market in 2022, with double-digit organic growth for the second year in a row and very solid financials. As we enter 2023, we are confident that the same combination of revenue mix, go-to-market and platform organization will continue to deliver profitable growth despite macroeconomic challenges. In 2023, we expect to sustain the momentum we have built since the beginning of the pandemic, delivering 3% to 5% organic growth, in line with our 3-year CAGR while maintaining an operating margin between 17.5% and 18%. This year, as we did in 2022, we will focus on delivering our commitments: accompany our clients in what is still a challenging time and continue to develop our protocol map to lead the change in our industry. All of this will not be possible without the trust of our clients and the outstanding effort of our people. I would like to deeply thank them. I hope you can hear me well. Well, impressive set of numbers. So congratulations. I have 3 questions, please. The first one is on the general environment. You provided a Q1 and 3-year organic growth guidance between 3% and 5%, suggesting momentum should continue into Q1. But after that, what are your clients sort of budgeting for the year? Are there any contingency planning? Are they pushing from a performance based? Any indication on your conversation with them will be great. The second question is on your organic growth guidance. Could you elaborate on the moving parts between business win contribution, underlying revenue inflation/pricing and [indiscernible]. And lastly, on the margin guidance, it would be great to understand how you thought of your guidance and what you have baked in basically in terms of wage inflation and progress on offshoring. Thank you very much, Lina. I'm going to take the environment and the growth guidance and I will leave you with the margin, if it's fine for you, Michel-Alain. Sure. So I mean, first of all, when -- I'm going to distinguish what we think is general to the industry and what is specific to Publicis your question about the environment. When you look at the industry, if you take the glass half empty, as we said, you're going to continue to see some budget cuts in the traditional marketing. Don't get me wrong. We don't see any big change of client behavior at the moment. But we do see locally some marketing budget cuts and it's one of the reasons, I'll come back to that on the 3% to 5%, okay? The other thing that we are seeing is, of course, the salary inflation, okay? So that's the thing in the market that gets a bit difficult. When you look at the glass half full and this is what you see in our results and in the current dynamic overall, is that despite the fact that our clients are facing some challenges, inflation, supply shortage, war in Europe, tension in general, they understand that they have no other alternative than to continue to transform their marketing and their business model. And again, this is where we are making a difference. Again in Q4 and by the way, better than the expectations, is that despite, again, those micro challenges, clients will continue to invest in their transformation. And you can see that in our offer and because, again, getting back to what is specific, what we have seen with our clients in the last year and what we're anticipating for 2023 is they will continue to go to us whatever happens to make sure that they can shift from cookies to first-party data management, for sure. They will continue to make sure that the content they put on the platform is more dynamic and driven by AI and technology and they will continue to transform digital user business. And so when you look at what we have built with Epsilon and Publicis Sapient at the heart of our Media and Creative operation, we have the right answer. And again, the best way to specify that is the way we are going to market and our new business track record again in 2022. When you take the guidance in terms of growth, first of all, coming back to what has happened in '21 and '22, we did actually outperform our guidance significantly. I think there are 3 elements that explain that. And that, by the way, explain also Q4. The first is our revenue mix with 1/3 of our revenue in data and technology, we thought that Epsilon and Sapient will do well. They did extremely well. The second thing is our new business performance and the tailwind we had from 2021 has, of course, resolved in 2022 and a better macroeconomic context than expected. So overall, for those 3 reasons, we outperformed in '21 and '22. Now when you look at 2023, it is important to understand that when you talk about organic growth, the lower end of our guidance at plus 3% is already a high target in the current environment. But we believe it is a realistic one. We know that it is well above consensus but we feel that it is realistic. The question you're going to ask is how can we deliver the 5%. And we believe it will depend on 2 things, first, the level of potential budget cut in traditional marketing, the one I talked before. Again, we don't see any big change in client behavior but we see some cuts here and there in some countries. And the second is the new business dynamic but honestly mostly with existing clients, because whatever we're going to win in the next 6 months big will have an impact for next year more than for this year. You are talking between 3% to 5%, about â¬250 million additional growth which is, of course, a gap to fill that we could fill with those 2 variables. It is clearly ambitious and very sizable given the current macroeconomic but we feel that 3% is realistic, 5% is ambitious and we're going to do everything we can to fill the gap. By the way, it is very important to note because, hopefully, we've been clear through the last quarter about that, the way we measure our performance internally, I'm not even talking about what we said to the market, is on the 3-year stack because what we want to make sure is that we build sustainable goals that can outperform the market with the best margin. And so when you look at our CAGR over 3 years at 4%, we are exactly at the midpoint of this range. I take the question on the margin. Let me give you a bit more color about our guidance. I think first important thing to have in mind, in that the midpoint of the 17.5% to the 18% guidance is about 50 bps above the average of the last 3 years. And as Arthur mentioned, we did all this while increasing the group bonus pool from circa â¬200 million in 2019 to close to â¬500 million in 2023, stable with 2022. So if I look at the hydraulics for 2023, as I normally do, after -- and I begin with personnel costs which I think was the heart of your question, Lina. After major investment in the last 2 years in the group talents to sustain double-digit organic growth, we expect personnel costs in 2023 to evolve broadly in line with the net revenue of 2023 which means establishing it slightly above 65% that I was mentioning in my presentation, pretty much like in 2022. So to achieve this, we will actually absorb wage inflation through 4 major actions: offshoring, extension of our shared service center, delayering and obviously, as Arthur mentioned, the country model. So that's for personnel costs. When it comes to other operating expenses, we expect to have higher depreciation derived from the increased investment in group platform that I mentioned as well as some more travel expenses as people increasingly return to face-to-face meeting with clients. So this means that other operating expenses which is the second part of our cost structure, should grow about 30 bps to circa 17% of net revenue. So when you take these 2 points into consideration, you reach the midpoint of the guidance for 2023. You asked a question about inflation, that is between revenue and margins. I'm going to take this one and then I'll make a comment on the operating margin. I mean, when it comes to inflation, thanks to our platform model and again this is a big competitive advantage, for those who followed us for a while, when Maurice Lévy put in place resource and our shared services when he started to develop through Sapient the global delivery model and then when we implemented the country model and Marcel, I guess, we made a big difference in our ability to fuel our growth while keeping our high level of margin that is paying off today. It is important that it is the same platform model that allow us to absorb most of the inflation through the efficiency of our operation. And this is how we do. To be clear and we said it already in 2022, the impact of inflation on our top line was very limited. When it comes to '23 which was your question, we expect the impact of inflation on our revenue to be circa 1%. And it's going to be largely driven by the contract renegotiation we'll have with Publicis Sapient. But again, we consider that it's our role to absorb inflation and this is why we are very happy to be able to maintain the same level of margin. It's our role to absorb because there is a part that we can pass to our clients but it is limited in our industry. I would like to make more of a comment for those that have been following us for years and with whom we had the debate between margin and growth when our organic growth was not where we wanted it to be. I mean, as Michel-Alain told you, H1 margin was extraordinarily high because we have a huge amount of business and there were some undocumented, okay? That's a very important point. And we always say and we will continue to say that as we are building a business based on capabilities exactly for our client needs where we believe there is some organic growth to extract in the future, we believe that the normalized operating margin is between 75 -- 17.5% and 18%. And we believe and this is an important point, that this is the right balance between what is today's highest margin of the industry that is also capable of absorbing inflation and the right level of investment in our talent to actually support the growth. That was a long answer but hopefully, we've covered some of the questions that are coming. Congratulations on the results. I also have a couple of questions, please. Firstly, on M&A, obviously, you guided to over â¬500 million, â¬600 million, you did â¬500 million last year. Could you maybe just comment on what level of contribution to the top line you would expect in '23 and then potentially in outer years? That would be helpful. Secondly, you announced this â¬200 million buyback to offset the impact of the LTI. Is that something that we should basically treat as recurring? So basically assume basically your share count going forward should remain flat, so beyond 2023 as well? And the third thing, again, is just to come back on the margin. Obviously, 3% to 5% growth is pretty strong, I understand the comp base is difficult. Are there any other elements which basically would prevent margins from growing in 2023? Maybe you can mention like maybe FX or anything else we are -- we may be missing here. And on the margin as well, could you also comment on where you are in terms of the margin for Sapient and Epsilon. Obviously, these are growing extremely strongly. So I'm just wondering at what point we will see Sapient and Epsilon margin also catching up with the rest of the group or even becoming accretive to the group margin. Thank you very much. I'm going to take the last question on Epsilon and Publicis Sapient margin. And then I will let Michel-Alain go onto the first 3 ones. What is important to understand here is we have really shifted from a model with global brands where we were looking at P&L per activities to country P&L. And so the reason why we are not disclosing the margin per operation is because you can find yourself, let's say, on a media pitch where Epsilon will be a key contributor to a win for [indiscernible] and where actually the margin impact will be shared between both entities. So because we have moved to a country model, what matters to us is, of course, the margin at country level more than on the global operation because, again, true integration means that we have to keep the P&L cycles. As you know, this is something that we started to do with the Power of One that has been created by Maurice in -- 8 years ago, 7 years -- 8 years ago, I guess, now that we have accelerated in '18 by putting the country model and makes a big difference, not only our ability to win but also on our ability to manage cost and make sure that we make the best use of our resources. Michel-Alain, take that [ph]. Yes, sure. So Lisa, we -- beginning with acquisition, we can assess an impact of M&A between 1% and 1.5% on top line. The second point related to LTI, so maybe you remember, Lisa, that we did exactly the same thing in 2021 in which we bought for about â¬140 million of euro of shares. Here, we have a larger program with â¬200 million representing about 3 million of shares. And our objective here, as I think we have shared with you several times with Arthur, is to stabilize the share count. So yes, indeed, going forward, the idea is to buy the share of our managers on the market. So that's for the LTI. The third point which is about margin. So maybe before addressing 2023, let me just have a word about 2022 and FX. I think on 2022, first, obviously, we landed at the upper part of the bracket. And this includes, as you may remember, 40 bps that we cashed out on the exceptional 1-week salary. But we were able to do so because we experienced, as Arthur told you, a very high H1 2022 margin. Maybe you remember that it was up 80 bps versus H1 2021. We saw strong revenue growth while we were still catching up in terms of resources. So it's really this 80 bps in H1 which represented 40 bps on the year which has allowed us to invest these 40 bps in exceptional 1-week salary. Or another way to say it is that these 2 elements actually compensated in shoulder in 2022. So there is no 1-week salary buffer in a certain way for 2023. And finally, on the FX, just have in mind that the dollar is representing 30 bps of tailwind in 2022, while in the guidance 2023 I think it's important that we tell you that we have taken a dollar to euro rate of 1.08, that's what's factored in the guidance which is compared to 1.05 for the average of 2022. So, it means that we are already factoring a headwind of about 3% coming from the dollar. If you don't mind, I would like just to come back on the contribution of the acquisition in order to give you a bit more color on how we deal with acquisition. It's still â¬500 million next year. It was -- this year, it was â¬500 million last year. It's -- hopefully, the message you're going to get from this call is that our transformation, all the efforts we have to make in terms of organization, in terms of investment, in terms of repositioning, in terms of changing the management is behind us. We have spent a huge amount of time to do it. It has been disturbing at one point. And now for the last 3 years and again, this is why we look at the 3 years stack, you can see the momentum. We have with 1/3 of our revenue in data and technology of fantastic assets. Fantastic assets because it's accretive to our growth. and a fantastic asset because it also boosts the rate of our business, as you can see in the business. And so the way we approach acquisition now is really looking for bolt-on acquisitions that can bring us 2 things: new tech capabilities or new kind of talents. And on top of that, companies that can fit either with Publicis Sapient or with Epsilon or sometimes smaller innovative company we have in the group but also reinforcing and leveraging everything we have created and integrated so far. So we are very, very picky on what we do and it's not a coincidence if you have a Citrus that has already double sized because we took an asset that we plugged into Epsilon. We came with the best offer today in the market in retail media which is a booming segment, as you know. And you can see the results not only in Citrus but also in Epsilon, as Michel-Alain just mentioned. Great. I'm just looking at your guidance of 3% to 5% for the full year and you're talking about 3% to 5% for Q1. So if I look at what that implies versus 2019, it's about 14%, 15% growth for Q1 and 70% to 80% for the full year. So I'm just wondering, are you being a bit conservative with that 3% to 5% for Q1? Or basically, why would the full year stack basically will accelerate, what gives you confidence the full year stack rate throughout the rest of the year to achieve your full year targets? I think, I if I may -- yes, I think on the 3% to 5% for Q1, we -- with the macro uncertainties that remain, we think that this is, as Arthur was saying for the entire year, I mean, the 3% is already high but realistic. And for the 5%, we've got a couple of things to happen in order to reach this. Missing -- basically, we see it in the line of the full year organic range, mostly driven by the robust trend of our underlying business. And then another way to look at it which I think is the most important, in our view, is the fact that it's fully in line with our last 3-year CAGR of 4%. I think that's the -- what is underlying our guidance for the year and for Q1. And the way we manage our team, this is very, very important. We are here for the long run to build a business that outperformed the market in terms of growth and deliver the best financial KPIs. And so we look at the 3-year stack. By the way, just a detail but -- it's true that our Q1 guidance is already 300 to 500 basis points better than consensus. And I think were there, so we feel it is a good performance in a very uncertain context. But as I said, we feel that it's realistic. The first question on the commerce business. Clearly, very strong performance from Retail Media there and some bolt-on focus there as well. Now comes lots of elements. So is Retail Media where you see your strength and focus going forward? Or is it a more sort of a broad-based development where you're seeking to lead in other areas of commerce as well? The second one on restructuring costs. Now it seems like you've reached a new milestone in terms of the rationalization program. So could you just give us an update in terms of where you stand now after moving to the country model? And what kind of level of cost could we expect going forward? And what the next kind of steps to rationalize are? Thank you very much, Matti. I'll take the first question. I'll leave the second one for Michel-Alain. I mean, there is 2 dimensions in retail in what we presented. There is retail when we talk about our retail clients. And as you have seen, it is an industry vertical that is growing very fast and there is retail media when we play our media role and help our client win in this channel. When it comes to retail as a client first. It's very important to note the strengths we are having today with Publicis Sapient to help retail transform. The reason why the number is so high is that it is definitely a category where we have totally shifted from being a communication partner to truly be at the heart of the transformation of our clients and helping them in every dimension. I guess, you will agree with me that retail needs a big transformation but the ones that are doing it faster than the other are winning bigger and this is where we are. So this is a very, very important thing for us because it's a big part of our business and we are seeing a huge momentum with Sapient. And I mean Nigel Vaz is spending a lot of time with CEOs of different retail companies just advising them and then we can follow up with this in place. The second thing is retail media. Retail media, again, is a new booming channel for our clients. We believe that -- we know, by the way, that CPG companies will spend more on retail media than on linear TV by 2025. And to come back to your question, where we have a huge advantage which is true for retail media but in general for commerce or for connected TV or for anything that I think it's important for you guys to get, is that on one side, we have with Epsilon leading capabilities in terms of data management and delivering precision based on identities. On the other side, we have Publicis Media that is a leader in media and definitely number 1 in the U.S. Our ability to combine our data expertise with our scale in media allow us to build new products and services that are exactly what our clients need in terms of investments to actually grow faster while spending less. And the reason why, again, we are insisting on retail media or in connected TV is that it's 2 booming areas where our client needs data on one side to personalize and scale because they still need to reach a lot of people, where we have a unique position on the market. Now, I'll stop one second on commerce because retail commerce, it's a lot of work and it's pretty complicated. We believe that we are now experiencing the third biggest revolution in the marketing industry. The first one was digital 20 years ago. The second one was social 10 years ago. The next one and the one that we're experiencing now is commerce. And just for a simple reason which is every marketing experience that our clients are existing in could turn into a commerce experience. Everything you see, you'll be able to tie it. And again, at the heart of this transformation, what our clients will need is better understanding of customer which is what we bring with Epsilon and direct access to them which is what we can build with Sapient. And so it's a big thing for us. It's not something that we're going to resolve overnight but it's definitely things that are already impacting our business, allowing us to win more new business and grow Sapient and Epsilon as you have seen. Yes, sure. On the -- Matti, on the second question, you have about restructuring, there's 2 parts in it. I mean, there is the delayering we're doing on our organization related to people, so -- and there is the real estate consolidation. I'm going to address both of it. So basically, on the restructuring part of people restructuring, as you've seen in our margin in 2022, we spent about â¬80 million and we expect to have the same level roughly in 2023. So that's for people restructuring. For the real estate consolidation, you're right. We have finalized in 2022 the third wave of all-in-one consolidation plan which since the beginning, total accumulated savings of â¬200 million roughly. We are working on a new plan which we will be integrating in the future of work with the hybrid mode we all know. But it's too early to announce any future savings yet. We're working on it in the first -- on the first semester. We'll get back to you on that one. Three questions. Coming back on the full year '23 guidance. I mean, you've already answered and you said that it was in line with your 3-year CAGR. But obviously, there are macro uncertainty this year. So -- and I assume some of your guidance is based on client budget. So what happens if clients do cut their budget? How much of that 3% to 5% is already booked in, cannot be cut if the macro disappoint because it's digital transformation? How much conservatism you have in your guidance? So some color on what happens if the macro disappoints, that's my first question. The second question is very clear on margin guidance for 2023. But what happens in further years, so in '24, '25, if you continue to do 4% organic top line. Do the margins stay at 18% because it's best in class and you're fully streamlined? Or can we have some operational gearing? That's my second question. And the third one is on cash. You're now comfortably net cash. You will add â¬100 million to your cash pile in '23 if you deliver on cash flow. So when can we expect a bigger buyback? I'm going to take number one and I will leave you 2 and 3 and then make a comment on 3 to you. What happens if macro uncertainties, I mean, the macro starts to get tougher, as you said, Julien and thank you for your comment. Again, what we have tried to demonstrate today is that we believe we have strong -- I mean, we have 3 very strong competitive advantages that make us confident. I won't say whatever the macro but definitely in a tough environment. The first and I won't insist enough, is our revenue mix because I can tell you something, is that things can get tougher, client won't stop to invest in their data, in their technology, in their commerce, in making sure that they digitally transform their business. They have no alternative than to do it. And so we believe it is a huge advantage because I think 1/3 of our revenue will be accretive to our growth and will also help us to boost the rest of our business, will make a difference. We have, as you have seen, very good new business tailwind. Let's be clear. again, 2021 was an exceptional year that translated very strongly into 2022. '22 was a good year. We had a transformation rate where that was as high but the level of activities was lower. But still, it's going to be a tailwind. And when you take one plus the other, again, we feel that the lower end of our guidance at 3% is definitely a right target. And you're right, in the current environment but is a realistic one. We are very confident to deliver it even if the macro starts to disappoint to be very clear. Now getting into the 5% is another challenge and this is why we're giving you a big bucket because we are talking about â¬250 million. And if I want to summarize, I would say half of this is eventual traditional marketing budget cuts, again, if things get worse; but also the same as of opportunity on clients, if we're able to transform. And this is why you have this bracket between 3% and 5%. So again, we feel that 3% is very realistic anticipating many things. And the 5% is more ambitious but of course, this is a target we set to our team. Yes, Completing your 2 other points, Julien, about margin and cash. So on margin, I think I'm going to repeat what I think I said in July, if I'm not mistaken which is that the bracket 17.5% to 18% is, we believe, the right one in order to sustain the level of growth we want to sustain and to sustain a profitable growth. So you can have it as a good proxy for the years to come. The second thing I would like to add on that point is that can we do more on the margin? We certainly can. But is it the point? No, it's not the point. The point is really about supporting our growth which, as Arthur is sometime mentioning it, was missing in some previous years. So, I think we are very clear on the relationship between margin and growth. No, I just want to say that we are very proud of what we are doing when it comes to variable compensation, will be the 1-week salary that we gave to 45,000 of our people. You need to understand that not only it has an impact on those people, that had a plus for the organization but it was felt as a moment of pride for our team in general and their manager and even for our clients that felt that we are doing the right thing for our talent. And this is maybe the most important point, is -- you know the scarcity of talent today. You know the difficulty to get the best and you know that we are a people business. And we believe that the more we invest in our talent, the better growth we have. And so again, we are very, very proud to be able to sustain such a level of margin in an inflationary context while rewarding our people in this way. And this is something that we're going to continue to do. By the way, you just have to look at the kind of talent we are able to attract at the moment within Publicis to understand that the policy we're having with our manager, talents and our people in general is truly making a difference. Yes. I just follow up on the cash point. I'm not obviously going to repeat the capital allocation for 2023. It's quite clear. The ones -- there are 1 or 2 things that I would like to underline. The first one is that based on â¬1.6 billion of free cash flow, with a dividend of â¬740 million, we are returning to the shareholder more than half of our free cash flow, so 50%, 55%. And the important thing is that it's an increase of â¬130 million compared to 2021. So we did -- I mean, sounds nothing but we did several things on this. We took out the scrip dividend and then we increased the dividend to a massive number of â¬740 million in 2023. The second point, I'm not going to comment about acquisition. I think Arthur has been super clear on the fact that we are directing them on bolt-on in order to boost our capabilities and our growth. But on the share repurchase, I think you have a clear commitment from our side to have this scrip purchase in place in order to stabilize our share count. Now, don't count on a big share buyback like others are doing because this is clearly not our financial policy. And we believe that the capital allocation I just described quickly is in line with our group strategy and that is creating more value than a purely financial share buyback. Okay. Very, very clear. If I could do a really quick follow-up. As you talked about tailwind on that new business, could you maybe quantify that for 2023? Are we talking about 1%, 2%? It's actually too early. They are going to be a tailwind for sure. We need to see how fast it ramps up. Again, it wouldn't be at the level of what we have experienced last year because the level of activity was higher but we expect that to be a tailwind. We will tell you more for sure later in the year as we did last year. I've got 3 questions as well, please. So first of all, you mentioned the Sapient and Epsilon are going to be accretive to growth in '23. Could you maybe just quantify whether that's either mid-single digit, high single digit or maybe low double digit in '23? That's the first question. And then, Arthur, you mentioned some budget reductions in traditional marketing. Could you maybe just highlight where you're seeing those which territories? And which segment is that kind of going to be coming through, in Creative, in Media or is that somewhere else? And then finally, as you just mentioned, the leverage that you have now doesn't appear to be, let's say, optimal. So could you maybe just talk about just long term where you think optimal capital structure should be for the company? And then Arthur, are you not tempted by maybe something a bit more transformational on the M&A side, if not this year but then at some point, particularly given the strength that you're seeing for demand in things like digital transformation consulting. Omar, I guess, you will agree that in terms of transformation, we have done a lot already. So our job now, that we have fully integrated those 2 very big acquisitions and one that was extremely visionary with Sapient and we see the result now thanks to what Norris has put in place and another one that was pretty bold at that time because it was a difficult time for us with Epsilon. What is coming now is bolt-on acquisition where we can leverage those 2 platforms that we have put in place. When it comes to Sapient and Epsilon, as you have seen, they have been performing very, very well this year. We know that they will be accretive next year. I think it's important to put things back in perspective. In 2019, Publicis Sapient was negative. We changed the model, we changed the management. We asked Nigel Vaz to take care of it and we have 18% growth this year and the 3-year stack that is pretty impressive. We bought Epsilon and the market recognized at the time that the multiple we paid were good on the premise of the growth that could go from 0 to 3, okay? We have delivered this year, 12 or 13, I mean depending if you take on the quarter on the year but we're way beyond that. Why? Because we have been able to integrate it properly with our activities. I mean, we talk a lot about Epsilon and Sapient but if you take both of those activities and particularly Epsilon, a big part of their success is due to the work they have been doing to truly continue to transform and bring new expertise but also how they have been working particularly with Publicis Media. And the ability of Dave Penski, for example, to -- that is now a member of the Director, to really bring, as I said, data with the scale of media. So again, what would be the growth of both of those entities, it's too early to say or at least too early to make a clear plan. I can tell you again that they will be accretive. And what we're going to look is, of course, their own growth but also the growth they will bring to other operations and other countries which is what matters at the end for us. Yes. Maybe on the complementing -- Omar, it's Michel. On the cash balance, maybe just to remind the numbers and then I go to the -- to your question. Just reminding the number is the following. In terms of average net debt for 2022, as I mentioned, we have reached â¬685 million. What we are planning in terms of average net debt for 2023 will be to be between â¬200 million and â¬300 million, reflecting the deleveraging I was just mentioning. I think what's important for us is that we have always been cautious on liquidity. And actually, when you look at the structure of our balance sheet, today, I think we are even more right than ever. We have a debt which is at fixed interest rates. So we are not suffering from the increase in interest rates on both sides of the Atlantic. That's number one. And number two, when you will look into the detail of our P&L and I hope I've been clear on this, the higher interest rate is actually benefiting us particularly on the dollar. You know that we have a large amount of dollars in cash which is helping our financial charges and will help our EPS for 2023. So when you combine all this, cautious on liquidity, large amount of dollars which are actually benefiting us in terms of interest rate, financial charges and EPS, I think the capital allocation is really making sense for 2023. And you know we don't have -- we don't provide a net debt-to-EBITDA long-term objective but I want to be clear on what we provide which is the capital allocation for 2023. Budget reduction, I think Arthur mentioned it. We saw some in Q4 in traditional marketing. Arthur, do you want me to take this one? Yes. No, no, no, sorry for that. I'll take this one. I mean, this is what I said. It's difficult to tell you where because it's everywhere but it's small. We are talking about, I don't know, a campaign in Mexico that has been cut because the client has decided to postpone it or just to change the product line or decided to reduce this product portfolio. It could be a transformation project for Sapient in Asia, where there is lack of CapEx and they decided to go over. So we are talking about the sum of mostly traditional marketing things. That doesn't add to global number that is material but does impact here and there are different entities. So again, no major change in our client behavior which is what we could have expected. It is not happening. Of course, some cautiousness where necessary because everyone has to make sure that they can find some savings will be to absorb the inflation. But more importantly, on the other hand, clients that understand that their transformation needs to happen despite the challenges they are encountering. I had 2 actually. First one is on the edge of Publicis vis-a-vis competition. You -- we have Sapient and Epsilon at 1/3 of revenues. I'm sure your peers are also aware of the commerce media opportunity, the demand for first-party data analytics from their clients. So I'm sure you're monitoring competition. What would you say the 1/3 of revenues is for your big peers? Is it 15%, 20%? Any number would be very useful. And the second one is, on -- sorry to bring up the subject but we have seen a lot of news flow on a ChatGPT AI. Actually, you did mention AI in your comments. So do you see demand from your clients for Publicis to use those tools? Do you see room to use them in production? Or do you think it's just best? No, we don't see our clients asking us to use this tool, in particular. What we do experience which is very important for us, is how we can put AI at the servings of our platform and services. I think we have to be very, very careful is that AI can be at the service of modern marketing but AI can't be modern marketing in itself. It will make absolutely no sense. You still need the strategic and creative mind to make things happen. Once I've said that, I'm going to take -- give you a very precise example that gets you into your other question which is our competitors, okay? I'm not going to talk about competition. You just have to look at who has made acquisition or had divested assets in the last 5 years to understand who has truly invested in data and technology. But having said that, I'll take the example of the data we're having in Epsilon. So one of the differences in the data we have in Epsilon, first, they are based on transaction. So we know what people buy and you are what you buy. Second, they are real-time. They are optimized real-time at the nanosecond, thanks to AI. So this is a great example of how AI can help you know your customer better but then you still need strategies to make something out of that. And so just to go faster because time is flying and we still have a couple of questions, when I come back to your first question, it's very simple, 1/3 of our revenue in data and technology which roughly represents â¬4 billion, no one has something even close to this. And this is what is making a big difference for us, not only in our revenue mix but also in our go-to-market, as you can see in new business. Actually, if I can just add one sentence. There's actually a good comparison. It's one of your colleagues, Christophe -- Adrien has provided a comparison of the different data assets in between the different holding companies in the last note which I think is interesting. Yes. First question on pricing. I just want to make sure I got the right numbers. So you said almost nothing in 2022 and plus 1 in 2023. So my question is, do you think there is room for further increase in the midterm? Because it doesn't look so much regarding the general inflation. And second question in terms of headcount. So you mentioned stabilization in Q4. So how should we expect Q1 and full year on that regarding your growth guidance. Okay. I'll begin -- thank you, Jérôme. I will begin by the second one, if you allow me. So on headcount, you're right. Just to remind you a bit the big picture here. Looking at the last 24 months, we increased in 2021 our headcount by 9,300 people, net hires. And then in 2022, we increased by 9,700 people. And during the year 2022, we really caught up on 2021 because in the second quarter of 2021, suddenly, we had the acceleration in the growth and we have difficulties to keep up in terms of resources. So that's the reason why at the call in October, we told you our objective in Q4 is stabilizing our headcount because we're there. And we did it. I think it was almost 0, actually, the variation of headcount for the Q4. Now looking at Q1, as Arthur is saying, we want to have a slight increase of our headcount for Q1 due obviously to the macroeconomic environment we know. But just to be clear, in 2023, as the difference of some tech companies, we don't plan any layoff, it's just obvious and we are going to carry on hiring to support our growth of 3% to 5% but obviously not in the amount that we did in the last 2 years. Now on the price thing, I want to come back on this. So yes, in 2022, indeed, we believe that the impact of prices on our revenue is really limited, where there is one in Sapient because of the demand in this sector which is really -- which was extremely hard and carry on to be extremely hard. But in the rest of our operation, we did not increase prices during 2022 and it was really at the end of 2022. And on 2023, Arthur mentioned 1% of impact in our top line. It's obviously always complicated to modelize. I want to be really humble on this. But that, I think, is our best estimate as of now. Obviously, we'll see if we get back to you while the year is progressing. Again, just 2 quick comments and I know we got to go fast. But on head count don't underestimate what we have developed with Marcel over the last 6 years in what is today an hybrid world. We have an ability to manage our capacity and our talent that is unique in the market and to make sure that we allocate resources properly. That has been a huge advantage during the crisis because we could allocate people and actually do well on our margin while not hiring too many people. And it's a huge advantage in terms of growth and particularly at a time where we know we have to be cautious and we have to give the priority for the next big job to our own people, okay? Second, on inflation, sorry, I want to make an account comment, not accounting but as a sales guy. The truth is we have been growing with our clients in 2022. And hopefully, we will continue to grow in 2023, for sure. But the 2 real reasons why we are growing is first, the quality of our people and our ability to upgrade the talent and get better organized for that and this is a discussion we're having on a daily basis because they want the best talent and the scope and our ability to win more scope within the client. Then what we can get through inflation is, of course, very minimal and not really material compared to the 2 first. First of all, Arthur, I hope you've made a speedy recovery. And then I've got 2 quick questions, please. So you're guiding at about 3% to 5% growth in what is a pretty soft year for the economy with real GDP growth being fairly limited. Does that mean that you think your like-for-like growth could actually turn out to be better in the future if we assume that GDP growth accelerates, for example, in '24? And then, the second question is hopefully a fairly simple one. Are you seeing any benefits from reopening from China, either on your local activities in China or from your clients that are exposed to China? Adrien, thank you very much and thank you for the personal wish and I'm actually in great shape. So thanks a lot for that. It's too early to tell you if we can deliver more growth in the future, I think it will depend on how the world goes and how things normalize at the world level before us. What is certain and hopefully, you have seen that on our 3-year stack because, again, this is what matters, we have the revenue mix, we have the go-to-market and we have the platform organization to deliver the best financial KPIs while growing above market. Thank all of those 3 reasons and we feel confident that we're going to continue to do that clearly. I'm very proud about what our teams have done in China under the management of Jean-Michel Etienne. Very proud because they have by far the most modern offer in this country. And again, it is not a big country for us when you look at our revenue but it is a big country for our big clients, okay? And it is a big country in terms of local opportunities. And so we definitely have there a bunch of talent that has been created at the time by Loris Nold but now he is in charge of Europe and is incredibly well led there, where we have made the demonstration that thanks to this offer, not only we can lead the business stable and you have seen what we have been winning but also continue to deliver very strong growth in a very challenging environment. I think this is very encouraging. And as it is not too early in China, if we have our people listening, a big thank you to them because it has been a very tough year with lockdowns as you know and they have been just outstanding. It's Tom here from Citi. And yes, congratulations on the results. One or 1.5 questions. The first one I wanted to ask about was the special incentive payment to staff. We know that obviously went down well because some of your competitors made a big fuss about it. So clearly, a good initiative. I'm interested in whether you can share any sort of either anecdotal or even quantitative metrics on what impact that has had on staff retention. It feels like an important development. That was the first question. And then, the other one I had was on the U.K. That 38% organic is obviously extraordinary. It's thrown out by Sapient and Epsilon, obviously. I'm just wondering whether regional or even global business is being channeled through that U.K. number so it's not sort of truly, truly representative? Thank you, Tom. I'll start by the U.K. So first of all, yes, U.K. on its own is doing very well on every business and better than expected. A great job that has been there. You're right to say that U.K. is also a global platform. So we have seen some growth coming from our global clients and outstanding performance of Sapient. I mean, I told you 2 years ago, I guess, when the performance at Sapient in the U.K. was not that good, I told you we are not worried. It is not clients that we have been losing, it is clients that have massively and drastically reduced their spend and their CapEx and it will come back and not only it came back very strongly but they have been winning incredibly there. They have a fantastic team. And we are seeing at the moment a great dynamic that make us very confident for the future. I'm going to end up with your question on the staff impact on the bonus we gave. First of all, if we are thinking about the same percent, it is definitely not a competitor for us. But more importantly, you can't imagine the impact this special bonus got because -- and I will close with this, thanks to all the hard work that has been made since the last 10 years, we have built a unique offer, our revenue mix, hopefully, you got that 30% in data and technology, accretive to our growth, transforming the rest of our business exactly where our client is, make a big difference. We have been working like crazy to win new business and have a go-to-market that is truly differentiated. That, by the way, I think this is something you need to take into account. We are the one winning more divisions than the other. And over the last 4 years, we have -- all over the last 5 years, we have been number 1 4x in a row. And during all of this period, we have continued to increase our margin which means that we are not buying market share. At the opposite, we said something special that can justify a premium. So this, again, is due to our capabilities. And we have built this platform capabilities that make us confident to deliver still the best margin in the industry while investing in our people and absorbing inflation. But all of this doesn't work if we don't have people that wants to work as one for the company. And so when we do something like the 1-week salary which, honestly, I shouldn't say that but at the end of the call and maybe this will be a comment I should make, we did that in Q3, while we didn't know exactly where we are on the land and how Q4 will look. But we consider that we were strong enough and our model was strong enough to actually reward people when they need it the most. And to come back to what you are saying, it had an amazing impact on the people that got it, an amazing impact on the leader that said that they were in the right place, an amazing impact on our clients and also a big question mark for our competition. So, I will leave you there. I thank you all very much for the call. Sorry to have been so long. Alessandra and the team are here for you all. And see you soon. Bye, thanks.
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Thank you for standing by. This is the conference operator. Welcome to the Rogers Communications Inc. Fourth Quarter 2022 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Paul Carpino, Vice President of Investor Relations with Rogers Communications. Please go ahead, Mr. Carpino. Thank you, Ariel, and good morning, everyone, and thank you for joining us. Today, Iâm here with our President and Chief Executive Officer, Tony Staffieri; and our Chief Financial Officer, Glenn Brandt. Our call today will include estimates and other forward-looking information from which our actual results could differ. Please review the cautionary language in todayâs earnings report and in our 2021 annual report regarding the various factors, assumptions and risks that could cause our actual results to differ. Thank you, Paul and good morning, everyone. Thank you for joining us on this busy morning. When I stepped into the CEO role, one year ago, our performance had been lagging our peers and we had lost our leadership footing. Last year we set a clear plan to reestablish our leadership position and to deliver sustained strong results. This included a renewed focus on the fundamentals and a significant improvement in execution. In short, we set a plan to turn around our performance. 12 short months I am pleased to share we made significant progress and we did it with a backdrop of a lingering pandemic and new executive team and one of the largest proposed mergers in Canadian history. Despite these challenges, we did not get distracted. And we remain focused on driving better execution across our entire business. As a team, we made tremendous strides. But we have much more opportunity in front of us. I have to say I am pleased with the speed and magnitude of our turnaround. Across critical valuation metrics such as financial growth, and customer share gains we went from consistently ranking second or third against our competitors over the past few years to now ranking first on the vast majority of these important metrics throughout the year. Our turnaround wasnât about coming out of a pandemic. It was about instilling a performance based culture focused on our customers returning to growth and outperforming the market. In 2022, the whole market grew slightly more than prior years. But we grew even more. In wireless we went from losing market share just a few years ago to now industry leading share of mobile phone net additions. The momentum you saw in the first three quarters carry through into the fourth quarter and contains the power forward into 2023. Importantly, we met our upgraded guidance for the year and set a strong foundation for growth in 2023. For the full year, we delivered strong total service revenue growth of 6% and adjusted EBITDA growth of 9%; the highest growth in over a decade. And the improvements we delivered in 2022 were reflected in our total shareholder return, which was up 9%. By comparison, our two national competitors had negative returns of minus 4% and minus 8% and the TSX and Dow Jones were down as well: 5% and 7% respectively. In wireless postpaid mobile phone net additions were 193,000 in the fourth quarter, up 37% from last year. The team executed exceptionally well in Q4. And we delivered the best Black Friday in our companyâs history. For the full year, we added 634,000 mobile phone net adds postpaid plus prepaid our strongest result in 15 years, and the best performance in our industry. In cable, we continue to see very aggressive in market promotional activity from our main competitor. And although revenue was flat, we delivered positive adjusted EBITDA despite investments in key areas including customer service. Here we see opportunity improve our customer share performance, and we have confidence that our product set and in particular, internet and TV have a competitive advantage across our entire footprint and our recent heightened investments in cable will begin to yield market share growth this year. In media, we delivered a strong fourth quarter and full year. In 2022 we grew revenue by 15% and turned $127 million of losses into $69 million of profit. Our media performance clearly stands out in the industry reflecting the quality of our assets and the teamâs execution capability. Importantly these results did not come at the expense of investment. In 2022, our team invested a record $3.1 billion in capital, the vast majority of which is now in networks. In fact, a doubling of where we were several years ago in network investment. Looking ahead to 2023, we continue to see healthy growth catalysts supporting our businesses from factors such as healthy population growth, penetration headroom, and the benefits our transition to 5G technologies will bring. And against this backdrop of healthy growth, we expect to continue leveraging our execution momentum to drive leading share of customer growth, which will fuel robust organic growth in both total service revenue and adjusted EBITDA as you saw this morning in our full year guidance release. You will also see that free cash flow will continue to grow as well as we deliver another year of record investment in our customers and our networks. In fact, in 2023, we have allocated an incremental $700 million of our CapEx envelope towards ensuring we continue to have the best wireless and wireline networks. As I reflect on the year, I am proud of our entire team for their relentless focus, disciplined execution firm commitments to our customersâ shareholders. While there is clearly more work to do, we have reestablished momentum. Before I turn it over to Glenn let me provide a brief update on Shaw. As you heard last week, the Federal Court of Appeal reaffirmed the decision of the competition tribunal. Two federal courts have now unanimously and decisively ruled in favor of these pro-competitive transactions, namely the sale of freedom to Quebecor and the sale of Shaw to Rogers. To quote the tribunal decision, there will continue to be four strong wireless competitors in Alberta and British Columbia. And the decision goes further concluding that Quebecor will be a more disruptive wireless carrier, and Rogers will inject a new and substantial source of competition. Given the matters before the federal government for final approval, we will not provide any further comment at this time. Thank you, Tony. And good morning, everyone. Thank you for joining us this morning. I know itâs a busy morning. Rogers industry leading fourth quarter and full year results reflect the companyâs commitment to better execution, combined with continued investment in our networks. In wireless, fourth quarter service revenue was up a very healthy 7%. This reflected higher roaming revenue as global travel continued to recover as well as a postpaid phone subscriber base which has consistently led on market share and growth throughout 2022. The wireless market in Canada is healthy and competitive. And our better execution is allowing us to grow share once again. Our loading was very strong as we added 193,000 postpaid net additions, reflecting a 37% increase from one year ago. Loading was particularly robust during the Black Friday and boxing week promotional periods. And we achieved record Black Friday loading with strength continuing through to the end of the quarter. As we have seen all year, our results have been driven by better execution, growth in our unlimited plans, increases in immigration, and the continuation of customers embracing the diversified value plans Rogers provides across Canada. Through the very active Q4 promotional period, postpaid mobile phone churn was also higher, again reflecting a very competitive Canadian wireless industry with consumers very aware of the peak promotional periods and the available pricing and value alternatives. As a result of this increased activity churn for the fourth quarter came in at 1.24% compared to 1.06%, one year ago. ARPU for the quarter was 58.69 up 1% benefiting from consumers continuing to travel. We exited Q4 with roaming revenues at 140% of pre-pandemic levels. And weâre just over 84% of pre-pandemic roaming traffic volume. Wireless adjusted EBITDA up a solid 8% reflecting excellent flow through from our service revenue growth, with adjusted EBITDA service margins coming in at over 63%. Moving to our cable business. Total revenue was stable and unchanged from one year ago. While adjusted EBITDA was up 1% reflecting tighter cost performance. Cable adjusted EBITDA margin was 51%, which is up 60 basis points from a year ago. As Tony has noted, the fourth quarter continued to be a very aggressive and promotionally intense period in the wireline market led by our national peer. We were largely measured and balanced in our competitive response, matching competitive offers were appropriate while seeking to maintain underlying profitability wherever possible, versus driving loading. Gross ads remained strong while customer churn remains elevated reflecting that promotional activity. The market is competitive. On a product bases, we delivered 7,000 retail internet net customer additions in the fourth quarter, down from one year ago, again reflecting the highly promotional environment. Additionally, we continue to make significant investments in our cable network spending $235 million in cable network infrastructure alone in Q4. In our media business our results continued to reflect the quality of our sports and media assets with strong top line and bottom line results in Q4. Revenue was up 17% driven by better content rates, a revenue distribution benefit from major league baseball and higher advertising revenue in the quarter. This drove strong profitability, with adjusted EBITDA of $57 million and $83 million turnaround from the $26 million loss in the same quarter last year, which as youâll recall, was affected by COVID on live sports. At a consolidated level Q4 service revenue grew by 6% and adjusted EBITDA grew by 10%. Capital expenditures were $776 million and free cash flow excluding Shaw financing costs were $644 million. I should add, our deposit interest income is roughly covering our 4.2% weighted average coupon on our $13 billion cash held on reserve for the Shaw bond financing. We achieved our 2022 guidance range despite the $150 million credits paid to customers in the third quarter. On a consolidated basis for the full year, total service revenue grew over 6% and e adjusted EBITDA increased by almost 9%. Capital expenditures came in at approximately $3.1 billion and free cash flow for the year excluding Shaw financing was $2.0 billion; all meeting guidance. This performance is a clear demonstration that we are growing top line and bottom line and reinvesting these profits aggressively and increasingly back into our networks for Canadians. Importantly, these results also show we are in a strong position operationally and financially as we prepare to integrate with Shaw. Succinctly we are ready for when we received the final regulatory approval. Turning to the balance sheet. At December 31, we had $4.9 billion of available liquidity, including $460 million of cash on hand and cash equivalents and a combined $4.4 billion available under our revolving bank credit facilities. We also held $12.8 billion in restricted cash and cash equivalents that will be used to partially fund the cash consideration of the Shaw transaction when that closes. Our weighted average cost of all borrowings was 4.5% as at December 31, 2022. And our weighted average term to maturity was 11.8 years. Our debt leverage ratio at quarter end excluding the Shaw financing was 3.1 times compared to 3.4 times at December 31, 2021. As previously discussed until we close the Shaw transaction, we use adjusted net debt which excludes the Shaw financing and related cash held in reserve to analyze our debt and calculate leverage. The Shaw related senior notes, derivatives and restricted cash and cash equivalents associated with the transaction financing have been issued for the specific purpose of funding the acquisition which of course is not yet closed. In terms of our outlook for the coming year, we continue to see strong momentum in our business and we have provided a robust outlook for 2023. Our 2023 outlook includes strong top line, bottom line and free cash flow growth, along with continued emphasis on investing in our networks, focused in particular on network reliability and customer service. 2022 has been a year of remarkable turnaround which will continue into 2023. We are executing well and our outlook reflects this. We anticipate total service revenue growth in the range of 4% to 7% and adjusted EBITDA growth in the range of 5% to 8%. These growth metrics continue to build on the industry leading organic growth we delivered in 2022. We are also continuing with our commitment to invest in our networks in 2023. Our anticipated 2023 capital expenditures excluding Shaw integration costs will be in the $3.1 billion to $3.3 billion range. We anticipate free cash flow excluding Shaw integration will grow in 2023 ranging from $2.0 billion to $2.2 billion. As we head into 2023 we are monitoring the economic environment for signs of economic pressures. But we believe our execution is sound and we are managing effectively through the overall economic and business climate. Once we receive approval for the Shaw transaction, we will provide an update to our guidance, which will reflect the combination of these two strong and healthy organizations. But in the meantime, you can see that our underlying business is performing well and that we have not nor will become distracted. In summary, we are very pleased with our results in Q4 and for 2022. These results reflect the Rogers teamâs ability to make the necessary changes in the business and deliver better execution. And our teams did both of these very well without distraction. 2022 was not perfect and we know we have more work to do. But we have the right team in place and have established a much improved cadence for delivering more consistent and leading results. Thank you for your interest and attention this morning. Certainly. We will now begin the question and answer session. [Operator Instructions] Our first question comes from Vince Valentini of TD Securities. Please go ahead. Yes, thanks very much. The guidance youâve given looks impressive, by the way and good fourth quarter, I should add it. Can you clarify what youâre doing with your wireless ARPU assumptions since there are a lot of moving pieces with roaming and potentially new competition? Would you be assuming positive wireless ARPU growth within the service revenue and EBITDA guidance you provided? You will see continued those slowing growth in ARPU coming from roaming. You will see continued emphasis on our customers upgrading to unlimited plans and premium plans and so that will have a positive impact on our ARPU events. So yes, youâll see that revenue growth will also be flowing through ARPU. And just to clarify Glenn that the new guidance assuming you get the deal done, do we have to sort of wait until your next scheduled call in April with Q1 results? Or are you planning some sort of interim investor event to showcase what pro forma looks like? I think Vincent in fairness, let me not presume timing of when that will come and get ahead of our skis. We will be ready when we get clearance. But let me not guess when that will come relative to our next earnings release or prior. I donât want to be presumptuous, and I donât want to speak on behalf of others that the files on their desk. Thank you for taking my questions. Good morning, and congratulations on good results. Especially for the guidance, which is in within the current environment is impressive. But I did want to ask you a question related to the overall wireless market. Weâre starting to see deceleration of wireless service, revenues and unsubscribe loading in the U.S. And some of that is coming from reduction in enterprise and the business segment. Now, Canada is a different beast, for sure. Weâre seeing a lot of immigration. But can you talk a little bit about your expectation for wireless in â23? And are you seeing any deceleration of your business segments, which could, put some cap on how much further growth we can see in subscriber loading? Thanks for the question, Maher. As you stated, in your comments, Canada is slightly different than the U.S. macro environment owing to a couple of things that have helped us on the wireless side from a market perspective in â22 which we expect to continue into â23. And weâve talked about them before. But notably, the level and pacing of immigration continues to be strong. When we look at foreign students and temporary workers, that pacing continues to be strong as well. And importantly, the penetration levels in Canada continue to have headroom. And so as we head into â23, weâre not foreseeing downward pressure on those. And with respect to the business, what we have seen is proportionately the business segment, and a particular small business has continued to grow in line with the consumer and those trends that I just talked about. And so, as we looked at â23, we continue to see a fairly healthy backdrop. If you look at the overall wireless market, total number of subscribers for the market seems to have grown in â22 by just over 5%. And one of the healthiest growth rates weâve seen in a long time. And so our expectation is that weâll continue to see healthy growth in â23, may not be as high as â22, because there is a bit of the post pandemic catch up we believe that happened earlier in the year. But as we look for the rest of the year, we continue to see opportunity for that growth. Also Maher on the guidance you see it reflects that population growth. You asked specifically about the business market, as you know, I think in the business market, we have an opportunity to continue to increase our share in that market. But I think if you look at our service, revenue guidance, 4% to 7% is reflective of those general trends of population growth. So weâre not out of line. Sorry to cut you off. Thank you for that increased information. But I wanted to ask you in terms of the operational performance, and Tony since you came in, you implement the changes. Weâre seeing the benefits on the bottom line. Can you talk a little bit whatâs the next step in your overall view of how to keep improving operations even further from here? What should we be looking for in terms of changes that we could see as Rogers beyond whatâs happening with the Shaw? Itâs a good question Maher and what you saw this year, when I say this year and 2022, was a rebalancing back to the fundamentals of our business which has been, quite frankly, letâs ensure we have the best network and ramp up investment in our wireless and wireline network combined with improvements in the customer experience. And as we head into â23 and we look at the industry, what youâll continue to see is improvements in our network that are tangibly visible to our consumers and business customers. Thatâs important to us. And secondarily, when we think about customer service, we think about the customer experience and as an industry, as technology continues to evolve, we see the opportunity to continue to make things simpler for our customers, and continue on the agenda of resiliency and redundancy of our network. And so they need connections that can trust that are always on. And those are the themes that youâll continue to hear us focus on and we believe thatâs going to be the fundamental catalyst to continue to have leading market share, as we head into â23 that will convert to the financials that you see. itâs as simple as that in our mind Maher. Good morning. Just extending on the previous question, maybe starting with you, Tony, specifically, on the cable side, I think everyoneâs kind of well aware of the strategy there, and getting that circuit back on, on its feet post outage. But also in anticipation of a broader transaction, it could be in a transition, just wondering what your expectations are on the cable side for Rogers stand alone as we at least start the beginning of the year here. And then secondly, for you Glenn just an update on my end on the balance sheet, assuming the deal closes. Obviously, thereâs been with the passage of time, some delivering evolving market conditions, etc. Just, would love to hear how youâre seeing delivering post deal close over the next two to three years, just relative to what youâve previously indicated, if thereâs any change there. Thank you. Thanks for the question Drew. In terms of the cable side of the business, think about it in two points. One is the backdrop, will accelerate growth. We saw very good growth in the market size in wireless. And thereâs a bit of a lag is that translates to new home construction and homes past in our cable business. So we see that fueling a growth in homes past that will be combined with additional investments will put into homes past. So we see the opportunity and high likelihood for the size of the market for us to continue to grow. And as we retool some of the fundamentals in that business, our expectation is you will see largely in the back half of â23 but starting to see early signs in Q1 and more so in Q2 improvements in subscriber market share. You see in the fundamentals of retooling of the business in terms of bringing in simplicity in our operations. Weâve actually invested more in customer experience than we have in any previous year, yet our overall cost structure has come down for cable and thatâs really a reflection of that transformation to the fundamentals in that business. Weâve also at the same time and weâve talked about this on previous calls, are re-indexing from our Flanker Fido internet, back to the Rogers main brand. Itâs a much better customer experience in terms of a better modem, and a whole bunch of things related to that. And you see that when we look at the churn in the Flanker product versus our main brand. Rogers Internet has substantially by a wide margin lower churn than Fido internet. So what you see us is trying to move to the more value add brand for us of Rogers. And weâve been making that change. In the short term our main competitor has launched, I would describe aggressive, competitive promotional pricing, especially in the higher tiers of one gig and above, which is fine, weâll compete with that. But as Glenn said in his opening remarks, our response to that will be very measured at the right time in terms of competing on that basis. But right now, there were a few things we wanted to focus on in the fundamentals in that business and so thatâs what youâre seeing play out and how we think about our outlook for this year. And then Drew in terms of the Shaw transaction and our balance sheet, when we received the regulatory approval, and close on Shaw, Iâll start with we have all of the permanent funding in place to close. We have $13 billion in cash held in reserve from the proceeds from our $13 billion in bond issues from last March 2022. That those bonds, as youâll all recall, are in place and extended out through to being available through the year end â23. So we have plenty of runway there. We also have $6 billion in committed bank term loans, with terms ranging from three to five years, split evenly across three, four and five years. So that takes our cash funding up to $19 billion dollars available. And then there is a portion of the purchase price, of course, itâs done in shares for the Shaw family. And then finally, there will be proceeds that come in, from the transaction into Shaw communications before we close from Shawâs sale of Freedom to Quebecor and so all of that netted together, we have all of the funding in place to close the transaction and meet all of our liquidity needs through the year without touching the $4.9 billion of liquidity I mentioned we had on hand at year end. So the balance sheet is strong in terms of corporate funding. We will meet all of our maturities and Rogers specific commitments as well as being able to close on Shaw without needing to come back to the capital markets. In terms of where we will be on leverage when we close, weâll be right around five times maybe a tick over five times when we close depending upon timing. Weâve taken advantage of the time that weâve had to have strong organic growth within the Roger standalone business. We have had some expenses come in along the way, which we now have to cover on our balance sheet, not the least of which was the cost of extending those bonds because we did not close in â22. Even with those added expenses coming in, we will still be closing right around five times, low five times when we close on the transaction I anticipate and then going forward, we havenât given a forecast as to schedule around delivering. But if you look at where our EBITDA rolls up with Shawâs EBITDA and then you look at where our path is on synergies, I think youâll see through earnings growth alone, we generate some significant de-levering on an annual basis. I donât know if youâre looking for a rough rule of thumb, think of it in the range of probably 0.4 to 0.6 times depending upon the year depending upon how much of the year we have left in â23 once we close. But if you were to try and model it along those lines, Drew, I think youâd probably be in the ballpark. And then free cash flow in the outer years, maybe not in the first 12 months. But we will have available free cash flow to nominally pay down debt as well. Thatâs about as fulsome as I want to get right now, but thatâll give you an idea how to model it. Hi, good morning. Thanks for taking the question. Just sticking with the cable network investments and competition themes you did mention in your prepared remarks that the fourth quarter was aggressive and promotional intensity from your national peer. But at the same time, I think Tony, you mentioned that you expect perhaps market share trends to improve in 1Q and 2Q. So in the near term basis, if you can maybe unpack some of the drivers there, you expect within the first and second quarter team to lead to the better subscriber market share. That would be great. And then maybe a longer term question. And in the U.S. youâre seeing your larger peers, charter, Comcast talk about versus 4.0 upgrade path, obviously, you are largely going to follow the Comcast paths. But they have outlined the goal to get the DOCSIS 4.0 by 2025, pretty much ubiquitously across their footprint. What does that mean for Rogers? While market share trend may improve over the next couple of quarters relative to [Indiscernible] they are continuing on their fiber path, assuming the transactions with Shaw closes here shortly, obviously tell us pretty formidable in terms of cyber overlap as well. And just maybe give us a view on how Rogers is thinking about the long term HFC DOCSIS 4.0 upgrade paths, and maintaining competitiveness relative to your fiber peers. Thank you. Thanks for the questions Sebastiano. Two parts to your question. The first is now as we look to â23 and I just want to clarify as we talk about market share improvements. I just want to reiterate and level set expectations that it will be a progressive ramp in â23 a little bit in the first quarter ramping to the second quarter and then into the back half. And so I just want to just make sure weâre not getting too far ahead of ourselves. In terms of the fundamentals that get us there weâre very focused on the customer experience, and are they getting reliable internet at speeds that they want. Weâre less focused on a price battle. What we do know is you can sign on a customer at a very low ARPU. But in the end, if theyâre getting experience theyâre not happy with, then that is the primary reason for change. We continually look at the market reasons for customers coming on board, reasons for customers leaving and across the industry and thatâs true both Canada and U.S. while price is always important a more important factor is the internet reliability. And thatâs because we just even in the consumer space with a lot of work from home, itâs become so critical. And so those fundamentals around customer experience is what we believe will in the long term continue to drive the right gross add in the right churn fundamentals. So thatâs point one. Second point relates to DOCSIS 4. Let me be clear, we do not have a competitive disadvantage in our internet business. In fact, we see it as a competitive advantage. In our footprint, weâve been deploying fiber all the way to the home, all the way to the business premise for over a decade. And so we have robust, complete fiber to the prem throughout our footprint, and where it is, and we still have coax in the last mile. Weâre in the fortunate position that coax in the last mile continues to deliver speeds that are well beyond customer demand at this stage. Weâre offering at least one to one and a half gigs across our entire footprint. 99% of our footprint is capable of those speeds. And in many areas, thatâs now two and a half gigs and growing rapidly. The migration to DOCSIS 4 will only enhance the top end of those speeds. And we expect that to come as a fast follow, if not in line with where you see our U.S. peers going on DOCSIS 4. The biggest limiting factor and youâve heard that from them, I suspect are the chipsets that support the DOCSIS 4. But weâre extremely comfortable that as we looked at â24 and â25 deployment for DOCSIS 4, that will still be well ahead of where the market demand is. So we have plenty of capacity, plenty of headroom to meet the customer expectations as we move to DOCSIS 4 but again, thatâs for that portion of our network where the cost effectiveness of coax in the last mile continues to be very compelling. Hey, guys, thanks so much for taking the questions. So, I guess like, I want to talk a little bit about the merger. And congrats on getting this far the process and your success there. The first question would be, given that itâs been probably a year longer than we thought, given what weâve watched happen, with at least down here and charter and LTs, and their response to fiber overbuild. Are the synergies of this merger that you articulated two years ago, at a billion dollars still real? And how do you think about the CapEx requirements of the absorbing Shaw in the future? Thatâd be one. And then the second one would be not to put you in a tough spot, but really to put you in a tough spot, which is youâre making the arguments that Kevin Corp, and whatever youâve done, your agreements with them, itâs going to make them a more effective competitor in the Canadian wireless market, which sounds like a terrible thing if youâre an equity investor in Rogers. Can you square that for me in the market like why is the net of these two things youâve given up to create a better competitor and Kevin Corp, less than the benefit that Iâm going to get from being an investor in the benefits of the Shaw cable merger synergies? I just need a refresher on how this all makes me excited about the Rogers transaction. I will start and Glenn will fill in on some additional points. But as we look to and weâve continually assessed throughout how our investment thesis on the Shaw transaction compares to what we thought, and I think thereâs two things that I would describe at a macro level. Firstly, on the cost synergies, the additional time, has allowed us to, as I mentioned earlier, make progress on retooling our own Shaw. And so we will be entering that transaction from a position of greater clarity on our cost structure and our cost roadmap. And so a very macro level, we have heightened confidence on the synergy benefits. The second piece, and we havenât talked about it much, if at all, are the revenue synergies. On this time we did the deal, we look at the Canadian population in particular, where Shaw has its primary cable markets and that growth is more than we had expected when we looked at it two years ago, owing to those factors that are driving our own cable market growth that I mentioned earlier. A number of other factors as well. But if we step back and look at those two primary factors, the investment thesis not only continues to hold, but in our view, continues to improve with the passing of time. The second part of your question relates to having a fourth wireless competitor. We have thrived in a competitive landscape in the past, including in 2022. Weâve entered into transactions that will allow the buyer of freedom to enhance their competitive ability. And itâs over to us and weâre confident we have what we need to be able to compete in a four player market just as weâve done in the past. And itâs all going to be about relative share. And in four player market there are a number of dynamics. And so when you talk about the impact, it isnât necessarily anything that a fourth player picks up is at the expense of Rogers. There are dynamics and market share and weâre comfortable as I said that we have what we need to be able to compete for share in that space. And then Dave, maybe if I could just add in a little bit more on you asked on synergies and capital expenditures. As Tony has mentioned, weâve had more time to look at the synergies, we remain committed to that. Tonyâs touched on that. The capital expenditure piece. The plan, the model, the forecast hasnât changed from our initial evaluation of the transaction. I think, fundamentally, if you look at Shaw communications and how it operated its wireline and its wireless business over the last few years, a significant portion of its capital spend has gone into the wireless side of that balance sheet and investing in their build out of their wireless infrastructure. We have a strong national wireless network that we already have well in hand, in terms of investing. Our acquisition of Shaw is an acquisition of the wireline side of their business. We will take Shaw communications, annual capital spend, and devote it to wireline assets in the West succinctly. And so if you work on that premise, you can I think, ladder up to what that business plan looks like and how it forecasts out. But in a nutshell, thatâs how we prepare for taking in Shaw and the capital spend related to Shaw. It will be focused on wireline investing in the West to go along with what weâre already doing in our core business today. I think Tony answered the rest of it. Yes. Thanks. A few for me. One, just a clarification, Glenn. Just on that CapEx comment. Are you implying that youâll spend the billion dollars a year in Western Canada or notionally the 700 that theyâve spent on wireline? Iâm not going to get into the close specifics yet Tim. Weâre in 2023. Iâve given our guidance for â23 standalone. Weâll see when we close the transaction before I start telling you what numbers weâre going to spend on Shaw in year. But we will invest in the wireline networks to invest in customer service, across our entire footprint. And once we take in Shaw, that entire footprint will go from coast to coast. We will invest as needed. And thatâll be an investment program thatâs done over the years, not over months. A couple of questions for Tony, and one for you, Glenn. Tony, can you talk a little bit about the wireless loading dynamics in the quarter in the outlook? I mean, you had a very successful loading quarter, but our proven churn did, were affected. I mean, were you more active on the Flanker brands, perhaps in anticipation of a Freedom at Quebecor. Can you just talk about the competitive dynamics within the brands in the quarter? And then just curious if you could comment on some of the media signaling coming out of chairperson each of these at the CRTC and focused on pricing again. Just wondering if youâve had any dialogue or any comment many of us have heard this kind of signaling before, it just would be interested in your perspective. And lastly, Glenn, just a clarification on the media number. It looks like thereâs a onetime BAM contribution in the fourth quarter. Could you confirm that and perhaps quantify it? Thank you. Thanks to Tim for the questions. A couple of things is just to give you some context on the fourth quarter, quite a bit of competitive intensity in terms of promotional activities, not just on the price plans, but to some extent on the handsets as well. So what you saw play out and we were largely more reactive in terms of the Flanker. In fact, when you look at over the course much like on home internet, weâve been re-indexing back to our premium plan. And if youâre looking at the rate of growth in the fourth quarter of Rogers viz-a-viz Fido what you see is a significantly faster rate of growth on Rogers. And so weâre pleased with that on balance. So notwithstanding that competitive intensity. We continue to make good traction on re-indexing back to our premium brand and something weâve been on throughout 2022 and weâll continue to do in â23. But no doubt some of the value out there, and itâs just a reflection of the market. There was good value for consumers in the fourth quarter and the overall impact on service revenue was offset by share gains, which is important in a market where the rate of growth is accelerating. And so weâre always trying to balance off both of those. And I think we are striking the right balance between market share gains, and ARPU growth as well. And so thatâs what really reflected the heightened churn that you saw in Q4 for us and the industry. In terms of your second question, on pricing. Well thereâs not a lot I could say, with respect to the new CRTC chair. We look forward to working constructively and proactively at the right time with the mandate of the CRTC as we would with any other regulatory body. But what I will say is, we feel good about the market dynamics and the value add that the industry and Rogers is bringing to customers. Itâs a continue to highlight against the backdrop of increasing inflation in a number of parts of the sector and consumer goods. Our industry in Rogers continues to reduce pricing. If you were to look at it over the last several years, and in particular, over 2022, one of the few if not the only sector that actually has price declines in the marketplace, and thatâs owing to the competitive intensity thatâs out there. And frankly, as Iâve said in other forums are intend to continue to figure out ways to bring more value add to customers And then, Tim, just quickly on your question around the MLB proceeds. Itâs not my transaction to release the details on. And so I canât give you a specific amount. It does relate to MLB, having sold the minority interest in the remaining minority interest in held in one of its properties, and then the distribution to each of the teams. And so that was our, we recorded our share of it in the quarter. Youâve talked a little bit about revenue synergies, and one of the things weâre seeing in the U.S. is the rise of the double play, the internet plus wireless bundle, and triple play bundle kind of declining over time. Perhaps you could just give us a little bit of a sense of how you see that in Ontario? What sort of performance you see having being able to offer that combination to your customers? What percentage of your cable base does have your wireless product? And how do you see the opportunity to bring that playbook to Western Canada? Thanks. Thanks for the question, Simon, Iâll start and Glenn will pick up. At a very macro level. Weâve, weâve been watching that trend closely in the U.S. In Canada, because weâve had, I would say more experience at it having been a cable and wireless operator in significant parts of the country for a long period of time. In terms of the bundling, itâs largely been a price dynamic in terms of enticing the customer to it. When you look at the actual by dynamic in many ways, the channel distribution is different in how the customer buys, and a number of other factors in terms of the decision making criteria and how they think about them. And so other than promotional incentives to bundle them, I would say the fundamentals of the business seem to be continue to be somewhat separate. And so weâll continue to capitalize on that coming together at the right time. But price alone isnât the answer long term and it really gets back to the comments I gave earlier with respect to long term cable churn rates. So we continue to watch that trend and certainly itâs an opportunity for us in terms of bundling. We donât disclose the specifics of, within our footprint, what that looks like in terms of bundled offering for competitive reasons. But I would say it is growing, but perhaps not as much as you might think. Then maybe the only thing I would add to that Simon is our Ignite offering is particularly attractive as peopleâs viewing habits turn towards streaming to help still provide a base upon which to sell our video service product. It is a very strong offering that allows people to access streaming as well as the traditional channel lineups very conveniently. So that does help as well. I think weâve touched on what I think the priorities were it was a consistent, it is a very competitive market, it remains competitive going into â23. And I donât think thereâs really anything more to call out than that. On 5G, can you talk a little bit more about the 5G rollout and the 5G mid band coverage targets you have and what youâve seen in terms of an uptick in customers moving to higher tier plans once youâve deployed it? And finally, how you think about network costs if you operate both 4G and 5G networks in the near term? Thanks for the question, Stephanie. In terms of 5G rollout, as you saw on previous calls, we were very quick out of the gate very early in the year to deploy the mid band spectrums as you referenced very quickly. As of today weâre sitting at approaching 85%. Weâre at about 83% today in terms of 5G coverage. And so we continue a very aggressive ramp. And you can expect that as we head towards the end of the year that will approach 90%. So we continue to deploy that spectrum very quickly. And in many markets, youâll see the banner 5G Plus much like you do in the U.S. and that will continue to be at a very rapid pace as well. So thatâs all proceeding well. I think in terms of the network costs, Stephanie, think of it in the context of the higher band spectrum carries more data. 5G service users consume more data. On a per gig basis, you need the mid and higher bands. And weâll need those as we move into the years to come to carry the data. But the capital investment in that spectrum and getting it into our towers that, think of that as being the network costs associated with 5G. They are fixed costs, largely theyâre the capital spend that we put into spectrum into infrastructure. And those were the fixed costs that you donât see in the margins. You see them below the EBITDA line in terms of our capital spending. Once we get them out there, we deploy them and we can run services out to our customers. Thanks for taking my questions. Two for me. The first one is on cable. I would like to get a an update on the percentage of your cable network that overlaps with fiber to the premises. And then second question on wireless. Great postpaid adds, again. Would you agree that now a larger proportion of wireless subscriber growth comes from a bit of a lower end of the market? And if yes, what does that mean, in terms of the strategy to adopt to go to market? Thank you. Thanks for the question, Jerome. Iâll start with the second part. And then Glenn will come back to the cable question. In terms of the wireless as you think about new to Canada as a student migration. Certainly that segment would index first to the Flanker brands and weâre certainly seeing that and as so I would say in the near term, thereâs a slight indexation to that. But at the same time, what weâre finding is a very good and healthy migration to the Rogers brand, especially as a result of, as weâve talked about our focused efforts on that migration within our base. And so I would say it continues to be balanced much like it always has been. And so I wouldnât overstate that the market is moving to in a big way to the Flanker. As I said, I think itâs slight, but thereâs more than enough offsetting in the base and the rest of the market to get the right mix to the premium brand. And Jerome in terms of the percentage of our network that we have fibre to the prem without seeking to frustrate you with my answer, we were opportunistic with Atlantic Canada is an overbilled or a rebuild of our network facilities. Because Atlantic Canada is primarily ariel over the air transmission and poles are simply easier to run fiber than burying and replacing plant that way. On a cost per home pass basis we can be opportunistic and run fiber through Atlantic Canada. New construction build when the trenches are open, weâre putting in fiber to the premise. Weâre opportunistic with it, but donât think of it in the context of theyâve done X percent and still have 100 minus x percent to go. Our hybrid fiber coax has a long, long tenure still to run. DOCSIS 4 will be entirely competitive with whatever we can deliver over our fiber to the premise plant as well. There will be comparable and we will be competitive with our peers, where they have fibre to the pram over our hybrid DOCSIS or sorry, hybrid fiber coax plan. So think of it in that regard. Thanks for taking my question. Two for me. One signal back to wireless churn. Obviously weâve seen an uptick, which is obviously natural, considering sort of the return of foot traffic and so forth. But maybe Tony, you can talk about your expectations over the medium to longer run. I mean, thereâs always been a case to suggest that there is going to be structural decline in churn which would obviously help margins, assist the broader model for all the reasons that have been cited from family plans to sort of the lifecycle of the device. I wanted to get your thoughts on how you see that thesis in light of sort of what weâre seeing right now, where most of the companies are coming in with higher wireless churn. And then perhaps Glenn, on the free cash flow guide. I did notice that the cash taxes were materially lower in 2022. I wanted to get a sense of any color you can provide on what youâre building it for â23 there with respect to cash taxes. Thank you. Aravinda on the first part with respect to our thoughts on wireless churn, and the implication of it. Certainly, as youâve said, the industry has traditionally thought of lower churn as a better enabler, because you save on the cost of acquisition. I think what we found was in particular, when you look at the fourth quarter and the competitive intensity there, I would say the general principle is still true, lower churn is always better. And weâre always focused on making sure we try to keep as many customers and losing one is always too many. So that fundamental doesnât change. But at the same time, the cost of acquisition if you looked at the industry, overall, over the last three to four years hasnât been coming down. And so notwithstanding the slightly heightened churn that you see in the fourth quarter. Now you continue to look at our margins sitting at a strong performance there and itâs actually up year-on-year, despite the increase in churn and so when you look at the fundamentals of it I would say our thinking on this is sort of real time matured so that we get the right balance and ultimately Itâs net mobile phone market share that we stay focused on. And the churn aspect is one piece of that formula on a secondary metric basis. Hope that helps. And then Aravinda on the free cash flow and the cash taxes, thereâs not a material difference from year-to-year really. Youâll see some difference going from â22 to â23, as a result of the quarterly timing of some cash taxes that were paid in â22. But itâs not, itâs not a semantically material number from one year to the next. Can you provide an update on how we should think about this synergies or maybe merger integration cost after the deal? And a second question on what youâre seeing in the business market? And what could be the opportunity after youâre close with deal? Thank you. Morning Batya and thanks for the question. Iâll start with the second one. And Glenn will come back to the first question. In terms of the overall business market, as you heard in my opening, or on a previous question, the population growth and the contributors to overall market growth that I talked about is certainly helping the consumer side. And as you would expect, we see a very quick follow on lag in the business market. So the size of the business market is improving as well while at the same time, our penetration rates in business and in particular, small business continues to improve. And so the growth that weâre seeing is, I would say slightly more index to small business. And that continues to be an area that weâre quite pleased with our performance in that and continue to see more opportunity for high penetration there. And then Batya on the cost to achieve the synergies. I think as a rough rule of thumb, if you think of it as weâre driving at a billion dollars a year of synergies, think of it as likely a one times turn on that in terms of our cost to achieve that will give you a rough rule of thumb to work off. Yes, thanks for squeezing in. So just looking at the guidance, obviously, the guidance looks quite strong. I was just wondering if you can give an update on revenue size, revenue volume versus revenue in the fourth quarter, and then sort of what you have is for next year? And then the second question is, I know that you are saying that your fees are comparable to say fiber offering. But have you explained the fact that they keep putting up very strong internet particularly cable competitors in their footprint, it seems like theyâre taking share there. thanks. Thanks for the question, David. Again, Iâll start with the second one and Glenn, weâll come back to the first one. As I said, on the subscriber share, internet side on cable itâs not lost on us in terms of our performance on customer share. And so itâs something weâve looked at very closely and as I said, our response will continue to be very disciplined and measured. And what you see there is not a capability discrepancy but all youâre seeing play out is pricing. And as I said, I think weâve got the right approach on this and weâre playing the long game. And so I wouldnât confuse short term promotional pricing with the long term health of that business and the fundamentals in that business. I continued to reiterate that capability speeds on home internet, continue to far outpace where customer demand is. And so average speeds would sit in the 300 megs and so when you compare that to top end speeds that are available in the marketplace, weâre well beyond that by a factor of approaching 10x. So thatâs why I say network capability is not at all an issue. And in fact, as I said, we think of our network as a competitive advantage when you look at internet and our TV product combined across our footprint. And so thatâs what you see playing out. In our view itâs as simple as that. And then David on roaming succinctly, weâre running about 85% of roaming volume relative to 2019 pre-COVID levels. And weâre sitting at, weâve ticked up to about 140%, revenue comparatively against 2019, pre-COVID, revenue, volumes or revenue. So weâve seen that tick up from Q2 and Q3. Travel remains ongoing. And so weâre through, largely through that cycle of getting back to where we were maybe a little bit more room. But on in terms of volume, but weâve ticked up a little bit. I would anticipate that roaming revenue to temper a little bit, youâre not going to see that necessarily grow much more than where weâre sitting other than filling in the rest of that volume. Well, maybe I can just use that. Just to follow up on that, because Iâm just wondering how you explain your roaming metrics, like 85% of volume 140% of revenue. When you look at, they announced today that their volumes flat versus pre-COVID, in the revenues, so youâre grabbing up substantially more than theirs, and youâre volumes lower, which implies you have some more upside on roaming, how do you explain that Iâm just wanting to get your comments on that. So without getting inside their numbers, I canât, I got to reserve my response to mine. Iâm confident in where we are. These are rough rules of thumb. The 85%, from month to month, maybe itâs 5 or 10 different here and there, there might be a little bit of rounding. I think generally, you can see it in the airports, the airports are busy. Travel is back Business travel is lighter than it had been previously. Consumer travels probably a little bit heavier business travel a little bit lighter than where we were going through COVID. If airports are able to get their flow sorted out, I think youâll see continued growth in travel. Weâre coming up on March break, itâll be interesting to see what those volumes are. I think let me just respond by saying the roaming growth is relatively mature relative to where we were two years ago, one year ago. And so weâve seen some sequential growth from Q2 and Q3 into Q4. Weâve ticked up to 140 versus 130. Great. I think if we hold that growing a little bit as more business travel comes back thereâs still room for a little bit of growth. And itâll be what itâll be. Iâll pause there. Thanks, everyone, for joining us today. And if thereâs any follow up, please feel free to reach out to us. Thank you.
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Welcome, and thank you for joining Rayonier's Fourth Quarter and Year-end 2022 Teleconference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Thank you, and good morning. Welcome to Rayonier's investor teleconference covering fourth quarter earnings. Our earnings statements and financial supplement were released yesterday afternoon and are available on our website at rayonier.com. I would like to remind you that in these presentations, we include forward-looking statements made pursuant to the safe harbor provisions of federal securities laws. Our earnings release and Forms 10-K and 10-Q filed with the SEC with some of the factors that cause actual results to differ materially from the forward-looking statements we may make. They are also referenced on Page 2 of our financial supplement. Throughout these presentations, we will also discuss non-GAAP financial measures, which are defined and reconciled to the nearest GAAP measures in our earnings release and supplemental materials. Thanks, Colin. Good morning, everyone. First, I'll make some high-level comments before turning it over to Mark McHugh, President and Chief Financial Officer, to review our consolidated financial results. Then we'll ask Doug Long, Executive Vice President and Chief Resource Officer, to comment on our U.S. and New Zealand timber results. And following the review of our timber segments, Mark will discuss our Real Estate results as well as our outlook for 2023. We are pleased with our overall financial performance in '22, particularly given the challenging macroeconomic backdrop that developed during the course of the year. For the full year, we generated GAAP earnings per share of $0.73, pro forma earnings per share of $0.62 and adjusted EBITDA of $314 million. Notably, our three timber segments generated total adjusted EBITDA of $275 million, representing the highest ever result for the company and roughly 8% above the previous record achieved in 2021. Despite deteriorating market conditions towards the end of 2022, in response to rising interest rates, growing macroeconomic uncertainty and a slowing U.S. housing market, we still achieved record full year adjusted EBITDA in both our Southern and Pacific Northwest Timber segments. We believe this underscores the relative strength of our timber markets and the ability of our team to navigate an ever-evolving operating environment. The strong full year results in our U.S. timber operations were partially offset by lower adjusted EBITDA versus the prior year in our New Zealand Timber segment, which contended with slower economic activity in China, as well as higher operating costs. Meanwhile, in our Real Estate segment, we achieved solid retention that were generally in line with our expectations entering the year, reflecting our continued focus on optimizing the value of our portfolio through the sale of rural and recreational properties, land entitled for development and nonstrategic holdings. As Mark will discuss in greater detail later in the call, we are providing full year 2023 adjusted EBITDA guidance of $280 million to $320 million. This is a wider range than we've historically provided for full year adjusted EBITDA guidance, which reflects heightened macroeconomic uncertainty as well as log pricing headwinds entering the year. That said, we've seen some recent signs of end market improvement, including increased wood products pricing, a more stable interest rate environment and improving homebuilder sentiment which suggests that timber market conditions may be poised to rebound to some extent, which is reflected in the higher end of our guidance range. Stepping back to the fourth quarter, we generated adjusted EBITDA of $68 million and pro forma earnings per share of $0.11. Fourth quarter adjusted EBITDA increased 36% versus the prior year quarter as stronger results in our Pacific Northwest and New Zealand Timber segments as well as a higher contribution from our Real Estate segment more than offset a slightly lower contribution from our Southern Timber segment. Drilling down deeper further on our operating segments. Our Southern Timber segment generated adjusted EBITDA of $33 million in the fourth quarter, which was 1% below the prior year period. While weighted average net stumpage realizations increased by 7% versus the prior year quarter, this was more than offset by an 11% decrease in harvest volumes. In general, our Southern Timber segment continued to benefit from our concentration in some of the most tensioned log markets across the U.S. South, although both demand and pricing were impacted late in the fourth quarter, as market conditions deteriorated. In our Pacific Northwest Timber segment, we achieved fourth quarter adjusted EBITDA of $16 million, up 18% from the prior year quarter. The year-over-year increase was attributable to 17% higher weighted average log prices and a 3% increase in harvest volumes. Our operations in the region continued to benefit throughout the fourth quarter from favorable supply-demand dynamics as domestic lumber markets, export markets and pulpwood markets competed for a limited supply of logs. Turning to our New Zealand Timber segment. Fourth quarter adjusted EBITDA of $14 million increased 39% from the prior year period due to increased carbon credit sales and 7% higher harvest volumes, which more than offset lower log pricing amid continued export market headwinds. In our Real Estate segment, we generated adjusted EBITDA of $14 million in the fourth quarter, up significantly from $3 million in the prior year period. The improved results were driven by increased sales in the Wildlight development project north of Jacksonville, Florida, as well as a higher number of rural acres sold and higher per acre value realizations versus the prior year period. Despite the increase in interest rates as compared to a year ago, demand for rural land remains strong as we enter 2023, and we continue to be pleased by the favorable momentum in both our Wildlight and Heartwood development projects. As previously announced, in the fourth quarter, we also completed the acquisition of approximately 137,800 acres of high-quality commercial timberlands located in Texas, Georgia, Alabama and Louisiana for an aggregate purchase price of $454 million from Manulife Investment Management, a leading timberland investment manager. The acquired properties are well stocked in highly productive timberlands located in some of the strongest timber markets in the U.S. South. We are pleased to have successfully integrated these properties into our portfolio and have been encouraged by the customer response to our initial timber sales from these assets. Looking ahead, we're very excited about managing these timberlands for long-term value creation. Thanks, Dave. Let's start on Page 5 with our financial highlights. Sales for the fourth quarter totaled $245 million, while operating income was $44 million and net income attributable to Rayonier was $33 million or $0.22 per share. On a pro forma basis, net income was $16 million or $0.11 per share. Pro forma items in the fourth quarter included $16.6 million of income from large dispositions and a $0.4 million favorable adjustment to a timber write-off taken in the third quarter. Adjusted EBITDA was $68 million in the fourth quarter, up from $50 million in the prior year period. On the bottom of Page 5, we provide an overview of our capital resources and liquidity. Our cash available for distribution, or CAD, for the full year was $189 million versus $208 million in the prior year period. The decrease was primarily driven by lower adjusted EBITDA, higher cash taxes and higher capital expenditures, partially offset by lower cash interest paid. As previously discussed, cash taxes were elevated in 2022 due to the required timing of estimated tax payments for our New Zealand subsidiary, following the full utilization of its NOLs. A reconciliation of CAD to cash provided by operating activities and other GAAP measures is provided on Page 8 of the financial supplement. During the fourth quarter, we closed on the previously announced 5-year $250 million incremental term loan through the farm credit system to partially fund the U.S. South acquisitions that Dave discussed. The company also entered into an interest rate swap agreement to fix $100 million of the term loan at an all-in effective cost of approximately 4.6% net of estimated patronage refunds. Additionally, in the fourth quarter, we replaced our prior aftermarket, or ATM, equity offering program with a new $300 million ATM program. During the quarter, we raised approximately $30 million through the new ATM program at an average price of $35.51 per share. We continue to view the ATM as a cost-effective tool to opportunistically raise equity capital and fund capital allocation priorities. In sum, we closed the fourth quarter with $114 million of cash and $1.5 billion of debt. At year-end, our weighted average cost of debt was approximately 3% and the weighted average maturity on our debt portfolio was approximately 6 years with no significant debt maturities until 2026. Our net debt of approximately $1.4 billion represented 22% of our enterprise value based on our closing stock price at the end of the year. Thanks, Mark. Good morning. Let's start on Page 9 with the Southern Timber segment. Adjusted EBITDA in the fourth quarter of $33 million was 1% below the prior year quarter, driven by lower harvest volumes, largely offset by higher net stumpage pricing, lower leased land report station costs and higher non-timber income. Volume decreased 11% versus the prior year quarter as macroeconomic [ph] headwinds led to softer demand in certain markets, particularly for pulpwood. Average sawlog stumpage pricing was $34 per ton, an 11% increase compared to the prior year period. The improved pricing reflected healthy demand from sawmills across most of our operating areas, despite a significant decline in lumber prices relative to the prior year period. Meanwhile, pulpwood net stumpage pricing decreased 1% to roughly $21 per ton versus prior year quarter, primarily due to weaker end market demand and an increase in available supply as a result of drier weather conditions. Overall, weighted average stumpage prices in the fourth quarter improved 7% versus the prior year quarter to nearly $26 per ton. Entering 2023, we have seen some decline in both sawtimber and pulpwood pricing compared to the fourth quarter as our customers are approaching the New Year cautiously, given the slowdown in residential construction activity and other macroeconomic challenges. Notwithstanding these near-term headwinds, we believe that the longer-term outlook for Southern timber prices remains favorable. Specifically, we expect that lower lumber pricing will lead to additional sawmill curtailment in British Columbia, which should allow the U.S. South to continue to capture a greater market share of North American lumber production. Importantly, we also anticipate that the Southern Timber markets with more favorable supply-demand dynamics and corresponding price elasticity will benefit disproportionately from this transition relative to the U.S. South as a whole. Moving to our Pacific Northwest Timber segment on Page 10. Adjusted EBITDA of $16 million was 18% higher than the prior year quarter. The year-over-year increase was driven by the sale of a timber reservation to a conservation group. Higher net stumpage realizations, lower costs and higher volumes, partially offset by lower non-timber income. Volume increased 3% in the fourth quarter as compared to the prior year period, primarily due to labor strikes in the region, causing a reduction in supply of pulpwood and residuals on the market. Turning to pricing. At nearly $112 per ton, our average delivered sawlog price in the fourth quarter was up 14% from the prior year period, primarily driven by strong demand from this lumber mills as well as a favorable species mix with a higher proportion of Douglas for volume. Meanwhile, fourth quarter pulpwood pricing of $66 per ton increased 80% over the prior year quarter, reflecting strong end-market demand, coupled with supply constraints due to fewer residuals and increased competition from mills for limited supply of smaller-sized logs. However, similar to the U.S. South, in Pacific Northwest, we have seen declines in both sawtimber and pulpwood pricing in early 2023 as compared to the relatively strong pricing realizations we achieved throughout 2022. A slowdown in residential construction activity has weighted lumber prices and, in turn, sawtimber prices, while pulpwood pricing has retreated from the exceptionally high levels achieved at the end of 2022 due to softening demand as well as the temporary curtailment of a mill in the region. Although current market conditions are more challenging, we believe our nimble approach to operational decision-making, the relative strength of our markets and the optionality offered by our export market capabilities position us well to adapt ongoing changes in the operating environment. Moving to New Zealand. Page 11 shows results in key operating metrics for our New Zealand Timber segment. Adjusted EBITDA in the fourth quarter of $14 million was $4 million above the prior year quarter. The increase in adjusted EBITDA compared to the prior year quarter was driven by increased carbon credit sales and higher harvest volumes, partially offset by lower net stumpage realizations and unfavorable foreign exchange impacts. Average delivered export sawtimber prices of $111 per ton declined 16% as compared to the prior year quarter, reflecting reduced demand from China. While our New Zealand export business faced a number of headwinds last year, we're optimistic that the recent relaxation of COVID-19 containment measures and fiscal support of the property sector by the Chinese government will lead to a gradual increase in export log demand and pricing versus the prior year. In addition, Chinese port inventories were at relatively normalized levels heading into the Lunar New Year, which coupled with ongoing supply side constraints, including a reduced flow of European salvage logs into China and the ongoing Russian log export ban provide us with further optimism that the export market will gradually improve as the year progresses. On the cost side, we expect the decline in freight rates versus the elevated levels seen in 2022 should contribute to improved margins year-over-year. Shifting to the New Zealand domestic market. Fourth quarter average delivered sawlog prices declined 20% from the prior year period to $65 per ton, largely driven by a sharp decline in the New Zealand dollar, U.S. dollar exchange rate. Excluding foreign exchange impacts, domestic sawtimber prices decreased 5%, reflecting weaker domestic market demand due to reduced competition from export markets, as well as higher mortgage rates negatively impacting the demand for construction materials. Domestic pulpwood prices in New Zealand were likewise impacted by foreign exchange rates, declined 24% on a U.S. dollar basis compared to the prior year quarter. Excluding foreign exchange impacts, domestic pulpwood prices declined 9%, reflecting less competition from export markets for lower quality logs. While log markets in the New Zealand remained challenging in the fourth quarter, non-timber income in New Zealand, which primarily reflects carbon credit sales, continue to bolster our financial results during [ph] $9.1 million of revenue in the quarter. Going forward, we plan to remain a optimistic in our sale of carbon credits, depending on carbon credit market conditions and our pricing outlook. Lastly, in our Trading segment, we posted a slight operating profit in the fourth quarter. As a reminder, our trading activities typically drive low margins and are primarily designed to provide additional economies of scale to our fee [ph] timber export business. Thanks, Doug. As detailed on Page 12, our Real Estate segment delivered strong results in the fourth quarter. Real estate sales totaled $57 million on roughly 13,100 acres sold, which included a large disposition in Washington, consisting of roughly 11,000 acres sold to a conservation-oriented buyer for approximately $30 million. Excluding this transaction, fourth quarter sales totaled $27 million on roughly 2,100 acres sold at an average price of over $13,700 per acre. Real Estate segment adjusted EBITDA in the fourth quarter was $14 million. Drilling down, sales in the improved development category totaled $17 million, including $15 million of sales from our Wildlight development project north of Jacksonville, Florida; $700,000 for an industrial lease parcel in Kitsap County, Washington; and $400,000 from our Heartwood development project south of Savannah, Georgia. Sales in Wildlight included a $7.3 million sale of 87 acres to an industrial park developer and a $3 million sale of 16 acres for a senior housing community. On the residential side, we also sold a 74 lot residential pod to a national homebuilder for $4.3 million and 13 developed lots for $800,000 at an average base price of $65,000 per lot. Sales in our Heartwood development project consisted of 10 developed residential lots at an average base price of roughly $43,000 per lot. While Heartwood is still in its early stages, we are excited about the two new Hyundai [ph] facilities that have been announced in Bryan County, Georgia. With an estimated 9,500 jobs being created within a 30-minute drive from Heartwood, we believe the project is well situated to capture incremental demand from these facilities as well as the ancillary suppliers they are likely to attract. Overall, our Wildlight and Heartwood development projects continue to benefit from favorable migration and demographic trends, relatively affordable price points and a diverse mix of residential, commercial and industrial and uses that each help to catalyze demand for one another. Turning to the rural category. Fourth quarter sales totaled $12 million, consisting of approximately 2,000 acres at an average price of roughly $6,200 per acre. Key transactions included the sale of 615 acres in NASA County, Florida for $3.8 million or roughly $6,300 per acre and the sale of 290 acres of former Resources property in Jefferson County, Washington for $4.1 million or $14,200 per acre. Now moving on to our outlook for 2023. Page 14 shows our financial guidance by segment and Schedule G of our earnings release provides a reconciliation of our guidance from net income attributable to Rayonier to adjusted EBITDA. For full year 2023, we expect to achieve adjusted EBITDA of $280 million to $320 million. Net income attributable to Rayonier of $52 million to $73 million and EPS of $0.36 to $0.50. As noted in our earnings release, we generally expect the results in the first half of the year will be meaningfully lower than results in the second half of the year as end market demand continues to normalize following the rapid rise in interest rates and associated market volatility. We further expect the year-over-year net income attributable to Rayonier and EPS will be impacted by increased depletion rates in our Southern Timber segment following the completion of the U.S. South acquisition that Dave discussed earlier. With respect to our individual segments, in our Southern Timber segment, we expect full year harvest volumes of 6.7 million to 7 million tons. The anticipated increase relative to the prior year reflects the additional volume associated with the acquisition of 137,800 acres in Texas, Georgia, Alabama and Louisiana. We also anticipate higher non-timber income for the full year 2023 as compared to 2022. However, we expect that these positive variances will be largely offset by lower weighted average stumpage realizations in 2023 relative to 2022 due to softer demand as well as higher cut and haul costs. Overall, we expect full year adjusted EBITDA in our Southern Timber segment of $145 million to $160 million. In our Pacific Northwest Timber segment, we expect full year harvest volumes of 1.5 million to 1.6 million tons. The anticipated decrease relative to the prior year reflects recent land sales activity, a more muted domestic demand outlook and an ongoing mix shift towards Douglas-fir, which has a lower MBF to ton conversion ratio. Furthermore, we expect weighted average pricing in 2023 to decline relative to full year 2022 due to weaker macroeconomic conditions and lower lumber prices. Overall, we expect full year adjusted EBITDA in our Pacific Northwest Timber segment of $42 million to $52 million. In our New Zealand Timber segment, we expect full year harvest volumes of 2.5 million to 2.7 million tons. As Doug discussed, we are optimistic that export market conditions will continue to improve as the operating environment in China normalizes following the COVID-related disruptions that persisted throughout 2022. We further expect that favorable carbon credit pricing and volumes will contribute to improved results in 2023. Overall, we expect full year adjusted EBITDA in our New Zealand Timber segment of $58 million to $64 million. In our Real Estate segment, we are encouraged by the continued interest in both our development projects and rural properties despite the higher interest rate environment. Overall, we expect full year adjusted EBITDA of $68 million to $77 million. We anticipate the real estate activity in 2023 will be significantly weighted to the second half of the year with the first quarter in particular being relatively light. Thanks, Mark. As I reflect on 2022, I'm pleased with how our team was able to work together to deliver strong financial performance while contending with considerable challenges during the year. These challenges included significant inflationary pressures, which were exacerbated by the Russia-Ukraine war, a slowdown in U.S. housing activity driven by a dramatic increase in interest rates and a challenging export environment due to COVID-related disruptions in China. Nevertheless, our team was able to adapt quickly amid a very volatile business environment to deliver strong results throughout the year. While our products and markets are certainly not immune from the macroeconomic headwinds facing the broader economy, I believe that the dedication of our talented employees, the geographic diversity of our portfolio and the tensioned log markets in which we operate position us well to build long-term value for our shareholders across economic cycles. On the capital markets front, following a very active 2021, we entered 2022 with our balance sheet in an excellent position to deploy capital if the right growth opportunities emerged. To this end, we were pleased to close on seven transactions totaling 140,000 acres for $458 million during the year, which was primarily driven by the large acquisition in the U.S. South that we closed in the fourth quarter. While we are very excited about these acquisitions, our active portfolio management strategy also remained focused on addition through subtraction as we completed a large disposition of nearly 11,000 acres of less strategic holdings during the fourth quarter for over $30 million. In sum, over the past year, we improved our portfolio through acquisitions that will further bolster our competitive positioning, recycled less productive capital toward uses with a better risk return profile and opportunistically raised capital through our ATM program to fund growth opportunities. In addition to our focus on achieving important financial goals and ongoing portfolio management objectives, we also continued to advance initiatives related to nature-based solutions throughout the year. We made great strides in advancing various opportunities in solar energy, carbon capture and storage and voluntary carbon markets. As we move forward, we believe we are well positioned to capitalize on these nascent business opportunities, and we'll continue allocating resources as these markets develop. All said, I'm confident that the operational flexibility afforded by our pure play timber REIT model, the ongoing improvements to our portfolio and the resiliency of our team will enable us to stay focused on long-term value creation as we continue to navigate the uncertainty facing the U.S. housing market and broader economy in 2023. Before turning the call back over to the operator, I'd also like to congratulate Mark and Doug on their recent promotions. In late January, we announced that Mark has been appointed to the additional position of President. Mark has been a valued partner to me over the last several years, and we are pleased to be expanding his leadership role within the company. In addition to his current duties as CFO, Mark will be taking on a greater role in leading our strategic planning efforts, as well as participating in broader operational and personnel decision-making. Additionally, we announced that Doug has been promoted to the position of Executive Vice President and Chief Resource Officer. In this expanded role, Doug will continue to oversee our global forestry operations while also devoting more time toward developing business opportunities around nature-based solutions. We believe these announcements underscore our commitment to continuously developing talent, including our senior leaders, our thoughtful approach to succession planning and our continued focus on allocating resources to the emerging opportunities for timberland owners in a low carbon economy. Thank you. Thanks for the details, Dave, Mark. So first, just a couple of questions, if I could. One, so the more tensioned wood baskets in the South, which help you when things are good. Does that mean that things soften a bit more when things are weak and then you get more upside when they tighten again in the future kind of similar to how in the Pacific Northwest, there's a bit more volatility or not necessarily? What's your view on that? Yes. Good morning. This is Doug. I'll take a swing at that one first. Yes, I think you've kind of categorized that correctly. For example, some of the highest-priced baskets that we saw the biggest year-over-year improvements in 2022, and while we're seeing some decline relative to those levels reached last year, the absolute pricing level in the major [ph] markets are still very favorable compared to the South as a whole and we're still seeing weighted average total pricing seeing 2021 [ph] levels. But I think that price elasticity, you point out, is exactly right that when there's tension we see prices really ramp up, but then we also can see them slowly come back down off this sometimes. I think it's also worth noting, Mark, that the overall pricing is quite a bit higher in those tension markets. And so again, we saw very significant lifts in '21 and then again in 2022 in some of those more tensioned markets, whereas bottom quartile markets really saw a relatively flat pricing or very modest increase. And so again, while we have seen prices come off, those extraordinary highs that we saw in 2022, the absolute pricing level in those markets is still considerably higher. Understood. And then second, in New Zealand, if I could kind of look back the last since 7, 8 years, EBITDA range from $55 million, I think, to $100 million plus. And your guidance for next year is obviously towards the low end of what we've seen. Can you talk about kind of what you think the medium to longer term right type of normalized level is? And how important is China to where - when we start seeing higher profitability there? And then any more color you can provide about the changes in the China property market initiatives and - et cetera, as to how that might factor into the timing of when the improvement might develop? Yes, sure, Mark. This is Mark. I'll take that. I mean in terms of a normalized EBITDA there, again, we - to your point, I mean, we've seen EBITDA as low as the 30s back a number of years ago and sort of peaking probably in the '90s. And so New Zealand has always been more volatile, and that's really driven by the much more heavy reliance on export markets, just the cost structure there. A lot of the land is - is leased. You've got a much higher cost component in terms of delivering wood in the export market. So obviously, headline price volatility translates to greater margin volatility in New Zealand, certainly relative to, say, the U.S. South where we're - a lot of our sales are stumpage. And so it's a very high EBITDA margin on the stumpage sales. Yeah, I certainly don't think that New Zealand is going to retreat to levels that we saw in '13, '14, '15. But obviously, we've normalized kind of off of the levels that we saw 3, 4 years ago as well. I think - as it relates to China, obviously, China was very challenged in 2022, given the COVID containment measures, as well as some challenges in the property sector there. I'd say we're very optimistic that now that China is reopening. We've already seen some bounce back in export pricing there. As the supply chain in general has loosened up, we've seen some relaxation of export freight costs there. And obviously, carbon has been a bright spot in New Zealand as well. So a lot of moving pieces, I'd be reluctant to kind of characterize what we see as a normalized EBITDA. But certainly, we're hopefully trending back towards that type of level here as we move into 2023. Mark, this is Dave. I'd add just a couple of things I'd add to that is keep in mind that a lot of the drivers are also around relative supply from other regions and you've had historically, a lot of wood going into China from Russia as well as Australia. Those two sources are essentially done. And what really overwhelmed the last number of years was flow of salvage wood from Europe, which took Europe's market share from essentially next to nothing to write behind New Zealand. And so I think where we have a lot of optimism is that is tapering off as they've essentially gone through that wood. And we feel like New Zealand is very well positioned going forward, and we expect to see less volatility certainly than we had over the last year in things like shipping costs. And so notwithstanding some of the headwinds in 2022, we remain pretty optimistic about how that's positioned. And it shows in our cash flow generation on a per acre basis is superior to all of our other regions. Right. And I guess - and I recognize you're juggling lots of variables coming up with your various outlooks by regions. But I know it's kind of the range you had for New Zealand is actually maybe less wide than you had it for some of the U.S. regions, which I guess surprised me a little bit given the uncertainties of exactly when and how China plays out, as well as the historical greater volatility. And I don't know if that's communicating something specific? Or again, it's really just a function of your juggling lots of variables and coming up with your best assessments and that's the way it came out? Any color on that? Yes. This is Doug again. I'll take the start this one. I think what that shows is we really are having some optimism around what's happening in China as they come out their COVID restrictions. Prior to the Lunar New Year, we saw demand really pick up. The headline numbers only averaged 55,000 cubes per day, which doesn't sound that amazing. But really, what we saw is a real pickup towards the right before the Lunar New Year. And as mentioned by, I think it was Mark, we've seen a trend where the long brokers have additional confidence now to hold inventories because they're forecasting higher demand and pricing after the holidays. So we're seeing some potential really green shoots in that area. And then with - I think you mentioned there that the property markets, and we've seen quite a bit - policymakers and to governments have pledged quite a bit of money to restart construction in the areas, and we're seeing that start to flow back through into demand also. So the People's Bank of China have recently launched a CNY 200 billion relending program and quite a few regional banks have also kind of matched that. And so kind of what we're hearing kind of on the ground is that expecting property sales to stabilize at lower levels, obviously, in these coming months, but then to rebound gradually from the second quarter onward. And that's really being help with that reopening of China. Okay. I promise you, last one just on the same thing. So I guess what I'm trying to understand is if things play out as you are kind of seeing, is that particular - New Zealand, is that one region where maybe if we look into next year, you can really get an outsized increase relative to what one might expect in North America? Or is that not necessarily a right avenue to be thinking about at this point? Again, I apologize because that's looking quite far out. I mean, it's certainly possible, Mark. Again, if you look at where New Zealand EBITDA has been last year and kind of what we're forecasting for 2023, it's generally kind of below the level that we've averaged for the last 5 years. And so '22 is obviously very challenging. We're expecting to see some recovery in 2023. And to your point, if that trajectory continues, we're obviously not providing 2024 guidance, but you could certainly see some outsized gains there. I would just add one more thing that's kind of probably not appreciated a little more in the details. But due to some few mega issues that we've had being banned in New Zealand, the India market has not been an option for us for most of last year. And we're seeing discussions between India and the New Zealand official is basically around that. And so we think that, that market to India could also open up for us in this current year and the next year. So some more optimism around that. I think another - lastly, Mark, I think another thing to think about is, historically, carbon credit sales have not been a very big factor in New Zealand, and that market has really evolved to a point where it's making meaningful contributions last year, and we expect that's going to play a role going forward as well. Yeah. Thanks very much. Morning, guys. Just following up Dave on your comment on carbon markets. I saw that $21 million in sales in New Zealand in '22 versus kind of just over the $1 million that you did in '21. Maybe you could give us a background of what those - how you achieved that and what your expectation is for '23? I'll start on that, and I'll let Doug provide a little bit more color. Keep in mind that historically, the carbon credit market there had been at a fairly low pricing level. And so we had sort of taken a very opportunistic approach. It was one of the reasons that we really didn't have much in the way of sales a couple of years ago, but that market really took off. And they conduct quarterly auctions by the government where they release carbon credits out onto the market, and we watch that pretty carefully. And that started giving us confidence that that the market was going to head up. And some of that's also predicated on prices that the government sets where they will release incremental carbon credits onto the market. And those prices tended to lead the market up. And so it gave us a lot of confidence to bring more volume forward last year of our credits. And Doug can provide a little bit more color as to as to where we stand on the credits as we enter this year, but it's definitely playing a bigger role in how we think about those - that region. Yes. Thanks, Dave. I think as Dave mentioned, with those auctions, the government does set these cost containment reserve prices that basically at that point, if the price is reached, they'll release some more credits into the market. And so they often kind of do tend to set I wouldn't say a floor, but that's where targeting seems to be towards. And so we saw - the current one is around $80. And so we saw pricing last year in the $70 to $80 range. And as Dave said, it's markedly up from years before where it's been as low as single digits to probably more recently in the $30 to $40 range. So we saw a pretty drastic step-up and the opportunity to execute on those as we said, the opportunistic around that. Sorry, all New Zealand dollars. Yes, thanks, Dave for correction on that. And as we go into this year, we're building new units as we go, growing them up, but we also come in with roughly around 1.6 million in the use that we had. We do have to surrender units as we harvest and then we also gain units as we grow timber. And so as we go through the year, we have the opportunity to sell some more and can be somewhere. I don't want to give out our exact - what our plans are to the market but exceeded at the end of the year over 2 million units type of thing and potentially more than that, just depends on how we see the pricing flow through year and how we side to execute. Yes, the North American markets, those are still voluntary. So basically, not - and they still have a lot of standardization, I guess, what I would say. So there are a few obviously [ph] firms that are basically focused on getting that standardization. But we've seen as everyone is seeing some issues around people talking about green washing and different things. And so what I think is happening now is that the buyers are starting to figure out what is a valuable credit to them and looking for those. And so we've really seen pricing move around in the single digits to $20, $30 a ton depending on how it's being produced. And so I think what we're still waiting on in that market is for more standardization and for the market to realize what the value is and to possibly get rid of some of these lower value credits that are out there right now. So we've got some projects in our back pockets, but we haven't actually registered those yet because we feel like there's still opportunity in that market yet before we do that. Okay. And then just turning over overall, it looks like with your '23 guidance, you're expecting to slow down in North mark on the timberland side, that percentage of real estate of EBITDA - of your total EBITDA is kind of holding up a lot better than new timberlands business. Just wondering if that's a lag and you expect a slowdown in '24 as a result? Or maybe you could comment on that. I think some of what you're seeing, Paul, is that we have these two big projects, one that's in the Jacksonville, Florida area, the other in Savannah, Georgia. And as they kind of pick up heads of steam, they have been running at more kind of regular levels. And so over the past number of years, we've seen that Wildlight project here in Florida growing larger and larger. And meanwhile, the project in Savannah is really just getting started, but we're very encouraged by the developments that we've seen there and we're leveraging a lot of the learnings that we've had here. And one of the things that we're particularly excited about, there's a large investment being made by Hyundai around electric vehicles and other aspects that's going to bring substantial employment into the area right adjacent to our project. And we think that's going to translate into further demand. And one of the things that we've done in both our Florida and our Georgia projects is we've got a really nice mix of product types from developed lots to residential pods, to build-for-sale, to multifamily. All of those things, I think, are helping to propel the momentum on those two projects. And so I think that those two projects, as they exit kind of their beginning stages, are going to supply a more stable stream of cash flow going forward. And then shifting to our more rural product mix. That's one that's always been relatively stable. And I think as we've seen pressures on land values. You've seen that translate in terms of the types of values you're getting. And we're really focused on - on selling lands where we can get a good premium. And so we've been happy with the progress that we've seen on the real estate side and don't see that kind of tailing off as we go down the road. Okay. That's great. Thanks for that. And then just overall, I mean, one of your competitors mentioned that their expectation for 2023 timberland sales was more muted than what we saw in '22. Do you have the same expectation? Or what is your view of the future on M&A? Yes, I wouldn't - I'm not sure I agree with that. And - but having said that, it's a hard thing to peg. And so you have - increasingly, you have situations where a lot of the - a lot of the TMO [ph] downstream investment clients are controlling exits of sales and forcing that to occur through separate accounts. And as that occurs, you really have to kind of get into the mindset of those ultimate owners of those properties, and they're all over the board. You've got some people that had a desire to sell during COVID that weren't able to because you really couldn't do much due diligence. And I think that contributed to some of the outsized volume that we saw last year, and I suspect there's still maybe some of that at play. I think another thing to keep in mind is as we've seen stronger pricing, we've seen NCREIF - the NCREIF Index is now over $2,000 an acre in the South and certainly on the higher-quality properties like the one that we completed in Q4, where you're seeing really outsized cash flow generation, those are generating large values. And I think that's going to have the potential of spurring additional volume on the market as the ultimate owners of those properties decide they want to cash in. The flip side of that, I think, is there's a greater recognition that you've got optionality around ESG and carbon-related values. And I think some - there will be some owners that want to stick around and see if they can see that translate into their properties. As we look across the three geographies that we're in, I think we see more potential for stronger activity in the U.S. South than we do in the Northwest and New Zealand. I think we've seen much more tepid volume of offerings in those two geographies, and we expect that to continue. The 2023 outlook for the saw and timber segment. I was hoping you could provide some additional colors to what your demand picture kind of looks like right now? And how much of an impact are you expecting that to have on log pricing? And also if there's been any changes to the assumptions for the recent [ph] acquisition? Yes. There are always moving pieces in kind of terms of our geographic mix and other factors, and we're looking at it kind of year-over-year comparisons. And we have seen some decline for demand and particularly along the East Coast here of the U.S. And a lot of that - we're in a drought situation right now, so there's plentiful wood out there. But also, I think given the kind of macroeconomic uncertainty at the end of 2022, we have our customers, we're trying to manage inventories quite closely, and they were reluctant to secure log volume by locking and pricing beyond Q1. But as we progress through the month of January, and we see more positive news on lumber pricing and homebuilder sentiment and things like that, we start to see increased interest by mills to secure forward volume. So I think we're cautiously optimistic that things are starting to move around and turn around in the market and those things. But we did factor that in as we thought about our guidance. With respect to Project D, the new acquisitions that we talked about, we take the combined acquisitions with our overall harvest plans. And then there's always some changes we look to stay nimble with our operations based on how we see the current market conditions. And so we're working those in as we think about them and basically take into account how we think about the market and where we should harvest and where we should maybe pull back and allow markets to regain strength. But overall, I'd say our estimates for that acquisition are largely intact. I don't think anything has changed in terms of our 10 year outlook or certainly our harvest flows that we provided when we announced that acquisition. Okay. Thank you. That's pretty helpful. And just to follow-up on that. You noted that you're seeing increases in cost. I'm just trying to get a little bit of gauge as to how significant increases may be. Should we expect something similar to give your growth in 2022? Or do you think it's going to come in a little higher? We've actually seen costs moderate over the last couple of quarters. So really, while there really more folks are on diesel now. Labor seems to have settled down and equipment is starting to work through the process - through the chain, supply chain, things like that. So I would say that we still see increased costs, but they're not near what they were kind of going from '21 into '22. Thank you. This is Collin Mings. I'd like to thank everybody for joining us. Please contact us with any follow-up questions.
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EarningCall_644
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Good morning, everyone, and welcome to today's presentation. This morning, we're going to cover BP's fourth quarter and full year '22 results. We'll also provide an update on strategic progress. Before we begin today, let me draw your attention to our usual cautionary statement. During today's presentation, we will make forward-looking statements, including those that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially due to the factors we note on this slide and in our U.K. and SEC filings. Please refer to our annual report, stock exchange announcement and SEC filings for more details. These documents are available on our website. Well, thanks, Craig, and good morning, everyone. It's great to have those of you on the call join us. And obviously, it's great to see people here in London this morning. Before we begin, after yesterday's terrible earthquakes in Turkey and Syria, our thoughts obviously go out to colleagues and everyone with friends and family in the region. All our colleagues are accounted for, and we have a team set up to support them. But of course, many, many more people were affected, thousands of people have died and we'll do what we can to support. There will be operational matters to attend to in time. But in our -- in the first instance, our focus is obviously on people. I'm here today with Murray, who is standing ready to take over here in a few minutes, poised. And I'll be joined in a bit for Q&A by Carol Howle, Gordon Birrell, Emma Delaney and Anja Dotzenrath. The rest of the BP leadership team are also around, Giulia Chierchia, Kerry Dryburgh, Eric Nitcher, Leigh-Ann Russell. So you'll get a chance to meet them as well. Three years ago, we announced a significant strategic change for BP pivoting from, at that time, a 110-year history of being an international oil company, or IOC, to becoming an integrated energy company, or IEC. I'm personally in awe of what the BP team has delivered since then. And all during the most volatile and the most uncertain times that many of us, I think, have ever experienced. When we updated the market this time last year, I said to you all that our direction was set. Our change was done and we were now 100% focused on delivery, and that is exactly what we have been doing. With that backdrop, there are 3 things that you'll hear from us today. The first, and important is that BP is performing. Our businesses are running well. Our costs are being controlled. We are reducing emissions. We are growing value. We feel and believe our strategy is working, and we are more confident than ever that what we laid out in 2020 as a strategy is the right one. And as we've said and your Board of it consistently that we are performing while we are transforming. Second, we are leaning further into our strategy. We're planning to invest more into our transition growth engines and, not or, and at the same time, investing more into today's oil and gas system. A plan that we expect will materially increase EBITDA by 25% and by 2030. And third, crucially, we are delivering for shareholders. In 2022, we have grown distributions through an increase in our resilient dividend and delivery of a material share buyback program. So let's start it off if it's okay with a little video that shows -- it's 2 to 3 minutes, so it won't be too long. That shows some of the delivery by the team at BP over the last 3 years. So we're going to play the video. So thanks for -- it's as much for our own teams that would be showing them later today as anything else. But I might be a bit biased. I am probably a bit biased. But I think that's pretty brilliant, and I'm really proud of the people at BP for their part in delivering that. Turning now to focus on delivery in 2022. First, reflecting, as we said, in the video on safety. At BP, safety comes first. It's core to the way that we live our purpose. We have seen our combined Tier 1 and Tier 2 process safety events continue to improve in 2022 compared to 2021. However, we do know from incidents during the year that there's always more that we can and must do and we will do that and safety remains and is foundational obviously, to everything that we do. Turning secondly, to our businesses where our focus on operational reliability and cost performance underpinned strong financial delivery. Adjusted EBITDA for 2022 was $60.7 billion; operating cash flow was $40.9 billion, including a working capital build of $6.9 billion. Net debt reduced for the 11th quarter in a row to reach $21.4 billion, the lowest level in almost a decade, and return on average capital employed was 30.5%. And third, we delivered for shareholders. Executing against our clear, consistent and disciplined financial framework and delivering what we believe are sector-leading distributions. Today, we have announced a 10% increase in our dividend per ordinary share for the fourth quarter, underpinned by our strong underlying performance and supported by our plans to lean into our strategy and deliver further growth in EBITDA. Including this increase, our dividend per ordinary share for the fourth quarter is 21% higher than a year ago. and very importantly, fully accommodated within our resilient $40 per barrel balance point. And since commencing the share buyback program in 2021, we have reduced our issued share capital by 11%. I'll say more about our plan to lean further into our strategy in a moment, but let me first hand over to Murray to run through our results in more detail. Murray? As usual, I'll start with the macro environment. During the fourth quarter, Brent fell by 12% relative to the third quarter to average $89 per barrel. This reflected increased uncertainty over the economic outlook and relatively high production from Russia and OPEC. In the first quarter, we expect prices to remain supported by recovering Chinese demand, ongoing uncertainty around the level of Russian exports and low inventory levels. Turning to natural gas. During the fourth quarter, we saw a sharp decline in both spot and futures prices. The quarter average TTF price fell by 51% as warm start to winter allowed Europe to maintain inventory levels. In the U.S., Henry Hub declined as storage levels recovered towards seasonal norms. The outlook for the first quarter remains dependent on weather in the Northern Hemisphere and the pace of Chinese demand recovery. Moving to Refining. Consistent with trends in seasonal demand, global margins decreased modestly to average $32.20 per barrel during the quarter. We expect industry refining margins to remain elevated in the first quarter due to sanctioning of Russian crude and product. Moving to our long-term price assumptions. Last week, we presented the BP 2023 Energy outlook. And in line with our annual cycle, we've reviewed our price assumptions used for investment appraisal and accounting. To summarize, the continuing impact of the war in Ukraine and the resulting energy shortages, together with changes in the structure of energy markets post-COVID, means we now expect oil and gas prices and refining margins to remain higher throughout much of this decade. Further out, we continue to expect prices to fall as the energy transition gathers pace. The charts on this slide show our old and new assumptions for Brent, Henry Hub and the refining marker margin. In the second half of the decade, we assumed the prices return towards historical levels. These changes have no impact on our cash balance point at $40 Brent; $11 RMM and $3 Henry Hub. Turning to results. In the fourth quarter, we reported a profit of $10.8 billion, allowing for post-tax adjusting items of $7.1 billion and an inventory holding loss of $1.1 billion. Our underlying replacement cost profit was $4.8 billion compared to $8.2 billion in the third quarter. Turning to business group performance compared to the third quarter. In gas and low carbon energy, the results reflect a below average gas marketing and trading performance compared to an exceptional result in the third quarter lower gas realizations and lower production. In oil P&O, production and operations, the result reflects lower liquids and gas realizations. And in customers and products, the products result reflects a higher level of turnaround and maintenance activity. The customer's result reflects lower marketing margins and seasonably lower volumes. And finally, our trading business had an exceptional year. And with consistent strong delivery has now contributed an average uplift of 4% to group ROACE over the past 3 years. Moving to cash flow. Operating cash flow was $13.6 billion in the fourth quarter. This included a working capital release of $4.2 billion after adjusting for inventory holding losses, fair value accounting effects and other adjusting items. Capital expenditure was $7.4 billion in the fourth quarter and $16.3 billion for the full year. For the fourth quarter, inorganic expenditure was $3.5 billion, including $3 billion for Archaea Energy net of adjustments, and $500 million for the earlier-than-expected completion of the acquisition of EDF Energy Services. During the quarter BP repurchased 3.2 billion of shares. Reflecting strong cash generation, net debt fell for the 11th consecutive quarter to reach $21.4 billion. And with surplus cash flow of $5.1 billion in the quarter, BP intends to execute a further $2.75 billion buyback prior to announcing first quarter 2023 results. Turning to our disciplined financial frame. Our resilient dividend remains our first priority. As Bernard outlined for the fourth quarter, we have announced an increase in the dividend to $0.0661 per ordinary share. This is underpinned by strong underlying performance and supported by the confidence we have in delivering further growth in EBITDA as a result of our updated investment plans. Second, our strong investment-grade credit rating. During 2022, we reduced net debt by a further $9.2 billion. Third, disciplined investment allocation. Capital expenditure for the year was $16.3 billion, slightly higher than expected due to the phasing of our acquisition of EDF Energy Services. Thanks, Murray, and thanks for your leadership over the last few years, fantastic. So let me turn then if I may, to the update on our strategy. The world is in a very different place today compared to when we began this journey just 3 years ago. The challenges and volatility we have seen make it clear, maybe clearer than ever that the world wants and needs a better and a more balanced energy system, one that can deliver more secure, more affordable as well as lower carbon energy solutions, the so-called energy trilemma. To deliver that better energy system, action is needed. One, to accelerate the energy transition; and two, ensure an orderly transition from today's predominantly hydrocarbon-based energy system with the emphasis being on orderly to maintain ongoing energy security and affordability. This means both increased investment in lower carbon solutions that can help society decarbonize faster and not or, something you'll hear me say a lot, and not or, at the same time, continued investment in hydrocarbons to keep energy flowing with energy security and affordability at a premium. At the same time, our track record of delivery over the last 3 years has given us increased confidence in the strategy that we laid out. An integrated energy company is, we believe, uniquely set up to help deliver energy security and energy affordability today as well as to help accelerate the energy transition. And crucially, we believe we can generate growth and attractive returns in doing so. And it is for these reasons that we see the opportunity to lean further into our strategy, and that is what I will now describe. We remain focused on transforming to an integrated energy company, our 3-pillar strategy, which includes our 5 transition growth engines, is unchanged, as is the fact that the power of integration, underpins and connects it all. So what does leaning in look like? Well, first, we plan to invest up to $8 billion more this decade in our transition growth engines. On average, $1 billion more each year, investing more into higher-return Bioenergy and Convenience and EV Charging where we have established businesses, strong capabilities and a proven track record. Alongside this, we are focusing our hydrogen and renewables and power strategy. Anja Dotzenrath, here in the front row who I introduced earlier, Anja joined us last year and has brought real clarity to that strategy, while at the same time, building our organizational capability and a pipeline of value-accretive growth options, and I will come back to this shortly. Second, we plan to invest up to $8 billion more this decade, on average, about $1 billion more each year in today's energy system, which depends on oil and gas. Targeting shorter cycle, fast payback oil and gas projects and investing in certain oil and gas assets that we now expect to retain for longer. These are investments that we can deliver quickly over the next few years with minimal new infrastructure and that capture any price upside in the near to medium term. As we do both of these, we expect to materially accelerate growth in EBITDA through 2030. In February last year, we laid out plans to generate group EBITDA between $39 billion and $46 billion in 2030 at $60 real in 2020 terms. With the plan we're announcing today, we now expect to deliver around $3 billion more EBITDA in 2025, rising to an aim of $5 billion to $6 billion more in 2030. We expect our additional investment in transition growth engines to contribute around $1 billion in EBITDA in 2025, and we aim for around $2 billion in 2030. We expect our additional oil and gas investment to contribute around $2 billion additional EBITDA in 2025, and we aim for around $3 billion to $4 billion in 2030. And as Murray previously mentioned, we have raised our price assumptions. Taken together, we now aim to generate group EBITDA of around -- of between $51 billion and $56 billion in 2030. Turning to some more detail on our plans for our transition growth engines. We expect to invest around 50% of our CapEx in 2030 in these 5 engines. This includes both organic and inorganic investments. We will continue to allocate capital to transition opportunities with discipline, applying our balanced investment criteria and investing where we can meet our return hurdle rates. We expect this investment to accelerate earnings growth from our transition growth engines, increasing EBITDA to $3 billion to $4 billion in 2025, and $10 billion to $12 billion in 2030, up from greater than $10 billion that we announced previously. We continue to expect -- to deliver greater than 15% returns in Bioenergy; greater than 15% returns in Convenience and EV Charging combined. We also expect double-digit returns in hydrogen and 6% to 8% unlevered returns in renewables. Now taking each transition growth engine then in turn. In Bioenergy, we are deepening our investment and now expect to deliver around $2 billion EBITDA in 2025 and aim to deliver more than $4 billion in 2030. We have established global biogas and biofuels businesses that are positioned in an increasingly supportive environment of rapidly growing demand with attractive fiscal incentives. And our trading capabilities enable us to integrate supply volumes to capture enhanced value. We plan to increase Biogas supply volumes by around 6x by 2030 to around 70,000 barrels per day oil equivalent. We completed the acquisition of Archaea in December. And this is a real game changer for us. Rapidly advancing our access to feedstock and scaling our upstream participation in the Biogas value chain, which is a distinct source of competitive advantage. We're now focused on integrating Archaea into BP and building out the significant development pipeline. We have also identified opportunities to get renewable natural gas projects online faster, and we're looking at ways to improve landfill gas recovery. This is a business that we are very excited about and one that we believe can deliver significant value faster than what we had thought. In biofuels, we aim to materially grow biofuel production volumes to around 100,000 barrels a day by 2030, focused on sustainable aviation fuel, or SAF, where we aim to be a sector leader. We already produced more than 7,000 barrels per day of biofuels through co-processing, and we aim to triple this by 2030. We also plan to deliver 5 biofuel projects focused on SAF at our Conana, Rotterdam, Castyon, Lingen and Cherry Point facilities. We expect these projects to produce around 50,000 barrels a day by 2030. And the BP Bunge Bioenergia joint venture in Brazil, one of the largest bioethanol producers in Brazil, aims to produce around 30,000 barrels per day by 2030 net to BP. In Convenience and EV Charging, we plan to deliver EBITDA of more than $1.5 billion in 2025, and we aim to deliver more than $4 billion in 2030. We're confident in delivering our strategy. It remains unchanged, and we have, I would say, even deeper conviction in it. First, in the growing Convenience sector, our combination of local strategic partnerships and global reach enables us to deliver leading offers for our customers. Second, we have a proven track record of delivering growth, and we have continued to grow Convenience's gross margin despite a challenging environment. Third, EV Charging is moving at pace, and we see significant value through our focus on fast charging with customers using our rapid and ultrafast charging points, significantly more than the slower ones. And fourth, major corporations are increasingly demanding decarbonization solutions driving strong momentum in the fleets business. We're excited about bringing our capabilities and our reach in Convenience, together with EV Charging, enabling us, over time, to provide customer-focused, lower-carbon transport solutions and our confidence is underpinned by strong strategic momentum in 2022. In Convenience, we now have 2,400 strategic Convenience sites with 250 added in 2022. We grew our highly profitable loyalty customer base by more than 5% versus '21. And we're particularly excited about our progress in the United States. For example, has integrated well and delivered a record Convenience gross margin in 2022. In EV Charging, we now have 22,000 charge points and almost all charge points that we roll out now are rapid or ultrafast. We sold 2.5x more electrons year-on-year, supported by increasing power utilization, which is now approaching double digits. And in fleets, we're building scale, recently announcing our nationwide collaboration plans with Hertz in the U.S. Moving to Hydrogen and Renewables and Power. This is about establishing this decade, the foundations of a material business for the following decades to come. We expect to invest up to $30 billion by 2030, while remaining flexible in our capital allocation as markets evolve and with a focus on returns. Through this, we aim to deliver EBITDA of $2 billion to $3 billion by 2030, ramping up thereafter in the 2030s and beyond. In Hydrogen, our ambition is to build a leading position globally. While the market is at an early stage of development, we see customer demand growing rapidly and regulatory support gaining momentum, as evidenced by the Inflation Reduction Act in the United States. We plan to use our refineries as demand anchors for hydrogen and to scale these up into regional hubs. These hubs will then provide low carbon energy solutions for customers, particularly in hard-to-abate sectors such as steel. In parallel, as markets evolve, we expect to invest to build global export hubs for hydrogen and hydrogen derivatives. These are in advantaged geographies where we have an established presence. By 2030, we aim to produce between 0.5 million and 0.7 million tonnes per annum are primarily green hydrogen, while selectively pursuing blue hydrogen opportunities where there is regulatory support and CCS access. Turning to Renewables & Power. Here, we are focusing our investment in renewables on opportunities where we can create integration value and enhance returns. We aim to participate in 2 ways. First, focused investment to build out a renewables portfolio in service of green hydrogen, green and e-fuels, EV Charging and power trading, including low carbon flexible generation. As part of this, we are building a global position in offshore wind, enabled by our capabilities in large-scale complex offshore projects. Second, we continue to progress a solar development and sell model with Lightsource BP, which is self-funding and capable of delivering renewable power rapidly at scale. Taken together, we remain on track to deliver our 50 gigawatts net developed through FID aim by 2030. Of this, we aim to have around 10 gigawatts net installed capacity largely operated in offshore wind, solar and onshore wind. We also expect to have assets under construction and for Lightsource BP to contribute materially. And finally, we have brought power trading into the renewables growth engine. This reflects our focus on creating value through integration across our own portfolio as well as the opportunity to help customers decarbonize their power needs as grids and our own supply decarbonizes. And we're in action. Looking back over the past 12 months, we have made significant progress in hydrogen and renewables. We now have a pipeline of hydrogen projects in concept development totaling 1.8 million tonnes per annum net to BP and we would expect to double that by the end of this year. We're also progressing customer acquisition and have an unrisked customer hopper of around 10 million tonnes per annum. Our renewables pipeline increased by 14 gigawatts in 2022 to 37 gigawatts through offshore wind, Lightsource BP and hydrogen-linked renewables in Australia. As this slide shows, our portfolio is global. It's focused in 4 regions with cost-advantaged renewable resources, policy or government support, where we have an established presence and where we can leverage again our distinctive trading and shipping and integration capabilities. To summarize, we are excited about the portfolio we are building. We have distinctive capabilities to succeed, we believe, and we see huge opportunity to enhance returns by integrating across renewables, hydrogen, e-fuels and e-mobility. Turning now to our oil, gas and refining portfolio. Let me start with where our oil and gas production is today. It is around 40% lower versus 2019, including the decision by BP's Board to exit Russia. We remain actively engaged in marketing our Rosneft shareholding, and we will update the market as appropriate. But as you have heard me say before and Murray, our oil and gas strategy is about value, not only volume, and our focus remains on maximizing returns and cash flow, reducing emissions and is underpinned by a deep and high-quality resource base that allows us to choose the best investments. Our of resource options enables us to allocate more capital, particularly to short-cycle opportunities to maximize value, including investing more into BPX and more into the Gulf of Mexico. Having grown production in 2022, we plan to grow underlying production to 2025, adding around 200,000 barrels per day of oil equivalent of high-margin production from 9 major project start-ups by continuing to manage base decline to between 3% and 5%, by increasing BPX production by 30% to 40% and retaining some assets for longer than previously planned. A great example is in the Gulf of Mexico, where we expect production to increase to around 400,000 barrels a day by the middle of the decade, and average 350,000 barrels per day through the end of the decade. In the second half of the decade, we also have options to progress new hub opportunities, including in offshore Canada, in Brazil, in Mauritania and Senegal in Australia, the Gulf of Mexico and Indonesia. We also remain focused on high-grading our portfolio and aim to divest around 200,000 barrels a day of oil equivalent of lower-margin assets by 2030, less than previously assumed given the strong progress we have made improving operational reliability and commerciality across our portfolio over the past few years. And to maximize value, we intend to maintain investment discipline with hurdle rates of 15% to 20% at $60 per barrel, maintain a balanced portfolio with a broadly equal mix across oil and gas, drive capital productivity through strong execution capability across our subsurface wells and projects organization and sustained cost efficiency and reliability improvements in our operations. Our 2022 performance shows our focus on this, delivering our lowest unit production cost since 2006 and our highest plant reliability on record. Turning to refining. Three things. First, through our business improvement plans, we are continuing to drive greater competitiveness and value from our refineries. We are focused on improving process safety and operational emissions and delivering portfolio performance. Second, as I mentioned earlier, our refineries are a foundation for 2 transition growth engines, namely Bioenergy, specifically biofuels and hydrogen. We plan to grow biofuel coprocessing production and deliver 5 projects focused on sustainable aviation fuel. Our existing refining hydrogen demand will be an anchor to build scale through both green and blue hydrogen projects. And third, we will continue to invest to digitize and modernize the systems and back office of our refining business, as we have in the Upstream over the past decade. This is expected to drive higher reliability, more efficient work and eliminate substantial waste in the system. The combination of an increasingly competitive refining portfolio and the opportunities we see to convert or consolidate refineries to deliver our biofuels and hydrogen strategies means that we plan to retain our current refining footprint and throughput at around current levels. So what does this mean in terms of our pathway to net zero. In short, our destination is unchanged with a triple net zero ambition across operations, production and sales by 2050 or sooner. Since we laid out our aims in 2020, we have enhanced our net zero 0 ambition. We have increased AM1 to 50% in 2030. We have increased 3 to 15% to 20% in 2030 and net zero 0 by 2050 as well as expanding the scope of AM3 to include physically traded energy products. As we lean further into our strategy, we have updated our goals for AM5, now aligned with our transition growth engines for '25 and 2030. We expect to invest more than 40% or $6 billion to $8 billion of our capital expenditure in transition growth engines in 2025, up from 3% in 2019 and around 50% in 2030, or about $7 billion to $9 billion. We have updated our pathway for AM2, our net zero production aim. We are now targeting 10% to 15% reduction by 2025 and aiming for 20% to 30% reduction by 2030. We continue to believe that our ambition and aims taken together are consistent with the goals of the Paris Agreement. In summary, our transformation is gaining momentum. Some of the key elements of which are on this slide. We're turning planning into delivery. Turning data on PowerPoints into shovels in the ground, being the good farmer that I am, and that's what performing -- while transforming is all about. It's what people want to see. They want to see delivery, delivery, delivery. We're making strong progress towards delivering our 2025 targets and our 2030 aims and we're leaning in. Great. Thanks, Bernard. Shovels, not PowerPoint. I don't want to live for a while. As you've heard, we see the potential to advance the delivery of our strategy. and create additional value by investing on average up to $2 billion per annum more than previously planned through 2030. Compared to our previous plan, we expect to invest more on resilient hydrocarbons in oil and gas and bioenergy. We also expect to invest more in Convenience and mobility, in Convenience and EV Charging. And we're focusing our capital expenditure in hydrogen and renewables power, planning to reallocate around $10 billion across the decade towards Bioenergy and Convenience and EV Charging. In aggregate, we now expect annual capital investment, including inorganics, to be in the range of $14 billion to $18 billion through 2030. For 2023, reflecting our expectation of a supportive price environment, we plan to invest between $16 billion and $18 billion. And we retain significant flexibility in our investment plans. In a lower price environment, we anticipate managing shorter cycle investment, particularly in hydrocarbons to maintain a resilient cash balance point of around $40 per barrel Brent; $11 RMM; and $3 Henry Hub. To turning to EBITDA, these changes to our capital investment plans underpin an uplift of $5 billion to $6 billion to our 2030 EBITDA aim. As a result, and together with our revised price assumptions, our 2025 EBITDA target increases to $46 billion to $49 billion and our 2030 EBITDA aimed to $51 million to $56 billion. And as Bernard outlined, within this, we now expect our transition growth engines to contribute $10 billion to $12 billion of EBITDA in 2030. Our $46 billion to $49 billion 2025 EBITDA target is underpinned by the strong and highly visible operational momentum we see ahead of us. In our transition growth engines by 2025, we expect an 80% increase in our biofuel volumes, around a 30,000 barrel oil equivalent per day increase in biogas supply, a 25% increase in the number of strategic Convenience sites and around a doubling of EV charge points. In oil and gas, by 2025, we expect an incremental 200,000 barrels per day of high-margin production, an increase of 30% to 40% in production from BPX Energy and more than a 30% increase in LNG supply to around 25 million tonnes per annum from Coral, Venture, Mauritania, Senegal, Tango and the return of Freeport. And this strong operational momentum is supported by our continuing focus on cost efficiency and digital. Having completed the largest reorganization in our history, we've delivered on our target of $3 billion to $4 billion of pretax cash cost savings by 2023 relative to 2019 around a year ahead of schedule. Looking ahead, we're working hard to extend the progress we've made in deploying digital and standardization in the upstream to the broader group. This will take time, but we continue to see a substantial opportunity to drive savings, which absorb inflation and provide the space for us to profitably expand our transition growth engines. As we deliver our business plan, we remain focused on the disciplined delivery of our financial frame. Our first priority remains a resilient dividend accommodated within a balance point of $40 per barrel, Brent; $11, RMM; and $3, Henry Hub now defined on a point-forward basis. We see capacity for an annual increase in the dividend per ordinary share of around 4% per annum at $60 per barrel, subject to the Board's discretion. Second, maintaining a strong investment-grade credit rating. For 2023, we intend to continue to allocate 40% of surplus cash flow to further strengthen the balance sheet and now target further progress within an A grade credit rating. Third and fourth, we plan to invest with discipline in our transition growth engines and in our oil, gas and refining businesses. And finally, share buybacks. We are committed to allocating 60% of 2023 surplus cash flow to buybacks and expect a buyback of $4 billion per annum at around $60 per barrel at the lower end of our capital range and subject to maintaining a strong investment-grade credit rating. Taken together, we believe this business plan and financial frame delivers for shareholders today. It offers first double-digit per share growth. We now expect to deliver an EBITDA per share CAGR of over 12% between 2H '19, 1H '20 and 2025 at $70 per barrel 2021 real. Second, competitive returns. We have increased our ROCE target and now expect to achieve over 18%, both in 2025 and 2030 and at $70 per barrel 2021 real; third, debt reduction through our intention to allocate a proportion of surplus cash flow to strengthening our balance sheet; and fourth, compelling shareholder distributions through our resilient and growing dividend and with leverage to higher prices through our share buyback commitment. Great. Thanks, Murray. As we come to a close at least in the presentation before we go to Q&A, what excites me, maybe the most and gives me the confidence in our ability to deliver on our growth plans is what I think is the world class, a world-class BP team. We're building capabilities and skills. We're leveraging deep experience within and we're attracting new talent from a broad range of sectors. We're becoming more diverse, making tangible progress on both female and minority representation across our organization. Our restructuring and our change is behind us. We only have one focus, that's on delivery. And finally, and people ask me about this, our transformation is inspiring our people and others who want to join us. Pride in working for BP is at an all-time high and staff confidence in our future is at the highest point since we started surveying over a decade ago. So let me wrap up. First, I hope you will agree that our results show that BP is performing while transforming. Second, we have the right strategy. And today, we're leaning further in, helping give society the energy it needs and materially growing EBITDA at the same time. And third, crucially, we are delivering for our shareholders. Executing against our disciplined financial frame, growing our resilient dividend and delivering a material share buyback program. This all comes together, as you can see on this slide, in what we believe is a compelling investor proposition to grow long-term shareholder value. Thanks very much for your patience and for listening and for watching the video. Members of the team will now join me on stage, and we'll be delighted guys come on up, game time. We'll be delighted to take your questions, starting in the room probably and then we'll go to on the line. So I think everybody knows everybody. Emma's here. So we got Anja, Emma, Gordon, Carol and you've met Murray. So let's get going, and we'll start off here in the room, and we'll start with Lydia, why don't we start with Lydia, and then we'll start making our way around. So Lydia, over to you, please. I'm looking for my notepad. It's Lydia Rainforth from Barclays. So 2 questions, if I could. The first one is on the change around the upstream production side. previously, they have been described as low-margin barrels. Can you just talk us through what's happened to that margin now why you want to keep them? And whether that made you feel uncomfortable with [indiscernible] to the AIM goal. And then the third one, and for Anja. Bernard trades having brought clarity to the strategy in the renewables part of the business or local part of the business. Can you talk to me what you found, what you've changed? And then perhaps linked to that, just how you, Carol and Emma, all work together in terms of some of that trading business being quite clear? Yes. Thank you for the question. I think over the last couple of years, there's really 2 things that apartment does gives us huge confidence to keep these barrels. Number one is just the operational improvement. We've improved reliability on our assets. We continue to drive down unit cost. We continue to drive capital productivity in the Wells area. We've deployed new technology. Ocean Bottom Seismic now is being deployed widely across our portfolio, giving a better view of the barrels that remain. And then finally, I would say commerciality, if you look at what we've done, say, in Azul Energy, we brought together 2 very mature sets of assets with our friends in D&I brought them together into a company now called Azul that's doing over 200,000 barrels per day has 3 major projects coming towards it has a huge growth potential actually. So London, Aker BP and London Energy would be another example of where we've added through commerciality, we've added value. So that gives us lots of confidence that staying inside our portfolio, we can continue to add value to these barrels. Thank you, Gordon, and well done on the reliability for last year, even better than when I was in charge of the upstream. But anyway, Anja Isabelle. Anja is fine. Thanks for the question, Lydia. What I found is, first of all, a great foundation to start from. And I'll give you, for example, Slides BP. It's a 1,000 colleague organization by now. in motion to deliver gigawatts at lowest cost possible presence in 19 countries. So a very, very important capability for everything we want to do in hydrogen and also in Emma's business, et cetera, et cetera, because renewables capabilities are absolutely key. Another example is our entry in offshore wind, which I give, let's say, the BP team, the credit for. So I inherited a great pipeline to build on. And so my focus really in the last 12 months was 3 things. I mean being even clearer what we want to do in low carbon, what to do and what not to do. So where do we want to play in hydrogen, how do we want to play in hydrogen. And I think Bernard alluded to it. And one important question was also to clarify the role of renewables in BP's portfolio. And I think we have a very, very clear answer to that. It's all about integration value. It's not about just gigawatts, it is about value. And this is a very, I think, unique proposition. The second thing I focused on was building the delivery muscle. We stood up 2 new operating models, organizations focused on hydrogen and offshore wind. And we are fine-tuning as we speak, but up and running, and we brought external talent in. And the third is really growing the pipeline. And I think you've seen the numbers literally from very, very little to a very material pipeline in hydrogen and a very, very good pipeline in renewables. And of course, development of the projects, maturing the projects and then the steering model behind it because these businesses are distinctively different to oil and gas and that they need a different steering model. So this was what I did in the last 12 months. Brilliant. It's fantastic Anja having you here. And there was a question about how you and Emma and Carol works together. Emma, Carol, anyone if you want to say how you bring it all together? It's Lucas Herrmann, BNP Paribas. A couple as well, if I might. And perhaps the first ties in with 1 of Lydia. So 15% to 20%. it's an obvious allocation question, 15% to 20% return in hydrocarbons, great than 15% biogas, great than 15% in electrification or EV, 10% or so in hydrogen and 6 to 8 unlevered in renewable. so explain to me or just timing to me, the 6 to 8 In renewable and their electrons, there are a commodity, you can buy them in. So why allocate in that direction. That's the first question. And the second is to Murray, and it's just maybe to Carol. And it's how do we think about the LNG optimization trading business in terms of pricing this year? And I asked simply because gas prices globally have clearly come back a long way, but you position a long way forward. So when I think about the profit delta, the price would imply for the year. What can you tell me to afford me comfort that what I see on the screen today, TTF and BP, JKM relative to last year is not something I'd necessarily affect volume aside, Murray, for the Gas and Power or the gas and low emission business. I hope that was clear. Possibly to people who understand the market well, which is Carol. So Carol, I'm going to ask you to lead off on that. Murray can add if you wish us to. But Carol go for it. And Anil will ask you to take the 6% to 8% question, please. Go ahead, Carol. So yes, we have seen, as you said, a reduction in prices since last year. But I think there are also -- when you look at the fundamentals of the market, there's potentially still tightness going forward when you look at growing demand, China coming back in, for example, East unlocking. We did lose a lot of demand through winter, warm winter. That's something that we'll continue to watch going forward. So I think we're looking at the supply-demand balances. We're looking at all of the factors. They're not all necessarily bearish, I'll just say it on that perspective. and we have a portfolio which we've created around optionality so that's pricing centers, it's demand centers, it's volume, it's flexibility. And our job is to monetize that for and I think the team have done a great job of doing that over multiple years over multiple market conditions, but I'm sure Murray can give us the right nomenclature for the performance. You guys have performed tremendously. Just to add any word. Lucas, it's not about high price, low price, it's about volatility, and there's not an awful lot of supply out there right now. So that suggests volatility. So we look to Carol's organization to manage that volatility. And I think there's -- they continue to be well positioned to do that. And I think the A lot of the contracts and supply that we're bringing on in the coming years. Importantly, were deals that were signed many, many years ago, not in the last year in the middle of some of the biggest price spikes in history, but many, many years ago. So also a great place as Carol grows from 19 [indiscernible] to 25 by 2025. So Anja, 6% to 8% returns in renewables and power, why should we be [indiscernible] an attractive business for BP? And I would slightly disagree if I made to your statement, there's an abundance of green electrons around the world. Actually, this is not the case. We invest -- we allocate capital to own renewable assets. if you believe this is a critical control point. So if you think about projects like RA, for example, in Australia, this is largely off-grid renewables. And it's 70% of the total CapEx of the project. So we need a leading edge capability to deliver the green electrons at the lowest cost of energy. This is absolutely crucial for the success of this business. If you think moving to Europe, if you think about how to scale a hydrogen business in Europe, -- it is all about scaling offshore wind because this is the only scalable technology in Europe, which can deliver gigawatts of, let's say, green electricity in service of green hydrogen production. This is why we believe we need to play in offshore wind because there are regions around the world where this is the only scalable technology. And I think this is how we think about it. If there are liquid markets, if there's an abundance of green electrons, and we can buy them in a way cheaply competitively. We will not deploy capital in renewables, but we believe definitely for this decade to come, we have to because it is absolutely crucial. Thank you very much. Just back on the returning average capital employed numbers, the -- so I think 2020, we said up to 2% was delivered over the last 20 years. The last 3 years, we've added 4%. As we look out to that in 2025 and beyond, which is a big number. How much is the trading contribution in that, please? I'd love just to tie that perhaps, Carol, back to Anja say, do you believe that trading electrons, you can trade and add value here? I think coming from your old company and others, utilities tend to say it's not quite possible. So I'd love you to square that circle, please. And then secondly, sorry, you're deepening or higher conviction on EV Convenience, to Emma. Can you help us a little bit more on pricing across fleets, Hertz, Scottish Police Force, Uber London. I mean how much of that is helping it to 15% returns in that business and even some of the trucking that you're doing in Germany. Is there an array of pricing here that's helping? Thank you, Oswald. Let's start off. Murray, 18%, how much includes trading on your trading electrons. Do we make money and Carol may want to add together both of you guys and Emma. So Murray? Yes. I don't think I'll guide on what's trading as a component of the 18%, Os. That would be a little bit tricky for Carol moving forward. But I will say that Carol had a stunning track record over the last 3 years, 4% on average ROCE for the group, so you can calculate the numbers now, I'm sure. And Carol has a growing portfolio ahead of her with our [indiscernible] biogas, with LNG expanding, and I think the profitability of trading will really depend on a few things. First, continuing volatility. Those continuing volatility happen as per Lucas' question. Second, can we continue to manage gross margin competition because it's a competitive space and can we continue to do a good job so far, so good. And I think I'd put my confidence in Carol and her team and then we have growing LNG. So as Lucas says, it's volume, not price, but again, it's volatility. So I think I'm not going to guide on it, but certainly, we have a fabulous capability here in place. and I'm confident Carol and Heron organization will do just fine. I'd kick it off, Yes. So I think So one of the questions previously was around integration, and we do work very closely across each other. We're looking at power value chain seamlessly, fabulously seamlessly we think about routes to market, we think about how we want to lock positions in. We think about whether it's corporate, industrial self-supply. We take trading positions around that. We look at greening of products. And so we won't be giving numbers, but we did have a strong power trading delivery last year, and that is because we've built up this position across assets, corporates merchant and what we call virtual strategies. That's in the U.S. We're building that in the U.K. and Europe, and we're also supporting around the Australian renewable energy hub. Perfect answers always. Murray, I'd like to say that you're bringing these guys up on the stage. I think we should... Yes, great. Thanks for the question. So in our EV business, as you know, we have a very focused strategy. We're focused on fleets, and we're focused on fast charging on the go. And just to give you a sense of the balance of that, we probably expect about 70% today as we look at our business, 70% to come from on the go, fast charging, 30% from fleets. And we've really built capability over the last number of years now more than 500 people really working on deploying into both of those core focus [indiscernible], and it's working. So power energy sales up 2.5x, utilization is up in every market where we operate. And it's clear that for the -- on the fast charging side, customers in the U.K. where you have a choice between fast and slow, customers choose fast 5x more frequently than slow. So we're really seeing a play into this fast charging on the go. We're investing in this business today, of course, and it will turn earnings positive, some chunky earnings coming from that by 2025. So -- we're looking forward to that. fleets, in particular, what I like about fleets is we have a really sizable fleet business today, 170,000 customers around the world. Those customers and corporates have made commitments to decarbonize and the vectors energy vectors they need to decarbonize will be a multitude of energy vectors, all the way from biofuels, which is near-term decarbonization through EV Charging and EV Charging and trucks who would have thought 5 years ago that you'd have a 19-ton truck that can be run on electricity. And we're playing into that market with some specific investments which we've made in Germany, where the truck -- EV trucks are already taking off. So I think fleets for us really offer an opportunity to play into a number of our areas, and we're really looking forward to seeing what this business brings in the next couple of years. Thanks, Emma. Let's go to Irene, and then after that, guys will go to a couple of questions online. So Irene? Irene Himona, Société Générale. My first question on the framework. And congratulations on the numbers, first of all, and you have upgraded EBITDA targets very materially, partly because of the increase to your Brent from -- but of course, you continue to guide on a 4% dividend increase based on $60 for consistency. But how should we think around that 4%? What does it grow to in your new framework of $70, please? And my second question, back to Convenience and mobility. Obviously, we focused on EV Charging. Can you give us some insight on the conventional part of that business. So for example, is Castrol lubricants finally delivering the long-awaited potential that we think it has. Great. Irene, thank you. Murray, we'll kick off with you, and then we'll go to Emma on the non-EV charging part of the business. Yes. For consistency, we stuck with guidance at $60 to guidance points, $4 billion on buybacks at $60 million and the capacity to grow the dividend at 4% per annum at 60%. That's what we've chosen to do. If you'd like to figure out what it looks like at 70%, we've got our rules of thumb, they work pretty well. They have worked pretty well over the past 3 years. So I just use the rules of thumb to guide you towards $70, but I'm not giving specific guidance on different price decks. Too many things moving around to do that. So we'll just stick with our guidance at $60. Yes. Thanks, Irene. As I look at the fuels and Castrol part of the business, so non-EV, non-convenience part of the business for 2022, a number of headwinds there that we've been working against, so particularly ForEx, cost inflation, we saw during 2022. Nonetheless, some really bright spots. So aviation record year. Americas did really well. But nonetheless, some of the volume numbers in 2022 are still 8% behind COVID. So I think plenty of recovery is still to come in the base there, and we've seen some of that recovery in some of the businesses, some of the regions come through. And I'll just point out Convenience, which is inextricably linked actually to our fuels retail business because most of our Convenience today exists on our existing retail network and some stellar performance there despite tricky trading conditions. So 9% gross margin increase over the last 3 years and particularly in the Americas per annum, yes. And particularly in the Americas, if I look at AMPM 12 years of sales growth in that franchise, 2, 20% growth in Food for Now, which is a high-margin category. And even in the U.K., increased sales in Germany, we've been rolling out a partnership called Rave to Go. We see sales there, 1.5x sales on the competitor sites. So I think a lot in the Convenience side, which is inextricably linked to the fuel still some recovery to come actually, which is all to play for as we really recover out of COVID. You mentioned Castrol, I think Castrol has seen particularly in cash flow business, unprecedented headwinds over the last 3 years, base oil has affected them, in particular, additive shortages and ForEx, as I mentioned earlier. But nonetheless, and we're not yet where we need to be and where we want to be in Castrol, but we do have a new CEO in place in Castrol and a clear plan to get after Castrol's recovery. Great. Thank you very much, Emma. Let's go to the line, and we go to Michele Della Vigna at Goldman Sachs, and then we'll go to Paul Cheng at Scotiabank. So Michele? Congratulations on the very strong quarter. Two questions, if I may. The first one on you have 1 of the best growth in the industry in terms of new supply coming on in 2023 and 2024. You took a major hedging position in Q3, which looking back, looks very well timed. I was wondering if you could give us an idea of how much of the extra LNG supply has actually been locked in, in terms of pricing for the next 2 years? And related to that, you had a $7 billion working capital build because of that in Q3. I was wondering how much of that actually unwound already in Q4 and how much is still to be expected for the next 2 years? And then if I can have a second question. We had a major new ESG disclosure coming through in Europe this year, which is the EU Green taxonomy. I was just wondering out of what you call transition growth engines, which accounts for 25% of your CapEx now going to 50% by 2030. How much of that would you say is taxonomy aligned because I think that's going to be a major focus out of ESG investors in Europe this year. Kelly, thank you. Murray, working capital bill/release. Carol, how much have you hedged and sold forward, all of that good stuff. And I'm going to ask Julia to comment on the taxonomy We'll get a microphone in the room. So Murray? Yes. So if you go back to 3Q guidance, what we told you is that we expected $7 billion of working capital release from the LNG book, as cargoes were delivered starting in 3Q '23, heavily weighted into '24. That's what we talked about last quarter. This quarter, we've had a $4 billion release in working capital. Some of that did come from that LNG book, given the size of the decrease. And so we had about $2 billion of that release in the quarter out of our $4 billion release. So as you look out to third quarter '23 through the second quarter of 2024, we'd expect to see around $5 billion of release as those cargoes get delivered. We don't think it's tremendously price-sensitive. But when you have a 50% fall in LNG, a lot happens with the IM and VM that's sitting, and that's why some of that money came back in the fourth quarter. Carol, over to you. Unfortunately, a short answer, I can't give any guidance on how much we're hedging or the forward sales because you don't know I know slightly sensitive. Yes, slightly sensitive. But what I can say is the team has managed the portfolio very well through Q3. We did have below average performance in Q4. That main driver on that was actually Freeport performance risk, but I don't see any reason why we can't continue to deliver from that portfolio based on the optionality that we have within it going forward, and I'll leave it at that. Yes. Thanks. So thank you, [indiscernible]. Let me start by saying that we actually clearly support the efforts in terms of transparency in the economy. We're looking to see what happens in terms of all the multiple taxonomies coming together, CSRB, the EU taxonomy. We will start disclosing along the new taxonomy in 2025 based on 2024 data as required by the CRB. Now if you look into how much of our investment is actually going to be aligned to the taxonomy, we'll be disclosing our investments into transition growth engines until then. And you can assume that towards 2030, a significant majority of that will be aligned to the taxonomy. Two questions, please. What's the assumption -- I think this is for Murray. What's the assumption that behind the high end and the low end of your capital range. I mean, what is the parameter behind that? The second one is that maybe that is for Bernard. So if we're looking outside your transitioning business on the conventional or legacy oil and gas, should Europe be part of your long-term portfolio, given the political environment? Very good, Paul. Thank you. So Murray, the question, I think, was what would guide you to $14 billion or $18 billion. What's the marginal thing to do in there. Great. Thanks, Paul. Nice to hear you earlier in the morning in the U.S. I think 2023 is a good way to think about our guidance. Right now, the hydrocarbon prices are pretty strong. And as we've said, we expect them to continue to be elevated. Our organic CapEx in 2022, if you look at the fourth quarter, started to tick up probably into the low 14s. And if you multiply by 4 our quarterly run rate in -- and of course, we've added the Archaea pipeline, which will increase organic CapEx. We're adding more rigs, which will add CapEx. So we're probably at an organic run rate now of $14 billion to $15 billion in 2023. what we've guided is $16 billion to $18 billion, including inorganics. So given the high price environment, given what we're seeing organically, that gives you a sense of what our organic inorganic split is. And looking forward, we'll be guided by the price range that's out there in the market each year as we think about that 14 to 18 range if prices fall back to the $40 level, we'll obviously be at the lower end of the range as prices remain high, we'll have the flexibility to stay at the upper end of the range. I think that's probably what I'd say, Bernard. Great. Thank you, Murray. And Paul, on Europe, I mean, I won't collapse and make kind of regional statements in general other than to say we're returns driven, our investments have to make the returns that we've laid out. There are some great opportunities in Europe today. We have a strong oil and gas business in the U.K. North Sea. We have a strong oil and gas business in Norway with Archaea BP. We are, I think, the fastest charging, the largest fast charging provider in Germany today. We're excited about that. We have a new partnership with Ignacio Galan and the Iberdrola team that we're very excited about in Spain around hydrogen and the potential for that. So it's a case-by-case basis, Paul. We look at all countries. We look at -- ultimately, we have to be driven. Our investments are driven by our returns criteria. And there are great opportunities in countries around Europe, just like there are great opportunities. elsewhere in the world. So let me leave it at that and come back to the room to Chris Kuplent, please, and then we'll -- there must be some people over here, but excellent. Chris Kuplent from Bank of America. One under the banner of CapEx discipline. Just wondered whether your hurdle rates in upstream have changed alongside your 60 to 70 move on the real assumptions for pricing. And if you could, there's quite a big difference between 1.5 million and 2 million barrels per day in 2030. So I just wonder whether you could maybe go and talk us through the additional projects that would make up either the stemming of decline or the much lower assumed disposals that are behind this new target. And maybe as a bonus question, what makes you so confident that with no reduction in your refining footprint and now a much higher oil and gas footprint upstream, your Scope 1 and 2 targets can remain unchanged. Yes. So we go from that then to -- what are we keeping? You're not well, let you answer your question, $1.5 million to $2 million, and how are you going to deliver the Scope 1 and 2 emissions, which we have not changed, Chris, as you quite widely pointed out. So Gordon? Great question, Chris. Thank you for that. So we have a hopper of opportunities of 18 billion barrels. That's what underpins our plan to 2030. And I have to say -- the subsurface team under the leadership of have done a fantastic job of articulating these 18 billion barrels numerically and quality-wise, much better than I've seen in the past. We've got 18 billion barrels in there as we bring forward the opportunities they have to hit the hurdle rates and as Murray said, no hurdle rates. We've got to create momentum through to 2025. We've got 5 major projects coming on this year, a little bit back-end loaded, but 5 major projects that we have confidence, big projects, projects like Phase 1 in Mauritania, Senegal, projects like Tang Phase I in Indonesia, projects like Argos, Mad Dog 2 in the Gulf of Mexico, they're going to come on and they're going to bring high-quality barrels with them. Through to 2025, we've got 9 at over 9 major projects coming on stream. So again, creating that momentum through to 2025. And then from '25 to '30, we have a rich opportunity set within that 18 billion barrels, so we can make choices that will continue to offset decline, allow us to sell the 200,000 barrels per day that was mentioned earlier is to end up at 2 million barrels per day by 2030. So I'm very confident that the resources in the ground -- we've got the teams in place to execute. We keep driving capital productivity under Andy Kreger in wells. I'll give you just 1 example, a fast piece tieback we're executing right now in the Gulf of Mexico. Thunder Horse expansion between Phase 1 of that expansion in Phase II where half the cost safely, half the cost of a deepwater well. That's just one example of how we're driving productivity. And all these things just give us confidence that the Clear Ridge team doing similar great work, subsurface-wise, drilling wise to develop the giant field west of Shetland more productively, more efficiently. So I'm actually very confident that we've got the resources in the ground. We've got tremendous teams in place to execute and all we need to do now is execute well through the balance of this decade. Great. And you've kept your Scope 1 and 2 target constant despite the higher refining throughput and a higher production. How have you done that? It just makes it harder. That's as simple as that. I think the world, the company, our stakeholders required cover on our give confidence. And I think, look, we've got a track record of delivering 1 million -- roughly 1 million tonnes per annum of sustainable aviation reductions, just through improving the way we operate. We're now starting to fill the hopper with projects that are slightly longer wavelength maybe require a bit of capital. So we've got lots of opportunities here to deliver on that AMI. It's never easy. You got to while you're operating, you've got to look for emission reduction. But I think that AMI is deliverable. I'm confident it's deliverable, and we'll continue to fill the hopper with opportunities through the balance of the decade. And the reality is, it's what society needs. And quite frankly, Chris, it's what our people want to deliver. They don't want to see us going back on A1 and we control it and we're leaning into it. And we'll find -- it's harder, of course, it's gotten harder, but we're going to deliver it. Patricot from UBS. I have a couple of follow-up questions. The first one on the upstream and the change in the production outlook to 2030. Should we expect a major change in terms of allocation between oil and gas and. Obviously, You raised your oil price due to . So should we expect to be skewed towards all projects in the later part of this decade? Or do you still intend to keep that fairly balanced oil gas. I think we'll be fairly balanced oil and gas, Patricot, good question. Fairly balanced oil and gas. And of course, every one of these projects must go through our investment reach our investment hurdles. That will be the primary determinant of how we invest. But as we look forward to the 18 billion barrels, and I can see more than a dozen major project FIDs coming towards us from that hopper and it's pretty balanced oil and gas. Second question is a follow-up on the previous question around the capital allocation and the increase of $1 billion per annum for upstream and on the transition. It sounded like it's all subject to the macro and your ability to generate the cash flow to finance that growth. So you basically have line of sight of enough projects to actually go through [indiscernible], is that fair? Yes, there's definitely not a lack of opportunities to spend CapEx. Let me put it that way. For '23, '24, '25, short-cycle paybacks, Gordon is already getting the rigs. They're already coming into the portfolio. The returns are super high on those. Likewise, on the trend. so I think that's something we'll do. And it's robust through pretty low prices. You see where we're holding our resilient balance point. It's robust through pretty low prices. As you then look at the transition, we're committed to doing these transition investments. If you cycled around the team, [indiscernible] is doing a fabulous job on EV adoption. I wouldn't be surprised if she does better than she's talking about. Convenience is going very well. I think we're very excited in the biofuel space between the refineries and additional facilities we see. As Bernard said, the Archaea transaction is going to be faster, better. I think we'll see lots of opportunities there. So I'd probably count on the higher end of the capital range and that we'll drive towards that. All of this delivers EBITDA, obviously and an awful lot of the EBITDA that's coming from the transition growth engine isn't price sensitive. So we'll have our higher earnings that aren't as sensitive to the low price environment. So I'd count on us being able to manage through this time period with a fairly high activity set. Great. And there is a big wrapper Murray, isnât there, around this whole presentation, which is everything we do here has to meet our returns and our growth target has to meet. And that's the wrapper, the underpinner the foundation of everything that we talk about today. And if the returns aren't there, the capital doesn't get spent. If the returns and growth are there, it will get spent. Christian? Christyan Malek from JPMorgan. So sort of one quite long question, if I may, which is 3 years ago, asked the question, well, if prices were higher, but as you said, would be very focused on CapEx. We wouldn't increase CapEx and you're increasing CapEx on oil through a high oil price deck. And so it sort of begs the question in terms of -- I see how you have to frame a macro view and you've got to take a view. I agree with it in some ways, particularly in the oil piece. But what I'm struggling with is the disaggregation of value created through your macro outlook versus what you're doing bottom up through the businesses and the proof of concept. In terms of the cash flow generated in your renewables vis-a-vis the investment and the return you're making against a price view. And it's not that clear what you're assuming in the Renewables segment as it is obviously in oil because you can just put a Brent forecast down. So how do you help us disaggregate that value creation from what is a macro call to actually creating value through the value chain in renewables, particularly when it's becoming increasingly commoditized is sort of the part A of my question. Part B is in the spirit of changing CapEx relative to your macro view, what's stopping you from flipping it back again if you become more bearish in one of those segments? In other words, you don't think renewables is going to generate the same returns to reduce CapEx. I mean it sort of feels quite dynamic and fluid around CapEx versus the prevailing macro view, which can obviously change, and as you said, be very volatile. So you're making an assumption, I think, that we're growing capital because we increased our price deck. That's not the case. We're growing capital because we want to grow -- you asked for a disaggregation. It's very clear. It's in the deck. We deliver $5 billion to $6 billion of extra EBITDA by 2030 for get price from the investments that. $3 billion to $4 billion in hydrocarbons, $2 billion extra in our transition growth engines. So this is about growth. This is about opportunities that we see to invest both in today's energy security and in the energy transition, all of which we believe are accretive. They drive earnings. It's why one of the reasons we've raised the dividend today is because we are investing and we see more potential to grow. So this isn't about prices go up, CapEx goes up. It's very, very different to that. This is a very, very disciplined focused on growth where we can meet the returns that we laid out. And I think within there, we're very clear Murray about where that extra EBITDA comes from, how much is -- I think we're crystal clear actually in the deck on that. Murray, what have I missed? Where returns settled -- returns driven, Slide 18 tells you our returns and our assumptions. I'm not really sure how I'd get much clearer on that. And this is about performance really. If you go back to 2020, our balance sheet wasn't as strong as it is now. So we've got a much stronger balance sheet. We've improved our position with the ratings agencies. It gives us the capacity to invest more, to drive more returns for shareholders. So we -- it's much more about performance and where -- what the strength of the company is rather than an arbitrary view on price, which you're right, can change every time. Yes. So we'll invest more. We're going to grow the company. We're going to deliver the returns and the shareholders are going to see increased value both through distributions like the announcement today on the dividend, but we can follow up on it. Where do I go next. Here in the back. It's great to hear that. It's Amy Wong here from Crédit Suisse. Want to take advantage of having Anja on the panel to ask a question on biogas. Clearly, you guys are making a pretty big statement with -- we have the Archaea Energy acquisition. But also I just want to hear about -- how do you scale business because I think what I really struggled in some of the investors sous understand how biogas business, where you're going from landfill to landfill is a scalable business and can deliver the type of returns. And I think it was also mentioned on the panel that you're going to do Archaea better and faster. So what's driving some of those comments? Amy, thank you. It's actually Carol's business, so we should give it to Carol. And we had Nick Stork here and his team, I think last go to founder. And we are particularly excited about this business. Go for it. No. We are very excited about the business, and we do see great opportunities. So I think when you look at it, I mean, at the moment, of course, we're looking at integration, BPK platform coming together. But as Bernard mentioned previously, there's a significant -- there's more than 80 projects in that pipeline. We've got the ability to do a modular scaling across each of these landfills go in there, develop the gas and bring that out and then look at different transportation routes to market. So we can increase and accelerate production. We can increase recoveries, and we can also look at accessing newer revenue streams as well. I mean in the future, we'll have hydrogen as opportunity. But right now, we can do methanol, we can do CCS, EV Charging for Emma's business. We've got utilities interested in renewable natural gas because it's lower CI. So it's transportation, it's utilities. We could take it into our refineries. There are so many opportunities around it, which creates the optionality that we like in the portfolio, it gives us an opportunity to build the best markets for that to gain premiums and also to trade around those positions. So it is certainly scalable, and we see strong returns, and we see the opportunity to invest more. And yes, hugely excited to be working with the team. And if I could back to Christian's point, Christian is a good example. We're putting more money into our Archaea than Archaea would have on their own. They could have probably done 20 sites a year of that 80. We'll do more quickly because we have the balance sheet to be able to lean into that investment. What's the stat we'll get 30% of that CapEx back if we get them online by 2025. So these are decisions that with the balance sheet, we can lean. It got nothing to do with the price assumption on oil. This is an opportunity driven. We're going to speed up that pipeline and get those 80 sites online in the next couple of years. And the EBITDA from that's going to be material without questions. It's Biraj from RBC. Two questions, please. First one, in the upstream. Could you just clarify whether or what role, if any, exploration success has in your plans to 2025 and 2030. And so related to that, on the inorganic side, most of the inorganic activity acquisitions wise has been on low carbon last couple of years. And I don't want to make Gordon's Life even harder, but are you open to inorganic bolt-ons in the upstream? And how you're thinking about that within the constraints of the framework? And then second question is going back to LNG. So last quarter, Murray, you highlighted the big working capital outflow because of the margining. If I'm thinking about hedging through summer, the 2023 price was actually way above the price cap, which was then implemented. So how does that price cap impact 2023, if at all, in the LNG business? Fantastic. Okay. Thank you, Biraj. Carol, I'll ask you to lead off on price caps for Murray, as you guys debated. Carol, go for it on price caps and hedging. And then Gordon is exploration success built into your plan? Do you need it? And are you going to come to Murray and I with a bunch of money to go and buy oil and gas assets when you've got 18 billion barrels of your own [indiscernible]. Go ahead, Carol. So talking about the European market correction mechanism. So we're working through that. I mean there are a number of nuances around that. In terms of it has to be over a certain number of days, and then there also has to be a certain delta in terms of when that actual cap gets triggered. I think the whole market is working through that at the moment. Do we think in any way that it impacts our ability to manage our portfolio? No. We do have other opportunities. We've got opportunities directly, bilaterals. We've also got opportunities in terms of different structures that we can use. Our role is to make sure that we've got the optionality. We're being proactive around managing that risk, and with Murray's support and treasury support. That is certainly what we did last year in terms of getting ahead of some of these changes in the market. Yes. On exploration, the 2030 outcome is influenced by exploration success by a very small way. What do I mean by that? We have exploration success built into the 18 billion barrels, but on a risk basis, we take the exploration risk, and the reason we've done that is we have some pretty rich, what we call ILX, infrastructure-led exploration opportunities, particularly in the Gulf of Mexico, in the North Sea and in Egypt, which if they come in will become part of the fast tieback opportunity set, but to emphasize and to answer the question, they're all risk within the 18 billion barrels. So that's a very small impact on the outcome in 2030. Not relying on it. It's a simple answer on that. And then am I going to come and ask for money to buy inorganic. The answer is a qualified yes. where it's a natural -- where it's a natural fit in the portfolio. Are we going to go buy something way outside our current portfolio, we're outside our heartlands that we have in our company. No, that doesn't make any sense. Other companies can go and do that. Where there's a natural bolt on and we could add more value having it in our portfolio than we think anyone else could and it meets the criteria of contributing to low carbon and low cost and security of supply, then of course, we would consider that. Very good. I mean I think we used to call it smart M&A or commercial deals. Aker BP instead of exiting Norway, we created Aker BP. Aker BP then went and bought Lundin Aker BP operated by other production from Johan Sverdrup alone. It's 250,000 barrels a day. It's a pretty extraordinary company now that was created. Instead, we could have exited Angola, maybe, but we didn't. We wanted to stay. We wanted to grow. We've created Azul Energy. So think about it as I think you may see us doing some smart M&A, commercial deals, partnerships, things that make sense in that space. We'll go ahead, go for it. I think we said while we're going. So we'll go 15 more minutes, and then we'll let you guys have a break, and we'll have time outside. Go ahead. Peter Low from Redburn. Yes, the first question, you've announced an increase in spending today across the oil and gas and the renewable and low carbon piece. I think it's probably fair to say you're seeing inflationary cost pressures in both. How are you managing that? And kind of what inflation assumptions are embedded within the CapEx budget? And then the second question was just on kind of the 2030 renewable power targets. So the 50 gigawatts and the 10 gigawatts. Can you just explain the difference between those 2? Is a lot of it going to be under construction? Or will you be farming it down? Some color on that would be helpful. Inflation is -- continues to be pretty low for us. You'll remember, back in 2022, we had about 10% inflation inside the Lower 48 Gordon. Since then, for 2023, we've gone out and let longer-term contracts, and we've seen deflation as opposed to inflation. So it's not really featuring as a material issue across the upstream I think in low carbon, there's really no change from previous guidance around 5% inflation is what we saw in the offshore wind platform. There's more inside solar but solar self-funding inside BP -- inside Lighters BP, so that doesn't impact the overall balance sheet. So despite the extraordinary environment we've been through the past couple of years, these guys have done a tremendous job working with supply chain to mitigate those supply chain effects. And I wouldn't expect them to not continue to do that in the future. 15, 10, we said 15 gigawatts to FID. And as I said, we'll be very selective in terms of where we allocate CapEx because it has to ultimately make sense, create integration value and as such a superior return and derisk because you don't have access to green electrons everywhere around the planet. So 50 to FID, 10 will be in operations, hold it another 10 in construction. And then the rest is farm downs. A lot of the 50 will come from Lightsource BP, which is a develop and sell model very, very attractive, very stable. But we will also farm down on, let's say, for example, offshore wind assets, et cetera, because ultimately, what we want is access to the green electron and the high-grading opportunity, and we don't need to necessarily control 100% of the asset. Excellent. Thank you, Anja. [indiscernible] Martin, sorry. These photographs guys, you need to update your photographs because Os is the only person who hasn't aged All right. Wonderful. Well, so slightly conceptual, but I was wondering the $8 billion in oil and gas in sort of today's environment. It's not entirely sort of obvious. And so a lot of technical questions have already been asked about it. But I was wondering how the internal sort of decision-making process came about to sort of got you there. what the milestones or the sign post along the way were where you say you have really like we need to do this? Was this just simply about oil and gas prices or European energy crisis or whatever it might be. The second thing I wanted to ask you is about the assets that you now intend to retain a little bit longer. And I'm sure you're not going to spell those out for us. But I was wondering if you could perhaps talk about whether they have a sort of shared characteristic as in the assets that you're now likely to retain longer? Is it oil? Is it gas? Is it offshore? Is it onshore, East Hemisphere, Western Hemisphere, where there's some common denominator that we can sort of work with. And then finally, if I can throw in a third one, given the way things going, I mean could you stay in the building? Great. I'm fascinated how you connect that to the investment thesis. But it is a nice building. I like it. We can follow up on that, Martin. But Great. Gordon will ask you to say about the assets you're keeping longer. I mean in terms of the production thing, it's really an output of the work that we've been doing. And I would say it's driven by 2 things. And in fact, the whole strategy leaning in today is driven by 2 things, Martin. First is we've been at this for 3 years. We have done a lot. The organization has done a lot. I think it's fair to say that we can all say there's a real track record of delivery. And that has brought with it our increased confidence in the business. And in doing that, the business has improved. I'm delighted that we've had the best operating reliability on record in BP and the records go back 15 or 20 years. I'm delighted that we have the lowest production cost since 2006. So our ability to add value to the assets that we have, have improved -- has improved over the last 3 years. That's a very important part. And then the external macro part isn't about prices. It's about is what is needed. We must solve the energy trilemma. Yes, we need lower carbon energy, but we also need secure energy, and we need affordable energy and that's what governments and society around the world are asking. And they're asking it publicly. They're asking it in the United States, invest in today's energy system. They're very every country in Europe, but many countries in Europe going around the world searching for energy supplies. So we're being asked by governments and society. We have improved our business. We have more confidence. And we think in doing this, we can help solve the energy trilemma for society, which feels a worthwhile thing to do, and we feel we can create shareholder value. And that's what we're trying to do. That's what we have to do. That's our job. So that's a little bit of the backdrop. Gordon? Yes, in terms of the assets that we now plan to keep, I'd say there's 3 characteristics. The first one is an improved view of the commerciality around these assets. And I gave the example of Azul and Aker BP, London Energy and there are others. So the commercial opportunity around owning these assets, we've got an enhanced view of. The operating performance, and Bernard just mentioned it, that we have seen an improvement, and we can see more improvement going forward in these assets. And that all leads, of course, to the third characteristic, which is returns. It's all returns driven. Our returns criteria and it fits with our -- how we look at returns going forward. And we are going to move from at some stage, but it would be an a year or 2. So this year lady here, please? It's Kim from HSBC. On the incremental dollars going into hydrocarbons, I suppose you mentioned BPX and the U.S. Gulf of Mexico, but you did mention LNG. And when it comes to the energy security concerns that Bernard alluded to, you would have thought LNG would be front and center of those. So I just wondered if you had any plans to invest incremental CapEx into LNG or maybe use a more capital-light strategy, such as, for example, contracting third-party LNG from other companies. My second question is on the impact of the U.S. inflation Reduction Act. I wondered if you could offer any thoughts on what that does to the economics of your existing low-carbon projects such as hydrogen and CCS and bioenergy and whether as a result of the RA, it might attract more of your own investment dollars going forward into the U.S. Great, Kim. Thank you very much. I'll ask Anja to take on the impact on the IRA. Carol can add anything on biogas in the area she wishes. And Carol LNG, I mean, just the growth that we have in LNG over the next 3 years, maybe just spell that out a little bit and how we think about it. Yes. No, absolutely. So 90 million tonnes per annum in 2022, grow to 25 in 2025; and 30 in 2030. It's a mix of merchant and equity, but we will see the balance going to more merchants in the future. We have a contracting strategy we have done for a number of years. And as Bernard mentioned before, we've been able to time those purchases well in terms of actually avoiding buying in the peaks and selling in the troughs. So we've got a good process around that, and we'll continue to look for opportunities as they go forward. And then, of course, we've got on the upstream gas side. We work very closely with Anja and the team there and with Gordon in terms of selling and trading the equity from BP's positions. On the equity side, I suppose we have some choices ahead of us. We've got some choices in Australia. We've got choices and West Africa, we've got choices in the Middle East to continue to think about expanding equity investment in LNG as well, and those are decisions that we'll be making over time. Game changer very, very clearly that underpins really a lot of the projects we have been working on not only in my space but equally so in MS space. I think -- and as a consequence of IAA, we clearly have prioritized projects in the U.S. versus other regions around the world. I think it's fair to say that Europe is catching up and some very good announcement or promising announcement last week, but it is -- the beauty of the RIA is the simplicity. And I think this is where I think Europe, let's say, needs to catch up a little bit with kind of you have to -- kind of bit your projects into is, et cetera, et cetera. So very clearly, a strong focus on the U.S. as a consequence of -- and then strong focus, as Bernard explained on our refinery project because these are natural things for the hydrogen. So I think we feel comfortable about the delivery. Good. Great. Anja, , thank you. We'll take 1 more question in the room. I'm just going to take Jason Kenney from Santander. Jason, I think your second question has been addressed. Carol. Good job on delivery by BP in 2022. Yes, we haven't had our performance appraisal later today. If trading has added 4% to race over the last 3 years, what should we expect in the next, you can thank Murray. What should we expect in the next 3 years? I'm assuming He is assuming through cycle, but how much is excessive volatility and how much is average conditions? So I know with my learned colleague on the left here, he would say no guidance. So what I can say is that we do have -- strongly believe that we do have a differentiated trading platform. Global scale, experience, multiple markets, multiple commodities, multiple customers. We have benefited from the inherit increase in volatility over the past few years. But we've also seen growth in that portfolio. We also see further growth going forward, whether that's across biogas, biofuels or LNG or even then into the newer commodities, hydrogen and their derivatives. I believe we've got strong capability, risk management, trading, optimization analytics. We would like to say world-class. And I think subject to volatility and retaining our competitive advantage, as Murray said, we would like to continue to deliver for BP going forward. Sounds good. Good job. Great. Last question in the room who wants to take the last question. We don't have any more questions. Lydia, go on, and then we'll let you and then I need to wrap. One last one for me. Just given the amount of cash flow and EBITDA that you now have, where do you want net 0 debt to actually go to, Murray, just in terms of to help us think about long term? Because I mean, if I look at the 2025 numbers, you're essentially trading on 2x the EBITDA. So assuming you've got no [indiscernible] that point. So where do you want to? Yes. I think -- look, we give this guidance year by year is what we give you. We've firmed up the guidance a little bit this time instead of just strong investment-grade credit rating. We've said further progress in the A range. So we'll be working with the rating agencies to try to achieve that. We think with the growth we're seeing that we should be able to progress through the A range with that continued debt reduction, but it's a little bit about how our interaction with the ratings agencies go. So fingers crossed, but we provide this guidance 1 year at a time. We don't look beyond that, the macro environment is just too volatile to do anything else, leave. So 40% of surplus to debt reduction and continued focus on growing EBITDA so that we can get that cash flow from operations over expanded debt down. Great. Thank you, and thanks for listening. I hope. I hope you've got a bit of a sense of the business, the strategy and I hope, importantly, the team sort of I think we're in our stride 3 years in now, and I hope you can see the confidence that we have in what we're trying to do. We have no more time for questions. For those of you in the room, thank you for coming here. For those of you on the phone, thank you for joining us. It is an important day for us as we transform ourselves. And I hope you've heard 3 clear points they're short. Don't worry. First, we're delivering -- BP is delivering. We are performing while transforming. Second, we're leaning further into the strategy, and we're doing that with increasing confidence. And third, crucially, we remain focused on delivering for our owners, our shareholders. And I and the team look forward to seeing many of you this week when we're out on the road, we're headed to the U.K. or we're in the U.K., we're headed to Europe. We're headed to the United States as well. And for those of you who made the journey here in person, we've got some refreshments outside, and the team will hang around to spend time and chat with you if you'd like.
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Good morning everyone, and welcome to our 2022 Full Year Results Presentation. I am Jack Bowles, Chief Executive of BAT. With me this morning is Tadeu Marroco, our Group Finance and Transformation Director. I am proud to share with you today that we have reached an exciting inflection point in our transformation. Over the last few years, New Categories have rapidly become a significant part of our business and are now a strong contributor to our financial performance. As a result, last week we announced our new regional structure and management team realignment to drive us through the next phase of our transformation journey. Our presentation today will take on a new format. First, I will give some highlights of the progress. Tadeu will take you through the details of our results, highlighting how in 2022, we continued transforming the business, delivered strong financial results, and successfully navigated a challenging macro-economic environment. Then I will talk about how we are taking BATâs strategy to the next level, and why we are confident in bringing forward our New Category profitability target by one year to 2024, as our transformation accelerates. As usual, once Tadeu and I have taken you through the presentation, there will be an opportunity to ask questions. Before we start, I would like to take this opportunity to give you an update on the progress of the transfer of our businesses in Russia and Belarus: As we have already shared, we are working as quickly as possible to transfer the businesses in compliance with international and local laws. We are now in advanced discussions with a joint management distributor consortium with a view to completing the transfer in 2023. Our priority remains supporting our employees in the affected areas and safeguarding their employment. Upon completion, BAT will no longer have a presence in Russia and Belarus. With that, I take it that you have all seen the disclaimer on slide two and Slide three. I am delighted to share with you today our progress and delivery against the three priorities we set out in 2019. We are, delivering a Step Change in New Categories, enabling us to bring forward our profitability target, driving value from our combustibles business, and at the same time, significantly simplifying BAT, our structure, processes and ways of working to drive greater efficiency. Since 2018, we have grown our Non-combustible product consumer base by 30% on a CAGR basis, reaching 22.5 million in 2022 with again more than 4 million added in the last 12 months. And we remain confident on our target of 50 million consumers of non-combustible products by 2030. Over the last four years we have grown New Category revenue by a CAGR of 33% and we are confident in achieving our £5 billion revenue target by 2025, regardless of the transfer of our businesses in Russia and Belarus. Non-Combustible revenue as a percentage of Group revenue has more than doubled from 7% in 2018 to 15% today and grew by over 2 percentage points in 2022. So in just a few short years, with Vuse and glo, we have built two, one billion pound global brands. This is an enviable performance relative to any global CPG brand. In 2022, Vuse further built on its market leadership position in vapour and delivered a 3rd consecutive year of over 40% revenue growth. glo continues to outpace global THP category growth, delivering in excess of 25% revenue growth. In Modern Oral, Velo delivered another year of over 40% constant currency revenue growth and maintained its leadership position in Europe. ESG, is at the centre of our strategy. All this is supported by a clear environmental focus, underpinned by science for each of our New Category brands and is actively contributing to our Group sustainability targets. We continue to develop and publish a substantial body of scientific evidence. And we are investing in the R&D of products that have a lower environmental impact and improved circularity. This means we are seeking to design products that are easier to dismantle at end-of-life. Improve ways to enhance reusability and recyclability, and convert to more sustainable packaging. More broadly, as we reduce the health impact of our business, we must also drive progress across all other material ESG areas. And in 2022, we appointed Mike Nightingale as our first Chief Sustainability Officer, implemented a new Double Materiality-led approach to inform on Sustainability Agenda and continued to embed sustainability across BAT. While we recognize we have a lot more to do, we are making very good progress. In 2022, we achieved our renewable energy use targets three years early, which is why we have increased our target to 50% by 2023 -- by 2030, sorry. In addition, we are on track to reach our gender representation target across our wider workforce with women in management roles at 41%, and we are delighted to be included in the 2023 Bloomberg Gender Equality Index. Alongside this, our continued efforts have been recognized with the CDP "A" rating in climate change and inclusion in the Dow Jones Sustainability Index for the 21st consecutive year. Central to our purpose is reducing the health impact of our business. In our established markets we continue to transform at speed, with non-combustible already representing over 30% of our revenue in a total of 11 markets, where we have been most active with our multi-category strategy and we expect more markets to exceed this 30% level in 2023 as we take our transformation to the next level. I am especially proud that since 2020, we have improved New Category contribution by nearly £700 million, while also investing over £4.5 billion. Our New Category model is now meaningfully contributing to Group results, and our progress to-date makes us confident that we will achieve Group profitability in 2024, one year early. Our transformation continues to be fueled by combustible value growth. Over the last four years we have delivered robust revenue, profit, and value share growth, while significantly reducing complexity to drive further efficiencies. We have also delivered a total of £1.9 billion of annualized cost savings over the last three years through Quantum. Nearly doubled our initial £1 billion target. Project Quantum has enabled new ways of working that are now fully embedded within BAT. In addition, our strategy has enabled us to materially increase our free cash flow generation with four consecutive years of at least 100% operating cash conversion. As a result, we have been able to return a total of £19.2 billion to shareholders through dividends alone. Over the last four years, which is around 30% of our current market capitalization. We know that innovation and transformation is fed by a broad diversity of views and experiences. Over the last four years, we increasingly attracted new talent to BAT with over 3000 new capabilities hires focused on areas of, Science, Innovation, ESG, Digital, and Data analytics. While at the same time we have accelerated our diversity agenda, with 47% of our new hires being female. We have also improved our new hire turnover to a level well below market norms. I am proud that our achievements are being recognized externally including most recently being certified a âGlobal Top Employerâ for the 6th consecutive year. So we have come a long way on our A Better Tomorrow journey and I am proud of what we have achieved. Our strong momentum has continued in 2022. Thank you Jack. I am delighted to share more details on how we have delivered on our guidance in 2022. I am proud to say, as Jack has highlighted, that we are accelerating the Transformation of our business and delivering robust financial results while successfully navigating an increasingly challenging macro environment as we moved through the year. Our reported results were impacted by a number of mostly non-cash one-off items, including, a full-year non-cash impairment of our businesses in Russia and Belarus. A provision recognized in respect of the DOJ and OFAC investigations. And restructuring charges driven by Project Quantum. These were partially offset by VAT credits in Brazil relating to prior periods. To better understand the key drivers of our performance, we will now focus on constant currency adjusted results, unless otherwise stated. In 2022, we delivered revenue growth of 2.3% driven by New Category growth of 37%, and a strong combustibles price mix of nearly 5%. Profit from operations was up 4.3%, driven by a reduction in New Category losses of nearly £600 million and continued Quantum savings. Altogether, we achieved a 150 basis points increase in our operating margin at current rates. This drove adjusted diluted EPS up 5.8%, or 12.9% on a current currency basis. Turning to New Categories, we delivered strong revenue growth with all three categories growing in excess of 25%, driven by share growth, innovation and Geo expansion. This demonstrates the importance of a global multi-category strategy with strong brands and great products, in the right markets. I will now share more details on our key category drivers. Full market shares across our key markets are available in the appendix. In Vapour, we extended our value share leadership position with Vuse achieving 35.9% in the key vapour markets up 2.5 percentage points. In the U.S., Vuse strengthened its number one position reaching 40.9% value share, up 8.4 percentage points. We expect further upside in the U.S. going forward driven by existing vapour consumers switching to products that receive marketing authorization from FDA together with increased enforcement. In addition, given the excise advantage of vapour over combustibles, we see a strong runway of growth as consumers can benefit from significant savings. In Europe, our closed system value share, excluding disposables, grew strongly, and is now over 64%. In Canada, we extended our value share leadership position growing 8.9 percentage points to around 90%. We launched the Group's first connected Vapour device, Vuse ePod2 plus driving increased pod consumption. Through our growing scale, we are making continued progress on driving profitability in vapour reaching a positive contribution in three of the five key markets in 2022. Growth in the global vapour category has accelerated driven by modern disposables which have expanded the category. We launched our modern disposable, Vuse Go, with a premium price positioning and volumes which are accretive to our ePod platform. We have rapidly rolled out Vuse Go and are already the value share number two in the UK, France, South Africa and Germany. In addition, we are starting to see some accelerating poly-usage with modern disposables coming from THP, which creates a significant opportunity for us. We are approaching modern disposables in a responsible way supported by our well embedded marketing practices including age verification processes for retail and take back schemes. In THP, gloâs sequential revenue growth accelerated in the second half. Consumable volume growth outpaced the industry 1.7 times. The continued momentum of glo Hyper drove category volume share in key THP markets up 1.4 percentage points to reach 19.4%. All key European markets continue to grow strongly. In Japan, gloâs volume share of the total nicotine market reached 7.4%, up 60 basis points, with a record glo share in December. glo Hyper X2 is delivering an enhanced product experience with positive early results in Japan. We broadened our price laddering with new Lucky Strike consumables, complementing our existing ranges. We have also expanded our multi-category offering with a Velo city pilot, delivering attractive margins. This further demonstrates the strength of our consumer-centric approach with more to come in 2023. Turning to Modern Oral where revenue grew strongly, at 46%. In Europe, we remain the market leader in 15 markets, with aggregate European volume share broadly stable at 69%. In the U.S., the market remains small at around 2.5% of total nicotine value and highly competitive. Revenue was up, as we pivoted to drive value, reducing promotional support for the brand, and prioritizing investment behind Vuse. In order to be well-positioned for the future, we have submitted a PMTA for a new Velo product. We are also excited about the significant opportunity for Modern Oral in emerging markets. We are particularly proud of Veloâs performance in Pakistan, now our third largest Modern Oral market by volume. Enabled by powerful, digital activations, and innovations with local flavors, Velo has reached a monthly volume of over 40 million pouches. In 2022, we rapidly scaled up our business and moved to localized production in market, driving the lowest COGS across the Velo brand. As a result, Veloâs gross margins improved significantly during the year. Together with our other pilots this progress gives us confidence in our ability to unlock future emerging market opportunities. Alongside significant investments in our New Category transformation, we continue to explore opportunities Beyond Nicotine, notably in the fast emerging wellbeing and stimulation space. BTV has completed 22 investments since launch. In 2022, this included five new investments and two exits. We are building world-class R&D together with our partners at Organigram and we continue to explore opportunities to expand our cannabis ecosystem. This included a non-controlling minority stake in Sanity Group and an investment in Charlotteâs Web in 2022 as we continue to monitor changes in the regulatory environment. Our approach provides us with evolving capabilities for the future across both New Categories and Beyond Nicotine. Turning now to Combustibles, our volume declined by 5.2%, mainly due to the lower U.S. industry volume, exacerbated by the partial unwind off inventory in 2022 and the sale of our Iranian business in 2021. Cigarette pricing remained strong, up 10.4%, offset mainly by geographic mix. Together, this resulted in a 0.6% decrease in revenue. Group value share was flat with the continued strong performance in the U.S. and APME offset by lower value share in Europe and AmSSA. Volume share was down 20 basis points. Whilst our U.S. business was impacted mainly by macro-economic headwinds, our targeted portfolio of brands across price tiers enabled the delivery of a robust financial performance across APME, AmSSA and Europe. Turning now to the regions, in Europe, New Category revenue was up 43%, driven total revenue up 7%. Europe is a true multi-category region. Non-combustible revenue already accounts for around 20% of total revenue and continues to grow fast. Combustible revenue grew 1.2% driven by strong pricing partly impacted by the reallocation of the North Africa area to APME. Profit was up over 7% with improving New Category contribution and further cost savings as a result of Quantum. In APME, New Category revenue was up 10%, with total revenue up 7.7%. Combustible revenue grew nearly eight per cent with resilient volume benefitting from emerging market recovery post COVID. Profit was up 3%, with a robust combustibles performance partly offset by negative geo mix and the disposal of the Iranian business. In AmSSA, New Category revenue was up 48% and was a strong contributor to the revenue growth of around 5%. Combustible revenue was up nearly 4%, driven by strong pricing and resilient volume. Profit was up over 4%. Turning to the U.S., our total Nicotine value share was up 40 basis point to over 37% driven by Vuse. New Category revenue was up 52%. Vuse continued to extend value share leadership and is the fastest growing brand in total nicotine in the US. Combustible industry volume was down around 10% mainly reflecting: post COVID normalization of consumption patterns, and macro-economic deterioration through the year. Our volume was down 15.5% additionally reflecting the partial unwind of our prior year inventory movements, volume share loss, and lower retail inventory levels across the industry at year end. Over the last three years, industry volume has declined in line with historical levels at around 5% CAGR. The premium industry segment remained resilient with volume share declining by only 50 basis points. As a result of the increased impact of macro-economic headwinds the low-end segment grew volume share by 90 basis points. In this challenging environment, our value share grew 10 basis points despite volume share declining by 30 basis points. Value share growth was driven by the continued strength of Natural American Spirit and Newport which together drove premium value share up 20 basis points. In addition, Lucky Strike was the fastest growing combustible brand in both volume and value share terms in the US, reaching an exit share of nearly 3%. This more than offset losses in Pall Mall at a total industry level. In 2022, our U.S. pricing remained strong, up 10%. At the consumer retail level, our average pricing in the year was up 5.6% lower than key industry peers and significantly below elevated consumer price inflation as we activated targeted commercial plans to support our consumers. Despite the more challenging macro-economic backdrop, our profit was up 3.5%, with operating margin up 330 basis points to 53.7%. This was driven by continued improvement in New Category contribution from both Vuse and Velo, alongside cost savings initiatives. Taking a step back to look at the broader U.S. context. U.S. consumers faced strong macro-economic headwinds in 2022 with record inflation, seven interest rate hikes, and high gas prices resulting in real disposable income falling by nearly 7%. Looking into 2023, we are starting to see some very early signs of recovery with gas prices stabilizing, levels of unemployment remaining low, and the gap between wage growth and inflation narrowing. Most notably, elasticities remain stable at 0.4 comparable to pre-COVID levels and affordability remains high. Through Revenue Growth Management, we have targeted investment in specific brands, channels, and states with price laddering across all brands. We expect the US economy to stabilize as we progress through the year and together with the remaining unwind of our 2021 inventory movements, we expect our performance to be second half weighted. With our multi-category strategy and strong portfolio of brands, we are well positioned to benefit from macro-economic recovery. Group operating margin expanded strongly, up 150 basis points on an adjusted current rate basis. We successfully absorbed increasing inflationary pressures and a 1.5% transactional FX headwind on profit. This was supported by our strong progress towards New Category and Quantum savings. Our improved New Category contribution was largely driven by increasing scale leading to operating leverage and further automation reducing cost of goods. With all three New Categories and all regions contributing. In addition, our growing brand equity has enabled us to increase pricing on both devices and consumables supported by insights from our digital tools. We have reached an inflection point in our New Category model. Having invested significantly in the base, we are now in a growth period where we can invest more and deliver improved profitability. In 2023, we will capitalize on our momentum, and further invest in our transformation to accelerate our innovation cadence and drive faster geographic expansion. With that we expect to continue to improve New Category contribution in 2023 and are confident in delivering our target of profitability, ahead of plan in 2024. Alongside £1.9 billion savings delivered through Quantum, we continued to drive further simplification. Moving forward, we will deliver efficiencies through our established continuous improvement mindset to offset inflationary pressures and fuel our transformation. In addition, we are committed to reporting no further significant P&L impacts from adjusting items related to restructuring programs in the medium term. Turning now to EPS, we delivered constant currency adjusted diluted EPS growth of 5.8%. This reflects, our robust operating performance, the benefit of the continued recovery in ITC post-COVID, and the share buyback which more than offset increased net finance costs and tax. The underlying tax rate was 24.8% and with existing tax rates, we expect a similar rate of around 25% in 2023. Operating cash conversion was strong at 100% reflecting our focus on cash delivery. As in 2022, we expect gross CapEx for 2023 to be below adjusted depreciation and amortization at around £600 million CapEx. We continued to reduce leverage within the 2 to 3 times corridor, and have a manageable maturity profile, with 97% of our net debt fixed average maturity of around 10 years, and close currency matching. BAT is sheltered from unprecedented interest rate rises but is not immune. While the majority of our net debt is fixed we have an approximately 18% exposure to fluctuating interest rates when you consider cash holdings and refinancingâs. Our average cost of debt is 4% which is below the current market rates, so we expect to see the impact of higher rates in our net finance costs in 2023 and moving forward. As a result, we expect 2023 full year net finance costs to be around £1.9 billion subject to both FX and interest rate volatility. The Board actively reviews our capital allocation priorities taking into account macro-economic factors and potential regulatory and litigation outcomes. Our framework includes, continuing to grow the dividend with an average pay-out ratio of 65% over the long term, maintaining leverage within our target corridor of 2 to 3 times adjusted net debt / adjusted EBITDA, potential bolt-on M&A opportunities, and share buybacks. At this time, the Board has decided to take a pragmatic approach. Given our incremental investment plans in 2023 to further accelerate our transformation and in light of the uncertain macro environment, higher interest rates, outstanding litigation, and regulatory matters, the Board has decided to prioritize strengthening the balance sheet. This will provide greater business resilience while continuing to support future financial agility as we aim to reduce leverage more quickly towards the middle of our target two to three times corridor. We strongly believe that share buybacks have an important role to play within our capital allocation framework and we will continue to keep it under review as we progress through the year. Finally, in line with our long-standing commitment to dividend growth, we are pleased to announce a dividend of 230.9p for 2022 with growth in line with our constant currency earnings. Looking forward, 2023 results are expected to be driven by another year of strong New Category growth and a further reduction in losses, alongside a resilient combustibles performance, supported by continued efficiency savings and strong cash generation. We expect to deliver organic revenue growth of 3% to 5%, excluding Russia and Belarus, adjusted mid-single figure EPS growth, second half weighted, reflecting, incremental New Category investment, higher net finance costs, transactional FX headwind of around 2%, and a second half weighted U.S. performance. When we think about the corridor for adjusted mid-single figure this year, it is a little wider than usual at 3.5% to 6.5%. This is because it is impacted by both the volatile macroeconomic environment at a timing of the transfer of our businesses in Russia and Belarus. Extrapolating current spot rates, we expect currency translation to be broadly neutral on full year adjusted diluted EPS growth. And finally, as already mentioned we expect to continue to progress towards the middle of our 2 to 3 times leverage corridor. In summary, we have a clear momentum behind our New Category transformation, which is now a significant contributor to the Group financial delivery. The current challenges we face in the U.S. are mostly macroeconomic related and we expect stabilization from the second half of 2023. In 2022, our results have enabled us to return a total of £6.9 billion in cash to shareholders. In 2023 we are taking a pragmatic approach and prioritizing strengthening the balance sheet. Share buybacks will be kept under review as we progress throughout the year. Thank you Tadeu. At the start of todayâs presentation, I highlighted the significant progress BAT has made since the launch of our purpose-led A Better Tomorrow strategy in 2020, building a New Categoriesâ consumer base, growing powerful global brands, and developing capabilities for the future. The speed of our transformation over the last three years means that now is the time to take BATâs strategy to the next level. In 2022 we have shown that our multi-category model is working, meaning that we can both continue to invest, and deliver improved profitability. In this final section, I will share how we are getting Fit for Growth with our new operating model. This means that alongside investing more, we will also be investing smarter. Enabling us to accelerate New Category profitability and reach our target one year early, while also preparing the business for sustainable long-term profitable growth. Firstly, let me remind you of the opportunity. Total Nicotine industry revenue is growing, with a 3.5% expected CAGR to 2025. This means an additional £11 billion revenue at industry level. 75% of this industry growth is expected to come from New Categories with a forecast of 15% growth CAGR. This is supported by the growing number of New Category consumers increasing from around 80 million today, to an estimated 130 million by 2025. The percentage of smokers interacting with New Categories is growing fast especially in established New Category markets. Variations between markets are largely driven by regulatory environments, alongside differing consumer tastes and pricing relativities. Sustainable New Category growth is also supported by consumer demographics. In established New Category markets, Solus usage is now above combustible levels among adults under 45. This shows the clear potential to make a significant positive impact on public health and deliver sustainable high-quality growth. Alongside accelerated decline in cigarette Solus usage in established markets, poly-usage within New categories is growing fast. This means that with our consumer-centric, multi-category strategy, we are well positioned to capture future growth. So the opportunity is big. Given the significant variation in New Category development across markets, we must prioritize our investments smartly and focus our activities and resource allocation to maximize the returns. We must be fit for growth. Following our comprehensive strategic review, we have taken the decision to further simplify the Group to enable even greater collaboration, and faster decision-making. Our new organizational design will be based on fewer, larger business units, reducing the number of regions from 4 to 3, and business units from 16 to 12. This led to the senior management changes and realignment announced last week. And we are further optimizing our footprint. Phased over the next two years, we plan to exit around 30 smaller markets, where we donât see a near-term opportunity to execute our New Category strategy. When completed, this means we will be selling at least 20 billion fewer cigarettes annually with a limited impact on our P&L. This will enable us to increase profit and unlock cash through resource reallocation into markets which generate higher returns. Should the conditions and the opportunity for New Category products materially change, then we will reconsider our presence in these markets. In addition, we have identified six different market archetypes to guide strategic choices and resource allocation. We understand that markets vary significantly by category maturity, driven both by, consumer tastes and preferences and more importantly by different regulatory environments. We continue to work hard to engage with regulators around the world, to help inform them of the science that supports the potential benefits of smokers switching to reduced risk products. New Categories already represent a significant percentage of the revenue and growth in a number of archetypes, and we expect these archetypes to be dynamic, over time. Overall, we are getting fit for high quality sustainable growth. Together these projects and initiatives will deliver a reduction of over 3,000 roles in the next couple of years with the majority of this effort happening in 2023. Moving forward, we will leverage the foundations created by Quantum. We will keep delivering efficiencies through our established continuous improvement mindset with an ambition to generate at least £1 billion additional savings over the next three years. These savings will help the business continue to offset inflationary pressure, fund New Category investment and improve New Category profitability. We are committed to building A Better Tomorrow. As our transformation journey gathers pace, we are further sharpening our operating model, enhancing our agility and continuing to build new capabilities. We are transforming BAT into a high growth, multi-category, consumer led, CPG with a reduced impact on public health and ESG at its core. I am confident this will create value for all our stakeholders. [Operator Instructions] We will now take our first question from Nik Oliver from UBS. Your line is open, please go ahead. Good morning. Thanks for the question. Good morning, guys. I had two from my side. First one on the U.S. On the minus 15.5% combustible performance, is it possible to disentangle how much of that was industry the inventory moves and then some of the share losses that you mentioned? And then I guess, as we look forward, is the better way to think about the U.S. in terms of total nicotine share as opposed to just focus on combustibles? That's question one. And then question two just on the... We start with this one. I mean first of all, we are having a very strong portfolio in the U.S. And as you know, we've grown in the last three years value share, volume share and profit and operating margin. So our position in the U.S. is extremely strong. Now related to the 15% versus the 10%. Of course, you saw that we have lost a little bit of share. But the premium is very resilient, only losing 50 bps and the law is not growing more than 90 bps. At the same time, the price elasticity is 0.4%. So I think that the market is very resilient. When you see the average of the last three years, you see very clearly that the average reduction in terms of volume has been around 5%. So you saw that we lost a little bit of market share, okay? That's fine. And then we said last time that we had around £200 million in terms of stock that we would have to unwind and now we are doing that at pace, and we are at halfway through the journey related to that. So I think that we're going to do a further enhancement of our performance in 2023. The second part of your question is related to looking at total nicotine. And you're absolutely right. I mean the reason why our performance in the U.S. is strong, it's because we have a very resilient combustible business. The macros are now improving. So you will see improvements related to the macros in the U.S. that will benefit to the size of the market. And the second thing is our performance in terms of new categories is just stellar. I mean remember three years ago, everybody said that we will never take a position related to e-cigarettes. Now we're not only the leader, but we are the leader in the U.S. with price index to competition at 140. So we are doing extremely well, and we're continuing to grow in terms of New Categories. So I think that looking now holistically at the total market is something that makes total sense moving forward. That's right. And just to be clear about the 15.5% and the 10%, most of the gap is related to the unwind of the stock addition be a surprise because we have flagged that a year ago. So I'm confident in the progressive recovery of the U.S. market and our strong position in terms of our portfolio. I mean, we have at the upper end of the market, you have American Spirit that is super premium, if you want to call it this way. There is growing share and value share. And you have the most successful launch in the in the VFM with Lucky Strike, which is now reaching three points of share. That's the most successful launch in the last at least 15 years in the U.S. So we have a very well-balanced portfolio. And now we have to do price laddering through the different brands in order to make sure that we help the consumers to navigate. Also always remember, the U.S. is a very large market, and I spoke about price elasticity at 0.4. You have to remember that some prices in some states are at $11 and some are $6. So there's a lot of gamuts of different markets. And you see that the price elasticity, in average, is 0.4. So I think that we have a very strong business over there that has grown share and value share in the last three years. And the operating margins are going in the right direction. We are delivering 3.5% profit growth in 2022, and we are confident in the U.S. business. Great. And then just the one final one for me, and then I'll hand over. Just on the -- obviously, the no new buyback this year was kind of quite topical with investors this morning. But I guess in the press release, you mentioned that would be reviewed during the year. Maybe today, just a few words on the thought process of one -- not announcing one now and then what would need to change for that to happen later in the year? Yes. Nick, we have been focused on cash generation at least for the last three, four years in a very intense way. That's reflecting our conversion being consistently at 100%, and we managed to deleverage the company to the corridor of 3 to 2. But we are still in an uncomfortable position to be at the high end of this range. And the world has changed. We have a very high levels of cost of capital today after 7 interest hikes in the U.S. alone throughout 2022. Our cost of capital is much higher than before, and we are still seeing a lot of volatilities in that environment. So one thing that we would like to observe more clearly is where this will stabilize. For sure, when the Board takes a decision in terms of capital allocation, it's always looking ahead. And from the regulatory side, the litigation side, you note that we have provided for investigations that we have around DOJ or FAC and we still have to pay for those. We don't know exactly when these get concluded. We expect to be in 2023, but it's not completely up to us. And also, we have a CC88 [ph]. There is a mediation processing in place. I cannot comment further on that. But in the medium term, we have to prefer the company for that. So the reason why we want to accelerate to land in the mid of the range is to create this space so we can have a more resilient balance sheet and a much more financial agility moving forward, and this is a benefit for us in the medium and long term of the company. I mean to speak clearly, since three years, we have done a lot of transformation. We have done a lot of acceleration in terms of our business. Now we have the possibility to decide. Last year, we did $2 billion of share buyback. The interest rates are going up. Deleveraging is important, taking care of our balance sheet. We want to be in that corridor of three to two and to accelerate faster to the mid of that corridor. That's the pragmatic way of looking at it. And frankly, share buyback, we are convinced with share buyback. We did 2 billion last year, and we will review in the course of the year. And we'll make the decisions as we see pragmatic to do so and continue on that journey. I like share buyback. Good morning, Jack. Good morning, Tad. My first question is a follow-up on U.S. combustibles and your relative performance. So the numbers you've given in your prepared remarks, 10% industry decline and the 15.5% decline in your portfolio, is on a full year basis. Now if I think about the second half specifically, it does look like that gap versus the market has got a little bit larger. So my question is, what has sort of driven that? Where are you seeing the relative weakness in your portfolio? And what actions are you taking to narrow that gap into 2023? That's the first question. Just to make the more clearly because it's difficult to analyze by half because there were a lot of movements in the U.S. We mentioned the unwind of stocks. But remember that in the first half of 2022, we also introduced our TAU [ph] system. Weâve rolled out the TAU system. So we had to build up stocks just before that. So your first -- the unwind of stocks in reality materialized more towards the second half of the year. So that's why you see a different picture in the second half as compared with the first. And this also explained the reason why we expect to be more second weighted this year because we are lapping our first half of last year that was impacted by the stock build from the introduction of the TAU system in the U.S. So I just want to make this point clearly. In terms of the -- as the macro became much more visible throughout the second half of the year, we start taking commercial initiatives related to that. As we presented in the presentation, we have much more been -- much more active in terms of revenue growth management, granular in terms of pricing decisions at state level, channel levels. We have been laddering now in different price points. So we are ending the year to in a much more competitive basis. And we saw that in terms of our share performance in Q4 compared with Q3, where we see some stabilization of that. And we continue this trend to grow in '23 as we approach '23. In the big players, not in the low, I mean, you saw that we defended share much better than competition, and we have a pricing environment. Where you always have to remember that the pricing that has been taken by the industry even in Q3, Q4 was far less than CPGs in general, yes. So we had a much more linear pricing activity in the second half of the year than CPGs. That give us some runway in terms of pricing in 2023. So I think that the overall market has suffered in terms of size. The consumers -- we always speak about the price of oil, but it's not only the disposable income. It's also the Americans go less to the shops. And if they go less to the shops with the product that they buy every day or every second day, then you have a bit of reduction in terms of the total market. But I think that with the performance that we have in premium where we're growing and the down trading that has been very reasonable in that environment, and the price elasticity at 0.4 and the portfolio that we have. I'm confident on the U.S. for 2023, but it's going to be more geared towards the second half or the stock issues and for the recovery of the macros moving forward. And always remember, I think that the point I was made before is very important, Total Nicotine. And in Total Nicotine, including e-cigarettes, you see that the performance is extremely good in that environment. Cost of access to e-cigarettes is lower for consumers in the U.S. than in cigarettes. So I'm confident. Thank you. That's very helpful. My follow-up is going to be on e-cigarettes in the U.S. So obviously, very impressive performance on views on a top line basis and on improving profitability, but my question is on the volume performance of U.S. paper. Looking at the numbers on the second half, it looks like volume growth did decelerate a little bit. So my question is, how to think about the growth drivers for Vuse in the U.S. moving forward? I mean, should we expect it to be continued to be pricing-led growth? Or are there more investments that you need to make to reaccelerate the volume performance of Vuse and, I suppose, the overall category? That's the follow-up. Thank you. Yes. I think what's important to consider is first -- there has been a new category that has emerged in the U.S., which is the disposable with synthetic nicotine, okay? And you saw that it grew very fast and especially in non-organized trade. So that has taken some consumers in terms of the cigarette business that have moved to these kind of categories. But in reality, it's an additional pool of consumers that have been created, and the FDA now wants to regulate that environment and that will allow us to have even more oxygen, so just in the transition. But what's very interesting to see is that the vapour -- traditional vapour pods has continued to grow. It did not replace one another. The traditional is continuing to grow. There will be more regulation in synthetic nicotine products. So then that will create an additional expansion bubble, if you want, for us for the next few years to come. So I think that not only we have the best brand in the market. We have, as I said before, a price index of 140 to the nearest competitor. And we're continuing to grow. The market is continuing to grow at a smaller space. And we have that additional bubble of oxygen that is coming our way with regulation related to the FDA. So I think that we own for something very good in terms of e-cigarettes in the U.S. And at the same time, you saw the profitability. I mean, the numbers speak for themselves, if I may say so. Good morning, Jack and Tadeu. Also just two questions from my side. I just want to quickly focus on the combustible market share. You mentioned it was down 20 basis points. So it's a bit of a reversal of what we've seen in prior years. And I know you mentioned it is the U.S., but in your report, you also state that the market share was lower in AMSA in Europe. So I was just curious about where you've seen market share declines and what you can do to reverse that in the combustible side? Yes. I think that the first thing to consider is that 2022 has been a year where there were more tensions in terms of pricing across the globe. Let's put it this way. Then also, you had the macroeconomics that we are hurting the consumers in the second half of the year. So I think that what we start to see in the last quarter is that resilience is transforming again into growth in terms of volume. And there is more benign pricing environment, i.e., the pricing is coming through. As I said earlier, always remember a lot of FMCG, CPG company, took a lot of pricing in Q4, then it's different for us. We took reasonable pricing because consumers buy every day, and we can continue to take that pricing. So we see the volume and the pricing in a good environment for 2023. Yes. I just want to compliment about -- I think that we have -- what we saw in '22 is a very resilient combustible business to start with. We referred to 1.2% FMC THP worldwide decline. If you see combustible loan, it's around 2%. And if you see emerging market was pretty much flattish. We saw volume growth in place like Brazil, which we are very strong as well as Bangladesh, Malaysia, Vietnam. So a lot of markets and we decided even in places like Italy, Spain and Europe. So we had a number of markets where with all the macroeconomic headwinds, inflation, we still saw volume growth. In terms of our performance in market share, we are not really concerned about that. This is very specific for some specific markets for Brazil, for example, we had some price schemes there and we prioritize some value. And we had in Turkey because of this macroeconomic situation, we saw a lot of increase illicit trade, and we are more exposed because we are strong on the low end of the market. So we lost some share there and has a big weight. So -- but it's not something -- it's very specific for some countries, but I think the key message is that we are seeing a very resilient business across the world. Excellent. And then just a question for you about the interest guidance of £1.9 billion. It looks a bit high to me. So I just want to know -- I mean, it sort of went up of my calculations like an average coupon rate of about 5%. Now is it an issue of that you probably expect your free cash flow to be a bit lower this year? Because, I mean, I just want to tie the two ends together here. Okay. No, it's not that. It's -- well, we had our starting point will be a £1.6 billion in terms of interest cost in 2022. And then what we are seeing, and that's why I referred to 18% in terms of our exposure for 2023. We have some refinance to do it. So we used to refinance at 4%, 4.5%, and this is higher than that. And I don't think that is as high as we saw in October because the market has come down a bit more this year, but can be much higher than the average cost of capital. And we also have needs in terms of working capital, CP markets, bilateral, and those rates were very, very minimal back in early stage of 2022 and now went up substantially. So that's where you see this -- when you see the gap between where it was, where is now plus the commitments that we have in terms of other finance costs and in terms of maturities that adds up to something close to 18% of our needs, you come to this number of 1.9%. And it's important to flag that because we will be seeing this annualized impact in 2023. So it's a one-off that we see in '23, and then we create a new base moving forward. And in terms of cash conversion, I mean, you saw that we had 100% in average in the last three years, and we have a number of 95% and higher. So I mean we are very dedicated to that. And after that, the free cash after dividend. What you see is that last year it was £2.1 billion last year, 2021. 2022 was £2.7 billion, and we continue to make a lot of efforts. Also, you saw that we had the program of Quantum that was £1 billion originally three years ago. We delivered £1.9 billion -- and we just said that we're going to do another £1 billion in the few years to come. So I think that it's -- we're getting to a position where financials make a lot of sense where our business is making a lot of sense where we're accelerating our transformation. And we're on the midterm to long term. So it's about now at the moment, the balance sheet, the corridor 2 to 3 and we'll review during the year. So I'm very confident in the quality of the business that we have. We take some decisions because we have the possibility to take decisions, and we have the choice, and we exercise that choice because it's for the good of the growth of the company and the sustainability moving forward. Yes. Hi guys. Maybe first to come back to the U.S. What impact the expect on the California flavor ban across your portfolio? And maybe you could talk a bit about -- maybe some very early signs if you have data from there so far? Yes, good question. I mean California represents around, what, 5% of the total market in the U.S. and it's a market that we are looking at, of course, very carefully. It's very difficult to read the early signs in the California market because you had a lot of stock movements in December. As you know, the ban came in 21 of December. There was still a lot of stock that was available in the shops in January. So you'll have to wait April, May in order to read all this. If you look at the size of the market and the way the market is faring at the moment, it's robust, but you have to offset all these movements in terms of stocks. Our brands are doing well. We've launched new SKUs and e-cigarettes is doing very well also. So we'll have to navigate all this. And it would be too early or too confident from my side to say that the job is done. It's going to happen in the next few months. And I'm optimistic in terms of the solidity of the business. Remember, in all the different geographies where you had that kind of things that happened, in Canada, in Europe, in Turkey or in other places, the retention rate was around 95% and more. And then on top of that, you had related to New Categories, another increase in terms of retention rates. So the jury is out, but the start is very good, but very mixed in terms of numbers. You would not be able to find your ducklings in there because it's all stock movements, trade, availability in trade. There is the key accounts, the organized trade that has been more speedy in terms of stopping these products. General trade is very important in California and that is less measured accurately. So, give it a bit of time. But I think that is going to be a good outcome for us. Got it. And then maybe switching gears over to THP. It was another good year, but I noticed in the second half of the year, especially the price/mix was weaker, especially in Asia. Can you talk maybe a bit about what's driving that, especially given that you had the launch of Hyper X2 and good device sales? I would have thought you would have had a mixed boost from that? Yes. As you see, I mean, we have now close to £3 billion in terms of new category revenues to a point that represents 50% of the total company. And you saw that in the different categories, vapour grew very fast, and the percentage of growth of THP has slowed down a little bit, and there is more price competition within the different segments. So you have different competitors that have come in at different price points, different product offerings. So I think that there's a bit more of internal competition in the segment. I must say that we are very happy with our performance, and we continue to plow forward. We're only in 50% of the markets that are carrying THP, as we speak today. So we still have a lot of geo expansion to do, and we're improving our pricing as we go along our price index as we go along. So I think that we have a very good start with glo X2 in Japan. It has reached a record share in December, and we grew during the year. So there is more intense competition, but we have a lot of space to grow in. And when you look at, for instance, Europe, that is the nearly 50% of the total market, I mean, we are doing extremely well and growing fast. Overall New Categories, as we said in the presentation, in 11 markets where we have already 30% of our revenue that is there, yes, for the total company. So we are strong, and we'll have an innovation pipeline that is strong, not only in 2023, but also in 2024. So we have more launches that are coming, and we are doing the rollout of X2 that is very well accepted by the consumers. It's smaller, it's lighter, delivers more flavor. And we've done a lot of improvement also in terms of the consumer models. So I'm confident. Just to complement that in Japan, and it's not different in Europe, every single product we sell in THP has higher margins than our combustible products. So even the newly launched the Lucky Strike that we did to complement our range in the market has higher margins than the combustible on. So, for us, is a financial opportunity to strength our business in all those locations. We are very pleased with the -- to be honest, with the progress that we have made in all categories throughout 2022, margin-wise. We have read in THP on the consumables side margin that is higher than combustible. The same is happening in Modern Oral. And in vapor, we have reached worldwide, a 50% gross margin compared with the cigarettes, which is around 68%. And in the U.S. alone is even higher than that. So it's a big improvement. That's what is really driving the reduction in loss as well. And we are really heading towards a very sustainable business where we're being different between you selling cigarettes or selling one of these products. I mean we took the view three years ago to do multi-category. And that's starting to pay off because you have more interaction between the different categories. Tadeu was speaking about the fact that there is now a relations between THP users and Modern Oral, for instance, or in other markets, THP with Vapour. Just remember that the number of consumers in Vapour is close to the double of the ones in THP. And this is interesting to see that increased interaction between the categories. So being truly multi-category as weâre now and having done that for three years gives us a head start in terms of being able to serve better the consumers, and we have now a profitability that is coming through in vapour. So all they put together gives us a very strong position, where, again, I insist, we said we will invest in '23 and in '24, and we prioritize that because as we saw, we can grow volume and revenue faster and reduce our losses by £600 million. Guys, it's not a small thing. When we said a few years ago that we will be profitable in 2025. People said, ha-ha. Now we're saying we're going to be profitable in 2024, and we're going to continue to invest more because we have the brands, we have the capabilities. We have reorganized the company three times in a row. Not redoing everything every time, no, it's blocks of transformation that we did Quantum 1, Quantum 2 and Quantum 3 to be able to do what we are doing as a transformation today in order to accelerate the delivery. So we're on big guys. I mean, we really believe that the strategy not only is paying off, but is putting really the company forward in terms of delivery of our transformation and accelerating the delivery. Of course, at the same time, you have the net debt to EBITDA, you have to take care of that. Your balance sheet and everything. So we continue to invest hard and continue to plow through. I'm on the mid-to long term. Tadeu and myself, we see these numbers all the time, and of course, we want to do the best for the business, and you will see us for some time. Hi. Good morning, thank you. I have three questions. So first, Tadeu for you on the restructuring charge in the comment you said. So last year, BAT had restructuring of £770 million. And over the last 12 years, it is £400 million on average. And now you are saying, going forward, it will be zero. So if I had assumed a £400 million restructuring charge for next year your adjusted EPS growth will be high single digit. Is that the right way to think about that it? First of all, just to some color on the £770 million that you are referring to. We -- as we highlighted in the announcement, we -- within that, we have a factory closure in very costly locations, that's there. We have pulled out of -- we are closing operations in some markets, as you saw, and a place like Egypt, Yemen and they come also with some tax liabilities that need to be settled this is in there as well. And we have, like Jack said, with all the archetypes of markets and the closure of factories, we have almost 2,000 employees leaving in the next coming years and most of it in '23. So it's also provide there. So what we are referring you absolutely right in the sense that we believe that with the conclusion of Quantum now, we are not incurring in the restructuring, adjusted items anymore. This will be a positive for the cash, to be honest, because when you see adjusted numbers, we are taking this out. But on the cash, there still cash outflow, some of that. There are some other elements that are noncash items. But this will be helping us more, I would say, in '24 because a lot of this provision will result in some cash outflow happening in '23. But from '24, is where we expect the major benefits coming from the cash side. Sure. My second question is on the NGP breakeven guidance for FY'24. And a lot of people are concerned about the U.S. e-cigarette business because see, 30% of your NGP is U.S. e-cigarettes, where FDA has given two Vuse vibe menthol variants and MDO. And they also commented that Vuse was second ranked in the FY'22 youth prevalent survey. So most likely Vuse Alto menthol will also get an MDO and maybe a tobacco product also gets an MDO. So with all this regulatory uncertainty, how certain are you that you will hit NGP breakeven, in FY'24? Yes. I mean, to be blunt, we would not say that we accelerate the profitability of NGP to 2024. We would not have looked at all these things, but it's a very valid question. I think what you have to see is the consumers are increasingly coming to our portfolio and to our brands. And we have now 22.5 million consumers that are there, which only represents a small portion of the 80 million that are existing at the moment. So we have a lot of space to grow and to grow against competitors. The second thing is the FDA is, of course, doing all the regulatory work, but it has slowed down dramatically, because they have a lot of things to do, which I understand. So I think that the speed at which regulation and new regulation will come in and reglementation related to all these is going to be slow. And I think that we have adapted very well in the past to all the regulators. And we know that we have very strong brands. So we have space to grow, and we know that we have very strong brands. So I'm confident in the way forward. These things are multiyear things with a lot of litigation, regulation, discussions and all this will take time. We have this kind of debate is now five years, and it's only starting to move slowly and there is not even a definitive view in terms of what is going to happen. So we'll take the time and we'll make sure that we do the right thing for the business. And we reiterate -- I reiterate the fact that we'll be profitable in New Categories by 2024. I could even be profitable sooner, but I want to invest the money in order to make sure that we grow the base of the business. And that's what we're doing in the right way. Already last year, we reduced the losses by £100 million. This year, it's another £600 million. So it's all about continuing to grow. We have 40 -- sorry, we have 80 million consumers that are out there already. I said that that's going to grow to 130 million consumers with a lot of available income. We have 22.5 at the moment, I have seen a lot of space to grow. So yes, it's always a complex market. If it was not a complex market, we would not be so much benefiting because we have wired the organization to be not only much better in terms of combustible, and we've done a great job in combustible in the last three years. We have appointed now a Board member in terms of combustible in order to make sure that we extract the value and we are going even to take out around 30 markets, yes, which we are the first ones to do seriously and reducing the number of cigarette users. And at the same time, we're going to have another GBP 1 billion of reduction of cost in terms of our structure. We are reorganizing our structure in a way that is geared towards category management, and we are making sure that our financials are sound in order to make sure that we continue to invest. We're making money and we're investing that money. So that's what we do. Yes. The only add to what I would say to your question; is that the FDA has embraced the risk continue. So you would believe that all the decisions they will take is actually aligned with that and not incentivize consumers should go back to cigarettes. I think it's a very important point of Tadeu. The fact that they give PMTAs to e-cigarette means that it's a less risky product recognized, yes? So it starts there. So that gives a lot of traction also in the rest of the world. Okay. Sure. And my last question is on -- you will have a new competitor next year entering the market in the U.S. with heated tobacco product. And you have filed for the glo Hyper PMTA in December '21, if I remember correctly. So when can we expect that PMTA to come? And would you launch soon after in the U.S. market? Yes. First of all, you have to take it piece by piece. First. Combustible business is extremely important in the U.S., yes. Even if you don't like it pays your bills every day. That gives you the resources to be able to invest, that's number one. The second thing is there is already 20% of the market that is in New Categories, mostly e-cigarettes, that's already there. And that's I think very, very interesting in terms of margins per 1,000, okay? The second -- the third thing is there is a lot of things that have been said in terms of THP in the U.S. It has been on the market for two years, it has not worked and the high tar levels and everything. But at the end of the day, what is important is what position you have in New Categories in the U.S. And we have a presence in the three categories. We have PMTAs that are in progress, and this is going to be more in two years from now or at least. So you have to take your time and look at what is there, what is growing, and then that's for the mid- to long term. And I'm confident that when you see what has happened in Europe between THP and e-cigarettes, there has always been a very strong space for e-cigarette in high tar markets. In Japan, it is different because there is very low tar nic consumers that are already there. So the satisfaction gaps are lower, and you have always in the process of PMTAs. You have to have the science that goes with it. So you don't have the latest product that comes to the U.S. You have the products that were there three, four years ago where you have the science that you have to take the time for making the science, and then you can come with the -- to the market with a product that has been there a long time ago in other markets. So that's an iteration process, where New Categories, I'm very pleased to say, is growing in the U.S. and where there will be more opportunities in the three to five years to come. Okay? And as you see in our results in the U.S., now the New Categories, the e-cigarette is having a major part in terms of our profitability and our financial numbers, which we are very pleased with, okay? It appears that there are no further questions at this time. I would like to turn the conference back to Mr. Jack Bowles for closing remarks. So thank you very much for joining us today. I'm very proud of our performance in 2022. Our results show that we are transforming the business at speed and delivering strong results in a challenging macro environment. We expect 2023 to be a stronger year with organic revenue of between 3% and 5%, led by new categories and stronger combustibles. While higher interest costs and our exit from Russia and Belarus, means that we are guiding mid-single figure NPS for this year. We are also making active choices as our New Category growth model continues to accelerate and deliver. This means that we will invest more and achieve new category profitability in 2024, one year early. We have made choices, and this is the right thing for us to do. I'm excited that building on the strong progress that we have made today will continue to transform, driven by our brands, our capabilities and determination to drive long-term value creation for all our stakeholders. So thank you very much for listening, and have a very good day.
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EarningCall_646
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Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Murphy USA Fourth Quarter 2022 Earnings Conference Call. All lines have been placed on to prevent any background noise. After the speakerâs remarks, there will be a question-and-answer session. [Operator Instructions] Hey. Thank you, Brent. Good morning, everyone. With me today are Andrew Clyde, President and Chief Executive Officer; Mindy West, Executive Vice President and Chief Financial Officer; and Donnie Smith, Vice President and Controller. After some opening comments from Andrew, including a discussion of our 2023 annual guidance, Mindy will provide an overview of the financial results. After a few closing comments from Andrew, we will then open up the call to Q&A. Please keep in mind that some of the comments made during this call, including the Q&A portion, will be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. As such, no assurances can be given that these events will occur or that the projections will be attained. A variety of factors exist that may cause actual results to differ. For further discussion of risk factors, please see the latest Murphy USA Forms 10-K, 10-Q, 8-K and other recent SEC filings. Murphy USA takes no duty to publicly update or revise any forward-looking statements. During todayâs call, we may also provide certain performance measures that do not conform to Generally Accepted Accounting Principles or GAAP. We have provided schedules to reconcile these non-GAAP measures with the reported results on a GAAP basis as part of our earnings press release, which can be found on the Investors section of our website. Thank you, Christian. Good morning and welcome to everyone joining us today. In reviewing the companyâs outstanding 2022 results and preparing for this call, I was really struck by how last yearâs performance reflected so many of the improvements we have made to the business since our spin in 2013. These results reflect a lot of hard work over the past decade, executing against the key elements of the strategies we established a spin to create a sustainable and advantaged business. We prioritized organic growth, adding over 500 stores to the network since 2012. We improved store productivity, optimizing cost while improving per store merchandise contribution. In addition to substantially reducing our fuel breakeven metric, we enhanced employee engagement and customer satisfaction. A trifecta, any retailer would be especially proud of. These actions improved our already low-cost position on the industry supply curve, while our relative advantage increased further as costs for the broader industry rose. We also leveraged our fuel infrastructure assets and capabilities to lower our supply cost and maximize our fuel contribution dollars through our retail pricing excellence campaign. Other significant capability investments like Murphy Drive Rewards further heightened our advantage and differentiated positioning with customers and consumers on our core merchandise offer, while the QuickChek acquisition significantly enhanced our food and beverage capabilities, while introducing a new advantaged format for growth. Perhaps the most telling statistic reflects our commitment to disciplined capital allocation. As a result of our balanced 50-50 capital allocation strategy showcasing steady unit growth, with a consistent and opportunistic share repurchase, we have grown our store count by nearly 50% and repurchased more than 50% of our original shares outstanding. We are proud of these milestone achievements that created significant shareholder value for our long-term investors. These investments, coupled with our relentless focus on operational excellence helped lay the groundwork for the companyâs outstanding 2022 results. Importantly, 2022 performance wasnât just about fuel margins. We leveraged our scale and overall cost advantage, including the benefits from PS&W in a tight supply market to grow per store volumes and gain market share. We also leveraged Murphy Drive Rewards to generate continued tobacco outperformance that also led to share gains, which, along with stronger fuel traffic, helped to grow non-tobacco categories. We grew food and beverage contribution by $9 million growing legacy Murphy contribution by nearly 50% to $8 million. We extracted further synergies from QuickChek, making excellent progress on our integration as our internal focus transitions in 2023, the enterprise-wide initiatives that will benefit the combined network. We have been very pleased with QuickChekâs performance and are equally excited about the future opportunities we see across both brands. Looking at OpEx, we took substantial costs out of the business leading up to COVID and while we are certainly not immune to the wider inflationary pressures on the industry, our advantaged format and low cost position afforded us the opportunity in 2022 to allocate incentives and employee appreciation programs without permanently impacting our cost structure. This program helped to financially reward our employees and drive store level engagement, which resulted in strong merchandise sales and higher customer satisfaction. In closing out the 2022 performance discussion, itâs clear to us that our financial and operational results were the product of intentional actions we have taken as a management team. Our relentless efforts to improve the business have positioned us at the right place, at the right time, with the right capabilities and with the right team in place to extract the most value from the opportunity the market provided in 2022. At a time when affordability matters more to more people, Murphy USA is also very well positioned for the future. Looking out over the next decade, we are poised to continue delivering results and making investments that we believe better prepare the company to compete and win in 2023 and beyond. First, we are preparing for more new store growth, building better stores and strong markets. Looking at the network plan in 10 years, we would anticipate at least another 500 high-performing stores, providing material contributions to the future earnings potential of the company. That is in addition to ongoing efforts to improve the current network through our raze-and-rebuild program and other investments. Second, we will remain focused on improving same-store productivity, increasing efficiency across all aspects of the business and maintaining an ultra-low cost structure, which supports our everyday low price strategy. Third, we are embarking on a comprehensive set of new investments that will help extend and ultimately widen our competitive advantage in the industry. The first of these digital transformation will help evolve the reach and effectiveness of our Murphy Drive Rewards loyalty platform, leveraging customer shopping habits to customize more impactful offers at scale and trigger point-of-sale upselling opportunities. In addition to customer-facing opportunities, transaction data will help inform pricing and assortment optimization at the local and store level. These learnings and capabilities will inform a redesign of the QuickChek Loyalty Program to increase brand awareness and attract new customers. These are just a few early examples of what we look to deliver from our digital transformation campaign. Another new campaign in-store experience involves a comprehensive redesign of the inside of new and existing Murphy stores, leveraging critical insights from consumer research, QuickChekâs food and beverage expertise and analysis of subcategory performance. This effort goes beyond routine category resets, the resets represents a fundamentally different experience for our customer that will better showcase the breadth and accessibility of our product offerings and drive higher in-store sales. In turn, we will take full advantage of these combined learnings and synergies in the imagination and design of our Store of the Future, which we expect will enhance new store performance and returns over the next decade. Importantly, these initiatives go beyond technology and capital investments, but involve investments in people with new skills and experience sets in the home office as we build new muscles and data science and data analysis. Like prior capability-building investments such as MDR, retail pricing and our zero breakeven campaigns, success wasnât realized overnight. But as we have seen from our 2022 results, the tangible benefits we realized were achieved from seeds planted in prior years. Similarly, we expect these new investments to deliver significant tangible benefits in the coming years. With that context in mind, let me take you through the elements of our 2023 guidance. Starting with organic growth, which remains the centerpiece of our growth strategy, we completed a total of 36 new stores in 2022, including two QuickChek stores and completed 32 raze-and-rebuilds, a notable improvement compared to the 23 new stores opened in 2021. While new store additions fell short of our internal target of 45 new stores, we were able to backfill with a few more raze-and-rebuilds and enter 2023 with nine stores scheduled to open in the first quarter. Putting new stores into service remains challenging from sourcing electric panels and concrete to local delays in hooking up to permanent power. Nonetheless, we maintain a robust inventory of high-quality new store locations and expect 2023 activity to eclipse that of 2022. As such, our guidance remains up to 45 new store additions and up to 30 raze-and-rebuilds. Moving on the fuel contribution, we are pleased to report 2022 average per store month fuel volumes were in line with the high end of guidance, just under 245,000 APSM, representing 7% growth versus 2021 as our everyday low price value proposition attracted more customers to our stores. Looking ahead, we donât expect the same level of market share gains in 2023, given we are not expecting a once in every six year to eight years mega-price drop in our forecast, but we do expect to hold on to many of the new customers that came to our stores looking for value. As a result, we are forecasting a slightly tighter range of volume guidance between 240,000 gallons per store month and 245,000 gallons per store month in 2023. Looking at store profitability. We delivered $767 million of merchandise margin in 2022, above the guided range of $740 million to $760 million due to strong performance from categories attached to fuel that benefited from higher customer traffic and a highly impactful promotional events in the tobacco category. In 2023, we expect to continue to take share and deliver growth for merchandising initiatives, driving contribution dollars to a range between $795 million and $815 million or an increase of about 5% at the midpoint. This growth is primarily attributable to increases in the non-tobacco merchandise and continued growth in food and beverage categories. Operating expenses, excluding payment fees and rent came in at 31,700 APSM in 2022 within our adjusted guided range of 31.5% to 32.5% APSM, which included the impact of our WayPay supplemental incentive program we provided our employees over the summer of 2022. While many of the factors impacting OpEx growth in 2022 will persist into 2023, including labor and service cost inflation, which are stickier in nature, not all of last yearâs cost increases are built into our structural base. As a result, we expect a range of 2.6% to 7.4% increase in operating expenses, excluding credit card fees and rent or 32,500 to 34,000 on a per store month basis. This forecast does not assume a repeat of the special incentive program we implemented in 2022. For corporate cost, general and administrative expense adjusted for the $25 million contribution to the Murphy USA Charitable Foundation was $208 million, within the guided range of $200 million to $210 million. 2023 guidance of $235 million to $245 million reflects the aforementioned investments in people and technology around digital transformation and in-store experience, in addition to higher planned costs to extend a richer package of retirement benefits deeper into the organization as we sunset QuickChek retirement programs and fold them into Murphy USA. Similar to the early stages of developing and launching Murphy Drive Rewards, which laid the groundwork for significantly improved long-term performance from our merchandising business, these new investments come with significant upfront costs, but they are critical to maintaining our competitive advantage in the marketplace and further monetizing the benefits of our advantaged model over the next decade. At this time, I will hand it over to Mindy to cover the capital allocation portion of the guidance, along with our normal review of the financial component of our results. Mindy? Thank you, Andrew, and good morning, everyone. I will begin with CapEx, which for the fourth quarter and full year was $82 million and $306 million, respectively, at the low end of the adjusted guided range of $300 million to $350 million, primarily due to the new store delays and also timing around certain IT projects and ongoing improvement initiatives. Looking into 2023, given a higher level of expected new store and raze-and-rebuild activities, coupled with investments in some of our transformational campaigns, we expect total spending to be in a range of $375 million to $425 million. Turning to financial results. Revenue for the fourth quarter and full year 2022 was $5.4 billion and $23.4 billion, respectively, compared to $4.8 billion and $17.4 billion in the year ago period. EBITDA for the fourth quarter of full year 2022 was $230 million and $1.2 billion, respectively, compared to $216 million and $828 million in the year ago period. Net income for the quarter, $117.7 million versus $108.8 million in 2021, resulting in reported earnings per share of $5.21 versus $4.23 in the year ago period. Net income and earnings per share for the full year was $673 million and $28.10, respectively, versus $397 million and $14.92 per share in the year ago period. Average retail gasoline prices in the fourth quarter were $3.19 per gallon versus $305 per gallon in the fourth quarter of 2021 and for the full year averaged $3.63 in 2022 and $2.77 in 2021. The effective tax rate for the fourth quarter was 22.3% and 23.9% for the full year, and for forecasting purposes, our 2023 guidance remains within a range of $0.24 to $0.26. As mentioned in the earnings release, we repurchased $240 million worth of shares in the fourth quarter, which left us with $61 million of cash and cash equivalents at year-end. You may have noticed that the balance sheet reflects two new categories, marketable securities of $17.9 million under current assets and non-current marketable securities of $4.4 million in long-term assets, which collectively are comprised of T-bills and high-quality corporate bonds, which can be converted to cash in one day to two days, if needed. These investments, of course, help us to earn a higher rate of return with any excess cash balances given the upward move in interest rates over the past year. Total debt on the balance sheet as of December 31, 2022, remained at approximately $1.8 billion, of which approximately $15 million is captured in current liabilities, representing our 1% per annum amortization of the term loan and the remainder is a reduction in long-term lease obligations as they are paid through operating expense. Our $350 million revolving credit facility had a zero balance at year end and remain undrawn -- and remains undrawn currently. These figures result in gross adjusted leverage ratio that we report to our lenders of approximately 1.5 times. Thanks, Mindy. In closing, I do want to remind investors of the rationale behind our decision to discontinue fuel margin and consequently EBITDA guidance since 2019. This choice was the outcome of our intent to refocus investor conversations away from short-term fuel margins and to emphasize the long-term potential of the business. We believe shifting this conversation has helped investors become better informed about the true performance drivers that impact our valuation over time. Nevertheless, we have typically supplemented our guidance with an EBITDA marker for investors, primarily to assist with buy-side and sell-side modeling, which suggests a single EBITDA outcome at a specific fuel margin assumption. This year, we have opted to provide a range of margins with the book ends of that range representing $0.26 per gallon and $0.30 per gallon or about a $0.02 swing around the midpoint, which is representative of the historical annual margin volatility of the business prior to 2020. To avoid zeroing in on a single reference point that elicits disproportional consideration and undue emphasis from investors for modeling purposes only using the midpoint of the official guidance metrics we discussed and attaching $0.26 and $0.30 all-in fuel margins to these forecasts, the outcome should approximate $800 million and $1 billion, respectively, of adjusted EBITDA. I appreciate you do not have a crystal ball, we donât either. The biggest determinant of how much margin and volume we generate in any given calendar year is a function of a number of factors, the shape of the price curve, the magnitude and amplitude of the curve, which measure volatility, how different competitors behave in those environments, along with geopolitical events and other externalities that impact demand, restrict supply and shift the actual and forecasted supply-demand balances for the relevant commodities. As we have noted, the magnitude and volatility of last yearâs price curve created significant opportunities as input costs change dramatically on a daily basis, likely influencing how competitors responded. Where we do have a high level of confidence and do not need a crystal ball is how we are going to perform in the different environments that we are presented with, and looking at January 2023 results, they reflect what we would expect in a rising price environment. We have seen prices increase about $0.60 per gallon since mid-December, which typically results in depressed retail margins in a more difficult environment to grow volumes and capture share. While this kind of environment may be interpreted as disappointing to investors, I can tell you January volumes were up about 4% versus prior year January and retail only margins were in the neighborhood of $0.19 per gallon before adding the typical benefits we see in PS&W when prices rise. As a result, total integrated contribution looks to be running ahead of January 2022, and we all know a kind of year 2022 turned out to be. In short, we are carrying over the momentum realized in 2022 across our business, generated from the essential advantages we built over the past decade. We feel great about how the year is starting off and there are still 11 months to go. Thank you. Hi, Andrew, and everyone. I had a -- my first question, I guess, is on your station OpEx guidance. I mean, I think you highlighted a lower increase that you expect this year than maybe what you reported last year. So, first, I just want to make sure I heard that correctly. And then maybe you could walk through some of the key puts and takes regarding this? And then could you give us a sense of how this dynamic is possibly impacting breakeven margins, especially for the smaller or marginal operator right now? Is it -- I guess, is it possible that as inflation peaks and pressures start to ease cost pressures that is? Is it such that these marginal players may not be forced to price so high at the pump, which could start to squeeze fuel margins a bit for the industry? Sure. So, yeah, letâs start with OpEx. One of the most transformational things that we are doing is building bigger stores, both at QuickChek and at Murphy USA, and then raising and rebuilding 25 to 35 plus stores a year. And so one of the big drivers of cost is the fact that we are building bigger stores that have a higher labor component that have higher fuel volumes, merchandise contribution, very attractive returns, even more attractive in the current environment. So that is one of the big drivers there. The labor component, as we noted, we didnât build permanently into our cost structure with higher salary or hourly increases, but had the WayPay appreciation bonus over the summer, many other competitive competition, et cetera, that allowed our staff to earn more and sell more. One of the changes with the QuickChek acquisition is, from a benefit standpoint that we are extending deeper into the organization as our IRS transition period has us consolidate those plans and some of thatâs in G&A. With respect to other costs, we certainly had some favorable contracts. Some of those will be renewing in 2023 versus 2022 and so there may be some upward pressure there. If thereâs one area of deflation, it might be in areas where hydrocarbons are consumed like garbage bags, et cetera, but those typically make up a smaller portion of the expenses. How does this really impact ultimately breakeven margins for the industry, for the marginal player and for us. What -- I think your point is, inflation, the year-over-year rate of change is peaking, but I donât think anyone is out there forecasting that we are going to see deflation. We are not going to see year-over-year changes go negative. I think we would be happy to see those changes get down to the 3% to 4%. We have a long way to go just to get it down to the Fedâs target rate of 2%. So while I see some of the cost pressure increases easing, we are starting from a base, I mean, if you want to do a one-year, two-year, three-year, four-year stack, you are just going to have smaller increases on significant increases from prior year. So I really donât see anything from a cost pressure easing that is going to help this marginal operator. Let me tell you what we are seeing. In January, merchandise transactions are accelerating. Food and beverage transactions after a challenging fourth quarter accelerating. We just talked about the OpEx rate increases year-over-year is going to be lower and our fuel volume is sustaining it up 4%. The result of that is our business is getting better. But when I look across the industry, some of the other reported numbers by firm or across the industry, we are not seeing those trends at the same level and so that would suggest to me that the industry breakeven is probably continuing to go up. I am not seeing anything thatâs suggesting for the entire industry, merchandise and food and beverage is accelerating, data points to the opposite and the same with fuel volume. And so one of the proof points we would look at is, we -- what are we seeing in January year-over-year margins and they are actually increasing versus a year ago. So I hope that answers your question. I understand cost pressures might ease, but thereâs still going to be smaller increases on a significantly higher cost base thatâs built up over the last two years to three years. Right. No. Thatâs super helpful. Andrew, I know this is incredibly complex and thereâs this dynamic of the structural change that you are kind of talking through within the industry? And I guess thatâs maybe a little bit on my second question and final question that is, just in terms of the fuel margin range you provided for modeling purposes, I guess, first, I am a little curious why you chose to provide a range this year? And then, second, I guess, it does beg the question about what gives you maybe the confidence that your margins will be in that range? Just even given the dynamic we are seeing play out so far this year with, I think, industry margins down 57% in January versus December and you just kind of touched on where your margins are trending. And again, I know itâs one month so far, but just trying to think through how the rest of the year may play out, and again, how much confidence do you have in that sort of that modeling purpose range? Thank you. Yeah. First of all, I would encourage you and everyone else not to make judgments based on sequential margin changes. I mean, if you have done that back in September to October and you see the huge margin when prices fall off significantly, you would come to just an erroneous perspective. So I would say, look at the broader trends. Look, prior to COVID in 2019, we were having a discussion at Murphy about sustaining $0.16 margins and there was probably as much disbelief around that is there is around current levels. But what have we seen over the last three years? Structurally, when we do our analysis, looking at sort of the NACâs fourth quartile and adding cost inflation, volume reduction, merchandise changes, I mean, thereâs at least a $0.10 per gallon increase that sustains itself and the NAC survey doesnât represent the entire industry, especially the smaller players. $0.26, actually $0.264 was our 2021 result. Itâs a solid $0.10 above 2019 and the kind of that three-year average. I think the stake we are putting in the ground today is, we believe that represents kind of the new floor for us from a margin standpoint that has persisted and shows up in every way in which we can kind of triangulate the industry supply curve, the marginal players cost structure, et cetera. You book in that with the $0.34, again, actually $0.343 or $0.344 for 2022. But I think you have to walk that back $0.04 for the unique once in every six-year to eight-year price fall off that we had that we frankly hadnât seen except in 2014 and 2008. And so that gets you under that $0.30 range, right? Now there are plenty of people that are saying crude prices stay between $70 and $85. There are others we talk to that say they are going to be north of $100. I believe a $0.26 to $0.30 range provides a nice set of bookends based on what we have seen, what we can back into as a base case. And where, frankly, when we look at sort of the trends we are seeing and the trends it means for others, given we are gaining share. Once again, there may be more upside than downside within that range. But anyway, thatâs how we got to the range. Itâs kind of a 2021 base case, 2022 actual minus kind of a once in every six-year to eight-year effects and provides a nice range versus a single point. So thank you and we will move on to the next question Yeah. Hey. Good morning, guys. Thanks for taking my question. So I want to start with the gallon guidance number suggests flat, I think, to slightly down on per store gallons. I realize you are lapping some potential benefit from elevated prices last summer and we have obviously seen quite a bit of share move around, but within trade down and general consumer softness sort of help you offset that to some extent. So can you just elaborate a little bit more on your assumptions there? Sure. So you go to the price structure, we donât expect a big falling price environment that allows us to really differentiate our positioning. I think there is a question around total demand and how much sensitivity we might see. We donât predict recessions, down trends, et cetera. But recognizing thereâs some pressure there. The flip side of that is when thereâs pressure there, we gain customers, because more people need affordability and thatâs what we deliver. So those are probably a couple of the biggest factors, but the biggest single one is just not expecting that repeat of the price fall off. Okay. And then on merchandise margins, that 19.1% you put up in Q4, looks quite a bit below what we have been running at, say, the last five quarters or effectively since you acquired QuickChek, it seems like cost inflation on the food side is playing a part. But can you just dig in a little bit more on what drove that and talk about how you are expecting that to trend as we move into 2023. Sure. I mean we absolutely saw cost pressure, including outages on agâs led us some other commodities at QuickChek and that certainly impacted that and the good news is thatâs improving. The second thing is we are really establishing QuickChek as the high quality value brand for the products it serves. And so from a price pressure standpoint, we held price longer than the broader market and it showed up in transaction results. I will give you an example. Breakfast represents about 37% of our transactions and in Q4, where we were down 1.7%, the broader QSR industry was down 7.3%. That has paid off, not only in that differential, but January foodservices, transactions at QuickChek are up 6% and that is after making strategic price decisions as well. So we felt the cost pressure, we maintained our price longer in the broader market, it paid off in establishing that brand position that showed up in transactions and that momentum is continuing over into 2023. I guess, first off, just you gave some details about the step-up in the SG&A. I think it applies probably 15%, 16% growth year-over-year versus 7% this year in 2022 ex the donation. Is that the right way to think about just a one-time step-up or is this kind of a multiyear investment thatâs going to take place on the wage on the benefit side as you talked about? Yeah. So two components there. One, these capability-building investments. If you remember back to the Murphy Drive Rewards days. There were some peak costs, right, in terms of build required to stand up the capability that then goes away as you move into operate mode. So there are some peak costs in here, but as we build up a deeper bench around data science, data analytics and the like, on top of some of the great capabilities we have already built, some of that will sustain. Certainly, on some of the in-store experience, thereâs some one-time costs there as we leverage some third-party support. Benefits is an interesting one. It does go into G&A where we had to align some of the retirement plans. And in the early years, over a five-year to 10-year period, the costs are higher. But as you think about just normal attrition and where we set the benefit for new employees, by the time you get to the outer years, our actual G&A cost on those line items go down as a result of the new plan design. So, hopefully, those two examples give you some sense. They are both kind of investments to the future. One is just a peak that goes into operating mode. The other one is in alignment, but it shifts over time just with normal attrition, retirement, et cetera. Okay. Yes. Thatâs very helpful. And then, secondly, maybe just to touch on, I think, in your prepared margin, you mentioned a new store design and maybe just sort of expand a little bit on that. Is there a remodel program thatâs going to take place on the existing stores or is this kind of a new store of the future that you are going to start rolling out for the 2,800 square foot stores. Just anything, how to think about that and timing wise, and as retail analysts, we typically like to hear, but I get pretty excited about the type of new store designs that could be rolling out? Yeah. So think about the 2,800 plus or minus some square footage, right, but not jumping that chasm to QuickChek, which is in prepared food and beverage, right? So we are not adding a kitchen at the Murphy stores. But if you think about how consumers want to engage with brands like ours, where do we have the right to win on packaged prepared food and beverage, what kind of innovation are we already implementing a QuickChek on dispensed beverage and frozen dispensed beverage. What are the things when we survey 10,000 Murphy USA customers that they say about our store in terms of how itâs laid out, the lighting, all the different things they are looking for, we have taken a huge body of work and now we are translating into that, within that box, plus or minus some square footage. How would you oftenly lay that out for the customer experience, for the player experience to drive higher sales in the growing categories where maybe we are not participating as much, but doing it all in the context of where we have the right to win versus where we donât. I think as I have mentioned before, we are out of roller grills right? The customer did not give us sort of the right to win in that space or even the right to play. But we are known as the retail brand with the best value on regional and national package brands. And so as we think about our open air cooler, grab-and-go, grab-and-repeat and go [ph], how to re-imagine how the customer wants to interact with that and some of the results that we are already seeing from some of the resets. The team has gotten incredibly good at resets within the same fixture layout, but how might you lay things out differently in terms of traffic flow, while making it easier for the store operator and the like. So that kind of gives you a broader sense. The big opportunities around the new 2,800s, but there will also be lessons that we translate into our 1,400 square foot raze-and-rebuild stores as well. I was hoping to revisit fourth quarter results a little bit on the in-store, and to the extent if you could, Iâd love to hear commentary on cadence during the quarter and then you talked about the initial start to 1Q. As we contended with weather in the fourth quarter and now weather across the Southeast in the first quarter, is that creating variability in the results month-to-month or is that a nonfactor? Yeah. Look, weather ultimately becomes a nonfactor because you got pre-buying, you got post-buying and the like, and so unless you have a much more extended event itâs usually not a big factor. Look, certainly, from a gallon standpoint, October started off stronger, because of where it was in the price fall off versus December. That in turn impacts the traffic inside the store over that same period as well. So thereâs probably some deceleration within the three months. I think what has really got us excited about the start to the year. If I look at January then, on the Murphy side merchandise transactions in total, are up 10%, leading to sales and merchandise margin up 9.5% and 10.3%, double-digit trip growth on top of the 4% volume growth is really impactful. Look at QuickChek, we are seeing transactions up 5% and some of thatâs still being weighed down by nicotine products and our Murphy centralized team has been working within some of the state minimum constraints that we deal with in New Jersey. So, certainly, a little deceleration within the quarter, but as we start the new year, we are seeing nice acceleration across the Board. Okay. Great. Shifting gears a little bit to the cash flow statement. CapEx was up -- you talked about new investments in SG&A. You also talked about kind of long-lived investments in the CapEx side of things. Is this kind of $400 million CapEx midpoint, the new normal would you expect us to continue to grow? Is it the peak kind of give us some sense as we look out several years from now for what your CapEx spend might look like? Yeah. I think itâs probably more in line with the new normal. What I would expect if I look across the buckets, Mindy went over between growth sustaining corporate and initiatives, some peak around some of the IT capitalized, around some of the initiatives like digital transformation. Those things tend to be a little bit more episodic like Murphy Drive Rewards. We also have our, we call it, our Common Systems Environment project, where we are looking across both QuickChek and Murphy USA, and making the choices for the future about the systems environment. So some of that corporate initiatives could come down as we get some of that one-time work done. From a sustaining standpoint, the more new stores and raze-and-rebuilds, we have those programs that are in growth, reduce some of the programmatic things from a sustaining standpoint. But if you continue to build the network, thereâs some puts and takes there. From an overall growth standpoint, we are still not at, I think, what our true potential is in terms of new store opportunities. Fortunately, we have had the opportunity to backfill that gap and maintain the productivity of our launch are building partner or general contractors through raze-and-rebuilds. But for us, even with the cost inflation that we are having, this is an attractive time to build stores. One of the things we talked about on the last call was we may be seeing inflation of $400,000 to $600,000 for our raze-and-rebuilds and our new builds, but for every $100,000 of capital, you need about $0.04 per gallon margin to cover that. So maybe you need another $0.02, $0.025, but we have consistently seen well over $0.10 margin. So our capital return projects look even more attractive. Raze-and-rebuilds that were below an economic threshold, even though they had the land and the economics are now above that threshold. And so that is the one area that I think we could continue to see that cadence play out as we grow more stores, we get some of the bottlenecks that we talked about behind us and we continue to evaluate the opportunities on our raze-and-rebuilds going forward. Hi, guys. Good morning. Thanks for taking the question. So my first one is on capital allocation and so you have drawn down cash in the past three quarters, you have been buying back stock in excess of your free cash flow, your balance sheet is certainly in a good shape. But should we think about 2023 as another year where you might buy back more stock than your free cash and particularly in light of the higher CapEx budget, and as you pointed out, thereâs actually a good return on holding cash right now. So just looking for thoughts on just currencies and buybacks can be maintained? Sure. We certainly front-loaded the $1 billion authorization we got from the Board, and frankly, no different than the $500 million authorization we got before that. We are certainly -- we are confident buying at $280 for the long-term and part of that is evidenced by the fact that our weighted average cost of treasury stock is about $103. So we are focused on the long-term. As we think about free cash flow, we talked about the margin, where is there more upside than downside on that. We have typically seen events that are adding more pressure to the marginal retailer, not less, more volatility versus less. So thereâs a of wildcards there that can continue to generate excess free cash flow above and beyond what our base case plan might be. So as we have said in the past, our number one priority for allocating excess free cash flow when we get it is share repurchase and that is what we did in 2022. When we earned it, when we received it, when we put it in the bank, we allocated that. So you should look for that same cadence going forward. Look, I would also say, leverage as part of our long-term algorithm, Mindy highlighted our ratios that are very conservative. The business is still a free cash flow machine. We have a conservative balance sheet with a lot of free board and so we always think about our entire balance sheet and how we want to manage our growth algorithm for both new stores and the balance part around share repurchase. So I hope that provides some insight into how we are thinking about it. Yeah. Thatâs helpful. Thank you, Andrew. And just wanted to go back to the fuel volume side, you have maintained a very healthy same-store comps on the fuel side and I think you noted when you are looking sort of midyear last year, you picked up some market share from people trading down to lower price players. In the 4Q comps would suggest and I think, Andrew, mentioned it in her comments that, you havenât given that share back as steel prices have come back down. So maybe you can talk about those dynamics at holding on to that share and strengthen the fuel comp? Yeah. Look, I mean, one of the things that we pay very close attention to is our consumer and we are just blessed through Murphy Drive Reward to have great insights into them and we have talked about this panel of close to 100,000 consumers who have bought something from us every month since 2019. Their basket of goods that they buy at Murphy USA doesnât cost as much as it did during the peak, which is good. And we are not seeing any significant changes in their behavior in terms of buying from us and as we noted that the fact that we are holding them steady and growing volume means we are bringing on new consumers. I think we have a target consumer that continues to be under pressure. They feel inflation more so than higher income consumers. They feel the gap between the wages they earn and inflation more than the higher end consumer and these are the consumers that really donât have a lot of alternatives for how they get to work, et cetera. So I think as we think about the economic outlook, we feel very confident that, we are going to be there from an affordability standpoint for both these current consumers, but continue to grow them like we did in January, even with the lower prices, because John, while prices are lower versus the peak, they are still significantly elevated from the low price environments we saw in 2015, 2016 and 2017. So I think you raised all those factors in, higher interest rates that are impacting rents and the like. This consumer is going to need us more than ever and I think there are going to be more consumers like that out there that we are going to be having the opportunity to serve with our affordable model. Great. Thanks so much. I just have kind of, I guess, a follow-up question just in terms of the competitive activity component and kind of how that might flow through into the CPG rate this year. I remember you had said this was maybe a year or so ago, right, where we had costs were materially inflating, is trying to feel like coming out of COVID, maybe at some of these other independent players on a national basis, we are increasing prices maybe at a kind of an accelerated rate maybe relative to history. Now you are seeing prices come down a little bit, but I guess some of the data that we see, it also looks like RAC has maybe gone up a little bit more quickly than some of the retail prices have gone up over the past month or so. So I am just curious like if you think about the competitive dynamic right now kind of vis-à -vis a year ago, right, would you say maybe the market isnât as quick to move those prices back up if wholesale goes back up, because everybody kind of wants to try to hold some share and the consumer obviously is not maybe in the best spot? Thanks. Yeah. Look, thereâs always a lot of moving pieces. Thereâs also a lot of different markets and different actors out there. So itâs kind of hard to generalize. I would say one and we have talked about it from the very first question, the rate of cost inflation, the rate of the industry breakeven requirement for the marginal player itâs gone up significantly. The rate of increase probably isnât going to go up at the same rate you wouldnât expect it to. But all the pressures on that retailers are still there and so it continues to go up, but at a more normal pace. And we have lower prices, but the consumer health isnât really that much better, at least the consumer that we serve. One of the things that you do see is versus, say, the peak prices is credit card fees are down and thatâs largely a pass-through. I would say that we have got some advantage there, because of the debit routing investments the team have made over the last three years where we saved several million dollars as a result of that and thereâs more work that we are doing on that front that our scale affords us versus the other player, but thatâs largely a pass-through. So if you say, well, margins are down a little bit, compare the year-over-year pricing and the credit card fee impact of that. Thereâs always some competitive promotional activity out there where someone may wake up and say, hey, I have lost some share. Let me try to go grab it. What I would say is, if I look at January, we are up 4% year-over-year margins all in from a contribution basis is higher and so while you might see that episodically, I think, you continue to see rational behavior across the Board. â¦I would add to Andrewâs comments, particularly with January from a retail pricing perspective, not only has the pricing environment been relentlessly upward with essentially the marketâs been in restoration mode for five weeks, but itâs also similar to what we saw in May of 2022. So itâs also a function of when prices are rising during the week. So if you start with the last week of December and go through January, in those five weeks, three weeks of the five weeks had price jumps of double digits heading into the weekend and that essentially trolls your intended margining position and freezes a lower margin in place, sometimes multiple days until the following week when the market begins to restore and you can get back on the right track. So we saw that same dynamic occur last May, leading many to worry that margins have peaked and structural pressures we are alleviating versus what it really was, which was just end-of-week price jumps. So our May margin, for example, on the retail side was below $0.20 a gallon that month, but it rebounded to above 30% in June. So as Andrew said, ironically, itâs Groundhog Day and we have seen this pattern before. So we are not really concerned with the January results or even the rest of the year as itâs really a logical function of the pricing and timing dynamic thatâs just occurring right now. Okay. Thatâs extremely helpful. Thatâs kind of where I was headed. We summed it up. And then I guess just kind of for clarification and maybe my own thinking [ph]. I think you had said kind of so far in January, you are seeing kind of the all-in fuel margin do a little bit better than last year despite the retail coming down because PS&W and RINs kind of have a different relationship and maybe they go up some. So like maybe just simplistically, just kind of explain quickly kind of how PS&W and kind of RINs might be a little bit higher, which is obviously a separate piece and you just explained. Thatâs still helpful. Thank you. Thatâs it. Yeah. So, the timing impact on PS&W in a rising price environment is typically positive. So we would expect any pressure that we are seeing on the margin side to be made up for within product supply. Also, RIN prices are elevated over what they were at least at the end of the fourth quarter. So we would expect on balance that our first quarter results, again, we are just looking at January, but we would expect those first quarter results to be comparable to what it was last year. There are no further questions at this time. Itâs now my pleasure to turn the call back over to Mr. Andrew Clyde. Great. Great call. Great questions. I feel like we spent a lot of time talking about kind of short-term, near-term margins and I think as we talk about the January environment and the acceleration we have seen across the business that itâs further reinforcement as to why we think about the long-term of this business. As Mindy highlighted wonderfully, one month doesnât make a quarter, one month doesnât make a year and kind of the comparison of January and May, I think, is a great example because of what follows that. I do think this longer term view of where the fuel breakeven requirement is going for the marginal player for the industry as a whole, for advantaged players like Murphy USA and other advantaged retailers is really the area that to be focused on. And we feel really good about 2022 is a year and the outlook that we have, not just for 2023, but the investments that we are making on top of the last decade of investments gets us really excited about the next decade ahead. So, with that, we look forward to any follow-up calls from people and have a great rest of your day. Take care.
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EarningCall_647
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Good morning, everyone, and welcome to the Lear Corporation Fourth Quarter and Full-Year Earnings Conference Call. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Ed Lowenfeld, Vice President of Investor Relations. Sir, please go-ahead. Thanks, Jamie. Good morning, everyone, and thank you for joining us for Lear's fourth quarter and full-year 2022 earnings call. Presenting today are Ray Scott, Lear President and CEO, and Jason Cardew, Senior Vice President and CFO. Other members of Lear's senior management team has also joined us on the call. Following prepared remarks, we will open up the call for Q&A. You can find a copy of the presentation that accompanies these remarks at ir.lear.com. Before Ray begins, I'd like to take this opportunity to remind you that as we conduct this call, we will be making forward-looking statements to assist you in understanding Lear's expectations for the future. As detailed in our safe harbor statement on Slide 2. Our actual results could differ materially from these forward-looking statements due to many factors discussed in our latest 10-Q and other periodic reports. I also want to remind you that during today's presentation we will refer to non-GAAP financial metrics. You are directed to the slides in the appendix of our presentation for the reconciliation of non-GAAP items to the most directly comparable GAAP measures. The agenda for today's call is on Slide 3. First, Ray will review highlights from the year and provide a business outlook -- business update, excuse me. Jason will then review our fourth quarter financial results and our full year 2023 outlook. Finally, Ray will offer some concluding comments. Following the formal presentation, we'd be happy to take your questions. Now please turn to Slide 5, which highlights key financial metrics for the fourth quarter and full year 2022. Lear finished the year strong with our best quarterly results since the first quarter of 2021 and our fifth consecutive quarter of improved adjusted operating margins. Sales increased 10% to $5.4 billion and core operating earnings increased 67% to $265 million. For the full year, sales were $20.9 billion and core operating earnings were $871 million. Adjusted earnings per share increased 10% in 2022 to $8.72 per share. Operating cash flow increased 52% to over $1 billion in 2022 reflecting improved working capital management and higher earnings. Our cash flow performance is already beginning to benefit from the Lear Forward plan. Slide 6 outlines key business and financial highlights from 2022, as well as a small sample of the many awards Lear received. We made progress on strengthening our product portfolio and business outlook in both business segments; in Seating the Kongsberg acquisition positions Lear as the only seating supplier with in-house capabilities in heating, ventilation, lumbar and massage. Since the acquisition of Kongsberg, we have been granted sourcing control on programs with seven customers and have won 30 new business awards on 22 platforms. Our leadership position in Seating innovation, quality and operational excellence is being recognized by our customers who awarded us over $700 million of conquest awards in 2022. In E-Systems we're selected by General Motors to supply our PACE Award winning Battery Disconnect Unit on all their full-size battery electric trucks and SUVs through 2030. We also expanded our connection systems product portfolio to add Intercell Connect Board. We are actively pursuing additional business opportunities for both of these product lines. Sales growth in both business segments continues to exceed market growth with five points of outperformance in 2022. Financial results improved each quarter in 2022 and we expect further improvement this year. Free cash flow conversion improved to 73% and we returned almost $300 million of cash to our shareholders through our dividend and share repurchase programs. We continue to win accolades from various industry publications, including our most recent awards yesterday when Fortune Magazine once again named Lear to World's Most Admired Companies. Slide 7 highlights some of our key product launches in seating this year. In addition to the just-in-time assembly for each of these programs, we're also delivering multiple components for these launches including thermal comfort systems, leather, fabric, structures, cut and sawn, seat covers and foam. We believe that our position as the most vertically integrated seat supplier provides a competitive advantage by improving the quality of our products and offering a better value proposition for our customers. Several conquest programs are launching this year including the BMW 5 Series and i5 in Europe, the Chevrolet Colorado and the GMC Canyon in North America and a major SUV program in North America that was awarded late in 2022 and that will be launching -- that we will be launching a new facility in 2023. Lear's best-in-class quality and craftsmanship drives our leading market position in luxury seating and we also have won significant new business on electric vehicles. Turning to Slide 8. Now, I'll highlight key upcoming product launches in E-Systems. In 2022, we had another great year of new business wins in E-Systems that will continue to drive growth over market of six percentage points, including about $500 million of business for electrification projects including high voltage wiring and connection systems and battery disconnect units. This year we will be launching the award-winning battery disconnect unit on an additional GM BET derivatives including GMC Hummer SUV and Chevrolet Silverado EV. In early 2024, we will begin to produce the BDU at our new facility in Michigan. This new production facility will generate $500 million in annual electrification sales when it reaches full production. Late this year, we will be launching production on our Intercell Connect Board. Annual sales are estimated to grow to approximately $150 million by 2026 and we are pursuing additional opportunities across our customer-base for this new product-line. The body control module, we are launching this year with the MINI Countryman, will be the first of many launches across numerous BMW and MINI platforms. We have several other product launches for electric vehicles in North America, Europe and Asia, some of which are highlighted on the slide. On Slide 9, I'm going to provide an update on the four pillars of our strategy, which we initially shared with you almost two years ago. We assess our strategic plan during the pandemic. With the objective to continue to position both Seating and E-Systems to achieve sustainable long-term growth in revenues, financial returns and free-cash flow generation as the industry transitions to electrification and recovers from the effects of the pandemic. We have made significant progress on each pillar of our strategy and the actions we have taken to-date will serve as the foundation of our plan to deliver long-term profitable growth. Over the past 10 years, we have made targeted acquisitions to increase our component capabilities in seatings. These inorganic investments coupled with investments in innovation and technology have resulted in steadily increasing our market share in seating to 25%. Conquest wins have been a major factor driving market share gains. Since 2019, we are approaching $2 billion in conquest awards which supports our mid-term goal of achieving 28% market share . Many of these conquest wins resulted from customers asking Lear to quote business because of our strong reputation for quality, operational excellence and product execution. The recently awarded SUV program in North America that we will be launching later this year is a good example. ConfigurE+ is the PACE Award winning Lear innovation that provides a wireless powered rail system that allows for easy repositioning of the seat in the vehicle. We are launching our second ConfigurE+ program this year on a Forward program. Other customers are showing interest in this product. And last month, Stellantis showed our technology in their new RAM 1500 Revolution BEV concept that debuted at the Consumer Electronics Show in Vegas. In E-Systems, we completed a detailed study to prioritize products where we can create the most value for our customers by concentrating engineering and capital investments on fewer products. We paved the way to win major new platform awards for Lear's Battery Disconnect Unit and Intercell Connect Board. Later in the presentation, Jason is going to provide more details on how these programs will support sales growth and higher margins in E-Systems . Just last month, we learned that one of our customers in Asia had independently audit all major global seating suppliers, now Lear's quality was rated the best especially for luxury seating. To ensure we remain the leader in quality and operational excellence, last year we established Lear Forward plan, which will improve operational efficiencies across our business. Over the past two years we have made substantial progress on our ESG goals. We developed new products such as FlexAir and ReNewKnit in Seating to support our environmental goals. We also have improved energy efficiency in our operations and established aggressive climate goals to reduce carbon emissions and increase the use of renewable energy. These efforts as well as well as increased communication in our sustainability report have resulted in significant improvement in our ESG ratings and multiple awards from leading industry publications. Now please turn to Slide 10 which shows our 2023 to 2025 backlog of approximately $2.85 billion. As a reminder, our sales backlog includes only awarded programs, net of any lost business and programs rolling-off and excludes pursued business and net new business in our non-consolidated joint ventures. We had a tremendous year of new business wins, our combined backlog for 2023 and 2024 increased by 22% to $2.5 billion and the 2024 backlog is a record for any single year. The Seating backlog benefits from $1.2 billion of net conquest awards. Also of note is that over 75% of our Seating backlog is for electric vehicles. In E-Systems the three year backlog consists of 63% in wiring and connection systems with the balance in electronics, more than half of the E-Systems backlog is for electrification products led by battery disconnect units, high voltage wiring and connection systems. Total electrification sales in E-Systems in 2022 were $565 million and we are on-track to exceed our prior goal of $1.3 billion in 2025 which implies a 34% compound annual growth rate for the three year period. Consistent with historical experience, we expect the third year of our backlog to continue to grow as there are numerous programs we are pursuing that will launch in 2025. While not shown on the slide, the 2023 through 2025 sales backlog at our non-consolidated joint-ventures is additional $380 million. Slide 12 shows vehicle production and key exchange rates for the fourth quarter. Global production increased 2% compared to the same period last year and was up 6% on a Lear sales weighted basis. Production volumes increased by 8% in North America and by 5% in Europe. Volumes in China were down 5%. The dollar strengthened significantly against the euro and RMB. Slide 13 highlights Lear's growth over market. For the fourth quarter total growth over market was seven percentage points, driven primarily by the impact of new business in both segments, E-Systems grew eight points above market and Seating grew seven points above market for the quarter. Growth over market was particularly strong in Europe. In Seating new programs such as BMW 7 Series and iX and the Renault Megane eTech as well as higher volumes on the Nissan Qashqai and then Land Rover, Range Rover and Defender contributed to the growth over market. In E-Systems, strong growth over market was driven by new Volvo programs including the XC40 and XC40 Recharge and higher volumes on the Ford Cougar, and the Land Rover Defender and Range Rover. For the full year, global growth over market of five percentage points was driven primarily by our strong new business backlog. Turning to Slide 14, I'll highlight our financial results for the fourth quarter of 2022. Our sales increased 10% year-over-year to $5.4 billion, excluding the impact of foreign exchange, commodities and acquisitions, sales were up by 13%, reflecting the addition of new business in both of our business segments and increased production on key Lear platforms. Core operating earnings were $265 million compared to $158 million last year. The increase in earnings resulted primarily from higher production on key Lear platforms, the addition of new business and favorable operating performance. Adjusted earnings per share improved significantly to $2.81 as compared to $1.22 a year ago. Operating cash flow generated in the quarter was $537 million, a significant increase from the $167 million generated in 2021. The increase in operating cash flow was due to an improvement in working capital and higher earnings. Slide 15 explains the variance in sales and adjusted operating margins in the Seating segment. Sales in the fourth quarter were $4 billion, an increase of $396 million or 11% from 2021 driven primarily by an increase in volumes on Lear platforms and our strong backlog. Excluding the impact of commodities, foreign-exchange and acquisitions, sales were up 14%. Core operating earnings were $275 million, up $76 million or 38% from 2021 with adjusted operating margins of 6.8%. The improvement in margins reflected higher volumes on Lear platforms, our margin accretive backlog and an improvement in commodity costs, partially offset by the impact of acquisitions. Strong net operating performance in the quarter, which included a $10 million benefit from the commercial settlement of a patent matter was offset by higher spending on engineering and launch costs to support our strong 2023 new business backlog and recent conquest awards. Slide 16 explains the variance in sales and adjusted operating margins in the E-Systems segment. Sales in the fourth quarter were $1.3 billion, an increase of 8% from 2021, excluding the impact of foreign exchange and commodities, sales were up 12%, driven primarily by higher volumes on Lear platforms and our strong backlog. Core operating earnings improved to $64 million or 4.8% of sales compared to $38 million and 3% of sales in 2021. The improvement in margins reflected higher volumes on Lear platforms and our margin accretive backlog, partially offset by higher component cost net of customer recovery. The positive net performance was driven primarily by an increase in plant productivity and lower premium costs, which resulted from a modest improvement in the stability of customer production schedules. Moving to Slide 17, we highlight our strong balance sheet and liquidity profile, a major competitive advantage for Lear in a rising interest rate environment. Our earliest outstanding debt maturity is in 2027 and overall, our low cost debt structure has a weighted-average life of more than 14 years. In addition, we have $3.1 billion of available liquidity. The level of unfunded pension and OPEB liabilities improved significantly over the past few years and is now only $119 million as at the end of 2022. Our focus is on growing and strengthening our core product lines to improve operating margins and cash flow generation. As we have previously stated, we are targeting to get back to an 80% cash conversion ratio. We are committed to return excess cash to our shareholders having repurchased $100 million of stock in 2022, along with our quarterly dividend. Our current share repurchase authorization has approximately $1.2 billion remaining. Now shifting to our 2023 outlook. Slide 18 provides global vehicle production volumes and currency assumptions that form the basis of our full year outlook. IHS's latest production forecast assumes global production will increase 4% in 2023 and by 5% on a Lear sales weighted basis. At the midpoint of our guidance range, we assume that global production will be up 1% for the industry or by 2% on a Lear sales weighted basis. At the high end of our guidance range. Our global production assumptions are generally aligned with the IHS forecast. We expect production volumes to grow by 5% in North America, while remaining flat in both Europe and China. From a currency perspective, our 2023 outlook assumes average exchange rates of $1.5 per euro and 7 RMB to the dollar. Slide 19 provides details of our 2023 outlook. Despite modest changes in industry volumes, we're expecting improved financial results. Our revenue outlook is expected to be in the $21.2 billion to $22.2 billion range. Our core operating earnings are expected to be in the range of $875 million to $1.075 billion. At the midpoint, this would imply an increase of 12% over 2022. Adjusted net income is expected to be in the range of $510 million to $670 million. Restructuring costs are expected to decrease to approximately $100 million. Despite expected higher capital investment to support launches and our growing backlog, our free cash flow guidance at the midpoint is expected to increase by over 17% over 2022 to about $450 million. The midpoint of our outlook, free-cash flow conversion would improve to 76%. Slide 20 walks our 2022 actual results to the midpoint of our 2023 outlook. Year-over-year revenue is expected to grow by approximately $800 million and adjusted margins are expected to improve by 30 basis points, due primarily to our margin accretive backlog and a reduction in commodity costs. Engineering and launch costs are expected to increase in 2023 which reflects investment required to support significant new business that will go into production in 2023 and 2024. This includes a roughly $25 million investment to support a newly awarded SUV JIT Conquest program launching late in the year. Positive net operating performance reflects the benefits from our Lear Forward plan and other performance improvements, partially offset by elevated wage and overhead inflation, including a significant increase in hourly wage rates in Mexico. We have included walks to the midpoint of our guidance for Seating and E-Systems in the appendix. Our overall guidance range is wide, reflecting the continued uncertainty around the macroeconomic outlook. At the high end of our range, which includes volumes largely aligned with IHS forecast, we would expect Seating margins in the high 6% range, E-Systems margins of approximately 5% and total company margins of 4.8%. Turning to Slide 21, we revisited the strategic pillars Ray previously discussed. On the next two slides, I will provide additional color on two of our strategic pillars. I'll discuss our growth plan for connection systems in electronics and E-Systems and how the Lear Forward plan will extend our leadership and operational excellence. Slide 22 provides details on the actions we are taking to drive margin improvements in E-Systems. While there are several factors that will drive margin improvement in the medium term, including further recovery of industry volumes, I want to highlight two key strategic areas that we have made significant progress on which will drive a meaningful improvement in operating margins. We have been targeting high volume products in connection systems and electronics that are shared across large electric vehicle platforms. This strategy has resulted in developing new products such as Battery Disconnect Units, Intercell Connect Board and Battery Plug Boards that customers will share across many vehicles in their product portfolios. With our acquisition of M&N in 2021, we increased our engineered components capabilities in North America, we're expanding these capabilities in Morocco to support our European business with increased vertical integration by in sourcing connection systems and engineered components on programs where we already provide wire harnesses, we will improve our cost competitiveness and the margin profile of this business. We expect organically increased revenues in connection systems, $750 million by 2025, which will improve E-Systems margins by about 100 basis-points. The second driver of margin improvement derives from our electronic strategy, we are focused on products that leverage our core capabilities and strengths in manufacturing and engineering. For example, our PACE award-winning BDU offers industry-leading thermal management innovations that enable electric vehicles to charge faster and drive farther. With the opportunities we have identified, we are targeting a 20% market share of Lear's addressable market for our BDU business. We've also begun to wind-down other parts of the electronics portfolio. We've spent the last three years studying the portfolio and the market opportunities to focus our investment on products with higher risk adjusted returns. For products such as audio and lighting, onboard chargers, inverters, cord sets and certain other power electronics products, we will continue to support the programs that are in production, but we have ceased all new development work. This strategy allows us to reduce and redirect our engineering investments, lowering near-term spending. This combination of lower near-term investments and higher operating margins on new programs that are launching will improve E-Systems margins by an additional 125 basis points by 2025. These two strategic initiatives, which will improve margins by 225 basis points by 2025 combined with further recovery in industry volumes and stabilization of the production environment will allow us to achieve our medium-term target of 8% by 2025. Please turn to Slide 23, On last quarter's earnings call, we introduced the Lear Forward plan, the plan is focused on driving efficiencies in our plants and across our segments. Our restructuring initiatives are designed to both improve efficiency and provide more long-term flexibility in our manufacturing facilities. We are applying what we learned by co-locating certain Seating and E-Systems operations in Brazil, to some locations in Mexico and Morocco in order to optimize our manufacturing footprint, capacity utilization and labor flexibility. We also have expanded our Industry 4.0 capabilities by acquiring Thagora and InTouch. These acquisitions increased our automation of surface material cutting and end of line quality checks in our GIP facilities, both of which will significantly reduce our manufacturing costs. To improve cash flow, we continue to focus on driving down inventory levels and improving capacity utilization to reduce capital spending. For example, in Morocco, we were able to consolidate cut and sew operations in a fewer facilities and repurpose an idle plants to support new business and connection systems. The Lear Forward plan is already driving results. We estimate cash flow improve by about $50 million in the fourth quarter due to these initiatives. In 2023, we are estimating operating and administrative cost savings of about $50 million with incremental improvements in 2024 and 2025 as the initiatives we are taking fully ramp up. Please turn to 25, which lists our key strategic priorities in 2023. We have made great progress positioning our Seating and E-Systems business for profitable growth. Integration of Kongsberg has exceeded our expectations and we are developing efficient modular solutions that will improve performance while reducing weight and complexity. Customers are very excited about our products and we believe our thermal comfort solutions business will support growth and margin improvement in seating. In E-Systems, we are ramping up production of both the BDU and Intercell Connect Boards. By focusing engineering and capital spending on fewer products across E-Systems, we are winning larger programs with higher financial return potential. Our backlog is strong and we have additional opportunities in the pipeline. Looking out past 2023, we expect to benefit from the continued industry volume recovery, stabilization of production and higher Lear content as EVs continue to display its traditional ICE vehicles. Our Lear Forward plan is already providing benefits and we have additional actions in-store for 2023 to improve our operational efficiencies. And we will continue to focus on generating cash to fund investments in our business and return returns to shareholders. I want to thank our employees for driving Lear's many accomplishments in 2022 and I can't wait to see what we will accomplish in 2023 and beyond. I'm curious about, maybe a little bit more insight into the bridge for 2023, you'd previously talked about the second half of 2022 is being a pretty good indicator of the launch point for margins with Seatings in the mid-sixes and E-Systems is in the mid-fours in the back-half and when I look at slide 30 and 31, it looks like similar margins into 2023 versus the back half. Can you maybe just give us a little bit more color on why from this point which reflects some recoveries the improvement in 2023 would be a little bit more modest. Yes, so I think starting with the second half of 2022, Seating margins were 6.7% that included about 300 basis points of timing benefit. So for example, on the commodity recovery negotiations with leather they typically happen later in the year and has an impact that relates to earlier in the year, as well as the patent matter that was settled. So the starting point for Seating, I'll go through Seating then E-Systems. 6.4% and sort of the launching point in the second half of the year and then we have margins flat year-over-year from there. Now the biggest negative driver from the second half to the full year of 2023 is on launch and engineering costs. And one thing we didn't know at the investor conferences we spoke at in early December was that we were going to be awarded a new conquest program that would have a very short development cycle and we take over production at the end of 2023. And so there's about $25 million of launch and engineering costs in the Seating doesn't associated with that. And overall it's about a15 basis point impact on margins year-over-year and 10 basis points from the second half to the full year of 2023. And then that's offset by modest net asset performance overall with another 10 basis points or so. So, volume and mix backlog is largely neutral in Seating from second half of 2022 to the full year of 2023. In E-Systems, second half margins were 4.4%, so we do have a modest increase in operating margins at the midpoint of the guidance to 4.5 for 2023 and that's really driven by volume mix and backlog are about 20 basis points, performance is about 10 basis points and then that's partially offset by higher engineering and launch costs, sequentially, again from the second half of 2022 to the full year of 2023 about 20 basis points. I will point out that at the high end of our guidance range there is 40 basis points of additional margin opportunity in Seating and 50 basis points in E-Systems, if Industry production more closely aligns with the IHS outlook. That's helpful. And maybe you can also clarify for us. You talked about, I think on your third quarter earnings call about $340 million of inflation that you had absorbed and that maybe half to two-thirds of it would be recovered over the next two years. Is the $25 million that you're indicating for this year kind of a sign that this is going to be a little bit more challenging or was that always something that was going to be more lagged? Yes. I think our general view on the recovery or offset of commodity cost increase is roughly the same. I think it's roughly half over the next two to three years, this is how I would characterize it today. And really, I think at this stage, we kind of shift more from contractual direct recovery to more of a negotiated recovery and so you sort of have to combine our LTA price down negotiations with all of the claims that we have on our end, which include higher commodity costs, higher wage inflation, the impact of an unstable production environment. And so our offset plan is a combination of recovery from the customer and continuing to generate net positive performance in both business segments, and I think if you look back over the last two years, just sort of step-back and look at the overall math the commodity impact, net of recoveries have been about 200 basis points for the company. We've offset about 100 basis points of that through performance improvements in both segments. So the net effect on margins of those two categories sort of gathers, about 100 basis points. I think if you look at 2023, 2024, 2025, I would expect that we will have fully recovered that 100 basis points over that time period. It's a little bit slower to start, I think in 2003, because in addition to the commodity issue that we've been dealing with and the unstable production environment, now we have sort of additional layer of wage inflation that I would characterize as well above what we've historically experienced. That by itself, rise by about an $85 million impact just looking at salary and hourly wage inflation in 2023 compared to 2022. That's the impact that we see in 2023. I think if the Fed does its job, central banks do their jobs and inflation comes down a little bit, you'll see that wage inflation normalize a bit more, if you look at 2024 and 2025 and that will give us a chance to what that net performance really show itself as margin accretion. Now with all that said, we're still very confident and fully committed to margin expansion in both segments, we see 8% as a reasonable margin target in both Seating and E-Systems in that 2025 time period. And we expect to take a meaningful step-up from the midpoint of the guidance that we just issued for this year to 2024, it may not be directly linear, but it's going to be pretty close I think as you look out over the next three years. Hey, thanks for that. And just to clarify that when you said you expect to recover half of this over the next two to three years. That's a combination of internal productivity plus external recoveries or is that just the recovery part of it? I would say it's both, those lines get blurred the longer time goes by here. Its -- those are -- the raw materials and wage inflation become part of that annual basket of goods that you're negotiating with your customers. So it's a little more difficult to delineate between the two baskets. Yes, good morning and thank you very much for taking the questions. First on the backlog, the three year forward backlog, I believe is now $2.85 billion. I think last year it was $3.3 billion. If I heard correctly in the prepared remarks, you talked about over 20% growth in backlog over the next couple of years. This is maybe you can help us better understand what's going on with a three year number and how much it's perhaps changes in overall end market assumptions? Yes, so let me start with time about 2023. The 2023 backlog that we issued last year is $1.450 billion, it's now $1 billion. So it's down by $450 million, $300 million of that's in Seating, $150 million of that is in E-Systems. And it's really attributed to two changes and customers' production plans. Starting with Volvo, their original production plan for South Carolina had a different mix of vehicles and what they're ultimately going to produce. And so in Seating we have EX90 SUV, electric SUV and the Polestar 3, but the ramp up of those is a little bit later than it was when that was originally awarded. So the impact on 2023 backlog is about $165 million and the impact of the overall change in their production plan is a negative impact of about $100 million to the three year backlog. The second issue is with GMs ramp up of the battery electric truck Factory Zero and the Equinox EV in Mexico, the assumptions that we had used last year compared to now results in about $150 million reduction to the Seating backlog in 2023, but no impact to the three year backlog. In fact, it might be slightly positive overall for those programs. So those two things together about $315 million that's been partially offset by this new conquest award which is going to launch at the very tail-end of the year, it's about a $50 million improvement net FX is negative as well. In E-Systems over that same time period in 2023, we were down about $100 million. Its also due to the ramp-up timing on the GM battery-electric truck platform, we saw $40 million impact and then to lesser extent there is an impact on Volvo. The Volvo production plant in North America as well. Now if you look out over a three year time period, the backlog in E-Systems is $25 million higher than it was last year and it's the second largest three year backlog that we've ever had in E-Systems and if you look at Seatings backlog for three years at $1.8 billion, its higher than the 10 year average that we've had in the seat business. So it does support that continued growth over market that we have demonstrated over the last 10 years in the seat business and continued gains in market share. So, in addition to that I will point to 2025 being very like given that there's lots of sourcing activity in both segments that will impact that number and we would expect to see that number considerably higher when we issue a new three year backlog 12 months from now. Thank you for all those details. With respect to the 8% E-Systems margin target in 2025, thank you for all the details you gave on that. Could you elaborate a bit more on how much incremental bookings may be needed in order to get there and also what type of global production environment may be necessary in order to hit that 8% target. Thank you. Yes, as we model 2025, we're using IHS at this stage which is I think 89 million units in 2025. And there's really no new business required beyond what's already been booked in E-Systems to achieve that. So, it's largely going to come through the improvement plan we outlined for connection systems and electronics and the growth in both of those areas combined with improvements in volume and commodity recovery and performance, driven by restructuring and other investments we're making in the wire business. One real quick on the balance sheet first on slide 17, I mean you're showing you have tons of liquidity and room to work with. I'm just curious what you think of as sort of your leverage targets, and how much room you might have to either buyback shares or get more aggressive on accretive acquisitions over time. It just seems like you have a lot of room. Yes. I would agree with that, especially as earnings continue to recover over time. Our target leverage ratio of 1.5 times EBITDA, I think is -- will give us some additional room to lever up if we saw -- found necessary to do so. I would say in the near-term, John, our focus is really on free cash flow generation, returning excess cash to shareholders through share repurchases and the dividend. There isn't anything big on the near-term horizon that we see as necessary or really attractive. And so if we're going to do anything on the M&A side. I think it's going to be more along the lines of what you've seen us do over the last couple of years more tightened... I think just the tuck-in acquisitions that we have done historically and more recently and they produce great results. I think when we think about the Industry 4.0 and the acquisitions we made there to really turn our business around and the operational efficiency in really driving our costs within our facilities exceeded our expectations. The Kongsberg acquisition, it's amazing with our customers, the type of momentum we're getting it within the thermal comfort management system. So the IGP, which is still, we still have to close that one out. It's going to only continue to help our position as the leader in vertically-integrated components within seats, but more importantly around the technology of the seat as we move forward. And the new contracts, we've been awarded, do give us the sourcing control, so we can organically what we're investing in is the ability to create those modular systems that integrate the components, a bag and a blower that just blows cold and hot air into trim cover and foam that's very unique to Lear Corporation. And so those type of investments are paying dividends. And the investment within connection systems like we saw with Intercell Connect Board, the electronic components that we're vertically integrating with M&N having that bus par capability is very unique and the over molding capabilities in our connection systems is really making the difference on how we can continue to drive down costs in our own product, but also the improvements within manufacturing. So, we like the position we're in, we like what we've been doing, its been very successful and there really isn't anything on the horizon that I would say is a major acquisition, I think of two smaller tuck-in acquisitions to continue to drive our strategy forward and position Lear for the success that we've seen. And I'd say and I think through the investment that we're making with this very unique, I think first ever in the market, changeover on the seat business that we're awarded late last year into this year, there's a lot more opportunities we're seeing in front of us. And so we see investment. We're only going to invest in products that get us good returns and so we're not buying business. This is a very unique program in seating that we're awarded. And we're investing in a brand new facility with the top line capital to make sure that we're efficient. And there's other opportunities that we're looking at in Europe, in North America that are very similar in nature. And those investments obviously expand our EBIT and our EBITDA, and our good investments in our wheelhouse where we're doing a nice job too. That's very helpful. And then quickly just a second question on EVs here. I mean we're getting real price action coming out of the biggest player in the market, it's people are responding in China now, in the U.S. What could a surge in EV volumes in 2023 mean for you? Are you set-up to benefit from that and have a capacity to handle that or is that something they might pass you by. I'm just curious if you think about the current environment, it seems like it could be very advantageous for the E-Systems side, but also maybe even on the Seating side as well. I think on both. I think we've talked about 67% of our new backlog was in electric vehicles and Seatings. So, yes that's setting up for Seating very well, and I think in E-Systems equally as far as the investments. I think it's taken a step back and we have talked about the strategy, we're really focusing on what we believe were core components that weren't going to be in-sourced or engineered by our customers and we have a shot at scaling properly. So the facilities that we're setting up like the facility in Michigan, it's designed exactly around that. We talked about on an annual basis, the $500 million revenue, but we can expand that for additional capacity and the focus that we're getting very granular in our approach of being very efficient at our engineering and capital that we're spending to capitalize on the ability to scale is exactly where we're going. So, yes as EVs accelerate, we are in a very good position both in E-Systems and in Seating based on the backlog that we've seen in Seating in the percentage of wins that we've gotten in the EV market. But just to be clear, in the near-term, this might be happening like as we are speaking. Have you seen anything in schedules as far as the mix change here in the short-run or are these pricing actions, something that are still kind of on the common in releases that you might see in the coming months? We are seeing customers ask for additional capacity, for example, Ford and the Mustang Mach E we've increased capacity in the near term to support a ramp-up in volume there. So, I think selectively in certain customers we are seeing an acceleration of volume potentially that may benefit later this year and into next year. Just on the U.S. growth over market backdrop. On a core basis, if you exclude the commodities impact in addition to FX and acquisitions, the mid-point is just under 5% growth over market, something like 4.7%. That compares to your weighted global LVP of course of plus 2%. So, can you unpack what's driving this point or so of lower outgrowth this year, is it Seating content mix, is it push out of certain launches in your backlog. Just how would you characterize the puts and takes? Thanks. Yes, so, James, the E-Systems growth over market, we would expect this year to continue at six points above market, consistent with the last what we've experienced over the last three or four years. Seating, we have grown at six points above market over the last four year time period 2019, 2020, 2021, 2022. We do see that moderating in 2023 to about two points of growth over market. And so the company growth over market would moderate to three points. Now the backlog in Seating is strong and that by itself contributes four points of growth over market, but the offset to that is our assumption around key platforms in North America in particular. So we have the North American market up 5%, we have a number of our top platforms down and on average, our top platforms in North America are down about 2%, so that's the biggest factor driving that. The GM full size pickup trucks and SUVs, for example, and we have that, we've assumed that that's going to be flat year-over-year. That may turn out to be a conservative assumption, that's what we've assumed coming off a really strong year last year for that platform. We've got the Audi Q5, Jeep Compass, Ford Explorer all down in a market that's up. And so it's really the mix of production and some of our existing platforms that's driving that. As we look out to 2024, you look again at our backlog, I point out that we would expect growth over market could be as much as seven points If you just look at the value of the backlog at $1.5 billion well with Seating that's six points above market and E-Systems at 10 points of growth above market just driven by the backlog. Again it's our core platforms are more closely aligned with market overall. Okay, no, that's super helpful. And then, just to size up the net commodities headwind impact entering 2023, could you maybe, my apologies if I missed this, but could you just confirm what is the expectation in terms of net commodity costs recovery for 2023. And then is this something where we should be thinking about the cumulative impact over the last couple of years and something that continually gets recovered or by the time we get to 2024, it's a clean slate. And we really shouldn't be thinking about the bridge in that regard. Thanks. Yes, so James, I did talk about that a little bit earlier, but, so the two year impact in 2021 and 2022, we had previously said was $340 million. We ended up a little bit better than that at $335 million. We expect to see about $30 million of that unwind itself in in 2023, largely driven by lower steel costs in North America. As we fast-forward to 2024 and 2025, what I would encourage you to do and sort of look at that in conjunction with our ability to deliver margin improvement through net performance, our cost reduction programs, our commercial negotiations more broadly, and so, I would expect to see margin growth in both segments of around 50 basis points each year in 2024 and 2025 as a result of that. So it's sort of indirect commodity recovery and other performance taken together. Maybe a follow-up on the earlier EV discussion. With the electrification and sales ramping and you have the CAGR out there. Can you walk us through impact on E-Systems margins today? And maybe how you see that evolving as you continue to aggressively scale the business? Yes. So the impact on margins is sort of embedded in those two data points that we shared with you, our connection systems and electronics because much of the electronics growth that we outlined through '25 is in the battery disconnect units, and we attributed 125 basis points margin expansion, 3 systems overall to electronics growth. And then also on the connection system side, the bulk of that growth it's going to come through electric vehicles, the intercell connect board being the most significant growth within that and then also the plugboard. So -- those are the two key drivers, and then we have the benefit of volume in wire on electric vehicle platforms. We do see growth there as well. But I don't have a specific basis point impact to highlight for that, David. Okay. Got it. No, that's helpful. And then I appreciate the color on the E-Systems margin expansion plan. Specifically on the connection systems build out, how much of that do you see yourself kind of able to do in-house today versus the need to do additional bolt-on acquisitions, whether it be in terminals or connector-type product areas? Well, I think we have great capabilities organically. There's -- if there's an opportunity for, like I said earlier, for a tuck-in acquisition that we continue to enhance our growth and expand our margin, it makes sense. We would do that. But to the Hu Lane partnership that we recently established, we've extended our ability to grow our business and grow that partnership. And then I think with the M&N acquisition, the over molding capabilities and the bus bars, these are becoming much more sophisticated. We have in-house capabilities. And the plug board for Volkswagen was probably one of the most sophisticated connection systems in what would be an EV space. And we were awarded that program. That program continues to grow because it gets scaled across multiple platforms. So nothing has limited us from growing in that area that we don't have in-house. It'd just be -- if there was an opportunity to expand quicker inorganically, where it would fit, it might make sense, but we have all the capabilities in-house and we've done a nice job growing that business. And we talked about the growth there. It's been incredible over the last several years. Wanted to follow up with you on some of the growth over the market. So I appreciate all the detail you gave on the backlog and even sort of the reconciliation towards the 2023 growth over market. What do you feel are now sort of the right normalized growth over market profile for both of your segments or on an ongoing basis? And then to what extent do you think mix could sort of play an ongoing headwind or tailwind in that? I understand the 2023 dynamics. But just generally speaking, is that a big factor? Yes, Emmanuel, I think that the mix factor or mix impact in '23 is probably the peak negative impact we would see in Seating. If you look out '24 and '25, I would expect that to moderate somewhat. And I think that 4 points of growth over market in Seating over the long term is still the right assumption to model. And as Ray alluded to earlier, we are seeing more interest from customers to take over business from competitors, either midstream or in the next generation than we've ever seen before. And that's coming on the heels of $2 billion -- nearly $2 billion of conquest awards over the last 4 years. I think the Seating team has performed at a very high level. They continue to -- customers are recognizing that. The competitive position we put ourselves in through the acquisitions, as Ray mentioned, again, with Kongsberg and the thermal comfort capabilities on top of everything else we've got there, certainly supports continued market share gains, and you may have noticed the change in tone somewhat on the 28% market share goal. That's a midterm goal. That's not the final goal. We see more runway to grow market share beyond 28% in Seating, and that would also support that four points of growth over market. In E-Systems, if you look at the backlog over the next 3 years and 6 points of growth over market is probably -- maybe a little bit light and maybe a little bit -- we may end up a little bit higher than that. But I think long term, that's a fair assumption to make as we continue to benefit from the shift to electrification and taking market share elsewhere in these systems. Okay. Great. And I guess then just drilling a little bit more on the factors in 2023. So I think you spoke about some of the key platforms in North America being down. I think the backlog itself for 2023 was -- seems like it was pushed out maybe on the electric vehicle, the electric trucks from GM. Can you just sort of like over the various - summarize as headwinds to the mix this year? Yes. I think you just described it. And some of the platforms that we're expecting to be lower that are important platforms for us. Today, they're still high volume Ford Explorer, we're calling that down 4%. I think IHS has it up. But our guidance assumes it's down 4%. The Jeep Compass, we're assuming that, that's going to be down about 24% and Audi, on the Q5, we're expecting that to be down about 20%. So in a North American market that's growing at 5%, that sort of weighs on the growth of the market in seating in particular. And then in terms of the backlog shift in 2023, you alluded to the GM program, but there's also a change in Volvo's manufacturing plants. So they had originally planned to build the XC90 in South Carolina when that program was awarded to us and then later made the decision to shift to the -- only the electric vehicle to the EX90 and the Polestar 3. And so the combined effect of that is lower revenue both in '23 and over the three year time period associated with that award. Okay. That's super helpful. And just a very quick one. The engineering launch being sort of a, I guess, an earnings and margin headwind in 2023 despite what is essentially comparable backlog versus last year. I guess, is this because of this program that's coming in on a shorter time frame? Yes, that is the driver. That's -- there's a $25 million investment in engineering and launch associated with that, and it's over a very compressed time period. And so that is the primary driver of the higher launch Engineering in Seating as we look out to next year. In addition to that, Engineering in general is up a bit more, and that's tied to some of the other conquest awards that were received that we'll launch in the '25, '26 time period in Europe in seating as well. Emmanuel, we'll talk more about the launch. We're working with our customer right now after the first quarter on this launch that will take place later this year about the specifics. We can't talk about it on this particular call, but hopefully, after the first quarter, we can give a little bit more detail and clarity on specifically what program we're talking about and where and volume and those type of things. Hi, everybody. You had a competitor on earlier this morning who guided to a negative 1% global production, and while acknowledging the chip supply broadly is getting materially better year-on-year, they did highlight that there are certain systems and chips, specific situations that do remain problematic and are leading to supply disruption. I was curious if that was consistent with your view, and could you specifically tell us what your OEM customers are struggling with right now? What type of chip or module or system is problematic to prevent significant growth on that weak term. Thanks. So it is better. There's no question about it. We're going to look back from where we were last year to this year. There's no question that our customers are much more sophisticated. I think what we're seeing now is the over ordering of all kinds of chips across the board, putting tremendous pressure on supply has been reduced. There are still issues relative to very specific chips and usage by particular products and I'm knocking in the specifics of what chips. I do know that we're in a much better situation, but there are situations where we're finding a shortfall of supply relative to chips. I think the communication between the customer and the Tier 1 and the chip manufacturer is significantly improved even though the industry as a whole has improved, there are pockets where we're finding shortage of particular chips. Now I do know that capacity -- more capacity is coming online this year. I think our customers are more optimistic about how things are going to move from the first quarter to the second quarter and the second half of this year should improve significantly. But we are at this stage right now in the first quarter, seeing shutdowns due to shortages of chips, and they're very selective chips. And I don't have the specifics of what those chips are, but we are still seeing shortages and it's more sporadic than we saw last year. That's helpful. That's helpful. So I was going to ask, when did you think that would alleviate your suggesting second half? I don't know if you wanted to develop that a little more based on the schedules and discussions of what you're seeing between your Tier 2s and what you're hearing from the Tier 1s? Is that kind of the expectation, I mean for the latter part of the year? There's capacity that comes online, I think that there's alternative designs that are coming online. There's, like I said, a much more sophisticated process now of what's required. The over ordering in the system that kind of shut down all chips, I think, has improved significantly. So from the way I'm looking at from what I'm getting feedback from OEMs and also suppliers, our chip manufacturers, is that the second half should be better. Hi guys. This is [indiscernible] filling in for Colin. Just on the price concessions. You guys have done a really great job at gaining market share. Don't you guys think that this kind of gives you guys more leverage when you go into negotiations with your OEM customers? Yes. You know what -- there's a -- like Jason talked about, there's a basket of ways that we can negotiate all kinds of things. And I will say this that we've been at this for 2.5 years with some of the commodity inflationary costs, labor shortfalls, those things, supply things. The customers are lot more willing to look at alternatives and ways to negotiate solutions across the board. We have not been in a position we have to buy business, and we're going after business just for the sake of buying business or productivity or paying for it. And I think the team has done a remarkable job of having balance between what our productivity deals are and offsetting some of the commodity increases, transportation increases, shutdowns, those types of things. So it is used in a very collaborative way with our customers to help offset some of the issues we've been talking about. And I think the customers have been receptive to working with us given some of the different situations that we've been able to help them out with either through supply or through launch or through production. So it continues to be a relationship game and making sure you're balancing between productivity and some of the issues that you're confronted with on the cost side. Okay. Cool. That's helpful. And then lastly, just on labor. I think you called out $85 million impact in 2023. I think recently in Mexico, there was a minimum wage increase of 20%. Is that baked into that $85 million number? Yes. It's one of the factors baked into that. And the minimum wage increase of 20% has sort of an indirect impact on us. Most of our -- for many of our wage groups in Mexico are well above the minimum wage. And so there -- it creates some compression in the wage scales, but it's not a 20% increase per se in our Mexico labor rates across the board. It's less than that. I think that's it, and probably the only one left on the phone now as the Lear team, and I just want to again say thank you for your incredible accomplishments last year. It's amazing what the team has done collectively around the world. We're going to have our challenges this year, but I know this team is absolutely capable of continuing to accomplish some of the great things we did last year. And I just want to say thank you for everything that you're doing. And ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.
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EarningCall_648
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Good day and welcome to the Enova International Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Lindsay Savarese, Director of Investor Relations for Enova. Please go ahead. Thank you, operator and good afternoon, everyone. Enova released results for the fourth quarter and full year 2022 ended December 31, 2022, this afternoon after market closed. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at ir.enova.com. With me on today's call are David Fisher, Chief Executive Officer; and Steve Cunningham, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website. Before I turn the call over to David, I'd like to note that today's discussion will contain forward-looking statements and as such, is subject to risks and uncertainties. Actual results may differ materially as a result from various important risk factors, including those discussed in our earnings press release and in our annual report on Form 10-K, quarterly reports on Forms 10-Q and current reports on Forms 8-K. Please note that any forward-looking statements that are made on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. In addition to U.S. GAAP reporting, Enova reports certain financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliations between these GAAP and non-GAAP measures are included in the tables found in today's press release. As noted in our earnings release, we have posted supplemental financial information on the IR portion of our website. Thanks and good afternoon, everyone. I appreciate you joining our call today. I'll start with an overview of our fourth quarter and full year results and then I'll discuss our strategy and outlook for 2023. After that, I'll turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and outlook in more detail. We once again produced a strong quarter, capping a great year for Enova, with solid revenue and profitable growth, combined with stable credit across both our SMB and consumer businesses. Our talented team, diversified product offerings and powerful machine learning credit risk management capabilities have enabled us to successfully navigate through the uncertain macroeconomic backdrop. Revenue in the fourth quarter increased 34% year-over-year and 7% sequentially to $486 million. Adjusted EBITDA increased 18% year-over-year and 4% sequentially to $120 million. And adjusted EPS increased 9% year-over-year and 1% sequentially to $1.76. Similar to Q3, the growth came from our SMB business as well as our consumer line of credit products. These results are driven by our ability to effectively manage credit through the current market environment. Net charge-offs were 8.8% in the fourth quarter which is slightly higher than Q3 as we continue to add a large number of new customers which were 42% of total originations. That being said, net charge-offs remain well below pre-COVID levels of 15.6% in Q4 of 2019 and 16.1% in Q4 of 2018 from a combination of mix shift and good credit management. Our analytics team has continuously refined our machine learning-powered model that have been the foundation of our ability to manage credit risk. And as we discussed on our last earnings call, we increased our ROE targets across all of our products during the back half of 2022. Those higher ROE targets remain in place and we continue to deemphasize our longer-term near-prime installment loans, limiting our duration risk and allowing us to adapt more quickly in an uncertain macroeconomic environment. Given our continued focus on shorter maturity products, in line with our expectations, the percentage of consumer installment loans in our portfolio decreased in the fourth quarter. And within consumer, line of credit products significantly increased as a percent of total consumer loans. While we have a more conservative approach to originations and our balanced approach to growth and risk, customer demand remains strong. As a result, we have maintained strong origination volume. Total company originations increased 9% year-over-year and were down only 3% sequentially. And we still generated substantial growth for the year with combined loan and finance receivables increasing 46% year-over-year to a record of $2.9 billion. Looking back on 2022 and more broadly to the past 5 years, we are proud of our world-class execution that has delivered sustained strong results with both meaningful growth and meaningful returns. In just 5 years, we've more than doubled our annual revenue, tripled our adjusted EBITDA and our adjusted EPS has grown more than 6x. A lot has happened over the last 5 years and the market environment continues to rapidly change but we have demonstrated that we are exceptional operators with an ability to adapt in any environment. That is rooted in our focused growth strategy. We have also demonstrated that we can maintain a strong balance sheet which currently has over $700 million in liquidity, even with difficult capital markets. The result of these efforts has been industry-leading performance for Enova. Over the last 5 years, we've transformed the business in a number of ways. We have been laser-focused on offering products with the features customers want through our flexible online model which is preferred by borrowers. This has enabled us to grow our share of the nonprime credit market. As part of this transformation, we have diversified almost every aspect of the business, including our revenue streams, marketing channels, funding capacity and more. The diversification has been very intentional. It has contributed to our growth while decreasing our macro and regulatory risk. Despite those results, we are trading at only 5.5x 2023 consensus earnings estimates, while EPS grew at a CAGR of almost 50% over the last 5 years. Accordingly, we are going to increase our focus on unlocking significant more value for our stockholders. Our confidence in the value of our company is related not only to the consistency of our performance over the past several years but also the growing contribution of our large and market-leading small business lending franchise. Our SMB business has a diversified portfolio across a wide range of industries, states, product types, loan sizes and prices. Today, small business products represent more than 60% of our total portfolio, up from 10% in 2017. And from 2019 to 2022, the contribution of small business to total company EBITDA has increased from 6% to approximately 60%. Our SMB business has generated a significant growth at attractive unit economics. As with our consumer businesses, we target ROEs of over 30% and EBITDA margins north of 20%. Even with our significant growth over the last couple of years, we are still a very small percentage of our addressable market, leaving ample room for future growth. Despite this demonstrated success in SMB lending, the implied multiple in our valuation is similar to other nonprime consumer-only lenders, while commercial lending sectors such as equipment leasing and business development companies are currently valued at significantly higher multiples of 2023 earnings. Even with the modest application of these valuation differences, we believe there is meaningful upside to our current share price. Before I turn the call over to Steve, I'd like to take a few moments to discuss our outlook and strategy for 2023. While in this environment, we will remain focused on our balanced approach to growth and risk. While it's hard to predict how the macro backdrop plays out this year, in any event, we believe that we have the right strategy in place to continue our success and help hardworking people get access to fast, trustworthy credit. As Steve will discuss in more detail, based on what we are seeing in the current market environment, we expect growth on both our top and bottom line in 2023 compared to 2022. For our SMB business, we will continue to analyze real-time cash flows as well as external data to monitor industries that are more prone to recession. While there may be pockets of challenging credit, given our diversified portfolio and strong brand presence, coupled with continued strong demand and low levels of competition, we believe we are well positioned to grow that business further. For our consumer business, we know that nonprime customers are familiar with living paycheck to paycheck and are adept at managing variabilities in their cash flows. In some ways, our customers are always in a recession. And so we believe that recessions have less of an impact on our customers than on prime borrowers. This is especially true when employment and wages remain high as we are currently experiencing. Finally, I want to wrap up by giving a big thanks to the amazing team we have built at Enova. Our collaborative work environment, challenging development opportunities and industry-leading benefits help Enova rank among the Computer Places -- Best Places to Work for the tenth consecutive year in a row. We believe that having diverse perspectives creates the best answers. I would now like to turn the call over to Steve, who will discuss our financial results and outlook in more detail. And following Steve's remarks, we'll be happy to answer any questions that you may have. Steve? Thank you, David and good afternoon, everyone. We're pleased to report another quarter of solid top and bottom line financial performance in line with our expectations. Despite a difficult macro environment during 2022, we produced record originations and delivered record revenue. We ended the year with the largest portfolio in our history and our ample liquidity, strong capitalization and solid returns on equity also enabled us to repurchase nearly $140 million of our shares. As David noted, our diversified product offerings have allowed us to adapt and pivot in this uncertain macroeconomic environment to support the resiliency of our portfolio while continuing to deliver solid financial results. Turning to our fourth quarter results. Total company revenue rose 7% sequentially and increased 34% from the fourth quarter of 2021 to $486 million. The increase in revenue was driven by the growth of total company combined loan and finance receivables balances which on an amortized basis were $2.9 billion at the end of the fourth quarter, up 8% sequentially and 46% higher than the fourth quarter of 2021. As David noted, total company originations for the fourth quarter totaled $1.2 billion, down slightly sequentially and 9% higher than originations during the fourth quarter of 2021. Total company origination trends were influenced by our increased emphasis during the second half of 2022 when originating shorter duration and smaller dollar consumer line of credit consumer products are reducing exposure to longer duration and larger dollar near-prime consumer installment loans. I'll discuss this more in a moment. In light of the customer demand that David mentioned, our marketing activities continue to effectively attract new customers across our products, with originations from new customers during the quarter remaining strong at 42% of total origination. We expect originations from new customers will remain above historical averages as our consumer mix continues to shift towards lines of credit. Small business revenue increased 12% sequentially and 67% from the fourth quarter of the prior year to $193 million as small business receivables growth continued to be strong. Small business receivables on an amortized basis totaled $1.8 billion at December 31, a 13% sequential increase and 77% higher than the end of the fourth quarter of 2021 as small business originations increased 42% from the prior year quarter to $826 million. Revenue from our consumer businesses increased 3% sequentially and 18% from the fourth quarter of 2021 to $286 million as consumer receivables on an amortized basis ended the fourth quarter at $1.1 billion, flat sequentially and 12% higher than the end of the fourth quarter of 2021. Consumer originations of $336 million were lower sequentially and compared to the prior year quarter. The lower growth in our consumer portfolio was influenced by our increased emphasis during the second half of 2022 on originating more consumer line of credit products. As a result, consumer line of credit receivables grew 18% sequentially and 43% from the end of last year as consumer line of credit originations grew 13% sequentially and 30% from the fourth quarter of 2021. Consumer demand for these products is strong and this mix shift supports our ability to adapt more quickly in an uncertain macroeconomic environment. Looking ahead, we expect total company revenue for the first quarter to be flat sequentially as we expect some first quarter seasonality and to maintain our balanced approach to growth that we've been executing for the past year. This expectation for revenue next quarter will depend upon the level, timing and mix of originations growth during the first quarter. Now turning to credit. The net revenue margin for the fourth quarter of 60% was within our expected range. Credit quality which is the most significant driver of net revenue and portfolio fair value, continues to perform in line with our expectations as $4.5 billion of loans originated during 2022 continue to season. Fourth quarter net revenue and credit metrics for the total company reflect the continued seasoning and normalization of our growing small business portfolio in the aforementioned deliberate mix shifts within the consumer portfolio. The total company ratio of net charge-offs as a percentage of average combined loan and finance receivables for the fourth quarter was 8.8% compared to 8.4% last quarter. And the percentage of total portfolio receivables past due 30 days or more was 6.7% at December 31 compared to 5.6% at the end of last quarter. With the meaningful growth in our small business portfolio this year, we continue to see credit metrics for the portfolio moving to more normal levels from unsustainably low levels we experienced during 2021 and early 2022, along with a corresponding move in the small business net revenue margin toward a more typical level, ranging from the low 60% to the low 70%. The credit outlook for our small business portfolio, as reflected by the fair value premium as a percentage of principal, continued to reflect a stable outlook for lifetime portfolio credit losses at the end of the year and increased 1 percentage point from the end of last quarter to 109%. Similar to what we have observed with our consumer portfolio during 2022, as our small business portfolio's performance and credit metrics continue to settle at more typical ranges, there could be some quarter-to-quarter variability, including temporarily falling below or above typical ranges for the net revenue margin. This can be especially evident in this uncertain macroeconomic environment where we could have slight quarter-to-quarter variations in growth and performance. We highlighted in our earnings call last quarter that we increased our ROE targets across our portfolio, including small business. This was to ensure we had additional cushion in the profitability profile of our loans to protect against potential credit variability in the market environments like we are in now. So even if net revenue margin is lower than expected for a short period of time, we are still likely to generate positive returns on those portfolios. Now turning to consumer. Performance and credit metrics for our consumer portfolio are reflecting the aforementioned shift toward line of credit loan. Consistent with that shift, we've seen an increase in the fair value of our consumer portfolio as a percentage of principal during the second half of 2022, including 3 percentage points this quarter, reflecting a solid outlook for the lifetime credit losses versus original expectations. As a result of the aforementioned trends in our small business and consumer portfolios, the fair value of the consolidated portfolio as a percentage of principal increased by nearly 2 percentage points this quarter to 110%. Looking ahead, the small business credit continuing to settle at more typical levels and consumer credit remaining relatively stable, we expect the total company net revenue margin for the first quarter of 2023 to be in the range of 55% to 60%. The future net revenue margin expectation will depend upon portfolio payment performance and the level, timing and mix of originations growth. Now turning to expenses. Our operating costs this quarter continue to reflect the leverage inherent in our online model and our thoughtful expense management. Total operating expenses for the fourth quarter, including marketing, were $176 million or 36% of revenue compared to $187 million or 52% of revenue in the fourth quarter of 2021. Our marketing activities remain effective and efficient with total marketing spend this quarter of $97 million or 20% of revenue compared to $108 million or 30% of revenue in the fourth quarter of 2021. Looking forward, we expect marketing expenses as a percentage of revenue to be around 20% in the near term but will depend upon the growth and mix of originations, especially from new customers. With growth in receivables and originations during 2022, operations and technology expenses for the fourth quarter increased to $45 million or 9% of revenue compared to $39 million or 11% of revenue in the fourth quarter of 2021. Given the significant variable component of this expense category, sequential increases in O&T costs should be expected in an environment where originations and receivables are growing. It should range between 9% and 10% of revenue. Our fixed costs continued to reflect our focus on operating efficiency and thoughtful expense management. General and administrative expenses for the fourth quarter declined to $35 million or 7% of revenue from $41 million or 11% of revenue in the fourth quarter of 2021. While there may be slight variations from quarter to quarter, we expect G&A expenses as a percentage of revenue of around 8% in the near term. We recognized adjusted earnings, a non-GAAP measure, of $57 million or $1.76 per diluted share compared to $1.61 per diluted share in the fourth quarter of the prior year. Our solid balance sheet and ample liquidity give us the financial flexibility to successfully navigate a range of operating environments. It has allowed us to deliver on our commitment to long-term shareholder value through both continued investments in our business as well as share repurchases. We ended the fourth quarter with $729 million of liquidity, including $196 million of cash and marketable securities and $533 million of available capacity on facilities. The solid credit performance of our portfolios continues to be reflected in our capital markets activity. In addition to closing a new $125 million facility to finance net credit installment loans in October that we discussed on our last call, during the fourth quarter, we also successfully renewed or amended $463 million of existing facilities secured by OnDeck receivables to either extend maturities or increase advance rates with favorable pricing. Despite the 425 basis point increase in the term SOFR rate during 2022, our cost of funds for the fourth quarter was 7%, up only 50 basis points from the fourth quarter of 2021. Demonstrating our confidence in the continued strength of our business relative to our current valuation, during the fourth quarter, we acquired 525,000 shares at a cost of approximately $19 million. At December 31, we had $158 million remaining under our authorized share repurchase programs. Now turning to our expectations for the full year of 2023. In a macroeconomic environment that is largely the same as when we exited 2022, we would expect originations for the full year 2023 to grow between 10% and 15% as we maintain our focus on an origination strategy that balances growth and risk. The resulting growth in receivables, stable credit and continued operating leverage should result in full year 2023 growth in both revenue and adjusted EPS that is faster than expected originations growth. Our expectations for 2023 will depend upon the macroeconomic environment and the resulting impact on demand, customer payment rates and the level, timing and mix of originations growth. Finally, to summarize our first quarter outlook, we expect revenue to be flat sequentially, primarily as a result of typical first quarter seasonality, combined with our continued focus on an origination strategy that balances growth and risk against the current macroeconomic environment. And we expect the total company net revenue margin in the range of 55% to 60%, with continued normalization of our small business portfolio and stable consumer credit. In addition, we expect marketing expenses to total approximately 20% of revenue, expect O&T costs between 9% and 10% of revenue and G&A costs of around 8% of revenue. These expectations should lead to an adjusted EBITDA margin in the 20% to 25% range and slightly lower adjusted EPS compared to the first quarter of 2022, primarily due to the rise in SOFR. Our first quarter expectations will depend upon customer payment rates, the level, timing and mix of originations growth. We entered 2023 with financial flexibility and we remain focused on delivering solid financial results while striking a prudent balance between growth and risk. We are confident that the demonstrated ability of our talented team has us well positioned to quickly adapt to the evolving macro environment. David, I was kind of planning on opening with expected question about kind of the macro and credit environment and so forth but I got diverted by your comment about increased focus on unlocking more value for shareholders. And obviously, there's a usual list that people have in terms of kind of the tools that are available and the company has been a fairly aggressive repurchaser of its shares in the past. I'm wondering, I mean is there anything you want to expand on that statement? Is it more of just a kind of general comment? Or is there a specific action plan above and beyond just continuing to deliver the kind of results you have? Yes. Sure, David. Good question and probably worth us clarifying a bit. I mean, look, we're not going to come out with the laundry list of stuff we're going to work on for a whole variety of reasons but it's more than just lip service. It's a concerted effort here. We've got people dedicated to the effort. We've just had so much success in the business really over the last decade but certainly over the last 5 years or so. And the business is just a completely different business than it was a handful of years ago. But given both the consistency and the diversification, the quality of our balance sheet, we're still trading at roughly the same multiples and that just doesn't make a lot of sense to us. So our job, in addition to continuing to operate the business well, is to unlock some of that value. So definitely more than lip service. I'm not going to give a list but certainly a concerted effort here. Understood. And the frustration is understood as well. Maybe just 1 follow-up question, I guess, regarding product focus. As it relates to kind of the ROE targeting and the, I guess, deemphasizing the kind of near-prime installment product, is that something that's a permanent shift and should be something we should think about as kind of the longer-term profile of the business? Or is this just in relation to the macro environment trend you saw on the ground? Just kind of wondering, like are there certain things we should be keeping an eye on that would signal the company reaccelerating that product as well in the future? No, it's really just situational. It's a great product. We've built a great business around it. We're still originating. We haven't, by any means, turned it off. We've just deemphasized it to focus more on shorter-term slightly smaller dollar loans, it just give us more visibility and more flexibility in the uncertain macroeconomic environment. I think as we see the economy improving and on an upswing, you'll -- I think all things equal, you'll see our emphasis on that product increase because it was very successful with great returns and great profitability. So yes, that's purely situational given the macroeconomic environment. Okay. And I apologize, just to squeeze in one last one. I just wanted to clarify Steve's comments during the guidance presentation. Did I hear correctly that through the full year, obviously, a lot of variables but revenue and adjusted EPS would be expected to grow on a year-over-year basis in excess of the 10% to 15% range that was provided for originations? I appreciate all the guidance. Real quick on that, Steve, you said the words for the near-term when you gave a few guidance factors around some of the expenses and so forth. When you were saying near term, was that just referring to the first quarter? Or is that more of kind of just kind of a base case throughout the year as you stated it? Yes. I mean for the most part, as I wrapped up at the end there, I clarified that it's primarily focused on the first quarter. So aside from what David just asked, most of my guidance was related to first quarter expectations as we've been providing a quarter forward general view for a while now. Okay. That's helpful. And then I guess a little follow-on for David's question. Just as you emphasized more of the line of credit product given your focus, what should we think about the overall yields and so forth kind of the mix of the -- I don't know, the ROA drivers in the consumer book as you kind of emphasized that product over the course of the year? Yes, I mean I think you've seen a little bit of -- if you've seen our supplement, yields ticked up just a little bit which is what we said last quarter when we were asked about it. You might see a bit of a change but not a return to kind of where we were last year. And I think that's going to hold true. So I think you're going to continue to see strong risk-adjusted cash flows, as you've seen in the fair value marks on the consumer book as we make these adjustments and that's a reflection of the performance as well as the cushions that we're building related to ROE to give us flexibility. Yes. I think the only thing I would add is the ROEs on that product are very strong. So I think that's why you're seeing the strong fair value marks with the higher yields over time. With that mix shift, you'll see slightly higher charge-offs than you would have with the installment product. But given the higher yields and the higher fair value marks and the higher ROEs, that the returns on the product are very, very strong. So yes, if we see slightly higher charge-offs in the consumer book, it's likely to be largely mix-related. Okay. And then last question, just because we've heard like in the small business that certain industries are doing well, certain industries have been challenged, I guess, tied to inflation. You guys are obviously sailing through that kind of variability with pretty consistent results. So I'm wondering, as you kind of tightened or refined in that segment, are there different subsectors that you can -- you've been emphasizing and some that you've been shying away from or any color you can give us on that? Sure. So I think one reason we're able to manage this well is we got way out in front of it. This is not last quarter or 2 initiative. This really started with COVID and has been continuing ever since. So we look at industries, we break it down, it's really 100 different industries if you think kind of high level. Restaurants, we continue to be cautious with, although they're doing very, very well now. So we certainly haven't abandoned that space at all but it's a place we're watching out for. Trucking is a mess; the whole industry is having problems, from supply chain issues affecting their loads but also their ability to fix their trucks, fuel prices, just a whole bunch of factors. Trucking is really problematic right now. So we've been -- we've stayed out of that space for many, many quarters now. And then residential construction is a place that we have continued to deemphasize really over the last year. That market is not doing particularly well. So those are a few of the highlights. There's many, many more that have different risk ratings in our portfolio so that we're shying away for emphasizing the different degrees. On the flip side, there's industries that are doing really, really well right now. So they get varying risk degrees. They're continually upgraded but -- updated. But those are a couple of examples of ones that we were staying pretty far away from. Just -- again, I'm going to ask for a clarification on guidance. I just want to make sure what you said. First quarter earnings per share or adjusted earnings per share are down slightly year-over-year in the first quarter. Did I hear that correctly? Yes. That was the expectation we set. And really, it's largely related to the interest expense that I mentioned, the rise in SOFR compared to where we were a year ago. But again, I'd point you back to a slight decrease. That's fine. And obviously, the net revenue margin guidance that you gave for the first quarter is slightly lower than what had been kind of communicated through 2022, right? It was -- you had 55% to 65% in the first quarter here, supposed to be between 55% and 60%. So it takes off the top end a little bit. Is the -- I mean is the first quarter supposed to be lower than the other quarters? Is 65% still a doable number? I know you gave some puts and takes and how it can be below or above kind of the historical ranges going forward. Is there just more variability in that number going forward? Is that maybe due to the fair value mark? I'm just trying to get my head around if that kind of historical 55% to 65% is still an appropriate rate going forward. It is in that the 55% to 65% is intended to be -- when you're in sort of a normalized environment, think of a pre-COVID environment where you're sort of clicking along, not really in an environment like we're in right now, where we're pivoting and adapting and you may have some variability from quarter to quarter. So you'll be -- we'll still be within that range. But there might be a little bit more variability quarter to quarter between the 2 products and on a consolidated level. But we think we'll still hang in that 55% to 65% at a consolidated level. And then just last question for me. Obviously, you noted strong consumer demand for your products. I'm wondering how closely you're watching what the CFPB is doing in the credit card market. Obviously, the Credit CARD Act, I covered the space when the Credit CARD Act was enacted and I remember certainly kind of a windfall of consumer demand because of what the initial Act did. I'm wondering if what the CFPB is trying to do with late fees could usher in a new wave of consumer demand for smaller ticket items that people are not getting kind of the in-store credit for anymore if that fee is, in fact, reduced as sharply as they proposed this morning. And that's it for me. Yes. No, it's a great question. Certainly something we've started thinking about as well. We -- yes, we have definitely seen when credit is limited in other parts of the market that it benefits us. Whether it's from a competitive basis or a regulatory basis, our products are ones consumer want. They're solid. They've been in the markets for a long time. We don't charge a lot of those kinds of fees that are getting a lot of that attention. So we'll keep an eye on it. But tightening or elimination of credit in other areas of the economy has been beneficial to us in the past. Just following up on the SMB question earlier. So just wondering if you could take us through sort of your expectations for SMB if you were to go through a mild recession. So I know on the consumer side, the consumer, as you pointed out, kind of is very adept at managing and is kind of in a recession most of the time. I'm just wondering if you could expand on the small business side. What is the small business customer kind of thinking or worrying about right now? And then as we go through the cycle, how does that behavior typically change? Yes. No, great question. We are being very conservative with our small business lending right now. There's a tremendous amount of demand. I think both demand from businesses who need money coming out of COVID still but also from a lack of competition and a reduction of competition. So there's a tremendous amount of demand. We're filling a very small portion of it as we are trying to remain very, very conservative with respect to our originations, so we can manage through any turmoil in the economy. And that's really our approach to it. I think where on the consumer side, you tend to have a lot of people who act similarly kind of all at the same time but you have a very large book. That's kind of how you manage through it with very high spreads. On the small business side, our focus is really on diversification, diversification across states, across industries, across product types and across kind of the credit spectrum. And we think that diversification is really what provides the protection in a recessionary environment for us, especially an environment that looks like the one we're likely to be in for the next 6 months to a year where it's more choppy. Obviously, you have a giant hit to the economy like you did in 2008 or 2009. You're likely to feel pain across all those spectrums. But as we've just seen over the last 6 to 12 months, there are some industries that are doing well for a couple of quarters and some that are doing worse and then that rotates. And having that strong diversification has allowed us to manage through that variability over the last couple of years without too much difficulty. So that's kind of our approach, kind of our thought process going forward. This doesn't look like a recession that's going to bring down all kinds of businesses all at once. So that diversification effort and having portfolio limits across states, across loan types, across industries, we think, is really -- is going to allow us to continue to manage a strong book through this period. Okay, great. And following up on small business again. So you pointed out that your share is low as a percentage of the overall market even though you've grown so well. So if you kind of play out how you plan to expand and maybe take share from that, is that sort of competitors pulling back maybe in a recessionary environment while you're able to underwrite better? Or is there product expansion or just sort of thinking of how you can expand on that -- on the TAM opportunity versus your competitors? Yes. Another great question. So we're not being super aggressive with taking share right now because we don't want to be too aggressive with our lending. But we continue to build out products and expand the types of opportunities we can offer to small businesses and we'll continue to do that over time so that as we do get aggressive hopefully in the next -- more aggressive over the next 6 to 12 months, we can take our industry-leading position, combine that with the new products that we can offer customers and we'll be even in a more dominant position. So we're gaining share just by kind of just by the fact that competitors are pulling back even more due to credit concerns or lack of capital and we're fine with that. But we're not trying to maximize our market share right now because we do want to make sure that we're being smart about credit. But continuing to build in the background so that when we do get more aggressive, we're really well positioned. This concludes our question-and-answer session. I would like to turn the conference back over to David Fisher for any closing remarks. We appreciate everyone joining us today and your questions and we look forward to talking to you again next quarter. Have a great evening.
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EarningCall_649
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Ladies and gentlemen, thank you for standing by. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. [Operator Instructions] Welcome to Avery Dennison's Earnings Conference Call for the Fourth Quarter and Full Year ended on December 31, 2022. This call is being recorded and will be available for replay from 4:00 PM Eastern Time today through midnight Eastern Time, February 05. To access the replay, please dial (800) 633-8284 or 1 (402) 977-9140 for international callers. The conference ID number is 2202-0690. I would now like to turn the conference over to John Eble, Avery Dennison's Head of Investor Relations. Please go ahead. Thank you, Frank. Please note that throughout today's discussion, we'll be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified and reconciled from GAAP on schedules A4 to A10 of the financial statements accompanying today's earnings release. We remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the safe harbor statement included in today's earnings release. On the call today are Mitch Butier, Chairman and Chief Executive Officer; Deon Stander, President, and Chief Operating Officer; and Greg Lovins, Senior Vice President and Chief Financial Officer. Thanks, John, and good day, everyone. We posted impressive results in 2022 in the face of an extremely challenging environment. We delivered another year of double-digit EPS growth on a constant currency basis. EPS is up 40% from 2019 levels, reflecting our consistent ability to deliver year-over-year earnings growth, despite concurrent and compounding challenges. Both our Materials Group and Solutions Group delivered solid top and bottom line results last year, while driving further acceleration in the pace of Intelligent Labels adoption. As you can see, we have changed our operating segments. We combined LGM and IHM to create the Materials group. Over the past few years, we've been leveraging more and more of the operational capabilities and technologies across LGM and IHM to enhance our ability to win in each business's respective marketplace. The combination of these two businesses is the next evolutionary step of this strategy. As for RBIS, we renamed the segment the Solutions Group to better reflect the increasingly broader reach and ambitions of our solutions beyond Retail. Deon will provide color on segment performance in a moment. Both businesses delivered impressive results in 2022, especially considering the significant macro headwinds we faced, including sizable currency movements, pandemic-driven demand challenges in China, the Russian war in Ukraine and, of course, significant inflation and supply chain disruptions. In addition to the unique challenges that the inflation and supply chain disruptions presented, this also caused an increase in demand volatility throughout the year. The high inventory levels downstream from us, which we called out at the start of the year, were built further midyear. Then as supply chain constraints began to ease and raw material inflation showed signs of moderating, inventories were reduced swiftly beginning in November. This trend continued into December and January. Now while we anticipated the inventory buildup downstream from us to unwind at some point, the pace and magnitude of reductions was faster and greater than we expected and then we have seen in past corrections. Overall, while this put significant pressure on our financial results in Q4 and now in Q1 of this year, we see the reduction of excess inventory is a good thing as it positions our industries and business to return to a more normalized growth trajectory beginning in Q2. That said, such a sudden decline in volume is indicative of patterns of previous macro slowdowns. We have been activating countermeasures accordingly. We have initiated temporary cost reduction actions, ramping up restructuring initiatives and paring back capital investments in our base business -- base businesses while protecting investments in our high-growth initiatives, particularly Intelligent Labels, both organically and through M&A. Despite a challenging macro environment, we are targeting mid- to single-digit EPS growth in 2023, reflecting a soft Q1 driven by inventory corrections, followed by a second half run rate for EPS of more than $10. Our strong track record over the long term reflects the strength of our markets, our industry-leading positions, the strategic foundations we've laid and our agile and talented team. Our playbook is working extremely well as we continue to focus on five overarching strategic pillars: to drive outsized growth in high-value categories; grow profitably in our base businesses; focused relentlessly on productivity; effectively allocate capital; and lead in an environmentally and socially responsible manner. As you know, a key element of our strategy to drive outsized growth in high-value categories has been our focus on Intelligent Labels, which we expect to be a $1 billion platform this year. We continue to invest in this platform as we expect it to grow more than 20% annually in the coming years. This is a tremendous example of our strategy at work. We've refined our strategies over time, raising the bar for ourselves in the process to ensure we continue to deliver superior value creation for all of our stakeholders. We have a clear set of objectives and strategies focused on their mutual success. We're making great progress towards our 2030 sustainability goals and are on track to deliver our 2025 financial objectives, which Greg will walk through momentarily. The ability of our teams to drive these strategies forward over the long haul and deliver these impressive results, including once again achieving double-digit EPS growth last year, is remarkable. So, I once again thank our entire team for their tireless efforts to keep one and other safe while delivering for all of our stakeholders. Over to you, Deon. Thanks, Mitch, and hello, everyone. As Mitch said, we delivered impressive results in 2022 in the face of an extremely challenging environment. I'll now provide more color on our segment performance. Materials Group delivered 11% organic growth for the year, driven by higher pricing and a low single-digit volume decline, excluding the impact of exiting Russia. Operating profit for the segment was strong, up mid-single digits ex currency as unprecedented levels of inflation were met with significant pricing actions to continue delivering strong returns in this already high EVA business. Over the long term, Label materials volumes continue to grow at GDP plus, up 3% annually in 2022 compared to 2019. In the fourth quarter, Materials Group sales were up 2% ex currency and on an organic basis, driven by a mid-teens impact from higher prices, largely offset by a low double-digit volume decline. Following a period of material constraints earlier in the year, downstream inventories that began the year elevated were built up even further midyear. And the supply chain disruption eased and inflation abated, customers rapidly destocked as they began to optimize inventory levels in the fourth quarter. On an organic basis for the quarter, Label materials were up low single digits, graphics and Reflective sales were up low single digits and Performance Tapes and Medical sales were up low double digits. Looking at Label materials organic volume growth in the quarter by region, combined North America and Western Europe were down mid-teens. Overall emerging markets were down mid-single digits, with China volumes down low single digits, and the exit of Russia lowered total Label materials growth by roughly three points. Given the soft environment over the past few months and the expectation for moderating economic growth, we have been activating our cost-saving initiatives, both temporary and structural. We are focused on optimizing our cost structure and protecting the bottom line in this lower volume period while continuing to manage strong pricing discipline. Given all these factors, we expect Q1 to look similar to Q4, anticipating roughly one to two weeks of inventory to be further reduced across the industry with destocking concluding in the earlier part of the year. Following the inventory correction, given the durability of our diverse and growing end markets, along with our market-leading position, we expect to rebound to GDP plus growth from Q2 onwards. Stepping back, the combination of LGM and IHM not only enables us to fully leverage the capabilities of the whole business but strengthens our ability to win in the broader functional materials market, while also continuing to deliver EVA growth. Turning to the Solutions Group. Organic growth sales were up 5% for the year, driven by strong growth in high-value solutions and posted record margins, despite the impact of retailer destocking. In the fourth quarter, Solutions Group sales were down 7% ex currency and 8% on an organic basis. The base business was down high teens organically, partially offset by mid-single-digit organic growth in the high-value categories. Apparel inventory reductions were broad-based across all channels in the fourth quarter, and destocking continued in January. In this segment, we expect destocking to continue through Q1 and into Q2 as retailers factor high inventories, muted holiday performance and lower sentiment into their near-term sourcing plans. Similar to the Materials segment, we are activating cost-saving initiatives, both temporary and structural. We expect our apparel business to return to historic GDP growth in the second half of the year and for the Solutions segment to additionally benefit from the significant growth increasing through the year in our Intelligent Labels platform. Turning to Intelligent Labels; enterprise-wide sales were up mid-teens on an organic basis in 2022. Momentum in this roughly $800 million platform continues to accelerate. This business has more than tripled in size over the last five years, averaging 20% annual growth on an organic basis. The strong growth over this time horizon has primarily been driven by apparel as we continue to drive further adoption of the technology, extend use cases and expand programs with major customers in this key end market. And while we continue to expect apparel to be the largest volume in the coming years, we see even greater opportunity over the long run in other key untapped markets. In logistics, which is expanding from targeted applications such as special package handling, to broad-based use cases such as improving miss loads and routing accuracy. In food, where we are seeing promising pilots in QSR and grocery, in use cases covering freshness and labor efficiency and in general retail, where the technology is being expanded beyond apparel. The benefits of our Intelligent Label technology and Solutions are clear. The increased supply chain and inventory visibility, lower cost and improved speed of operations, reduce waste and ultimately enhance the experience of end consumers. As a leader in ultrahigh frequency RFID, we are extremely well positioned to not only capture these new opportunities but lead at the intersection of the physical and digital. To that end, we are continuing to invest in developing new applications and markets; adding new technologies, both physical and digital; increasing our manufacturing capacity, including investing more than $100 million in a new facility in Mexico for growth in the back half of 2024 and beyond; and expanding our team, the best, most experienced in the space. Our strategies here continue to pay off. We remain confident this will be a $1 billion platform in 2023 and are targeting more than 20% growth in the coming years. Lastly, we continue to deploy capital in other high-value solutions. Signing an agreement in January to acquire Thermopatch, a business specializing in external embellishments with roughly $40 million in annual revenue. In summary, we delivered impressive results in 2022 in the face of an extremely challenging environment. Inventory destocking is impacting our results near term, and we are making adjustments accordingly. I remain extremely confident in the underlying fundamentals and prospects of our business over the long run. And with that, I'll hand the call over to Greg. Thanks, Deon. Hello, everybody. I'll first provide some additional color on our results and our performance against our long-term targets and then walk you through our 2023 outlook. In the fourth quarter, we delivered adjusted earnings per share of $1.65, down 14% ex currency compared to prior year, driven by a low double-digit volume decline due primarily to inventory destocking. For the full year, we delivered adjusted earnings per share of $9.15, up 11% ex currency, with organic sales growth of 10% as pricing offset a low single-digit volume decline. Our full year adjusted earnings per share was in line with the midpoint of our original guidance from the beginning of the year, adjusted for currency translation. For the year, we generated $667 million of free cash flow, and we invested $300 million on fixed capital and IT projects as we continue to accelerate investments in Intelligent Labels. Free cash flow conversion in 2022 was lower than we targeted, including higher-than-anticipated working capital driven largely by inventory. The high inventory levels include some strategic inventory builds in areas such as RFID chips. In addition, we still have some inventory we are working to optimize given all the supply chain disruptions throughout the year. We're clearly focused on this and expect to make strong progress as the year progresses. Despite this challenge, our average free cash flow conversion over the past three years has been roughly 100% of GAAP net income, and we expect this to continue in 2023. Our balance sheet remains strong with a net debt to adjusted EBITDA ratio at year-end of 2.2x. Our current leverage position gives us ample capacity to continue investing organically as well as through strategic acquisitions while continuing to return cash to shareholders in a disciplined way. During the year, we returned $618 million to shareholders through the combination of share repurchases and a growing dividend as well as deployed $40 million for M&A. Turning to our long-term targets. Slide 9 of our supplemental presentation materials provides an update on our progress against the long-term financial targets that we communicated in 2021. Recall, this represents our fourth set of long-term goals after meeting or beating our previous three sets. The consistent execution of our key strategies enables us to continue delivering against our targets with an overriding focus on delivering GDP-plus growth and top quartile return on capital over the long term. Through the first two years of the cycle, sales growth on a constant currency basis was 16% annually, well above our target and GDP, driven by strong volume growth, higher pricing and M&A. Adjusted EBITDA dollars have grown 28% compared to 2020, with adjusted EBITDA margin of 15.1% in 2022. As always, our focus will continue to be the optimal balance of growth, margins and capital efficiency to drive incremental EVA over the long term. We remain confident in achieving our 2025 margin target of 16% plus as part of that EVA equation. Adjusted earnings per share grew 13.5% annually over the past two years, surpassing our target of 10%. And our return on capital was 17.4% in 2022 and in the top quartile relative to our capital market peers. Given the diversity of our end markets, our strong competitive advantages and resilience as an organization to adjust course when needed, we're confident in our ability to continue delivering against these targets through a wide range of business cycles. Now shifting to our outlook for 2023; as Mitch and Deon commented on, we are starting out the year in a challenging volume environment as we continue to see destocking in the first quarter in both the Label materials and Apparel businesses. We have been activating countermeasures and are confident in our ability to grow earnings for the year through a variety of environments. As we look at how we expect that to play out across the year, given the continued destocking, we expect the first quarter to be comparable to Q4 of 2022, which was $1.65 in adjusted earnings per share. Following Q1, we expect to see a strong rebound beginning in Q2 and moving through the back half of the year, with a second half earnings run rate of more than $10 annualized. In the second half, we expect downstream inventories will normalized, China to be rebounding and our growth in Intelligent Labels will build as we move through the year as the new programs roll out in areas such as logistics. For these reasons, we expect significant earnings growth in the back half and also see a very strong trajectory as we exit 2023. For 2023 overall, we anticipate adjusted earnings per share to be in the range of $9.15 to $9.55. To highlight the key drivers of the high end of our 2023 EPS guidance compared to prior year, we anticipate roughly 5% organic sales growth, with the majority from higher prices. We estimate restructuring savings net of transition costs of roughly $0.40 and another roughly $0.30 from temporary cost reduction actions. And we expect strategic growth investments of roughly $0.25, and we estimate net nonoperational items, headwinds from interest, currency and tax and a benefit from share count to be roughly $0.25 net headwind. In summary, through this dynamic environment, we're pleased with the strategic and financial progress we made against our long-term goals in 2022. Despite the near-term challenges, we remain confident in our ability to continue to deliver exceptional value through our strategies for long-term profitable growth and disciplined capital allocation. Now we'll open up the call for your questions. Can you just give us yes -- can you just sort of elaborate on your view that the near term is largely inventory destocking versus something more broader in terms of recession? I mean you yourself are enacting a recession scenario plan. How do you -- what gives you confidence that this is purely more or less inventory destocking versus something more broader than that? Ghansham, this is Deon. When you look at the volume that we saw come out in Q4, largely because the inventory destocking, we see that trend also continue in January that we saw in both November and December. And we expect in our Materials business for that destocking to be completed largely by the first quarter. On the Apparel business, as I called out, we both see inventory destocking happening as we ran through the back half of last year and will continue in Q1 and into Q2 as well. While we don't have as much forward visibility and also because of the Lunar Year, it's clear that retailers are also factoring in sentiment into their forward volume ordering plans as well. But we anticipate that by the second half of the year that Apparel business will return to its historic GDP growth rates. And then when you factor in our additional growth that we're going to get from our IO platform, the rebounding of China, we expect to be able to deliver above GDP growth rates in the second half of the year. And Ghansham, just to build on that. It's also what we're hearing from the marketplace, our customers are talking about the fact that they had built inventory throughout the year leading up to Q4 as well as the end customers, CPG firms and so forth and the same thing on the Apparel side. So it's market Intel. It's comparing -- we have pretty clear links between our product consumption and demand relative to consumption of nondurable consumer goods, for example, and they definitely have disconnected to the negative. They were a bit positive early in 2022, even the end of '21, which is why we called out that we thought there was some excess inventory in the system at the time, and that continued throughout the year. And then it's unwinding just at a much quicker pace than we traditionally see. So there's a number of vectors we're looking at triangulate it gives us a lot of confidence. This is a majority of inventory correction. That said, we do expect and consumption to moderate a bit. You're already seeing it in Apparel with a weak holiday season. And as far as you're looking at the GDP outlooks for at least Europe and North America, they're modest to a slight recession. Mitch, just one last one along similar lines to Ghansham's question, which is, if you're anticipating conditions to get more or less back to normal in the second half, why they need to activate this recession scenario, if it's just a 2-quarter blip? And what exactly does that entail for you because if the economy gets back to normal in second half, will you still need to do that recession activation, if you will? Yes. Well, I mean, as far as the recession activation, there's a couple of things. The structural cost reductions are not the recession activation, if you will, at the long -- part of our long-term strategy, as you know, to focus on productivity. It's a way we free up capital to invest more in the high-value categories, keep our base businesses competitive and profitably growing as well as to expand margins over time. So I wouldn't look at the restructuring of that side. And as far as the temporary cost actions, part of those are when your volume environment is lower, you're having some dark days within plants to drive the way you balance your load, if you will, can drive some savings, and that's something that we're very focused on as well as belt tightening. And everybody should tighten belts in this type of environment, and that's just part of how we operate. Thanks for the details. I wanted to touch particularly on Intelligent Labels just given some inbound that we've gotten over the last couple of days. Can you talk at all to how much chip shortages may have constrained your growth, recognizing that Intelligent Labels is still growing very, very nicely? What could the incremental volume have looked like? Had there not been shortages, what impact did it have on your margins? Could margins have been pick a range 100 points, 200 basis points, whatever better, how would you have us think about that? And last part of the question, and I'll turn it over. Can you talk at all to how much -- how important some logistics rollouts are in terms of your guidance for this year? Could they be incremental? Thanks, George. We don't believe that in 2022, our volumes were impacted by any part of chip shortages because, as the market leader, we had secured enough chip supply to ensure that we could deliver to all of our customers' expectations. Clearly, from a margin perspective, we maintained margins. There was some degree of chip inflation, and we've dealt with that through productivity, as we always do. And as we look forward, the logistics is certainly going to be a big part of the second half of our growth during 2023. But I will emphasize that Apparel will still be the largest part of our business and will be growing during 2023 as well, George. When you look at the severity of the destocking, particularly in the LGM segment, I mean, we've seen some data out there that kind of shows year-over-year 20%, 25% decline. I mean, certainly worse than we even saw in the financial crisis. I guess, can you explain how that's happening or why that's necessarily happening? And are we putting ourselves in a position now, given that it's so much worse than GDP in terms of the production levels, that there may actually be a restock where maybe people have cut even too deeply, just trying to focus on cash generation or what have you? I guess, can you help us to understand that a little bit?. Yes, John. So why -- first part of your question, I think it's a little bit of why a deeper decline that we've seen in past corrections, which you do have to go all the way back to the financial crisis to see that. The reason is basically because of the supply chain disruptions, people wanted to make sure they secured enough of the inventory for their own end demand and so there was much more safety stock in the system, one, two. Timing of significant inflation, we were raising prices significantly and people wanted to get in the queue and basically order and build inventory early to avoid the next round of price increases given we were actually in a stage of basically raising prices every couple of months or so in each region. So that's what drove the increase. And then both of those factors basically started to stabilize at the same time. And so people no longer needed the excess inventory, and they were starting to build it down. So that's the biggest reason for why you're seeing a shift here overall. This is actually Bryan Burgmeier sitting in for Anthony. With some inflation buckets moving lower throughout 4Q, what do you assume for price cost in the Materials group this year? Do you think Avery would be able to potentially capture a benefit from lower raws? Or would that be passed along in full to customers? And separately, just apologies if I missed this. Did you provide a growth target for Label this year? Is it fair to assume that it could fall a little bit short of that 20%, just given the headwinds in apparel? Yes. Thanks, Bryan. So on the inflation question, I think sequentially from Q3 to Q4, overall net price inflation was a relatively immaterial impact. We had a little bit of sequential price Q3 to Q4 from some of the actions we've been taking as we move through the back half and a little bit of sequential inflation. I think I talked about last quarter, we expected a little bit of sequential impact from paper. At the same time, we had some sequential benefit from the films and chemicals, a bit of deflation there. So, as you look into 2023, sequentially, we don't see a lot of change there. Still a little bit of pressure on specialty papers, just given capacity and what's happening in the marketplace there from a specialty paper perspective and maybe a little bit of sequential benefit in films and chemicals just like we had in Q4. When we look at overall price inflation, we have a carryover benefit of price, carryover impact of raw material inflation. We also have a bit at or above historical levels of wage inflation. We've got some utility inflation where we had a little bit of a benefit last year from prices we had locked in for part of last year as well. So we look across that whole basket of raw materials, wage inflation, utility inflation. We expect roughly neutral impact year-over-year from that perspective, all those things included. And Bryan, on your IL question, we will be growing more than 20% this year. Recall that we've said, we are very confident in this being a $1 billion platform in 2023, and we see growth in Apparel, and we see significant growth in our logistics platform during this year. First question, just I know you mentioned, Deon, just now in response to the last question about more than 20% growth in IL. But with respect to IL adoption, as global economy soften, companies are increasingly laying off employees, could that be a headwind as companies look to spend? Or alternately, really be a benefit as they look to increase efficiency and productivity and the like? And then my second question is just in terms of China, with Chinese government using a strict Zero COVID policies, obviously, that's been last year. I think, in April, it was a $10 million headwind. Could that actually serve as a pretty big tailwind to you as things normalize in China? Yes, Mike. In answer to your first question, it was the latter. We see during times when things are more difficult for brands, retailers and customers that they look to improve their automation efficiency. And this technology that we have really plays into the heart. It reduces cost, labor -- improves labor efficiency, provides visibility throughout the supply chain. So we see that as an accelerant and not a barrier to adoption of our Intelligent Labels platform. As it relates to China, clearly, we saw in 2022, the impact of the COVID policy playing out in the country. And what we saw, as I said in the fourth quarter was that China was down low single digits. That trajectory started to change. We believe that post the COVID change, we see China returning to its normal or slightly above GDP growth said. And we see that as part of our ongoing second half growth that both Mitch and Greg have called out as well. For the nine months, your Intelligent Labels were up 20% year-to-date, and they're up 15% for the year. So that means in the fourth quarter, they grew 0. And you're expecting the first quarter to be like the fourth quarter. So can you talk about what happened in growth in Intelligent Labels in the quarter? Is it likely to be similar in the first quarter? So Jeffrey, from an IL perspective, yes, we grew 15% last year. And in the fourth quarter, we grew -- sorry, mid-single digits in the fourth quarter, reflecting the impact of destocking, particularly in Apparel. And as I said, we anticipate the destocking to continue in Q1. But as we ramp through the year and that business returns to its historic GDP growth, we see a number of factors come into play that helps us get to and we have conviction around our $1 billion platform. Firstly, the Apparel business will be in growth during next year as both the business rebounds and further adoption in retailers as well as further use case extension such as loss prevention come to bear in new programs. Secondly, as I already called out, we're going to see a significant ramp in our logistics program as we go through the second to the back half of the year, and that will add to that. And finally, we continue to see good traction in a number of our food pilots that are also adopting with an increased frequency as well. Yes, Jeff, on the raw material side, we're up for the year in 2022, a little more than 20%. And in Q4, that would be kind of mid- to high teens rate versus prior year. So overall, for the full year, over 20%. And last year, in the fourth quarter of 2021, we still had a net headwind between price inflation than is adjusted as we look Q4 versus prior year. Just a couple of follow-ups, if I could. With depth the destocking that you're seeing in the base labels, has there been any change in pricing in terms of competitive dynamics in that market? And then on the RFID side, you talked about chip availability last year. Do you have availability or secured your needs for what you expect to happen in later this year? And are chips inflationary or deflationary for your cost stack over the next 12 months? Josh, let me address your second question first. We have secured all the chips that we need for this year and into next as well -- sorry, for 2023 and into 2024. And the market has been slightly inflationary, and we're adjusting, as I said, based on both productivity and pricing as we move forward. In terms of destocking, just repeat your question for me, Josh. We don't see that at the moment, Josh. Historically, as the market leader, we maintained fairly strong pricing discipline. And we will respond if there is pricing changes in the market. But typically, we tend to make sure our discipline hold is strong. And if you also remember during the inflationary period, Josh, we tend to use surcharges the first start in how we manage pricing. And as deflation starts to occur and if it does occur, those are the things that first start to roll off. I'll try to get them all in here and turn it over for the rest of the call. So first of all could you talk at all to what your customers say their inventories grew to relative to normal at the peak of the inventory build, where customers in your key categories saying their inventories were double what they normally have triple, half -- well, obviously not half, but somewhere in that range between what would you say there? Secondly, as we think about logistics and project out, your market share and the market growth you've talked about in the past, could logistics alone be $1 billion plus in revenue by 2030? And then last, Deon, any comments on how Vestcom is doing and how that's adding or not relative to your expectations? Thanks, George. Yes, so I'll start off. So as far as what our customers are saying around inventory levels, a couple of things. One, as you know, we have many customers, particularly on the material side. And so there's a lot of anecdotes, but we were hearing definitely a range of two to four weeks of excess inventory. So there was quite a bit of build overall. And on the Apparel side, the end customers not -- I mean, you've heard -- you can read all the headlines of what they're talking through, but they definitely have quite a bit of extra inventory and even entire containers full that they were -- said they're just waiting for the next season to unload at the next season. So quite a bit of inventory, which is that's what our customers are telling us and what we're all seeing in the headlines, and I think what we all know on the Apparel side. If you look at the actual hard data of inventory levels within Apparel, it's actually dropped down a bit from where it was pre-pandemic. So a little bit of a disconnect between what the data says and what we're hearing anecdotally, but we definitely ourselves know that there's excess inventory there. As far as logistics, I think your question is with the growth and the opportunity we see, how big can logistics be specifically can it be $1 billion by 2030. Deon, do you want to take that one as well as a follow-up? Yes, George, you can see the scale of what we believe this initial phase of logistics adoption will do for us in our results overall and our drive to get to $1 billion business during this year commitment to that. And as you know as well, Logistics segment is highly concentrated. My sense and belief is that as the technology continues to resonate with one or two customers, I think it will become a de facto mechanism for operating as a logistics provider around the world and if that should happen, then I believe that this should be a $1 billion-plus business by 2023. As it relates to... 2030 -- sorry, 2030. As it relates to Vestcom, George, the business continues to perform very well. The team have added enormously to our capability and providing great access to the grocery and retail market. And in addition, it's also a fairly consistent, stable business and ensure that portfolio of our solutions businesses becomes more robust through cycles as well. Mr. Butier, there are no further questions at this time. I will now turn it back to you for any closing remarks. All right. Well, thanks, everybody, for joining us today. As you've heard throughout the call, we remain confident that the consistent execution of our strategies will enable us to continue to meet our long-term goals for superior value creation for all of our stakeholders. Thank you all. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Thank you.
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Good afternoon and welcome to Clearfieldâs Fiscal First Quarter 2023 Earnings Conference Call. My name is Paul, and I will be your operator this afternoon. Thank you. Please note that during this call, management will be making Forward-Looking Statements regarding future events and the future financial performance of the Company. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. It is important to note also that the company undertakes no obligation to update such statements, except as required by law. The Company cautions you to consider risk factors that could cause actual results to differ materially from those in the Forward-Looking Statements contained in todayâs press release, Field Report, and in this conference call. The Risk Factors section in Clearfieldâs most recent Form 10-Q filing with the Securities and Exchange Commission and its subsequent filings on Form 10-Q, provide description of those risks. As a reminder, the slides in this presentation are controlled by you, the listener. Please advance forward through the presentation as the speaker presents their remarks. Good afternoon, everyone and thank you joining us today. It is a pleasure to speak with our new and returning investor and analysts this afternoon to share Clearfieldâs results for the first quarter fiscal 2023 as well as provide an update on our business and current market trends. Our strong financial performance in the first quarter of fiscal 2023 reflects our ongoing execution on our strategic growth plan, as well as the robust and sustained demand for high speed broadband. Total net sales for the first quarter were $86 million, which includes an $8 million contribution from Nestor Cables. Our organic net sales growth continues to be driven by our leadership and community broadband, an expansion across each of our core end markets. As we continue to execute on our lead strategic plan, we aim to strengthen our existing competitive advantages as we build a scale necessary to serve the long-term demand runway for high speed broadband in unserved and underserved communities nationwide. Based upon consideration of the expected investments and impact of our progress on our leads strategic plan, as well as our ability to manage countervailing headwinds that could develop the customer ordering patterns and components sourcing, we are reiterating our previously stated revenue guidance for fiscal year 2023. In addition, we are introducing 2023 net income guidance of $4.30 to $4.50 a share. Before I review our performance and current market dynamics in greater detail, I would like to briefly introduce you to who we are and what we do for those of you who may be new to Clearfield and our industry. Clearfield is a leader in the expanding fiber broadband industry. Our goal and underlying value proposition is to enable the lifestyle and better broadband provide. We provide craft friendly fiber protection, fiber management and fiber delivery solutions that enable rapid cost effective fiber fed deployments throughout the broadband service provider space. Our primary end market is community broadband, which is predominantly comprised of Tier 2 and Tier 3 incumbent local exchange carriers and an increasing number of municipalities, utilities, co-ops and wireless carriers. We also serve service providers in the Tier 1 national carrier market, and multiple system cable TV operators or MSOs as well as some international service providers. Pictures on Slide 4 is the Clearfield consent, which has changed the rules of fiber management. This integrated fiber management system is based on multiples of 12 fibers and can be utilized whenever and wherever it is required in the network. Our FieldShield platform offers protected pathways and fiber options that suit the needs of any network deployment. Our entire product line was thoughtfully designed to be craft friendly in the field, reducing both the amount of necessary skilled labor needed for installation and the level of skilled required to install. This enables our customers to complete their deployments faster and more efficiently, accelerating their time to revenue. With these capabilities, and the competitive advantages we have summarized on Slide 5, we have expanded our market leadership in underserved world broadband. To further enhance our positioning, we have worked to improve our product delivery lead times, which represented another key area of industry leadership for Clearfield before the COVID-19 pandemic. Across our industry, pandemic fueled supply constraints, held fiber lead times to a range of 10-months to 12-months. By contrast, Clearfield is now targeting lead times within the range of eight-weeks to 10-weeks. Iâm proud to say that, we have already achieved these lead times within the range for all product lines with the exception of active cabinets, which have been negatively impacted by the longer lead times associated with power conditioning sub components used in their manufacturing process. This work to improve our lead times comes as our customer ordering cycles return to pre-COVID patterns, but at post-COVID volumes. Over the past three years, our customers ordered products early in their deployment schedules to stay ahead of any supply chain challenges, as they plan their fiber bills. These advanced orders led to growth in our backlog, which reached record levels by the end of fiscal year 2022. Our customers have moved to staging less equipment in their yards and have now begun ordering according to more normalized, seasonally driven deployment schedules. We believe this trend will continue in 2023 as customers readjust their ordering planning to our improved product lead times, and try to match their order timing to their deployment schedules. Consistent with the return of this traditional ordering and delivery patterns, we anticipate approximately 40% of our expected revenue in the first six-months of our fiscal year and 60% in the second half. We believe long-term demand remains exceptionally strong. Nearly all of our customers are indicating an increase in the number of homes they are passing and connecting in comparison to the previous year. In addition, the increase in the number of service providers we serve is exciting. For some additional insights on what we are seeing in the market and the significant long-term growth runway for fiber deployments, I would like to welcome our Chief Marketing Officer, Kevin Morgan, to the call. Kevin. Thank you, Cheri. It is great to be joining all of you this afternoon. The appetite for high-speed broadband communications has never been greater and shows no sign of letting up. This continues to drive fiber deployments deeper into every corner of society and across all market segments. As Cheri mentioned, we believe our work to maintain our world class lead times and further progress, our elite strategic plan enhances opposition for the robust near-term demand environment. On Slide 6, we have also included the fiber broadband associationâs strong forecast for power deployments over the next decade. In its 2022 fiber provider survey, published in December, the Fiber Broadband Association estimated a 10-year annual average run rate of 11.3 million fiber deployments. In 2022 alone, fiber providers passed 7.9 million additional homes, representing a new record for annual deployment. This momentum gives us a powerful foundation for 2023 and the years ahead. As you will see in the accompanying chart, or position within an accelerating investment cycle that has yet to reach its peak. We continue to view the gradual disbursement of ARPA and RDOF funds and the upcoming distribution of BEAD funding as meaningful but gradual industry tailwinds further expand our market opportunity. The data indicated on this slide assumes that 12.3 million new housing units will come online over the next 10-years. Further 92% of homes are expected to have fiber availability, with an additional 34% of homes having two or more available fiber connections. As this market continues to expand, we believe our craft friendly products will continue to play a vital role in translating homes past numbers in homes connected revenue for our service providers as they deepen their fiber deployments. Turning back to Clearfield fiscal first quarter performance. I would now like to pass the call over to our CFO, Dan Herzog, who will walk us through our financial results for the fiscal first quarter of 2023. Thank you, Kevin. Good afternoon, everyone. It is a pleasure to be speaking with you today about our fiscal first quarter 2023 results. So looking at our fiscal first quarter 2023 results in more detail. Consolidated net sales in the first quarter of fiscal 2023 were $86 million, a 68% increase from $51 million in the same year-ago period, and down 10% from $95 million in our fourth quarter of 2022. This figure includes $78 million from organic Clearfield and an $8 million contribution from Nestor Cables, representing Nestorâs first full quarter of contributions since we acquired the business on July 26, 2022. The increase in net sales was due to higher sales across our core end markets, particularly in our community broadband, multiple system operator and national carrier markets consistent with our performance throughout fiscal year 2022. We recorded a 34% year-over-year increase in our sales order backlog. Order backlog was $136 million on December 31, 2022, up from $101 million on December 31, 2021 and down from $165 million on September 30, 2022. We believe our lead time progress will remain a more meaningful measure of our operational performance going forward. Accordingly, we will focus on this metric in lieu of reporting on backlog in future quarters. I will not review net sales by our key markets. Sales to our primary market community broadband comprised 55% of our net sales in the first quarter of fiscal 2023. In Q1, we generated net sales of approximately $48 million in community broadband, up 33% from the same period last year. In addition for the trailing 12-months ended on December 31, 2022, our community broadband market net sales totaled approximately $192 million, which was up 69% from the comparable period last year. Our MSO business comprise 25% of our net sales in the first quarter of fiscal 2023. Momentum in the MSO market continues to be strong, with net sales growing 137% year-over-year and up 152% for the trailing 12-month period. Net sales in our national carrier market for the first quarter of fiscal 2023 increased 67% year-over-year. On a trailing 12-month basis, net sales in our national carrier market was up 102% from the year-ago period. Net sales in the international market increased 412% year-over-year in the first quarter compared to the same period last year and we are up 126% year-over-year on a trailing 12-month basis due to the acquisition of Nestor Cables, which are included international sales. Gross profit in the first quarter of fiscal 2023 increased 33% to $31 million, or 35.7% of net sales from $23 million or 44.9% of net sales in the same year-ago quarter. Our gross profit was affected by our investments to increase capacity for additional growth in the coming quarters and years. These investments include the increased facility costs associated with the addition of the companyâs new Minnesota and Mexico facilities that came on board late in the second quarter of fiscal 2022 and the continued expansion to outfit these facilities. Company continues its investment in cable manufacturing at its Mexico facility in conjunction with the Nestor Cables acquisition, which is expected to be operational in our second fiscal quarter. Gross profit was also affected by a full quarter of lower gross profit realized in our Nestor Cables cable manufacturing business. The company expects to operate at these gross profit percentage levels for several quarters with improving margins as revenue levels increase later this calendar year. Operating expenses for the first quarter of fiscal 2023 were $13 million, which were up from $10 million in the same year-ago quarter. In addition to the increase from the first full quarter of Nestor Cables operating expenses in general, increased areas reflects higher compensation costs travel and entertainment, stock compensation and professional fees. As a percentage of net sales, operating expenses for the first quarter of fiscal 2023 was 15% down from 19% in the same year-ago period. Our current OpEx at less than 15% of sales reflects our continued strong operating leverage. Net income in the first quarter of fiscal 2023 increased 37% to $14.3 million from $10.4 million in the same year-ago period, and was down from $17 million in the fourth quarter of fiscal 2022. As a percentage of net sales, net income for the first quarter of fiscal 2023 was 17% down from 20% in the same year-ago period, and down from 18% in the fourth quarter of fiscal 2022. In terms of our balance sheet, we had $2.2 billion in capital expenditures, mainly to support our expanding capacity and continued with facility build outs, and our inventory balance increased from $82 million to $90 million in the first quarter. While we expect to continue to increase in inventory this year, we do not expect to do so at the same levels as it did during fiscal year 2022 resulting in improved free cash flow in the fiscal year ahead. As a reminder, we did use approximately $16.7 million of our line of credit in July of 2022 to fund the Nestor acquisition and that amount off in the first quarter of fiscal 2023, leaving a zero balance draw on the line. In addition, we further enhanced our liquidity position through closing an upsized $120 million public offering of our common stock on December 09, 2022. Under the terms of the offering, we sold 1.2 million shares at a public price of $100 per share. Including the underwriterâs full exercise of the option to purchase up to 180000 additional shares we sold a total of 1.38 million shares of common stock at closing for net proceeds of $130.3 million after expenses paid in connection with the offering. The additional capital grants us greater flexibility pursue our longer term growth objectives and be opportunistic as further growth opportunities arise. We can continue investing in our inventory, CapEx, infrastructure and other necessary strategic areas at a larger scale as well as ensure that we have the working capital position to effectively compete for larger customer opportunities. We appreciate the support of our new and existing shareholders, as we continue to advance our strategic progress. That concludes my prepared remarks for our first quarter fiscal 2023. I will now turn the call back over to Cheri. Cheri. Thanks for the financial update, Dan. As I mentioned earlier in the call, we have continued to make progress on our new multiyear strategic plan LEAP which is a successor to our previous Now of Age plan. The LEAP plan is our roadmap to how we will scale at the company in order to seize the opportunity Clearfield was built to achieve, how we expect to jump higher, farther and with greater force. With that said, I would like to review our progress on each of our LEAP plans, four tenants, one for each letter. The L is to leverage our decade long excellence in Community Broadband, the market on which we have focused since our founding in 2008. Through our deep understanding of this market and our customerâs base and regional operators, we have proven to be an agile partner that can evolve with a broader market and grow alongside our customers. Earlier this month, we announced that we have reached to milestone of shipping 50 million fiber ports of our craft friendly, labor light family of Clearfield cassettes, field assemblies and U.S. terminals. The vast majority of these five reports have been deployed throughout the networks of our community broadband customers. Reaching this milestone underscores the success in the fiber broadband market is as much about execution, as it is innovation. To further improving our scale, we are deepening our commitment to providing our customers the products and support they need when they need it to take their fiber broadband networks as far as they can go. Our E is to execute capacity growth in advance of the market opportunity. Building upon our previous strategic work to augment capacity for ongoing growth, we will continue making progress on these enhancements and developing our supply chain partnerships maintain our market leadership. Having expanded our manufacturing footprint in both Minnesota and Mexico last year, we are leveraging the in-house cable manufacturing capabilities brought by our acquisition of Nestor Cables. Most recently, we are adding another - line in Finland to generate additional revenue and to improve margins from our current facility. This new line will enhance Nestorâs capacities and will allow us to run our manufacturing at a higher and more efficient level. The A in our LEAP plan is to accelerate infrastructure investment. This tenant represents our underlying investment in our organizational infrastructure, as we continue to grow the business and manage our expanding capacity. To support the significant growth we have generated over the last two-years, we focus in investing in our quality teams and systems. This includes adding supply chain and quality personnel, as well as placing quality engineers earlier in the overall process. As I said in the past, we can grow as fast as our quality systems will allow. Our investments in this area have played a meaningful role in our top-line growth expansion, and we expect them to help facilitate additional progress. More broadly, we may add personnel to our sales, product management, and manufacturing teams as we work to improve lead times. We will also continue to expand Clearfield College to provide online and infield training support as our industry navigates the ongoing shortage of train labor in the market. Finally, the P in LEAP stands for position innovation at the forefront of our value proposition. To increasing the cadence of our product expansions and emphasizing innovation in our pilot designs, we aim to build upon the craft friendly nature of our products. We will soon be enough to add additional new product in the coming weeks that we believe further enhances our promise on innovation. More to come on that front. We intend to introduce additional fiber management and fiber connectivity solutions that align with federal and state funding program requirements. These will help facilitate swift and streamlined installations for our customers as they extend the depth and breadth of the fiber broadband access in their networks. As our first quarter financial results indicate, we have continued to make strong progress on our strategic plan amid a robust demand environment and fiber fed broadband. Our operational agility allows us to be flexible in an evolving market and we have built a strong foundation from which to address the long-term demand runway for high speed broadband across our markets. We believe our continued work to leverage our deep expertise in community broadband, enhance our capacity, accelerate our infrastructure investments, and prioritize innovative product design enables us to both address existing demand and prepare for the longer term tailwinds of state and federal funding. With our current visibility into our current pipeline, we are reiterating our previous staff line guidance of estimated revenue of between $380 million to $393 million, representing a 40% to 45% growth rate over fiscal year 2022. In addition, we are introducing fiscal year 2023 net income guidance of $4.30 to $4.50 a share. We continue to expect our revenues to follow year-over-year seasonal patterns, resulting in expected strong year-over-year growth in the first half of this fiscal year. We remain underway with improving our product lead times as we further improved capacity and reduced order backlog. While we still expect to see higher levels of build activity in the second half of the year, we will closely monitor the availability of labor that our customers need to proceed with their planned network bills. Cheri and Dan, what do you all expect, what contribution you are expecting from Nestor, in the March quarter? Is it consistent with the eight million, is that in December or is it something meaningfully different than that? Yes, it is going to go up in the next quarter. I mean, it is important to remember that Nestor is very much affected by the seasonal nature of our business and probably even more so than we are. And so you are going to see the their numbers about 8 million this quarter, it will probably be double that by the summer, and you know, growing second quarter to probably 10, 11, up to as much as 15 in the summer months, and their gross margins are going to be affected significantly by that. So we are going to see gross margins now at about 11%, 11%, 12% by the summer months, we will be up in the high teens, kind of averaging in that middle about 15%. We said, when we acquired the company, that they are a commodity based business, so the gross margin percentage would go down. But the gross margin dollar contribution would be accretive. This quarter, that wasnât the case, the because of the down nests of the winter months, but we still continue to expect that accretive nature throughout the year. Let me get to the real question. So if I take 10 million to 11 million, 10 million for March, that would imply organic, but do the math right? Based upon your 40/60 split your reiteration 380, 393. And what you did the first quarter that would imply organic, somewhere in the neighborhood, if I did the math correctly, 56 million to 61 million, which in turn would translate to 23% decline to 17% decline sequentially? On a year-over-year basis, if I did the math, right, that would imply 5% to as much as 15% growth if you hit those numbers, or Nestor, and for the larger company. That would be deceleration down from over 50% year-over-year, in the December quarter. And I appreciate the return of a more seasonal business pattern. But I guess Iâm trying to understand the dramatic decline in growth, what would drive such a dramatic - well, I appreciate that everyoneâs going to go back to more normal order patterns, the backlog was sustainable. But the number suggests a significant collapse and backlog in a very, we can see the numbers but in a very compressed way. And Iâm trying to understand the if we look at linearity, including through the 30-days of the current quarter, is business continuing to soften as you go forward in time, or is it more of a stabilization? Let me let you respond. Thank you, Paul. I think I would call him in alignment in that. We talked about 90-days ago, at the end of the fiscal year that we were going to see for the first time in two years, bookings were going to be less than shipments and that was a result of the world of coming back to your pre-COVID world a way of doing things and ordering patterns. We are going to start into that process. As people are, as our customers align their inventory positions and their forecasts positions in regard to product alongside the labor conditions, we are seeing a bit of a bubble or perhaps even an inventory swell at this point in the market. And so we think it is very much a - it is not a softening of the market and that demand is very high. It is an alignment of what is actually available with labor. Alright. And I can do the math, I guess, after the call, but help me out. We have said 10% to 11% gross margin set up for Nestor. How much of a hit was it to overall gross margin, If we look at the 35.7 whatever the number was? Yes. It is probably about 2.5% this quarter. I mean, they would affect that. So it is important to when we look at the fourth quarter of last year, that is really not a comparable number because we didnât have any of the new facilities up and we were at complete capacity. Over the course of the last year, we have been adding a considerable level of the capacity to building themselves in March of last year and now adding continual building enhancements. And probably one of the biggest investments that we have made is about a 25% increase in our labor force since summer of last year. And so even though we knew that, the winter was going to be more seasonal, we made a conscious investment in people to ensure cross training of resources and labor capacity availability. And so while it might be a little unsettling for this first quarter, it is absolutely to plan, as to where we are at from a gross margin standpoint, so that we can prepare for the summer and into next year on the capacities that are going to be necessary. Alright. I appreciate the responses. Before I pass it on, I would just respectfully submit, I think you are making mistake, with respect your time to stop disclosing backlog, even assuming the times are better days of your business as you maintain. Again, I would urge you to continue providing that. But, let me pass on. I appreciate the responses. Hey, guys. Thanks for taking my questions. Just following up on that line of question. And just what gives you the confidence that second half snapback will come and that this inventory correction or issue or digestion, whatever you want to call it, is just sort of a one quarter issue. What we are seeing is an absolute continued demand from every customer that they want to increase the number of homes that they are connecting and passing and aggressively working with the contractor community and the labor community to find additional resources and to train additional resources. So we are actively involved in that process, and helping them to gain the knowledge and the training tools by which to enhance the labor availability that is out there. I think there is really, I would call it, almost like a review of household conditions when you come back in at the end of this of the year and you kind of working through your calendar and you are looking to see what is out there versus what you have. And so all of our customers, I think, are just kind of making that refresh. I think it is the continual demand push that they all continue to want it to be the first buyer out and that commitment across the board that there was still growth in every part of our marketplace. The other thing I want to make sure I think reiterate, is the fact that, when we walked into this year, as we identified the 40% to 45% growth rate for the year. We said we would come out extremely strong in first quarter. In first quarter at up 70% growth rate over last year and that growth rate would de escalate over the course of the year. So the end of the year at a 20% to 25% increase over last year and then working for us to continue at that position. So I think it is important for us as a community to identify that the industry is going through a complete readjustment to this one sort of weird lifetime situation that we call the pandemic. And so, there isnât really a model by which to judge the spine or didnât really even compare it to from a trend statement. Okay, that is helpful and I understand there is a lot of dynamics out there. Just curious, when you did provide that original fiscal 2023 guidance, what had you been thinking the split would be? I mean, now you think it is going to be 40/60, but what were you here, the initial expectations? I was thinking a little closer to 45/55, so just a little bit of a readjustment, the answer that we would be pushing out second quarter and seeing that more at the tail end of the year. So it is important to look again, that next quarter, we are probably looking at 30%, 35% increase over last year, which again is an amazing level of increase, on an organization from a marketplace is growing, at about 12% to 15%. So, we are just trying to normalize our patterns and put everything together. Okay, and then just last one, for me, just looking at gross margin, obviously going to kind of remain at these levels for the next several quarters. So does that mean we shouldnât expect a step up and tells that December quarter timeframe or could you start to see an improvement in September? I think we are anticipating an improvement in September and as we get back up to levels, similar and beyond last year in that fourth quarter, where everything was clicking, and people were taking their inventory positions for the winter. So yes, absolutely fourth quarter is where we should be shining. Hi thanks for the questions. I want to ask about your assumptions in the March quarter and this new customer order pattern and booking behavior. What are your assumptions going into March, do you feel like March was can still be a period where you would expect your backlog to soften a bit and then pick up during the peak construction season or what is your kind of general mindset there? I know you donât plan to give backlog out but any kind of insights be helpful there. Thanks. Of course, the backlog went down about 30 million for over the course of the last 90-days. And as we talked about that was anticipated and planned for that we had hit a very high 160 million and I think we are just a little under 130 million at this point. I said at that point that we were aiming to get to a backlog that was consistent with about one times revenue for the quarter and so much backlog will go down a little bit as well as we get to more of this cadence in which we are ordering product or our customers are ordering product in the period in which they are deploying. Well it is in a normalized world that I see that this, you know, reduction in backlog is a bad thing. But in a post COVID world, I really believe this is returned to normal necessity that kind of walks through this bubble during this period of time. Got you, that is helpful. And if you could reflect on the strength in the quarter from the cable segment look like it was real strong is that coming from your active cabinets into the DAA or more your fiber the home customers and maybe give us a color on the strike? Yes, it is coming from both areas. And that there was different types of cable companies. The both the regional, as well as the national have different philosophies and how they can best provide high speed broadband to their customers. And the architecture of our product line that allows us to support whether it is a pawn based deployment or a non-pawn based deployment, active cabinets versus the your X terminal, we are actively involved in both and both have similar high gross profit margins. And we are excited about all of that opportunity moving forward. Like everything else in our space, I think we will probably see some bubbles with that over the course of the next couple of quarters, but the demand is absolute and really exciting to see the cable community come and play. Alright terrific and in terms of your latest quarter and bookings, any mix shifts there between passings and connected home in the product lines? We are starting to see a more initial increase in the end of connecting, and that people are looking at their samples that they made the investment in the passing of the homes, and now by connecting the homes, they can turn that into a revenue producing customer that is at a higher rate of revenue for them. So it is still - passing of the home is still a higher percentage of our revenue, but definitely seeing connecting homes increasing and seeing it is exciting to see the success of those deployments take place. Got you and one last one, any new commentary around the RDOF and ARPA contributions to your recent business? Is it still gaining momentum? And kind of where do you feel like we are relative to those programs contributing? Still gaining momentum but still very early. This is almost entirely privately funded. So and that is why we are comfortable making the capacity enhancements that we are. One of the things that is very frustrating as an industry, right, is how long it takes for government money to fund through the programs you can get into the market. We have seen it time and time again in regard to 2012, 2008. I mean, all of those times were, we were excited about the money and then we had to wait two years. So we know it is coming. We just havenât seen a lot of it yet. Actually my question was on capacity, so that is a good place to pick it up. And you have obviously been on this capacity addition planned for a couple of quarters now, but we do have made some additional kind of increases. So I wonder if you can give a sense of where you stand from a kind of quarterly revenue capacity stand point. Currently, I think you are looking for some record quarters in the second half of the fiscal year, but if you want to take it from what you just reported or what you expect here in the current quarter, where are we from a capacity utilization standpoint? And where do you expect that capacity to be by, call it, fiscal year end? Right. I would say, what we try to do from an operational standpoint is set metrics as to where we want to be by the end of each quarter, and so that we can make incremental investments along the way. And so I think we are probably at about $105 million today. And by the year end, we expect to be closer to $130 million, maybe $135 million quarterly, which puts us at about a $500 million of run rate by the end of the year. Great. And in terms of getting there, I mean, is that more kind of adding people, are you pretty well set from a facility standpoint, as you continue throughout the year, how you kind of address the facility, not expecting a bit if at all? Right. The facilities are in place, but we need to continue to augment the facilities and the infrastructure surrounding it, for example, bringing in the ability to produce optical cable inside of the facility means, bringing in higher power capabilities. You got to bring in the new lines and we are bringing in water out of the floor, so that we can actually produce the cable and the flushing lines that are necessary for cooling the cable as it comes out of the extruder. So those are the some incremental costs that you perhaps that we donât think about, but those are what are in place right now. We are also looking at a standpoint of just kind of infrastructure around it, and you wouldnât think of this as affecting the capacity, but it is the procurement teams and it is the software systems around it, and it is the process development to ensure that, we do this in systematic process based way. And we have been very successful over the course of the last two-years growing at the rate that we have, but we have to take a step back and look and say, how are we going to make this sustainable and how can we scale this. And I think that is an important element for us to look at from a gross profit standpoint is, this company was designed to scale, but there is still a standpoint of infrastructure that needs to be put in within it. And so it is that strong foundation to ensure quality. And so there will be people, there will be systems, there will be some software within it. And that is so that we can grow long-term. So we have got a little bit of catch-up to do from what we perhaps should have done a year-ago. Just didnât have the wherewithal because of how quickly we were going to take that step back. Okay. In terms of the - you seem to be going back, I guess, to maybe your more traditional seasonality, going back several years now where you had, I guess, a quarter in there somewhere that was up 20%, 30% sequential, something like that on a seasonal basis, that is the way we should kind of look at this in context just at a much higher revenue level, obviously. Exactly, yes. I mean, I think that is how Iâm trying to describe it as being pre-COVID conditions at post-COVID levels. And there is always been seasonality to where business is just that it was hidden the last two-years. And so I think, I want to go back to a statement that thing that Jason asked you. How do I have the confidence that the back half of the year is going to follow through and it is really doing this the last 15-years, in that that is the traditional normalized pattern and so the only caveat to that is in a post-COVID world, how quickly will we get back to that normalized pattern? Good afternoon, thanks for taking the question. Just to dive in on the gross margins again. It sounds like most of the beyond the mix issue, that there is a labor content issue here until you get capacity up at the facilities that is kind of weighing on the near-term results. Is that the way to think about it until we get into the second fiscal half of this year? Absolutely. We are making the addition of those people in advance of meeting them. So are you are efficiencies and utilization on the floor is not at the level that you targethem. But what it does allow us to do is to move those people around, so that they are not trained on a single line, which is what we did when we brought everyone on board. Last year in the second quarter is we hired people and we put them on one line. And we made sure that they could optimize that one line. But it doesnât allow you to scale, what you need to do is you need to train all those people on all the different functions, and process steps in the fiber termination process, in order to really have the flexibility to ensure these lead times that are so crucial to our long-term success. And so it is that investment in people and the training that will allow us to hit those six to eight week lead times this summer. That is still far more than what we were doing pre-COVID, we were working on lead times three to four weeks. I donât think that is in our future. That is a whole that is not necessary. But six to eight weeks should be our goal. And we will have the labor force by which to do that based upon the investments we are making right now. And just a follow up, I guess in catalogs a couple of the earlier comments. You are looking for 30% to 35% growth in the second fiscal quarter, which kind of implies like you said normal seasonality is sequentially down December to March. Before we see that recovery into the second half of which you are expecting a 60% loss split, being skewed towards the back half of the years. Is that correct? Okay, and then to just to dig in on the back half. I know, it was asked earlier, but the comfort level there. What you are seeing in terms of the engagement from a customer standpoint requesting of shipments and it doesnât sound like RDOF is really built into those expectations. Iâm kind of curious where that fits either into the backlog or your thought process around a ramp up in the second half of the fiscal year? Right. I never count on government money in my projections, because it is just it is too much variability and lack of accountability to meeting have a date. And so that is definitely been that is still not in those numbers. And the other thing that is affecting these numbers is, one of the things that I mentioned in regard to our backlog, our lead time is of coming down with the exception of active cabinets and our availability of sourcing rectifiers. You donât think of Clearfield has being a chipset affected company, but the components that are in the rectifiers for power conditioning are in extremely long lead time positions and it is been frustrating for our revenue models, and for our customers to not be able to get those products as they would like to see them. And so that is one of the other reasons for the back half of the year coming back on board is as the chipsets, the rectifiers become more readily available. That is, the amount of our active cabinet business will be a much more significant part of our total revenue plan. They are pretty similar, to the rest of the cabinet best of the line. So no, I wouldnât call them higher, but they will be pretty close. They are in the same, you know, 40% to 43% margin. Got you, but in terms of the revenue guidance and extrapolating that into the back half, you are starting to get back into that 110 million to 120 million range. Okay. Yes. Look, I would make, it look at it from a standpoint I think of it seeing the significant because Iâm just not sure where those rectifiers are going to come in and the amount of backlog that we have for powered cabinets that definitely the fourth quarter is going to be this step up in that the availability of some of those materials, it is going to allow fourth quarter to be a higher number than what you would normally expect. At this time, this concludes the Companyâs question-and-answer session. If your question was not taken, you may contact Clearfield Investor Relations team at clfd@gatewayir.com. Thank you all for the opportunity to speak with you and for the questions from our analyst community. Definitely a year of transition and a year of being able to come back into these normalized patterns. And so I invite shareholders to contact our gateway or our IR firm. We welcome the opportunity to speak with you, because I could not be more excited about the revenue plan in front of us and the opportunity by which to become a significant player in high speed broadband, until next quarter.
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EarningCall_651
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Good day, and welcome to The Hanover Insurance Group's Fourth Quarter Earnings Conference Call. My name is Anthony, and I'll be your operator for today's call. At this time, all participants are in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. We will begin today's call with prepared remarks from Jack Roche, our President and Chief Executive Officer; and Jeff Farber, our Chief Financial Officer. Available to answer your questions after our prepared remarks are Dick Lavey, President of Agency Markets; and Bryan Salvatore, President of Specialty Lines. Before I turn the call over to Jack, let me note that our earnings press release, financial supplement and a complete slide presentation for today's call are available in the Investors section of our website at www.hanover.com. After the presentation, we will answer questions in the Q&A session. Our prepared remarks and responses to your questions today other than statements of historical fact include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements can relate to, among other things, our outlook and guidance for 2023 economic conditions and related effects, including inflation, supply chain disruption, potential recessionary impacts, evolving insurance behavior emerging from the pandemic, and other risks and uncertainties such as severe weather and catastrophes that could affect the company's performance and/or cause actual results to differ materially from those anticipated. We caution you with respect to reliance on forward-looking statements and, in this respect, refer you to the forward-looking statements section in our press release, the presentation deck and our filings with the SEC. Today's discussion will also reference certain non-GAAP financial measures such as operating income and accident year loss and combined ratios excluding catastrophes, among others. A reconciliation of these non-GAAP financial measures to the closest GAAP measure on a historical basis can be found in the press release, the slide presentation or the financial supplement, which are posted on our website, as I mentioned earlier. Today, I'll begin with an overview of our performance, discuss winter storm Elliott and ways to address future impacts of winter storms, update you on progress we've made in the fourth quarter to recapture our top-tier underwriting margins, and I will conclude my remarks with a review of our 2022 strategic accomplishments and the important strides we made this past year, strengthening our competitive position and executing our winning strategy. Next, Jeff will review our financial and operating results by segment as well as our balance sheet and provide an update on our outlook and longer-term financial expectations. We'll then open the line for your questions. For the full year, we delivered operating income per share of $5.53 and an operating return on equity of 6.7%. Both reflections of the inflationary economic environment and the magnitude of the cat activity in the fourth quarter. From a growth standpoint, we generated net written premium increase of 9.7% for the year, with strong contributions across all segments. Our full year combined ratio, excluding catastrophes, was 92.1%, toward the lower end of the guidance we provided on our third quarter earnings call in November. Given the frequency and severity of catastrophes in recent years, including unusual atmospheric events like Elliot, I'd like to take a minute to highlight the work we've done in the past and most recently, in terms of the strategic management of our catastrophe risks. We've built a strong track record in addressing catastrophe risks, in particular, hurricanes and convective storms, employing disciplined underwriting strategies augmented by data, analytic tools and technology. As a result, our share of catastrophe losses over the last five years relative to the domestic P&C industry has declined significantly. Additionally, our catastrophe losses during the same period generally have been in line or smaller than our market share in the affected territories. But as evident from our fourth quarter results, extreme cold weather like we saw with winter storm Elliott can challenge the conventional wisdom of what level of losses a winter storm can bring. And our prior catastrophe management actions clearly weren't as effective in this type of storm. While our top priority in these circumstances is to address the needs of our customers and agents, it is also incumbent upon us to leverage all we learn from this event to advance our financial and operating performance. With changing weather patterns affecting more geographies, we've intensified our focus on pricing and volatility management over the last few years. We have further expanded our capabilities in the area of risk solutions and mitigation, collaborating with innovative technology partners. Today, we are gathering vital information from visual intelligence technology, water and temperature sensors, AI risk assessment data and other advanced tools to make underwriting decisions and prevent claims. A relatively small number of early adopters of water and temperature sensors and related property IoT solutions have already begun to benefit from their use. We believe winter storm Elliott will drive a needed market movement on adoption of these risk solutions more broadly, and we have the infrastructure ready to quickly scale our existing risk prevention platform as customers better understand their exposure. We are focusing our efforts to address weather loss volatility around the following levers: actively repricing products consistent with change in weather risks; addressing risks for which we cannot achieve adequate price; significantly increasing water damage deductibles; and enhancing the implementation of water sensors using lower deductibles as incentive. We're confident our focus on risk selection, pricing and use of innovative tools will enable us to even more effectively address these less frequent but more broad-based storms in the future. Now, I will take a few minutes to update you on our progress, regaining our top-tier margins in Personal and Core Commercial property lines despite the persistence of inflationary and supply chain pressures. As we discussed in our third quarter call, our margin recapture plan includes three main levers: enhanced pricing, significant insurance to value adjustments and targeted underwriting measures, and we have successfully executed on all three areas in the fourth quarter. First, on pricing. As guided, we achieved Personal Lines pricing increase of 10% in the fourth quarter, up nearly 3 points sequentially, with meaningful gains in both auto and home pricing. Personal Lines retention remained solidly above 86%, with only slight sequential moderation, which is a testament to our unique account proposition and strong agency relationships. Additionally, we are operating in an unprecedented hard market in Personal Lines. And the regulatory environment is evolving to allow further rate increases in most states. Given the disciplined market conditions and elevated loss trends, we now expect Personal Lines pricing to further strengthen and end 2023 in the mid-teens. We also made meaningful strides increasing Core Commercial pricing, with underlying property renewal price change up 11%, slightly above third quarter levels and expect even higher increases for 2023. A disciplined strategy is essential in the current environment, and our superior agent partnerships and strong market position should enable us to hit our pricing targets while maintaining satisfactory retention levels. Second, we're using property-specific insurance to value adjustments to complement renewal increases for certain middle-market property risks. The adjustments we made in the fourth quarter, in combination with the work we completed throughout the year, added approximately 3 points of middle market premiums in 2022. And third, we continue to make enhancements to our underwriting strategies. We are tightening criteria with our targeted underwriting risk appetite to restrict new business and renewals in challenging industry classes and updating underwriting guidelines, particularly related to secondary perils. For the year, we [non-renewed] (ph) approximately $25 million of middle market commercial property business that presented outsized volatility. We expect this to improve CMP property profitability by approximately 1.5 points in 2023, all things being equal. Overall, I am pleased with the strides we made in the quarter to address recent inflationary pressures in property. We are already beginning to see the impact of our action plan and expect to achieve solid profitability gains in 2023 as a result of these actions. Now, let's take a broader look at the past year and discuss our strategic accomplishments in 2022. While the year was certainly not without challenges, we remain well on track on the execution of our strategic priorities: continued expansion of our specialty business; investment in innovative technology to enhance analytics and ease of use; deepen and broaden our agency partnerships; and further cultivate our strong culture to build on our talent momentum. Our Specialty business continues to deliver in terms of financial contributions as well as becoming a critical element of our agency value proposition. Specialty Lines delivered a combined ratio of 89.3% for the full year, an improvement of nearly 4 points from 2021. This business continues to serve as a major source of growth, increasing annual premiums by 11% in 2022, and enabling us to pursue an even better balance between property and casualty risks over time. Our highly diversified and specialized portfolio enables us to offer our retail agents one of the broadest ranges of products in the small to midsized market. We continue to expand our offerings in 2022, completing the nationwide rollout of our specialty general liability product and strengthening offerings for financial institutions, retail E&S, management liability and other sectors. Additionally, we implemented automatic renewal capabilities in the underwriting system for professional and executive lines, reducing manual intervention and creating greater operational efficiencies for both us and our agents. We continue to be impressed with the diligent work of our specialty team and their ability to drive our strategic initiatives forward. And it certainly gives us confidence in our continued momentum and success in this business. On the technology front, our investments in digital capabilities, underwriting tools and innovative platforms enabled us to react more quickly to the dynamic environment we faced in 2022. We made enhancements to our claims platform to improve user, customer and agent experiences, while reducing manual intervention and workarounds, driving increased productivity. In a similar vein, we launched Hanover Small Business Digital Exchange gateway to streamline the small business placement process for agents. We also made important strides in 2022 advancing our independent agency relationships, helping many agents succeed in the midst of continuing consolidation trends and a challenging employment market and better serve their customers. We gained share with many great existing agents while at the same time, making 290 new agency appointments, enhancing Personal Lines, Small Commercial and Specialty niche market access. Finally, we believe our organizational culture has been a distinct competitive advantage for us. And in 2022, we continue to build on this strength making additional investments to further attract, retain and cultivate talent. Despite the challenging employment market, we have real momentum with employee engagement and talent acquisition. From our efforts to advance our inclusion, diversity and equity initiatives to multiple skills training opportunities and workshops, we expect our accomplishments from last year to feed our great culture and talent depth in the years ahead. We entered 2023 with the advantage of several quarters of strong rate increases and the benefit of sophisticated underwriting expertise. We will continue the necessary work of adjusting to our dynamic, rapidly changing environment. And I have every confidence we have the team and the expertise necessary to anticipate the impact of the changes ahead, delivering long-term value for all of our stakeholders. I will begin by reviewing our consolidated results and discussing our segment operating performance in more detail. Next, I will update you on our investment portfolio and capital position. And then, I'll close my prepared remarks by providing our guidance for 2023. In the fourth quarter, we incurred catastrophe losses of $190 million or 13.9 points. Winter storm Elliott accounted for approximately $165 million or 12.1 points of the total losses. Over 70% of the losses from Elliott were within our Core Commercial property book. Properties with the largest losses were likely unoccupied for an extended period of time during the holiday week, which we believe may have delayed the discovery and remediation of water damage that resulted from burst pipes. Catastrophe losses aside, the fundamentals of our business remained very strong, and loss trends were within our expectations as evidenced by our ability to deliver ex cat results in line with the guidance we provided on the prior quarter call. The enterprise combined ratio, excluding catastrophes, was 94.1% in the fourth quarter, bringing the full year ratio to 92.1%. For the full year, we recorded favorable prior year reserve development, excluding catastrophes, of $20.6 million or 0.4 points, driven by specialty lines and continued favorability in workers' comp. These results underscore the success we've had building a solid balance sheet over the past several years. We entered 2023 in a really strong position and with heightened vigilance in assessing liability trends. We delivered an expense ratio of 30.9% in the fourth quarter, which reflected a strong improvement from the prior year quarter. The full year expense ratio came in at 30.8%, an improvement of 50 basis points from 2021, primarily driven by the impact of fixed cost leverage from growth as well as some one-time favorability, including lower-than-expected agency and employee variable compensation. We remain well on our trajectory towards our long-term expense ratio target. Moving on to a discussion of our underlying underwriting loss performance. Compared to the prior year quarter, the consolidated underlying loss ratio increased 3.7 points to 63.3% for the fourth quarter and increased 3.2 points to 61.7% for the full year, reflecting higher loss costs due to inflation and higher property large losses in the second half of the year. Fourth quarter outcome was consistent with the outlook we provided on our third quarter earnings call, with some puts and takes by segment. Relative to our expectations, strong improvements in our Specialty business and more benign property large loss experience in home and CMP relative to third quarter levels were offset by the impact of higher frequency and severity of losses in personal auto comprehensive coverage. Looking at underwriting results by segment, starting with Core Commercial. The Core Commercial loss ratio, excluding catastrophes, increased 2.2 points for the fourth quarter and increased 0.4 points for the full year, primarily due to an uptick in loss cost inflation and property large losses in the second half of the year. We were pleased to see property loss pressure in CMP abate somewhat in the fourth quarter from elevated Q3 levels. That said, we continue to push for additional rate across the Core Commercial book of business, which the market certainly supports. In the quarter, we achieved rate increases of 7.2% and total renewal price increases of 10.2%. More specifically, the renewal price change in the property portion of the book of 11.2% was up slightly from the third quarter and we expect additional increases in 2023. In casualty coverages, while we continue to see robust rates, some of the elevated exposure increases we experienced post COVID are beginning to normalize. As Jack mentioned, we remain focused on leveraging property-specific insurance-to-value adjustments to recapture target margins in core property lines. Our ability to quickly adjust exposures to align with prevailing inflation combined with granular data and analytics and targeted underwriting actions positions us well to deliver improved margins in Core Commercial going forward. Looking into 2023, we expect earned price and select underwriting actions to meaningfully drive margin improvement in our Core Commercial book. At the same time, we are cognizant of the current dynamics with the reinsurance market and expect part of this improvement to be temporarily offset by an increase in the cost of July 1 property reinsurance treaty renewals. Specialty posted another quarter of excellent results, delivering top-line growth of 8.7% and a combined ratio of 90.5%. For the year, our Specialty team delivered 11.2% net written premium growth and a sub-90s combined ratio. Specialty current accident year loss ratio, excluding catastrophes, was 51.5%, reflecting an improvement of 90 basis points from the prior year fourth quarter. The Specialty pricing environment remains firm in the majority of our markets as we achieved renewal price increase of 13.2% in the fourth quarter, a sequential acceleration of 80 basis points from the third quarter, resulting from both rate and exposure growth. We have full confidence that our specialty business will continue to be an outsized contributor to our results. At the same time, in light of an expected uptick in medical inflation as well as prudence in liability assumptions for certain lines, we embedded more conservative expectations in our loss picks for 2023 relative to 2022 results. Turning to Personal Lines. The business reported a combined ratio, excluding catastrophes, of 98.9% for the fourth quarter, driven by the impact of inflation and supply chain delays on personal auto and homeowners property. In personal auto, the current accident year loss ratio, excluding catastrophes, was approximately 2 points above our expectations for the fourth quarter exiting Q3, which was primarily due to the elevated frequency of animal hits. We are among the largest personal auto insurers in Michigan, where deer hits reached their peak in Q4 and impact the frequency and severity of comprehensive coverage claims. Putting comprehensive coverage aside, the underlying loss trends in auto remain in line with our expectations and frequency continues to track below pre-COVID levels. We are addressing higher prevailing auto severity through robust rate and non-rate actions. Auto pricing increases of 6.7% in the quarter reflected an acceleration of 2.6 points from the third quarter. Furthermore, we have line of sight to further price increases and expect to achieve auto renewal price change of approximately 9% in the first quarter of 2023. In homeowners, we were pleased to see large loss experience stabilize somewhat in the fourth quarter. At the same time, we continue to experience somewhat elevated inflation on property losses. The homeowners underlying loss ratio was slightly better than our expectation due to somewhat reduced frequency of lower non-cat weather losses. We are beginning to see the impact of the robust pricing increases on profitability in home. Written price change in our homeowners book remains on a strong upward trajectory as evidenced by increases of nearly 16% in the fourth quarter. We have line of sight to further price acceleration to 18% in the first quarter of 2023, and expect it to remain in the upper teens for the remainder of the year. As an account writer, we are intently focused on the profitability of our Personal Lines business as a whole. We expect overall Personal Lines loss ratio to improve by over 2 points in 2023 from 2022, led by homeowners. Adjusting for normal weather seasonality, we expect each quarter of 2023 to reflect a sequential improvement. We anticipate underlying results in auto will follow a more paced progression, as current and future rate actions earn in and some of the residual auto frequency benefit from early 2022 levels create comparison headwinds for the first half of 2023. However, we expect further Personal Lines improvement in 2024, supported by both auto and home, and this business should return to target profitability in 2024, all things equal. Turning to reinsurance. On January 1, we successfully completed our multi-line casualty reinsurance renewals. We are pleased with our ability to renew our treaties with limited changes and at an acceptable price. As a reminder, our cat program is a three-year rolling program that renews on July 1, which gives us time to study coverage options, adjust our risk exposures where necessary and seek pricing increases ahead of anticipated reinsurance cost increases. Now, moving on to a discussion of our balance sheet and investment portfolio. Higher interest rates continue to provide a meaningful lift to our net investment income and overall earnings. In the fourth quarter, net investment income came in above our expectations at $75.9 million, helped by higher bond reinvestment yields, which more than offset slight partnership underperformance in the quarter. For the year, we delivered net investment income of $296.3 million, which beat our original expectations by about $25 million. Looking ahead, we expect the current interest rate environment to have a substantial building impact on net investment income as the portfolio turns over and is reinvested at higher interest rates. We continue to achieve new money yields on purchases of fixed maturities well above our total portfolio yield, and also above what is rolling off the portfolio. We expect higher interest rates and cash flows to provide a meaningful tailwind in 2023. We experienced a favorable change in our investment portfolio valuations of $80.3 million before tax during the fourth quarter, driven by the increase in the fair value of fixed income securities, but the portfolio remains in an unrealized loss position at year-end. We typically hold fixed income securities to maturity, and therefore, we are not overly concerned with temporary interest rate-driven movements in the market value of the portfolio. The increase in interest rates in 2022 has allowed us to invest portfolio cash flows at attractive market yields and at higher quality and shorter duration. Portfolio duration at year-end stood at 4.3 years compared to 4.9 years at the beginning of 2022. Looking at our equity and capital position. Our book value increased in the fourth quarter, while being down for the year due to mark-to-market losses on our investment portfolio. Statutory capital remained relatively unchanged at $2.7 billion compared to the end of last year, as investment losses on equity securities and a $100 million dividend payment to the parent were nearly offset by insurance company earnings. We remain disciplined and balanced on our capital management priorities and committed to being strong stewards of our capital. In December, the Board of Directors approved an 8% increase in the company's quarterly dividend. This increase reinforces our commitment to maximize value for shareholders and reaffirms our confidence in the long-term earnings potential of our business. Turning to our guidance for 2023. We expect overall consolidated net written premium growth to be in mid-single digits, driven by growth in our most profitable businesses, partially offset by the impact of repricing and targeted underwriting actions in certain parts of the Commercial Lines business. We expect net investment income growth of approximately 8% after incorporating an assumption for some lower partnership performance in 2023 relative to 2022. Net investment income on fixed income securities is expected to increase by approximately 18%, propelled by higher operating cash flows and higher yields. Our expense ratio should be 30.8% for the year, improving 30 basis points from the 2022 guidance and putting us at 50 basis points of improvement over two years. The full year combined ratio, excluding catastrophes, should be in the range of 91% to 92%. In addition to usual weather seasonality, our quarterly ex-cat combined ratios will be impacted by progressive earning in of price increases and the changes of frequency for personal auto. Additionally, quarterly comparisons of 2023 to 2022 will be impacted by the lower frequency of auto claims in the first half of the 2022 year. The cat load for 2023 increases 10 basis points from 2022 guidance to 5.1%. The cat load for the first quarter is 4.6%. In conclusion, our differentiated offerings, strong pricing capabilities and underwriting discipline position us well for 2023 and beyond. 2023 should represent solid operating performance and meaningful improvement from 2022, on our way to 2024 return to top-tier profitability. We continue to partner with the nation's best agents and look forward to driving margin growth throughout the year. We will now begin question-and-answer session. [Operator Instructions] Our first question will come from Mike Zaremski with BMO. You may now go ahead. Hey, thanks. Good morning. My first question is on loss cost inflation, and I appreciate all the great commentary. Maybe you can kind of give us an update -- I think you did, but maybe elaborate a bit more about whether you're seeing a pickup, not just on the property side, but I heard medical inflation mentioned to bit and some peers have talked about liability inflation kind of moving up a bit as well. But just curious if you -- if there's anything -- any more color you can offer other than the property side, which I think we better understand and we're seeing rate accelerate there to get in front of that on the more property side? That's my first question. Thanks, Mike. This is Jack. I appreciate the question. I think we are not seeing any material lift in medical inflation at this point, while we're watching it very carefully. We, obviously, look for that not only in the workers' comp line, but also in the liability lines to see if we're starting to see some eventual medical inflation, which we do expect to evidence itself eventually. On the liability trends more broadly, we continue to monitor and see some evidence of the litigation environment and elements of social inflation starting to show up, and we've tried to stay on top of that from a claims analytics standpoint. I think we've captured that, frankly, in our picks. So, we're not seeing anything that we haven't contemplated to date. But like any prudent underwriter, we're watching it like a hawk and making sure that we have the right analytics in place to see what's on the horizon now that the courts are really fully up and running, and those cases are making their way through. As far as expectations are concerned or guidance for 2023, we've incorporated increased lawyer involvement and increases in some medical procedures and the costs there on into those picks. On the property side, not taking into account reinsurance costs. I know you guys have -- sorry, the company has a rolling reinsurance program. But is there any changes in what you're seeing in terms of the property inflation side in terms of maybe a step down from what's been historically high levels trailing 12 months? I don't think we've experienced a material step down as of yet. And so, we're not certainly reflecting that in our picks. We're watching and hoping for that to eventually show up in terms of something more than, say, the cost of lumber and things that have come down a bit, but not -- we haven't seen a material dip yet. I think overall, related to our property trends is we were glad to see some stabilization in some of our property large losses, particularly in CMP, which we anticipated after seeing a little volatility earlier in the year. But overall, we have a pretty robust pricing environment, and we've done a lot of things from an underwriting standpoint to try to get at some of the volatility we've seen and try to stay ahead of this as much as possible. We're getting a lot more rate than we are in terms of loss trend across virtually all of the different segments. And the assumption that we've made through 2023 is inflation remains high and then it begins to -- the increase in pricing begins to soften a little bit as you get later in 2023. Okay. My final follow-up is just thinking about the long term, I know this is long-term return on equity, I guess, targets that you put out about 1.5 years ago at the Investor Day of 14% and kind of being cognizant, we can see the '23 guidance, what it implies a lower level, and we know that the inflationary environment is somewhat elevated and you'll be getting in front of it. But just curious, one, has the world changed a lot in the last 1.5 years that maybe we should be thinking about a different long-term number puts and takes? And also, just curious, ultimately, when we and investors look at kind of the proxies and compensation targets for upper-level decision makers, should we expect a step-up in targets to given that the 14% ROE is higher than current expectations over time? Thanks. So, Mike, we have a lot of confidence in the long-term trajectory and the drive over the period of time to the 14%-plus ROE. 2023 will be very solid results. And you're right, if you were to do the math, think something like the guidance would imply 11.5% to 12% ROE, and that's not where we wanted it to be, but it's solid. But as you think about the rate and how it earns in and if we think about 2024, for 2024, we are every bit as strong as we would have anticipated in the Investor Day, if not stronger, when you bake in investment income. So, we're still very, very optimistic about the trajectory. But clearly, 2022 and even into '23, are not exactly on that line, but I think we're perfectly fine with that. Any comments on just will the firm -- the firm's compensation structure given we're 1.5 years in, does it reflect a step-up in ROE over time? Well, remember that particularly for our senior executives, we're heavily influenced in our compensation by long-term stock. So, I would argue that our performance, meeting expectations of investors is heavily weighted in our compensation scheme. But I think our Compensation and Human Capital Committee regularly intersects with our -- with the management team to set appropriately aggressive goals and to adjust those as the environment starts to improve, and we have high expectations that we're going to achieve those longer-term targets like we said, and our goals will reflect that. Okay. Understood. And maybe I'll sneak one last one in. Just in terms of kind of reappraising property values to reflect inflation over the last couple of years, is there -- I don't know if it's baseball inning analogy in terms of kind of reunderwriting on the property side of the portfolio, maybe on the commercial side that you could kind of give us some insights into? Is it kind of latter half baseball innings or still a lot of work to do there? Thanks. Well, I'll just say a quick thing about this. This is Jack, and then maybe let Dick get his perspective on the table. But I would say we're pretty far along in our overall property re-underwriting and repricing, but the environment is dynamic. And if we've learned one thing over the last few years, including the pandemic implications as well as the inflationary and supply chain pressures, some of the weather dynamics going on is that our job is never done in terms of assessing those trends against our portfolio and making sure that our underwriting and our pricing reflects those changes. So, I'm confident that we know how to do that and that we're making all the right adjustments. But I think because of the dynamics, Mike, it's hard to say what inning in the game is. I think the game continues, and it may be more like a soccer match where you have to just keep going until the PKs are done. No, exactly. I would say we're leaning into the ITV increases throughout this entire next year, and we'll watch it closely, right, both on the building values, the contents, business income. So, we've meaningfully increased what sort of rolls on to each policy upon renewal. And so, we'll see that -- we're just going to continue to put that at a pretty high level and watch the actual loss cost. But then also, as Jack said, we took a hard look at where within our book, we might be -- there might be undervalued properties. And so, you get at that in sort of a one-time basis where you analyze where ITV may fall short and you make adjustments. So, we're pretty far along on that process. And just -- this is one that will be in front of us absolutely for the next 18 to 24 months. Hi, there. Good morning. A couple of questions on the guidance. So, the first off is the cat loss ratio, 5.1%. That's kind of low relative to the past few years, probably low relative to the average over the last 10. So, I'm just kind of curious if that's just because of the actions you've been taking to kind of reduce the volatility in cats. If you look at that over 10 years, that's definitely the case. So, we've deconcentrated properties in order to reduce that. So, the earlier periods in the 10 years, I think, had a little bit different mix of business. We've done our modeling. We've increased the load. We've increased the perils. We've done a lot of work on it, and I think we're comfortable with the 5.1%. Okay. And on the premium growth, so it sounds like it's probably going to slow down a little bit relative to 2022. How do you see the growth in each segment? It sounds like from your comments, you're going to see maybe a little slower growth in Core Commercial because of underwriting actions. Is that the right way to think about it? Hey, Bob, this is Jack. I think overall, we're trying to reflect our premium guidance, if you will, to make sure that we're emphasizing that margin recapture is more important than the last point of growth. That said, we're in a pretty dynamic environment. And if we can improve our pricing and get done what we want to do on the margin with some of our underwriting actions and the market stays as firm as it is, then the growth may surpass that. But I think, at the sector level, PL, we're making material changes in Personal Lines that may move our PIP growth down. Obviously, the pricing, we'll work against that from a growth standpoint and keep the growth from going down too low. But we're certainly going to see less growth in Personal Lines in 2023 than we saw in 2022. And I think you're right, within middle market in Core Commercial, because of the limits volatility that comes with that business, we're going to be particularly focused on adjusting our growth and making sure that the growth is appropriate until we get more confidence in some of the pricing over loss trend. I also would be remiss if I didn't say that there's a number of parts of our portfolio across the Specialty Lines, in Small Commercial and even sectors within middle market where we're very bullish. The combination of the pricing environment and our current profitability and our headroom with agents allows us to continue to stay on the offense in those parts of our portfolio. So, really, that mid-single-digit guidance is a combination of all that, but with an emphasis on the fact that margin improvement trumps the last point of price in terms of our goals. All right. Okay. Thanks for that. And that brings up another question for Personal Lines, as the rates keep going up, you said your retention seems to be holding up pretty well. Is there a point where you maybe pull back a bit if the retention drops too low? I'm just trying to get -- curious if there's a certain level of retention that you would say, all right, maybe we pushed the rate too much? Well, let me let Dick comment on that, because I think if you watched us over the last few years, we've managed this particularly well in a pretty dynamic pricing environment. And so being an account writer, I think that gives us a little bit more stability than those that are writing monoline home and monoline auto tends to stabilize retentions. This is at the heart of our state management and actuarial science and what we spend every waking moment of the day looking at price, the price retention trade-off, by state, by customer segment. We have profit pools that we obviously know of and want to protect. So, we watch those retention metrics very closely, and we make our pricing increases appropriate such that we protect those. So, I wouldn't put a particular number on it per se. And as Jack referenced, we're proud of our capabilities in this regard back in the pandemic times when others were reducing rates, and we were sticking with our higher level rates, we did see retention start to drop a little bit and made adjustments and we think quite effectively. So, with our account strategy, we like retention in the -- certainly the mid- to high-80s. So that's certainly a barometer that we'll watch closely. Right. Okay. Thanks for that. And probably one last numbers question for Jeff. Just -- you keep mentioning that the new money rates are in excess of expiring. So, can you just give us what the actual new money rate is these days? We haven't shared that. I guess treasuries are moving around so quickly, but I would suspect it's somewhere in the 4.75% range, something like that or to 5%, somewhere in that range. Good morning, guys, and thanks for the call, all the help. I am getting a question from investors today that sort of surprises me, but I wanted to ask it is more of a philosophical question, maybe a little bit [indiscernible] question, which is -- it sounds like you folks are, what I would expect, focusing primarily on profitability improvements. I guess philosophical question is, philosophically, why do you think in this part of the cycle, you should be -- you shouldn't be focused more on top-line growth in the various businesses? I think this is mostly coming from people looking at Personal Lines where they think price increases are pretty heavy and maybe we're seeing a reduction in competition. But just philosophically, how do you guys think about that? Well, Paul, I actually appreciate the question because I think that is the appropriate question given the business we're in. And I think of growth really over a multiyear basis. The best underwriters in our business are able to generate good returns and grow ahead of the market over a period of time. And that is our aspiration. You saw that in our September 2021 aspirational goals. I think this year, we have the proper humility coming out of 2022 that the combination of hyperinflation and a challenging storm in the last two weeks of the year caused us to want to be a little bit more cautious with regard to growth rates and make darn certain that we can get our margins back on track and be a top-tier performer like we've been accustomed to being. And we know we have plenty of headroom. So, I have complete confidence that as we see our margins improve and the environment play out the way we hope it will, that we have all the capability as a firm to elevate our growth back to where we were, and we can balance growth and profitability quite well as a firm. Paul, we have a lot of confidence in our ability to deliver on the growth goals that we set out there over a five-year period. And just as an example, for the five quarters since the September 2021 Investor Day, we've averaged about 10% growth versus the 7%-plus that we put out there. So, if there's a period of time where we're slightly below the 7% to make sure our margins are great, we're perfectly fine with that, as Jack just said. And maybe just a couple of additional thoughts on the broader competitive environment across your businesses. It isn't really clear to me that people are actually -- competitors are actually pulling back in material places. It looks kind of like it may be a pretty mixed environment that's just -- and basically at the same place with various lines may be a little bit less or a little bit more competitive. Is that a fair assessment? Or do you really think that given all the craziness and volatility of earnings and the big losses that there's some material areas where people are actually pulling back and just the competitive environment is getting better? I think that overall, we are in a reasonably disciplined marketplace. I think we see -- and as we predicted, there will be many cycles based on lines of business and sectors of the business. I think you saw on the extreme and some of the tougher specialty areas, there was a real hard market and some of that starts to subside a little bit, but already signs that may be in areas like med mal that may reaffirm. Relative to our portfolio, I think we see the same thing. If you look at Specialty, we have areas of the Specialty business that are performing extremely well. but we're still getting pretty good pricing. And traditionally, what would happen is that you would see some hyper competition developed. To me, that means that there is the utmost respect for what could be around the horizon and acknowledging that liability trends are still evidencing themselves, particularly coming out of a pandemic. So, when I put all that together, Bryan, maybe -- I know you're on the line, maybe you could add in your two cents, but Specialty is probably the best example for me where the market is still pretty stable and firm despite some pretty good margins by some of the better companies. Yes, Jack, glad to weigh in. Look, I would say, and I would agree with you that there's enough out there in terms of the potential for social inflation, the potential for rising and the rising insurance -- reinsurance costs that I think folks are paying attention to that. And that's the way we're thinking about it. So, I feel good that we were able to achieve the kind of growth that we did, right, 11.2% last year, while continuing to appropriately, is the way I would describe it, push on rate, whether it's on the casualty side or on the property side. We continue to push, monitor our results and adjust accordingly. So, on the property side, we continue to push and that is holding, and our retentions are holding quite nicely. On the casualty side, we continue to push as well. And so, we'll watch that throughout the year. But the -- our competition is not creating an environment for us where we feel like we have to deviate from that right now. And I guess the only other thing I would add is, our book composition is sort of an interesting one given that it skews towards middle and smaller risks with a lower limit profile. And so those attributes are also serving us well. So, I think we're in a space where we can continue to push, we can continue to watch, and we're in a position to adjust should we think it's appropriate given the rate on the year-on-year rate increases we've gotten. Hi. Considering the catastrophe loss guidance for this year, I was wondering how the outlook for midyear reinsurance renewal factors into the increase? And just kind of if we should expect a bigger step-up in the second half of the year compared to the first half? Grace, we went through our casualty renewals, as we said, and that was unremarkable or uneventful. We did a lot of additional buying last year. We added to the cat tower. We also put in place a cat bond, which has a three-year program on it, assuming we don't hit it, which is highly unlikely to hit given it just at the very top. We have assumed a firm market based on what we see and what we read for [one-one] (ph). I suspect we'll be in good shape in getting it done since we've never impacted our treaty since Katrina. But we buy the program on a three-year rolling basis. So, we're always pushing out a third. So, we've been conservative in how we've set our assumptions, but I'm feeling pretty good about it. Thank you. And one more quick one. As we consider, I guess, casualty loss cost trends being under more scrutiny, have you all noticed any difference in umbrella loss cost trends in the latter part of the year? Well, I think umbrella, Grace is I think it's hard to look at those losses on a quarter or even a half year basis, because they're kind of the law of small numbers, very few claims obviously produce your umbrella losses. I can't say that we've seen any huge material changes. But like many in the industry, we are observing more cases going to trial or staying longer in the litigation process. We are seeing some awards that appear to be above traditional levels, some of which get resolved and appeal, others don't. So, we're clearly monitoring the true implications of social inflation, which we believe exists, but we're not seeing a tremendous delta, if you will, on that aspect of our portfolio yet. Great. Thank you very much. Two quick questions, I guess. One, we've got the expense ratio guidance, obviously. But I was wondering if you could talk about the impact of inflationary pressures on incentive compensation in 2022? And how we should think about that component changing in 2023, 2024? I guess both, because I assume that they are going to both be included in the expense ratio. But if I'm thinking about that incorrectly, please let me know. Sure. So, with respect to 2022, one of the reasons that the expense ratio was 50 basis points better than it was the year earlier or 30 basis points better than the guidance was both of those elements were impacted by Elliott and were impacted by inflationary pressures in general. And they follow the fortunes of the underlying firm in both cases. Absolutely. So, obviously, everything gets re-planned and re-baselined based on the guidance that we have. And so, the 30.8%, while flat to 2022, is a 50 basis point improvement over a two-year period or a 30 basis point improvement over the 2022 guidance that we gave. On the agency compensation side, as we look at that every single year, there's puts and takes on the direct compensation as well as the profit sharing or bonus plan calculation. So, you'll see some ups and downs on that, but that's embedded in this expense ratio. Okay. No, that's perfect. That's helpful. The second question, and I don't know if this is meaningful, but if we tease out the exposure unit growth from the pricing and rate changes in Core Commercial and Specialty, it seems like exposure unit growth is decelerating in Core Commercial and picking up in Specialty. Is that random? Is there something actually going on there? And should we expect that to continue going forward? So great question, actually. If you look at our pricing overall in Core Commercial, we have made progress in terms of getting rate up and holding it stable. We expect that, that will continue. Exposures on the property side will continue to go up. We are ratcheting up insurance to value appropriately and making sure, as Dick said, that certain occupancies and business types get reflected more than just the general increases. The casualty exposures for many classes are driven by payroll and/or sales, and those will fluctuate, particularly if the economy hits different sectors in different ways. And we saw a little of that frankly, in 2022. So, we try to reflect that. We're focused mostly on rate in the casualty lines because of that, because when those exposures come down, generally loss costs tend to follow that. I think in the Specialty Lines, I think, for the most part, our exposures have been growing because there is some property also in our Specialty portfolio, but exposures aren't as sensitive to those payroll and sales. And so, I don't think you're going to see that same kind of up and down, if you will, on the casualty side of Specialty. Okay. Should we infer that there's maybe more not property exposure but property premium coming into the mix in Specialty relative to Core Commercial? No, I would not come to that conclusion. I think it's just less downside on some of the casualty exposure, particularly when you think of workers' comp or the sales on manufacturing and retail and wholesale, it just doesn't have that dynamic in it. This concludes our question-and-answer session. I would like to turn the conference back over to Oksana Lukasheva for any closing remarks.
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EarningCall_652
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Good morning, and welcome to the Evolution Q4 2022 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Good morning. Welcome everyone to the presentation of Evolution's year-end report of 2022. My name is Martin Carlesund and I'm the CEO of Evolution. With me, I have our CFO, Jacob Kaplan. I will start with some comments on our performance in the quarter, whereafter I will hand over to Jacob for a closer look at our financials. After that I will round off our presentation with an outlook for the rest of the year, and at the end we will open up for your questions. Next slide please. I'm very satisfied to be able to present yet another strong quarter which concludes a successful 2022 for Evolution. As always, operationally it has been a very hectic year for us, and in the fourth quarter, we continued at a high pace from the previous quarters. We continue to see strong worldwide demand for our products in Live Casino. Both existing as well as new games launched during the year continue to attract new players, but also new player groups. We can also now notice how different parts of the world have initially slightly different preference when they begin their journey within Evolution. At the beginning of the year I spoke of 2022 as a year of the product. I think 2022 has lived up to that billing. In the quarter, we have further expanded our North American footprint with the launch of a third studio in New Jersey to support the growing demand there and the build-out of the new studio will continue in 2023. We are also gradually starting to expand our games portfolio in North America, after the launch of Craps in Pennsylvania last quarter, and we finally also launched the fantastic new game in New Jersey in Q4. In addition, the new studio was launched with our newest game called Football Studio. Furthermore, we will shortly also launch Mega Ball with the British Columbia Lottery Corporation with the other Canadian lotteries to follow. This will be the first real lottery game launched with a lottery in Canada. In January, we also went live with the Canadian province in Saskatchewan. Things are also moving within slots. Red Tiger is the first game supplier to introduce time jackpots in North America. Time jackpot is a mechanical slot game that allows operators to set up the progressive jackpot that are guaranteed to hit before a certain time. In the fourth quarter, Red Tiger launched these unique time jackpots games in Connecticut, Ontario, and Quebec. And a week ago, they were launched in Michigan, and it has been an instant success. At the end of the quarter, we had over 1,300 tables live, resulting from an increase of over 300 tables during the year. The high demand for our products means that we must expand in existing studios and the new ones to keep up the pace. We will continue to increase our studio capacity also during 2023. During the second quarter last year, we launched a new fantastic lobby and since then we have rolled it out. And now in January, the transition to the new smart lobby was completed for all customers. The lobby's recommendation engine powered by artificial intelligence assure that the players will always get the content best suited to them. The recommendation engine gets smarter every time the player enters the lobby. And our goal with the new lobby is simple, to help players quickly find a game that they will enjoy. The new lobby is smart, powerful and personalized and will thus definitely enhance the playing experience for the end users. During the year, we have faced a difficult macroeconomic environment with war in Europe, increasing cost levels and pressure on supply chains, which has put pressure on our margins, but even throughout the year we have continued to invest in growth. This year, as always, our main priority has been to continue to serve an ever-better experience with the all-fantastic new games as well as enhanced existing games. With that backdrop, we delivered an EBITDA margin within the guided range for 2022 despite the cost increases we have faced this year. In 2023, cost efficiency will remain as important as in 2022 and our efforts to increase efficiency and throughput will continue. We round off 2022 with a strong financial result and continued the new year with fantastic line of new games and a strong momentum which makes us well placed to further strengthen our market share and continue to widen the gap to our competitors. Now let's move to the coming slides and see the effects on numbers, on products, on all our efforts. Operator, next slide, please. Our financial results for both the quarter as well as for the full year 2022 are strong. Revenues increased by 36% both in the quarter as well for the full year. EBITDA increased by 35% to â¬279.5 million in Q4, corresponding to a margin of 68.6%. For the full year, the EBITDA growth amounted to 37% and reached a margin of 69.2%, in line with our guidance of 69% to 71% for the year and an increase compared to full year 2021 - 2022. Hard with the years now, when we are in the beginning of '23. Live Casino delivered very satisfactory growth of over 41% in the quarter and for the full year, RNG revenue amounted to â¬72.5 million, a growth of 15.3% in reported numbers. The growth in the quarter compared to the combined revenue of Evolution and Nolimit City for Q4 2021, the pro forma growth of RNG amounted to 5.1%. As earlier communicated, we have a target of double-digit organic growth in RNG. Moving forward into 2023, the path to our goal within RNG will not be linear, but we look forward to 2023. We will double the releases of our national brands, add new bonusing tools for slots and increase distribution for slots through OSS. Our EBITDA margin guidance for 2023 is 68% to 71%, and we have widened the range to 1% as a result of the uncertainty of the macroeconomic situation in the world. It is, as always, important to state that the investments will continue to be high and our main priority is to continue to grow, and as always in a trade-off between growth and margin we will always opt for growth. Important also to note that the Board proposes a dividend of â¬2 per share for 2022. This is in line with our policy and slightly above 50% of net profit. All in all, fantastic numbers, and I'm very pleased with our financial performance in the fourth quarter, and we are definitely well-placed to deliver a strong 2023. Operator, next slide, please. Expanding our studio capacity means we need high recruitment pace, and in the quarter, we increased the number of Evolutioners with 1,100. The increase in staff in 2022 amounted to 3,600, adding to over 17,000 Evolutioners at the end of the period. Evolution is a truly global company. Our products can be played in most corners of the world and our employees are a good mirror of that global reach. And at the end of the period, we had over 100 nationalities employed all over Evolution. We will continue to increase headcount during 2023 as we expand in our studios and we will continue to consider diversity as a strategic advantage and a key asset. It is accreditation for Evolution's operational excellence. I'm very proud of all our employees and the work ethos they show in their daily work, they make up a fantastic company. Next slide, please. Last quarter, we replaced bet spots as a measure of play activity on our network and replaced it with game rounds. The best sports slide was only related to Live games and that did not cover the whole network and simply had played out its role as a performance indicator. Game rounds index instead shows the development of the whole Evolution network and includes all games. A game around is what it sounds like, one round of a game, one round of Roulette, one hand of Baccarat or one spin of a slot, all count as one game round. There are still differences between games and, for example, since the hand of Blackjack takes longer time than a spin of a slot, each game round of Blackjack typically carries a higher bet. So all game rounds are not equal in value. In the short, the index values for game rounds from Live and RNG and other are weighted according to revenue contribution. This gives us a joint index that includes all games based on equal revenue contribution. Game around index will over time give a better view of activity in our network. This index will not correlate exactly with revenue each quarter. As you can see in the chart, the activity has remained high in the quarter, over 70% year-on-year growth for the second quarter in a row. One reason for the high growth in game rounds compared to the revenue is that we are adding many game rounds from new markets that typically have a smaller bet size. So activity increases more revenue. Still, increased activity in the network is a very positive sign and will contribute to growth in the future. Operator, next slide, please. This slide shows the breakdown of our revenues by geographic region. It's a very good growth year-on-year in all geographical markets, and it's evident that the demand is truly global. Year-on-year growth in North America amounted to 66% with the highest growth rate of all regions for the fourth quarter. For the full year, the growth amounted to 65% compared to last year. In Asia, saw continued strong growth of 50% year-on-year and a growth of 67% for the full year. We see good potential in both these markets and extremely high growth rate going forward. Europe as a whole, including UK and Nordics, showed a good growth of 7% in the quarter - quarter-on-quarter. European markets in general have a slower growth than North American and - American and Asian markets due to both regulatory changes as well as the - that they are more mature. It's worth noting that this table does not include pro forma figures of the growth year-on-year. So to some extent it can be attributed to acquisitions. Other, including Latin America, Africa and remaining part of the world, shows a very good growth of 61% year-on-year. In this market segment, it is LatAm that is the main driver for growth. Share of revenues from regulated markets amount to 40% in Q4. Next slide, please. Products - most important thing, products. In 2022, we grew the Evolution Live offering significantly, further widening the gap between Evolution and our competitors. One year ago I said 2022 would be the year of the product and set a goal for ourselves to deliver 88 new games in 2022. It would mean a record number of releases from Evolution in one year. We did it. I'm very proud of all the people within Evolution Group that made it happen. In 2023, we will launch over 100 new games. I think it's fair to say it will be yet another year of the product. Among the new games in 2022, XXXtreme Lightning Roulette was an out-of-the-gate success. MONOPOLY Big Baller is another mega hit. And I'm happy to report that the original MONOPOLY Live continued to see good increase in player numbers even after the launch of Big Baller. The third exceptional game to point out is this Live Slot, Crazy Coin Flip, a truly unique game that combines slots and live show entertainment and the game found a very large audience. I'm excited to do more in 2023 combining the worlds of Live and slots. In the fourth quarter, we launched two new and exciting Football Studio games, Football Studio Dice and Football Studio Live. Another game in Q4 was the Free Bet Blackjack, a variation of our classical Blackjack, but what makes the version different are the exciting Free Bet. Also new in the quarter is the gripping experience with Dead or Alive: Saloon, a card game set in a fantastic Wild West saloon-style environment. Actually this studio I showed you on the cover of the Q3 report presentation if you remember. While we want to see more in RNG, we have released many very good games also in 2022. During the fourth quarter, one of my favorite is Dead Canary from Nolimit City. Other releases in the quarter, as you can see in the slide here, are In the Rabbit Hole from Red Tiger and Cupcakes from NetEnt, but there were more. We will have a very high focus on RNG for 2023, and we will do everything in our power to deliver the best and most innovative slots in the world this year. Now, let's say just a few words about the roadmap for 2023. Operator, let's move to the next slide. Yes, products, 2023. Exciting 2023. Here on this picture is a sneak peek at one of our launches at ICE next week. It's one of our headline games in 2023 and the most technically complex game we have ever built. It's the largest and most exciting game show we've ever made. It's a strikingly beautiful studio and a bonus and multiplier extravaganza. End users will see something they have never seen before. I won't get into details, as it's released on ICE, but I'm very, I would say even extremely excited to bring this experience to players across the world. 2023, we have a great variety and innovation amongst existing releases, both Live and RNG from all seven of our brands. We will show some but not all of what we are having in store for players next week at ICE. Looking forward to see you all there. At Evolution, we always strive to be a little bit better every day. So, of course, 2023 is going to be our strongest product year ever. End-user entertainment and satisfaction is what will be the future, not only in 2023 or 2024 or 2029, it's the ultimate goal for all of us trying to make a difference every day. We need to stay on our toes, breaking boundaries, create what others dream of and think it's impossible. We can never stop. We need to relentlessly continue to create Evolution's future. That's what all of us Evolutioners do every day, trying to create what others dream of and that is called ambition, hunger and energy. That is why all of the 18,000 employees of Evolution should be proud. We now have a couple of slides with comments on our financial development during the period, and I'm on Slide number 9. Revenue amounts to â¬407.5 million in the quarter, that is made up of â¬334.9 million related to Live Casino and â¬72.5 million from our RNG games. Live Casino has had a very strong performance throughout this year, or 2022 I should say, and shows the strong development also in the fourth quarter. Year-on-year growth is 41% in the final quarter of the year and 42% for the full year. As Martin mentioned, we see year-on-year growth in all regions and have also been successful with several strong game releases this year and we feel good about the roadmap for 2023, as Martin just pointed out. There are still large growth opportunities for us in many markets. All that said, I expect the growth in percentage terms to continue to come down as our revenue base gets larger. RNG revenue amounts to â¬72.5 million in the quarter. Growth rate for RNG, just looking at the reported figures is 15% in the quarter, but that does include Nolimit City that was acquired in the third quarter of this year, so not included in the comparison period. Growth compared to pro forma figures is about 5%. This is a slight improvement in growth from Q3, but it's still lower than the goal of double-digit growth we communicated at the beginning of 2022. We stated also then that the development will not be a straight line towards that goal and I see that comment as still valid looking into 2023. We remain committed to the goal, as Martin pointed out, and are continuously working to improve productivity in our RNG operations, but we will not set a firm deadline for when the goal of double-digit growth can be achieved at this time. EBITDA for the quarter amounts to â¬279.5 million, giving an EBITDA margin of 68.6% in the quarter and 69.2% for the full year. We are in line, albeit at the low end with our margin guidance of 69% to 71% set at the beginning of this year. For 2023, we expect to achieve a margin in the 68% to 71% range. I guess you can say that's a notch lower than the guidance for 2022, but given the uncertainty in the world, the pressure we see on cost right now, and the fact that we exit this year just over 68%, we think the larger interval does make sense. As we have said many times before and I will repeat now, we do prioritize growth over margins. So this guidance is a way to share our expectations today rather than that it's a hard goal in and of itself. Operator, let's move to the next slide, please. We are at the end of the calendar year, so I have added this slide to the presentation, a little bit to zoom out and also take a look at the multi-year performance of Evolution. As you see here, we closed this year, or 2022, with almost â¬1.5 billion in revenue and just over â¬1 billion in EBITDA. When you look at numbers all day, sometimes they can be more than just numbers and for me, it was very nice to see us break the â¬1 billion level for EBITDA. Of course, â¬999 million wouldn't have been a huge difference, but still a milestone and -or I should say, we all are happy for that. Looking at the multi-year development, we also see that we have been able to increase margin with the growing top line. We do increase margin also 2022 versus 2021 but not with the same jump as we saw during pandemic years in '20 and '21. During 2021, we also added the main part of the RNG business through acquisitions of NetEnt, Red Tiger and Big Time Gaming, which as you can see here, gave an extra boost, both to revenue and EBITDA. So as we've talked about on the previous slide and earlier in the presentation, we have more work to do to achieve the future growth we want in RNG, but it's a highly profitable business but still has a very good fit in the Group. Looking at revenue, we increased top line by almost â¬400 million or 36%, 2022. That revenue figure does include a mix of organic and acquired growth. But looking at Live casino revenue isolated, which is all organic, we had over â¬300 million in both '20 and '21 respectively, with growth rates around 50%. So while we actually had even more revenue in 2022, the math works that the growth rate starts coming down a bit, as I mentioned on the previous slide. That was a quick look at the full year development. Let's go to the next slide and we'll have a more detailed look at the most recent quarter. So moving to the next slide. This shows our P&L in a bit more detail. As usual, we'll walk through the tables from the top. Live revenue just under â¬335 million for the three-month period October to December 2022, and â¬1,188 million for the full year. This is organic growth of 41% and 42% respectively compared to the same period last year. RNG revenue amounts to â¬72.5 million in the three-month period and â¬268.4 million for the full year. And the total growth, including organic and acquired, is 15% and 17% respectively, as mentioned earlier; majority of that, of course, acquired as was covered also earlier. Total revenues sum up to â¬407.5 million for the quarter and just over â¬1,456 million for the full calendar year 2022, a 36% growth in the full year numbers versus reported figures. And pro forma, that works out to about 33% for the quarter and about the same for the full year. Moving down to expenses, personnel expenses amounted to â¬81.5 million during the quarter, an increase of â¬26 million compared to the same period last year. This includes increase in staff compared to last year in all our teams; commercial, operations, engineering, business support, I'll say, across the board. Depreciations amount to â¬29.5 million. That does include â¬11 million in amortization of intangibles related to the acquisitions of NetEnt, Big Time Gaming and Nolimit City. Other operating expenses include items such as consumable equipment, communication costs, consultants and royalty fees, totals â¬46.4 million, an increase of 22% compared to the same period last year. Summing up, total operating expenses, â¬158 million, increase of 36% compared to reported figures same period last year. That brings us to operating profit. Sums up to â¬250 million in the quarter and â¬908 million for the full year period; increases of 35% and 39% respectively. Financial items include, as always, a charge for right-of-use assets according to IFRS 16. Also on this line we have currency-related effects from the revaluation of balances on bank accounts that we hold in non-euro currency, as well as effects on intra-Group loans. So it's a little higher cost there than the previous quarter, but it's not related to interest rates. We carried no external debt. So that's not what it is. Tax is just under â¬17 million in the quarter, that's a tax rate of 7.1%. For the year-to-date period, it's 7%. It's almost 1% higher than the previous year and our tax rate will continue to gradually increase in 2023 as we increase our global footprint. Regarding the upcoming project of global minimum tax of 15% or the Pillar II as it's referred to in tax speak, I guess, the current timetable is that it will come into effect from 2024. A lot of work still remains and we will probably know more as the year progresses, how and when it will affect us, but expect a higher tax level from 2024, as I know most of you already have in your models. All this sums up to profit for the three-month period of â¬223.5 million. That equals an earnings per share of â¬1.03 per share for the quarter and that's an increase of 34% compared to fourth quarter of 2021. And finally, the rolling 12-month period, the full year earnings per share is â¬3.88 per share. Operator, let's go to the next slide, please. Before handing back to Martin, a look at cash flow and financial position. And we'll start to the left, where we see the development of capital expenditure. The gray part of the bars represent investment in tangible assets. That means our investment in studio projects. And in the fourth quarter, CapEx - intangible assets is almost â¬18 million. We have had high activity in studio projects in the quarter. The blue part of the bar is intangible - investments in intangible assets, and that's related to new games and features to the platform. It's about â¬10 million in the quarter and in line with previous quarters this year, as you can see. For the full year 2022, CapEx amounts to â¬97 million. It's much higher than the â¬90 million we estimated at the beginning of the year, but fully in line with our plans from later in the year. For 2023, we will maintain a high pace in our investments and I estimate CapEx will total around â¬120 million for 2023. In the middle of the slide, we show operating cash flow in the quarter, it amounts to â¬221 million. Operating cash flow in relation to EBITDA on a rolling 12-month basis is still on a very good level at around 75%. And finally, to the far right in the slide, a quick look at the balance sheet. We maintain a very strong financial position, â¬532 million in cash on balance at the end of December, which if the Board's proposal to the AGM, a dividend of â¬2 per share goes through, â¬426 million out of that will be paid as dividend in early April. That was the end of my prepared remarks. I'll hand back to Martin for some closing words. And we'll take questions after that. Martin, over to you. Now we are on the next slide, the last slide before Q&A. Thank you. A few words to conclude this report presentation. We have a strong end of 2022 and an overall strong year for Evolution with many strategic achievements, such as building four new studios, launching record number of new games and most importantly, we have continued to increase the gap to competitors. In 2022, we worked hard to restructure the cost base to reach effectiveness and cost awareness and that job will continue throughout 2023. Despite the macro challenges we face, inflation and cost increases are reality for us. We have great momentum, and we will focus on Evolution and the things we can control, to innovate and push boundaries and enhance the player experience and increase the gap to competition even further. We see good opportunities for continued positive development in the U.S. We will continue to expand capacity in our studios and increase our games portfolio in that market. Last week, we had an official opening of our new studio in Madrid and with three others newly launched studios, we will during the year be focusing on scaling up new studios, but at the same time we will build a number of new ones in 2023. We expect to see continuation of strong growth in Latin America, and we will expand our presence to capture those markets. With a local organization already in place, we are well prepared to continue our expansion there. Moving into the new year, increased growth within RNG is a high priority. And looking at the roadmap for games, I very much look forward to 2023. Beyond everything and most important of all is our focus to innovate and push boundaries to enhance the player experience. In the end of the day, that is what counts. Thank you all for listening and we'll speak in a couple of months again. And now we'll move to questions. So next slide, please. Thank you. Good morning, guys. Thank you for taking my questions. I am going to ask about products. I recognize the importance, it sounds very exciting. But given you've heavily blurred your slide and it's ICE next week I guess I'll wait till then to ask. So my first question, if it's okay, is on margin. You've given the range there, Jacob. I wonder if you could just go into the line items a little bit in terms of how you think about the evolution of that cost. I know that the cost per personnel was down a little bit in Q4 on Q3, but you said there is a step-up, I think, probably in the spring. So could you talk, perhaps, about particularly personnel, how you think about the growth in those line items, or how you will be able to manage the business to hit within that margin target? I'll ask questions in turn, if that's okay. I will comment to that. We will continue to expand and we will build studios. So that cost is positive. We need to be cost aware in all different parts, but we will continue to expand and growth is priority. Exactly how that will fall out over the month and quarter is very hard to say. We add the percentage to widen the gap to 68%, 71%, due to the macroeconomic situation in the world. It's purely because it's very volatile in the world right now, there's a war in Europe. And to account for that we add the percentage. That's the whole story of that. Our ambition is, of course, as high as it's always been when it comes to margin and we have a scalable business and we should continue to add that. Understood. Second one is on returns. Martin, you've spoken over the past few months by our personal view on buybacks versus dividends and we've had the conversation on these calls variously over M&A versus returns several times. I appreciate it's the decision for the Board ultimately but I just wondered if you could give any update on or color on how you see things, particularly in M&A versus returns, and if there is a prospect for the company to put its balance sheet towards buybacks over the coming year. I think that the first comment would be that the money we have in the balance sheet now currently at hand will to a large part go out as dividend in a couple of months, and the decision for dividend or buybacks is a Board decision. My view is that this would be a nice - complement the dividend with the buyback. But that's a decision that would be taken by the Board in a later stage. Okay. And then the final one is on the U.S. There was a legal update last week with the Superior Court of New Jersey's Appellate Division on the defamation lawsuit you brought around the report in late '21 that you said originated from a competitor. One of the aspects raised by the judge is whether the DGE or the Pennsylvania Gaming Control Board has finished any kind of review of the report they received more than a year ago. I appreciate it's a legal process, so you probably won't be able to say too much, but could you give any update or color around that at all, please? We pursue, and think that we are entitled to know who was behind the report and we take legal action to do so. That goes a little bit. Now it went up on one instance and that instance pushed it down and I see that as positive. Thank you. Good morning, guys. Thanks to you for taking my questions. So first of all, I just want to know about the competitive landscape, how you see it developing during the tougher economic environment. So do you see any signs of others slowing down as a result and also just particularly on the U.S., how do you see competition developing, like Authentic Gaming in Michigan, for example, or Playtech's expansion? How it relates to the macroeconomic situation is, of course, there is less money going around the companies that are in need of money, and that might affect. When it comes to the competition, I would say that it's been a couple of years now, and it's slowed down in my point of view. We have continued as before and even accelerated. So my point of view is that we increased the gap to competition and they are now even further behind than they were before. But that's, of course, my view. Understood. And just on the U.S. expansion. I mean it's - obviously, I think Authentic Gaming just launched in Michigan and Playtech is the only other Live Casino operator. Do you see any signs of any others coming in there like Promatic or should we see, all else equal, that you continue to dominate the U.S. Live Casino space? I don't think we should single out any market. We have huge amount of competitors in Asia, we have competitors in Europe, and it's healthy to have competition and we work and we fight every day. And there is no specific situation in U.S. I'm very happy with the position we have and the expansion. Okay. Thank you. Next one just on - I think that the UK saw a bit of a sequential increase. So, are you seeing any signs of easening there just looking sequentially from a bit, I mean, pressured levels I guess? And also I mean if you have like any expectation sort of ahead of the white paper coming, did you see signs of operators actually like moving up their plans now that - I mean, the comparables should be easier, I guess, soon enough. It's very hard to say, it's been going a bit up and down when it comes to the UK regulation. If I would look at the total picture, I would say that I think that we have a bit more stable situation coming our way in 2023 than maybe 2022 in Europe we have had before, and I hope for being right in that. Alright. And just want to follow up on the capital allocation question there. So you're not ruling out any potential M&A within the RNG space to maybe expand through M&A there? I think, yes, our position has been the same for the past couple of years. The main - we have a dividend policy of 50% payout, which this year is very much in line with, and I think most of the cash that we hold on balance right now will be that dividend. And then the buyback is an opportunity if there is more cash than that. And we've also done some M&A, but M&A is - that's a bit opportunistic. If the opportunity is right, if it fits within the Group. So it's nothing that we rule out, but it's also not - our main growth avenue is organic growth. That's how we've put it in the past. I want to ask the first question on game releases, if that's all right. A couple, and I'll take them one by one. So you did very well I think to hit your 88 game targets here, and despite acceleration in Q4, RNG growth is still somewhat below your aspirations. So could you kind of help me understand why throughput of these games was a bit soft and what needs to be done from a slots quality perspective? Yes. I mean, the roadmap for RNG looks much better 2023 than it did 2022. To single something out we will double the amount of releases on that front, which is highly needed and we see great potential in that. When it comes to quality that's a hard one. It's a little bit more of a volume business when it comes to RNG. But we have a couple of things that we want to do anyway when it also comes to slots and we look forward to those. Then we are now in the distribution phase of OSS. So we also will increase the distribution of our slots with OSS, 2023, which is a little bit later than what we expected. So also that we look forward to. Excellent, very clear. Thank you. And then also kind of on the same topic, could you disclose how many live games were released as part of the 88, and then kind of I guess what the aspiration will be for kind of live game releases in 2023? And I guess similar to that, one of the more popular games or the more popular games in 2022 were kind of your more Game Show-style games such as MONOPOLY Big Baller and Crazy Flip Coin. So if you agree with this, is there going to be kind of continued increased focus on these kind of game show releases as well? Thank you. The comment on live releases - we released - it's a multitude of brands and there is also Ezugi. So it's like, I would say, somewhere between 15 and up to maybe 20 Live games for one year. And then they have - some games are aiming for one market and there is a portion of Live games which are sort of regular and a portion that is game shows. And we don't really break it out, but 15 to 20 games a year and I think that's a good number. We look forward to be on that --- somewhere around that also in 2023. I think it's worth mentioning also that there is also lots of innovation and new things that go into the existing games. So improvements to the interface or sort of new functionalities, things like that can also be very, very important. Then in terms of the game releases, you might be right in that, some of these game show games, very spectacular studios and they do get a lot of attention and should get a lot of attention, but there's a lot going on also when it comes to the traditional table games. Excellent. Very clear. And then the last one is kind of a follow-on, I guess, from Ed's comments. Your kind of full-time employee growth was very consistent throughout 2022 of kind of 37% or so. Should we kind of expect this level of growth into the kind of first part of next year and are there any regions, I guess, this is more heavily concentrated or is again kind of across the board? We don't really comment on the growth phase. But they can vary quarter-on-quarter and even maybe sometime year-on-year as we saw with the pandemic. But, overall, we'll continue to expand and grow studios and add studios also during 2023 and 2024, which then of course increases the staff. My first question just on the growth drivers in 2023. What drivers are you most excited about if you have to choose one or two things? I'm very happy with the new games released in 2022, we really see that, that's exciting. They were good, many of them were mega hits in many ways. Also I'm very excited about Latin America now coming on and the number of players we see there and the type of games that they play is also very exciting to see. Asia, as always, large market, growth while also exciting. But now we start to see a little bit pickup in Europe. That's also nice to see again. And then Africa is bubbling somewhere around the corner or there are countries in Africa that are really interesting as well. Interesting. And the locations, the studio locations, have you decided them, the one or two new studio locations for this year, and have you started to build? Okay. And what would you - I mean are you preferring to keep it in Eastern Europe, or do we look forward to LatAm or what do you expect? We will - naturally, we need to get closer to all markets. There is no plan - the first question then would be are there any plans for a studio in Asia? No, we don't have that. Latin America, yes, of course; Europe, yes, of course, something that we need to expand capacity. And you mentioned product. I mean it's obviously your key focus area also this year, and this new game that you were marketing a little bit today without commenting too much, still alive. Is that a completely new version of a game show, or is it an IP built out from existing games? And also do you think it could be on par with the success of your biggest game show or what kind of expectations do you have on the game? There will be more answers on Tuesday when the games release. It's an extremely exciting time now to be able to release that, it's a fabulous game, it will be very exciting. Exactly what will happen with players and how they will be received - of course, we have high expectations on that and we think that this can be something phenomenal, but you never know. So we will wait with the valuation of it until released. Okay, fair enough, guys. And one final for you, Jacob. You mentioned that you expect growth rates coming down a bit given the big base and you've talked about that for quite some time. Is that something you experienced so far in January in the new year? It wasn't a comment on January, relates more in the year-over-year scenario, where I think you see that - even Live Casino, we're fantastically happy with 40% growth this year, but it was 50%, a little bit higher last year or 2021. So, more to highlight that, so not the comment on January. Yes. Thank you. Good morning, Martin and Jacob. So just a few follow-ups here. Firstly on LatAm, what markets are performing well here and also if you open a new studio in the LatAm market, what parameters are important? We won't single out markets in Latin America either. We stick to sort of this, but the general comment on markets in Latin America is that they follow, of course, the social economics and the number of people living in the country. So that sort of gives you the idea of where the biggest portion of players could be. That's the same for Europe or other parts of the world, that's the same time. Large part of Latin America is regulated or on its way to regulate. So we follow that. And if we would place a studio, of course, that plays in to see exactly how and what markets to serve from what. So we will look into a lot of parameters when we decide where to build a studio in Latin America. Yes. All right. And also just quickly here, the Ukrainian development, have you been impacted here for the slots development and have we seen any delays in game developments here? We had a large development hub or community there for slots. Of course, it was impacted but more maybe in the beginning of 2022 than in the later part. And it's a tough situation in Ukraine, we feel a lot for that. And we needed to offset that with other development. Perfect. And just lastly, given the inflationary environment which is here, how should we understand the royalty rate towards operators going forward? Should we expect some pricing power from your end when renegotiating contracts given the cost inflation we see? As usual, we want to deliver the best products ever existed to any operators and we want to be a one-stop shop where we supply all possible content that makes an operator successful, and we don't want to use that position as the pricing power. We believe in competition, we believe in running faster and we believe in a partnership relation with our operators. A couple of questions from me. I see the pipeline in these few years in 2023 is lighter than that for '22. Should we assume relatively fewer cost headwinds in that case, because that's the ramp-up costs I suppose? And then the second question is, you still have this goal to reach double-digit growth in RNG. What's going to drive the step-up in growth? And related to that, you've done several acquisitions over the last few years on RNG. Have this fully been integrated, are you leveraging all sort of USPs from the different acquisitions and combining them now in your new games? Thank you. Yes. We are happy with our acquisitions. We're not happy with the 5.1%. We believe in double-digit growth. But don't lose eyesight from the fact that we have added fundamental value and good margin and cash flow from the RNG business and it's a great business and an addition to Evolution. I think that coming to this double-digit growth, we will be very satisfied. I'm very happy with RNG business. On the first question, Kiranjot, was that related to pipeline of studios or I didn't catch the first part of what you asked there? It was on the pipeline of new studios. I think there's fewer new studios for '23 than '22, assuming that with each one. I don't know that that's - I think we've had quite a rapid expansion phase during '22 as you see in the CapEx, where studios development has been high through the year. And I think we see that we maintain that also for next year. So it's not - I wouldn't say that the pipeline for new studios is so different. Also, remember, now we are soon up to 20 studios or something like that, or maybe that's between 15 and 20, and adding a new studio or expanding an existing one it's not that big a difference when it comes to the cost implications of that. So I would say that we have a high pace of expansion in 2022 and we expect to continue that into '23. So no shift there. A couple from me. You added 300 live tables in 2022 and I think 300 in 2021 as well. Is 300 the magic number that we should think of in terms of capacity expansion? Not the magic number, but it's roughly where we've been in the last couple of years. So - but it's not the magic number in itself. No. No. It could be a bit more, it could be more likely not less. [technical difficulty] the gap with the competition expanding to ever greater levels - You break up a bit, but my - if I little bit guess, you're asking if the gap to competition is the largest ever and if it affects the pricing position for us. And I will answer that and I would say that in my belief I think the gap to competition has never been wider. We are adding much more games, we're adding phenomenal games. And if you come to us, you will see something spectacular. And compared - competition is more now than a couple of years back, actually only copying what we did. And to some extent maybe not even trying to do something of their own. So the gap is widening. The pricing is - I think that we charge far too little for our product, I always say that, and we should charge much more. But I neither see that there should be price pressure. We deliver fundamental value, we add new games, we add new player - we add new player groups to the operator. So I think that it's fine. Neither I think that we should use our power to increase the price just, of course, we can. So that's - we're in a partnership with our operators and should continue to being that. Last one was just on - obviously, it's been a key focus for M&A over the last few years that growth rates have been disappointing. Is it fair to assume that the focus will be on consolidating what you've got now as opposed to any further M&A in the RNG space until you can kick start that business? I think that the acquisitions over the last year has been truly right. I think that we bought the right companies. I think that we actually put the cost and we increased the margin and we delivered on that and that's contributed a lot value. I think that we are a little bit late with the distribution of our assets. We didn't get the games out that we wanted to have out, 2022, and we were a little bit late. But besides that, we are in very good shape and we look forward to 2023 when it comes to RNG as well. For us, the mergers or the acquisitions or the M&A for us, it's a way to enable us to reach the position as a worldwide leader. And if a new company would occur, look at DigiWheel it's a fantastic acquisition, adding value to us. Maybe there are more things like that, small or big, and then we'll consider it. Thank you. There are no further questions at this time, I would like to hand back to our presenters for closing remarks. Thank you. Thank you very much for listening. It's been a pleasure to be here today and it's a fantastic new year started and thank you and see you in a couple of months.
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EarningCall_653
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Yes. Thank you so much, and hello, everyone. This is your CEO. So we welcome to the fourth quarter full year 2022 conference call for investors and analysts. The presentation was posted to sobi.com earlier. Letâs go to slide number 2. Slide 2 has the usual safe harbor statement. As stated, Iâll be making comments that mostly related to fourth quarter performance in 2022 at constant exchange rates [Technical Difficulty] Please turn to Slide number 3. This is the agenda where we plan to cover all key aspects of the results today. We plan to review the presentation first and then do a Q&A until around 2:00 p.m. Swedish time. If you keep question short, we will try to keep our [Technical Difficulty]. In speaking order, Iâm joined by Henrik, our CFO; Anders, our Head of R&D and Medical affairs and Chief Medical Officer. Armin, our Senior Scientific and Medical Advisor who usually [Technical Difficulty]. Please turn to Slide number 4. Starting off, Iâm pleased to say that 2022 was a year that we saw a solid future ahead. We met the outlook for the year and we also guided for further growth in 2023. In the quarter, revenue increased by 5% in constant exchange rate and then by 8% in the year, fully met outlook. And it would lead to end of year with the revenue to launch medicines has increased by 29% in the quarter and then by 37% in the year, led by Doptelet. In Haemophilia, we continue to develop relative stability and the Aspaveli launched [indiscernible] nearly in third quarter, while Immunology was held back by high COVID comparison for Kineret in 2021 as well as low sales of Gamifant. We saw slower cost growth in the SG&A in one of the growth in R&D limited to cost, as a result, the EBITDA margin adjusted a little at 41% in the quarter and at 35% in the year. So the pipeline continued to deliver with the launch of EU approval, Doptelet submission in China for ITP2, Kineret emergency use in the U.S. AstraZeneca and Sanofi have also announced the regulatory submission items for nirsevimab with a late 2023 approval expected. News flow is set to increase in 2023. In summary, we met the 2022 outlook today, and provide us a solid outlook for 2023 with continued growth. Thanks to all my colleagues at Sobi to make this progress possible. Letâs turn to Slide number 5. Moving into these areas and geographies, we saw good double-digit growth in Haematology driven by Doptelet in all geographies while Immunology was held back by tough comparisons for Kineret due to lack of COVID sales and/or Gamifant sales. From a regulatory point of view, we saw highest growth in the rest of the world driven by Doptelet in China, [indiscernible], itâs increased well and in sales of our medicines. Overall, in Europe and in the U.S. was held back by Kineret compared to the Gamifant, while sales by Aspaveli and Doptelet launches. We are pleased to see the increase of performance revenues coming from Rest of World, or as we call it, International, as it helps to diversify the revenue base and it all helps more people gain access to Sobi medicine. In 2023, we anticipate several approvals and launches of region for driving global [indiscernible]. Letâs move on to Slide number 6. Turning to Haemophilia, we saw continued relative stability. So the performance here is spot on our expectation and commitment [Technical Difficulty] to continue this year. Elocta increased by 6%, timing of orders boosted sales. There was growth in patients [Technical Difficulty] but they also realized lower price across Sobi countries. We think factor consumption in 2022 in general reached pre-pandemic levels. Alprolix increased by 1%. More patients and consumption offset by lower price. We see relative stability to continue in 2023, driven by new countries and [ offsetted ] by price. Doptelet had the best quarter [Technical Difficulty] trends continuing, up to 72% excluding China. In the U.S., trends continued. More new patients, new prescribers and higher share and longer duration of treatment are the main reasons. Market share gains are mainly from the injectible competitor. And in Europe, Germany continues to be the biggest driver, supported by recent reimbursement. Sales reached more than SEK 300 million in China. We expect a tough comparison this year, with potential for lower sales depending on how the competitive situation looks. Let us turn to Slide 8. The launch of Aspaveli continues to grow as its quarterly sales approaching SEK 100 million. We have launched in Germany, the U.K., France and parts of the Middle East, with early sales in a number of countries where the reimbursement is starting to come in one at a time. We increased to approximately 100 people on commercial supply by the end of December, and in line with our commitment, our official [indiscernible] number shared at past conference calls. Turning to Immunology, Kineret declined due to tough comparisons in 2021 due to COVID sales. In one COVID quarter, Kineret release is tough COVID comparison and move on. Gamifant sales are lower, but saw a sequential decrease from the second quarter. Gamifant has reached high adoption in the U.S. and declined mainly due to lower use in adults. Letâs turn to Slide number 10. Now Synagis, we saw the RSV season start a little later than in 2021, but sales in the fourth quarter caught up with 2021. Thereâs also an element of price benefit in the performance. U.S. RSV infection have decreased, so we still think it is realistic to expect an overall season that will follow the pattern closer to a normal season than in 2021 with a lower first quarter. Thank you, Guido, and hello, everybody. So please turn to Slide 12, and Iâm pleased to take you through the key financials for the fourth quarter and full year â22. Starting with the top line. Q4 revenue of almost SEK 6 billion was the highest ever as reported in SEK, with benefit both from performance but also currency. The reported growth was 22% and growth at CER, 5%, which gave the full year growth at CER of 8%, in line with our full year guidance. Looking at the bars to the left, we saw continued sequential growth in Haematology driven by the strong performance of Doptelet, as well as the seasonal boost in Immunology due to Synagis. Back to the table, the gross margin in the quarter of 78% decreased slightly from a year ago due to the lower gross margin associated with sales of Doptelet to China, partly offset by FX. The EBITDA margin realized was 41%, equal to the same period last year, and there were no items affecting comparability in this quarter. Although operating expenses, as expected, increased in Q4 versus previous quarters, the EBITDA margin of 41% was supported by good cost control. With operating expenses growing by 4% at CER, excluding amortizations, and this compared with a revenue growth of 5% at CER for the quarter, as I just mentioned. Earnings per share for the quarter ended at 4.68%, representing a growth of 11% versus Q4 â21. Operating cash flow was seasonally strong in the quarter and amounted to SEK 1.9 billion, reducing net debt by more than SEK 2 billion in the quarter to SEK 7.4 billion. And this corresponds to a net debt-to-EBITDA ratio of about 1.1. For the full year, operating cash flow reached close to SEK 4.7 billion, which is close to 80% of reported EBITDA. And as stated before, we anticipate milestone payments coming our way. For Q1, we expect to pay $175 million for nirsevimab and $50 million for the approval of loncastuximabtesirine. For details on items affecting comparability in the year, please see Page 3 in the report or the appendix to this presentation. If we then move to Slide 13, I will now turn to the financial outlook for 2023, which is on revenue growth at constant exchange rates and adjusted EBITDA margin. So the same principles as in 2022. We will continue to expand our presence in Haematology, Immunology and Specialty Care through ongoing launches, new medicines and geographic markets, and we anticipate sustained sales growth. So revenue is anticipated to grow by low-to-mid single-digit percentage at CER. And as we continue to invest in launches and advance the pipeline of new medicines and emphasize the long-term value of the business, we expect to keep a favorable EBITDA margin. So the EBITDA margin adjusted is anticipated to be at the low 30s percentage of revenue, and this outlook continues to exclude any elements of our rights to the full share of U.S. profits and losses for nirsevimab. Thank you very much, Henrik. Hello, everyone. I will now take you through pipeline highlights and news flow. So turn to Slide 15, please. When it comes to the pipeline, we saw more milestones reach in the fourth quarter. Doptelet was submitted for regulatory review in China for the ITP indication. Itâs already approved for chronic liver disease. Zynlonta, which is a new name for loncastuximabtesirine, was approved in the European Union, and Kineret authorized for emergency use in COVID-19 in the United States. Finally, nirsevimab was accepted for regulatory review in the U.S., which was announced in January by AstraZeneca and Sanofi. Please turn to Slide 16. Staying on the science in Sobi, the ASH meeting in December displayed a breadth and depth of Sobi in Haematology. Efanesoctocog alfa highlights included new data on physical functioning and pain from the XTEND-1 Phase 3 study. Doptelet had data looking at length of therapy and persistence, areas where we see clear differentiation for our medicine versus competition. On Aspaveli, new data was shared on long-term safety in PNH and more intense dosing schemes and study in progress in cold agglutinin disease. Zynlonta had new data shared from the LOTIS development programs by ADC Therapeutics. And on Gamifant, we had the first look at the REAL-HLH study providing details on the real clinical utility in HLH. As the Head of Research and Development, it was nice to see the extensive presence at the meeting and being able to imagine the benefits that existing and new evidence can bring to people with rare and debilitating diseases. Please turn to Slide 17. Last month, the first Phase 3 study for efanesoctocog alfa was published in the New England Journal of Medicine. Together with our partner, Sanofi, we were pleased with this milestone for the XTEND-1 study. The publication confirmed the clinical benefits of efanesoctocog alfa, and the editorial was very supportive of the benefit this new medicine can bring to people with Haemophilia A. Next up is the data readout from the XTEND-Kids, the second Phase III study in the first half of this year, and the EU and other Sobi regulatory submissions in the second half of 2023. Please now turn to Slide 18. Now looking ahead, we are into a new year with increasing news flow from the Sobi pipeline. During the first half, we can expect regulatory decisions in the U.S. for efanesoctocog alfa as well as the readout of the second Phase III study required for the EU regulatory submission. Doptelet and Aspaveli are both awaiting regulatory decisions in Japan, and we are anticipate Phase III data from Gamifant in a new setting, as well as 2 Phase III studies for SEL-212. And in the second half, we will see some of the data readouts as mentioned convert into regulatory submissions, as well as average regulatory decisions in China for Doptelet and Kineret. We will also see if there is any utility of Aspaveli in ALS or Lou Gehrigâs disease, and [wait] to see from AstraZeneca and Sanofi when nirsevimab is approved in the United States. In 2024, there is more to look forward to. All in all, itâs going to be busier for the pipeline in 2023, and we look forward to sharing the news with you and see how we can further help people with rare diseases. Before I close and hand back to Guido, I would like to say thanks to everyone in Sobi who have helped advance science and care for people with rare and debilitating diseases. Thanks, Anders. So in summary, 2022 was a good year, and we can look forward ahead to a solid future here at Sobi. So we are pleased about the progress we have made last year and the outlook provided for 2023. The business is in a good shape and growing the pipeline of new opportunities continued to progress well, with a busier news flow in 2023. As Anders said, itâs well thanks to everyone at Sobi, who made this possible, and we hope to continue to provide good news for patients also this year as we move forward with Sobi. Please turn to Slide number 21. We now go to the Q&A. [Operator Instructions] Perhaps now we can take the first question from the conference call. Christopher Uhde from SEB. I apologize if there is [Technical Difficulty] for you guys as well. So my first question is related to pricing adjustments. So could you please give us a little more color on the retroactive pricing adjustments on Haemophilia products? And also -- so I mean, I guess in the context of what weâve heard about the new market access reform impact, so particularly AMNOG and the U.K. rebate? Thatâs my first question. And then the second question is related to Synagis. What -- can you tell us about your thoughts for Q1 given the drop-off in the season? I caught that you said that you expect a more normal Q1 than the prior year, but what factors give you confidence in that? And then for Q4, given the likely launch of Beyfortus ahead of the quarter, what can you tell us about the impact of sales erosion on the productâs gross margin? I guess, are you thinking -- well, so in a hypothetical scenario, they were -- you lose half your sales, would we be talking on the order of 10 percentage point lower gross margin for Synagis, or would it be closer to 2 percentage points, or -- what can you tell us that can help? Yes. Thanks, Christopher. I mean, letâs start with the easy bit. I mean, there was a retroactive price adjustment, but this is 2 years ago, and we donât anticipate a retroactive price adjustment from recent initiatives in Europe. What we expect, though, is some headwinds, and thatâs the reason why also itâs part of the reason why we are a little bit more cautious because we obviously see continuous patient growth across the board, also in Haemophilia. But we probably will -- we will face some headwinds there, and thatâs the reason why the outlook is covering this. I donât think we will provide here an in-depth outlook, but we will see some headwinds in Europe that will obviously suppress, letâs say, sales. I think no doubt -- and you mentioned quite a few of those initiatives. And this will affect us. Itâs early, early stage, but what we can see and we have scoped out that the momentum we have across the portfolio should compensate or overcompensate those effects. With regard to Synagis, I mean, the -- we went through quite extensive outside-in research, and how to think about it. And basically, what we can see is that the second part of the â22, â23 season is probably more following a normal pathway that you would have seen in the 2020 pre-COVID scenario in 2019, probably, and where the second part of the season is always a little bit weaker than the first part. And -- but we have granted that the virology is changing, but donât forget these are very, letâs say, fragile babies even in the, letâs say, second part of the season. And obviously, there are quite a few newborn as such. So we donât expect here, letâs say, something in the extraordinary. Just more following a normal pathway. And with regard to the -- and basically the -- obviously, itâs driven also by adherence, letâs say, to the 5 cycles, and a lot of babies have been dosed now. So the -- and compliance in recent history was quite good. I mean, if anything, the epidemic levels of COVID and others have taught us that we should take those vaccinations seriously. So I think that is -- weâre actually quite optimistic that we will have a decent finishing of the 2023 season. And hence, we -- the impact on gross margin, at least for the first quarter, we donât see if coming -- major deviation coming here from Synagis versus the right comparison. And moving forward, on the, letâs say -- on how this is going to play out. I mean, we think that, letâs say, we will obviously maintain a large chunk of the Synagis business in 2023, given also the late launch of the new competitor, and we have done their various scenarios. I think maybe this is -- I stop here, and we open up for more questions, and happy to come back to this some other time. Thanks. So I have a question on Beyfortus. But before that, I want to ask you on 212. So we are expecting Phase III data in the first quarter of this year. Can you remind us what are the kind of differentiating aspect of the product we see compared to Krystexxa in the trial or the trial is compared to placebo? And in the U.S., the Krystexxa side running over $700 million annually. How do you see the European opportunity? Yes. I mean, maybe Iâll start with the commercial element of your question and then also give an outlook, and then maybe Anders can talk about the trial in a few seconds. So with regard to SEL-212, obviously, weâll have to wait, hold our horses. I mean, you will see an effect size, letâs say, in -- of SEL-212 that will be basically that even though the data are not comparative, as you rightfully pointed out, I mean, we will still have a look at the absolute effect size and compare it, obviously, this is what Krystexxa has achieved. I think for us, to be honest, this trial is all about meeting primary end point, and which hopefully we are going to make. I mean, otherwise, we have a problem. But that basically is the main theme. And then the question is going to be, what are we going to do with this data, and how do we see our positioning then versus Krystexxa? I mean, you have seen the data from the Phase II, but we got a little bit unlucky on the primary endpoint, but got some good numerical data differences in various aspects. So I think itâs -- we always said this is a commercial product. Letâs say that we can sell, and we can -- and we think that we can make a dent. But itâs a bit early at this stage. We would rather wait now to guide when we have seen the Phase III data. And letâs say -- and give you then a bigger -- better picture. Anders, you want to quickly comment on the study design? Yes, for the study? Iâm happy to. First of all, the product, this is the co-administration of 212, which is 2 components, which is -- you kind of speculated in its same principles as Krystexxa and in addition, a select proprietary-developed immunomodulator to give a better protection from neutralizing antibodies. The study -- the Phase III studies with more or less identical design are placebo-controlled studies and a study population that is similar to what we have said before and with a significant part of the population being [indiscernible] patients, et cetera. So the goal is, of course, to demonstrate safety and efficacy at a competitive level over placebo and documented tolerability of this combined treatment, which we are confident that we will meet. And itâs also pointed out that this is done a -- in less frequent and therefore, for patients, more convenient therapy. So a relatively straightforward Phase III program, in my view. Yes, so I think we are quite hopeful that we have a positive outcome, but we would like to wait for the data first and then guide you. But I mean, we always said this is a product that we can sell. At this point, we have no indication any otherwise. And then you had a question, I think, regarding Beyfortus, Eun? Yes, yes. So Sanofi set that for Beyfortus third quarter, but they are hoping to get approval before the June CDC ACIP meeting schedule. So in the event that itâs approved earlier and then Sanofi is able to launch preseason, would you update your guidance for this year? Yes. I mean, we -- at this stage, we -- I mean, our guidance is obviously dependent a little bit on how much you would expect from the product. I mean, itâs a bit of a -- there are various scenarios that we played through and itâs -- they are dependent on, obviously, on the launch. They are dependent on the time we have to those patients. They are dependent on the labor as such, when we asked people who used to be involved with those decisions. And then they are dependent, obviously, on their ability to basically manage this kind of very significant complexity of the launch. Now this is the largest -- used to be the largest company. And letâs say, so -- there are quite a number of factors that need to be considered. I think itâs a bit early for us and -- to change any outlook. I think we will reassess this when we have a good grasp on how this will affect all those different parameters. And -- but the good news is that weâre actually quite insulated, and there are scenarios where we could have -- end up with a significant upside there. Some scenarios where we have -- which we think are unlikely, we could have a downside. So what we used here in our assumptions is a base case, and letâs see how it plays out. So we are not, at this stage, giving any indication on the new reassessment. Maybe we move on then to the next person. Sorry, yes. So [Eun], letâs move on to the next question. Similar in speaking on nirsevimab, if itâs not approved in time for the start of the RSV season, so the date [ sensitive ] as you said. To what extent is your guidance conservative, and should we be thinking about a mid-30s margin in line with 2022? And then secondly, just on Doptelet. Are you able to update us on the situation in China? How many generic players are pursuing Doptelet, and what level of sales revenue should be factoring [ post-BBP ] inclusion? Letâs come to Synagis and nirsevimab. Obviously if there would be a miss in the season, we have anticipated some effect on Synagis. And yes, I mean, the point is if you sell more Synagis, weâre going to make money, more money. And if they are not there for the season, I mean, we have no indications why we should not have then a normal year, yes? And that to -- do as well. Do we reach 2022 level? Well, we donât know at this juncture because it will depend also on the virology as such, so. And it is, again, not the time now to give new guidance. But clearly, just looking at the factors, it would do as well, yes. The other thing on Doptelet, yes, the ITP submission is, I think, is opening up a very significant opportunity horizon for our partner, Fosun. Obviously, thereâs a risk which currently is not the case that there will be generic competition affecting the business. To what degree? Itâs speculative. I mean, you need to realize, obviously, that Fosun is a very formidable force in a Chinese context. And the sales we are seeing in our books are the sales to Fosun, not the sales in market. And we will have to hold our horses to see, but we just point out that there could be a negative effect. But there could be also obviously some positives if Fosun goes for a broader indication because the only indication is -- currently approved is [ COD ]. So itâs a -- there is a bit of uncertainty, but there are -- there could be some negative knock-ons because of generic competition that may arise. Or either there could be a positive, obviously, also from a broadening of the indication. And -- but we are very confident, obviously, that we have a strong partner at our side, so who is -- who can manage this business very well. Maybe the next question. So I have 2 questions, please. Firstly, with regards to efanesoctocog alfa and risk for development of inhibitors. I noted in the New England Journal Paper, no trace of inhibitors in the XTEND trial. However, given the complexity of the molecule and potential exposure of new epitopes at the [indiscernible], Iâm curious to hear youâre thinking about the risk for inhibitors in the ongoing Kids trial? And to what extent the DSMB has already provided insight to this topic, given the open-label nature of this trial? And then secondly, if Henrik could help us think of the net financials for the year, Iâm yet to see details on the maturity and structure of your debt from your upcoming annual report. So is the Q4 run rate a good way to think of net financials for â23 per quarter? Or to what extent do you have debt maturing repriced at higher interest rates during â23, making a more gradual increase also likely for â23? Yes. Maybe we start -- Mattias, thanks for your question. Maybe I refer to Anders, and he can update us on what he expects on inhibitors from the children trial. I mean, Anders, maybe you fire off, and then we give it to Henrik. Yes. This is, of course, an ongoing, well-controlled blinded study where we -- of course, we are following safety, et cetera, as normal. But there is -- we have no reason to believe that it would be less safe or less efficacious in kids than in others from our understanding of the mechanism, et cetera. We can, of course, not comment upon the trial outcome, as itâs still ongoing and not analyzed yet, so. Yes. So I think we donât expect anything in the unusual. Obviously, when you expose kids to it for the first time, there could be inhibitor development as it is with every other factor product, letâs say. But itâs too early to speculate, but we think that efanesoctocog alfa will sail through. Maybe, Henrik, you can comment on the net sales in Q4? Yes. Regarding the finance net, yes, we do have maturities in Q4, but we donât really expect any impact on financial net coming out of those maturities. I think Q4 is a reasonable proxy. We donât know what interest rates will do to us in 2023, but I think itâs a reasonable proxy. We have, of course, an expected strong cash flow in 2023, but we also have significant milestones coming up during the year. So in Q4, reasonable proxy. Yes. I just wonder if you could tell a bit about planned launch activities for Zynlonta? I mean, they recently in-licensed ADC product from ADC Therapeutics. Tell us a bit about the launch priorities, which countries would you launch in, when and what kind of pace up do you see on that product? Yes. I mean, we -- the first launch country, it wouldnât surprise you, is Germany in Q2. Currently thinking about [ Moema ], and then we -- I mean, itâs going to be a gradual ramp up. I think we have -- also in terms of resources, we have a lot on the plate right now with, obviously, with pegcetacoplan plan, with Doptelet launch in Europe, so you want to manage this. But product is, as we always said, is a good opportunity that we consider more as a haematology product than an oncology product that we -- letâs say, that we see as a nice addition. But itâs not, letâs say, the main theme for us, yes? But -- so we are quite hopeful for the product. We had quite a number of KOL meetings. So there is a clear medical need, and KOLs are waiting for the product. So we think we can sell it, but I think for this year, I want to manage expectations, this is not going to be the main commercial event. And then anyway, we have to get also reimbursement in other markets as we follow. Okay. And can I just follow up on nirsevimab? Disregarding when Sanofi is going to launch, et cetera. And I assume whenever they will launch, will you incur your share of the results, so to say, on the product, irrespective -- or whether itâs a profit or a loss? Yes. I mean, this is -- as of launch, we will be in for the launch cost, the commercial cost. And we will share, we will -- and Henrik can comment on this, we will consolidate this business on a gross basis. And so we will -- but it could negatively affect our earnings thatâs for sure. Considering the product and the simulations we made, considering that it will very likely a product for a very, very large target audience, we consider these investments as a happy problem in view of -- when you look at it from a discounted perspective. Yes. So maybe we go to the next caller, I think itâs Erik from Carnegie, if Iâm not mistaken. I have 2, if I may. First, on the guidance that you provided in the end of 2020, the 25 by â25. And I was just wondering if -- how we should look at this guidance, if it still reasonable to believe you will hit this target? I know part of this guidance included accelerating growth in margins from â23, including double-digit revenue growth from â23, and that seems to stand in contrast with the outlook provided today. So just curious to understand what sort of have been -- what products or what parts of the guidance had performed better, and what parts have underperformed since you provided that guidance? And then -- sorry. Then finally [indiscernible], maybe a question for Henrik on CapEx, on top of the [ 175 ] for nirsevimab and 50% loan, what more should we expect for CapEx -- driven CapEx this year and potentially next year? Sorry, that was a long question, but... I appreciate it. I mean, the -- if Iâm not mistaken, Erik, when we made this outlook, provides this vision, I mean, we said 25 by â25, and we had an error margin there of 10%, letâs say, that we allowed for. And obviously granted that this was made at a time when nobody saw that Russia would invade Ukraine and COVID was a very far away idea, and letâs say, so -- but bottom line is we still have 3 years, yes, letâs say, to fulfill this mission, letâs say. And I appreciate that obviously, on the earnings side, when you look at it today, that -- and we have made a guidance. And what can I say? The guidance would not point you into leverage right now, yes? So that is a deviation where thatâs what we said, letâs say, at that time. And letâs say, this was also at the time when we thought we had, as you know, the CIT indication in the bank. And letâs say -- so a few things have changed. Overall, I think the business is doing quite well. I mean, when you think about a SEK 2.5 billion business for Doptelet, I donât feel actually ashamed. I think itâs quite a nice uplift. And at this stage, I think what we also need to see is to what degree can we give Gamifant an additional push now with the help of new data. And there, we saw it obviously at that time, probably that we were a little bit further ahead. But overall, the business has held quite nicely together. I mean, there were quite a few people who saw that we would not -- towards the [indiscernible] in haemophilia and weâre projecting a lot of [ Cassandra ] scenarios, what is going to happen. I mean, it didnât happen. We grew the business. We increased the patients, so I think this is how I would like to bring it into perspective. So give us a bit more time. This is where we are at this point of time. The good news is that we have a lot of opportunities to invest, yes? And thatâs basically what we are now doing, building a very strong future. Maybe to the other question, Henrik? Yes, regarding the upcoming milestones. So in addition to what I mentioned regarding the nirsevimab payment in Q1 and the Lonca payment also in Q1. We have some milestones there to Eisai related to Doptelet sales coming up, and there is also a payment for the approval of nirsevimab. So thatâs close to SEK 4 billion for 2023, and in â24, the major 1 expected to come up is, of course, the approval in Europe of efanesoctocog alfa. Thanks a lot Henrik. Just on Selecta. Is there any payment to Selecta coming up, given that they are quite advanced in that program? I mean, maybe we keep up the beat and move to Alistair from Royal Bank of Canada, and -- straight away. Just a couple. First one is just on the Specialty Care segment, fairly small. But just in terms of the EBITDA margin there, which is down about 10 percentage point year-on-year. So just to get a sense of how -- is that settled there, can it recover, or whatâs the outlook there? And then just a follow-up on Gamifant, touched on the [ MEs ] approval. I mean, can you give us a sense of what sort of uplift that could be from the current indication in terms of sales potential? Yes. I mean, maybe Iâll start with the easy bit, the Gamifant one, and then I donât think we really got the acoustics of your first question. But maybe coming from first very quick, letâs say the patient potential for the indication at stake is, give and take, 3x of what basically the labor in the strictest sense is what we have right now. So itâs quite substantial. And Henrik, maybe you can talk about the -- I mean, maybe you can refine your question, because I think we didnât really get it? I think it was -- acoustically, it didnât come across, Alistair, maybe you can repeat it? Yes, sorry. I was just looking at the divisional EBITDA margin for the Specialty bit, which is year-on-year down from about [ 32% ] to [ 32% ]. Just to get a sense of where that could go from here? Is that ideal, does it improve, or is that where itâs going to stick? Itâs a fairly small part of EBITDA. Yes. So when it comes to the Specialty Care segment, that is, of course, under pressure. And the decline of Orfadin has, for sure, an important EBITDA impact because that is still a profitable product. Thatâs the main reason. Yes. And maybe with this, we go to Peter from Pareto as the next one, given the -- that we are running a little bit out of time. Okay. Just 2 quick ones regarding Beyfortus. Firstly, did you say that you included some cannibalization on Synagis in your 2023 outlook? Okay, great. And then youâve been saying that youâre working with different scenarios regarding the Synagis and nirsevimab, how did that pan out? Have you had any discussions with your auditors around the SEK 11 billion intangible that you have for synergies on your book right now, how you will deal with that going forward? With the first part, we obviously had the discussions and basically feel that we understand the opportunities reasonably well. Maybe Henrik, on the auditor discussion? Yes. Itâs Synagis and its follow-up, nirsevimab, as well as 1 item. So itâs 1 unit of accounts. So itâs not like we expect to -- an impairment of Synagis because of nirsevimab. I mean, historically, we have guided, Peter, that we are more optimistic for the profit streams from nirsevimab in comparison to what we expect, what we realized from Synagis as a consequence. The answer is yes. So -- youâre welcome. So maybe we go to the next guy to call up. Itâs Viktor, I think, from Nordea. From Nordea, congrats on the quarter. So on nirsevimab, just wanted to dig a bit into your agreement with AstraZeneca for the U.S. market. So the agreement seem to include that AstraZeneca is titled to an additional royalty from you if profits exceed a certain level in the U.S. Can you give any guidance how much headroom you have until that royalty component from AstraZeneca will kick in for you guys in the U.S.? And maybe whatâs that all about also? Okay. On the same topic, that is RSV, I also wanted to get some more color on your comment that favorable price effects help during the quarter. Is that price hikes youâre talking about, and can you comment if that will follow you through into 2023? And then I have a quick follow-up as well. Sorry. For Synagis, you said that there were some favorable price effects that you talked about in your slide. I just wanted to get some more color on that. Viktor, those price effects are mainly related to gross to net. So itâs not -- in Q4, there are no price increases in Q4. Itâs gross to net. Yes, because you make certain assumptions on the mix to whom you are selling, and then you have obviously -- depending on how the mix is turning out, you have variances. Okay. Yes. And also on the EMERALD study here quickly. Have you got any feedback from the agency, said anything about how many patients that you need to achieve a complete response for you in this study to be enough for supporting an added label? Yes, if you got any feedback from the FDA, how many patients that need to reach a complete response in the study for it to be enough for a supplementary label? I have 2 on Synagis. So at the last ACP meeting, Sanofi and AstraZeneca presented 4 efficacies and safety data from MEDLEY, this was in the cohort of CLD and CHD patients. So first, I was wondering if you could share your thoughts on that data? And then secondly, if you could give us a rate of how many patients that received Synagis in 2 seasons over just the 1 season? Those were my questions. I mean Synagis normally, letâs say, give and take, 50,000 patients plus/minus, yes, this is what we have in a normal season. In MEDLEY, with regard to the MEDLEY study, I think the key question is there, will -- because itâs obviously safety data, no efficacy and to what degree, then -- and this was allowed in the European context, can those data be extrapolated to our study or to our population that is on label, yes? I think thatâs the main question with regard to Synagis, but we donât know how this question will be addressed as a privilege of the committee. Yes, I think we keep up the beat. And I think that maybe we end with the last question from Christopher from SEB. So my question is on the Gamifant lupus cohort in the study, when we expect to see that readout? Because itâs not in the table anymore. And then that and the other cohorts, whatâs the pathway look like for approvals for the EU and Japan, and whatâs the current status in China? Yes. There were several questions there. So I -- first of all, our main focus on [indiscernible] now is to get the patients requested from the first cohorts in Stillâs disease to facilitate the submissions due to completing the remaining part for making the submission for secondary HLA in Stillâs patients. The second cohort is ongoing. We have the first patients recruited, SLE patients with SLE. Itâs a tough recruitment goal, but we are optimistic that we will move on. We have not communicated this in time line on that, and -- but we -- I think we will come back with that in later updates when -- but right now, the main focus. In terms of the -- in European, we are engaging. First of all, we are getting a lot of interest, and then access requests, et cetera, from European key centers. And weâre looking, of course, with additional data in new times to see if we can reconsider the primary situation in Europe. And we will -- when we have the outcome of the of the secondary study also, also map out the regulatory strategy for other territories. We know that we will probably need slightly more patients, so the study goes there. Also, the first cohort goes is beyond what is requested for FDA in that process. So we canât give you details there yet. But of course, we are committed to make Gamifant available for as many patients as possible, both with primary and secondary HLH in as soon as possible. I think if you round it off, I mean, we think that we are not too far away anymore from where we need to be, letâs say, with the EMERALD study to have something to submit to FDA. So basically, when you look at it in summary, for 2022, I think it was a good year. We can look forward to a solid future, and weâre obviously quite gratified that we made good progress last year and have quite a bit of momentum now for 2023. Business is in a good shape. We are growing the pipeline. Youâve seen in a table there on the news flow, we think itâs quite material to ask what happens in the next half year and a lot of good news are hopefully coming and new opportunities. And that basically means we will be quite busy with the business, but also with what we are going to do in the part run in 2023. Thank you so much for your interest and apologies that we overran a little bit in time and if you have questions you know who to call, Thomas is here and is happy to connect you and we will address any information request that you may have. Thank you so much. Wish everybody a great day.
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EarningCall_654
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Good morning, and welcome to the Boston Scientific Fourth Quarter 2022 Earnings Call. All participants will be in listen only mode [Operator Instructions] Please note, this event is being recorded. Thank you, Drew. Welcome, everyone, and thanks for joining us today. With me on today's call are Mike Mahoney, Chairman and Chief Executive Officer; and Dan Brennan, Executive Vice President and Chief Financial Officer. We issued a press release earlier this morning announcing our Q4 and full year '22 results, which includes reconciliations of the non-GAAP measures used in the release. We have posted a copy of that release as well as reconciliations of the non-GAAP measures used in today's call to the Investor Relations section of our website under the heading Financials and Filings. The duration of this morning's call will be approximately one hour. Mike and Dan will provide comments on Q4 and full year performance as well as the outlook for our business, including 2023 guidance, and then we'll take your questions. During today's Q&A session, Mike and Dan will be joined by our Chief Medical Officer, Dr. Ian Meredith and Dr. Ken Stein. Before we begin, I'd like to remind everyone that on the call, operational revenue growth excludes the impact of foreign currency fluctuations, and organic revenue growth further excludes acquisitions and divestitures and for which there are less than a full period of comparable net sales. Relevant acquisitions excluded for organic growth or Preventice, FARAPULSE and Lumenis Surgical, which closed in March, August and September of 2021, respectively, as well as Baylis Medical, which closed on February 14, 2022. Divestitures include the BTG Specialty Pharmaceuticals business, which closed on March 1, 2021. Guidance excludes the previously announced agreements to purchase a majority stake in M.I. Tech and Aquatech as well as the acquisition of Apollo Endosurgery, which are all expected to close in the first half of 2023. For more information, please refer to our financial and operating highlights deck, which may be found on our Investor Relations website. On this call, all references to sales and revenue, unless otherwise specified, are organic. This call contains forward-looking statements within the meanings of the federal securities laws, which may be identified by words like anticipate, expect, may, believe, estimate and other similar words. They include, among other things, statements about our growth and market share, new and anticipated product approvals and launches, acquisitions, clinical trials cost savings and growth opportunities, our cash flow and expected use, our financial performance, including sales, margins and earnings as well as our tax rates, R&D spend and other expenses. If our underlying assumptions turn out to be incorrect, or certain risks or uncertainties materialize, actual results could vary materially from the expectations and projections expressed or implied by our forward-looking statements. Factors that may cause such differences include those described in the Risk Factors section of our most recent 10-K and subsequent 10-Qs filed with the SEC. These statements speak only as of today's date, and we disclaim any intention or obligation to update them. Thanks, Lauren, and thank you to everyone for joining us today. 2022 represented a return to more durable and consistent procedural growth within the markets we serve, which provided a stronger base for our innovative portfolio. I'm very proud of the resiliency and winning spirit of our global team, delivering on our sales and EPS goals despite the ongoing macroeconomic and supply chain challenges. Importantly, we delivered strong performance across all geographic regions and believe that most all of our business units gained or maintained market share throughout the year. In fourth quarter '22, total company operational sales grew 9% and organic sales grew 7% versus fourth quarter '21, which was the low end of the guidance range. However, it's very important to note that these results include an unplanned sales reserve of $60 million, established for an Italian government payback provision which resulted in a headwind of approximately 200 basis points for the quarter. The underlying fourth quarter performance was strong on both sales; operating margin increases and earnings per share. And without the impact of the Italian sales reserve, we would have achieved the high end of our organic sales guidance range of 7% to 9%. Full year '22 operational sales grew 11% versus '21, while organic sales grew 9%, in line with our guidance of approximately 9%. Fourth quarter adjusted EPS of $0.45 declined minus 2% versus '21, and full year adjusted EPS of $1.71 grew 5% versus '21, both achieved in the low end of the guidance range. Once again, without the impact of the Italian sales reserve, we would achieve the high end of the guidance range for both fourth quarter and full year of $1.71 to $1.74. We generated full year free cash flow of $950 million and adjusted free cash flow of $2.1 billion, in line with our expectations. Now for outlook for 2023. We are guiding to organic growth of 6% to 8% for both first quarter '23 and full year '23, which excludes the acquisition of Apollo Endosurgery and the majority stake investments in M.I. Tech and all of which are expected to close in the first half of 2023. Our first quarter '23 adjusted EPS estimate is $0.42 to $0.44, and we expect our full year adjusted EPS to be $1.86 to $1.93. And despite the ongoing macroeconomic pressures and supply chain headwinds, we remain committed to our goal of plus 50 basis points of operating margin expansion and double-digit adjusted EPS growth in 2023. Dan will provide more details on our '22 performance, the Italian sales reserve and our '23 outlook. I'll now provide some additional highlights on '22 results along with comments on our '23 outlook. Regionally, on an operational basis, the U.S. grew 10% versus fourth quarter '21. Full year '22 grew 11%, inclusive of a 300 basis point tailwind from acquisitions, with particular strength in our WATCHMAN, Endo and urology business units. Europe, Middle East and Africa grew 11% on an operational basis versus fourth quarter '21 and 12% on a full year basis. This above-market growth was supported by ongoing investments in emerging markets, new and ongoing product launches across the portfolio, pricing discipline and strong commercial execution. We're excited about the year ahead with ongoing momentum across the region, particularly with our innovative EP portfolio and further opportunity with Baylis in the Access Solutions franchise. Asia Pacific grew 10% operationally versus fourth quarter '21 and 12% for the full year. On a full year basis, six out of eight business units grew double digits, supported by ongoing innovation across the region. Full year Japan growth was driven by new products, including POLARx, which has approximately 50% share in open accounts. We look forward to 2023 with ongoing momentum from both new products and are excited about our recent approval and reimbursement received for AGENT DCB, which is a coronary drug-coated balloon for restenosis in small vessels. On a full year basis, China grew more than 20%, fueled by 13 new product launches, ongoing portfolio diversification and the team's resiliency and execution. We continue to expand our presence in the China market with the recently announced acquisition of a majority stake in Acotec. We believe this investment can create strategic value for both companies with opportunities to collaborate in R&D, manufacturing and commercial strategies. We also continue to expect China to be a double-digit grower in '23 despite ongoing VBP pressure and potential impact to procedure volumes in Q1 from COVID. In Latin America, the momentum continued with operational sales growth of 16% versus fourth quarter '21 and full year growth of 28%, with all business units growing double digits versus '21. On the business units, starting with urology. Urology sales grew 12%, both operationally and organically versus fourth quarter '21 and on a full year basis. They grew 15% operationally and 10% organically versus '21. Within the quarter, all franchises grew double digits, fueled by new and ongoing product launches and continued global expansion. On a full year basis, global growth was driven by key products such as LithoVue, Rezum and SpaceOAR as well as the acquisition of the Lumenis Moser laser technology, further complementing the urology portfolio. Endoscopy sales grew 7% organically in the quarter, and on a full year basis grew 8% organically versus '21. In '22, we had global success with innovative products such as AXIOS and Single-Use imaging, both growing over 20% and supporting strong growth across the globe. In the fourth quarter, we announced our intent to acquire Apollo Endosurgery, which will add a complementary and innovative endoluminal surgery portfolio. We look forward to closing this acquisition as well as our previously announced majority stake in M.I. Tech, which includes the innovative stent in the first half of '23. Neuromodulation sales grew 5% organically versus fourth quarter '21 and on a full year basis grew 3% organically versus '21. Globally, our spinal cord stimulation business grew 4% in the fourth quarter with continued physician enthusiasm for WaveWriter Alpha and FAST. We continue to invest in clinical evidence to expand indications and present three-month data from our nonsurgical back study, SOLIS, at NANS earlier this year. The study comparing SCS to conventional medical management met its primary endpoints, and we anticipate FDA approval for nonsurgical back indication by the end of '23. Our Brain franchise grew double digits in the quarter and low double digits on a full year basis. This strong performance is aided by continued momentum from new product launches in '22 as well as the recent launch of the Vercise 2-in-1 lead extension. Peripheral Intervention sales grew 9% organically versus both fourth quarter '21 and full year '21. Within Arterial, we are pleased with the performance of our drug-eluting portfolio growing strong double digits for the full year and achieving the number one global position -- I'm sorry, the number one position within SFA in the U.S. On a full year basis, our venous franchise was flat versus prior year with Varithena, our market-leading varicose vein offering, growing over 20% in 2022. Our Interventional Oncology franchise performed well in '22, growing low double digits, led by our portfolio of innovative cancer therapies and suite of embolization tools. We continue to invest in expanding the potential applications of TheraSphere and enrolled our first patient in our early feasibility study, frontier the image of -- safety of image-guided intra-arterial delivery of TheraSphere GBM in patients with the reoccurring glioblastoma. Cardiology delivered another excellent quarter, with operational sales growing 13% and organic sales growing 10% versus fourth quarter '21. On a full year basis, sales grew 14% operationally and 10% organically. Our newly aligned cardiology group delivered strong growth across its four businesses, as we continue to invest in the higher growth segments and differentiated offerings for our customers that address the areas of greatest cardiac need for patients. Within Cardiology, Interventional Cardiology Therapy sales grew 5% organically in fourth quarter and on a full year basis grew 8% organically versus '21. On a full year basis, the Coronary Therapies' franchise, which includes both drug-eluting stents and complex PCI grew 7%, driven by strong performance in our international regions and our imaging franchise. Our structural Heart Valves franchise grew double digits in both fourth quarter and the full year basis, outpacing the market in Europe with our ACURATE neo2 aortic valve. Ongoing clinical evidence to support growth throughout '22 and in the fourth quarter. Data from the ACURATE neo2 PMCF study was presented as a late breaker at PCR London Valves, demonstrating positive safety and 30-day outcomes with low PVL rates and best-in-class pacemaker implantation rates. Additionally, we enrolled our first patient in the ACURATE Prime XL Nested Registry, assessing the safety and efficacy of the ACURATE Prime Aortic Valve XL to treat patients with severe aortic restenosis who need a larger valve size for the TAVR procedure. WATCHMAN sales grew 22% organically versus fourth quarter '21 and on a full year basis grew 24% organically versus '21. Q4 finished with record sales, strong utilization in the U.S. supported by the DAPT label expansion. Importantly, we completed the enrollment of our CHAMPION-AF trial way ahead of schedule. This head-to-head trial versus novel oral anticoagulation has the potential to more than triple the number of patients indicated for WATCHMAN FLEX in 2027 and beyond. We remain excited about this outlook for this business and expect double-digit growth in 2023, fueled by innovation, ongoing clinical evidence and strong commercial execution. CRM sales grew 6%, both operationally and organically versus fourth quarter '21 and on a full year basis grew 8% operationally and 7% organically. Our Diagnostics franchise had a strong year, growing double digits versus '21. In core CRM, on the full year basis, our high-voltage business grew low single digits, and our low voltage business grew mid-single digits, and we expect that all major markets were in line or slightly above the market. Electrophysiology sales grew 76% operationally and 25% organically versus fourth quarter '21 and on a full year basis grew 69% operationally and 18% organically versus '21. Importantly, our international EP business continues to outpace the market, growing over 40% organically versus fourth quarter '21. POLARx continues to perform well in both Europe and Japan has now been treated to treat over patients since launch. Momentum in FARAPULSE continues with another strong quarter of growth in Europe. And we continue to invest in clinical evidence and look forward to the readout of the randomized ADVENT U.S. IDE trial in the second half of '23 and are planning to initiate our ADVANTAGE AF trial these therapods patients with persistent AFib imminently. We've been very pleased with the performance of our Baylis acquisition and the innovative platform, which grew 2 times faster than the market in '22. We launched our VersaCross Connect in '22, improving efficiencies in our WATCHMAN procedure. Earlier this year, we shared our strategy consistent with years past. We continue to position ourselves to win in the markets we play through meaningful innovation by balancing our financial commitments. And in '22, we announced four acquisitions, invested 10% of our sales in internal R&D to fund sustainable growth and advance patient care. We're extremely excited about the year ahead and remain focused on our people and sustaining a culture that is motivated to drive differentiated performance and achieve our long-term goals, continuing to grow sales faster than markets, continuing to expand operating margins and delivering double-digit adjusted EPS growth and strong adjusted free cash flow generation. So, before I turn it over to Dan, I want to share that with the retirement of Dr. Ian Meredith, Dr. Ken Stein will assume some of the global responsibilities that previously fell under Ian, including total company investor engagement, in addition to a CRM, EP and WATCHMAN roles. Please join me in congratulating Ken, and thank Ian for his many contributions. With that, I'll pass it off to Dan to provide more details on the financials. Thanks, Mike. Fourth quarter consolidated revenue of $3.242 billion represents a 3.7% reported revenue growth versus the fourth quarter 2021 and reflects a $158 million headwind from foreign exchange, slightly favorable to our expectations as the U.S. dollar weakened throughout the quarter. Excluding this 500 basis point headwind from foreign exchange, operational revenue growth was 8.7% in the quarter. Sales from the acquisition of Baylis contributed 160 basis points resulting in 7.1% organic revenue growth at the low end of our guidance range of 7% to 9% growth versus 2021, including an approximate 200 basis point impact associated with an unplanned sales reserve related to an Italian government payback provision, which was recorded in the fourth quarter of 2022. With the goal of recovering spending above the government's medical device budgets, this payback provision requires companies that have supplied medical devices to public hospitals in Italy to pay back a portion of these overrun amounts. While we and others in our industry, have appealed and will continue to challenge the enforceability of the law through the Italian court system. We established a sales reserve of $60 million in the fourth quarter, representing our best estimates of amounts we could be required to pay back. Without the reserve, we would have achieved the high end of the organic revenue growth guidance range. Flow-through on the Italian sales reserve resulted in Q4 adjusted earnings per share of $0.45, at the low end of our range, representing a decline of 2% versus 2021. Without the reserve, we would have achieved the high end of our range for the quarter. Full year 2022 consolidated revenue of $12.682 billion represents 6.7% reported revenue growth versus full year 2021 and reflects a $524 million headwind from foreign exchange. Excluding this 440 basis point headwind from foreign exchange, operational revenue growth was 11.1% for the year. Sales from closed acquisitions contributed 240 basis points, resulting in 8.7% organic revenue growth, in line with expectations and inclusive of a 50 basis point impact associated with the Italian sales reserve. Full year 2022 adjusted earnings per share of $1.71 represents 4.8% growth versus 2021, achieving the low end of our guidance range of $1.71 to $1.74. Without the unplanned Italian sales reserve, we would have been at the high end of our full year guidance range. Adjusted gross margin for the fourth quarter was 70.5%, resulting in full year 2022 adjusted gross margin also of 70.5%, in line with our expectations. Full year adjusted gross margin improved versus 2021, driven by an FX tailwind of approximately 100 basis points related to our hedging contracts, partially offset by continued macroeconomic headwinds. These headwinds were approximately $375 million versus 2019 and are predominantly from increased freight costs and unfavorable manufacturing variances primarily related to direct material cost and availability. Our 2023 guidance assumes macroeconomic and supply chain headwinds will be similar to 2022. Different from prior years, we expect first half 2023 gross margin to be higher than the second half, largely due to the timing of foreign exchange movements that occurred during 2022. Fourth quarter adjusted operating margin was 25.7% resulting in full year 2022 adjusted operating margin of 25.6%, improving 30 basis points versus 2021, inclusive of a 30 basis point negative impact from the unplanned Italian sales reserve. As we look to 2023, we continue to focus on our goal of annual operating margin expansion. And despite our expectation of continued macroeconomic headwinds, our goal is to achieve approximately 26.4% adjusted operating margin for the full year 2023, representing 80 basis points of improvement versus the 2022 adjusted operating margin of 25.6% and importantly, 50 basis points of expansion compared to the full year 2022 adjusted operating margin without the impact of the Italian sales reserve. On a GAAP basis, the fourth quarter operating margin was 12.4%, including $131 million in litigation-related expenses, which I'll provide detail on in a moment. Moving to below the line. Fourth quarter adjusted interest and other expense totaled $88 million, resulting in full year adjusted interest and other expense of $362 million, slightly higher than our expectations, driven in part by an FX loss from certain unhedged currencies. On an adjusted basis, our tax rate for the fourth quarter was 11.9% and 12.7% for the full year 2022 and including discrete tax items and the benefit from stock compensation accounting. Our operational tax rate was 12% for the fourth quarter and 13.5% for the full year, slightly favorable to our expectations of approximately 14%. Fully diluted weighted average shares outstanding ended at 1.442 billion in Q4 and 1.440 billion for the full year 2022. Adjusted free cash flow for the quarter was $776 million, and free cash flow was $597 million with $807 million from operating activities less $210 million of net capital expenditures. Full year 2022 adjusted free cash flow was $2.1 billion, in line with expectations, and free cash flow was $949 million with $1.5 billion from operating activities less $576 million of net capital expenditures. For 2023, we expect adjusted free cash flow in excess of $2.3 billion. As of December 31, 2022, we had cash on hand of $928 million. We continue to expect to close the acquisition of Apollo Endosurgery and the majority stake investments in M.I. Tech and Acotec with cash on hand or available credit lines in the first half of 2023. Our top priority for capital allocation remains high-quality tuck-in M&A, and we'll continue to assess opportunities in conjunction with our financial goals. As of December 31, our leverage was 2.57 times, in line with our expectations, and we were pleased to be upgraded to BBB+ with a stable outlook at both Fitch and Standard & Poor's within the quarter. Our legal reserve was $443 million as of December 31, an increase of $139 million from the prior quarter, primarily related to our mesh litigation. While our U.S. case count has remained materially the same over the past three years, we've increased our reserve to account for our latest estimates of the time and cost to resolve these claims as well as remaining probable and estimable global claims. I'll now walk through guidance for Q1 and the full year 2023. And as a reminder, guidance excludes any acquisitions that have not yet closed. We expect full year 2023 reported revenue growth to be in a range of 5% to 7% versus 2022. Excluding an approximate 100 basis point headwind from foreign exchange, based on current rates, and a 20 basis point contribution from closed acquisitions, we expect full year 2023 organic revenue growth to be in a range of 6% to 8% versus 2022. We expect first quarter 2023 reported revenue growth to be in a range of 3% to 5% versus Q1 2022. Excluding an approximate 350 basis point headwind from foreign exchange based on current rates and a 70 basis point contribution from closed acquisitions, we expect first quarter 2023 organic revenue growth to be in a range of 6% to 8%. We expect our full year 2023 adjusted below the line expenses to be approximately $340 million. Under current legislation and forecasted geographic mix of sales, we forecast a full year 2023 operational tax rate of approximately 14%, with an adjusted tax rate of approximately 13% including the benefit of the accounting for stock compensation, which we expect will largely be recognized in the first quarter, resulting in a Q1 2023 adjusted tax rate of approximately 12%. We expect a fully diluted weighted average share count of approximately 1.447 billion shares for Q1 2023 and 1.464 billion shares for full year 2023, which includes the shares we expect to issue on June 1 this year related to our May 2020 mandatory convertible preferred stock offering. We expect the impact to adjusted earnings per share to be neutral with the preferred stock dividend ending at the time of conversion. We expect full year adjusted earnings per share to be in a range of $1.86 to $1.93, representing 9% to 13% growth versus 2022. At current rates and existing hedging contracts, we anticipate a neutral impact from FX on full year 2023 adjusted earnings per share. We expect first quarter adjusted earnings per share to be in a range of $0.42 to $0.44. For more information, please check our Investor Relations website for Q4 2022 financial and operational highlights, which outlines more details on Q4 results and 2023 guidance. In closing, I'm very proud of the results that our global team achieved in 2022 with top-tier revenue performance and differentiated operating margin expansion despite a challenging macroeconomic environment, and I'm looking forward to continued momentum during 2023. Thanks, Dan. Drew, let's open it up to questions for the next 30 minutes or so. In order for us to take as many questions as possible, please limit yourself to one question. Drew, please go ahead. Good morning everybody. Great to see another excellent year from Boston Scientific. I guess to focus on one question, I'll start with your 2023 guidance. Obviously, the 6% to 8% guide is right in line with your long-term philosophy. But you started in the same place in '22. You obviously, excluding the Italy issue, finished above 9% organically. Why again stick with the to 8%? Is this conservatism, respect for lingering macro pressures or both? And maybe just as part of that, why model macro headwinds similar to '22? The large-cap companies reporting to date, they're not Boston Scientific, but they're all in some way, shape or form highlighting the improving or less pressures from macro as they finish the year and start '23? Thank you very much. Good morning, Rick. It's Mike. Thanks for the compliments. Just to summarize your points, I guess. We're really happy with fourth quarter. Excluding that onetime Italy reserve grew plus 9%, basically high end of sales, high end of EPS. And as Dan said, really pleased that delivered top-tier revenue growth and I think one of the few companies that actually improved margins as well in '22. So, we have a lot of momentum and we're excited, very bullish on '23 in the future here. On guidance, you don't win the day in February here. So we think the 6% to 8% guidance for full year is appropriate. For the full year, we're coming off a 9% growth comp in 2022. And we obviously plan to grow as fast as we possibly can we continue to invest in the company. There are a couple of things that will be in -- there are pluses and minus. We're very bullish on the EP business, our momentum with WATCHMAN with There's a couple of headwinds. We do believe on the CRM side. We grew about 6% or 7%, I guess, last year, 7% in a market that's low single digits when you include diagnostics. So, we expect a little bit of a headwind there based on comps China performed terrific for us in '22, and we expect them to deliver, again, excellent double-digit growth but potentially not quite as fast as they did in '22. Also, the underlying markets we compete at about 6%. So, we think coming off a 9% comp, 6% to 8% full year estimate. This time of year, is the smart prudent guidance to give, and we're going to push to beat it. And then relative to the macroeconomic environment, Rick, the -- we kind of reiterated that 375 that we saw in 2022 as being a similar headwind in 2023. As you saw through 2022, we have a pretty high-performing global supply chain organization that has been on top of this all through it, and which is the reason that we've been giving the updates at the level of specs specificity that we have. So, as you would imagine, as we went through our annual operating plan process and guidance preparation process, they really dug in at a detailed level to try and understand what 2023 could bring. There are some elements that look better, right? Freight does work better. You see fuel prices and oil prices coming down. So, we're optimistic freight costs will be less. The supply of materials and the cost of materials is still a bit uncertain and choppy and that direct labor piece that we had that in 2022, you've got to annualize that in 2023. So, I think the prudent case right here, the prudent course for guidance in February is to assume that we don't get a lot of macroeconomic help in 2023, I'd love to be surprised as we go through the year that we get that help. But I think as we sit here in February, prudent to assume a similar headwind to what we saw last year. Thanks for taking my question. Congrats on a nice quarter. Maybe to start, Mike, at our conference last month, you were really bullish on FARAPULSE, and we saw EP have a nice beat in the quarter, particularly outside the U.S., where you have FARAPULSE and POLARx going now. Maybe you could talk about your expectations what you saw in the quarter for FARAPULSE specifically and your expectations for it in 2023, especially after we get the data later in the back half of the year, assuming it looks good? 40% internationally and poorly in the U.S. because we don't have these products approved in the U.S. So that really drove the growth down to 25. But I really look at the -- outside the U.S. growth as the key barometer for us. And we're continuing to see great pickup with both our cryo platform and FARAPULSE. Cryo is a platform that is competing against a product that hasn't changed in a decade. And so, physicians like the ease of use and the features of the cryo platform that we have in Japan and in Europe. So that's doing quite well, and we're hopeful to have approval for that second half of '23 in the U.S. here. And then FARAPULSE is doing extremely well for both cryo users who have adopted FARAPULSE and point to point RF users, Dr. Stein is on the phone, so he can make some comments. But the utilization enthusiasm for FARAPULSE is extremely high, and we're very bullish as we look at 2023 in terms of our EP performance and outlook, especially in Europe and Japan. And if we can get some -- the approval of the cryo platform in the second half, the U.S. will perform quite well as well. And then we expect to see a big impact from FARAPULSE in '24. So, the future of our EP business is very bright. We know it's a competitive field. We believe we have unique platforms in both FARAPULSE and cryo that are differentiated and showing that clinically where they're launched and we have an excellent commercial team ready to bring these to the U.S. So, we don't give specific guidance for EP, but it's clearly a critical growth driver for us 23 and well beyond that. Dr. Stein, if you have any other comments? Yes, absolutely. Thanks, Mike. Thanks, Robbie. Again, just we do believe that FARAPULSE is differentiated relative to other PFA technologies out there. I think it's important to reiterate that all PSA is not created equal and because it's a field effect, the results that you're going to see with any of the technologies are highly dependent the way actual catheter design and FARAPULSE is the only system in evaluation right now that was designed from the ground up to deliver PFA dependent on the waveform that's delivered and dependent on the dosing strategy. And as you said, we are really looking forward to presenting the results of our randomized FARAPULSE trial, ADVENT in the second half of this year as well as to initiate our persistent AF trial advantage imminently. The only thing I'd add to what Mike said is I also think as you think about I think it's really important also to consider the really extraordinary momentum that we've got with our Transseptal access solutions from Baylis and continue to see above-market growth with that and continue to see increased use of the bales Transseptal access solutions, the energy needle and versus across access, both in ablation procedures and in WATCHMAN and other structural heart procedures. Great. Thanks. And maybe just a quick follow-up. China has been an important growth driver for Boston Scientific, grew 22% in the year even with the difficult operating environment. So how should we be thinking about China coming out of the reopening here into first quarter? And what's your expectation for the year going forward? Thanks. Thank you. That team had a terrific '22 despite all the challenges with COVID and all the different pricing tenders that occur over there. So, for China, in '23, we are very bullish again -- we do expect double-digit growth out of the China team for the full year. There'll likely be some pressure in first quarter given the challenges that they've had in China with COVID. So, we expect potentially some sales growth challenges in Q1, but we do expect strong double digit for the full year, likely not at the same level as the 22% that we delivered in '22, but strong double digits nonetheless. Good morning. Thanks for taking my question. Congratulations on a strong end to the year here. I wanted to ask a two-part question also on FARAPULSE. So maybe for Dr. Stein, you talked about your excitement for the ADVENT trial later this year. Can you help put the data into context? How did that compare to prior RF and cryo studies? And what would be a win for you in ADVENT for FARAPULSE? And we're going to see -- the second part is we're going to see the Medtronic Pulse select data at ACC, the J&J INSPIRE data at Boston AF, I guess, this weekend. You talked about how FARAPULSE is differentiated. What should we be looking for in those studies that would support your comments earlier? Thank for taking my question. Yes. Thanks, Larry. And let me just sort of begin by reiterating what I said to Robbie here. As we look at the data, everyone just needs to bear in mind that every PFA technology really needs to be evaluated on its own. It's very much unlike RF ablation. When you're doing RF ablation, if you've got the same size catheter tip and you've got the same back patch and the same power that you're putting through, you get the same lesion. PFA is very different. Again, because it's an electric field effect, what happens is just intimately related to actually the catheter design that tells you the shape of the field that you're generating; the waveform, which tells you very much what kind of impact you're going to have from that field and then your dosing strategy, how many applications of energy do you put in and where do you put them in. We're very confident that FARAPULSE is the industry leader in this. Again, based on having a catheter that was designed from the ground up to deliver PFA, based on a decade of preclinical and then really high-quality clinical data, validating the waveform and validating a dosing strategy with ReMAP studies that creates durable isolation. And I say, the proof of the pudding is in the eating, and we're really excited and looking forward to seeing the results of our randomized ADVENT trial. I'm glad that you mentioned MANIFEST, again, gives us a high degree of confidence in where we're going, right? So, MANIFEST is a registry study of the earliest commercial cases following our CE Mark approval in Europe. So, this is people's first experience climbing the learning curve and is reported out published initially on the first 1,700 cases and then some limited follow-up in about 1,400 of those patients. And really what those data show really proves the advantages of using a system like FARAPULSE. Certainly, 1,700 patients, the safety promise of FARAPULSE was realized. No cases of esophageal injury, no cases of persistent phrenic nerve injury, no cases of pulmonary vein stenosis, so certainly being able to avoid most feared complications of AF ablation. Seeing efficacy results that for paroxysmal AFib are at least as good as what's reported in high-quality trials with conventional thermal ablation and seeing remarkable procedure efficiency. Now -- in commercial clinical use, now sort of routinely seeing these cases being done on the order of 30 minutes. And that kind of procedural efficiency is, it's good for the system as a whole, right? There are a lot of patients who need to be treated dealing with staffing issues, et cetera, et cetera. Anything we can do an increased throughput is good. It's good for patients, though, too. The less time you're undergoing a procedure, the less number of things that can go wrong, honestly. And so basically, to some, right, the MANIFEST data validates what we see as all the differentiated advantages of FARAPULSE, a safer procedure avoiding the worst complications. A procedure that is at least as effective as what you see with thermal ablation and a really efficient procedure, which benefits physicians, hospitals and patients. Thank you very much for taking the question. And good morning. I want to spend just a minute or two on the Urology and Pelvic Prolapse business. I mean, that was up another 12% this quarter, 12.7% organically last quarter. What is driving that? And should we think of this more as a solid double-digit grower as we look forward? And my follow-up question, I'm going to just put it out there now, 50 basis points of operating margin expansion or at least 50 basis points this year, where is that coming from? Thank you. Great, Mike here. Thanks for asking the endo, uro. You didn't asked about endo, but I'll throw it in there because they continue just to really outperform and are getting quite sizable within our portfolio and both accretive nicely to margins and growth rate. The urology results, I mentioned in the prepared words, it's a strong global performance around the world. This business has been predominantly a U.S.-oriented business that grows faster in the U.S. accretive to Boston Scientific. Outside the U.S. has been very underpenetrated. But now with all the investments that we've made, commercial and through R&D and through acquisitions is strengthening our outside the U.S. business in urology extensively. And the combination of that global performance and I would say, a highly differentiated portfolio. We talked about category leadership within a service line, and we really have that with urology and with endoscopy. So they have a very differentiated portfolio that's very comprehensive versus our competitive set and contracting capabilities with customers who want to work with us. And so urology continues to do quite well, and we expect similar results over the next few years here. And the integration of Lumenis has done well. So that's a terrific business. And I would say, along the same lines, most of the same words with endoscopy as well. In terms of margin improvement, Dan, do you want to hit that one? I can do that. Yes, so the commentary again was 50 basis points on top of the 2022 results, excluding the Italian sales reserve. So that would be more like 25.6% was the actual, and then there was a 30 basis point impact. So then add 50 basis points to that is where you get the 26.4 just to give you the math there. And where does it come from? The short answer is, we believe all lines of the P&L. So gross margin will have a slight headwind from FX this year. Again, we said neutral to the EPS line, neutral to adjusted EPS for the year. But at the gross margin line, we're largely hedged for the year 2023. And with what we see with where rates are today, we think we'll have a slight headwind from FX in gross margin. But we still think gross margin itself can go north through a lot of the good activities that we have from our global supply chain team in terms of reducing cost and other volume improvement programs. And then tightly managing our discretionary spend within SG&A to ensure it's helping us achieve our strategic plan. And as we've always talked about, just really focused on R&D efficiencies and leverage. It all starts with a healthy top line. We think that 6% to 8% guidance versus that 9% comp last year is a good, solid, healthy top line, and that gives us leverage opportunities throughout the whole P&L. And we think each line of the P&L has the opportunity to contribute towards the goal in 2023. Thanks for taking my question. Just some cleanup questions here on the guidance assumptions. Mike, the 6% to 8% organic, it is what it is, but can you just remind us what are the incremental tailwinds -- positive tailwinds here in '23 and any incremental headwinds versus '22? Some things I can think of FARAPULSE becomes organic, maybe China has a little bit of a headwind, but can you just go through some of those drivers? And again, on share count up 20 million, that seems are just given how we've seen share count progress throughout the year. Curious why -- what's behind the share count assumption for the year? Yes, sure. On the share count, just to take that clean up quickly and then Mike can take your revenue question. It's just a simple math of the converts that we have in -- during the year. So the increase is from the share count that will increase when we convert the mandatory preferreds. Recall, we then lose the preferred dividend. So it's neutral to EPS, but the share count increases as those preferred holders will get common shares. That makes sense, Vijay? Yes. So I mean the takeaway should be neutral EPS impact from share count related to the mandatory preferred conversion this year. Sure. And the headwinds and tailwinds, maybe just some of the headwinds: we like the fact we did 9% growth in '22, but that's a bit of a tighter tougher comp than normal. So that's one. I had mentioned China would be expect double-digit growth, but likely not the same growth as '22. And then also CRM coming off of a really exceedingly market growth quite a bit in '22, likely to grow more in line with the market in '23. So there's a couple of the headwinds, clearly, a bunch of tailwinds. The company performed -- continues to perform extremely well across the globe, Europe, LatAm, Asia-Pac and U.S. You saw really impressive growth across the company. WATCHMAN growing 24% for the year, Cardiology as a whole grouping grow 10%, PI grew 9%, Endo 8%, Euro 10%. So we have just very strong momentum across the businesses, which is obviously a bit of a tailwind given the momentum we have commercially. And we have incrementally to that some of the questions today on EP. We expect to have a very strong year in EP in outside in Europe and in Japan. Potential tailwind would be depending on when cryo gets approved in the U.S. So I'm sure how much of an impact that will have in the U.S. depends on the approval date there. Other products like WATCHMAN continue to do extremely well. We're really proud. We actually think we gained share in fourth quarter with WATCHMAN and ended the year just over 90% market share. So that business continues to do really well. And the one that gets very little discussion by analysts, but lots internally and by physicians is ACURATE neo2. We now have a large size. That business is doing extremely well in Europe, actually building momentum each quarter. And we're anxious to finish that U.S. trial shortly. Hi, good morning, everybody. And thanks for taking my question. I guess I'll ask a question on the Italy impact. Just curious why we're only hearing about this from Boston. I don't know if maybe it's -- you're taking a more conservative approach in taking a reserve. And it seems like a big number. I know it seems like Italy wouldn't be that big of a country, so maybe just calculated on more than a year of sales. And I just want to confirm no impact on 2023? And then I'll ask my follow-up now as well, which is on op margins. I think you mentioned gross margin first half higher, lower in the second half on currency. And I just want to make sure there's any puts and takes to consider on the op margin side first half versus second half? Thank you. Sure, Travis. I'll take the Italy one first. I can't speak for other companies. I can speak for on behalf of Boston Scientific. It's been an evolving situation, particularly over the last few weeks here, because what you have is the Italian government passed a provision back in 2015 with regard to what I mentioned to trying to claw back some excess spending over the allocated budgets within the public hospitals in Italy. But for the last 7-plus years, there's really been -- it's been dormant. There's been limited implementation guidance, there's really been literally no activity around that. That changed, again, over the last few weeks, with some events that put a little more teeth into their desire to collect those monies. And so we booked that incremental reserve. We had a reserve on the books, we booked an incremental reserve to cover what we believe will be the amounts that we'll owe as part of that. We're obviously challenging it vehemently through the Italian court system as our other industry participants, we disagree with it. But that outcome will be uncertain, but we picked a reserve that we think is a reasonable reserve given the timeframe. The '23 amounts are included in guidance. So the amount of the reserve relates to prior periods, 2015 to 2022, anything that's 2023 and beyond is included in guidance. With respect to op margin, actually, I'm glad you asked that question because it's a bit of a juxtaposition with gross margin. So I mentioned that gross margin will be higher in the first half and lower in the second half, which is a bit of a buck the trend we normally have, which I wanted to make sure I got that point out there. Relative to operating margin, though, I think you'll see a similar trend where it builds throughout the year. So the gross margin higher in the first half, lower in the second half, but through the rest of the P&L and netting down to operating margin, I would expect you'd see a very similar trend starting in Q1 and building to higher amounts as you go first half, second half. So hopefully, that's clear, Travis. Good morning. And thank you for taking the question. I wanted to ask on WATCHMAN, specifically what's underlying the double-digit growth outlook that you called out for '23? How you're thinking about market growth as well as Japan and China contributions? And then just a quick follow-up on ACURATE neo2 with the Prime XL registry. How are you thinking about approval time lines at this point in the U.S.? Sure. On WATCHMAN, we had a terrific year in '22. As I said, maintaining, call it, 90% share, potentially slightly above that, grew 24% for the full year. It's a very healthy market, so call it, 25% growth we expect in '23, two companies in the marketplace today. Similar to previous comments, the success of WATCHMAN is really manyfold. The safety, consistency and proven effectiveness through clinical trial in everyday practice at WATCHMAN, physicians are extremely comfortable in using the device. They're very comfortable with the support team they have from Boston in the lab with them and the referring physician community is seeing such strong benefits from the LAs procedure that is helping to drive that market growth. So it's an excellent market. It's also a product that's -- a procedure that's profitable for hospitals. And the procedure time today continues to improve, which is really important for hospitals. So the overall market context is very good. We have the leading platform, and we have a new product, new steerable sheath coming this year and the next-gen WATCHMAN platform coming about a year from now. So we have a differentiated pipeline as well. Neo2 is doing extremely well in Europe. We just launched -- or just having some implementation of our XL valves. That's part of the U.S. trial. There was, I think, some -- a bit of inaccurate reporting on that one. We do not expect that XL to slow down the approval process for the U.S. So that does not have an impact on U.S. approval. And that XL valve is important because it's about a one-third of the procedures are using that size valve in Europe. So we're doing quite well, growing faster than market in Europe without that, and eventually, we'll be adding that to approval. So we're excited about that. ACURATE neo2, we expect it to be approved in 2024 in the U.S. Hi, good morning. Thanks for taking the question. I was hoping to start off with just your Apollo acquisition and get you into the diabetes -- sorry, not diabetes, the obesity segment. And I just wanted to hear about your outlook for that portfolio but also just device-based intervention opportunities in obesity from a higher level and whether this portfolio could become a long-term growth driver for the endoscopy franchise? And then the follow-up is just on your neuromodulation business. Congratulations on SOLIS trial results. And I think three of the big competitors in the space have a peripheral diabetic neuropathy indication now with different levels of evidence. But I was hoping you could just review Boston's plan to generate clinical evidence for that indication going forward? Thanks a lot. Yes. So on Apollo Endosurgery overall, it's really consistent with our overall strategy of category leadership, which is driving above-market growth and continuing to advance new therapies where we can be the leader. When we look at endoluminal surgery, we think that is really the next frontier for our endo business. And you see a terrific uptake of endoluminal surgery, I would say, outside the U.S., particularly in Japan, a bit more so in Europe and less so in U.S. And so we think endoluminal surgery will really continue to build momentum over the next coming years and Apollo is a platform that's most used by physicians pick outside the U.S. to perform these procedures with a product called OverStitch and xTAC. So we think the addition of Apollo into our current platform will obviously make us the number one strongest endoluminal surgery portfolio, but also put us in a position, as Dr. Duncan would say, to help train the field because these are procedures that require significant physician training to get great outcomes, and we'll be able to do that with the Apollo platform. On SOLIS with SCS, again, we did see some improvement in that overall SCS business in the fourth quarter, growing 4% in the quarter. SOLIS, we're pleased with the three-month results that we expected. We expect indication and approval for nonsurgical back by the year-end of 2023. And we're in early clinical work for PDN right now and haven't announced any timelines, but we'll look to invest in that space. And that concludes our call for today. So thank you for joining us. We appreciate your interest in Boston Scientific. If we were unable to get to your question or if you have any follow-ups, please don't hesitate to reach out to the Investor Relations team. Before you disconnect, Drew will give you all of the pertinent details for the replay. Drew? Please note a recording will be available in one hour by dialing either 1-877-344-7529 or 1-412-317-0088 using replay code 7345419 until February 8, 2023 at 11:59 p.m. Eastern Time. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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Hello, and welcome to today's Hansa Biopharma Fourth Quarter 2022 Conference Call. My name is Bailey, and I'll be the moderator for today's call. [Operator Instructions]. Thank you, moderator. Good afternoon, good morning. Welcome to the Hansa Biopharma conference call to review year-end results for 2022. I'm Søren Tulstrup, CEO of Hansa Biopharma. Joining me today is our CFO, Donato Spota; and Hansa's Head of Investor Relations, Klaus Sindahl. Today we'll discuss the progress we made during the last quarter of 2022 and review our near-term milestones. The presentation should take roughly 15 minutes, after which there will be an opportunity to ask questions during the Q&A session. Now please turn to Slide 2. Please allow me to draw your attention to the fact that we'll be making forward-looking statements during this presentation, and you should therefore apply appropriate caution. Please turn to Slide 3 and an overview of Q4 highlights. 2022 was a successful year for Hansa with solid performance and strong progress across our research, development and commercial projects and operations. The launch of Idefirix in Europe continues to progress according to plan. Based on the successful execution of our market access efforts, we have now secured pricing and reimbursement in four of the five largest markets, including most recently, Italy. In total, positive reimbursement decisions have been secured in 11 countries and market access procedures are in progress in a total of nine countries, including Spain. We're also pleased with the progress in our engagement with the leading European medical societies, such as the British transplant Society, which recently published new guidelines for implementation in the United Kingdom. Importantly, these guidelines are in line with the recommendations from NICE in the U.K., all the way from patient selection to transplant and post-transplant patient management and protocols. Outside the EU, we recently signed a distribution agreement with Icon, a leading Swiss health care product supplier to cover the distribution of Idefirix in Switzerland. On the clinical development side, we are pleased with the positive top line data that was published back in November from the Imlifidase Phase 2 study in AMR post kidney transplantation, demonstrating statistically significant superior capacity of imlifidase to rapidly reduce levels of donor-specific antibodies compared to standard of care plasmic taste. In anti-GBM, we recently commenced the pivotal Phase 3 study with the first sites initiated at the end of 2022. This new global Phase 3 study will target 50 patients at 30 to 40 sites in the U.S., U.K. and EU. In our ongoing GBS Phase 2 program, patient enrollment is picking up again following several initiatives implemented during 2022. I'm also very pleased with the solid progress seen in our preclinical development programs, specifically in the Duchenne muscular dystrophy program with Sarepta in gene therapy and the NiceR program, which is exploring utilization of second-generation enzymes for repeat dosing. In the Duchenne program with Sarepta, imlifidase is being investigated as a potential pretreatment in patients with pre-existing IgG antibodies to Cereptas-SRP9001. Based on encouraging preclinical data, plans to initiate a clinical study during 2023 were announced in November last year. As for NiceR, our program to develop second-generation enzymes for repeat dosing, I'm pleased to announce that IND-enabling toxicology studies have been successfully completed and that a clinical trial application was recently approved. We plan to initiate a Phase 1 study with our lead candidate in the NiceR program in the first half of this year. Finally, while the capital markets for biotech companies remain challenging throughout 2022, I'm pleased that we're able to successfully secure additional financing through two financing events last year, enabling us to extend our cash runway into 2025. Donato will cover this in more detail later in this presentation. Now please turn to Slide 4. During 2022, our market access efforts in Europe continued to progress as planned. In the fourth quarter, we secured positive reimbursement decisions in both Italy and the Czech Republic for highly sensitized kidney transplant patients. These positive reimbursement decisions were both aligned with the conditional approval granted by EMA and expect it to help change the clinical practice for desensitization of highly sensitized kidney transplant patients who are incompatible to a disease donor organ. In Italy alone, more than 6,000 patients are waiting for a kidney transplant, and it is estimated that 1 in 10 are classified as highly sensitized with limited or no access to suitable donor with today's standard of care, effect, which serves to emphasize the unmet medical need for transformative treatments such as Idefirix. With the positive reimbursement decisions in Italy and the Czech Republic, market access has now been secured in 11 European countries including larger markets such as Germany, U.K. and France. A reimbursement decision in Spain is expected in the near term. Please turn to Slide 5 and a review of our ongoing clinical programs. As briefly mentioned at the beginning of our call, we announced positive top line data in November of last year from the Imlifidase Phase 2 study in antibody-mediated rejection episodes post kidney transplantation. The data readout demonstrated a statistically significant superior capacity of Imlifidase to rapidly reduce levels of donor-specific antibodies compared to standard of care plasma exchange in the 5 days following treatment start. In AMR, the current treatment protocols can take up to several weeks to reach the decide effect and in some cases, the outcome remains incomplete or ineffective. We, therefore, believe there is a clear need for clinicians to be able to provide patients experiencing post-transplant AMR with a more rapid and effective therapy that can quickly eliminate donor-specific antibodies and thereby minimize the risk of damage to or loss of the kidneys. These first results are another important milestone in executing our handset strategy to expand the reach of our IVIg antibody cleaning technology platform to address significant unmet medical needs in a wide spectrum of disease areas and indications. We plan to publish the full data set from the AMR study in the second half of this year. With respect to our GBS Phase 2 program, we implemented several significant initiatives during 2022 to increase the enrollment rate in this trial as a shortage of IVIg as well as reduced capacity and availability of staff across a number of trial centers have negatively impacted the enrollment rate. During the fourth quarter, we saw an increase in patient recruitment due to these initiatives, and we have now enrolled 25 out of the target of 30 patients. We expect enrollment to be completed in the first half of this year, as previously guided, with the first high-level data readout in the second half of 2023. In anti-GBM, we've commenced a pivotal Phase 3 study, as previously guided, with the first sites initiated in December of last year. The new global study is an open-label 1:1 randomized controlled study targeting 50 patients to be treated with either Imlifidase and standard of care or standard of care alone at 30 to 40 sites in the U.S. and Europe. In NTTBM disease, today's standard of care consists of a combination of plasma exchange, cyclophosphamide and steroids. For patients randomized to the Imlifidase on the first round of plasma exchange after annualization will be replaced by the administration of Imlifidase. As a primary endpoint, kidney function will be evaluated by eGFR at six months from randomization while anti-GBM, antibody labels, pulmonary symptoms, safety, pharmacokinetic, pharmacodynamic and health-related quality of life measures, among others, will be assessed as secondary endpoints. In the U.S., our pivotal capitas trial in kidney transplantation is evaluating Imlifidase as a potential desensitization therapy to enable kidney transplants in highly sensitized patients waiting for a disease donor kidney through the U.S. kidney allocation system. In this trial, patient enrollment continues to progress, and we have now enrolled 51 out of a target of 64 patients. At this point, 13 clinics are open for enrollment and new clinics are continuously added, aiming for approximately 20 to further increase enrollment capacity and accelerate the study. Completion of enrollment is expected in the first half of 2023, while completion of randomization is expected in the second half of 2023. As previously guided, we are targeting submission of a BLA under the accelerated approval pathway in 2024. Please turn to Slide 6 and a summary overview of our pipeline. As you can see on this slide, we have successfully developed a broad and exciting clinical pipeline in both transplantation and ordinary diseases. During 2023, we plan to further expand our clinical development activities following the successful preclinical work completed with both our lead NiceR candidate for repeat dosing and with imlifidase as a pretreatment to Sarepta SRP-9001 gene therapy in Duchenne muscular dystrophy. As far as our NiceR program is concerned, we plan to enter the clinic this year with our lead candidate, HNSA-5487 following the recent approval of our clinical trial application. In gene therapy, Hansen Sarepta recently announced plans to initiate a clinical study this year with Imlifidase as a pre-treatment to Sareptas-SRP9001 gene therapy in Duchenne muscular dystrophy. The advancement of these programs into the clinic represents two major milestones for Hansa and our unique ITG antibody-cleaving enzyme platform as we continue to expand our activities across multiple therapeutic areas. With this overview, I will now hand over the call to Donato, who will walk us through a review of the fourth quarter and the full year financials. Donato? Please turn to Slide 7. Total revenue for the full year of 2022 amounted to SEK 155 million, including SEK 87 million in product sales and SEK 64 million in contract revenue from the agreement with Sarepta and -- AskBio. This represents more than a quadruple year-on-year total revenue and an almost sixfold increase in product sales as compared to 2021. For the fourth quarter of 2022, we saw again a confirmation of the solid progress that we have been making throughout '22 with respect to pricing and reimbursement and the further broadening our hospital reach. Total revenue for the quarter amounted to SEK 31 million, including product sales of SEK 20 million and contract revenue of SEK 11 million. For 2023, we aim at building upon our market access achievements seen in 2022 to foster sales uptake across European markets. Nevertheless, we do expect product sales to remain somewhat volatile between quarters as we continue working with hospitals to strengthen the base for repeat business and in power also running the post-approval study throughout the year. Please turn now to Slide 8. Total SG&A expenses for 2022 amounted to SEK 336 million compared to SEK 327 million for the full year of 2021. The moderate year-on-year increase is mainly related to our commercial launch activities and organizational expansion in Europe, partly offset by onetime expenses related to the U.S. IPO preparations in 2021. In the fourth quarter, SG&A expenses amounted to SEK 82 million, which is basically on par with the level we saw during the prior quarters in 2022, but approximately 20% below Q4 2021 due to the previously mentioned one-time expenses. For 2023, we do expect a managed increase in SG&A expenses, reflective of the inflation scheme in Europe and the U.S. throughout 2022 as well as us starting to strengthen our U.S. presence in support of our late-stage development activities and preparation for a potential market entry. R&D expenses amounted to SEK 346 million for the full year of 2022 compared to SEK 231 million for 2021. For the fourth quarter 2022 R&D expenses amounted to SEK 92 million, which is on par with the recent quarters. In the fourth quarter, we started to capitalize the development cost related to MA post-approval commitments as we met the respective accounting criteria under IAS 38. The capitalized development costs amount to approximately SEK 18 million. The increase in R&D expenses for the full year was mainly driven by the ongoing confine study in the U.S., our post-approval commitments in Europe and the preparations for our pivotal Phase 3 program in anti-GBM disease. Further, we have also been increasing our investments into our second-generation enzyme program as we prepare for taking our lead candidate into the clinic this year. Looking at 2023, we do foresee to increase our investments in R&D as we initiate the clinical program with our lead second-generation molecule have the Phase 3 anti-GBM study fully up and running, the confides and the rebound study ongoing as others continue to work on the EMA post-approval commitments. Net loss amounted to SEK 610 million for the full year of 2022 and SEK 147 million for the fourth quarter. The increase over 2021 primarily reflects our increased R&D investments and included interest costs related to our debt financing, partly offset by significantly increased year-on-year sales and revenues. Please turn to Slide 9. Cash flow from operating activities amounted to minus SEK 112 million for the fourth quarter of 2022. For the full year of 2022, operating cash flow was minus SEK 504 million compared to minus SEK 481 million for the full year of 2021. The limited increase in cash consumption reflects a significantly increased year-on-year product sales and the Asbupfront payment. As highlighted by Søren, we have extended our cash runway into 2025. Despite challenging financial markets, we have successfully completed two financing transactions in very competitive terms during the last year, again, confirming the potential value in our technology and business. In July 2022, we raised $70 million in a non-dilutive debt financing. And in December, we raised $40 million through a direct share issue. The direct share issue included participation from our existing institutional investors, RedmanGroup and new investors, including Bradwell, HEIGHTS and other U.S. and institutional investors. With the cash injection in December, Hansa's cash position as of December 31, 2022, amounted to SEK 1.5 billion. Please turn to Slide 10. 2022 was another successful year for Hansa with solid performance and strong progress across the organization. We anticipate an exciting year ahead in 2023 with the achievement of several key milestones across our platform and therapeutic areas as we continue the development of new transformative medicines for patients suffering from serious rare immunologic diseases. Looking forward, we are encouraged by the demonstrated potential of our unique antibody cleaving enzyme platform and the company's potential to become a global leader in rare immunologic diseases. As discussed, first half 2023 milestones include patient enrollment into our pivotal global Phase 3 study in anti-GBM disease and the completion of enrollment in our Phase 2 program in GBS. Patient enrollment also continues to progress into our U.S. compritus trial, and we expect to complete enrollment during the first half of this year with subsequent completion of randomization expected in the second half. As previously guided, we're targeting submission of a biologics license application to the U.S. FDA under the accelerated pool pathway in 2024. Further, we anticipate starting a new clinical trial in the first half of this year with our lead NiceR candidate, ANSA5487, following the successful completion of IND-enabling tox studies and the recent CTA approval. In addition, together with Sarepta, we will advance our DMD program in gene therapy into the clinic this year following the generation of promising data from preclinical development. This program imlifidase is being investigated as a potential pre-treatment in DMD patients with pre-existing IgG antibodies to Serestos gene therapy SRP-9001. Finally, I want to note that we also plan to announce this year, 5-year data from the long-term follow-up study in kidney transplantation from the 4 Phase 2 programs, which led to the conditional approval in Europe. The results from the long-term follow-up study are expected to be announced in the second half of 2023. During this time, we also expect to publish the full data readout from the AMR Phase 2 trial. Please turn to Slide 11. This concludes our presentation, and we would now like to open the call for questions. Moderator, please begin. [Operator Instructions]. Our first question today comes from the line of Gonzalo Attali from ABG Sundal Collier. Please go ahead. Your line is now open. Hi. Good afternoon and thank you for taking my questions. First one is on the U.S. trial, the confidence trial. So before you were aiming to enroll all patients in '22, but you still have 13 to go. And I don't know if you could give us some color on the actual reason for the slower enrollment. And apart from increasing the number of clinics, are you taking other measures that -- or are you trying to implement other measures to increase the speed of recruitment. And just like as a fast question here also on average, how long does it take from enrollment to actually being randomized for a patient? Thank you. Thank you, Gonzalo, for those questions. So first of all, I'm sure you all appreciate it. It's very, very difficult to predict in advance of a study like this, which is quite complex with many moving parts, which is being launched in the middle of a pandemic to accurately predict when you will complete enrollment on whether it's December or whether it's a few months later, right? So currently, as you say, we have 51 patients out of a target of 64%. Looking at the current enrollment rate and the initiatives we have taken recently, including expanding the number of clinics. We expect this study to be fully enrolled in the near term. Then of course, as you allude to also the key thing is how long will it take to then have all these patients randomized, meaning that they will have had an ordinary offer. And that's something we're monitoring very closely. As I've discussed on previous calls, there is a delay. It's a number of months from the enrollment, i.e., you have patient cancer to then that patient actually being offered in organ. And the only thing we can say at this point is that we expect all patients to be randomized in the second half of this year. But it's obviously something we're watching very closely. And we want to make sure that there is an adequate and sufficient flow of organs to the patients, and we're working with the centers and relevant third parties to ensure that, that is the case. I think those were the two questions you have, right? Yes, very clear. And I have another one is on the gene therapy segment. SRP-9001 has the PDUFA date set for May 29. So would it be fair to assume that the start of trial is conditional on the potential approval of the gene therapy. So therefore, starting potentially in? That's not a necessity whether you think that it's realistic that it will happen only after the proof of rate is another question. What I can say is that based on the very, very encouraging preclinical data, Sarepta has taken a clear decision to take and into the clinic, right, because the value of enabling a broader range of patients to benefit from their gene therapy is very, very significant, not just for Sarepta, but more importantly, for the patients who have been excluded from trials so far and then patients who are out there waiting for the product to be approved. So we expect this clinical trial to commence this year, and I cannot be more specific on the guidance we provided so far. Thank you. The next question comes from the line of Zoe Karamanoli from RBC Capital Markets. Please go ahead. Your line is now open. Hi. Thank you for taking my questions. My first question is about Idefirix sales. I fully acknowledge that there is complexity in many variables around estimating timing of treating patients. But now you're two years into launch, and you have a good number of clinical centers activated, also reimbursement in most European countries. So I'm wondering if you could share your expectation on the level of sales for a number of patients that you hope to treat with Imlifidase. So a range here would be very helpful. Thanks. Yes. So we have decided not to provide a range at this point in time. It's still very early days in the launch of a transformative product, where you need to have a lot of different things in place, change in mindset that needs to be infrastructure in place protocols, guidelines, a lot of different things. So it would be a missed guidance rather than guidance to give a range. And if we gave a very, very broad range, it would be meaningless. So that's why we are not doing this at this point in time. However, as I believe we've discussed, obviously, and as you also alluded to, we have a growing number of clinics that have specific local protocols in place that have identified specific patients that are on a list waiting for an organ to be offered and where the supply chain has been set up so that they have access to product. Then the question is how long does it take for these patients to get an organ offer. And that obviously varies and is very, very difficult to produce. But we're very, very comfortable with the progress seen so far. There is a growing number of clinics that have, as I said, put local protocols in place. We talked about in the U.K. now where there is full market access. There is a total of, I believe, it's around 35 centers established themselves as a consortium. They put in place guidelines and so on, and they are ready to start seriously treating these patients. But again, it's difficult to predict a specific ramp-up in a country like the U.K. We got reimbursement in Italy very recently, I would say, ahead of the normal time line for Italy, which is very, very good. But again, it's impossible to predict the specific ramp-up of patients and sales in a country like that. So altogether, all I can say is that we're pleased with the progress so far. We're seeing patients being treated. We're seeing good outcomes, some of which have been reported in the public domain. And we expect, obviously, as we increase number of countries that we have access to. And as clinics get the first patient treated, that will enter a phase where you see more repeat usage at the clinic level. And this, together with additional countries being added, certainly, we expect would have a positive impact on the slope of the launch curve. So, so far, so good. And obviously, when we feel comfortable providing guidance via a range, we will do this, but we'll only do it when it makes sense on its actual guidance and not miss guidance. Okay. All right. Thank you. My second question is on AMR and the development path forward, which, from what I understand, it will require you to initiate a larger trial. So, do you have a time frame as to when you think this could happen? And do you have the funding in place? And are you -- or will you consider to find a partner for this indication, given the potential scale of the trial? Thank you. Thanks for that follow-up question. Yes, I mean, we do think that the AR opportunity is a real one, and it's a substantial one. There is a clear unmet medical need in that space. And we believe in it has what it takes to potentially dramatically improve standard of care. We were very pleased with the outcome of the Phase 2 trial that we have recently completed. We have reported high level, the fact that the primary endpoint was met. So you clearly see this very rapid and complete production of domospecific antibodies in a statistically superior manner in the lipids arm versus the standard of care on. We will now publish the full data set. It will be in the second half of this year. Next step is in addition to publishing the data to obviously engage in dialogues with relevant regulatory authorities and to discuss the path forward. The fact is that it's actually quite challenging to run Phase 3 trials in this particular indication, as I'm sure you noticed from other attempts in the past because of the heterogeneity of the patients, right, and the difference in the protocols in different centers. So what is important for us right now has been and is to get the data out from our trial to make sure that this is appreciated and understood by relevant clinicians. And then we'll see what the next step is from here. It's too early to speculate about that. But I think it's really encouraging and bring hope to these patients, some of whom have lost their kidney or will do so that there is potentially a better solution coming. In general, I think we feel quite comfortable operating in the transplant space. Obviously, we've demonstrated our ability to do so far. That doesn't mean that we would not potentially work with a partner as well at different ways that you can partner. So nothing is excluded. And that's something we'll determine as we get closer to the decision-making. Thank you. The next question today comes from the line of Christopher Uhde from SEB. Please go ahead. Your line is now open. Hi there, Christopher Uhde from SEB. Thanks for taking my questions. So my first question is the also you've talked about the importance of identifying suitable patients before using Idefirix and managing that as part of how to roll this out successfully. What can you comment on though, I guess, because there's another factor aspect of it is sort of reluctance of surgeons to allocate organs to highly sensitized patients? What can you talk about that aspect and how it varies from site to site. That's my first question. Thanks. So the way I understood your question is there are issues around making sure that identified patients and the clinics have access to organs and that the practice there varies from clinic to clinic. And yes, you're right, absolutely. It's not -- certainly not enough to just identify the patients and then wait for an organ within the current setup of organ allocation systems. You need to be able to make sure that these highest sensitized patients are, in fact, offered an organ. So there are certain things you need to do in terms of delisting certain HLA antigens so that you get something that is close to what you would want, but where you still certainly need desensitization. So that ensures that there is a work and offer. And then, of course, as you know, if there is a positive cross-match which cannot transplant, which would be the case here, then you initiate the immediate therapy. So it's still a learning exercise from any clinics. And obviously, our role here is to work with all of the different parties and bring the clinics together to discuss how do you make sure that there is an optimal and ongoing flow of organs to the patients that you've identified and who are really in the high need of the transplant sooner rather than later. And so then, in terms of the extent to which some surgeons are more open to it than others. What can you comment about that and how you try to convince them to consider using it? So it's not difficult for us to, again, to convince and to use Imlifidase in general. I think we've seen a very, very good reception of the message that this is a way to ensure that these patients that haven't had real access in the past now have access and that there will be better usage of available organs because you don't need to really consider again the specific matching you should only based on antibodies, but you should look at matching based on other factors, relevant factors. But then I mean, clearly, it's our task to make sure that again, they are fully educated and informed about how should the system for auto allocation be set up. And here, we're working again, if you take the U.K., as I said, there is a consortium of 35 clinics now. So working together, leading clinics in the U.K. that after the nice recommendation and the decision to reimburse and provide financing for Imlifidase therapy. They are very keen to get started all of them, and they have put in place and guidelines. And obviously, they're also discussing how the organ flow should be optimized and so on. It's a similar situation in France where we have early access, and it's actually the same across different countries in Europe. And you see different practices and different approaches. And again, our role is to make sure that there is optimal learning and appropriate action taking. Okay, thanks. And then my second question is, so obviously, well, not to downplay the achievement that you guys have done in terms of getting a drug to market, which is obviously phenomenal. But I think it's fair to say that trial recruitment pace has always been kind of on the slow side sort of across the board of the clinical program. And so far, it also doesn't really seem to reflect how trials have been reading out because they've been successful. So it seems like the delays related to processes in medical. So what have you done to address this in the past? Why hasn't it been enough? And what should you do and what can you do to turn that around? I mean should you recruit more people with sort of hands-on experience in rare disease trials from like a CRO like IQVIA or yes. Thanks. So I think, Christopher, if you look at the performance of other companies with similar trials in the same state, if you look at the transplant space, which really almost Pixalate has been affected by the COVID-19 pandemic and is a very complex space to operate in. You see similar kind of performance. So I wouldn't necessarily conclude that there are very clear internal issues here, leading to slow patient enrollment. But it's clear that if you have more resources, you will see generally a better performance and faster enrollments and so on. We have more sites up and running of more frequent interaction with the sites and so on and so forth. So the fact of the matter is that we've been a relatively small organization. We are growing significantly, as you know, if you look at our organization, we're 35 people back in 2018. Now we're 3x as well, 4x almost 5x as many. So it's a fast-growing organization, and we've been able to recruit really talented and experienced people. Again, it doesn't mean that we are not trying to optimize our investment and also working with external parties. As you've heard me say several times also in previous calls, we are putting in additional resources and expanding the number of clinics and so on, we need to have more face-to-face time with the clinics, and that has been an issue during the pandemic. There's no doubt about it. But most of the delays that we've seen really have been due to the fact that pandemic has had a very serious impact, not just on the transplant space, where the transplant volume was down more than 20% in 2020, probably more in 2021. We don't have the figures yet. But also in the imbursed in other spaces where you've had on the supply of IVIg and so on and so forth. So there's been a number of very specific issues that we've had to deal with. And I would say that I'm quite pleased with the way that this organization has been able to act in a very difficult and challenging overall environment. And again, it doesn't mean that we're not necessarily going to invest more, and we are on a continuous basis, a growing organization, and we're bringing in more and more new and highly qualified people. I appreciate that. The next question today comes from the line of [Louise Mugarta] from Kempen. Please go ahead. Your line is now open. Hi. This is Louise in for Jacobs from Kempen. I have a couple of questions. On the NiceR program, I was wondering what are the potential indications that you are considering here? Thanks, Louise. Good question. So for the NiceR program, if you look you can actually bring to the market drug candidates that can be used in many different security universes. And essentially, all of the four big universes that we're currently active in transplantation, autoimmune diseases, gene therapy and oncology. If we take autoimmune diseases, clearly, you would want repeat dosing in the more chronic autoimmune diseases in our case, specifically those that are IgG-mediated where you have a rapid disease progression. And where you have flares, meaning that you if when you have these flares needs efficacy beyond what the maintenance therapy can bring you, right? So that would be a natural space to look at, and that's certainly something that we have been doing and we are doing and we are considering for specific initiatives. In the gene therapy space, with the Imlifidase, clearly, we're looking at pre-existing neutralizing antibodies many gene therapies, it seems like will have to be dosed, not just one but several times. Again, that is a relevant space for a repeat dosing version of Imlifidase. And obviously, in oncology, whether it's entortic stem cell transplantation or other oncology indications is almost by default and repeat dosing space, right? So there's a lot of different potential indications that we can target. And we are really pleased with the fact that our NiceR candidate has shown good preclinical data and that we're now ready to take it into the clinic, we think it will be a very considerable value driver for the company. So the GBS trial, just to summarize and repeat again, it's a single-arm study. We are putting it on top of IVIg, which is the approved therapy at this point and sign the standard of care. And then we compare to a patient registry in Europe. And so you would get data on functional functionality. There is a kind of a functional scorecard that is being used broadly for this indication, and that is a primary end point. And obviously, there's a number of other endpoints that will be part of the final readout. But the first readout, obviously, will be a high level. Thank you. The next question today comes from the line of Johan Unnerus from Redeye. Please go ahead. Your line is now open. Thank you for taking my question. The first one, what is the prospect of the European centers starting to treat, let's put it this second patient sort of multiple patients, no centers are probably treated one patient as I understand it. Is that correct? I'm not sure I fully got the question. But essentially, you're asking at what point do the centers are getting to initiating therapy. Yes, more or less, what's your feeling and impression what sort of signals can you not point to? Or should we expect some centers being close to treating the second patient? Yes. So obviously, we've had a number of centers last year that treated their first patient. And as we've discussed, they will wait at least six months in general, to see the outcome of that first patient to this before, again, making a decision to continue using the product and so on. Then once that have made that decision, you need to wait for a working be allocated and so on. So we do expect this year to have a repeat business happening at a growing number of clinics. Clearly, what we expect this year is given the fact that we've seen the big countries in Europe now, we've got reimbursement in Italy. We have it in the U.K. We have it in Germany. We have early access in France. The only country we now lack out of the top 5 is Spain, and we are hopeful that we are quite optimistic, actually, we have a very good dialogue with the Spanish authorities, and we're hopeful that we could see a decision coming relatively soon. And Spain is a top three country in terms of volume. So now these more significant from a volume perspective, countries are getting online. We certainly expect also to see the peak business coming in some of these countries this year, and that will really help the growth of the product. Excellent. And a reminder what to expect for Sarepta in terms of potential milestones, assuming that the clinical study will start sort of by mid or early Q3 or something like that. Yes. So there are, I think as you know, what we communicated is that there are potential milestones up just shy of $400 million. That includes early milestones and sales-related milestones and so on. So as this program progresses, obviously, there will be additional milestones, and we have not provided specific guidance there. So I think Donato there's not much we can add... I think what is important to note, Johan, and we discussed that before, is obviously that there is a certain acne milestone. So it's more related to sort of regulatory milestones and then obviously sales milestones. I don't want to say that there's no development milestones, but they're not going to make a break. Understand? No, what our understanding, and that's related to another question. You had, obviously, extended your access to growth capital, both the credit and the QT issue and strictly financial. We have repeated that you are comfortable financing '23 and '24. What about the actual equity level is that? I mean in Marten Sarepta or well to be not more than two in terms of exiting and strict financing. So I hear you're right. I mean we're happy with the financing events in 2022. We have runway into '25 as just communicated. Donato, do you want to comment on the equity question? And obviously, we've been able to strengthen the equity now also with the last raise that we did a couple of ways. So we're looking at that as well. You're right. I mean, you need to look at both the cash and the equity. And of course, if there's a tomans coming, that would obviously help the cash and the equity. Excellent. And smaller things in this quarter, the gross margin was markedly better. Is that sort of related to inventory or other changes or should be read into that? Yes. I think you can't read too much into that at this point, Johan. I think what, again, also discussed at previous calls, what you need to consider is that, obviously, we have a manufacturing capacity set up, which is obviously directed to be able to serve the market once we are fully up and running in this indication, but also in additional indications. So there is a bit of overcapacity right now. And so this is considered whenever there is a manufacturing happening then if there's an overage compared to what we have currently in our projections, and obviously, that will hit the P&L. So right now, I don't think you should put too much emphasis on that. I mean the in the long run or even in the midterm, I think what I can say is that the gross margin will be quite healthy. Yes. And also another question, R&D. Can you provide some portal more granularity into so increase in reported expenses and cash expenses for '23, of course, being only specific. Well, I mean, we do expect an increase in the R&D expenses. It's going to be well managed. We're not talking about 50% or 100% increase. I mean there's obviously an additional Phase 3 study now coming, and that's basically driving the increase. So there will be somewhat of an increase, but it's very well managed. It's anyhow considered in the cash guidance that we've given. Okay. And obviously, slightly higher in terms of cash, I supposeâ¦Million times on really increase if you capitalize some of the R&D expenses that could be a higher number for '23. Yes. On the other hand side, we'll be able to offset from the expected increase in sales. Does that answer your question, Johan? Thank you. The next question today comes from the line of Douglas Tsao from HC Wainwright. Please go ahead. Your line is now open. Hi, good morning. Thanks for taking my questions. So Søren, in terms of the NiceR program, it sounds like we're getting a Phase 1 study this year. I'm just curious, I presume that's going to be in healthy volunteers. And I'm just curious, will the results from that determine or help inform what indications you're going to pursue with the lead NiceR asset? And how quickly do you expect to be in a Phase 2 study with that program? Thank you. Thanks, Douglas, and Yes. I mean, obviously, that's a correct assumption. We'll go into healthy volunteers looking at safety and bancokinetics and dynamics and so on. But we have certainly already made a very clear kind of list of indications that are relevant, right? The results of this Phase 1 trial will inform the final decision-making. But obviously, we have some pretty good thoughts on what indications would be relevant. I just discussed the following Louise's questions, what could be potential indication spaces for the candidate? And there is quite a number. So the final decision will be made at a later stage, but we're certainly preparing for that, and we are happy that we can now move forward with this Phase 1 trial. So at this point in time, we're not providing more details. But obviously, at some point, this will be announced and available. My apologies. The next question today comes from the line of Bo Zhang from Intron Health. Please go ahead. Your line is now open. Thank you. This is [Bill] in from Intron Health. Thank you for taking my questions. I have two quick ones. One, going to market access. In terms of the receiving reimbursement from Spain and also potentially full access from France, would it be fair to assume this could happen sometime later this year within 2023? And my second question is, you mentioned expanding in most of the days across multiple therapeutic areas. We saw the recent first case study in lung transplant patients, highly sensitized long transfer patients in France. Would it be in the pipeline or plan on considering exploring to this indication in particular, considering the increased market size caused by severe Coga patients? Thanks, for those questions. First, on market access, -- we do remain optimistic that there will be a decision in Spain. And obviously, we're hoping it will be a positive decision to provide reimbursement and access for Idefirix in Spain and that this decision is coming in the near term, even very near term potentially. So we're optimistic there. As far as France is concerned, we have full access now using the reaccess program. So there is no restraints or constrictions, if you will. Obviously, we do need at some point to get more permanent or permanent reimbursement. And that process is ongoing. It's not critically important for us timing-wise to get it as long as we have access using the urea access program. So that was France. And then obviously, we have other countries where we have ongoing discussions like Belgium, Denmark and so on. And we're also hopeful that, that will bring these significantly forward in the coming months and this year. Then as far as expanding into other organs, lung transplant, absolutely, you're right. There has been a good case report coming out of France. We know that there is a very high degree of interest here. There is certainly a high degree of unmet medical need. This is a very critical situation for these patients. And so we do expect at some point that we will see that as a commercial opportunity for us long transplant. Similarly, we also expect that heart transplants will be a commercial opportunity for us. At what point we will have this in the label, obviously, will depend on trials being run and discussions with regulatory authorities and so on. So that's to speculate about. But I certainly expect, given the level of interest that there will be real usage at some point in these indications. Thank you. The final question today comes from the line of Erik HultgÃ¥rd from Carnegie. Please go ahead. Your line is now open. Hi there. Thanks for taking my questions. I have two, if I may. First, could you give us some sense of how the post approval study in Europe is progressing roughly how many of the 50 patients that you plan to enroll have been dosed with Imlifidase to date. And secondly, I'm just trying to understand the dynamics here. We have seen quite broad access, but still, we haven't seen any type of pickup in commercial demand. So trying to understand the dynamics here. What is the feedback that you're getting from physicians? Is it sort of a lack of long-term or more sort of more patient data that is keeping them sort of cautious and will sort of more data from, I guess, the U.S. trial and from also the post-approval study really changed that dynamic? Or do physicians still need to sort of test one patient at the time before we will start to see an acceleration. Eric, for those questions. So first, we do have patients treated in the post-approval efficacy study. We are not reporting patient numbers here. We need to recruit and treat 50 patients in total when we need to keep this trial by the end of 2025. There is no urgency for us to complete it as quickly as possible. But we're pleased with the progress is moving forward. We have three patients treated. And as we've discussed, I believe also is a great way not just to generate data, but to generate experience in relevant centers. So this is running in parallel to our commercial efforts. And obviously, there is some impact given the performance that we have, the good performance, I would say, from our market access team, getting access. There is competition in some countries. So this is not only being run in countries where we don't have access, but it's being run in parallel to commercial efforts. On your second question, the observation that you don't see a very, very rapid uptake and very fast growth of patients being commercially treated. This is fully as expected. Again, you need to change the mindset of the physicians, create the awareness and interest. That certainly is the very, very broadly. We're getting extremely positive feedback. I've been involved in a number of similar launches, and I'm really pleased with what we see, not just from individual physicians, but from centers and from societies, the European Society of Organ Transplantation has issued first batch of guidelines and mentioned in todayâs. And as I just said, this transplant society has also come out with very good guidelines. So the physicians, the clinics want to treat. They see a real need for individual patients and they see a need to optimize the use of available organs and in some cases, actually increase the number of available audits. What is holding them back is the fact that the system has many moving parts, as we discussed during this call also, you need to optimize the organ allocation system and the clinics role there to make sure that there is a continuous flow of organs to the patients identified. And this is something that's been done now. But there is a delay from identifying patients, putting up supply chain and so on and then actually receive an organ offer. So that is certainly holding things back a little bit and has been. The other is the fact that, yes, you get market access, right? Let's take a country like Sweden that you know quite well. But then after you have that decision at the state, at the national level, it needs to be pushed down to regions and from new regions down to the hospitals and the hospitals need to negotiate budgets and so on. It's a very compressing and long process. And it's something that also politically, I think many people are trying to have changed because it just takes forever for new innovative therapies to be used. But there are those are some of the issues in play here. Overall, as I said, our strategy has been to make sure that the centers become clinically ready to treat, and they are a very impressive number and a growing number that patients are identified that the first experiences are positive, and all of those things are happening. Then we're waiting for kind of the repeat usage time point, where you'll see more steeper growth. And as we discussed, we expect at some point this year to see that in a number of clinics. That concludes today's Q&A session. So I'd like to pass the conference back over to Søren Tulstrup for any closing remarks. Please go ahead. Well, thank you very much, operator, and thank you, everyone, who called in here. Thank you for your questions and interest. As we've discussed, 2022 was a busy, but overall, also a very successful year. We have an exciting year ahead of us here in '23, and we all look forward to continuing the dialogue.
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Greetings, and welcome to the Skechers Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. Hello, everyone. My name is Amanda Starsiak from the FP&A team. Thank you for joining us on the Skechers conference call today. I will now read the safe harbor statement. Certain statements paint herein, including, without limitation, statements addressing the beliefs, plans, objectives, estimates or expectations of the company or future results or events may constitute forward-looking statements that involve risks and uncertainties. Specifically, the COVID-19 pandemic has had and is currently having a significant impact on the company's business, financial condition, cash flow and results of operations. . Such forward-looking statements with respect to the COVID-19 pandemic include, without limitation, the company's plans in response to this pandemic. At this time, there is significant uncertainty about the duration and extent of the impact of the COVID-19 pandemic. The dynamic nature of these circumstances means that what is said on this call could change at any time. And as a result, actual results could differ materially from those contemplated by such forward-looking statements. Additional forward-looking statements involve known and unknown risks, including, but not limited to, global, national, local economic, business and market conditions, including the impact of inflation, Russia's war with Ukraine and supply chain delays and disruptions in general and specifically as they apply to the retail industry and the company. There can be no assurance that the actual future results performance or achievements expressed or implied by any of our forward-looking statements will occur. Users of forward-looking statements are encouraged to review the company's filings with the U.S. Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other reports filed with the SEC as required by federal securities laws for a description of all other significant risk factors that may affect the company's business, financial conditions, cash flows and results of operations. With that, I would like to turn the call over to Skechers' Chief Operating Officer, David Weinberg; and Chief Financial Officer, John Vandemore. Thank you for joining us today on our fourth quarter and full year 2022 conference call. 2022, our 30th year in business was a significant milestone for the company. We achieved record sales of $7.4 billion, an increase of $1.1 billion or 18% year-over-year. On a constant currency basis, sales would have exceeded $7.7 billion, an increase of over $1.4 billion. Our fourth quarterly sales records in 2022 are the result of our focused marketing efforts, extensive distribution network and core design principles, style, comfort, innovation and quality, all at a reasonable price. From a product perspective, we further cemented Skechers as the comfort technology company with the introduction of Skechers, hands-free slip-ins and continue to innovate our performance solutions with the launch of Skechers Pickle wall shoes. Among many other standout moments, Footwear news named Skechers Company of the Year for the third time, and our relief golf athletes, Matt Fitzpatrick and Brooke Henderson won majors wearing Skechers Go Golf. It was also a year that presented challenges including temporary COVID We also experienced supply chain disruptions that created inventory congestion throughout the distribution channel as we move through the year. We overcame those challenges and achieved record annual sales due to the flexibility, creativity and dedication of the global Skechers organization, offices and distribution centers our sales teams in the field and our retail associates throughout our global network of Skechers stores, each and every one of our team members is an important contributor to our ongoing success. We remain focused on meeting the demands of consumers continuing to replenish stock at all our Skechers retail stores worldwide and partnering with our global accounts to ensure shoppers have access to the leader in comfort footwear. For the fourth quarter, Skechers achieved sales of $1.88 billion, a 13.5% increase, marking a new fourth quarter record and slightly above our previous quarterly record. This notable achievement was led by increases of 16% in wholesale and 11% in direct-to-consumer. Domestic sales increased 22% and international sales increased 9% with international representing 62% of our revenues for the quarter and 59% for the full year. By region, EMEA grew 29% and the Americas grew 22%. APAC sales decreased 7%, which included a China sales decrease of 23%. Excluding China, APAC sales increased 31% and approximately 62% of our global sales for the year, wholesale remains a key element of our growth strategy. As a consumer-driven company, we focus on what shoppers want and deliver it as efficiently as possible to our global wholesale partners. This allows us to reach our loyal base where and when they want to shop, be it department stores, family channels or their favorite specialty store. In the quarter, wholesale increased by 16% in both the U.S. and international. The international growth was driven by double-digit increases across many markets globally. Overall, wholesale sales were driven by increases in unit volume of 9% and average selling price per unit of 6%. The Americas wholesale business grew 19% attributable to double-digit growth in nearly every market, including a 16% increase within our domestic wholesale channel, which saw a double-digit growth in our men's and kids lines and single-digit growth in women's. Of note, for the quarter, men's rose to 41% of our domestic wholesale business as we saw increases in most product categories. Recently, we have seen strong sales drivers across several men's key categories, and we believe that performance across the board speaks to the relevance and broad acceptance of our men's styles. EMEA wholesale growth of 31% was primarily driven by double digit improve in Germany, Spain and Central Eastern Europe as well as to our distributors including Turkey, Middle East, Scandinavia, and Greece. This is partially offset by determination of shipments to Russia. APAC wholesale grew 32% as we experienced growths in other markets most notably in India and Indonesia with high double-digit growth and Taiwan with triple-digit growth. A key focus area for the company is direct-to-consumer where we are working to create a more seamless omnichannel experience. The 11% sales increase in the quarter was the result of 27% growth in the Americas and 19% in EMEA, partially offset by a decrease of 7% in APAC. Again, primarily due to China. Direct-to-consumer comparable same-store sales worldwide increased 7.5%. Domestic direct-to-consumer sales increased 30% due to strong triple-digit growth in our e-commerce channel as well as a double-digit increase in our brick-and-mortar stores. International direct-to-consumer sales were flat due to declines in China where at 1 point over 35% of our stores were temporarily closed. Outside of China and Chile, which was impacted by economic volatility, every other market experienced growth within our company-owned Skechers store portfolio and nearly market grew in our direct e-commerce business. In total, that rep to consumer unit volume increased 15% and average selling price was down 3.5%. In the fourth quarter, we opened 62 company-owned Skechers stores and closed 22, of which 17 were in China. Included in the openings were 29 in China, 7 big box or outlet stores in the United States, 4 in India and our first company-owned store in Ireland, a flagship location on Grafton Street in Dublin. We ended the quarter with 4,537 Skechers stores worldwide, of which 3,093 were third-party stores, which include 157 that opened in the fourth quarter, 94 were in China, 16 in India, 9 in the Philippines and 7 in Australia. In the first quarter 2023, we've opened 7 company-owned stores, 6 big box locations in the U.S. and 1 concept store in Germany. Year-to-date, we have closed 1 location in the United States. We expect to open a total of 35 to 40 company-owned stores worldwide in the first quarter and between 100 to 120 stores over the course of the year. In the fourth quarter, we launched our first Skechers e-commerce site in Japan and are pleased with the initial reaction from consumers. We remain focused on growing our direct-to-consumer business to efficiently drive sales and connect with our loyal consumers. To this end, we have planned additional e-commerce sites, including Peru, Colombia and an update to our existing platform in Chile which is already one of our most productive international e-commerce sites. Last month, we also launched our Sketch + loyalty program in Canada and plan to roll out this program to more countries throughout the year. Our fourth quarter growth across all segments of our business and the increases in nearly every market demonstrate the robust demand for our comfort technology products. The relevance of our footwear collections, the effectiveness of our marketing efforts and our commitment and ability to execute in the face of headwinds. Many of the shipping challenges we faced within our own distribution centers have eased and we are seeing improved operations in our recently expanded 2.6 million square foot North American distribution center. By the end of the first half of 2023, we expect to be shipping out of a new 427,000 square foot center in Vancouver that will improve delivery times for Canada and to have relocated our new Chilean distribution center doubling our space to 430,000 square feet. Additionally, in India, the 660,000 square foot Phase 1 of our new 1.1 million square foot distribution center outside Mumbai is expected to be completed by year's end. As always, we believe demand creation is critical to our brand's success. To support and drive awareness of our diverse product offering, we leverage a roster of notable talent, both globally and in regional markets. The talent is as diverse as lifestyle Guru Martha Stewart, retired athletes, an elite major championship golfers, Brook Henderson and Matt Fitzpatrick. We also signed Pickleball Pros, Tyson McGuffin, Catherine Parenteau in early 2022 to correspond with the launch of Skechers Viper Court Pickleball shoes. We are now the official footwear sponsor of the professional Pickleball Association Tour creating an undeniable connection between the fastest-growing sport in America and Skechers. Skecher's employees, a 360 degree marketing approach, digital and social media, television, out of home, print, radio, PR and translates our campaigns into dozens of languages, wherever consumers are, be it the most watched soccer matches in the world, a subway in Asia, billboards in South America or fashion magazines in Europe, we are there. And wherever consumers shop, phones, high streets or malls, we are there. All these marketing techniques build brand awareness and drive consumer demand. While we fully expect to face continuing challenges throughout the year, the recent elimination of zero COVID policy is a positive for a business in China and we believe both consumer confidence and more normal shopping behavior will build throughout the year. In addition, despite the recent inventory challenges impacting our domestic distribution network, we remain confident in the strength of our brand and the demand for our products. Further, we are beginning to see freight and logistic costs normalize, foreign currency rates moving in our favor and our retail stores full of fresh inventory. We had a strong December and January direct-to-consumer sales tracked ahead of last year giving us confidence that we'll see continued growth in 2023. Thank you, David, and good afternoon, everyone. 2022 was our 30th year in business. And as I reflect on the past 4 quarters, I'm incredibly proud of our talented team around the globe for navigating one of the most turbulent macroeconomic environments in our 30-year history, while remaining steadfastly focused on executing against our long-term growth strategy. In this complex year, Skechers achieved record quarterly and full year results. Surpassing $7.4 billion in annual sales, an impressive year-over-year increase of over $1.1 billion, driven by global growth across our channels. These results demonstrate the strength of our brand as the comfort technology leader and the robust consumer appetite for our innovative product portfolio. We remain excited about the growth opportunities ahead and are committed to stylish, comfortable, high-quality and reasonably priced footwear for Skechers consumers around the globe. Now let's review our fourth quarter financial results. Wholesale sales increased 16% year-over-year to $1.05 billion, representing 16% growth in both our domestic and international markets. We continue to see broad-based demand for our products evident in the increased number of units sold and higher average selling prices achieved. During the quarter, our supply chain team continued to work diligently to alleviate the congestion stemming from the unprecedented supply chain disruptions last year. While we continue to experience some processing constraints at our distribution centers from record input volumes, we are pleased with the progress we have made to improve efficiencies, expand capacity and reduce on-hand inventory while also maintaining the pace of shipments to our wholesale customers. Direct-to-consumer sales increased 11% year-over-year to $829.6 million, driven by 30% growth domestically from a triple-digit increase in e-commerce and a double-digit increase in our retail stores. Both channels benefited from healthier inventory levels compared to last year's supply-constrained environment. International direct-to-consumer sales were flat year-over-year due to a decline in China. However, excluding China, sales increased 22%, driven by double-digit growth in both our stores and online. The expansion of our digital presence internationally and continued penetration of our retail stores contributed to strong growth as we further develop direct relationships with both our long-standing and new consumers. We are excited about the growth opportunities in our global direct-to-consumer business, both physically and digitally, and remain focused on weaving our omnichannel capabilities into a seamless consumer-centric experience and showcasing the breadth of our full product assortment. Now turning to our regional sales. In the Americas, sales for the fourth quarter increased 22% year-over-year to $925.6 million driven by double-digit growth across all channels, reflecting healthy consumer demand for our compelling product portfolio and improved inventory availability. In EMEA, sales increased 29% year-over-year to $413.7 million, driven by double-digit growth across all channels and in most countries, led by Germany and sales to our distributors. We continue to experience strong brand momentum and consumer demand in EMEA throughout the quarter. In APAC, sales decreased 7% year-over-year to $539.5 million. However, excluding China, sales grew 31%, driven by double-digit growth in all channels. We saw particular strength in India, one of our fastest-growing markets in the region and in sales to our distributors. In China, sales declined 23% due to continued COVID-related disruptions, including the closure of over 35% of our stores at 1 point. Our China team has done an excellent job managing through these challenging conditions and persistent disruptions, and we thank them for their tremendous poise they have shown throughout. Fourth quarter gross margins were 48.4%, a decrease of 40 basis points year-over-year, but an increase of 140 basis points quarter-over-quarter. The year-over-year decrease was the result of higher product costs and planned strategic promotions in our direct-to-consumer business. Operating expenses increased 60 basis points as a percentage of sales year-over-year from 43.2% to 43.8%. Selling expenses increased $19.1 million or 14%, but were flat as a percentage of sales compared to the prior year. The dollar increase was primarily due to higher demand creation expenses in digital and brand marketing globally. General and administrative expenses increased $88.9 million or 15% and 60 basis points as a percentage of sales year-over-year. We incurred approximately $25 million of incremental logistics costs globally to minimize disruption in delivering products to our customers in addition to increased volume-driven distribution expenses. We are making considerable progress on restoring efficiency and accelerating the capacity expansion in our domestic distribution center, where notably, inventory was down 12% from the prior quarter. However, we continue to expect to incur some incremental logistics costs over the next several quarters, albeit at a moderating amount. Earnings from operations were $86.6 million, a 7% decrease compared to the prior year, and our operating margin for the quarter was 4.6% compared to 5.6% in the prior year. Earnings per share were $0.48 per diluted share on 156.3 million diluted shares outstanding compared to adjusted diluted earnings per share of $0.43 in the prior year, a 12% increase. Our effective tax rate was 9.6% for the fourth quarter and 17.8% for the full year. The lower-than-expected tax rate was attributable to the utilization of foreign tax credits and benefits from certain discrete items. And now turning to our balance sheet. We ended the quarter with $788.4 million in cash, cash equivalents and investments, a decrease of $252.1 million from December 31, 2021, but an increase of $106.9 million from the prior quarter. We continue to invest in working capital to drive sales and ensure we have product available in the right place and at the right time to meet consumer demand. Inventory was $1.82 million compared to the prior year, but up only 2% versus last quarter. We continue to experience supply chain disruptions, but we are pleased with the progress we are making to reduce elevated inventory levels. Accounts receivable at quarter end were $848.3 million, an increase of $115.5 million, reflecting higher wholesale sales. Capital expenditures for the quarter were $95.4 million, of which $40.2 million was related to the expansion of our distribution infrastructure globally, $23.8 million related to investments in our retail stores and direct-to-consumer technologies and $21.7 million, primarily related to the construction of our new product design center. Our capital investments are focused on supporting our strategic priorities, growing our direct-to-consumer business and expanding our brand presence globally. Now turning to guidance. As we begin 2023, it will come as no surprise that there is a meaningful degree of uncertainty ahead. For example, while we continue to see robust consumer demand for our product evidenced in strong comparable store sales trends and sell-through. There are also many recessionary signals in the marketplace. Our results will be significantly influenced by what prevails, but embedded in our initial guidance for 2023 is the following: Continued sales momentum in most of our international markets throughout the year. A China market recovery characterized by continued near-term challenges but improving steadily over the course of the year; a domestic wholesale marketplace gradually overcoming elevated inventory levels and supply chain constraints, resulting in declines in the first half of the year before returning to growth in the back half; a steady improvement to our distribution operating efficiency as expanded capacity and other remediation efforts bear fruit. And finally, the gross margin benefits of lower logistics costs particularly in freight, maturing into our results over the course of the year as we deplete the inventory we acquired last year. For fiscal 2023, we expect sales to be in the range of $7.75 billion to $8 billion and net earnings per diluted share in the range of $2.80 to $3. For the first quarter, we expect sales in the range of $1.8 billion to $1.85 billion and net earnings per diluted share in the range of $0.55 to $0.60. Our effective tax rate for the year is expected to be between 19% and 20%; and we expect total capital expenditures to be between $300 million and $350 million as we continue to invest in our strategic priorities, including additional stores, added omnichannel capabilities and incremental distribution capacity in key markets like India, China, Chile and more. We also expect to continue our discretionary share repurchase program, of which approximately $425.8 million remained available at December 31, 2022. As we move forward into 2023, we remain confident that our long-term growth strategy will continue to provide a strong foundation and ensure Skechers is positioned to drive long-term profitable growth underpinned by our unwavering commitment to deliver value through our innovative comfort technology product portfolio at compelling prices for consumers globally. Thank you, John. The past 30 years have been marked by unforgettable moments from our first store opening, first television commercial and first $1 billion in sales to now operating over 4,500 stores, collaborating with Martha Stewart and many others for our Comfort footwear, being named company of the Year by leading trade publication footwear news and achieving well over $7 billion in sales this year. At every point along the way, the many milestones or the challenges we have faced over the years, 1 thing has been consistent. Our incredible employees; sales personnel and customer service teams on the front lines, a talented and creative group of designers and marketers; our logistics and operations force that makes it all check, managers and executives who drive the vision. There is truly nothing like the global Skechers team, and we thank the entire organization for making 2022 an incredible year. 2023 will continue to present challenges, but we believe that with our loyal partners and dedicated team, Skechers will continue to reach new heights, including $10 billion of annual sales by 2026. Great. My question is just about China and what's embedded into the guidance. John, you mentioned you expect an improvement throughout the year. But can you tell us sort of right now in fourth quarter? What -- how would China sales are trending year-to-date -- sorry, quarter-to-date and then sort of what you expect for Q1? And then maybe if you can sort of quantify a little bit how you expect the year to play out, that would be super helpful. Well, we're not going to give a year-to-date trend for '23 other than to note that what we referenced in the guidance certainly includes that perspective. I think there are a lot of unknowns in China currently, having departed from the COVID zero policy, you're still seeing COVID effects as there are infections and other protocols in place in response to that. That is one of the reasons why the fourth quarter saw the declines that it did. Currently, we expect the challenges to continue for at least the first quarter and potentially reaching into the second, but a more significant rebound opportunity in the back half of the year. I mean, admittedly, though, we're going to have to see how the situation unfolds. We have seen some positive indications lately with regards to foot traffic and in-store performance that we haven't seen for quite a while. So that's very encouraging. I think the inventory position is well suited for that market to rebound. But ultimately, that's one of the bigger unknowns in our view for 2023. We are optimistic though. I'd say what we see right now is encouraging, but it's been a long road in China over the last couple of years that they've dealt with COVID, and so we want to make sure that we're cautiously optimistic before we get overly optimistic. And if I could maybe ask 1 more. Just on G&A in the quarter. I think, John, you called out the $25 million incremental from some of the processing constraints I think that's related to. Can you just talk about if there was other sort of onetime items in SG&A this quarter? And then if we think about Q1, it sounds like there's still some constraints that might continue to impact SG&A. If you could just talk about those, that would be helpful as well. Yes. I mean the most significant item, Jay, as you identified, was the challenges that we've continued to have to battle from a network congestion perspective. And I think it's important to know that, that's not just Skechers distribution centers that are having challenges. We're seeing that those challenges exist downstream as well. And then unfortunately, that causes a backup into our own distribution centers that we have to deal with. So the most significant driver -- single driver was continuing what I'd call, congestion-related costs similar to what we discussed in Q3. We did see a noticeable step down this quarter, which is, I think, a testimony to the comments both David and I made about seeing improved efficiencies in our network. . The next most significant driver, quite frankly, in the G&A was volume related. That's attach themselves to our business operations when we see sales increases of the scale that we saw this quarter. We did put a little bit more into some media. That stayed flat as a percentage of sales, but it was a conscious effort to make sure we're bringing forward the comfort technology products that we're emphasizing right now. And I'm sure many of you have seen commercials out there for our new slipping, which are doing tremendous. So absent that, no, nothing really to note in the period that I would consider to be kind of outside the ordinary course. Great to hear about the target for $10 billion still intact. I remember -- I recall, I think, John, that you were guiding for U.S. wholesale to grow at a mid-single-digit CAGR over that time period. Is that still the right framework as we think about long term? And then I think you made some comments about first half, second half. How do we think about U.S. wholesale for the year? And can we see first half like down mid- to high single digits? Any framework on that would be very helpful. . Absolutely, Laurent. But I think we first had to acknowledge that the operator pronounced your name right, which is amazing, but that's the first in my experience. Yes. I would first say as well, though, that the $10 billion goal for us is still imminently achievable. Now we feel very good about where we sit as a brand, the strength of our product portfolio. What we're seeing across the broad swath of where we operate in the world today. I mean I think it's noteworthy that we saw growth pretty much across the board, certainly in all channels, but for those that continue to be impacted by COVID. Relative to the domestic wholesale, this is going to be really, I think, a year of kind of 2 different periods of the first half and the back half. The first half is looking like at the moment, that it's going to continue to suffer from the challenges of elevated inventory downstream. And I think is important to note about that is we're still seeing very strong results for the Skechers brand throughout our network in our own stores and in our partner stores. So this really is not a question in our view about Skechers product building up. It's really, quite frankly, the impact of the broader inventory congestion that's being felt downstream. That is, as we've noted in a couple of quarters ago, that has been impacting order behavior for the first half of the year. I really think once we get clear of that, the door quite openly opens for us to return to growth on the domestic wholesale side, and we're optimistic about that in part because of the great product lineup we have coming. I think that also then adds to our faith in that long-term guide that we've always provided, which is kind of a mid-single-digit domestic wholesale. Now we've been beating that pretty handsomely over the last couple of years. So I would take that into consideration, you're going to have your ups and downs because nothing goes up in a straight line. But we're still very confident in that contribution to the $10 billion objective, which, again, I just double emphasize here, we still are very, very confident in our ability to achieve. And then piggybacking off of some of Jay's questions on margins. John, can you maybe kind of quantify how much freight -- ocean freight contracts, just all of it, just how much of a press reporting was for the full year FY '22. Was it -- can we assume like 300 basis points of gross margin pressure? And if that's the case, how much do we -- should we expect to recapture? And then on the SG&A line, I appreciate that you gave us the $25 million incremental distribution cost there. So in aggregate was $75 million for the second half. I understand you're going to have a little bit more in the first half of this year. But net-net, should we assume it's like about $60 million lapping as we think about FY '23 SG&A? A 3-part question there, Laurent. On the freight side, what I would probably give you as the best indicator is when you take everything together, and it's not just ocean freight, obviously, is the biggest piece. The year-over-year decline in gross margin is nearly entirely the result of that and more because we did put in pricing. I mean, of note this quarter, we improved the gross margin, I think, by about 140 basis points, which is a very strong result and that reflects some of the pricing that we've been talking to. We didn't get all the way to match prior year. That was a bit of a mix shift, quite frankly, and some delayed shipments that occurred because of the congestion we've spoken about, but we grew gross margin quarter-over-quarter. And I think that's a good testimony to the actions we had taken that we had spoken about. But when you think about freight and logistics last year, and what that -- the toll that took on our business, you need to look no further than kind of the gross margin differential and understanding that we did mitigate a lot of that over the course of the time period. So obviously, gross margins would have been down further had it not been for the actions we took. On the congestion cost, it's difficult to get a precise quantification because a lot of that is going to depend on factors outside of our control. We mentioned that a lot of the congestion we're seeing now is actually downstream. It's not in our own distribution centers. It's our ability to ship on because others are having a similar congestion-related issue. So it's somewhat contingent upon that. We do think year-over -- sorry, quarter-over-quarter continues to be a lesser number how far below this quarter's $25 million is something we'll have to watch carefully. But we see it declining over the course of Q1 and Q2, hopefully gone by Q3. The last note I'll just give you, though is although you are right in quantifying the second half amount, we would estimate that the full year charges we incurred because of congestion is actually closer to $90 million, all in. So we had mentioned previously, there were some costs in Q2. We just hadn't considered calling those out then. But when you look back on the full year, there's close to $90 million of costs that we would attribute to this congestion that have been working their way in the P&L for a while. And maybe if I can squeeze 1 India question for you, David, talked about Mumbai, D.C. up and running. Can you just maybe give us some guardrails or just how big India is? Is it like a $200 million business? And do you think we can get to a -- can it become a $1 billion opportunity within that $10 billion framework? Or is it beyond that? I think it can get beyond that. We're only scratching the surface. The brand is very well recognized and being accepted there. And it's only a matter of getting everything up and running, and we're looking to do production also in India. India is a very protective marketplace. So we have to move more things in there than we've had before. When we went to China, it was obviously a big marketplace. We already had production in China to a significant degree. We're starting to move some production into China. That's both apparel and footwear. We're building our infrastructure. Without giving away too much information, your numbers are pretty close for where it is now. They're a little higher and $1 billion is certainly depending on what your time frame is within our sights. So we do well there both from a wholesale basis. We have third-party partners there that are terrific that we use and continue to grow, and we use a franchise model and our own wholesale. And now we're putting in our own e-commerce, while they've had it, we're putting our own platforms in. So we still have a lot of work to do, but there's a lot of open road there. John, can you give us detail just on the sequencing of gross margin this year between expansion in the back half, potential contraction in the front half? Is there any magnitude you can give us in terms of how cost of goods sold and gross profit should flow throughout the year? Well, I mean, in part is dependent upon how quickly we deplete the inventory we have. What I would say is if you kind of take the halves of the year, you would definitely expect the first half to be materially lower from a gross margin perspective than the back half of the year. There's always mix in there and business mix as well as concentration within direct-to-consumer that kind of gets in the way of getting a pure look. But what I would tell you is we definitely anticipate that the back half of the year is when we'll start to enjoy the benefits provided our plan holds. So I think you can expect from -- if I take it back to kind of 2021 before we had as much of the impact, you should see some marked improvements from those certainly in the back half of the year to start to accentuate the value of what we lost in freight and other logistics-related costs over the course of 2022. And I guess just to harp on that just for a second. I mean this really -- this year will really become, again, a tale of 2 halfs. The first half is where we're seeing the challenges. The second half is where we see a ton of opportunity. I would tell you, our guide attempts to sufficiently incorporate the challenges we foresee in the first half and probably leaves open opportunity on the back half because we have the visibility into bookings and activity yet. We don't know how COVID is going to unfold, but that's how we try to position the year so that once we get through the first couple of quarters, which we've already started on, we'll get a much better insight into how the year is going to unfold, but we do see abundant opportunity there. Maybe just a quick follow-up on that. The gross margin in the first half of the year, could it be down year-over-year? And then most of the recovery -- the increase in gross margin starts to fall in the back half of the year? No, I wouldn't expect it down versus '22. '22 was sorry for the color, but it's just a terrible gross margin here. I mean no fall of ours. I think everybody saw the impact of the highest freight rates we've ever seen by a factor of 5, logistics costs, backups, and everything. So we certainly have no exception that year-on-year, we would see declines in any period, but it gets better as the year goes on. My follow-up is just on Q1 top line guidance. Could you talk to channel and geography in terms of any expectations you can give us, obviously, domestic wholesale has an incredibly difficult comparison. But wondering if there's any other detail you can give us to get to that sales guidance range? Yes, again, and not the heart of my theme, but obviously, you can see where our speaking notes went to. It's really China and domestic wholesale in the first half, providing the headwind. We think the balance of the markets we're in will continue to perform very, very well. Direct-to-consumer has definitely started off strong. I think as David noted in his prepared remarks, so we're very encouraged by what we see there. And you do rightly point out, if we recollect back to 2022, Q1 was with a year -- with a quarter where a lot of catch-up shipped in the period from the inventory stagnation of the port here. So it's really domestic wholesale in China in the first quarter, offset by good, solid continuing performance elsewhere. There's certainly opportunity to outperform those 2 challenging markets, but it's going to be something that we're going to have to see as the period unfolds because of the known challenges there. So kind of just bigger picture. I wonder if you can just talk about how you view Skechers' ability to get back to 2019 operating margin over time? Kind of where do you still see the biggest opportunities within the business and maybe the biggest risk just considering the macro environment and the uncertainty there? Yes. I don't mean for this to sound tried Gaby, but it's really 2 things. Our margins are going to -- gross margins are going to build back because of the absence of the extraordinary logistics costs, and we're going to get our distribution network back to what we would consider to be normalized efficiency. If those 2 things happen, that's -- those are going to be the biggest contributors to success. I think the potential risks to that are continuing COVID challenges across the globe. Obviously, we've spoken about China already, but what we've seen the nature of this condition is that it kind of travels across the globe. So if there's an impact out there to be had, that could be a headwind. And then obviously, we don't see any signs in what we monitor and certainly not in our own brand performance that we monitor of a forthcoming macroeconomic recession, but that's obviously a possibility. And I think if that occurs, we still have a lot of tools in our tool belt to use to protect margins, but that would certainly be kind of the 2 biggest risks I see. And just a quick follow-up. Just wondering if you can provide a bit more color around the composition of your inventory. It does seem like levels are much improved on a year-over-year basis versus the end of 3Q, but are there any areas in channels and regions where you still feel a bit more over inventory than you would like to be? Yes. I mean I would first point out as we noted, the U.S. quarter-over-quarter was down, and that's where we previously had some of the bigger challenges. We did see a little bit of a shift of the issues in the U.S. kind of like a contingent kind of made their way overseas into Europe a little bit. I think we're getting beyond that much faster than we did in the U.S. So I think that's incredibly important. I would note in contrast to last year, we're seeing significantly less inventory in transit, which is good because that gives us the ability to deal with the inventory. Obviously, we're still sitting on some inventory. We'd like to ship on to customers for which they have orders that the integrity of which we feel really good about. But until they clear their own congestion in their own distribution networks, it's tough for us to have the opportunity to do that. But again, I think we're seeing encouraging signs. We think a flattish inventory quarter-over-quarter is a very good sign. China reopening is a very good sign. We just need to work through where we're at. And that we believe, again, is probably a first half of the year activity. I wanted to start building on Gaby's question on the inventory. Can you speak to how you see the glide path for inventory normalization? And you mentioned perhaps in some recessionary signals. With respect to the inventory, how are you planning receipts on a go-forward basis? Yes, I think it's fair to say receipts will slow down. I think in taking the question a draw further to John's point, we were down in the U.S. It's growing internationally. It grew primarily in EMEA, where we had a very strong January because of demand. We had a lot of movement from fourth quarter into first quarter this year because of the backup that happened to some of our consumer base. And I think it shows well for some of our operating margins as well. If you think about it, we had a catch up on our stores. The fact that our stores are now full and we've utilized all the cost and filling them up. So shipping them significantly more pairs than are selling, starting probably in the middle of the second quarter through probably the middle of the fourth quarter, we're now current. So we will have less cost to supply our own stores throughout the first half of the year, and they're doing quite well than we had in the middle of last year. We now have a significant amount of inventory. Basically, what happened last year was a lot of what people thought was going to be delayed and get later and they wanted to increase their purchasing. We now have we're helping our customer base both domestically and internationally as best as we can. But we've already paid for all the receipts. We've already gone out of our way to increase the size of our distribution centers so we can hold that. And that cost is already behind us as we fill these orders, it's only a shipping piece. So as wholesale continues to grow and we ship less per week to our retail stores, we'll gain much more efficiency certainly from a financial perspective in the first quarter and going into the first half. I'd also like to point out some of the inventory build is normal just from the movement and the change in our business. By and large, our own retail sits on inventory significantly longer than our wholesale partners. They -- we tend to turn wholesale much quicker. We're on a flow with them. We run our flows through, obviously, because of direct-to-consumer. We carry more in our stores and the more stores and the bigger they become, the more we carry so that there's a bigger carry piece in it. So we're looking much better. And we've gotten the inventory early and our receipts are slowing down. So it builds for more efficiencies and more continued sales. I think it's pretty normal that domestic wholesale had a tougher January than our own stores would indicate simply because they took a lot of product in the last quarter of last year coming into this year. And we don't have no overlap of stuff that was shipped in January as opposed to December. The end of January and the first couple of days of February have shown significant increases also in our wholesale deliveries. So everything we see is moving in the right direction and the timing of what we're holding and how it gets to be billable or invoice as it moves out is looking more and more solid as we move into the back half of the first quarter and into the second quarter. I wanted to dig in some on the comments on the domestic wholesale situation. Of course, there are difficult compares with Q1 a year ago. But I'm curious that backup, which you speak to of inventory in the channel, is that concentrated with any specific channels or key channel partners? Or is it wide spread across your U.S. wholesale base? Some are obviously worse than others, and we want to talk about specifics. But by and large, everybody took a significant amount of inventory, not necessarily Skechers. Our own inventory, we've cleaned up. So some customers like us ahead of the curve as we are with is why I think our direct-to-consumer will show so strong in January, but everybody is working through it. January, while everybody is showing some increases, we saw some increase here not the strongest month. It's a closed out month transition for product. I think as we got through January, which was the toughest comparison for us from year-over-year in the first quarter and why there's going to be pressure on the quarter simply plus last year, everything just opened up, and it went into empty shelves. So it really did create quite a distortion. But I think you won't see the same thing to the same order of magnitude for the balance of the quarter. We just won't catch the first month, but everything is cleaning out, everything is starting. And as we get to new seasonal goods, we find a lot of our customers are starting to get online now to even take more for January, February and getting ready. So if weather doesn't change the sales pattern, we should see that for the most part of February going into March. You talked about the wholesale dynamic between the first and second half, but what's the right way to think about units versus price? Because I believe you're taking pricing in wholesale. So I'm just curious if you can contextualize what the pricing tailwind might be that we see in the first half that could help to offset some of the pressure on the unit side? And also as a follow-up, whether you expect to take additional pricing action as we think about the new year as a whole? Yes. I mean -- so we won't talk about the pricing increases that we had announced previously, but we're waiting to materialize. You saw that in the gross margin performance this quarter, kind of quarter-over-quarter being up, those benefits will continue near to our P&L particularly over the first couple of quarters. So a lot of what you're seeing kind of to the commentary David just provided is a unit issue, and that speaks to congestion. So there's nothing in -- we see the envelope of pricing action that's actually going to change the dynamic. No matter what price we sell have, if they can't take the goods from a physical congestion perspective, you can't take the goods. So that should help, and that is part of what will continue to help support our gross margins certainly in the first half of the year. But in the domestic wholesale marketplace in particular, it's mostly a units-driven headwind. And as we think about the back half, what do you see is driving the recovery in the wholesale channel? Does that I'm curious like, is it inventory just being in better shape and your customers returning to a more normal cadence of taking in product? Or do you have innovation or demand creation in the pipeline that you think gets better traction in the back half? Well, Rick, you could not tee us up any better than that. I mean the answer ultimately is both. There's definitely -- I said a lot of this is congestion, congestion gets resolved and then product will flow. And to David's commentary, we're already seeing a little bit of that loosen up, which is an encouraging sign. But we also have, obviously, some continuing product introduction activity that's going to, I think, really propel where the market goes for Skechers in the back half of the year, most notably our slip-in products that's really when they begin to hit in full force in the market. Early indications have been nothing but incredibly strong from a consumer perspective. So those will start to hit. But I would also point out, a lot of our other comfort features continue to perform really well. Arch Fit continues to be a very solid franchise for us. So to answer your question, cleanly, it's both. We're going to see less congestion and that's going to help things. We're going to see the product really take hold. And you're going to see us also get behind that from a marketing perspective. So that will also be a propellant in kind of the back half of the year. Great. I know in the last year, we've talked a lot about shelf space opportunities for Skechers as peers have pulled back from wholesale and shifted into DTC. I know now that's a little bit bundled just with so many being over inventory and now kind of reverting back to wholesale. So is there anything you can provide us or any observations as it relates to the competitive dynamic and how you're thinking about shelf-space opportunities now? I would tell you, from our perspective, we haven't seen a significant change. Again, the major issue, as we've already, I think, beating the dead on this is it's a supply chain and logistics issue. We haven't seen a dramatic turnaround and approach from any of the brands that have previously been out of an account going into an account. So there's really -- from our perspective, there's still abundant opportunity to take more shelf space to bring more product forward to bring some of our new innovation for our slip-in technology, Arch Fit, et cetera. . So we still feel very good about those opportunities. Again, the biggest headwind that we continue to face is kind of on the logistics side, pure physical logistics. I would also just note because we watch the sell-through rates we see at our accounts, and we measure those against last year, a normalized year of 2019 and the metrics there continue to be very positive for the brand. Maybe just 1 more quick one. Can you just help me understand -- I want to make sure I'm understanding your wholesale order book commentary and how it relates to the guide because it feels like you're building in this ramp in the back half. So does that mean you've seen kind of the order book improve in the back half? Or is there still maybe some caution you're observing similar to the first half? I just want to make sure I have that right. I would say that relative to last year and probably the year before, we see -- quite frankly, we've solicited less long-term bookings. I think that's part of the reason, quite frankly, we got into the situation as an industry, we did with the shipments all coming in the last couple of quarters. with the normalization of kind of the production cycle and the transit cycle, we've been able to pull booking windows back to a more normalized sense. So as we sit here today, we have really good visibility into the first couple of quarters, but just because of the order cycles haven't yet triggered, we're not at a point where we have a ton of bookings for Q3 or Q4, which is entirely normal -- so there, obviously, we're giving our best guess. I would say we certainly didn't feel the need to be overly aggressive relative to those expectations. We think they're measured, we think they're appropriate. But I wouldn't tell you today that we're sitting on this back half hockey stick on the domestic wholesale side because we want to see some of that evidenced in the bookings, and that's what will come over the next quarter or 1.5 quarters. So we're still waiting for a lot of that activity to come through. The indications we have had, particularly for the product that will populate those order windows has been very strong. And so that's one of the evidentiary points we take and when we build that back half expectation. But ultimately, we'll have to wait and see how the bookings unfold. And as a result of that, we don't think, from our perspective, we've been overly aggressive in in setting kind of those early indications of where we think, in particular, the domestic wholesale market going to come. There are no further questions at this time. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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EarningCall_657
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Welcome, everyone. Thank you for standing by for the Alphabet Fourth Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please, go ahead. Thank you. Good afternoon, everyone, and welcome to Alphabet's fourth quarter 2022 earnings conference call. With us today are Sundar Pichai, Philipp Schindler and Ruth Porat. Now, I'll quickly cover the safe harbor. Some of the statements that we make today regarding our business, operations and financial performance may be considered forward-looking, and such statements involve a number of risks and uncertainties that could cause actual results to differ materially. For more information, please refer to the risk factors discussed in our forms 10-K and 10-Q filed with the SEC, including our upcoming Form 10-K filing for the year ended December 31, 2022. During this call, weâll present both, GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in todayâs earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz/investor. Our comments will be on year-over-year comparisons unless we state otherwise. Thank you, Jim, and good afternoon, everyone. It's clear that after a period of significant acceleration in digital spending during the pandemic, the macroeconomic climate has become more challenging. We continue to have an extraordinary business and provide immensely valuable services for people and our partners. For example, during the World Cup Final on December 18, Google Search saw its highest query per second volume of all time. And beyond our advertising business, we have strong momentum in Cloud, YouTube subscriptions and hardware. However, our revenues this quarter were impacted by pullbacks in advertiser spend and the impact of foreign exchange. I'll focus on two major things today in a bit more detail, and then I'll give a shorter-than-usual quarterly snapshot from across our business. First, how we unlock the incredible opportunities AI enables for consumers, our partners and for our business; and second, how we focus our investments and make necessary decisions as a company to get there. First, the AI opportunity ahead. AI is the most profound technology we are working on today. Our talented researchers, infrastructure and technology make us extremely well positioned, as AI reaches an inflection point. More than six years ago, I first spoke about Google being an AI-first company. Since then, we have been a leader in developing AI. In fact, our Transformerâs research project and our field-defining paper in 2017, as well as our path-breaking work in diffusion models are now the basis of many of the generative AI applications you're starting to see today. Translating these kinds of technical leaps into products that help billions of people is what our company has always thrived on. Everyone working on the various projects underway is excited. We'll pursue this work boldly, but with a deep sense of responsibility, with our AI principles and the highest standards of information integrity at the core of all our work. We have been preparing for this moment since early last year, and you're going to see a lot from us in the coming few months across three big areas of opportunity; first, large models. We published extensively about LaMDA and PaLM, the industry's largest, most sophisticated model plus extensive work at DeepMind. In the coming weeks and months, we'll make these language models available, starting with LaMDA, so that people can engage directly with them. This will help us continue to get feedback, test, and safely improve them. These models are particularly amazing for composing, constructing, and summarizing. They will become even more useful for people as they provide up-to-date more factual information. And in Search, language models like BERT and MUM have improved searches for four years now, enabling significant ranking improvements and multimodal search like Google Nets. Very soon, people will be able to interact directly with our newest, most powerful language models as a companion to Search in experimental and innovative ways. Stay tuned. Second, we'll provide new tools and APIs for developers, creators, and partners. This will empower them to innovate and build their own applications and discover new possibilities with AI on top of our language, multimodal, and other AI models. Third, our AI is a powerful enabler for businesses and organizations of all sizes and we have much more to come here. There's a few flavors of this. Google Cloud is making our technological leadership in AI available to customers via our Cloud AI platform, including infrastructure and tools for developers and data scientists like Vertex AI. We also offer specific AI solutions for sectors like manufacturing, life sciences and retail and will continue to roll out more. Workspace users benefit from AI-powered features like Smart Canvas for collaboration and Smart Compose for creation. And we are working to bring large language models to Gmail and Docs. We'll also make available other helpful generative capabilities from coding to design and more. And for our advertising partners, Philipp will discuss in detail how AI is powering dramatic campaign improvements and value-adding features for them. Of course, in addition to all this, AI also continues to improve Google's other products dramatically. And we'll continue our work with others outside Google, including joint research collaborations to develop AI responsibly and to apply AI to tackle society's greatest challenges and opportunities. For example, DeepMind's protein database of all 200 million proteins known to science have now been used by 1 million biologists around the world. We continue to invest in AI across the board, and Google AI and DeepMind are integral to a bright AI-first future. Over the past few years, DeepMind has been increasingly working across groups within Google and the other bets and to reflect that progress, we'll be making a financial reporting change that Ruth will share more about in her comments. We are just at the beginning of our AI journey and the best is yet to come. The second thing I wanted to discuss is our sharpened focus. We are committed to investing responsibly with great discipline and defining areas where we can operate more cost effectively. We are focused on methodically building financially sustainable, vibrant growing businesses across Alphabet. For example, we are working to improve the economics and hardware as we focus more intently on the Pixel line and our overall cost structure there. Cloud remains very focused on its path to profitability. And there are many opportunities to build on our progress at YouTube over the years, starting with Shorts monetization. Overall, I see this as an important journey to reengineer the company's cost base in a durable way. There are several dimensions already underway, including prioritization of our product investments across Google and other bets. It also includes a careful focus on our hiring needs, reflecting these priorities, as well as efficiencies in our technical infrastructure and productivity improvements from our AI tools. As part of this, we did a rigorous review across product areas and functions to ensure that our people and roles are aligned with our highest priorities as a company and we announced a reduction in our workforce. I'm grateful to Googlers leaving us for all of their contributions and their hard work to help people and businesses everywhere. Let me give a few quick updates from across the business this quarter. Just this week, we started bringing revenue sharing to YouTube Shorts, which is now averaging over 50 billion daily views, up from the 30 billion I announced on the Q1 2022 call. This will reward creators and help improve the Shorts experience for everyone. Our subscription business continues to grow, with YouTube Music and Premium surpassing 80 million subscribers, including triallers. Together with YouTube Primetime channel subscriptions and YouTube TV, we have good momentum here. YouTube's NFL Sunday Ticket will accelerate that by helping to drive subscriptions, bring new viewers to YouTube's paid and ad-supported experiences and create new opportunities for creators. Turning to hardware. Many outlets and reviewers named Pixel 7 Pro, the phone of the year. Features like Magic Eraser and Photo Unblur are incredible and help differentiate Pixel from others. 2022's Pixel 6A, 7 and 7 Pro are the best-selling generation of phones we have ever launched. And we gained share in every market we operate in this year. Next, Google Cloud. We see continued momentum with Q4 revenue growing 32%. Our differentiated products and focused go-to-market strategy continue to drive customer momentum, beginning with real-time data, analytics and AI. Customers are increasingly choosing BigQuery because we unify data lakes, data warehouses and advanced AI/ML into one system and now analyze over 110 terabytes of data per second. Customers like Kroger can analyze data in multiple clouds without moving data in most cases, and MSCI processes unstructured and structured data at scale. In infrastructure, our global network and an advanced TPU v4 AI supercomputer helped Snap triple the throughput for its business critical ad ranking workload, while significantly lowering cost. Our machine learning infrastructure with cloud TPU v4 Pods can run large-scale training workloads up to 80% faster than alternatives according to third-party benchmarks, which is helping customers like Bayer accelerate drug discovery. Our reliability advantages and open edge cloud power the mission-critical 5G network of Telefonica Germany. As I mentioned, our suite of AI/ML solutions across verticals are a key differentiator. We helped Wells Fargo automate the customer service experience for mobile users and HCA continually improve the quality of patient care. In 2022, Mandiant, which we are now integrating, helped over 1,800 customers prepare for or recover from the most critical cybersecurity incidents. In Workspace, the innovations mentioned earlier are helping drive new wins and expansions across geographies. In Other Bets, from Calico to Weibo, we are focused on investing sustainably across the portfolio and creating good business. Verily, for example, has recently honed its strategy and structure to more clearly focus its product development. To close, we are all standing on the cusp of an era of amazing opportunities. We are going to be bold, responsible and focused as we move into it. A healthy disregard for the impossible has been core to our company culture from the very beginning. When I look around Google today, I see that same spirit and energy driving our efforts. Thanks to our employees, our partners and people everywhere who use our services. I'm excited for what's next. Thanks, Sundar. Hello, everyone. It's good to be with you all. I'll start today with our Google Services performance in the fourth quarter and then dive deeper into our priority areas. Google Services revenues of $68 billion were down 2% year-on-year, negatively affected by sizable foreign exchange headwind. In Google advertising, Search and Other revenues were down 2% year-over-year, and YouTube Ads and Network had high single-digit revenue declines. Google Other revenues were up 8% year-over-year, with strong growth in YouTube, non-advertising and hardware revenues, offset by a decrease in Play revenues. I'll highlight two other factors that affected our Ads business in Q4. Ruth will provide more detail. In Search and Other, revenues grew moderately year-over-year, excluding the impact of FX, reflecting an increase in retail and travel, offset partially by a decline in finance. At the same time, we saw further pullback in spend by some advertisers in Search in Q4 versus Q3. In YouTube and Network, the year-over-year revenue declines were due to a broadening of pullbacks in advertiser spend in the fourth quarter. I'll now zoom out to share more broadly where we're investing and see clear opportunities for long-term growth. First, Google AI. It's important to recognize that our advertising business has obviously benefited over the past decade from the transition to mobile. More recently, we had outsized growth in advertising revenues during the pandemic, with 2022 advertising revenues $90 billion higher than in 2019. Going forward, we are focused on growing revenues on top of this higher base through AI-driven innovation. Sundar highlighted the incredible opportunities underway with AI and the transformative impact it will have on businesses. Already, breakthroughs in everything from natural language understanding to generative AI are fueling our ability to deliver results that drive meaningful performance for advertisers and are useful to users. Take smart bidding, which uses AI to predict future ad conversions and their value, helping businesses stay agile and responsive to rapid shifts in demand. In 2022, AI advances boosted bidding performance, allowing us to move advertiser outcomes down the funnel to drive better ROI and use budgets more efficiently. In search query matching, large language models like MUM matched advertiser office to user quarries. This understanding of human intent of language, combined with advances in bidding prediction, are why business can see an average of 35% more conversions when they upgrade exact match keywords to broad match in campaigns that use a target CPA. Google AI also underlies our creative products, like tech suggestions in Google ads and creative optimization and responsive search ads. We're excited to start testing our automatically created assets better, which uses AI to generate headlines and descriptions for search creative seamlessly once advertisers opt in. Then of course, there's Performance Max, which offers the best combination of our AI-powered systems to our customers. But we're not stopping here, and these examples aren't exhaustive. AI has been foundational to our ads business for the last decade, and we'll continue to bring cutting-edge advances to our products to help businesses and users. Number two, retail. Our foundation for delivering value over the long term includes three pillars: first, we are on a multi-year mission to make Google a core part of shopping journeys for consumers and a valuable place for merchants to connect with users. This means constantly improving our consumer experiences, starting with a more visual, immersive, browsable search. Second, we're empowering more merchants to participate in our free listings and ad experiences. In 2022, we saw an uptick in merchants, particularly SMBs and product inventory coming on to Google, adding more value for merchants remains a top priority. Third, to drive retail performance further, we focus on great ads products, from automation and insights to bidding tools and omnichannel solutions to AI-powered campaigns like PMax, we're helping retailers hit their goals and connect with customers no matter where or when they shop. Two quick insights on PMax, which we upgraded the majority of advertisers to from smart shopping campaigns last year. First, advertisers on average see a 12% uplift from SSC to PMax. Second, it was a success story during the holidays in Cyber Five, its ability to scale and adapt to changing traffic over a volatile peak retail season drove strong results for many retailers, particularly mid-market advertisers. Moving on to YouTube. Despite ongoing revenue headwinds in Q4, we're confident in YouTube's long-term trajectory. Here's how we think about our strategy. It all starts with a creator ecosystem. Creators are the lifeblood of YouTube. In 2022, more people created content on YouTube than ever before, long-form, short-form, audio, podcast, music, live streams. What sets YouTube apart is, we give creators more ways to create content and connect with fans and more ways to earn money than any other platform. More creators means more content, means more viewers, which leads to more opportunities for advertisers. The creator ecosystem and our multi-format strategy will continue to drive YouTube's long-term growth. And to support that growth, we're focused on: number one, ramping Shorts; number two, accelerating engagement on a large screen, number three, investing in our subscription offerings; and number four, a long-term effort to make YouTube more shoppable. First, Shorts. Viewership is growing rapidly, as Sundar said, 50 billion-plus daily views. We're also still pleased with our continuing progress in early monetization. On the creator side, it's been impressive to see the innovative ways creators are using Shorts to introduce their content and extend existing channels. We're focused on providing creators with the best content creation and monetization tools, new, richer features and analytics capabilities that help individualize and optimize their content strategies. It's early days for Shorts, but we're confident the runway is long. Next, connected TV, where users are increasingly watching their favorite creators on the big screen at home. According to Nielsen, YouTube is the leader in US streaming watch time. Advertisers are leaning in. With AI-powered solutions, we're helping brands deliver efficient reach and ROI and address pain points like frequency and measurement. Then there's our subscription offerings. It's clear the future of online video is about helping users seamlessly discover and watch content across ad-supported and premium services. Our goal is to be a one-stop shop for multiple types of video content. That's why we first offered Music and Premium, where 80 million-plus paid subscribers and trialers enjoy their favorite content and music ads-free. We then expanded into YouTube TV, significantly improving on the legacy television experience. And then last fall, Primetime Channels launched, making streaming subscription services available on YouTube on an à la carte basis. Given the potential we see in our subscription offerings, we recently announced a multiyear agreement to distribute NFL Sunday Ticket. As Sundar highlighted, we're excited about the opportunities this will open up. Lastly is our focus on shoppable YouTube. It's still nascent, but we see lots of potential and making it easier for people to shop from the creators, brands, and content they love. I'll close with something I've said many times before. Our success is only possible because of our customers and partners. The reality is we only do well when they do well. Since our earliest days, our revenue share models have been structured around ROI for our partners from Play developers and online publishers to YouTube creators, artists and media orgs around the world. Over the last three years, I'm proud to share that we've contributed more than $200 billion to these ecosystems. We remain as committed as ever to fueling the next generation of businesses, media companies and creativity on the web. On that note, a big thank you to our partners and customers for their ongoing collaboration and trust and to Googlers for their energy, focus, and dedication to helping our users, customers and partners succeed, especially through these tougher times. Thank you, Philipp. For the full year 2022, Alphabet delivered revenues of $283 billion, up 10% versus 2021 and up 14% on a constant currency basis, adding $37 billion to revenues, excluding the impact of foreign exchange. I will briefly cover the main points of our fourth quarter results and then turn to our outlook to give you more context for Sundar's comments on how we're focused on investing for growth as well as on reengineering our cost base for long-term success. For the fourth quarter, our consolidated revenues were $76 billion, up 1% or up 7% in constant currency. Search remained the largest contributor to revenue growth on a constant currency basis. Our total cost of revenues was $35.3 billion, up 7%. Other cost of revenues of $22.4 billion were up 15%. The increase was driven by two factors; first, hardware costs due primarily to $1.2 billion in inventory related charges, and secondarily, to strong unit sales. The charges reflect ongoing pricing pressures and changes in expected future inventory needs. Second, costs associated with data centers and other operations. Operating expenses were $22.5 billion, up 10%, reflecting an increase in R&D expenses, primarily driven by headcount growth, followed by an increase in G&A expenses, primarily reflecting an increase in charges related to accrued legal matters. These increases were partially offset by a decline in sales and marketing expenses, primarily due to lower advertising and promotional spend. Operating income was $18.2 billion, down 17% versus last year, and our operating margin was 24%. Net income was $13.6 billion. We delivered free cash flow of $16 billion in the fourth quarter and $60 billion in 2022. We ended the year with $114 billion in cash and marketable securities. We also repurchased a total of $59 billion of our Class A and Class C shares in 2022. Turning to our segment results, starting with Google Services. Revenues were $67.8 billion, down 2%. Google Search and other advertising revenues of $42.6 billion in the quarter were down 2%. Search delivered moderate underlying growth in Q4, absent the impact of currency movements on reported results. YouTube advertising revenues of $8 billion were down 8%. Network advertising revenues of $8.5 billion were down 9%. Other revenues were $8.8 billion, up 8%, reflecting several factors; first, significant subscriber growth in YouTube Music Premium and YouTube TV; second, strong growth in hardware revenues, primarily from the Pixel family. Offsetting growth in these two areas was a year-on-year decline in Play revenues, reflecting a particularly large foreign exchange headwind in APAC, as well as the impact of reductions of Play Store fees. TAC was $12.9 billion, down 4%. Google Services operating income was $21.1 billion, down 19%, and the operating margin was 31%. Turning to the Google Cloud segment. Revenues were $7.3 billion for the quarter, up 32%. Revenue growth in GCP was again greater than Google Cloud, reflecting strength in both infrastructure and platform services. Google Workspace's strong results were driven by increases in both seats and average revenue per seat. In Q4, we saw slower growth of consumption as customers optimized GCP costs, reflecting the macro backdrop. Google Cloud had an operating loss of $480 million. As to our Other Bets, for the full year 2022, revenues were $1.1 billion and the operating loss was $6.1 billion. Turning to our outlook for the business. In 2022, our year-on-year revenue growth was affected by a number of challenges. First, we faced very tough comps, given the outsized recovery in 2021 from the impact of the pandemic. Second, foreign exchange headwinds grew throughout the year. And third, we were operating against the backdrop of a more challenging economic climate that also impacted many of our customers, and which remains ongoing. Within Google Services, we are focused on investing in the opportunities we see for long-term revenue growth. First, within advertising, we are focused on using advances in AI to drive new and better experiences for users and search, as well as to deliver better measurement, higher ROI and tools for more compelling creative content to advertisers. In YouTube, we are prioritizing continued growth in Shorts engagement and monetization, while also working on other initiatives across our ad-supported products. As to our outlook for other revenues, in Play, 2022 results reflected the particularly sizable impact from foreign exchange, lapping the uplift in user activity during the pandemic and the impact from the fee reductions we introduced. We remain optimistic about the longer term prospects for mobile apps and gaming, although remain more cautious near term, given industry trends. With YouTube subscriptions, we're optimistic about building on its momentum across YouTube Music Premium, YouTube TV and Primetime Channels. In hardware, we continue to make sizable investments, particularly to support innovation across our Pixel family, while working to drive greater focus and cost efficiencies across the portfolio. For Google Cloud, we remain excited about the long-term market opportunity and the trajectory of the business. Enterprises and governments are increasingly turning to us for their digital transformation initiatives across verticals and geographies. While investing for growth, we remain very focused on Google Cloud's path to profitability. In terms of Other Bets, as Sundar mentioned, we will be making a financial reporting change as it relates to DeepMind. To reflect the increasing DeepMind collaboration with Google Services, Google Cloud and Other Bets, beginning in the first quarter, DeepMind will no longer be reported in Other Bets and will be reported as part of Alphabet's corporate costs. I'll now walk you through the key elements of our efforts to deliver a durable reengineering of our cost base in order to slow the pace of operating expense growth. We expect the impact will become more visible in 2024. First, with respect to Alphabet headcount, we are meaningfully slowing the pace of hiring in 2023, while still investing in priority areas. In Q4, we added 3,455 people. As in prior quarters, the majority of hires were for technical roles. With respect to our recent announcement that we are reducing our workforce by approximately 12,000 roles, most of the impact will be seen in Q1. We will take a severance charge of $1.9 billion to $2.3 billion, which will be reported in corporate costs. We will continue hiring in priority areas with a particular focus on top engineering and technical talent as well as on the global footprint of our talent. Second, we have a longer term effort underway to reengineer our cost base in three broad categories; first, using AI and automation to improve productivity across Alphabet for operational tasks, as well as the efficiency of our technical infrastructure; second, managing our spend with suppliers and vendors more effectively; and third, optimizing how and where we work. In the first quarter of 2023, we expect to incur approximately $500 million of costs related to exiting leases to align our office space with our adjusted global headcount look. This will be reflected in corporate costs. We will continue to optimize our real estate footprint. Turning to CapEx. For 2023, we expect total CapEx to be generally in line with 2022, with an increase in technical infrastructure versus a decline in office facilities. Our ongoing investment in technical infrastructure is obviously a critical component of supporting our long-term growth opportunities. Finally, I will point you to our earnings release in which we noted that we adjusted the estimated useful lives of servers and certain network equipment starting in Q1 2023. We expect these changes will favorably impact our 2023 operating results by approximately $3.4 billion for assets and service as of year-end 2022. Thanks for taking my questions. I have two, the first one around AI and sort of the cost of AI. I appreciate all the color about all the AI tools that are to come. I guess, first question is, how should we think about the potential impact on CapEx and the higher compute intensity of these AI tools to come, potentially impacting margins over the next couple of years? And then the second one, Ruth, I really appreciate the conversation about long-term efforts underway to improve efficiency. How should we think about potential impacts of those efforts in 2023 and in 2024? Have you sort of run any sizes of what types of savings we could see roll through the P&L over that period? Thanks. Thanks for the question. So starting on your question about AI and CapEx. As I think Sundar and Philipp both noted, AI is already incorporated in many of our products, products like Performance Max and Smart Bidding and Cloud, as Sundar said. It is more compute-intensive, but also opens up many more services and products for our users, for creators, for advertisers. That being said, we're very focused on further optimizing the cost of compute, and that's across all elements, data center, servers and our supply chain. So we're continuing to invest with a keen lens on the return on that capital. And as I indicated in opening comments, when we look at CapEx for 2023, we do expect it's going to be generally in line with 2022 with an important mix shift. We're increasing our investments in technical infrastructure. And that's not just for AI. That's to support investments across Alphabet, in particular in Cloud as well. And at the same time, we're meaningfully decreasing our CapEx for office facilities. And then, with respect to the overall efficiency opportunities, yes, very keen focus on the three areas that I noted, the -- and one of the key elements of it is using AI and automation to improve productivity and efficiency of our technical infrastructure. We noted that we want to be focused and that we are focused on durable improvements to our expense base. And that's because if you go through the items, the work streams that we have in flight, they take longer to implement, execute. They're in process now, and they continue to build on themselves and continue to provide added upside as we go through time, which is why I indicated you would see more of an impact on 2024 than in 2023. But we're continuing to work through them. Thanks. I have two. For Sundar and Philipp, you both mentioned the NFL in your remarks and the opportunities it opens up. Can you comment and help us define, what do you see is that longer-term opportunity? Why is it so critical to have the NFL? Is this the first of many sports deals to be had? So anything just help us, why this is so important to you? And then just, Philipp, you've said in the past about the scaling of monetization, YouTube Shorts. What are the sticky factors? What's taking you the time to really bring advertisers on? I wonder some of the things you've seen in terms that you've solved to make this a more quickly monetizable product? Thank you. Yeah. Thank you so much for the question. We think there is a lot of great opportunities to differentiate the user and creator experience, with our unique capabilities. It basically means that, every YouTube viewer, who is interested in the NFL can now have one-click access to the full offering of Sunday Ticket, as an add-on package on YouTube TV subscription, and as a stand-alone offering on Primetime Channels. This will be the first time that Sunday Ticket is actually available a la carte for fans. On YouTube TV, we're building the ability for subscribers to, for example, watch multiple screens at once. And on YouTube CTV, we'll be adding new features specific to the Sunday Ticket experience like comments, chats, polls, and so on. On the creator side, imagine all the innovative ways they can create with exclusive NFL content, behind-the-scenes event access and so on. And we're really excited to see, what they'll do across long-form, shorts, live streams and more. On your second question, on the Shorts side, as I said earlier, viewership is growing rapidly, 50 billion-plus daily views, up from 30 billion last spring. We're still pleased with our continuing progress in monetization. Closing the gap between Shorts and long-form is a big priority for us, as is, of course, continuing to build a great creator and user experience, which we're paying a lot of attention to. As on Shorts are now available, it gives you a bit of a sign for the progress. We have video action, app discovery, Performance Max campaigns and via product feed shorts are also shoppable. And again, we're the only destination where creators can produce all forms of content, across multiple formats, across multiple screens and really with multiple ways to make a living. And Sundar shared just yesterday, we brought revenue sharing to Shorts via our YouTube Partner Program. Ultimately, our goal is to make YouTube the best place for Shorts and creators. And that's really what our focus is at the moment. Thanks for taking the questions. One for Sundar and one for Ruth. For Sundar, can you just talk more about how you can bring the AI products to market with the principles and integrity that you talked about and how you can do that without kind of sacrificing quality or trust along the way? And then, Ruth, clearly, the language around reengineering the cost structure in a durable way and everything that went along with it is different than what we've heard in the past. Is there any way at all to help us quantify how you're thinking about these efforts? Thanks. Thanks, Doug. On the AI side, it is a really exciting time. I think we've been investing for a while, and it's clear that the market is ready. Consumers are interested in trying out new experiences. I think I feel comfortable with all the investments we have made in making sure we can develop AI responsibly. And we'll be careful. We'll be launching -- weâll -- more as labs products in certain cases, beta features in certain cases and just slowly scaling up from there. Obviously, we need to make sure we're iterating in public, these models will keep getting better, so the field is fast changing. The serving costs will need to be improved. So I view it as very, very early days, but we are committed to putting our experiences, both in terms of new products and experiences, actually bringing direct LLM experiences in Search, making APIs available for developers and enterprises and learn from there and iterate like we've always done. So I'm looking forward to it. And then on your second question, when we talk about being focused on delivering sustainable financial value, that obviously means that expense growth cannot be growing ahead of revenue growth. And we're focused on revenue upside, as well as durable changes to the expense base to really ensure we have the capacity to invest in that growth. And clearly, the emphasis of revenue growth, there's a lot that's exciting ahead of us within Google Services, all of the AI advancements that are improving advertiser ROI and the search user experience. And more broadly, as we've talked about across the key product areas. And then very importantly, on expense growth, we have a very strong commitment to, we canât keep emphasizing, durably reengineer our cost base, and that will benefit all of the segments across Alphabet. And the key components, slowing the pace of hiring as a starting point, product prioritization across Google, as Sundar said, is key, improving economics in hardware as we focus intently on the Pixel line and cost structure, then using AI and automation to improve productivity for operational tasks, as well as for the efficiency of our technical infrastructure, where we have a number of work streams. Managing our spend, as I said, with suppliers and vendors and then optimizing how and where we work, and you saw part of that with the real estate consolidation, given the slower headcount growth. All of those not only benefit Google Services, but many of those similarly drive greater efficiency across Alphabet. And so, as we've said, in Cloud, we remain very focused on the path to profitability. That's a revenue and margin driver. And then with Other Bets, we're similarly focused on investing sustainably. And so, to go back to it, it's the durable nature of change in some of the elements that I've talked about here where work is ongoing, you start to see impacting in 2023 but to really get full year run rate and the benefit of it, there is work ongoing. And that's why we've emphasized this notion of it comes in and then really you see the run rate in 2024. Thank you so much. Maybe two, if I could. Sundar, for you, continuing on the AI theme, how do you think philosophically about capturing the opportunity set that you see in front of you, given all the investments you've made over the last five-plus years that we've been talking about going back to a lot of Google I/Os versus potentially disrupt the user experience or the monetization arc in your existing product set and striking the right balance between the opportunity set and being disruptive to yourself when you think about looking forward over the next couple of years? And then, Ruth, maybe just following on some of the questions and debates on the cost structure. Obviously, Other Bets is an area where the losses continue to be sort of higher than what some of us think from the outside looking in. But then you showed some improvement in the losses in the Cloud division this quarter. How should we be thinking about the rationalization of the cost structure and aligning costs with opportunity sets across some of the divisions of Alphabet when you think for the medium to long term? Thanks so much. Thanks, Eric. Look, I do think, first of all, we made such a foundational technology and we've been investing not just in terms of research, but actually getting it all production scale-ready. We had already deployed. If you look at the impact, things like BERT and MUM had on search quality, making search multi-modal, driving the usage of products like Google Lens. I feel like we've been scaling up well. In Google Cloud today with Vertex AI, we'd already been bringing AI APIs to enterprises, and they're on a pretty healthy growth path. So we do see secular opportunities ahead, both in terms of putting these APIs out, making sure every developer, every organization in the world can use it. And as I said earlier, we are in very, very early days and I think there's a lot of room ahead. In terms of Search too, now that we can integrate more direct LLM type experiences in Search, I think it will help us expand and serve new types of use cases, generative use cases. And so I think I see this as a chance to rethink and re-imagine and drive Search to solve more use cases for our users as well. So again, early days, you will see us be bold, put things out, get feedback and iterate and make things better. And then in terms of your question about Other Bets investment levels, so as we've talked about in prior calls, our goal for Other Bets is to use our deep technology investments to drive innovation with real potential for value creation. And at the same time, we are very focused on the overall pace of investment and the financial returns. And so what we're really looking at here are what are the opportunities for monetization and commercialization. As I've said on prior calls, there is no monolithic approach across the portfolio, but we are very focused on whether â what's the pace of investment opportunities for monetization and commercialization. And just a bit more with respect to the DeepMind move, to be very clear, we consolidate in Other Bets into Google only when that bet supports products and services within Google or for Alphabet broadly. And you saw us do that, some time ago when we moved Chronicle as an example into combining with our Cloud business and really the cybersecurity offering that is now in Cloud, and that was very effective. With AI, this is obviously an Alphabet strategic priority, and we see huge opportunity ahead, and DeepMind's research is core to that future across the product areas in Alphabet portfolio. And so this reporting change reflects the strategic focus in DeepMind, the support of each one of our segments, and that's why I indicated that beginning Q1, DeepMind financials will be reported within our corporate cost segment. Thank you for taking my question. Just digging into Search, low single-digit growth ex-FX. Can you talk about the pressures there, volume versus pricing or CPCs? What's really driving the slowdown? It's almost back to 2009 recession levels. Just think about that. And then any signs that we're near a bottom? Any stabilization in growth rates you can talk about or how your outlook is for 2023 on that? Thank you. So overall, as we've indicated, we remain very excited about all that we're doing in Search, the utility for all of us. And so that's why you've heard so many comments about the application of AI and what that means for the ongoing opportunity. You had a number of different questions in there. I think one was on volumes. In the 10-K that we'll be filing shortly, you'll see that for the full year 2022, CPCs were down 1% versus last year. And as we've talked about in prior quarters, the change in CPCs can reflect a number of different factors; geographic mix, property mix, all sorts of things. Clicks were up 10% in 2022, reflecting a number of factors, including increased engagement, primarily on mobile devices and improvements in ad formats. But I think overall, we're really excited about what we see ahead. We're not going to predict the global environment. We did say the challenging backdrop is ongoing, and you can see that but we're very focused on what we can control. And I think most important and what we're really excited about here is innovation to help advertisers overall and our cost reengineering that really gets us to align this long-term sustainable value creation. Yeah. Just a question on the hardware business. Pixel's doing quite well, but it seems like there have been issues around other areas with this inventory write-down. So could maybe you guys just talk about, in your mind, the strategic importance of having the wide range of hardware products that you have in that segment as it relates to your overall AI initiatives? Thanks a lot. Thanks, Ross. First of all, very, very pleased with how Pixel has performed through a challenging macro environment. Look, I think our computing portfolio is incredibly important. It's what allows us to -- for us to invest and drive innovation forward. You have to put it all together as a product and ship it. And I think it ends up playing a very, very big role in guiding the ecosystem as well. And increasingly, I think users are thinking beyond phones and thinking through a holistic ecosystem. To give one example, us undertaking Pixel Watch and, as part of that, integrating Fitbit and bringing it to our ecosystem as well, partnering closely with Samsung on wearables. The combination is what has driven over a 300% increase in actives on Android watches ecosystem. So, just to give you a context on that. So, we are very thoughtful about how we are approaching this area. And as Ruth mentioned, across all these areas, too, we are working to drive greater focus and cost efficiencies in the portfolio. Obviously, we work through a challenging supply chain environment as well as a challenging environment on the demand side. And so we'll continue focusing on improving all of this in a durable way. Hey I'll just ask one question on, Ruth, you mentioned a couple of times, getting Google Cloud to profitability. And just talk through how that gets done. You had almost 40% growth in Google Cloud. The operating loss level stayed about the same from 2021 to 2022, so the growth is there. What are the factors that need to be solved in order to get pretty nice profitability out of that segment sort of anywhere akin to what Azure and AWS have been able to show over the years? Thank you. Thanks for the question. So, as we've talked about on prior calls, with Google Cloud, we've really been investing ahead of our revenues, given the growth and the opportunity overall and the desire to ensure that we're equipped, able to support customers across segments around the globe. And so there's been meaningful investment to position ourselves to really have the momentum that the team has continued to deliver. That being said, they are, as both Sundar and I have noted, extremely focused on the path to profitability in every element of that and some of the items that I noted that benefit Alphabet generally most certainly are relevant here for Cloud as well, everything from our efficiency with our technical infrastructure, which we're very excited about, all the efforts that they're doing there and more broadly. So, this has been really to ensure, first and foremost, given the scale of the opportunity and the speed with which it's moving that we're positioned to be present with our customers, to provide them with the analytics, the skills, the capabilities that are needed to build for long-term growth. And we're at a position now where we've meaningfully closed the gap to profitability but still are working through as we continue to invest for growth while narrowing what this is on our march to profitability. Good afternoon, Ruth, can you give us a sense of what you're seeing in Q1? Is this year a little more seasonal than historic? Are you observing any different patterns just over one month into of the year? Can you give us any color in terms of how you're framing this quarter? So I think as you know well, we don't tend to -- we don't provide exit run rates. What we tried to do is give you the context within which we're approaching the overall business and the priorities that we have as we're looking at revenue upside and the growth levers there as well as how to reengineer our expense base to deliver attractive returns. So not really much to add to the comments that you've heard today, and we're continuing to execute across each one of the elements we discussed. Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Jim Friedland for any further remarks. Thanks, everyone, for joining us today. We look forward to speaking with you again on our first quarter 2023 call. Thank you, and have a good evening.
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Ladies and gentlemen, thank you for standing by. Welcome to the Fox Corporation Second Quarter Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I would like to emphasize that the functionality for the question-and-answer queue will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded. Thank you, operator. Good morning and welcome to our fiscal 2023 second quarter earnings call. Joining me on the call today are Lachlan Murdoch, Executive Chair and Chief Executive Officer; John Nallen, Chief Operating Officer; and Steve Tomsic, our Chief Financial Officer. First, Lachlan and Steve will give some prepared remarks on the most recent quarter and then we'll take questions from the investment community. Please note that this call may include forward-looking statements regarding Fox Corporation's financial performance and operating results. These statements are based on management's current expectations and actual results could differ from what is stated as a result of certain factors identified on today's call and in the company's SEC filings. Additionally, this call will include certain non-GAAP financial measures, including adjusted EBITDA or EBITDA as we refer to it on this call. Reconciliations of non-GAAP financial measures are included in our earnings release and on our SEC filings, which are available in the Investor Relations section of our Web site. Thanks, Gabby, and thank you all for joining us this morning to discuss our second quarter results. Our fiscal second quarter continued to build upon the strength of the first quarter to deliver record first half ratings and revenue at Fox. Financially, we delivered a 4% increase in our top line, including a 4% advertising revenue growth. Our EBITDA grew a massive 71%, principally due to strong advertising results from sports and political as well as the impact of exiting Thursday Night Football. Our television segment led this growth and had a truly stellar performance. The station's group posted another record political midterm cycle, with approximately $250 million booked during the first half of our fiscal year. This is higher than our previous midterm record and just shy of our fiscal '21 presidential year record. These are impressive numbers and reinforce the strength and breadth of our station group. FOX Sports was also a key growth driver this past quarter where advertising, pricing and demand remains solid on the back of viewership records for the NFL and for the World Cup. By every measure, FOX Sports is having an extraordinary year. Fox's domination of the fall was led by four of our most prominent rights packages, the NFL, the Big Ten network, Major League Baseball and FIFA, all coming together to produce a truly powerful schedule. For the fourth straight calendar year, FOX Sports is the industry leader in live events, with some notable achievements that bode well for our future, including the current NFL regular season on FOX averaged over 19 million viewers and finished as the number one NFL package on television. America's Game of the Week averaged just over 24 million viewers and is projected to be the most watched program of all of television for the 14th straight year. And our Thanksgiving game this year was the most watched regular season game ever on any network, delivering 42 million viewers. College Football had its most watched season ever on Fox, led by Big Noon Saturday, which was the most watched college football window for the second straight year, while the annual Ohio State-Michigan rivalry was the most watched regular season college game on any network in 11 years. And, of course, the 2022 Men's World Cup exceeded our expectations with average viewership of over the tournament up 30% from the 2018 matches. We can't wait for the Women's World Cup this summer, and we're already getting ready for the 2026 Men's World Cup here in North America. Of course, the strength of the FOX Sports portfolio was on full display this past Thanksgiving, with our traditional Thanksgiving NFL game, USA versus England in the World Cup, a huge college football game and America's Game of the Week, all spread over just four days. The ratings were impressive, but the revenue we generated was even better. We wrote just shy of $250 million over the long weekend. And the strength of FOX Sports has continued into the current quarter on the back of exciting player football and what will be a record sold out Super Bowl this coming Sunday. At Tubi, we had another strong quarter where ad revenues grew by 25% over last year, as we continue to outperform our peers. We have seen increases in almost every major KPI of Tubi, including CPMs, TVT and engagement. In fact, Tubi had its highest quarterly viewership in this fiscal second quarter, with total viewing time up 41% year-on-year, while December alone was the highest TVT and highest user month ever. These trends have continued early into the third quarter as Tubi add viewers and content to the platform. At FOX Entertainment, Rob Wade has settled into his new role as CEO and has already launched two of the season's biggest hits; Accused, ranked as the most watched debut on any broadcast or cable network in two years; and Special Forces: World's Toughest Test is this season's number one unscripted program. Further, FOX Entertainment recently announced a multiyear extension with Hulu of our longstanding content licensing agreement, which bolsters Fox's streaming audience and provides Hulu with a key point of differentiation in a crowded streaming world. Turning to FOX News media, the FOX News channel ended the second quarter as the most watched cable network in total day and in primetime, while maintaining its lead as the most watched cable news network, beating CNN and MSNBC combined in both total viewers and demo in the quarter for both prime and total day. And the FOX Business Network ended the quarter as the most watched business cable network, beating CNBC in total viewers during the business day and market hours for the third consecutive quarter. FOX Nation accelerated subscriber growth over the last quarter and last year and had the best quarter ever for engagement in terms of hours viewed, no doubt driven by brilliant fresh content like Yellowstone: One-Fifty. Looking at the distribution side of our business, we have now completed most of the deals expiring in the first year of our multiyear affiliate renewal cycle. So far the results confirm the confidence we have in monetizing our leading brands and content, and we are pleased that the market recognizes the value that Fox delivers to their offerings. It has been a truly strong quarter, one that showcased the very best of Fox and has shown that the underlying performance of Fox is exceptionally healthy. Looking ahead into this third fiscal quarter, our top line will, of course, be aided by a record Super Bowl. But we are still seeing solid national demand for our news and sports platforms, growth in the Tubi KPIs and we are encouraged to see multiple ad categories pacing strongly positive at our local stations. Before handing the call over to Steve, I want to add some perspective to the Fox story. In the almost four years since the spin, Fox has grown and flourished while pursuing a simple strategy, a core business of trusted brands that delivers consistent and substantial audiences and a portfolio of digital growth initiatives that scale over time. With our focused sports and news franchises, we have taken a differentiated approach, choosing to serve our audience primarily through the pay TV ecosystem, which optimizes the delivery and value of live programming. Our ability to drive our business and execute our strategy is underpinned by a number of accomplishments. For example, our affiliate and advertising revenue growth is driven by our pricing power, reinforced by regularly delivering large scale audiences and uniquely providing exclusive content to our pay TV distributors. This approach has led to nearly $2 billion in affiliate revenue growth and over 1.3 billion in advertising revenue growth since the spin in 2019. By focusing on live content, our core Fox brands have been able to run sharply counter to the broader trend of linear TV. We can see this by looking at consumption trends. Over the past 10 years, consumption of FOX Sports events is up 18% and consumption of FOX News is up 28%. Our portfolio of sports rights is secure and is the best out there, with the vast majority of them locked up for the foreseeable future. Our NFL rights, the single best package in all of television, extends to the 2033 season. We just completed the first year of our Major League Baseball extension and renewed our Big Ten rights, which each takes us out through the end of the decade. We have the European Championships through 2028 and another cycle with our FIFA World Cup rights. These long-term rights provide us the visibility and necessary flexibility to plan our businesses and pursue growth opportunities moving forward. On the digital side, we have made calculated investments in areas where we believe we can add significant value. Sports wagering and advertising video-on-demand are the two best examples of this. We have a firm footing in the sports gambling space. We were the first among U.S. media companies to strike a partnership with a betting operator because we see the potential for sports betting to drive engagement, enhance the viewing experience, and keep viewers coming back to FOX Sports linear and digital platforms. The various financial options and investments we have reflect our view that sports gambling is a long-term play and we are focused on cementing our leadership in this rapidly evolving and high growth sector. Tubi, the number one AVOD player, leads our streaming strategy and with minimal investment when compared to our peers. Revenue and engagement KPIs at Tubi have far exceeded our expectations and are consistently growing in the healthy double digit range since we acquired it almost three years ago. The results at Tubi are proof that our strategy is working and we will continue investing in and growing this platform. Finally, I'd like to address the recent announcement regarding News Corporation. As you know, my father and I reached the conclusion that exploring a combination with News Corp. is not optimal for shareholders of Fox or News Corp. at this time. As such, the special committees were disbanded and no further time or action is being taken on this topic. I've said in the past that I think scale provides flexibility and that it's important to be prepared when opportunities present themselves. The rationale behind considering accommodation with News Corp. was about that; scale, flexibility, synergies, opportunities, great IP and above all creating value for all shareholders. As a CEO of Fox, I have never felt more confident about our strategy, the quality of our assets and the strength of our financial position. This confidence is clearly demonstrated by this morning's announcement to increase our share repurchase authorization to $7 billion, with the immediate deployment of $1 billion of the expanded authorization toward an accelerated share repurchase transaction, while continuing our current in-market purchases. Consistent with our track record, we remain committed to delivering value for our shareholders in a thoughtful and disciplined manner. And we will continue to explore every opportunity to maximize that value over the long term. Thanks, Lachlan, and good morning, everyone. Fox continued to deliver financially in the fiscal second quarter, with total company revenue growth of 4% and 71% growth in EBITDA. Notwithstanding the absence of Thursday Night Football, our overall revenue growth was led by a 4% increase in advertising revenues where in the quarter, we saw continued strength in political advertising of the stations, which when viewed across the full fiscal first half, nearly matched the political record set during the 2020 presidential cycle. Additionally, our sports advertising was supported by a full roster of marquee events and Tubi continued to sustain its high growth trajectory. Our affiliate revenues increased by 1%, with limited renewal activity impacting the quarter and trailing 12 months subscriber losses remaining consistent at approximately 7%. Quarterly adjusted EBITDA was $531 million, up $220 million over the prior year. In addition to our revenue growth, we also have benefited from lower expenses as a result of our early exit from the Thursday Night Football agreement. Net income attributable to stockholders was $330 million, or $0.58 per share, up meaningfully against a net loss of $85 million, or negative $0.15 per share, reported in the prior year period. Alongside our growth in EBITDA, you'll recall that our GAAP P&L is regularly impacted by the change in fair value of the company's investment in Flutter, which we recognize in other net. Excluding this impact and other non-core items, growth was strong with adjusted EPS of $0.48 per share, up $0.35 against last year's $0.13 per share. Turning to our segments. At television, we delivered 6% revenue growth, including a 5% increase in advertising revenues. As you know, our advertising revenues in the December quarter of last year benefited from our coverage of Thursday Night Football. Despite that comparable headwind, we delivered meaningful gains across the segment. This was led by the strong political cycle, the addition of the World Cup at FOX Sports and continued strong growth at Tubi. On the NFL specifically, we also have benefited from strong pricing, a record-breaking Thanksgiving Day broadcast and the timing of Week 18 of the season sliding back into the December quarter. Meanwhile, advertising revenue growth at Tubi was up 25% in the quarter and exceeded $200 million on the back of record levels of engagement. In an uneven programmatic advertising marketplace, we're able to maintain CPMs and are well positioned to deploy more inventory as market conditions strengthen. Television affiliate fee revenues were up 6% as healthy growth in pricing across all Fox affiliated stations continued to outpace the impact from subscriber declines. Other revenues increased 26% in the quarter, primarily reflecting the consolidation of the prior year acquisition of MarVista. EBITDA in our television segment was up $529 million to $256 million as we benefited from the strong political market and realized the anticipated financial benefit from the exit of our Thursday Night Football agreement. These benefits were partially offset by higher costs from the World Cup and the annual growth in rights amortization we see across our sports portfolio. Similar to the levels reported in our fiscal first quarter, our net EBITDA investment in Tubi amounted to approximately $50 million in the December quarter. At cable, we saw revenues generally in line with the prior year. Cable advertising revenues were essentially flat. As Lachlan mentioned, we continue to see meaningful pricing gains in national advertising across our leadership brands. Additionally, our national sports networks benefited from the broadcast of the World Cup in the quarter. However, this was offset by a softer direct response marketplace that impacted FOX News Media. Cable affiliate fee revenues were broadly flat coming in at $1.03 billion. As we have signaled previously, we are in the early days of our next distribution renewal cycle where we expect revenue gains to be skewed towards the television segment. Meanwhile, cable other revenues were up 7% in the quarter, once again led by higher FOX Nation subscription revenues. EBITDA in our cable segment was $353 million compared to the $668 million reported last year, largely due to higher costs of the national sports networks led by the World Cup and postseason baseball. Expenses were also elevated at FOX News Media due to the digital investments at nation and weather and higher legal costs associated with ongoing litigation. Now turning to cash flow, we're consistent with the normal seasonality of our working capital cycle. We recorded a free cash flow deficit of $610 million in the quarter. This typical first half trend reflects the concentration of payments for sports rights and the build-up of advertising related receivables, both of which reverse in the second half of our fiscal year. From a capital deployment perspective, fiscal year-to-date, we have repurchased $550 million by our share buyback program. This takes the total cumulative amount repurchased to $3.15 billion, representing 15% of our total shares outstanding since the launch of the program in 2019. In addition, today, we declared a $0.25 semiannual dividend. And as Lachlan mentioned, this morning, we also announced an incremental buyback authorization of $3 billion, taking our total authorization to $7 billion. We will immediately deploy $1 billion of this expanded authorization toward an accelerated share repurchase transaction, while concurrently continuing with our normal course buyback pacing which would see us repurchase $450 million in additional shares across the remainder of the fiscal year. These meaningful capital return measures are enabled by the strength of our financial position where we again closed the quarter with a very robust balance sheet, comprising $4 billion in cash and $7.2 billion in debt. Ladies and gentlemen, I'd like to emphasize the functionality for the question-and-answer queue. [Operator Instructions]. Your first question comes from the line of Robert Fishman from MoffettNathanson. Please go ahead. Hi. Good morning, everyone. Lachlan, you've talked about the importance of scale in the media industry. So now that the News Corp. deal is no longer being explored, can you just help investors think about what the future of Fox is as a standalone entity in the coming years? And ultimately, do you think it will be better off combined with another strategic or financial partner? Hi. Good morning, Robert. Good to hear your voice. Thank you for the question. So I do think scale is important. And as we look at sort of our growth going forward and enhancing sort of our growth opportunities, I think scale is important, but equally important is the depth of our business. So we think about scale in terms of adding and broadening our sort of business lines, but also the depth of how we engage with our consumers, as we'll be investing I think probably equally in both. If we look at our strategy and how it's performing, I think you just have to look at our results. This quarter, our results have really been truly stellar. I think we stand out in the media landscape, certainly in this country, in terms of the health of our results and that goes to our strategy. We are very focused. We're focused on a core set of brands that are really must-have brands in the United States media landscape. So we like our strategy. We're absolutely focused on it, but we will pursue both scale and further investment in sort of the depth of our engagement with our consumers. Thank you. Good morning. I guess two topics. But one, can you give us some color on the advertising outlook? Obviously, it will be a good, great quarter with the Super Bowl, but just besides that underneath that. And then Tubi, maybe talk a little bit more about the drivers of growth. I think you're adding one of Brothers Discovery fast channels. I think that Steve said that something that you held back advertising. What's going on with demand there? But how many minutes are you selling and how many can you go up to? Hi, Jessica. Good morning. So let me start with the advertising market. And as you mentioned, obviously, I don't believe I'll talk to the kind of the outlook. Advertising, like I know there's a lot of talk about advertising being soft in the market. We're really not seeing that. We're seeing advertising being sort of fluid and money coming in late. So it is different. It's a different environment than we were in a year ago or even a couple of quarters ago. But at the end of the day, we're still hitting our goals and achieving our revenue targets. It's just coming in late. And look, I think to be honest I think that goes to the strength of our portfolio, right? I think being in news and being in sports and the leader in those two categories, I think sets us apart in the advertising marketplace from a lot of our peers. So I don't want to say that that's our strength and certainly our relative strength in advertising is not indicative of the whole marketplace, but it's definitely indicative of our brands and our ability to achieve our revenue goals. So this Super Bowl to talk about some specifics. As I said, the money came in late. So we had some nervous moments. But we will right just shy of gross, about $600 million of revenue next Sunday. We are sold out. It will be a record Super Bowl for us, both in terms of total revenue and obviously in what we achieve for each spot. Ex the Super Bowl, if you back out of the Super Bowl, we are still up in national advertising revenue. And so I think that, again, bodes to certainly the strength of our brands and so the power of Fox. If I look at local stations, Jessica, categories, we're really happy to see a lot of categories back into robust growth. Auto is pacing up almost 30%; health, up 30%; pharmaceuticals, up 45%; travel, up 60%. And, of course, this is offset with categories like crypto money exchanges, I think down 97%. And so I'm still trying to find who the 3% less that's advertising. So there are some sort of swings and roundabouts, but the key categories are back in a very strong way. So that's probably more than you wanted on advertising, Jessica. On Tubi, look, all of our -- well, I'd say almost all of our KPIs are at record highs. I think December, the end of December was actually a particularly strong year in terms of TVT and engagement. And what we'll see is we'll see revenue. Revenue is up 25%, but I think what we're really pleased about is when your engagement and your total viewing time is up by more than that. As the market strengthens, we expect certainly more revenue to flow and follow that audience that we've garnered in Tubi. And all of the major studios continue to work with us. I think we're seeing benefit of people realizing that their libraries, they're sort of deep libraries, we can help them monetize those libraries. And so we're seeing -- you mentioned the Warner Brothers' deal, we're seeing everyone work with us, which is why Tubi has the biggest television movie library in streaming anywhere in the world. So we're really very, very pleased with it. Hi, guys. Thanks. I wonder if you could talk about wagering. Lachlan, you discussed cementing your leadership today. And last quarter, I think you discussed potential volatility in that market. Where do you see the market going at this point? And how ideally would you like to see Fox involved? Thanks. Look, I think we have a âweâll talk about the market, we remain incredibly excited and optimistic about the wagering market going forward in this country. Obviously, it will take some more time for further states to be licensed and you'll start to see a shift from wagering advertising and marketing shift from local markets to national markets. We're obviously incredibly well-positioned on both sides to capture revenue from the wagering operators as they battle it out for us, supremacy in each of their markets. So we've done extremely well at the local stations and I think we'll see that shift to the national markets where obviously FOX Sports and to some extent FOX News and the entertainment network will continue to capture that revenue. So we are incredibly optimistic about it. I think from a corporate perspective, we're also the best positioned media brand to continue to partner with our wagering partners, particularly, obviously, the 18.6% option that we have in FanDuel is a fantastic position to be in. We have about a 10-year option. I think we have about eight years to go on the option. And Flutter will be our partner for a long time. So we feel very well in terms of where we're positioned. Ask when Tom Brady is joining the Fox booth, so it might as well be me? And if you don't want to answer that one, maybe just a couple of strategic questions, picking up on Phil's. What do you guys think the value of FOX Bet is? And what could that business or that asset be over the longer term in sort of the bull case? And then you extended with Hulu not a huge shock, but just any comment on sort of whether that's enough of a needle mover financially or how robust the market was for that content because obviously that's a lot of licensing revenue potential. Just wondering if you could comment a little bit on how you approach that renewal and the outcome. Thanks, Ben. I'll answer the Tom Brady part of the question and maybe the Hulu part, I'll let Steve talk to the value of FOX Bet and importantly the -- obviously the Flutter or FanDuel option. I won't be the first to congratulate Tom on a stellar career and congratulate him on his retirement. The whole FOX Sports team and Fox Corporation overall is really excited to have Tom join the team here. That will be in the fall of next year, '24. He is going to take a little bit of time to decompress, which he well deserves after such a stellar career. Let me just quickly talk to Hulu. The Hulu renewal was very important to us and also very important to Hulu. The kind of symbiotic relationship that we have with Hulu, it grows in significance as viewers more and more watch our content on a sort of catch-up basis. So when we look at our hit shows, we're not monetizing them in the first window in the live or even live plus same day window, as you all know, in the same manner that we used to. And so being able to capture the engagement after live and same day or even live plus seven days is critically important. And our Hulu deal really allows us to do that. For Hulu, it gives them tremendous content the next day and they are able to, I'd say, sort of benefit from or piggyback on the marketing spend and the reach that we give all of our content as we push it out. So it works very well for Hulu and it works very well for us. Steve, do you want to talk to the FOX Bet value? Yes. Ben, listen, on FOX Bet, I think we take a step back and just see how our betting in totality in terms of the investment. So FOX Bet is one component of it, and it's an important component. We'd like to see it in more states than the four states it's in at the moment. But it's being operated by Flutter who bear the investment cost of that asset. And so in some respects, we're behest in terms of how they develop that. But we look at it and it's a clear marker for success in terms of FOX Bet Super 6 for us in terms of the way we've developed that and cross promoted that with our stations. And also it's not just FOX Bet sports betting, but also includes the PokerStars non-sports betting assets. So it's an important asset. But when we look at the totality of our betting position, we increasingly think that the option that we have over FanDuel is the one that's really important for us. It's the leading market player. We have the opportunity over a long, long period of time to take a very, very new stake in a player that's sort of head and shoulders market leader right now. Thank you. Good morning, Lachlan. Where are you with the life cycle for your digital investments? I'm just sort of curious, when I think about Tubi, pretty consistently you've been talking about growth every quarter on these calls and engagement viewer and adding more content. How much more content is there to add? How much more growth is there to drive at Tubi? And same question on the Fox digital side. Thanks. Thanks, Doug. So in terms of the life cycle for sort of digital investments, I think the reality is there are teenagers that are putting on muscle and growing pretty spectacularly. So if I look at Tubi, as an example and you think about the key metrics we've talked about now for several quarters is the total viewing time, total viewing time is -- it's not equivalent, but it's like ratings. We continue to grow to total viewing time. The revenue that we're seeing follow that, and we have 25% up in this quarter, which I think is pretty fantastic. But the opportunity is much higher, right? Because the total viewing time has grown faster at a much bigger rate, a faster rate than the revenue has. So already within Tubi and when we look at these metrics, there's a ripeness for very significant revenue growth. So digital investments are adolescents, but they're a huge upside as they get older. And then when you talk about Fox digital, the digital assets, I was pretty amazed. We went through some numbers yesterday, just things like the local TV stations. The digital advertising business now at the local TV stations is really becoming quite significant. So when we look across our whole portfolio and we push further into our Web sites, our fast channels, our apps, this revenue is becoming very significant and even in parts of the company that you wouldn't expect. So we believe the future of our business is obviously digital and we're making that transition pretty rapidly and very robustly. First question on the balance sheet. Investors are definitely going to like the accelerated repurchase, but you still have $4 billion on the books, relatively low debt. Just maybe talk about sort of the usage of that cash? How much cash do you need on the books and maybe what the M&A environment looks like out there and what kind of opportunities do you see? And then on the affiliate line, you said you haven't seen the impact of the renewals and the [indiscernible] that you expect you'll see over the renewals you'll expect to do over the next couple of years. When do you expect to sort of get into the sort of the wheelhouse and see those lines really start to turn from the renewals? Thanks. Thanks, John. Steve jump in at any point. No, I'll start. Thanks, John. So first of all on the balance sheet, I think we do have an enviable balance sheet. We're going to deploy our capital as we have in a very disciplined manner and entirely focused on shareholder returns for all of our shareholders. That will be both as evidenced this morning with our accelerated share repurchase, which we think is a great sort of mechanism strategy to return some of this capital to our shareholders. But we will also, obviously, be looking at M&A and other opportunities to use to deploy our capital against. We don't have anything on the table today, but we are I think in a strong position to capture opportunities when they present themselves. And obviously, there are other companies in our sector that are not in a greater position and there will be things that we will I'm sure cast our eyes over. So we do expect the M&A will be part of -- a more important part of our toolkit as we deploy capital, but we have nothing on the table in front of us today. Before I go on affiliates, Steve, do you have anything to add there? John, I think if you fast forward, like if you fast forward to the end of the fiscal based on the ASR and our regular share repurchases, we'll have done $4.6 billion in share repurchases by June 30, call it. You compare that against how much we've deployed in M&A, which on a gross basis is about 1.5 billion on a net basis after asset sales is probably $500 million, $600 million. So we've been super balanced, super disciplined on M&A. And if anything, the SKU so far in the life of Fox has been towards capital returns to shareholders. So we're going to continue to be thoughtful in the way we deploy capital. And then on the affiliate question, John, I think we are now through for this fiscal year, all of our significant -- maybe one, but all of our significant affiliate renewals will start again in the very beginning of the next fiscal year, this summer with some important renewals. But for this fiscal, we're through with them. What we've seen in the renewals this past year is the importance really of our Fox brands with our affiliate partners and the pricing power that we have with them. And I think that's been pretty, very evident in all of our renewals to date. More and more, like when you look at the split between our cable affiliate revenue and our television affiliate revenue, we really negotiate those together. So we've been focused on the television half of that ledger, but you have to think about the strength of these brands as a combined strength and where we in the marketplace find are kind of best ability to push rate is where we do, and that's been really on the television side, the retransmission side of that ledger. But it's the strength of the portfolio that allows us to do that. So yes, so we are looking forward to continued success in our affiliate renewals as we get into the next fiscal year. At this point, we are out of time. But if you have any further questions, please give me or Dan Carey a call. Thank you again for joining us today. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.
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Good morning ladies and gentlemen and welcome to the Zimmer Biomet fourth quarter 2022 earnings conference call. If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded today, February 3, 2023. Following todayâs presentation, there will be a question and answer session. At this time, all participants are in a listen-only mode. If you have a question, please press the star followed by the one on your pushbutton phone. I would now like to turn the conference over to Keri Mattox, Senior Vice President, Chief Communications and Administration Officer. Please go ahead. Thank you Operator and good morning everyone. I hope you are all well and safe. Welcome to Zimmer Biometâs fourth quarter 2022 conference call. Joining me today are Bryan Hanson, our Chairman, President and CEO; EVP and CFO, Suke Upadhyay, and COO Ivan Tornos. Before we get started, Iâd like to remind you that our comments during this call will include forward-looking statements. Actual results may differ materially from those indicated by the forward-looking statements due to a variety of risks and uncertainties. Please note we assume no obligation to update these forward-looking statements even if actual results or future expectations change materially. Please refer to our SEC filings for a detailed discussion of these risks and uncertainties in addition to the inherent limitations of such forward-looking statements. Additionally, the discussions on this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures is included within our Q4 earnings release, which can be found on our website, zimmerbiomet.com. All right, great. Thanks Keri, and thanks to all of you for joining us this morning for the call. Weâve really got three sections for the call this morning. First, Iâm going to talk briefly about our fourth quarter performance and spend a few minutes on our teams, what I just define as solid execution, as well as our innovation and drivers for continued strong performance. Then for the second section, as usual, Suke will provide more detail on the quarter itself and very importantly our 2023 guidance and expectations. Then of course, weâll close things out by addressing any questions that you might have. Before we get started, I wanted to take a minute to thank really the ZB team, just the full ZB team not only for their work in making Q4 another successful quarter but also for their resilience. The innovative thinking and dedication to getting the job done throughout all of 2022, even in the face of very real adversity, thereâs no doubt in my mind that this team is the engine that is driving us forward, so again thank you. I can tell you that Iâm very proud to be on this journey with you. Now as we turn to Q4 results, know that each and every one of you made the quarter happen, and I can tell you it was a solid quarter. We again saw better than expected growth driven by continued procedure recovery, strong execution, and a solid momentum with our new innovation, and as expected, we also benefited from some favorable comps in the quarter. Inside of this, we saw another positive quarter of year-over-year momentum in large joints with our overall global hip and knee business growing more than 8% and 10% on an ex-FX basis, and our overall set category grew in the high single digits driven by strong performance in our business growth drivers, which as we said before, are supports, CMFT, and upper extremities, as well as the expected tailwind from BBP comps in our trauma business. That said, we are clearly seeing overall market stabilization, but our fourth quarter execution and procedure recovery is still set against a macro backdrop that is challenging and fluid. Foreign currency has improved but remains a challenge and supply, inflation and staffing pressures continue. In fourth quarter, our team was once again able to navigate these challenges, flexing what I would just define as a muscle memory that I think, fortunately or unfortunately, is a bit unique to ZB and has served us well over the past year during 2022. But make no mistake - the challenges are real and theyâre ongoing, but regardless of this environment with COVID mainly in the rear view mirror, I have confidence that the ZB team will continue to deliver. Our culture, our strategy, innovation and execution are coalescing right now, driving tangible momentum and importantly belief from the team, and as a result confidence in our business continues to grow. Let me just give a few examples from Q4. In the quarter, we announced the approval of our new cementless knee form factor which is adding to our Persona family and strategically rounding out that portfolio. The first procedures have been completed with this new keel design, and the feedback, as expected, has been very positive. We continue to belief that our cementless knee penetration will grow significantly and that this differentiated, premium product can really accelerate that growth. Itâs early days with full launch planned for the middle of the year, but make no mistake, this is a real growth driver for our knee franchise. This launch builds on other recent product launches, like hip insights and our Identity shoulder system introductions, bringing now our total to more than 50 new product launches from 2018 through 2022, and importantly the largest majority of these launches came in markets we see growing in the mid single digits or better. Thatâs really important, being launched in markets that we see growing in the mid single digits or better. This strategic prioritization and output from our innovation pipeline has helped ZB more than double our vitality index over that time, and very importantly increase our revenue in faster growth markets and sub-markets, which of course drives positive increases in our weighted average market growth. That momentum continues. We expect to launch another 40-plus products between now and the end of 2025, once again with the majority of those launches in 4%-plus growth markets. This will drive further increases in our vitality index and weighted average market growth, and most importantly bring real and meaningful innovation to the patients and customers that we serve. So what I know for sure is that our current momentum, very robust new product pipeline, and our strengthening balance sheet focused on accelerating our portfolio transformation positions ZB well for the future, and as a result, I feel increasingly confident about ZBâs ability to transform our business, drive growth, deliver value, and achieve our mission to alleviate pain and improve the quality of life for people around the world. With that, Iâll turn the call over to Suke for a closer look at Q4 and again our expectations for 2023. Suke? Thanks and good morning everyone. For todayâs call, Iâm going to focus on three topics: first, our fourth quarter results; second, how that performance and recent macro trends translate into our 2023 guidance; and third, Iâll provide a brief update on our long term financial priorities. With that, Iâll turn to the fourth quarter results. Unless otherwise noted, my statements will be about the fourth quarter of 2022 and how it compares to the same period in 2021, and my commentary will be on a constant currency and adjusted continuing operations basis. Net sales in the fourth quarter were $1.825 billion, an increase of 2.7% on a reported basis and an increase of 8.3% on a constant currency basis. As previously noted, we had a selling day headwind of 150 to 200 basis points that impacted each category at about the same level. U.S. sales grew 6.2%, driven by strong elective procedure recovery and commercial execution, especially in our knee and hip businesses. In addition, the U.S. business saw strength across our three priority areas within SET. International sales grew 11.1% driven by strong procedure volumes across most markets in EMEA and APAC, in tandem with lighter comps and continued strong commercial execution. EMEA performance was driven by recovery in developed markets and continued strength in emerging markets. APAC was impacted by COVID-19 surges and lockdowns in China that were broadly offset by strength in other markets. Now turning to our business category performance, global knees grew 10.2% with U.S. knees up 10.8% and international knees up 9.3%, with strong performance driven by knee procedure recovery across most regions and an easier comp outside of the U.S. Continued global traction for our Persona knee system, including both Persona primary and revision in the U.S., and continued increase in Rosa procedure penetration and pull through. Global hips grew 8.4% with U.S. hips up 9.5% and international hips up 10.8%, driven by strong international procedure recovery and easier comps outside the U.S., continued traction across hip products including the G7 revision system, and Avenir Complete primary hip, which is focused on the direct anterior surgical approach, and lastly continued solid Rosa pull through in the hip category, especially in the U.S. The sports extremity and trauma category grew 7.6% and was impacted by continued strong performance across our key focus areas of CMFT, sports medicine, and upper extremities. SET was also impacted by a comp tailwind from China VBP that was partially offset by reimbursement changes in restorative therapies. Moving to the P&L, for the quarter we reported GAAP diluted loss per share of $0.62 compared to GAAP diluted loss per share of $0.40 in the fourth quarter of 2021. The change was driven by higher revenues partially offset by a goodwill impairment in EMEA as a result of macro factors. On an adjusted basis, diluted earnings per share of $1.88 represented an increase from $1.79 in the fourth quarter of 2021. Adjusted gross margin was 71.7%, bringing full year gross margin to 71.2% or about in line with full year 2021, despite significant headwinds from inflationary pressure. Our adjusted operating expenses were $791 million, an increase versus the prior year due to inflationary pressures in tandem with higher investments into R&D and commercial infrastructure to support new products. For the year, overall opex was flat to 2021 with an increase in R&D and lower SG&A. We remain disciplined in realizing efficiencies while investing in our priority areas and offsetting headwinds. Adjusted operating profit margin for the quarter was 28.3%, up slightly from the prior year, bringing total year operating margins to 27.3%, ahead of full year 2021 despite macro headwinds. The adjusted tax rate was 16.9% in the quarter, slightly higher than our expectations due to certain one-time discrete tax items. For the full year, the adjusted tax rate was 16.5% and in line with our full year guidance. Turning to cash and liquidity, operating cash flows were $244 million and free cash flow totaled $115 million for the quarter, bringing our total free cash flow for the full year to $910 million. We continued to reduce our net debt by approximately $150 million in the fourth quarter, excluding the effect of foreign currency, and ended the quarter with cash and cash equivalents of approximately $375 million. Moving to our financial outlook for 2023, weâve based our projections in the following key assumptions. We expect to experience procedure cancellations and staffing challenges, but the impact will be less acute than what we experienced in 2022. Supply chain headwinds will continue throughout the year but with improvement in the second half of â23. Pricing headwinds are expected to be slightly better than our historic average of 200 to 300 basis points. Inflationary pressure will remain stable to 2022 exit, and an expected adjusted EPS dilution of about $0.05 to $0.10 due to our acquisition of Embody in the first quarter of 2023. Against this backdrop, our expectations for the full year â23 financial outlook are reported revenue growth in the range of 1.5% to 3.5% versus 2022, an expected foreign currency exchange headwind of approximately 150 basis points resulting in revenue growth of 3% to 5% on a constant currency basis, and adjusted diluted earnings per share in the range of $6.95 to $7.15. Inside of that guidance, at our midpoint we expect adjusted operating profit margins to be flat to slightly up compared to 2022 levels. We also expect net interest and other non-operating expenses will be about $190 million primarily due to higher interest rates. Our adjusted tax rate should be broadly in line with 2022 and total shares outstanding are expected to remain in line with full year 2022 average fully diluted shares outstanding. Finally, we expect our free cash flow to be in the range of $925 million to $1.025 billion. In terms of cadence through the year, we expect that the constant currency revenue growth rate for the first half will be slightly higher than the growth rate in the second half, and we do expect choppiness by quarter. Q1 is projected to be our highest growth quarter due to easier comps and will be followed by the fourth quarter, driven by improved supply and innovation building throughout the year. Q2 and Q3 will be lighter quarters given tougher comps. Lastly, we donât expect any material day rate impact of full year results; however, Q1 and Q4 will benefit by about 100 basis points of tailwind that will be offset by headwinds in Q2 and Q3. In summary, we delivered accelerated growth in 2022 with a margin profile that is better than â21 as we overcame headwinds while investing in our priority areas. We navigated a number of macro challenges and delivered on our commitments to all of our stakeholders. As we look forward to 2023, while the environment remains dynamic, we see a path to delivering solid growth and earnings performance with robust free cash flow. To close out, let me make a few comments about our financial priorities moving forward. Weâve made significant progress over the past few years in strengthening our balance sheet through improved financial performance and ongoing reductions in debt. This ultimately provides ZB with greater strategic flexibility as we look to transform our portfolio with a focus on increasing our WAMGR and driving improved long term growth. We will remain committed to our investment-grade rating and will continue to look at ways to accelerate profitable growth with a focus on achieving our mission. Iâm so very proud of the ZB team for their perseverance and dedication throughout 2022 and Iâm excited about what we can accomplish in 2023. Before we start the Q&A session, just a quick reminder to please limit yourself to a single question and one follow-up so that we can get through as many questions as possible during the call. Bryan, maybe starting with guidance, if I think back to third quarter, you were asked whether 4% organic growth was an appropriate way to think about â23, and at the time you said â23--you know, you didnât see â23 as normal. But then in January, you said weâre in a better place, procedures are kind of normal and weâd expect that to continue in â23. So as we sit here today with guidance at, you know, 4% constant currency at the midpoint, just help us understand kind of that shift thatâs occurred in the fourth quarter that gives you a more optimistic view of the year ahead. Really, the key to my question is, this 4%, do you view that as a floor, do you view that as realistic or aspirational, and just help us kind of characterize where youâre sitting in guidance and the year ahead. Got it, thanks for the question, Ryan. Maybe what Iâll do is, Suke, you could provide color around the way weâre thinking about guidance, because thereâs a lot that goes into it. We still donât believe itâs a normal year, obviously - thereâs a lot of puts and takes on either side of the equation, but you could walk through those, perhaps, and then I will give you some color around what weâre seeing so far in January and how thatâs making us feel as well. But why donât you go ahead and start? First of all, Iâd say we had a really good close to the year. We ended top line, bottom line, and free cash flow at the top end of our third quarter guidance, so a really strong finish. There was a number of variables behind that, but the key one is really about execution, so feel really good about the momentum that we have. As we move into 2023, some of the key variables that underpin our guidance, I talked a little bit about them on our--in the scripted remarks. The first is around stabilization related to case cancellations, staffing shortages and things of that nature. We expect that to continue to improve throughout 2023. Weâre not completely at normal markets - there are still some underlying dynamics impacting the overall market, but things are definitely improving and we expect that to continue to work through the rest of this year, so procedure recovery for sure in â23. The other thing we have to think, though, to balance that out is weâre continuing to see supply challenges. We saw those in the fourth quarter. Our supply chain team as well as our commercial teams responded incredibly well to those challenges, but weâre assuming that those supply challenges remain at least through the first half of this year and begin to improve in the second part of this year. But as we put all that together, weâve got a lot of confidence against our full guidance range. Weâre optimistic about where trends are going and, like I said, weâre really excited about where the business is headed. Yes, clearly a lot of variables that are still moving, but if I just think about kind of the here and now and just look at what weâve already accomplished in January, Iâd just say it was a really strong start to the year. Again, weâre still looking at those variables, but when I think about the things that we can control, things around execution or innovation, theyâre going in the direction we want. When I think about the things we canât control, itâs procedural recovery and supply challenges. Those are also coalescing in a nice way, so I guess suffice to say based on those things, the momentum right now, and itâs early days, but the momentum right now in 2023 is feeling really good. Very helpful. Then if I could ask a follow-up, Suke, the streetâs margin expectations going into today for operating margins were essentially flat, maybe up 10 basis points, so really in line with your guidance. But just maybe walk us through the levers that you think are at your disposal here on the operating margin line that could maybe move that up a little bit higher than where weâre starting today. Yes, I think one of the key drivers is obviously going to be revenue growth, right, so if we continue to navigate the challenges around supply as we have been and as we saw in the fourth quarter, if we continue to see stabilization in the market and start to trend towards the upper half of the range, clearly that will help drive some margin expansion as we continue to leverage our overall cost base. Beyond that, itâs just the normal block and tackling that this company has gotten accustomed to over the last four or five years. Weâre going to continue to drive sourcing improvements around site optimization, six sigma procurement. Iâll tell you, the commercial team has really stepped up. Iâve never seen a focus on mix, on simplification of the supply chain and SKU rationalization, on pricing before in the companyâs history, so I think weâve made really good strides from a commercial perspective, which I think could be some leverage to the potential upside. Then across SG&A, weâre still in the early innings of fully leveraging our shared service operating model, which we started through the pandemic, so I think we have a number of things at our disposal that can help either expand margins or de-risk our margin aspirations in a downturn, so feeling really good about what the overall team has been able to accomplish and where we can go with this. I guess Iâll start with the recon market. It looks like it grew about 8% in 2022, and this is well above the 3% to 4% that we were seeing prior to COVID. What do you think is driving this above-normal growth? It seems like itâs got to be the COVID backlog, because I donât think pricing has been all that strong, but maybe you could comment on that, and do you think that this type of high single digit market growth can carry into 2023? Yes, so I would say that probably the biggest reason that youâre seeing that outsized growth overall, I wouldnât define it as backlog consumption. I donât believe weâve started to consume the backlog. I would define it more as comps, we just had easier comps. Iâd maybe call that procedure recovery versus the prior year, so that to me is not something thatâs necessarily sustainable but it was just easier comps, being that we had more pressure last year. Pricing was better, though, across the board, whether itâs our company or other companies. We did a better job in pricing as a group and as a result of that, that buoyed us as well. Sukeâs talked before about what our expectations are in pricing as we move into 2023, but Iâm sure weâll get another question around that, so those are probably the two biggest things that wouldnât be as sustainable. But make no mistake, I feel like the market is strong, and some of the things that we look to that can buoy sustainably the market growth is innovation, and innovation adoption right now in orthopedics is really promising, not just the typical innovation but technology innovation that absolutely can drive the share of wallet or mix benefit you get with that new innovation. Suke, FX of negative 1.5%, can you tell us the rate youâre using - that seems a little high, and the EPS flow-through? Youâre right - we pegged FX as a headwind year-over-year at 150 basis points. Thatâs an improvement from our original commentary back on our third quarter call. Originally, we were thinking 300 basis points, and so we did see some moderation of the dollar at the very back end of 2022 and early part of â23, so that drove the improvement. The way to think about it is we use recent rates. We look at the full cadre of all of our currency exposures. One of the things to recall, remember that about 40% of our revenue is foreign currency exposed. Half of that is euro and yen, right, so the other half is a lot of other currencies that you have to take into consideration. When we aggregate all that, weâre at 150 basis points. Hopefully we continue to see things improve throughout this year and things turn favorable, but for right now, thatâs our latest estimate. The flow-through on that, we expect it to be about 20% to 30% down to earnings. Thatâs a little bit less than what we said last year, and as I said last year when we quoted 30%, there are a lot of variables that can affect that but itâs still a reasonable drop-through to historical norms. So again, 150 basis points based on recent rates, euro, yen making up about half of our foreign currency exposure, and the flow-through being about 20% to 30%. Thatâs helpful, and then on SET, it was about 2% in 2022. Can you help us think about the growth thatâs embedded in the 4% constant currency at the midpoint and how youâre thinking about the different sub-segments there? Thanks for taking the question. Yes, so if we think about overall SET, I think what youâre asking, Larry, is how we view that business in an undisturbed market going forward. Is that kind of what youâre asking? Yes, so when we come into 2023, even though itâs not going to be a normal market, weâre still thinking about SET as being able to be a mid single digit grower. Thatâs the way weâre looking at that. In an undisturbed market, we would think the same thing. Remember in the first half, though, weâre going to be a bit pressured still by the restorative therapies group and that change in reimbursement, but even with that throughout the year, we believe that that segment can grow in the mid single digits. The key drivers for that, because we donât treat all the businesses the same from an investment standpoint, will be our growth drivers, which would be upper extremities for us, our sports business, and in certain portions of our CMFT business. Hi, good morning, and congrats on a nice quarter. I wanted to ask about the robotic shoulder opportunity. I think before youâd said youâd be first or second to market. Now that Stryker has given more definitive timelines, I wonder if you can kind of clarify if youâll be first or second, or some timing there, and how youâre thinking about the opportunity from a mix and share perspective. Hey Travis, good morning - Ivan here. I donât know where they are, we donât pay attention to where competitors are. We pay attention to where we are in the process. Iâll tell you frankly, Iâll be very surprised if weâre not first to market, given where we are in the development cycle. My expectation remains that weâre going to be ahead. The most important part is not just the speed in the actual launch, itâs the quality, the features and benefits that we have in the platform. Given the mix of developers that we have involved in the project, I do think itâs going to be transformational for our platform, so that would be my answer. Okay, and then--thatâs fair, and then a quick clarification. On the 3% to 5% constant currency growth, how much of the revenue is coming from Embody in that? Then Bryan, a question for you on M&A. Just kind of curious what your willingness is in 2023 now that markets are a little more diversified beyond electives, or if 2023 is more of a tuck-in year from an M&A perspective. Thank you. Sure. Maybe Iâll just start with the Embody thing. Thatâs a relatively small acquisition. I would probably think more about that as a product launch, so itâs not overly material but itâs a very attractive subspace of sports. As weâre building our that commercial channel, itâs one of those things you really need in your bag to attract talent to that commercial channel, so itâs important to us but I wouldnât look at that as a significant or a material impact to the year, only in the sense that weâre going to be able to bring that channel in place and get good momentum in sports overall. From an M&A standpoint, yes, we are clearly in Phase 3 of the transformation of the company, which Iâve clearly talked about looks at portfolio transformation, focused on getting more revenue in faster growth markets in its simplest form, and thatâs exactly what weâre going to concentrate on. The fact is as our balance sheet continues to strengthen, our flexibility here, strategic flexibility goes up, and we will look at acquiring technologies that make sense from a mission standpoint for the company, that we see a path to leadership in, that we think will increase our weighted average market growth because thatâs important for sustainability, and we see a path to be able to increase growth rate and EPS. Iâve said before there are three areas that weâll look at for acquisitions, mainly kind of smaller to midsized deals, but weâd look at things that would enhance our position in recon in those faster growth sub-markets - that could be robotics, data, or the ASC setting. In orthopedic area diversification, that would be in faster growth sub-segments like sports or CMFT or extremities, and then as you said, those things that might be outside of orthopedics that would help us diversify the business away from elective procedures but also in fast growth markets. All of those things are on the table right now, and again as our balance sheet strengthens, our ability to action that obviously also increases. Weâre going to stay disciplined, thereâs no question about it, but we are clearly on the hunt for targets that make sense in those ways. Maybe Bryan, just to start, a question for you. Youâve talked about your confidence in the business, and I understand that your thinking is this yearâs not normal relative to pre-pandemic times, but itâs been a while since you last discussed long term plans. Iâm just curious how youâre thinking about the business longer term and your confidence in gross margin expansion opportunities ahead. Just anything that you could help frame investors with in terms of thinking about the business from a margin or growth perspective. I would say our teamâs confidence is as high as itâs ever been, quite frankly. Just think about that in the short term - it is not a normal environment. There are a lot of challenges that weâre having to deal with from a supply chain standpoint. But I do go back to what I said in the prepared remarks - I have a lot of confidence in this team because of the muscle memory we have over the last five years of dealing with a lot of adversity. So just in this moment of a non-normal environment, I would rather have this team than any other team because I believe they can fight through those challenges, and theyâve proven it. Thatâs number one. Number two, outside of those challenges, weâre just hitting our stride. From a momentum standpoint, weâve had a lot of kickoff meetings here recently - I love to go to those meetings. You get a real sense for how people are feeling, just having a conversation with sales reps, thatâs where it all starts. The momentum there, the confidence there, the belief there is as good as Iâve ever seen it, so all those things add up to me to say, particularly in a normal environment, weâre in a good place and I feel confident that we can continue to deliver the innovation and drive real revenue growth. I donât want to give too many views of what the future revenue growth of the company will be, but know this - as we increase the weighted average market growth of the company, as we get to a 4% thatâs organic that we can commit to and sustain, that wonât be good enough. Weâll continue to look at portfolio transformation to drive it north of that, but right now I feel really good. I feel really good about the confidence that the team has and I feel really confident about the teamâs ability to drive the results that we just guided to in 2023. Yes, Iâll actually level up from margin expansion and talk a bit more about how we think about it, which is earnings power inside the company. Our goal is to drive a leveraged P&L, right, and what do I mean by that? Weâre looking for earnings growing faster than revenue, and as we approach those revenue outlooks that Bryan just talked about, we see a very clear path to being able to do that. Now, margin expansion will be a key building block in that, but itâs not the only one, right? Obviously sales leverage and then our ability to continue to leverage our interest rate, as well as tax, there are a number of levers at our disposal to drive that earnings power higher than revenue. Inside of that for margin, we continue to have the same variables that Iâve been talking about for quite some time, and the company has continued to show improvement on all those fronts, whether itâs pricing, manufacturing simplification, cost improvement, SG&A improvement - I mean, just look at our SG&A this year, weâve been flat year-over-year while driving expansion in a number of areas in commercial infrastructure, so weâve shown that we can do this. Iâm confident we can continue moving forward and start to really see that durable revenue expansion that Bryan talked about. Iâm very confident we can drive earnings power faster than revenue. Great, thanks, and just another question, we had a survey out with hospital CFOs and they kind of pointed to orthopedic robotics being a key capital spending category for this year. Just curious what youâre seeing in the environment in terms of hospital purchases, and it would be great to really hear what youâre seeing or having the most success in Rosa, whether itâs greenfield placements or multi-system orders, hospital versus ASC, and maybe what your share shift has been within Rosa accounts and cementless mix. Thanks for taking the questions. Iâm happy to take that one, Drew. Iâll tell you, Q4 was solid both from a Rosa installation and purchasing standpoint. Iâm not aware of any deal that weâve lost, whether itâs here in the U.S or OUS relative to capital. We also do small capital deals in the surgical business and those were on track as well, so sequentially Q3 to Q4 of 2022 was solid. Because of comps, obviously, itâs a lower number than a year ago, but so far, so good when it comes to capital, so nothing that Iâve seen so far leads me to believe that weâre going to have a challenge when it comes to robotics. Yes, and I think we do a really nice job of not just getting individual deals but also getting multiple placements in the same account. You do typically have hybrid accounts where youâve got us in there with robotics and potentially another competitor, but itâs not just greenfield, it is existing accounts where youâve gotten to the point where you donât have enough capacity for that robotics system and they want to buy another system, so itâs a combination of those two things. Thanks for the question, Drew. Katie, can we--oh sorry, the cementless mix, was that part of the question, as a follow-on? Yes, I can take that as well. Weâve been in the low teens, as weâve been disclosing. Thatâs obviously prior to the launch of Persona OsseoTi, which is now in the market, itâs been around for two weeks. The expectation is that number is going to dramatically increase, and as you know, Drew, in combination with robotics, youâre going to see a collateral effect. Youâre going to see increase of cementless mix, youâre going to see an increase of robotics penetration, so weâre already bullish about where weâre going to end at the end of the year. We donât disclose that externally, but you should expect something fairly aggressive. Just to make sure no oneâs confused, Persona OsseoTi, weâve not used the name before, but that is the new form factor for cementless for Persona. I was hoping, Bryan, to ask you--you teed up the question for us on price, and Suke, and just maybe a recap of how you fared in â22. Iâm not sure if you quantified pricing assumptions and guidance top line for â23, but maybe if you could also just directionally help us out, figure out the difference in terms of the pricing environment in the U.S. versus Europe and Asia-Pac. On pricing, we had a really good fourth quarter. If you look at our disclosure, our press release, youâd actually see that pricing is positive in the fourth quarter. Now, I would say on an underlying basis, pricing had erosion of about 100 to 150 basis points. We benefited by some year-over-year comps due to BBP, and we also had some one-time pull adjustments that were favorable in the quarter that drove us to be positive in the fourth quarter. But on an underlying basis, I would still think about it as 100 to 150 basis points erosion, which is still incredibly good versus our historical average of 200 to 300 basis points. We ended the year at about 150 basis points of erosion, again, so a pretty clear step change to where weâve been historically. I talked about in my scripted remarks, we expect next year--or this year, I should say, 2023 to be slightly better than that annual average that we had before 2022, so maybe not as good as â22 but definitely better than where weâve historically been. There are a number of drivers inside of that. Some of them are transitional, some are more structural in nature. The ones that Iâm more excited about are those structural improvements that weâve made. Weâve made a lot of investments around capabilities, around systems, around analytics. Weâve got better governance, weâve got better discipline. Itâs an area we incent the field force off of now, so there are a host of things that structurally are improving our price performance as we move to 2023, and thatâs sticking and part of our guide. If you think about the dynamics between U.S. and EMEA and Asia Pacific, maybe Iâll let Ivan talk a little bit about what heâs seeing. Thanks Suke. So far, weâre not seeing the performance when it comes to pricing being in a single region. Frankly, 2022, all three regions beat our expectations when it comes to pricing. The most important part, I do think itâs sustainable with the guidance that weâve given for 2023. The role of innovation also is a critical component of the sustainability of that pricing. As you think about bundle deals, as you think about bringing innovation, that is going to drive mix and in some cases a bit of price performance. Thanks for that. Maybe just a follow-up. I think we, at least our team has been tracking share for large joints in the United States more effectively than internationally, but maybe you could just help us understand where you think you had success capturing share in knees and hips in Europe and Asia-Pac, and just where that stands and how youâre thinking about share capture in those markets, those international markets in â23. Thanks for taking both questions. Yes, so you know, first of all, I think itâs really important - we never really pay a whole lot of attention to any individual quarter. Obviously this quarter was a pretty strong one for us globally and in the U.S., but we donât try to over-index on that. We do an eight-quarter trend and we look at how weâre trending versus market, and I even try to stay away from specific competitors but just the overall market growth, looking at the largest players. I would say in that eight-quarter trend, as that continues to roll, weâre seeing good performance versus market in large joints, both hip and knee, probably more in knee than hip, but overall weâre feeling pretty good. Youâve got to go back to before Q2 2020. As you probably remember, we had 20 straight quarters of being below market in every quarter, so five years below market in large joints, so we definitely have seen a sea change in our ability to perform at or above market in large joints, which as you know is our biggest business. Thatâs the way we think about it and we break it in a bunch of different ways - year over year, we look at it on a stacked basis, we look at it sequentially, but in all those areas when we look at that eight-quarter trend, weâre feeling good about where we are. Maybe to start, in the script you talked about improving supply moving throughout the year, but you also talked about it as benefiting fourth quarter sales. What are the products that are supply limited right now, and how should we think about the potential benefit to sales from improving supply? Yes, so maybe Iâll start off on a broad-based basis, because thereâs really two factors that you talked about, Suke, in being able to drive performance in the fourth quarter. One would be supply challenges alleviating, but also the innovation building, because those are almost two separate things, so weâll make sure that we talk about both of those, and Ivan, maybe talk about some of the innovation. For us when we think about the supply challenges, it really comes down to material shortages that weâre seeing, that we think are going to get better as we move in through the year, labor shortages that we think are going to get better as we move in through the year, and then sterilization capacity, which everybody is dealing with right now, that I do believe is going to catch up at some point. Thatâs why we think supply challenges are going to get better, but itâs pretty broad-based. I canât look at supply challenges and say itâs just this product or that product because itâs in packaging, itâs in resins. Almost everything that weâre dealing with has some form of supply challenges, like sterilization for instance, so I wouldnât isolate the supply challenges to a product or product set. Itâs just a broad-based pressure that weâre feeling. Outside of that, itâs around innovation thatâs going to be building, and maybe you can talk to some of the things youâre excited about there. Yes, sure. Good to talk to you here today, Robbie. Innovation, as we discussed at JP Morgan earlier in the year, could be a three-hour conversation, so Iâm going to try to keep it more or less succinct. But I will tell you, I truly believe today innovation is a key competitive advantage. Two data points right out of the gate that I mentioned, vitality index, the percentage of sales coming from new products has more than doubled over the last two years, and we expect the number to increase dramatically over the strategic horizon. Then the second part, we filed in 2022 the highest number of 510(k)s in the history of the company, and actually we had the largest number of approvals, public information, when it comes to the peer group. Breaking down innovation into three or four buckets, when it comes to knees, I already mentioned Persona OsseoTi - that is the new cementless form factor, that device that we have here at Zimmer Biomet. The clinical data we have on that product is compelling. We believe itâs highly stable when it comes to the mechanical and biological fixation. Itâs extremely versatile - you can all the way to the end of the surgery decide whether you want to go cemented or cementless. It does use the Persona technology, so itâs highly anatomic, you can customize the device to any kind of anatomy. Weâve got the broadest [indiscernible] ranges. Iâm excited with Persona Smart - we donât talk much about it because we still are in the limited market trials, but I like where itâs going. I like the opportunity that we have with Persona Smart, especially later in the year. When it comes to hips, in the prepared remarks, Bryan talked about HipInsight is the first and only mixed reality digital surgery platform for hip arthroplasty. This is making procedures faster. This is increasing accuracy in the actual procedure. When you come to the meeting in Vegas at the academy, I think youâll be impressed. It effectively gives the surgeon X-ray vision over the anatomy of the patient, the instruments, the implants. Youâre going to get more accuracy, faster procedures. It is going to be transformational. I like the momentum we have with both Rosa hips and knees. We have a strong portfolio when it comes to shoulder- letâs talk about Identity, the transformational launch that we did at the end of 2022. That is followed by a cadence of launches on Glenoids, on Signature ONE planning - I could spend an hour on that, and then through organic and inorganic means, I think we have a best-in-class portfolio in sports med. This will be my three minute summary on a lot of things that are happening from an innovation standpoint, but Iâll close it by saying again, I do believe itâs a true competitive advantage for Zimmer Biomet. Yes, and Robbie, just back to your question around supply chain, our comments on Q4 and then 2023, we did see pressure in the fourth quarter around supply chain. I think youâve heard us comment on that, and not inconsistent with what youâre hearing around the sector, we expect those challenges to continue into 2023. The commentary on Q4, just to provide a little color that we think that our group did a really nice job in navigating that. The situation continues to be dynamic into â23, but our expectation is that weâre going to continue to navigate that really well. Great, and you touched on inorganic, you did Embody in the business line. How should we think about overall inorganic and your view at Zimmer Biomet in â23 and beyond, and how should we think about the size of deals youâre looking to do and how fast youâre looking to move to take the inorganic and help expand the WAMGR higher? Thanks a lot. Yes, weâre ready now. Again, the balance sheet is moving in a place that allows us to have even more strategic flexibility than weâve had in the past, which is a good thing. As Iâve said, itâs probably more of those smaller to midsized deals that would be a bit closer to the vest for now, in other words closer to the orthopedic space that we are already in, but weâre ready. Weâre definitely ready. Now it comes down to opportunistically finding the right target at the right price and the right returns, but we are ready to move into Phase 3 of the transformation for sure. A clarification on the growth cadence in â23, I think you said that organic growth would be the highest in the first and fourth quarters, but I think those are your toughest comp quarters, so Iâm just wondering why 2Q and 3Q are a bit softer from a relative growth perspective. Is it simply the day rate dynamic? Yes, let me take that one. You heard us correctly. First half will be stronger than the second half from a growth rate perspective, top line ex-FX. First quarter will be the strongest followed by the fourth quarter, and then the second and third quarter. Let me go into a little bit more detail. On the first quarter, that will be our strongest one primarily due to procedural recovery. Remember, weâre comparing against the first quarter of 2022, which had omicron in it, and therefore youâve got a nice comp benefit. In the fourth quarter, thatâs generally from a seasonality perspective from growth, usually one of our strongest quarters, and weâre assuming a nice benefit from the innovation, the momentum of innovation build throughout the year from new products and execution, so thatâs why we characterize that as our second-largest quarter. Then inside of that, the second and third quarter will actually have tougher comps because thatâs when we began to see some recovery last year relative to omicron. The day rate impact, youâre right - we said 100 basis points for each of Q1 and Q4, thatâs a tailwind which will be offset by headwinds in Q2 and Q3, so youâve got it largely right there. Okay. Maybe just on M&A, the $0.05 to $0.10 dilution tied to the Embody deal is a bit heavier than we expected. Can you just talk about the return profile there and when can this be additive, or at least neutral to earnings? Yes, we would see this as breakeven to positive in the first 24 months, so itâs very attractive from a margin profile, from an earnings accretion profile. As Bryan said, itâs more or less like a product launch right now, but as that begins to ramp up from a revenue standpoint and begins to cover some of the investments weâre making in a very important sector in sports and extremities, we feel good about the return profile. It meets all of our hurdles from an NPV, IRR, ROIC metric perspective, and so again itâs early days but neutral within the first 24 months. Just wondered if--apologies if I missed it, I wonder if you could give us a little more insight into where youâre at from an inflationary perspective into 2023. I think previously you talked about being at the higher end of the range of 50 to 100 BPs. I just wanted to see if that was the way to think about the inflationary impact in the P&L in â23, and then maybe update us on the actual headwinds you did see in 2022. Yes, so youâre right - we did point to the higher end of our range back in â22 of 50 to 100 basis points flowing into â23. Weâre actually seeing that come through year-over-year as a headwind to gross margin. I could say, though, Iâm very pleased with how the commercial and supply chain teams have reacted to that, and we believe weâre going to be in a position to offset all of that and pretty much hold gross margin flat year-over-year Thatâs coming from a number of variables, but again weâre really proud with what the teamâs done to offset that. The impact that we saw in 2022 was, I would say, about 100 basis points as well, and if you actually look at gross margin performance, it was flat to 2021, so again the team did a really nice job in offsetting those headwinds. Once again, weâre demonstrating and showing that we can be disciplined, we can offset these headwinds and help our earnings growth over time. Great, thatâs helpful. Then overall in the commercial channel, you talked historically about making investments in specialized sales forces and investing alongside your distributors to support some of the higher growth market segments. Just wondered, can you help us understand how these initiatives are trending, and then any potential updates in where you stand from a distributor versus a direct model across some of those higher growth segments? Maybe I can take that one, Kyle. First things first, on the three segments we think that are growth drivers: sports med, upper extremities, and CMFT, we have double if not triple the number of people dedicated to these specialties. The sports med expansion is very real now that we have a portfolio, so the number of dedicated specialized people has dramatically increased in these three categories. In tandem, we also increased the number of people that are fully dedicated to the ASC environment, and thatâs because these procedures for the most part do take place in that space, but that goes beyond sales reps. It also touches on the contracting arm of the organization. As far as your second question, the percentage of direct and indirect, I donât think that we disclose that externally. We like where we are, we like the mix that we have of direct and indirect. We just left our sales meeting Denver, we had 2,000 people were there, and I tell you their mood is very solid whether an indirect or direct territory leader. I think people feel itâs a good time to be part of the company, but I donât think weâll break down the percentages externally. All right, Kyle, thanks so much for the questions. Katie, I think we have time for may one or two more. Thanks. Just a quick one. First, was hoping you could give us an update on the Rosa installed base exiting â22. Yes, Iâll keep it short and sweet here. In any year, we expect to do no less than 300 installations, and we exceeded that expectation across all three regions. As you think about the future, â23, â24 and whatnot, thatâs frankly the point of entry. I would be disappointed, maybe even jobless if we didnât exceed that number, given the new applications in shoulder, next generation hip, and other technologies coming in, but weâre so far exceeding those expectations. Okay, and then Bryan, I thought your comment that you had not started to work through the COVID backlog yet was interesting. It certainly felt like the market had some pent-up demand benefit last year, but I understand your point that the comps werenât exactly normal. My question is if you havenât started to make progress on the backlog yet, do you think you ever will, and are you assuming any progress on that front in 2023? That is the question that I think weâre all grappling with. Thereâs clearly backlog. You might call it longer waiting lists, backlog - you can define it the way you want, but the fact is thereâs pent-up demand for these procedures. The rate limiting factor is really capacity at the provider level. You could--because even itâs a supply challenged environment, maybe even capacity constraints the company level, but I think the bigger capacity constraint at this point is at the provider level. We actually had a third party run this analysis for us because we really wanted to get in tune to what is the size of the backlog based on the third partyâs view, and then also when they believe the backlog would start coming through and at what pace. What we found in that is that, number one, they came back with there is a very sizeable backlog in orthopedics - actually, their analysis came back smaller than what we expected, but still very material. They said that when we start to work through it, it would be constrained again because of the capacity, and it was a relatively minor impact, a tailwind for sure but impact to the overall market growth, just given the capacity constraints youâre going to have in the provider for some period of time. The good news about that, I guess, is when we start to digest the backlog, it will come as a positive tailwind, likely for years. It wouldnât be overly material in any given year, but it would be a tailwind for multiple years, so thatâs the analysis that we have and we just--again, just doing the math, we donât believe that weâre into that backlog yet. Hopefully weâll see some of that come in 2023, but weâre not depending on that when you look at the center of our guidance range. Great. Two questions. Iâll just say them right up front. First, I donât think you commented on China, Brian. It seems like the latest COVID surge is subsiding, weâre seeing mostly negative but sort of mixed results on doing a little better. How are you thinking about China, factoring it into the first quarter and to the full year? A quick one for Suke - Suke, Brian asked me to ask you about the shared services initiative. Youâre in the early innings. He said, why isnât it moving faster? Yes, so weâre seeing China and COVID surges clearly start to stabilize in the first quarter. It was pretty acute there in the fourth quarter. Fortunately, we were able to offset it with strength in other markets, so overall China wasnât as big a factor in the fourth quarter and we donât see it as a material mover, at least from a COVID standpoint, in the first quarter. We do see China as a very attractive market for overall growth in â23 and beyond, especially now that weâve moved through all of the pain and noise of BBP, which is now sunsetting behind us, so really feeling good about where that market is, and now that team can start to position towards not only growing the business but start to really work on the margin structure of China as a whole, coming out of BBP. So again, feel very optimistic about where we are there. Yes, what a way to end a call on a good quarter and good outlook with shared services, but I love your ambition and Iâm going to share that with the leadership team that weâve got to move faster, so thanks for the question. All right, thanks Rick, and thanks for all the questions. Iâll turn it over to Bryan just to close out the call. Just a couple thoughts. First of all, thanks for joining us this morning. I would say I hope itâs clear that the Phase 1 and Phase 2 of the transformation of this company are well on track and weâre feeling very good about where we stand. I can tell you because of those two phases, I feel that weâll at least take our fair share of the markets that we play in, and certainly hope to do more than that. Now weâre moving onto Phase 3, and that really is the portfolio transformation of our company. Weâre looking at changing the mix of our revenue to make sure that we have more of that mix in high growth markets, and weâre going to do that in three ways, which is kind of a combination of Phase 2/Phase 3. The first one is innovation - weâre going to invest in innovation in the right areas, in faster growth markets so that we build more revenue through that innovation in those attractive markets. It gives you real time revenue growth but it also makes it sustainable by increasing the weighted average market growth of the company. The second is investment in the commercial channel. Youâve got to have the commercial channel and capability to drive that innovation and make it real. The third is portfolio--active portfolio management, really looking at moving things into the organization and out of the organization that can drive our weighted average market growth rate up, so we are clearly in that phase. We have a better balance sheet right now that weâre going to be able to leverage in that part of the transformation, and make no mistake, we feel very confident about Phase 1, Phase 2, and now Phase 3 given that balance sheet freedom that weâre going to have going forward. Yes, thanks everyone for joining us. Iâm sure weâll talk today, and of course if you have questions, please donât hesitate to reach out to the IR team. Have a great day.
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Welcome to the Conference Call for Analysts and Investors for Infineon's 2023 Fiscal First Quarter Results. Today's call will be hosted by Alexander Foltin, Executive Vice President Finance, Treasurer and Investor Relations of Infineon Technologies. As a reminder, today's call is being recorded. This conference call contains forward-looking statements and/or assessments of the business, financial condition, performance and strategy of the Infineon Group. These statements and/or assessments are based on assumptions and management expectations. They are based on currently available information and present estimates. They are subject to a multitude of uncertainties and risks, many of which are partially or entirely beyond Infineon's control. Infineon's actual business development, financial condition, performance and strategy may therefore differ materially from what is discussed in this conference call. Thank you, operator. Good morning, and welcome ladies and gentlemen, to our first earnings call in 2023, sitting in-between Fed and ECB interest rate announcements. Starting today, our speaker panel for quarterly calls will narrow to our CEO, Jochen Hanebeck and CFO, Sven Schneider, who will occasionally be joined, as is the case today, by Andreas Urschitz, Chief Marketing Officer. Our procedure however remains unchanged. Jochen will open the call with remarks on the market situation and divisional performance followed by Sven commenting on our key financials. Jochen again will provide the outlook and highlight key messages. The illustrating slideshow, which is synchronized with the telephone audio signal is available at infineon.com/slides. After the introduction, we will as always be happy to take your questions. Kindly asking you to restrict yourself to one question and one follow up. A recording of this conference call, including the aforementioned slides and a copy of our earnings press release, as well as our investor presentation are also available on our website @infineon.com. Thank you, Alexander and good morning everyone. As we open the first chapters of a New Year's playbook, Infineon is consistently steering the course we charted and communicated a couple of months ago, with a clear focus on long term growth opportunities derived from decarbonization, digitalization. We foster our leadership in power systems and IoT. In financial terms this needs to translate into profitability and resilience through the cycle. Our December quarter has clearly lived up to these expectations despite some external factors, looking quite familiar. Macroeconomic burdens and geopolitical uncertainties are causing a volatile and challenging environment. While some signs of less bad and fewer developments are appearing. Semiconductor markets are bifurcating. Those driven by structural content like automotive and industrial applications show robust dynamics. Others driven more by cyclically fluctuating demands, like consumer computing and communications continue to be weak. Let's take a closer look at our numbers. Revenues in the first quarter of our 2023 fiscal year came in at EUR3.951 million almost exactly hitting our guidance of EUR4 billion, which had been based on an assumed U.S. dollar exchange rate of 1.0. The actual average rate over the quarter was 1.02, and thus caused a slight headwind. Our profitability continued to progress favorably ahead of our original expectations, with a segment result of EUR1.107 billion. The Segment Result Margin came to 28% after 25.5% in the quarter before. Our margin expansion was mainly driven by price progression, positive mix effects, as well as slight easing of cost pressures from the energy and material side. Meanwhile our backlog of confirmed and unconfirmed orders has gone down as expected. After EUR43 billion three months ago, it stood at EUR38 billion at the end of December. We attribute this to currency effects and some normalization in customer ordering patterns, reflecting generally better product availability as shortages are easing. The picture is differentiated by type of product and application, and I will comment further on it in my divisional overview. Automotive recorded revenues of EUR1.872 billion, a slight sequential decline influenced by a less favorable U.S. dollar exchange rate. On an annual basis revenue was up by a staggering 35%. Here the U.S. dollar had a positive impact. But even assuming a constant exchange rate, year-over-year growth amounts to 26%, showing unabated strength of demand across our automotive product groups. In line with this, we were once again able to bring up our profitability. The segment result for the December quarter improved to EUR532 million equivalent to a segment result margin of 28.4%, up by more than 200 basis points compared to the previous quarter. The increase was mainly driven by price and mix effects. Overall supply disruptions, material shortages, as well as macro uncertainties still weigh on automotive production volumes, but to a lesser extent. According to S&P Global the number of cars produced worldwide in 2022 was 82 million, still below pre-pandemic levels. For 2023, S&P is predicting around 85 million units, which we deemed somewhat optimistic as a part of pent-up demand might be affected by the lack of consumer confidence. Having said this, structural content growth remains by far more important driver for our business than unit evolution. From current interactions with our customers we learned a couple of things. First, the two automotive megatrends, e-mobility and ADAS are intact and irreversible. Second, there is a clear willingness to increase visibility and predictability of buying behavior and to secure semiconductor supply by engaging into schemes like capacity reservation agreements or longer dated committed orders. Third, there is a strong tendency for OEMs to source strategic parts such as xEV specific components and MCUs either directly or as so called directed buys, and to strive for higher stock -- targets stock levels. In this regard, our AURIX MCU remains a critical bottleneck part, or bolt and screw as demand continues to outstrip supply despite the fact that this year we are ramping our selling rate to close to 1 million pieces per day. Infineon's automotive business is well positioned for continued success, which is fully confirmed by recent design-win and innovation activity. Since silicon carbide is so top of mind, let's start there. At our customer Hyundai Motor Corporation, we have been awarded a further triple digit million euro silicon carbide business for the traction inverter of the future platform for the Kia Hyundai and Genesis brands. On the ADAS side, we are driving the transition of radar technology from silicon germanium to CMOS-based solutions. We are happy to report on the initial design win for our future 28 nanometer CMOS imaging radar sensor IC at a leading tier 1 with a low triple digit million euro volume. With a superior resolution it will be used to leverage for our platform. Finally, I would like to share a highlight from the forefront of innovation. We have sampled prototypes of a hydrogen sensor to around 20 potential customers. This sensor is based on our automotive qualified MEMS technology and can measure hydrogen concentration by means of thermal conductivity. Potential use cases are measuring lithium ion battery out gas to prevent battery failures in CVs; leaking detection for fuel cell and hydrogen combustion applications or pressure sensing for hydrogen infrastructure applications like storage, transport or fueling stations. Early customer feedback on this highly innovative solution supporting decarbonization is very positive. Decarbonization is bringing us to industrial power control which has a significant part of its business built around the theme. Revenue of IPC in the December quarter amounted to EUR500 million, down from the record level of EUR542 million achieved in the previous quarter. Basically, all applications saw seasonal step downs with the exception of the electrification of commercial vehicles. Most affected were major home appliances, with the notable exception of heat pumps, where we are unable to fulfill buoyant demand. Renewable energy and power infrastructure solutions in general are showing a robust momentum. Despite the decline in revenue IPC could increase its quarterly profitability, mainly through better mix and pricing. The segment result increased to EUR144 million, corresponding to a segment result margin of 28.8% after 25.1% in the prior quarter. Looking ahead, market dynamics show a differentiated picture. For auto appliances we expect the current weakness to continue. In the field of general purpose drives, there are some first indications of softening demand. However, this is outweighed by a still high backlog and even more importantly, we are able to shift the respective manufacturing capacities to solutions for renewable energies and the related infrastructure, where the desire for green and independent energy supply and remains a very strong structural driver. Overall, we expect our industrial business to remain highly resilient, supported by our leading position in silicon carbide for applications such as photovoltaic inverters, energy storage systems and the charging infrastructure for electric vehicles. In this regard, it's worth noting that we have taken another step to secure our supply of silicon carbide materials. We have signed a multi-year supply and cooperation agreement with Resonac Cooperation to deepen the long term partnership regarding silicon carbide materials. The initial phase of the agreement focuses on six inch materials. At a later stage Resonac will also support our transition to 8 inch wafer diameters. In turn we will provide Resonac with intellectual property relating to silicon carbide material technologies. This agreement and further ones we are currently finalizing will underpin the significant expansion of silicon carbide manufacturing capacities that we are undertaking for our automotive and industrial business. As you know with our new plant in Kulim, Malaysia which is scheduled to start production in autumn of next year we will increase such capacities tenfold by 2027 compared to last year. Now coming power and sensor systems. In the first quarter of 2023 fiscal year, the segment's revenue declined sequentially by 11% to EUR1.043 billion. Softness in consumer computing and communications added to normal seasonality. A few bright spots where EV charging, residential solar and USB components where demand remains strong and the easing of capacity constraints allowed the addressing of some backlog. Despite lower revenues, the segment was able to maintain its high profitability level for the quarter. With a segment result of EUR301 million PSS kept as segment result margin of 28.9% identical to the quarter before. Going forward we expect a majority of target applications addressed by PSS to enter a soft period. After almost two years of strong growth some of it's driven by pandemic era extra spending, micro and cyclical headwinds are clearly intensifying. Depressed consumer confidence is weighing on demand for items like smartphone, tablets, TVs, PCs or battery power tools. On the data center side we are noticing a slowdown in enterprise servers and recently also decelerating hyperscaler CapEx. The delayed roll over from one server architecture to the next by a leading vendor is further restraining customer demand. In these areas, we are anticipating a prolonged period of inventory digestion ahead. Conversely, we continue to see good traction for applications linked to decarbonization like solar installation by residential customers and automotive charging. In total, while the near term conditions are challenging, long term underlying trends remain strong, in particular, including vibrant demand for gallium nitride-based solutions. Let's finalize the divisional overview with connected secure systems. On the back of easing supply limitations, CSS brought up revenue to a record level of EUR531 million, 8% more than a quarter earlier. In particularly security solutions for payment and government identifications increased strongly supported by higher foundry supply. Bluetooth parts which had been a blip in the previous quarter where again in high demand. Segment result improved EUR125 million equivalent to segment result margin of 23.5% sharply up from 17.5% in the quarter before. Higher volumes and supported pricing were the main underlying drivers. Overall mid and long term growth opportunities for IoT applications are undiminished. However, they are not immune to current market uncertainties. Momentum for consumer and industrial IoT solutions is slowing absorbed to some extent by existing strong backlog. On the other hand, the business with security ICs in which Infineon has a global number one position, continues to show high resilience driven by innovative trends like contactless payments and continued recovery in demand for e-passports. Design wins and product launches keep their high pace. We achieved a key design win at a major Asian automotive OEM for its next generation connected cockpit platform with our Wi-Fi, Wi-Fi-Bluetooth combo offering. On the microcontroller side we launched the XMC7000 family for advanced industrial applications like industrial drives, EV charging or robotics. And we announced a new piece of family for the next generation human machine interface applications supporting our CAPSENSE touch sensors. Finally, we are the first ones to have introduced the SECORA T [ph] IC targeting high volume payment applications based on the future proofed 28 nanometer technology node. Thank you, Jochen and good morning, everyone. We had a strong start into our 2023 fiscal year in financial terms. Revenue and segment results have been covered. Let's look closer to gross margin. In the December quarter gross profit amounted to EUR1.866 billion, equal to a gross margin of 47.2%, up by 280 basis points from the previous quarter. Adjusted gross margin, which excludes non-segment result effects amounted to 49.2%. Key reasons for this very dynamic margin progression are pricing and mix effects in the top line as well as some positive contributions to our cost of goods sold from the development of energy and materials cost. Now to our OpEx numbers, which we are managing carefully to find the right balance between safeguarding our current profitability and enabling future growth. Research and Development expenses were EUR484 million, essentially flat quarter-over-quarter. Selling, general and administrative expenses went down from EUR452 million to EUR410 million in the December quarter. The net other operating income was minus EUR6 million. The non-segment results totaled minus EUR141 million. Of this amount EUR76 million corresponded to cost of goods sold, EUR10 million to R&D expenses, and EUR53 million to SG&A expenses. Other operating expenses amounted to EUR2 million. The financial results for the quarter under report was minus EUR24 million, up from minus EUR23 million before. Income tax expense amounted to EUR216 million for the first quarter of the current fiscal year, equivalent to an effective tax rate of 23%, and in line with our expectation of a range between 20% and 25% going forward. Cash taxes in the December quarter were EUR93 million, resulting in a cash tax rate of 10%. For the entire 2023 fiscal year we expect a cash tax rate of between 15% and 20%, as current prepayments will be trued up throughout the year. The difference between the two tax rates, effective and cash stems from historic tax loss carryforwards. We expect to benefit from those for at least another two years. Our investments into property, plant and equipment, other intangible assets and capitalized development costs amounted to EUR605 million in December quarter, down from EUR866 million in the last quarter of our previous fiscal year following a typical seasonal pattern. Depreciation and amortization, including acquisition-related non-segment results effects were EUR429 million in our fiscal first quarter after EUR443 million in the preceding quarter. The quarterly evolution of our free cash flow from continuing operations is worth commenting as the figure not unexpectedly went down steeply from EUR709 million to EUR25 million. There were three main effects at work here. First, the month of December is when the bulk of annual cash bonuses are being paid out. Second, we recorded an increase in inventories, the reach of which went up sequentially from 120 to 140 days at the end of December. Herein reflected are the differences in business dynamics across the various end markets and applications that Jochen has touched on in the beginning and which he will pick up again in his outlook section. Thirdly, there was an intertemporal reduction of accounts payable quarter-over-quarter. Now to our liquidity and leverage figures. Our gross cash at the end of December amounted EUR3.7 billion. Our gross debt stood at EUR5.5 billion, a bit down due to the slightly weaker U.S. dollar and corresponding to a gross leverage of 1.5 times. Net debt correspondingly decreased below the EUR2 billion mark to EUR1.8 billion, equivalent to a net leverage of 0.4 times. To close the financial part, let's look at our after tax return on capital employed. This metric, of course, reflects the strength of our financial numbers and came in at 16.8% for Q1, a level that is clearly indicative of value creation. Thank you Sven. Before going into our specific projections, let me provide some context. At the beginning of 2023, macro geopolitical and sector specific headwinds continued to cause heightened volatility. Some indicators like PMI readings point to upside to projected economic development, but it's still early stages. Semiconductors end markets keep following different pathways, both from a demand as well as from a supply side. On the one hand market conditions for automotive applications, especially e-mobility and ADAS, as well as industrial ones in particular, renewables, remain supportive. The underlying trends are strong. On the other hand, there is weakness in consumer-related applications. Also corporate spending on IT infrastructure like data centers and communication networks is slowing down. From a supply perspective, the general situation is improving, with shortages becoming less pervasive and lead times contracting. However, there are still product categories that are scarce, while in others a certain supply overhang is becoming visible. Hence also the inventory situation is differentiated to one. Overall channel inventories have only edged up slightly over the course of the December quarter to stand a bit above nine weeks. However, this averages hides the dispersion between items like standard MOSFETs, where stocks at distributors and downstream customers have been replenished, and others that are highly sought after such as MCUs, and particularly for automotive IGBTs for renewables, wide bandgap and analog mixed signal parts. We see a similar development for inventories on our own balance sheet and have started reducing uploading [ph] levels for those products for which a gestation period lies ahead. In parallel, we are still on allocation for some categories, and will shift available production corridors to the extent technically and economically feasible. Pricing in this context is remaining resilient overall as customers value supply certainties throughout different cyclical phases. As stated in our last call already, the supply situation for power devices might well remain tighter for longer, as e-mobility and renewables are competing for the same type of capacities. Let's translate this into numbers. For our Q2 and full year outlook we have changed our assumption for the US dollar exchange rate from previously parity to now 1.05 thus incorporating some headwinds. For the running March quarter we expect revenues of around EUR3.9 billion basically flat compared to the previous quarter, considering the adverse U.S. dollar assumption. However, the revenue composition by division is likely to look different. For ATV and IPC, we expect a sequential revenue increase of a mid-single digit percentage. CSS should keep stable revenues. As PSS is confronted with market weakness across the majority of its target applications it should see a further significant revenue decline. This will also affect our group segment result margin for the second fiscal quarter which we anticipate to come in at a level of around 25%. Sequential step down considers our expectation of a certain level of under utilization costs incurred on purpose to keep inventory levels for slower moving parts in check. Furthermore, we expect further wages increases to kick in. For the full 2023 fiscal year, we continue to expect revenues of around EUr15.5 billion plus or minus EUR500 million. While this headline number is the same as before, implicitly we're adding close to EUR400 million from volume structure and pricing. This is due to our less advantageous currency assumptions of 1.05 instead of 1.0 for the U.S. dollar euro exchange rate for the three remaining quarters and using our updated rule of thumb, which estimates a quarterly revenue impact of EUR25 million for each cent movement. We expect to be able to absorb the negative currency impact, as Infineon's key applications mostly still show robust dynamics. For example, automotive is fully booked for the 2023 fiscal year. Having said this, the consumer-related weakness should persist against on an uncertain macro backdrop. Also we envisaged some inventory digestion to occur throughout the year, for example, in the area of data centers. At the same time, our high existing backlog and other areas should help cushion some of the impact. Taking all of this together we remain cautious for the second half of our fiscal year and have baked in a certain slowdown. By segment we expect ATV and IPC to grow above and CSS at the expected corporate average rate of 9% year-over-year. For PSS we now expect annual revenue to fall short of last year's level. Now to our margin expectations for the 2023 fiscal year. With a strong first quarter already in the bag, the adjusted gross margin is expected to land at around 45%. For the segment result margin we now anticipate a level of around 25% after around 24% before. While the weaker US dollar is causing a certain burden, we expect this to be more than offset by positive contributions for higher volume pricing and less than high -- less than -- less higher than feared cost increases for materials and energy. For investments in property, plant and equipment, other intangible assets and capitalized development costs we project an unchanged level of around EUR3 billion, including Kulim 3 and the planned new fab in Dresden, as we are convinced of the value of forward-looking investing, preparing ourselves for secular growth. For depreciation and amortization, we expect a value of around EUR1.9 billion including amortization of around EUR450 million resulting from purchase price allocations that will end up in our non-segment result. For free cash flow we continue to expect a level of around EUR0.8 billion including some EUR700 million planned for the aforementioned major frontend buildings. Excluding those, our projected adjusted free cash flow would come in at around EUR1.5 billion representing around 10% of sales. For summarizing and opening up for Q&A, I would like to highlight an initiative, the importance of which is much broader than economical. Infineon is supporting NGO Rainforest Connection with ultra modern sensor technology to protect one of the most vulnerable regions of our planet. At the heart of the Rainforest Connection work our guardian devices powered by solar electricity, transmitting live sound recording from rainforest. Artificial intelligence is used to analyze the data, detecting sounds of threats. To ensure that the devices can not only hear but also smell, our highly innovative CO2 sensor will be added to a number of them. The goal is to considerably expand the database for recording biodiversity. In the future sound recordings can be linked with other information including temperature, humidity, ozone, and now CO2. Our technology can therefore be an important contribution to the protection of climate and biodiversity. Now ladies and gentlemen, it is time to summarize. We had a strong start in our 2023 fiscal year in terms of profitability, even a very strong one. With EUR3.95 billion of revenue we printed a segment result margin of 28%. The bifurcation of semiconductor markets is continuing. Dynamics in key application areas like automotive renewables and also security remain robust. At the same time consumer facing markets are seeing demand weakness. Also corporate spending on IT infrastructure is sluggish. A similar divergence can be observed with respect to supply and inventory. Depending on the product category overhang and scarcity are occurring in parallel. Vibrant design win activity is showing high customer interest in our value adding system solutions with silicon carbide and gallium nitride continuing to see very good traction. Navigating a challenging environment we remain vigilant and on our toes to react quickly when needed. We are upgrading our annual outlook in terms of revenues and profitability by absorbing adverse currency impacts while keeping our caution regarding the outer quarters for now. The secular fundamentals for our business remains in place. Semiconductors are indispensable building blocks of decarbonization and digitalization. Ladies and gentlemen, this is the end of our introductory remarks, and we are close to opening our call for your questions. The queue today is quite impressive. Great to see such a high level of interest. In the interest of fairness therefore, please keep your question to one topic at a time. Much appreciated. Operator, please start the Q&A session now. Yes, thank you very much for the question, and congratulations on the robust start to fiscal year. Your fiscal year '23 adjusted gross margin target of 45% implies a bit of a step down from the very robust 49%. Wondered if you could just decompose a bit the drivers there. One would expect some further pricing benefit to come through. But then also factoring in some level of supply chain constraints easing. So can you help us think about the kind of trajectory we should think about through the rest of the year and are you expecting any change in pricing environment as you go through fiscal year '23. Many thanks. Happy to take it. Hi Alexander. So this is a very good starting question. Let me explain why we have given that guidance. So the 49% to 45% and also on the segment results you see the same trends, 28% was the actual number, now we are guiding from 25%, has four major reasons behind it. The first one is -- excuse me -- that you see already we are guiding at a dollar exchange rate of 1.05. Nobody knows, at least, I don't know where the dollar will be. Today it's at 1.10. So there are already the first currency headwinds, which we have to at least anticipate. And if this would stay for a couple of quarters, our rule of thumb, that would be a headwind, number one. Number two is, as we alluded in the intro, there is pronounced weakness in the consumer market, consumer communications and compute, which affects our PSS division. PSS division has a significant contribution to revenue and profitability. And we expect the division over the next quarters to come down on both, on the revenue and on the profitability level, which of course is negative for gross margin. Thirdly, in order to have the right balance, and again we alluded to that a bit at the intro already on the inventory site where we have products still from hand to mouth and products, which have now replenished the levels, we have to steer the inventory carefully, which means we will reduce on the ones where we do not have hand in mouth. We will reduce the loading of the fabs, which means we will incur some additional under utilization costs. And lastly, as mentioned, we expect some further wage increases to kick in. So this is all factored in. And that explains from our perspective, why we feel as of today, in line with what we did last quarter, that this would be a conservative and better approach. And then I may add on the pricing environmental two sentences. So of course, in the PSS environment, there are pockets where we need to balance between market share and profitability. But the team has done that many times in the past. So I'm very confident that they handle it very professionally. On the automotive side on the other end, we have concluded VPA starting first of January, which we're still under the headline of supply security meaning a favorable pricing. Hi, thank you very much. So my question is a bit follow-up to Alex, not on the gross margin, but more on the top line. So you mentioned some weakness in the consumer PC. But when we look at your Q1 and fiscal Q2 guidance, with the growth of 20%, year-over-year and automotive growing at almost 30% more in the first half. To reach your guidance, I mean, you would need to have revenues down year-over-year. So will it be a significant step down from H1, and especially when we see the automotive growing so strongly, it's kind of difficult to imagine it would go down so quickly and significantly. So I was wondering, is it something that you see already? Or is it just some conservatism you want to keep for the second half of the year? Because I mean, I guess you would need to imply an inventory correction or even pricing deterioration in the second half, to get this kind of decline, just some thoughts [ph] on that. Thank you. Yeah, thanks for the question. Indeed, we are a bit cautious about the second half of the year. The weakness on consumer, you mentioned. On automotive I've still have escalations in terms of allocations on my table. But in this very dynamic environment of inflation, interest rates and consumer confidence, we think that this is a good guidance. But of course, can be upside, can be downside as always. And if I just may add to Jochen very quickly because I think it's very relevant in this situation. First our guidance last time was at 1, now we are guiding at 1.05. This translates into a headwind for the three coming quarters. I'm not talking now about the first of EUR400 million, if we just go from 1 to 1.05. If we would go from 1.05 to 1.10 there would be another headwind of EUR400 million. So please factor that in if you interpret our top line numbers. Thank you. Yeah, thanks for taking my question. I think I'm kind of coming to the same topic, but maybe from a slightly different perspective. Jochen, you mentioned the bifurcation in the supply demand situation, as allocation elevation on the one side, and then things getting weak on the other side. Can you maybe talk about this a little bit more from a production perspective? You said look, we're adjusting production, where we can. Maybe give us a few scenarios here, where can you actually adjust production and move things? Where is it more difficult? And maybe what does that mean for the utilization over the course of the -- also maybe considering things get worse in the second half from a macro perspective? Thank you. Yeah. Thanks, Johannes for the question. So of course, the foundry supply, we order what we need, of course, keeping our inventories in mind also, from a strategic point of view. In terms of in-house manufacturing, we anticipated some of this shift, some of this bifurcation, already in summer, and slowed down, for example, the 8 inch silicon capacity growth and relocated this CapEx, rather to those areas, for example, IGBTs, wide band gap for automotive and renewables. And that plays out now very nicely. But of course, converting those capacities has its limitations. And it's, of course, limited now, in the sense that we cannot absorb some of the weakness we see, for example, in MOSFETs, for PSS end markets to the full extent and therefore, we will incur idle costs mainly in this fiscal quarter in order to get inventories for PSS into the target range. So I think we are doing on a good track. But of course, consumer related end markets are definitely weak. We will continue to invest. The headline CapEx number will remain at EUR3 billion in order to fuel our growth in the aforementioned strong markets as well as into buildings, providing growth opportunities in the future. Maybe a quick follow-up if I can, the MOSFET weakness in PSS, I mean, the server and consumer-related stuff, it sounds like that will continue for a while. Is there anything more you can do from a production perspective to convert that capacity to something else? Or do you kind of have to wait it out in effect. Thank you very much. And congratulations on the gross margins. Really great recovery from where you were a couple of quarters ago. Two quick questions, if I may. So number one, can you talk about the backlog, deconstruct that, the direction of backlog for HEV, IPC, PSS? It looks like the dynamics are quite different. And then related to that, do you have a feel for where the backlog might trough? Is it in Q1 or Q2 calendar? Or is it further out? If you have a number to share, that would be lovely. Thank you. Didier maybe I take your questions, Sven speaking. So on the backlog it has decreased as we have communicated from EUR43 billion to EUR38 billion. We have said it multiple times that we could sleep very well with much lower levels given that this is not a normal pattern. If you have a backlog of 40 billion compared to EUR15.5 billion of revenues. So the gap or the delta between the EUR2 billion to EUR5 billion, I would say about half of the decline is currency. So that's something we just should take out. The other half is a reduction of orders. Here we have some cancellations of long term orders but we see a healthy take in of new orders. Three quarters of the backlog consists of orders up to 12 months and the big majority is still in automotive. So and going up of course if you just forecast some weakness on the consumer side. I cannot give you now an indication when it will thrust but I would not be surprised if the backlog goes down further in the coming quarters. Okay, brilliant. And maybe a quick follow-up. Then to your point, earlier you very kindly broke down the various components of gross margin guide for the full year. But you also said in your prepared remarks that material and energy costs went down. There was a surprise. I think they were lower than expected for Q1. So do you expect that to continue in the second half? Or do you expect energy and material cost that will increase? Yeah, good question, Didier, thank you. I mean, what we have all seen as is this significant increases in energy costs after the Ukraine war. It's material. But it's a lot around electricity. And we have seen that the electricity prices, especially for our front end chaps in Europe came down again over the last weeks and quarters. That was basically the main component for our comments. I have not now forecasted any further deterioration or increase. We just took it at current levels and forecasted that for the rest of the year. Thank you. Yeah, good morning. It's a quick question. You mentioned short AV for NTU [ph] utility. Could you help us to understand which nodes are particularly short of capacity? Yeah, thanks for the question. We have our AURIX family ranging from 90 to 28 nanometers. 90 is trailing edge currently, high volume is 65 and 40, and ramp is 28. We still see or would like to take more wafers on in 65 and 40 nanometers for automotive microcontrollers. Thank you. And maybe just a follow up on microcontrollers. And from a competitive standpoint, we hear your competitors talking about big design wins after five nanometer node for domain architecture and ADAS. What is your strategy for beyond L3 and System-on-Chip integration for the microcontroller? Thank you. Yeah, thanks for the question. So we are focusing on microcontrollers with embedded control. We are not into the regime of micro processors, which is a very different sort of products. We see we have a very strong position on the microcontroller side and we see continuous demand. And of course our high end devices of microcontrollers will continue to challenge the position of low end MPUs and we believe this is a very attractive market. And the AURIX family perfectly, is perfectly suitable also for domain architecture, software defined cars, zone controls and all of that. So the number of MPUs in a car will be very limited in our view. Thank you, gentleman for taking the question. I had a follow-up Sven, for you on the point you were making on the gross margin factors as we look to the rest of the year. The first thing you mentioned in those four factors was the foreign exchange move. As you say you've set your budget now, you said the guidance based on 1.05? You then said okay, there could be some further headwinds if it stays at 1.10, which I think, obviously, we can all work out mathematically. But by listing that as your first factor for having the weaker guidance into the back half of the year for gross margin, are you suggesting that you've left yourself some wiggle room there if it does stay at 1.10? Some of that perhaps could be absorbed relative to the budget? Just I -- just trying to understand the dynamics that you're trying to highlight. Andrew, thanks for the question. I mean, if you look at our Q1, you cannot now of course argue we have guided at 1 and I think the average rate was 1.02. And we have kept guidance, at least at the levels or even increased. So I would say your reading is quite accurate. We have this currency headwind, but we would not immediately walk away from our guidance if the dollar moves from 1.05 to whatever, 1.07, 1.08. But nobody knows. Let's wait until the central banks have made their decisions. But also let's be clear, the reason that I mentioned currency, as number one does not mean that this has the biggest impact. I would say the biggest impact on the margin compression is from PSS and idle and not from currency. But just to be clear, we wanted to highlight that to you given that we would expect questions, why are you guiding at 1.05, if the dollar is already at 1.10? That was the main reason behind it. I hope that's clear. Yeah, good morning, guys. And congrats on the great results. So firstly, I just wanted to understand, what is driving the IPC upgrade? You were previously talking about IPC growing in line with the group average. And now you're talking about faster growth? And is it at least partly driven by better silicon carbide availability for IPC? Or is there something else that's driving it? Any color here would be very helpful. Thank you. Yeah, silicon carbide, of course, volume and output from the fabs is growing as planned. But we are also making still very solid and sizable business, growing business with silicon across the board. And the picture here is that we cannot produce enough for renewables these days. And so even if there is, what we detect a slight weakness in industrial drives in China, we are ready to switch the capacities, which is in this case doable towards more renewables and our market position in new renewables in wind and solar. And there's ample of growth, and we are also taking extra measures in production to bring up the output as much as possible here. Our next question comes from Sandeep Deshpande from JPMorgan. Please go ahead. Sandy, please go ahead. Your line is open. And it's it seems that Sandeep has stepped away. We will now move to our next question from Lee Simpson from JPMorgan. Please go ahead. Morgan Stanley. Thanks for letting me on. Just going back to some of the commentary around allocation and the supply certainty that customers are looking for. Could you maybe just characterize that a little bit for us? Because the remark there about supply being tighter for longer suggests perhaps a quarter, maybe two quarters of extra build in the channel? Is that how we should look at that? And you mentioned also that idle costs were a big part of that gross margin impact in the guide. I wanted to give me the call out what you think the under utilization charges could be in the back half of the year. Thanks. Yeah, the under utilization charge I leave it for Sven. The first part, I am not sure whether I really understood, tighter for longer, I think refers to my statement that automotive and then meaning e-mobility and renewables are in competition for the same capacities. So there, this tighter situation can extend far beyond two quarters if that was your question. But please, let me know whether I answer correctly. And the other hotspot in allocation for automotive is microcontrollers. And here I refer to my previous statement. We would still take more 65 and 40 nanometer capacity wafers in order to also replenish the supply chain downstream. Sven you want to comment on idle cost? Happy to do so. So Lee the idle cost, which we have now taken into our forecast could be up to EUR500 million this year. Last quarter, we were indicating a EUR450 million number. So you see, it's trending up. But more importantly, if you compare that to last fiscal year, we have been at the so called level of structural idle, which was EUR150 million. So you see that is a significant contribution, negative to the profitability which we are compensating successfully with other measures. So up to EUR500 million is the answer. And in Q1, we have incurred a high double digit number. So the rest is Q2 to Q4. Thank you very much, guys. Good morning. And two topics from my side, I guess the first one on the revenue picture for the company. I think at least my conversations with investors are a little bit different than the tone that you guys have taken, which is that the first half of the year, particularly the March quarter will be weak for a lot of end markets. And then there's some potential drivers. I mean, nobody knows on timing, but for things to improve in PCs, smartphones, kind of consumption, a lot of things through the year. And I'm just trying to understand if your outlook on the market is quite different than that. So if automotive remain strong, it sounds like you're baking in some caution for the rest of the year when maybe investors are baking in some recovery and optimism. And the second topic just quickly Sven, just to -- you guys guided not just segment margin, but gross margin for the year, and that implies some volatility in OpEx as well. So if you could kind of talk through the drivers of operating expenses for the next few quarters, that'd be great. Thank you guys. So the second part of the question is when will take and the first part, I give it to Andreas because of course there are opportunities for the PSS end markets to recover. But Andreas, maybe you can shed some light on, let's say on upside opportunities, which we have not baked into our guidance yet. As it was said before, definitely we see strong momentum to continue in renewable e-mobility, EV charging, then also energy infrastructure, if you will. Nothing to add on this one. Then on point two with regards to more specifics on the offset side of things. Yeah, so we see on the consumer and computer side, still weak demand to happen, while we are speaking. Nevertheless, when you listen, so to say to channel partners, for instance, seems that the inventory levels of consumer devices here are already starting to normalize. So having said that, there might be in the one or the other sub segment, a bit of an upside coming in the second half. But for reasons, as alluded by Jochen and then also Sven, we prefer to be cautious in this area of consumer, computer telecom infrastructure. Okay, and then, Matt, I take your question on the OpEx development. So if you look at Q1 and I'm now referring to the gross margin, so the also the clean R&D and the clean SG&A excluding the non-segment result effects which we have shown you in the presentations, we are at around 21%, 22% OpEx level. I would expect that to stay in that ballpark broadly speaking. Of course, for us, it's always very important that we balance that in the right way. As I said in the intro, I would say there is probably a little bit more leeway to keep OpEx -- sorry, R&D on a good level in order to have the right innovation and product available and to be a bit tighter on the G&A and say the marketing expenses. Good morning, and thanks for taking the question. Congratulations for very strong results on the margin front for the quarter again. Now I'd just like to understand the EUR500 million in arbitration [ph] charges. Is that entirely going to weigh on the PSS division because you single that out has been the main driver of the sequential weakening of your margins for the remainder of the year? And a very quick follow up if you could reiterate your silicon carbide revenue, is it still EUR450 million [indiscernible]. Thanks. Yes, happy to do so. So Alex on the EUR500 million. So normally, a rule of thumb is that more than half of idle costs, given our manufacturing footprint go to automotive. So the current situation where automotive is so strong and PSS see some weaker quarters ahead, I would say there is more coming into the PSS then usually. So you are right. So more idle allocated to PSS and less than to automotive compared to historic patterns. On the silicon carbide revenue numbers, we have given last time EUR450 million. I would say there may be some upside for that. It's a bit early in the year but EUR450 million to EUR500 million. That's the update I would give you. The majority of the revenue is still from our industrial division but you are aware that automotive it has a higher CAGR. So that will, of course change over time. And all my numbers were related to our fiscal '23. Thank you. And our next question comes from Janardan Menon from Jefferies. Please go ahead. Janardan, please go ahead. Your line is open. Please make sure the mute function on your phone⦠Yeah, good morning. Thanks for taking the question and squeezing me in. Just want to dive a little bit into your automotive business. Obviously the numbers you're reporting a very strong. Are you seeing any differences between the different parts of automotive? Or is it all quite uniformly strong? I'm saying different products like MOSFETs, microcontroller, sensors, IGBTs, et cetera as well as between ICE and EVs. And there's a small follow-up. On the microcontroller side, are you saying that you're already getting as many wafers from TSMC, Global Foundries and you're now building up that inventory? Or is it that you expect the shortage to ease and availability to improve? And following that you're saying you will continue to build up? I'm just referring to TSMC is common during their conference call and I think they supply you the 65 nanometer that they would expect the microcontroller shortage to finish reasonably quickly. Yeah, thanks for your question. So I said that we would like to take more wafers on in order to prepare for further ramp. AURIX is in full ramp mode. Now focus will shift slowly from 65 to 40 nanometers. We have gotten more wafers and therefore the -- let's say burning allocation will get better in the second half. But again, AURIX is ramping and therefore, we are securing capacities. I think the 65 nanometer node at -- is still not really opening up to the extent we would like it to be. But I do expect customer escalations to ease for the microcontroller -- automotive microcontroller in the second half of '23. But we need more capacity to fuel the design wins we have achieved in the past. In general across the automotive business, of course, there is some hotspots in terms of strong demand being e-mobility, ADAS, also some analog mixed signal parts. Other parts are normalizing. And yeah, that's the way I would describe it. Yes, thank you for taking my question. I want to ask a question about your silicon carbide business. You highlighted around EUR3 billion of design wins in recent months. And it seems that your peers are also having a very strong design traction. One just announced new silicon carbide fab just yesterday. In that context, I wanted to ask how you think about your existing IGBT footprint. How do you think about growth in that business? And do you see a scenario in which you could refurbish one of your existing 200 mil silicon fab with silicon carbide fab, if the need arises in the coming years? Yeah. So first of all, I will not comment on individual competitor moves. But let me tell you, in general, our manufacturing strategy. So we think that for 300 millimeter, Europe is a good location, eight inch as you know, or 200 millimeter we are building up in Kulim. Here we have, of course, a lot of legacy business. But also growing sensors, products in that line. So there might be limited opportunity to convert Kulim 2 to 100 to silicon carbide, but there might be some, the majority will be by further expanding Kulim where we announced the first phase of Kulim 3 last year, and there's more room around that factory to go further if required. Now IGBT, IGBT, as we showed on the capital markets day or at the annual press conference, we still see a huge market in IGBT. We are also seeing competitors no longer investing in these technologies. We see major applications, for example, industrial drives, but also big parts of wind staying on the IGBT side. And in addition, we of course have new growth technologies for our 300 millimeter factories. As you know, we are planning to build Dresden 4 for analog mixed signal technologies. And therefore the 300 millimeter factories will continue to grow and contribute to our gross margin development. Thank you for squeezing me in. So I have a question about China. So your profession [ph] used to be very strong in China. And over the past few years, China has been really aggressive. And recently they've been doing more in ultra industrial space, trying to be self sufficient. What's your take on that? And also, do you think your market share may be impacted because of their pushing into sort of domestic made products? Yeah, thanks for the question. I mean, the strategy in China is very clear. Wherever possible, China will try to achieve a higher degree of self sufficiency. It will never work completely as for any other region in this world, self sufficiency in terms of semiconductors will not be achievable. But that's basically a continuation of the past. We always said, let's say that -- let's say standard power devices will be something where we will see a commoditization driven by Chinese players. And at some point when it doesn't make sense we will back off. But our answer for many years on that one is P to S, product to system thinking in the sense that we are not only relying on technology leadership, meaning the best MOSFET, the best silicon carbide device but going into the system thinking -- combining the power switch with the analog mixed signal devices with a microcontroller, with software. And there we think we have quite a lead on competitors including those in China. Okay, amazing. Thank you. And just a quick follow up, regarding our pricing, would you say your strong pricing today is a result of the market or it is actually you changing your pricing method has been really successful? It's a mixture in between a couple of elements. First and foremost, I tend to say that the value that we are creating through very application specific products that come out of a better system understanding, Jochen spoke about P to S. Our ability to translate that value that we create for customers into pricing definitely has grown quite substantially. So if you will price up is a function of value based pricing, where Infineon simply moved ahead along the curve. Other than this, we have structural effects out of our markets where in particular demand for power semiconductors, microcontrollers connectivity devices as a function of decarbonization digitalization is increasing. That in combination with availability of capacity, definitely also was part of positive impact on pricing overall. But simplifying things. So I believe customers are better and better seeing the value that we can create out of Infineon and are willing to share a fair of their pockets towards the benefit of Infineon [ph] as a company back into our P&L. And maybe let me add one thing. When I took over as CEO, I said that the strategy is perfectly fine. But we have to work on our behaviors. And I call this the -- we call this the spirit project or initiative, and this spirit initiative is focusing on three behaviors, setting ambitious targets, clear responsibilities and timely decision making. And you may also attribute some of what Andreas described to the first of the three targeted spirit behaviors. All right, time to wrap up the call. Thanks for all your questions. Fairly comprehensive as always. We are concluding now our first quarter's conference call. Any further question, any item that were left open, please feel free to contact us and the IR team here in Munich. Thank you very much. Take care and have a good day.
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Good afternoon and welcome to the Enphase Energy Fourth Quarter 2022 Financial Results Conference Call. [Operator Instructions] Please note todayâs event is being recorded. I would now like to turn the conference over to Karen Sagot. Please go ahead. Good afternoon and thank you for joining us on todayâs conference call to discuss Enphase Energyâs fourth quarter 2022 results. On todayâs call are Badri Kothandaraman, our President and Chief Executive Officer; Mandy Yang, our Chief Financial Officer; and Raghu Belur, our Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its fourth quarter ended December 31, 2022. During this conference call, Enphase management will make forward-looking statements, including, but not limited to, statements related to our expected future financial performance, the capabilities of our technology and products and the benefits to homeowners and installers our operations, including manufacturing, customer service and supply and demand, anticipated growth in existing and new markets, the timing of new product introductions and regulatory matters. These forward-looking statements involve significant risks and uncertainties and our actual results and the timing of events could differ materially from these expectations. For a more complete discussion of the risks and uncertainties, please see our most recent Form 10-K and 10-Qs filed with the SEC. We caution you not to place any undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in expectations. Also, please note that financial measures used on this call are expressed on a non-GAAP basis unless otherwise noted and have been adjusted to exclude certain charges. We have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release furnished with the SEC on Form 8-K and which can also be found in the Investor Relations section of our website. Good afternoon and thank you for joining us today to discuss our fourth quarter 2022 financial results. We had a good quarter. We reported record quarterly revenue of $724.7 million, shipped approximately 4.9 million microinverters and 122-megawatt hours of batteries and generated free cash flow of $237.3 million. Approximately 55% of our Q4 microinverter shipments were IQ8. We exited the fourth quarter at 44% gross margin, 12% operating expenses and 32% operating income, all as a percentage of revenue on a non-GAAP basis. Mandy will go into our financials later in the call. Letâs now discuss how we are servicing customers. Our Q4 net promoter score worldwide was 71% compared to 70% in Q3. Our North American net promoter score was 74% compared to 71% in Q3. Our average call rate time was quite down to 1.6 minutes compared to 4.8 minutes in Q3. We started our teams well, focused on root cause, fixes of customer issues and improved our business processes. Letâs talk about microinverter manufacturing. Our overall supply environment remains quite stable in general. There are issues that crop up from time-to-time. Our teams are staying on top of them. Our quarterly capacity was 5 million microinverters exiting Q4. We are on track to begin manufacturing at Flex Romania starting this quarter, enabling us to service Europe better. This will enable a total quarterly capacity of 6 million microinverters exiting Q1. We are going to increase this capacity even more with U.S. manufacturing. Letâs cover that now. As we discussed last quarter, we are pleased that the IRA will help bring back high-tech manufacturing to the U.S. and stimulate the economy through the creation of jobs. We are excited to service the U.S. customers better with local manufacturing. We plan to begin U.S. manufacturing of our microinverters in the second quarter of 2023 with a new contract manufacturing partner and in the second half of 2023 with our two existing contract manufacturing partners. We plan to open 6 manufacturing lines by the end of this year adding a quarterly capacity of 4.5 million microinverters, bringing our total quarterly capacity to more than 10 million microinverters as we exit 2023. We continue to await the details of IRA implementation from the U.S. Department of Treasury. Letâs cover the regions. Our U.S. and international revenue mix for Q4 was 71% and 29% respectively. In the U.S., our revenue increased 15% sequentially and 59% year-on-year. We had record quarterly revenue, record quarterly sell-through for our microinverters and record quarterly installer count in the fourth quarter. Our microinverter channel inventory was quite healthy at the end of the fourth quarter, while our storage channel inventory was a little elevated. I will go into more details about our batteries later in the call. In Europe, our revenue increased 21% sequentially and more than 130% year-on-year, led by strong demand in Netherlands, France, Germany, Belgium, Spain, Portugal and the UK. We had record sell-through and record installer count in Q4 as we continue to grow our business. We started shipping our IQ8 microinverters into Netherlands and France in Q4. We are working hard to introduce IQ8 into other European countries shortly. Also, we are currently shipping IQ batteries into Germany and Belgium. We expect to start shipping IQ batteries into Austria, France, Netherlands and Spain in the first half of this year. Our GreenCom Networks acquisition, which closed in the fourth quarter helps to integrate Enphase microinverters and batteries with third-party EV chargers and heat pumps, enabling homeowners to control their devices from one app, which is the Enphase App. We are integrating the GreenCom offering with the Enphase ecosystem and expect to make it available to our European installers shortly. Now I will provide some color on Latin America, Australia and Brazil. In Latin America, our revenue doubled year-on-year. We had steady growth in our solar plus storage business in Puerto Rico during 2020. In Australia, the solar market continued to recover in Q4 after a weak first half of the year. We expect to introduce IQ batteries in Australia, along with IQ8 microinverters in the second quarter of â23. As for Brazil, we experienced significant quarter-over-quarter revenue growth as we saw increased deployment of our IQ7 family of microinverters. The residential solar market in Brazil continues to grow rapidly. We have a very strong team in place. And we are excited about our future growth in the country. The emerging residential markets in Brazil, Mexico, Spain and India are all moving to high-wattage panels. In order to service them better, we plan to introduce a high-power 480 watt AC microinverter in the second quarter. Letâs discuss our overall company outlook for Q1. We expect our Q1 revenue for the company to be within a range of $700 million to $740 million. We are fully booked for Q1 right now. Let me provide some additional information on the key regions, first about Europe, then about the U.S. Our Europe business is doing very â is very strong as I noted. Note that we also doubled our revenue from 2020 to 2021 and more than doubled again from â21 to â22. We have a strong team in place and are quite bullish about 2023. We expect to introduce IQ batteries and IQ8 microinverters into many more countries in Europe as we progress through the year. Our value proposition is our differentiated home energy management systems, combined with high quality and great customer experience. As for Q1, we expect healthy growth compared to Q4, consistent with the overall growth in the European market. Letâs now cover the U.S. We expect our U.S. business to be slightly down in Q1 compared to Q4, primarily driven by seasonality and the macroeconomic environment. We are seeing that our distributor and installer partners are a little more cautious in booking orders. We normally have a 6-month order visibility and that has been somewhat reduced as our partners watch their spending closely. On the sell-through of our microinverters, while December was quite strong for us we saw a more pronounced seasonality in January than normal. There are a couple of interesting observations I thought I will share with you. Even with the pronounced seasonality and sell-through in January, we would like to point out that our activations are holding up. The second point to also note is that in conversations with our installers and distributor partners, they have started to see originations pickup in January when compared to December. Although the data we have is limited, these two points make us cautiously optimistic about Q2. We have also seen some analyst reports about a possible shift from loans to PPA due to the high prevailing interest rates. We work with thousands of installers every quarter. Our installer base is very diverse, both small and large installers that offer cash, loans and PPA options to homeowners. Any shift from one type of financing to another only has a minor impact to our business, almost negligible. No matter what the conditions are, our approach at Enphase does not change. We manage for the long-term. The basic thesis ongoing solar and storage remains intact, aided by a few factors: first, the utility rates, which are rising in many states across the U.S.; second, the 30% ITC tax credit, which has been extended for 10 years with the IRA; and third, the desire for energy independence and tackling climate change. At Enphase, we will continue to make best-in-class home energy systems with a laser focus on product innovation, quality and customer experience. Letâs switch to talking about battery. We shipped 122-megawatt hours of IQ batteries in Q4. We have now certified approximately 2,300 installers worldwide since the introduction of IQ batteries into North America, Germany and Belgium. Our installers in North America experienced a median commissioning time of 91 minutes exiting Q4 compared to 118 in Q3. We made significant software changes to improve communication, grid transitions and commissioning time, and I am quite happy with the performance of the team. As a result, we saw slightly higher sell-through of our batteries in Q4 versus Q3. We have also got a number of feedbacks from the installers about the fact of improved performance in terms of commissioning. We plan to ship 100 to 120-megawatt hours of IQ batteries in Q1. We also expect to start ramping our third generation IQ battery in North America and Australia in the second quarter. This battery has got 5-kilowatt hour modularity, 2x the power compared to our existing battery and 30-minute commissioning time in addition to being easier to install and service. We expect the higher charge discharge rate as well as the 5-kilowatt hour modularity to be uniquely beneficial to the homeowners under the upcoming NEM 3.0 tariff in California. With the significant changes we are making to our IQ batteries, we are confident that storage installations will become as efficient as microinverters. And as a result, the profitability for installers should get better. We expect our battery business to perform well in the second half of the year, both due to our third generation battery as well as NEM 3.0 adoption in California. Letâs now talk about our product for the small commercial solar market in the U.S. We are on track to pilot the IQ8P product and release it to production in the second half of the year. As our panel power continues to increase rapidly, we are increasing the power of the microinverter by 50% from 320 watts to 480 watts AC while sticking to the single panel architecture. This product as well as the 480 watt residential microinverter for emerging markets share the same design. Letâs discuss EV chargers. We shipped approximately 7,600 EV chargers in Q4 as compared to 6,370 charges in Q3. We began manufacturing Enphase branded EV chargers at our contract manufacturing facility in Mexico this quarter, helping us to increase capacity and reduce costs. We expect to introduce IQ smart EV chargers to customers in the U.S. in the second quarter. These chargers will provide connectivity and control, enabling use cases like green charging and allow homeowners visibility into the operation of their Enphase solar plus storage plus EV charger system through the app. We recently demonstrated our bidirectional EV charger technology combining vehicle-to-home, vehicle to grid and green charging functionality. This new bidirectional EV charger, along with Enphaseâs solar and battery storage can all be controlled from the Enphase app, empowering homeowners to make use, safe and sell their own power. We are working with standards organization, EV manufacturers and regulators to bring this technology to market in 2024. Let me give you a quick update on our Enphase Installer Network, or EIN. We have now onboarded more than 1,300 installers to our EIN worldwide through a highly selective process focused on installed quality and exceptional experience to homeowners across the globe. Letâs discuss the installer platform. We made several updates to the Solargraf design and proposal software during the fourth quarter, incorporating battery design and proposal, document management, consumption modeling and several other improvements as requested by our installer partners. In addition, we made significant strides in automating the creation of permit plan sets with Solargraf software. We now have over 1,000 installers using Solargraf software. Next, Iâd like to comment on NEM 3.0 in California. The CPUC has finalized its decision on NEM 3.0 in Q4. While we wish the export rates had been stepped down a little more gradually, the policy is generally in the right direction for incentivizing homeowners to adopt storage. The next step is for installers to educate homeowners to increase adoption of NEM 3.0 and companies like Enphase need to help in making this transition possible. Thatâs where Solargrafâs design and proposal engine comes in. Installers will be able to use Solargraf to provide homeowners with a proposal that optimizes their bills under NEM 3.0 tariff to minimize payback and maximize ROI. The advantage with Solargraf is that the underlying algorithm used by [indiscernible] will be the same as what is used in the actual operation of the Enphase home energy system. As the system complexity increases with solar, batteries, EV chargers and dynamic rate structures such as NEM 3.0, the tight coupling of Solargraf and actual product operation will maximize value to homeowners. In summary, we are quite pleased with our performance. As a reminder, our strategy is to build best-in-class home energy systems and deliver them to homeowners through our installer and distributor partners, enabled by the installer platform. We have many new products that are coming out in 2023 that will increase our served available market and positively contribute to the top line. We look forward to introducing IQ8 microinverters worldwide, introducing IQ batteries into more countries in Europe, launching our third generation battery in North America and Australia as well as introducing our highest power 480-watt IQ8P microinverter for both the U.S. small commercial and emerging residential markets. We are also excited about the upcoming Solargraf functionality, especially the NEM 3.0 functionality and finally, the work we are doing to bring both smart EV chargers as well as bidirectional EV charging capabilities to the market. Thanks, Badri and good afternoon, everyone. I will provide more details related to our fourth quarter of 2022 financial results as well as our business outlook for the first quarter of 2023. We have provided reconciliations of these non-GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the IR section of our website. Total revenue for Q4 was $724.7 million, representing an increase of 14% sequentially and a quarterly record. We shipped approximately 1,952.4 megawatts DC of microinverters and 122.1 megawatt hours of IQ batteries in the quarter. Non-GAAP gross margin for Q4 was 43.8% compared to 42.9% in Q3. The increase was driven by a favorable IQ8 product mix. GAAP gross margin was 42.9% for Q4. Non-GAAP operating expenses were $87.7 million for Q4 compared to $78.6 million for Q3. The increase was driven by international growth, customer service and R&D. GAAP operating expenses were $153.7 million for Q4 compared to $132.5 million for Q3. GAAP operating expenses for Q4 included $59.4 million of stock-based compensation expenses and $4.9 million of acquisition-related expenses and amortization for acquired intangible assets and $1.8 million of restructuring and asset impairment charges. On a non-GAAP basis, income from operations for Q4 was $229.4 million compared to $194 million for Q3. On a GAAP basis, income from operations was $157 million for Q4 compared to $135.4 million for Q3. On a non-GAAP basis, net income for Q4 was $212.4 million compared to $175.5 million for Q3. This resulted in non-GAAP diluted earnings per share of $1.51 for Q4 compared to $1.25 for Q3. GAAP net income for Q4 was $153.8 million compared to GAAP net income of $114.8 million for Q3. This resulted in GAAP diluted earnings per share of $1.06 for Q4 compared to $0.80 for Q3. We exited Q4 with a total cash, cash equivalent and marketable securities balance of $1.61 billion compared to $1.42 billion at the end of Q3. In Q4, we generated $253.7 million in cash flow from operations and $237.3 million in free cash flow. Capital expenditure was $16.4 million for Q4 compared to $8.9 million for Q3. The increase was primarily due to investment in additional contract manufacturing sites and R&D equipment. Capital expenditure for the full year of 2022 was $46.4 million. Now, letâs discuss our outlook for the first quarter of 2023. We expect our revenue for the first quarter of 2023 to be within the range of $700 million to $740 million, which includes shipments of 100 to 120-megawatt hours of IQ batteries. We expect GAAP gross margin to be within the range of 40% to 43% and non-GAAP gross margin to be within the range of 41% to 44%, which excludes stock-based compensation expenses and acquisition-related amortization. We assume a conservative euro FX rate in our Q1 guidance, and we donât expect significant impact to our financials from fluctuations in FX rates. We setup our GAAP operating expenses to be within the range of $177 million to $181 million, including approximately $77 million estimated for stock-based compensation expenses, restructuring charges for site consolidation, acquisition-related expenses and amortization. We expect our non-GAAP operating expenses to be within a range of $100 million to $104 million. Moving to tax. Since we have utilized most of our net operating loss and research tax credit carry-forwards in 2022, we announced a significant U.S. cash taxpayer. We expect GAAP and non-GAAP annualized effective tax rate for 2023 to be at 22% plus or minus 2% before any IRA impact. In closing, we are pleased with our 2022 financial performance. We grew our revenue by 59% year-over-year, while spending on non-GAAP gross margin to 42.6% in 2022. We increased non-GAAP diluted earnings per share by 92% to $4.62 per share in 2022 and generated record free cash flow of $698.4 million more than double from 2021. Thanks so much, guys. I appreciate all the detail here. Can you talk about what your â how your pricing strategy is evolving here as you move into different configurations for the devices, and you continue to try to monetize the value here. Are there areas where you can increase price a little bit? Are you trying to hold it flat? Just talk to us about how thatâs evolving here. Yes. The pricing in general right now is very stable. We do value-based pricing. We look at pricing versus the next best alternative. And we usually look at what value do we add in compared to that alternative. And typically, the things we focus on for microinverters are how is our quality compared to competition with our customer experience compared to competition. How is our ease of use compared to competition is the product a lot more easier to install and that matters to the installers and they â once they install, they do not want to come back to that site again. So they need excellent support. So if we look at all of these puts and takes, and we look at it versus the next best alternative. We price our products. We are extremely disciplined. There we also have a segmentation strategy, which means that we look at different flavors of power, and we price it according to the value those provide. In batteries, our strategy has been similar with the first two products in our generation, first generation and second-generation batteries, we fell a little bit short in terms of the differentiating features. And now with the third generation, I think we are going to be quite unique. We have modularity of 5-kilowatt hours, we will have double the power compared to the prior generation, which means a 5-kilowatt hour battery will have 3.84 kilowatts of continuous power and 7.68 kilowatts of peak power, which is amazing power. And then in addition, thatâs going to have 30 minutes commissioning time, the thing that we didnât get right on the first two generations. So with batteries, we are back into the value space, again, and we will price those products accordingly. So the short answer to your question, pricing is quite stable now. Okay. Excellent. And then as you look at making a bigger push into the commercial rooftop market, can you talk a little bit about the preparation in the channel in terms of education and training on the product, what youâre seeing already in terms of sell-through with some of the legacy products as you prepare to really get into full swing by the middle or latter part of the year? Right. This product, we had originally 3 years ago, we started with introducing the IQ8D product. And that at that time was a good idea. It was 640-watt AC. And that microinverter covered two panels. And we got excited by that. Weâve worked on it. And that product, it took us some time to work on it because not only we had to get the microinverter right, we had to get the entire chain right, which is the microinverter performance, the gateway performance, most important, the software performance. And then we needed a proper design and proposal inject light Solargraf. So it took us quite a bit of time. And then we realized a few months ago that, yes, we can come with that product, we can release that product out, but that product is going to fall short in terms of power because the panel power in the commercial business has moved to, letâs say, greater than 500 watts. So, two panels will be 1,000 watts. 1,000 over 640 is a DCA ratio of more than 1.5. 1.5 is not acceptable in this business. The right number is between 1.2 and 1.25. So then we regrouped, we told the installers we are going to make a quick change, going back to the single panel, single micro architecture, we are increasing the power, leveraging what we did on the IQ8D. So it was not lost. We increased â we used that architecture and we basically are introducing now a product that is a 480-watt AC product. And that will take care up to 650 watts of panel power. So â and also accompanied by that product, we need the entire platform. What I talk about in the installer platform, which is starting from lead generation qualification because this is a design win business. Itâs not like the residential business. There is some cycle time. You have to capture opportunities properly. You spend a lot of time in understanding analyzing the ROI, the tools need to be excellent for that. And then you need help the installers through the entire process. And so I think we are finally almost ready that we are looking to introduce â beat our test with the installers in the second quarter using the entire flow. Then we are planning to release to release it start ramping in the third quarter. And itâs going to take us a few quarters to ramp because like what I said, this is not like the residential business. Itâs a design win business. And so we have to work with customers for an extended period of time and then convince them of the value proposition, and we will start winning. But our basic piece is there is the same. Product innovation great quality and support customers well, which is customer experience. Hi, everyone. Thanks for taking my questions. Congrats on the strong Q4 and Q1. Badri, one thing that I noted in your prepared remarks was that you talked about how some of your customers are experiencing more caution or they are a little bit more cautious in booking orders. Normally, you have a 6-month order visibility, and that has been somewhat reduced as your partners watch their spending closely. Can you expand on that a little bit and help us understand when do you expect to get back to your 6-month visibility? You talked about originations improving in January. But based on some of the conversations weâre having in the industry, it seems like there is a fair amount of tumult and challenge out there with trade credit being pulled back and some bankruptcies and just some challenges out there. So how do you expect to navigate that overall and perhaps share gain is one source of strength. But just wanted to understand, as we look through the rest of the year beyond Q1, how do you expect the year to develop. Thanks. Yes. I mean, look, seasonality has always existed in the solar industry from Q4 to Q1. And historically, I would say that, that seasonality is a 15% number. That means, in general, the sell-through in Q1 is usually 15% down compared to the sell-through in Q4. Now right now, and Iâm giving you a lot of data from January, and thatâs the data we have. Our Q4 was very strong, including December. January, we start to experience a little more than 15%. Thatâs why I said more pronounced seasonality. And of course, we think it is due to the macroeconomic environment, but what we saw interestingly was the activations remain the same. I mean approximately and they were a little bit down they didnât have that much of a seasonality. So that basically was somewhat good because the customer demand at least whatever we saw was â I mean, did not get that much affected. But having said that, I think the installers are quite cautious. Therefore, they basically are only buying what they need from their distributors, which is a stark difference from 2022, where they were focused on supply. They were focused on maximizing what they had in their warehouse. Now is that they are worried about their spending, they are worried about their OpEx, they are worried about their cash flow. Therefore, they are going to make sure they do exactly what is required. So thatâs why I think â and I donât have a crystal ball. I cannot be sure. Thatâs why I think we are seeing some customers who used to book 6, 9 months ahead, now will not book so much ahead. They will be a little more conservative. And regarding your question on more â that the originations, whether they are improving or not, this is the data. We work with thousands of installers. We have a very strong sample set. We talked to a lot of distributors. Some of our distributors service hundreds of long tail installers. So we donât see originations ourselves. We only â what I reported to you is anecdotal information. But we hear that originations and especially originations in California are back to being strong in January. Thatâs what we hear. And I think that is â thatâs why I said that â plus the fact that we are not seeing that much of a link in activation points me to cautiously optimistic Q2 versus Q1. Okay. Great. Thanks, Badri. Shifting gears to the IRA historical, I think on the last call, you were talking about the ability to get the majority of that credit. I was wondering if you could comment on the latest you see in terms of the microinverter credits? Do you expect to get the vast majority of that? And then in terms of the timing of the Section 45X or manufacturing PTC guidelines, some of our checks suggest this could be released much later than originally expected maybe a year later. Just curious if that impacts your plans at all? And if you can talk about CapEx required for the facilities and factories, that would be great. Thanks. Yes. So Iâll answer the question in reverse. CapEx required, basically, an auto line is roughly 750,000 units and auto line cost is including tax, etcetera, anywhere from $8 million to $10 million per line. So if we have to do six lines, thatâs anywhere close to $60 million â $50 million to $60 million. So thatâs the CapEx spending. Now to answer your question, do we expect to get the vast majority. Yes, we do. And then does the announcement of the treasury indication change our plans, no, it does not. We are going to start manufacturing in the second quarter. And we are going to ramp up a couple of lines with a new contract manufacturer in the second quarter. And then we are going to start the remaining lines. So totally, we will have six manufacturing lines by the end of 2023 with three contract manufacturing partners. Hey, guys. Good afternoon. Thanks for taking the questions. Kudos on the solid execution. First question I had was just around NEM 3.0. I think there is different implications of that policy uncertainty near term and medium term from what weâre hearing. So maybe just wanted to get your thoughts near-term, some views out there that maybe there is a pull forward on demand in California would be curious what youâre seeing with respect to that? And then kind of in the medium term, weâre hearing the industry is still maybe trying to figure out how to navigate this. So curious how you specifically are thinking about the second half of 2023 in the U.S. you kind of base case in California to be down significantly? And then how do you see yourself navigating that, if thatâs the case? Are you driving more product to other states, focusing more in Europe? Just curious just how youâd be thinking about planning into that period of higher policy uncertainty in the back half? And then I had a follow-up. Yes. On NEM 3.0, we arenât really seeing any pull forward right now. But in talks with few installers in California, both big and small, like what I said, the originations are up strongly. They are all quite optimistic. And maybe we will see something soon thatâs why I talked about an optimistic Q2. But so far, we havenât seen any pull forward demand yet. Now on talking about NEM 3.0 in general. NEM 3.0 is going to be incredibly positive for us. Because NEM 3.0, I mean, just so everybody gets it, Iâll talk about NEM 3.0, the features of NEM 3.0. Basically, the â previously, the import and export rates were the same. So therefore, when you exported electrons with the solar system didnât really matter. As long as you exported, it got directly subtracted from what your input. Thatâs why itâs called net metering, and that was net metering 2.0. With NEM 3.0, it matters when you export these electrons. So you have 24 hours a day, 365 days a year. So basically, 8,760 data points, and there is an export rate for each of those data points. Each of those hours, there is an export rate. And â but what it works out to be is if you are interested in a pure solar system, your payback dropped understandably from, letâs say, 5 years, it increases actually to something like 7 or 7.5 years with the pure solar system. But the moment you add batteries, you can add batteries in steps of 5-kilowatt hour, 10-kilowatt hour, 15-kilowatt hour, the moment you add batteries, that payback comes right back in to that 5 to 6-year time, to that 5 to 6-year period. That is the stock difference with NEM 2.0. With NEM 2.0, the grid was the battery. Batteries didnât have an ROI because batteries were primarily for resilience only. With NEM 3.0, batteries are going to be financially attractive. But it is complex. NEM 3.0 is definitely complex. So the installers need to demystify it for the homeowners. And thatâs where an engine like solar draft and other engines come in, where if we are able to show this to the homeowner, we think it is a no-brainer. The homeowner will always pick solar plus storage. Now to add some more variance to it, Germany, for example, if you look at Germany, this is exactly what happened. They call it as a feed-in tariff where â so that is not 8,760 different rates for those hours, but they have one rate, which is a much reduced rate. And therefore, self-consumption becomes the norm in Germany. No one thinks about exporting solar, right? And that have an 80% attach there. This is going in the same direction, going in the same direction. In Germany, you have grid-tied batteries because power doesnât go out there much. It goes out maybe once a year. We have grid tied battery. Grid tied batteries means you â the installation is simpler, and it is cheaper. Iâm not sure whether California will go in that direction. Time will tell because we do have some color. We do have resilience issues as well. But I am sure markets will evolve a little in that direction, too. So bottom line, we are incredibly optimistic. We got the right batteries for it with the third-generation battery. We got the modularity, which I think will start becoming popular. Grid tied may become popular, but we will be ready to do either grid tied or off grid, on grid with backup. The things that are looking, we like NEM 3.0. Of course, we didnât like the fact the step down happened right away. But I think in the long-term, itâs an okay decision. One more â I will make one more comment to what Badri said. Obviously, the battery is the third generation of our battery is uniquely valuable for â in this NEM 3 environment. But in addition, itâs also the optimization engine that we will be running, right. The engine has to in near real time, every hour make a decision on whether it is charging the battery, discharging the battery, managing the load, etcetera. All of that energy management engine becomes extremely valuable and extremely critical. It all begins with the design engine itself. What we have mentioned this, as Badri mentioned it in his script, that design engine, the engine that you run in order to design the system is actually the same engine that you run to actually operate the system. And so bringing those two pieces together is extremely critical and extremely valuable. And thatâs what we are spending a lot of time optimizing our engine and building up the design as well as the operation. And that it starts with the battery and it â that software is becoming extremely critical. Yes. No, I appreciate the color. Maybe two quick follow-ups. So, the long-term thesis I get, I guess on a shorter to medium-term basis, as you mentioned, Badri, the change is immediate and the industry is still trying to figure it out. So, are you â I guess what are you hearing from installers? Are they ready to convert customers, up-sell customers to batteries starting as early as the second half, or are we going to have pretty meaningful friction here until the market figures out the new rules and I guess some of the macro uncertainty, which you even alluded to earlier kind of settles out. And then secondly, if I just look at your numbers, battery volumes for your shipment guidance in Q1 will be down year-on-year for the first time since you guys started breaking that out. So, batteries all of a sudden donât look like they are growing for you. What should we be thinking about for the next few quarters into the back half? Like does NEM 3.0 drive growth again, or is this a sort of more uncertain period of battery growth at least in the next couple of quarters until, again, the market kind of figures it out. We think you should think that NEM 3.0 is going to be great for us. We are going to be growing with â along with NEM 3.0, we are going to be growing. In addition, we are going to be growing outside California too, because I am not sure whether you cut the color on what I have said, the â we are working on the battery transition right now. The second-generation product is going to give way to the third generation. And we have fixed all of our issues in the field for the most part in terms of commissioning and all of the software performance is all in â is quite stable right now, and we are getting ready for the transition of the third-generation battery. The third-generation battery appointed to you on the benefits power, the 30-minute commissioning time, and modularity. So, we think that starting in the second half of the year, we think NEM 3.0 will be a huge catalyst for this in California. In addition, we expect to also see very healthy growth outside California. Your other question, we talk to a number of installers all the time. We recently talked to a bunch of California installers on exactly this, whether are they ready, and most of them are quite optimistic about increasing their battery attach because for the first time, with the batteries, the payback will be a very good payback between 5 years and 6 years. And I think many installers, of course, are worried about the customers having to shell out a little bit more upfront. But with the ITC, 30% tax credit and with an incredible payback they think the sale will be more easier than what you think. So, we are quite bullish about NEM 3.0 and especially our third-generation battery in that context. Great. Thanks very much for taking our questions. So, a lot of focus on the U.S. markets, but I just wanted to go back to your comments about Europe. So, thatâs obviously been very strong in the last couple of years, kind of doubling each year. I know you donât guide annually, but just kind of how should we think about that market in 2023? Do you think kind of an approximate doubling is kind of the base case that we should be expecting from here? Well, as you said, we do not guide something annually, but European market is growing. At least our internal reports talk about served available solar market of about 13 gigawatts in 2023. The markets to really â the markets that are really driving are Netherlands, Germany, Spain, France, Italy, and even actually Austria, Poland, etcetera. They are all becoming quite significant markets. In addition, attach â battery attach is also growing. Like what I have stated in the prior question â answering the prior question, the attach rate on batteries in Germany is 80%. So, solar plus storage is growing healthily. And the geopolitical situation accelerated it last year, and thatâs continuing what do â whatâs our position is. We have a very differentiated product. We have microinverters on the roof, which are very high quality, easy to install. We have a huge customer service operation there in France and in Germany, and we take care of customers well. On batteries, we are just starting to ramp. And we have introduced our batteries in two countries, Germany as well as Belgium. We expect to introduce many more countries this year, and that will happen every quarter. And so we expect to add a lot more battery revenue there. And I forgot to mention, IQ8, we will be introducing IQ8 into every country in Germany â I mean every country in Europe shortly. So â and then on top of it, we bought this company called GreenCom Networks. Their job is to network third-party EV chargers and third-party heat pumps to the Enphase solar and storage system, and therefore, homeowners can operate â can optimize their system from one app, can see everything that is happening. So, to answer your question, the market is growing. The market is growing really significantly. Thatâs what I told you 13 gigawatts, we are well positioned due to our differentiating value proposition, and we recently bought a company, GreenCom Networks that is even going to make that situation better where we provide a complete home energy management system to our installers. Okay. And then maybe, Badri give you a little bit of a break. Mandy, can I ask, I mean, we are all doing the math on the domestic manufacturing tax credits. But I mean is there any color that you can share yet as far as kind of the upside from the tax credit, the potential downside from higher input costs just kind of the blended average, the appropriate way to be thinking about that U.S. manufacturing from here? Yes. I mean net-net, we expect a net benefit of between $20 and $30 a unit. I am giving you a wide range right now because we do have some puts and takes, and we will refine it as we go. Yes. Thank you. Just you are growing your production capacity, you are doubling it from $5 million a quarter to $10 million. You said, I think by year end of 2023, just could you give us a sense of your conviction that the demand will be there to meet that doubling of production. Yes. Look, if you look at our past growth rates, you can see it, we grew from â we grew, I think, â21 to â22, we grew 59%. And at that time, I think end of â21, we were doing, if I remember right, around 3-ish million units a quarter. End of â22, we are now â we just reported 5-ish million units a quarter. So, you can see that thatâs the nice growth. So â our long-term thesis on solar is â we are extremely bullish. We â especially with countries like Europe and with a strong position in the U.S. with our rapid entry into other emerging markets. We think it is the right call to basically invest in the right manufacturing, especially given the IRA benefits. So, even if we donât use all 10 million units per quarter, we will use it sooner or later. And I think the ROI is well worth especially considering the net benefit to us. So, our logic was quite simple. We werenât worried. We did a few back-of-the-envelope calculations. We thought it is the right thing for us to invest in these lines and fortunately, we have very strong and great contract manufacturing partners who need to do a lot of the heavy lifting, all our capital that we set out is quite limited. They do a lot of the heavy lifting, like what they are doing today, and two of them are existing contract manufacturers. So, we have deep relationships. And we are going to work with them in the long-term. So, we thought thatâs the right decision for us to do, and we basically accelerated that effort. And once we make a decision, it takes us a few quarters. In the past, it has taken us four quarters to six quarters to ramp up the likes. So, our thesis is quite bullish on solar, and we think thatâs the right call. Okay. No, thatâs â so ultimately, expect obviously, significant volume growth from that. And then on margins, you mentioned, I mean you have had the gross margin held up well, but then the $20 to $30 that you just mentioned, is that a gross margin benefit net of cost? Thatâs the net â the IRA gives you an incentive, which is $0.11 a unit, $0.11 per AC watt. Now, every microinverter that we make, letâs say, the microinverter that we make 320 AC watts. 320 AC watts multiplied by $0.11, right. So, that number is roughly about $35. So, that $35 is the net benefit. Now, it takes us some incremental cost to manufacture in the U.S. versus manufacturing in Mexico, call that as some delta, right. It also takes us â we want to make sure our contract manufacturing partners are healthy as well. So, therefore, they share a little bit of that incentive. Therefore, the net benefit for us would be that $35 minus the incremental cost adder, minus the benefit we pass on to our contract manufacturing partners, and that number is what I reported as $20 to $30 net benefit per unit. Thatâs all incremental to what we have today. Hi. Good afternoon Badri. I have two quick ones. You touched a lot on Europe, but I was wondering if you can specifically drill down on the visibility you have there in terms of Q1 and Q2. Yes. Europe is actually the opposite. We do have good visibility. We do have these strong orders. Partners, our installer partners, distributor partners, they rely on us for supply. A few of them even come to our headquarters quite routinely, thatâs something that we are starting to see. And we also visit them quite a bit. So, I think we do have decent visibility there. Great to hear. And then either for yourself or Mandy, I didnât know if there is a way of doing sort of a gross margin walk between Q3 and Q4. Certainly, the IQ8 cycle is helping. But wasnât sure if thatâs the complete story, if there is a mix issue in terms of ancillary equipment or softer battery sales that led to the strength in the quarter? And then how do we think about the gross margin walk to get to the high end of the range for next quarter? Yes. Itâs mostly about IQ8 mix. The IQ8 mix is 55% in Q4. That means if we â out of the 4.8 million microinverters that we shipped worldwide, 55% are IQ8. So, thatâs principally contributing to the gross margin. And that number, the 55% was, how much Mandy inâ¦? Yes. 47% in Q3. That number, we expect that number to be a little greater than 60% in Q1, that explains the model. I appreciate that. A very quick follow-up. As IQ8 grows in Europe, is that accretive or dilutive to the results that you just reported? Good afternoon Badri. Thanks for squeezing me in. Just I guess a follow-up on that last line of questioning. But I think you guys have targeted to get to 90% in terms of IQ8 mix by the end of the second quarter, I think you just said 60% is kind of whatâs baked in for the first quarter. Are you guys running a little bit behind on that? We are running a little behind, I would say. I would â I am going to â or rather we are going to introduce IQ8 into several countries in Europe in the near-term. So, in Q2, we will probably be at maybe a little lower than 80%. And I think in Q3, we should probably catch up to that 90%. Great. Thanks for that. And then I think this time last year when we had this call, and certainly a battery kind of uptake in California will increase, and that might change things. But I think you guys said that like California was roughly 20% of total revenues post the initial NEM 3.0 proposal. I was just wondering if you could kind of give us kind of a refresh on where â22 ended up in terms of California as a percent of total revenues. Thank you. Hi. Good afternoon to you. Thanks for the time, appreciate it. Just first off, I wanted to come back to the margin question and talk a little bit more about structural margin expectations. I know we talked about value pricing earlier. Can you elaborate a little bit on where you stand vis-à -vis your margin expectations for the course of this year? You talked about pricing, pricing integrity, maybe there is a little bit of mix here question between storage and the other products here. How do you think about the evolution of margins here through the course of the year, especially as you think about mix? And then also a little bit of a nuance from earlier, if I can follow-up. On utilization, obviously, you are fully utilized today. You think about bringing on that capacity. Is there any margin impact from underutilization as you bring on some of this, given the comments about the backlog dynamic? Right. On the margin question, as we convert more of our mix to IQ8, margins will get incrementally better, and we will take care of it in our margin guide. Like what I have told you, margin is not always about pricing. It is about a lot of focus on costs. And we have an initiative called world-class in the company where we continuously focus on every small, whether itâs a capacitor, whether itâs a resistor, the gate driver, the AC fed, the porting, plastics, the cables, the connectors, we have a large team working on the transformers. We have a large team working on it. And what you see is a combination of good cost reduction efforts, plus good pricing efforts. So, we will â if you had noticed, we improved our non-GAAP gross margin guidance from the prior quarter by 1% because of the IQ8 transition plus the progress we are making on world-class costs. And I have told before that batteries, we are in our second generation, every generation, we will improve costs. And we will not be in a business until we are convinced we can meet that our model, the gross margin, the company operating model. So, on batteries, we are continuously working on it. Our third-generation battery will be better than the second-generation battery. We already have a plan on the fourth-generation battery to reduce energy intensity significantly, so that will be even better. So, itâs a continuous program. And your second⦠Got it. Alright. Great stuff. And then just if you can comment just quickly on just obviously, loan versus lease the evolution, whatâs your ability to deviate and press volumes into the lease markets here if you think about it that way versus just helping and enabling your loan customer. We do business with a number of installers who offer leasing. And with some of those we have 100% share. With some of those, we have a healthy share mix. So overall, we are very well positioned. We have a significant shift between loan and lease. I donât think we will miss a beat. Hi, everyone. Thanks for sneaking me in here. So maybe just on the contract manufacturing coming back to the U.S. Obviously, with that, with Romania coming on, itâs about better servicing the customer and lead times. But I am just curious, I mean, is there any margin benefit to that as well, you have been servicing global from Asia and Mexico to this point, any benefit from being closer to the customer? Net-net, it is a wash because if you think about it, it depends upon where the raw materials come from. So if you have manufacturing, for example, in Europe, unless you move all the raw material factories to Europe, to a first order, you will not get that benefit. So basically, you have to look at it as the full chain where your total cost is a function of how you transport the raw materials, then you make the product and then you ship the product to your customers. So in the case of Romania, yes, we are closer to the customers, but you do need to get raw materials to the factory. So I would say it is a wash. It is a wash. Itâs not significant enough to talk about, but it will become significant if we are able to do exactly what I said, which is us, if we are large enough and if we are able to convince some of our â some of the suppliers to move factories to open up factories closer to the manufacturing area, definitely, there is some cost to be taken out. Any indications that, that is starting to happen. I mean, people come into the U.S. the tax credits and that sort of thing? Yes. As we get bigger and bigger, those will eventually happen. Right now, it is a process. I canât tell you that itâs an event. It will happen one fine day. But for example, in Mexico, we have started to see that. Some of our suppliers have setup factories for enclosure, for example, or for connectors, they have started to setup. We are realizing some gain there, but it is an evolution. Hey, thanks for squeezing me in. This is David Benjamin on the line for Maheep Mandloi. I was wondering if you could give us a little insight into the mix for Europe in Q1? We basically told you that the revenue mix between U.S. and international is 71% and 29% and most of our international revenue is Europe. Okay. And thatâs the same for Q1 is â do you think thatâs going to be in line for Q1 as well? We donât usually talk about that mix for Q1, but I think it will be slightly better because Europe is a little strong in Q1 compared to the U.S. Great. Thanks. And just a follow-up, on batteries, can you talk a little bit about what you think with the new third generation, if you think â or what do you think the retrofit opportunity is going to look like? This is Raghu. I think retrofit in general, for storage is going to be better than before because if you recall the IRA now has 30% battery ITC, standalone battery ITC, which means that you can be decoupled from solar, you can come in and add battery later on into the system and still get your 30% ITC. And thatâs â and for us at Enphase, we have a unique benefit because we are AC coupled we can very easily do that. So if you have an existing system, even if itâs an older generation solar system, you can come in and add an AC coupled battery. And you can add it in modularity of 5 kilowatt hours, you can grow it how many hour system you want to add, you can add it over time. All of those things are possible with our system and get access to the 30% ITC credit. So definitely a benefit for retrofit. Good afternoon and thank you for taking the questions. So Badri, in your prepared remarks, you mentioned that distributors â some of your distributors are starting to see a bit of recovery in January. I was just wondering if you could maybe share some details on what those distributors are now seeing in terms of year-on-year growth and maybe how that compares to what they had seen in the prior quarters? No, those are not our data. So we cannot share those. All I said is basically â there are two things, which I said, we are seeing the distributor and installer partners a little more cautious in booking orders. Normally, we have 6-month order visibility and that has been â that is now somewhat reduced as they watch their spending. And then I also talked about the fact that our sell-through, which is what the distributors sell to the installers. Our sell-through was quite strong in December, while we saw a little bit more seasonality than normal in the month of January. On the originations, which I talked about where basically anecdotal data points from the installers that a few of them have seen the originations pickup in January compared to December. We also have our Solargraf design and proposal engine. We also have another company we bought called SolarLeadFactory, which also deals with selling leads to our installer partners. We are also seeing very similar trends that January is better when compared to December. So although the data we have is limited. And so I mentioned that the â this point makes us cautiously optimistic for Q2. Fair enough. Thanks for the clarification there. And this is my follow-up question. In the event that youâre the only major player thatâs able to capture the microinverter credit. Can you speak to your willingness to use the manufacturing credits as a tool to gain market share? In other words, just passing on all those benefits to the customer and just using that to gain share? And thatâsâ for me, thank you. Yes. I mean we normally donât think like that. We think we are quite disciplined. The product must add value and it must add value compared to the next best alternative. Thatâs the only way for us to win long-term. So this one is an incremental benefit and we have to do a lot of work for that. There is a lot of R&D. There is a lot of work we have to do in reliability in qualifying these factories and having the right operations running there. Of course, I talked about the capital outlay, etcetera. So all of those are we are investing in all of those right now. But we are going to be extremely disciplined. We are not going to use this as an opportunity to lose that discipline in pricing. Thanks. When you look at the U.S. market, I think you mentioned more than the typical 15% seasonal slowdown in January. Can you maybe just unpack whether thatâs more concentrated in in states like California? Or is it more evenly distributed across the country? I mean, in California, there is an added complexity due to the due to the weather in the first few weeks of January. So I would say yes, thatâs the only difference there. So once the weather is normalized, I think, we are going to find it is equivalent across the states. Okay. Got it. And then just switching gears, I wanted to ask on the bidirectional charger and what youâre working on there. I guess how much demand do you think thereâll be for this product down the road? I think itâs small now, but down the road? And then when you think about pricing, I mean, how much value do you think you could ascribe to bidirectional charger given all the opportunities that it opens up. Yes. This is Raghu. To begin with, we shouldnât think about a bidirectional EV charger or something stand-alone by itself. Itâs a core part of our energy management system. Energy management system will include, obviously, solar, stationary batteries, bidirectional EV chargers, grid management, etcetera. So it is part of that full solution that we offer. And within that full solution set, energy management piece, the software thatâs federating how the energy should flow between all of these resources as well as into the house. So thatâs the way we think about it. As far as â on a first principle basis, it would be if you buy an EV, you should buy directionally EV charger. Itâs really as simple as that in order to gain the most benefit out of it because should think back, as we said, it does both of those use cases we talked about, which is both vehicle-to-home as well as vehicle to grid, vehicle-to-home means providing resiliency for the home. Itâs the resiliency that the IQ8 on the roof provides see that our battery, modular battery system provides the resiliency now added resiliently that the car can also provide. And when it comes to vehicle to grid, this is about the ability to leverage the energy that you have stored in our â store in your car to provide things like grid services on act like a virtual power plant. So I think you bring a lot of value to it by being part of our energy system and really, I would expect that anybody who buys in EV would be naturally motivated to buy the Enphase Energy system, which would include the solar, the battery and the bidirectional EV charger. Hi, thank you for taking my question. A lot of my questions have been answered, maybe just one last one, if I may. So you doubling your capacity and presumably, the U.S. market will be going forward served by the manufacturing capacity in the U.S., right? So is there any risk that these capacity additions in the U.S. cannibalize some of your existing lines outside of the U.S. that current be important here? Or is the international growth that youâre expecting so strong that basically your international capacity will just serve outside of the U.S. demand? Thank you. Yes. I mean, once again, we are â I clarified this actually before. We are very disciplined. We will not â we are working with the same contract manufacturers. So we can see the business in totality with the â we are not going to basically shortchange them on their locations elsewhere. So it has to be carefully done and we have orchestrated the right plans. Fortunately, for us, our business is healthy, ramping up in Europe, Europe, for example, as well as U.S. quite strong usually. And it takes us anyway, four to six quarters to ramp such lines. So what we will do is a careful allocation process to make sure that all of the factories are correctly loaded. Thatâs what we will do. Hey. Thank you for taking my question. I just wanted to go back on the 1Q guidance and the range from $700 million to $740 million. How much of the softness have you embedded and incorporated into the 1Q guidance? And then I know you commented a little bit, but maybe if you can give even more color on what to expect in California in February and March? Thank you. Sure. I just wanted to get more color on the 1Q guidance in terms of how much of the softness you have incorporated into the guidance and then your view for California market for February and March? Yes. I mean we gave you 700 to 740 number. We told you clearly Europe, itâs growing quite well. We expect it to grow healthily in Q1 compared to Q4. And we also told you that the U.S. business will be slightly down as compared to Q4. So, thatâs the color we gave you. As for February and March, I mean I donât have a crystal ball, but like what I told you, it seems like the originations are starting to improve. So, we are optimistic things will get better. Thanks for the question. Two quick ones about Europe. Now that the European Union is talking about this net zero industrial plan, do you envision receiving any credits or other manufacturing subsidies for your operations in Romania? No, we have not heard about that or any â I mean about receiving any additional subsidies for our plant in Romania. However, there is active discussion going on in Europe about something analogous to the IRA thatâs being done here. That we are tracking pretty closely. And if that happens, and there are some benefits for us. We will obviously avail of it. But other than that, we are not hearing of anything else. Okay. And then I think other than Europe, your main international exposure is Australia. Can we get a quick update on that? Yes. Australia basically had a weak first half of â22. And the fourth quarter is basically recovering back to original levels. The exciting thing for Australia is we are just about to introduce our third-generation battery into Australia in the second quarter. And in addition, we are also planning to introduce our IQ8 microinverters there. So, they are going to have some brand-new products. And many Australian installers â we meet with the Australian installers once a quarter in a round table. And many of those Australian installers are excited about third-generation product. So, that will be an incremental revenue for us once we release it. Good afternoon, guys. Thanks for taking my questions. Could you address or help us understand what percentage of the battery storage sales are going internationally right now? And then I know you are introducing that in a number of new markets. Can you help us understand how the pace of ramp up in new markets, what we should expect for that over this year? Yes. We normally do not breakout batteries between U.S. and Europe. But I will say this that Europe is getting started. U.S., we have introduced batteries now for the last since Q3 of 2020. So basically, 2.5 years there. The Europe guys are getting started, but they are rapidly expanding. We have introduced the product in two countries, Germany and Belgium and there are a lot more countries that we plan to introduce in 2023. Immediately, we are going to introduce in four countries, basically, Austria, Netherlands, France and I think Switzerland and the fifth one as well, which is Spain. So we are going to steadily ramp up the megawatt hours there. And when it becomes we will actually look at it between Mandy and me and see whether we will start breaking that out for future quarters. This concludes our question-and-answer session. I would like to turn the conference back over to Badri Kothandaraman for any closing remarks. Alright. Thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again next quarter. Bye.
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Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Viavi Solutions Fiscal Second Quarter 2023 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, Regina. Welcome to Viavi Solutions second quarter fiscal year 2023 earnings call. My name is Sagar Hebbar, Head of Investor Relations with Viavi Solutions. Joining me on today's call are Oleg Khaykin, President and CEO, and Henk Derksen, CFO. Please note, this call will include forward-looking statements about the company's financial performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations and estimations. We encourage you to review our most recent annual report and SEC filings, particularly the risk factors described in those filings. The forward-looking statements, including guidance we provide during this call are valid only as of today. Viavi undertakes no obligation to update these statements. Please also note that unless we state otherwise, all results except revenue are non-GAAP. We reconcile these non-GAAP results to our preliminary GAAP financials and discuss their usefulness and limitations in today's earnings release. The release plus our supplemental earnings slides, which include historical financial tables, are available on Viavi's website at www.investor.viavisolutions.com. Finally, we are recording today's call and will make the recording available by 4:30 p.m. Pacific Time this evening on our website. Thank you, Sagar. Fiscal Q2 2023 slightly exceeded our lowered expectations, mainly as a result of anticipated headwinds in service provider spending. Fiscal Q2 revenue came in at $284.5 million, down 9.6% year-over-year and above our guidance range of $261 million to $281 million. Viavi's operating profit margin of 16.2% decreased 560 basis points from last quarter and 710 basis points from prior year, although above our guidance range of 13.9% to 14.9%, EPS at $0.14 per share was down 41.7% from the prior year and 39.1% from the prior quarter results and exceeded the guidance range of $0.10 to $0.12 per share. The current share count was $227.1 million during the quarter, down from 242.3 million shares in the prior year as we continue to improve the quality of the balance sheet. Cash flow from operations was $46.2 million versus $22.2 million in the prior year. And year-to-date, cash flow from operations continues to be strong at $72.8 million, compared to $75.6 million last year during the first half. Now moving to our reported Q2 results by business segment, starting with NSE. NSE quarterly revenue was impacted by lower service provider spent at $207.1 million and declined 15.2% year-over-year, slightly ahead of our guidance range of $187 million to $203 million. Although on lower levels compared to prior year and as the quarter progressed, demand patterns stabilized within NSE. NE revenue of $179.7 million declined 16.2% year-over-year, driven by the weakness in service provider spending. SE revenue at $27.4 million decreased 8.1% from last year. NSE gross profit margin at 64.4%, decreased 90 basis points year-over-year. Within NSE, NE gross profit margin at 64.1% decreased 30 basis points from the prior year, primarily due to decline in volume. SE gross profit margin at 66.8% decreased 500 basis points from last year, primarily due to product mix. NSE gross profit margin -- operating profit margin at 8.9% exceeded our guidance range of 5.5% to 6.5%, albeit down 980 basis points year-over-year. Now turning to OSP. Second quarter revenue at $77.4 million was up 9.6% year-over-year. Revenue was near the high end of our guidance range of $74 million to $78 million. Gross profit margin at 52.3% decreased 390 basis points from the prior year mainly a result of start-up costs in our new Arizona facility. Operating profit margin at 35.5% was within our guidance range of 35% to 37% down 70 basis points from a year ago. On February 1, 2023, the company approved a restructuring and workforce reduction plan to improve operational efficiencies and better align the company's workforce with the current business needs and strategic growth opportunities. The company expects approximately 5% of its global workforce to be affected and estimates it will incur charges of approximately $15 million in connection with this plan. The company anticipates the plan to be substantially complete by the end of fiscal 2023. Now turning to the balance sheet. The ending balance of our total cash and short-term investments was $489.7 million, down $27.4 million sequentially as a result of capital deployment towards both acquisitions and stock repurchases. As mentioned earlier, operating cash flow for the quarter was $46.2 million, an increase of â¬24 million year-over-year. The increase was a result of solid collections. In addition, we invested $18.1 million in capital expenditures during the quarter compared to $14.8 million in the prior quarter, primarily due to complete the build-out of our new Arizona production facility. During fiscal Q2, we repurchased 2.2 million shares of our common stock for $25.2 million under the share repurchase program announced in September, leaving the remaining balance of 274.8 million worth of shares authorized for repurchase. As you may recall, in September, we announced that the Board authorized a new common stock repurchase program for up to $300 million. In addition, we successfully closed the acquisition of Jackson Labs in fiscal Q2 2023. The total purchase consideration comprised of approximately $49.9 million in cash, and contingent consideration of up to $117 million in cash based on the achievement of certain operational and revenue targets to be achieved over a three-year period. This transaction provides Viavi, a leadership position and a resilient PNT, supporting government and service providers in protecting their key infrastructure and assets. The transaction allows us to leverage our existing go-to-market model and utilizes US federal NOLs. Now on to our guidance. We expect the fiscal third quarter 2022 revenue to be approximately $266 million, plus or minus $10 million. Operating profit margin is expected to be 13.6%, plus or minus 60 basis points, and EPS to be in the range of $0.10 to $0.12 per share. We expect NSE revenue to be approximately $197 million, plus or minus $8 million, with operating profit margin at 7.7% plus or minus 50 basis points. OSP is expected to be approximately $69 million, plus or minus â¬2 million, with operating profit margins of 13.5% versus minus 100 basis points. Our tax rate is expected to be between 23% and 25% as a result of jurisdictional mix. We expect other income, expenses to reflect a net expense of approximately $4.5 million. Share count is expected to be around 226 million shares based on current stock price levels. Thank you, Henk. Fiscal second quarter of 2023 came in above our guidance range. driven by better-than-expected NSE performance helped by stabilization in service providers' demand and spend. Our OSP business grew year-over-year and came in within the guidance range. Starting with NSE. NSE declined on a year-over-year and sequential basis. During the December quarter, we continued to see a continuation of general pullback in service providers' OpEx and CapEx spend that started during the last two weeks of September. In addition, we also did not see any meaningful year-end budget flush. Decline in NE, was primarily driven by weaker demand in our fiber and wireless lab products by Tier 1 service providers and wireless labs, responding to reduced business outlook. This was partially offset by stronger demand for our wireless field instruments, driven by the 5G C-band infrastructure deployment. In addition, we saw strong traction for the recently acquired Jackson Labs resilient PNT product, I'm pleased with the market momentum for resilient PNT technology as it increasingly becomes a must-have by the government and service providers as they adapt to resilient PNT technology to protect their strategic infrastructure and assets. Looking at the current quarter, we expect the demand softness to persist as many of our customers are continuing to pare back their CapEx and OpEx in face of weakening end market conditions. That said, we are encouraged with the service provider spend stabilization and are starting to see early signs of near-term recovery. We expect field instruments demand to start picking up by mid-calendar 2023, our service providers retrench and rebalance their CapEx and OpEx plans and resume their fiber network build-outs and 5G C-band expansion. This is expected to drive the recovery in demand for our fiber and field at products [ph]. In addition, we also expect several major cable operators to start upgrading their networks during 2023, and which is expected to drive the demand for our cable field instruments. Our SE business segment grew 14.2% sequentially, in line with our expectations. We expect SE revenue to remain steady at the current levels for the remainder of fiscal 2023. Now turning to OSP. OSP increased 9.6% year-over-year, driven by growth in both anti-counterfeiting as well as 3D sensing products and performed in line with our expectations. Looking ahead, we expect second half of fiscal 2023 to be weaker with quarterly core OSP revenue moderating to about $55 million per quarter, driven by weaker anti-counterfeiting product demand as some of our major end customers pulled back on fiscal stimulus. We also expect weaker year-on-year demand for 3D sensing products in the second half of fiscal 2023, driven by lower end customer demand. In view of weaker near-term demand environment, we're implementing a limited restructuring plan for our NSE and OSP businesses intended to align our operating expenses with the expected lower near-term customer demand and to redeploy investment to strategic growth areas in order to position Viavi for accelerated revenue and profitability growth as end markets recover. In conclusion, I'd like to thank my Viavi team for managing in this challenging environment and express my appreciation to our employees, customers, supply chain partners and shareholders for their support. Thank you, Oleg. This quarter, we will be participating at Morgan Stanley's TMT conference in San Francisco on March 6. We will also be attending the MWC in Barcelona and OFC in San Diego. Yes. Thanks for taking my question. Just in terms of what you just described for NSE and OSP in the near term, should I expect kind of a flat to down quarterly trend into the last quarter of the fiscal year and then a more meaningful pickup into next fiscal year? So I would say, seasonally, March quarter is one of our weaker quarters. And I think even though in the last two years, because of the constrained supply, seasonality was not as pronounced. I think this time around, we are seeing seasonality returning. So, I would actually expect I think, typically, our fourth quarter, we start seeing pickup. So I would expect the fourth quarter to be stronger than the third quarter. And I'd say, as it goes to September, it's a little bit too far out outside of our outlook, but I would expect it also to be coming in stronger, especially for OSP. Okay. And then specific to OSP, as we look into the next couple of quarters, how do you see the mix evolving â the NSE benefits from a pickup, lower base, especially as the service providers have become more cautious that could actually play to your favorite as the compares are easier, but I'm not so sure if the compares are relevant. As I think about OSP into next fiscal year? Any color would be appreciated. Well, let me just start and see if I'm addressing your question. So when we think about OSP, you got to think of it two ways, right? There's fundamentally two major segments. And there is Anti-Counterfeiting and then there's a 3D sensing. When the demand for smartphones is very strong, so effectively, if both Anti-Counterfeiting and 3D sensing are running strong, right, strong demand. You're in a $90 million quarterly run rate. When both of them are running weak as what we see like this quarter, right? 3D sensing demand is lower and the Anti-Counterfeiting you're closer to about $70 million, quarterly run rate. When either one of them is strong and the other one is weak, you're in about $80 million range. So we think in the -- over the next two quarters, there's headwinds for both 3D sensing, there's a lower outlook demand for the smartphones. And we're also seeing a number of major economies are pulling back on fiscal stimulus. So it may take them a little bit longer to work through the inventories of product they already have. So we think that's also going to be on the lower end. So we are clearly, March quarter, we see more clear demand. So we are saying to be in a neighborhood of like high $60, like $70 million. I think Q4, if Anti-Counterfeiting comes back a little stronger or smartphone comes in stronger, it may be better. But we are for the abundance of caution saying first half to be in the $70 million range per quarter for OSP. So I'm not sure if I answered your question. Thanks. So a couple of clarification just to be clear, the IP is going to be completed by the June quarter. You've talked about the size of the cost, but I didn't see any indication of what you think the benefits to results might be? What's the -- and what's your intended use of that benefit will be, whether it will be investing in something else or whether it will actually show through to the bottom line. So could you give us some sense of what the cost reduction, scale and benefits might be and what you're going to do with it? Sure. Sure. So 5% of our workforce will be impacted. The majority will be focused in the NSE business, a little bit in the OSP business, and we'll be targeting operating expenditures, most notably. So about 5 million of OpEx, 5% of the workforce. So call that a 25 million annualized benefit of which we'll see the impact in the September quarter on a full basis. Okay. And then going back to the OSP business for a second. So in the December quarter, we're talking about $24 million, $25 million worth of 3D sensing. And I assume when you're talking about the March quarter that the $55 million number was just the -- the counterfeiting and could you give us some sense of what you think we're looking at that In terms of -- it sounds like it's coming down into the $15 million to $18 million range in both the June and March quarters. Is that correct? That's exactly right. It's about 55 million for core or anti-counterfeit and then another 14 million to 15 million or so for 3D sensing products. If I could just steal one more Jackson Labs, can you give us some sense of what it contributed in the December quarter, what it might contribute in the forward quarters? Great. Thanks. Hi, guys. I guess Oleg, I'm trying to get the thread on carrier CapEx and OpEx a little bit more clearly because clearly, it was even better than you guided to in the quarter, but -- you talked about the macro, but yet it seems like calendar 2023 spend seems like it's going to be okay, and you're also saying that later in the year. AT&T guidance was good. I think wireless was good on the wireline side and maybe not as good on the C-band side. So could you just put all of this together and sort of help -- what exactly are we saying about CapEx and OpEx and the NSE business operating at a higher level because of those things. Sure, sure. So I think it's almost like when we had our earnings call in early November, we said, okay, it feels like it's a replay of the March quarter of 2020 when the COVID hit. First, there's a panic. And I think a lot of them kind of panicked in September and climbed down. And then usually, they step back and see, well, let's think what we're going to do well -- they reassessed and said, well, we got to take down some CapEx. And by the way, we really could care less about CapEx because we don't get impacted by that. But that's usually where our big money comes out. And then they say, well, we still have the business to run. So we got to start doing something more on OpEx. We've kind of pulled back too much. So usually, that quarter -- second quarter is when there a lot of realignment happens. And then the following quarter, which is where we are right now, there is now a reassessment and planning, okay, so what are we going to do? So the CapEx reductions get communicated to NAMs, and we've seen a number of major NAMs stating that lo and behold, yes, they're going to get less revenue this year, even though most of them were in denial or ignoring it in October. And so now the -- so that's kind of the CapEx plan. But then the OpEx plans come in because a lot of the equipment is already coming in and it came in and needs to be installed, deployed turned on. Well, you need the tools for that, and that really comes back to us. So we are seeing -- you mentioned AT&T Verizon. I mean, there is not, okay, the world didn't come to an end. Guess what? We still need to build our networks. We need to turn on the services. And let's start thinking about the deliveries and orders. This is why I'm saying we're feeling good that we are starting to see stabilization in the right signals coming out with the demand for field equipment. And it gets even better. I mean, you've seen the AT&T announcement with BlackRock. Well, now they just have a whole part of extra money to go and extend the fiber to the states where they were not even playing. And that brings a whole different element of competitiveness, whereas the cable players now need to respond sooner rather than later and equalize relative performance of cable network versus fiber. So, I feel very good that we're going to see a recovery and growth in fiber and cable spend. this year. And by the way, last year, cable was de minimis, it was kind of a cozier. So, I think over the next two years, we're going to see a -- I would say, a mid-cycle upgrade of network before the DOCSIS 4.0. And what they're going to try to do is reallocate spectrum in the cable to have more symmetric bandwidth up and down, right? And of course, in about two years, we expect the DOCSIS 4.0, which would get you up to maybe up to 10 gigabits in speeds on the cable network. So, that's why I feel in fiber and cable, we're going to have some upsides starting in the middle of this year and going on beyond that. And of course, the 5G C-band deployment is ongoing. And now that equipment is there, we feel the demand for field instruments will be kind of our time to shine. Well, I appreciate all that color. And I had a couple of follow-ups in there, and then you would get to the questions. So, I'm going to pass it on here. And again, thanks for the helpful answer. This is Karan Juvekar on from Morgan Stanley. Thank you for the question -- or for Meta Marshall. Thank you for the question. I guess just have you seen any changes to behavior from European customers? And there's been times since there seems to be some caution around overbuilding or maybe some rationalization over there. Any sort of geographic trends that you want to call out? So, I'll start and I'll turn it over to Henk. I think the -- in the last quarter, there's been a lot of volatility regarding the exchange rate. So, the European -- I mean, there's been some slowdown in deployment, but the problem is more driven they still spend the same budget, but they were getting fewer -- less equipment, right? So, actually, all things considered, we see actually EMEA doing pretty well. And there's a lot of structural problems. I mean, there's a lot of volatility of foreign exchange. But now we're kind of back to where we were in September in terms of euro and pound. And actually, Europe is holding up relatively well, I would say, for us, all things considered. Okay. That makes sense. And I guess just a quick follow-up just on the strategic activity in the space. I mean just given sort of the National Instruments announcement, I guess, and maybe more industrial players wanted to get into maybe T&M or the broader industry. I guess, does that change how you think about M&A opportunities, or any update to sort of your thoughts around M&A opportunities? Well, I mean, it's -- I mean, even though, I mean, generally National Instruments is in general category, their business model is very different. They're very much focused on lab and some of the industrial deployments. And I'm not surprised that, for the longest time, test and measurement has been kind of the ride the danger field for those who are old enough to remember. And he wasn't getting respect. So I think these guys are realizing that it's a very attractive business model. And -- but also SE is always greener on the other side. And when I see electrical industrial, electrical power industrial companies picking their nodes in our business, they really don't know what they are in for, because it's a very different business model. It's not a -- you have to keep spending money and a lot of them are used to relatively low margins and they get enamored by high margins, but they forget that it continues to -- they need to continue to reinvest non-stop in this business. So I think I mean they are doing what they are doing. I mean we are running our business to -- with the eye on the longer-term growth. And I think our test and measurement is a bit different from a lot of what they call industrial or lab-based business. But it's nice to see that our sector is getting the respect that for the longest time, it was not getting. Hi. Thank you for taking my question. I had a quick follow-up on the discussion around Mike Genovese's question and the sort of service provider linearity that you're looking at, when you went into the downtick late September quarter, you had characterized that as being sort of broad-based. And I guess, the question is the stabilization you're seeing, which I guess is a little bit of a surprise in the December quarter, given that you thought that this would be a two to three quarter phenomena. Was that broad-based, or was that sort of specific to one or a few customers? Well, so I mean, if you think our first quarter impact was September quarter, because we just shut down. And during the December quarter, there was a lot of rebalancing our customers looking at headcount cuts, the CapEx costs like the OpEx redistribution. And I would say we are now entering the third quarter of that. So it's very much in kind of what I said two, three quarters. And what is happening now, usually in the first calendar quarter, many service providers are setting their budgets for the calendar year, and they are starting to send smoke signals and engage with us some conversations and the momentum of these conversations, I would say, is a positive one. And they've now taken down some of their OpEx spend reductions, they've reduced their CapEx and now they're getting back to business as usual. And when you're spending less money, generally, you want to get the most of what you already have. So you invest in optimization of your network. And since a lot of equipment has been delivered in September, December quarter, now all that equipment needs to be put into production, so to say, and you need equipment to install it, turn it up and release it into operations, which also requires you to start buying new instrumentation and software to deploy your network. So that's why I'm saying that this quarter, we have seen things really stabilized and the discussions are now no longer how much can I push out the orders, but let's discuss the timelines and deliveries and what I will be requiring during this calendar year. So the tone is very different from what I would say we saw at the end of September and a bit of a panic in the early October. Okay. Thanks for that detail. And I guess just a quick follow-up then. When you talked about field instruments picking up mid 2023 is a combination of what you just talked about, plus sort of the view that the cable guys start to pick up as well. So that should help us⦠Well, and that's a big deal because in the past -- yeah in the past two years, cable -- most of the DOCSIS 3.0 was already done about three years ago, four years ago. So it's been -- cable was kind of running at de minimis. So the mere fact there is going to be this -- and it's not one, it's actually several major cable companies are looking to do an upgrade where they bring up -- they're still going to give you 1 gigabit on the line, but they're trying to make it more metric up and down. And that requires an upgrade. And it looks like they're moving forward during this calendar year and the expectations of the DOCSIS 4.0 probably will be two years from now because the chipsets have not been developed yet. And so -- and in many ways, it's a response to the aggressive fiber deployment that's happening out there. So in a way, it's part of the response to the competitive pressure from the fiber operators.
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Good morning and welcome to Tradeweb's Fourth Quarter 2022 Earnings Conference Call. As a reminder, today's call is being recorded and will be available for playback. Thank you and good morning. Joining me today for the call are our CEO, Billy Hult, who will review the highlights for the quarter and provide a brief business update, our President, Thomas Pluta, who will dive a little deeper into some growth initiatives and our CFO, Sara Furber, who will review our financial results. We intend to use the website as a means of disclosing material, non-public information and complying with disclosure obligations under SEC Regulation FD. I'd like to remind you that certain statements in this presentation and during the Q&A may relate to future events and expectations, and as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements related to, among other things, our guidance are forward-looking statements. Actual results may differ materially from these forward-looking statements. Information concerning factors that could cause actual results to differ from forward-looking statements is contained in our earnings release and presentation and periodic reports filed with the SEC. In addition, on today's call we will reference certain non-GAAP measures. Information regarding these non-GAAP measures, including reconciliations to GAAP measures are in our posted earnings release and presentation. To recap, this morning we reported GAAP earnings per diluted share of $0.42. Excluding certain non-cash stock-based compensation expense, acquisition-related transaction costs, acquisition and Refinitiv-related depreciation and amortization and certain FX items, and assuming an effective tax rate of 22%, we reported adjusted net income per diluted share of $0.49. Please see the earnings release and the Form 10-Q to be filed with the SEC for additional information regarding the presentation of our historical results. Thanks, Sameer. Good morning, everyone. And thank you for joining our fourth quarter 2022 earnings call. Before I start, I'd like to congratulate our colleague Ashley Serrao, on the birth of his daughter, and we're excited for his return post his paternity leave. As I kick off my inaugural earnings call as CEO, I want to celebrate the past and the amazing journey that the team has taking to get where we are now. Since joining the firm almost 23 years ago, I've had an exciting front row seat to helping the team grow an innovative startup into a global business that generated nearly $1.2 billion in revenues in 2022, marking our 23rd straight year of record revenues. Brainstorming challenges and pushing the envelope on the next innovation has been truly rewarding. Our success has been a function of hard work, some luck along the way, and an unwavering core approach, creating great feedback loops by listening to our clients, and then collaborating with them to make their lives easier across market environments. Despite all the success we've had to date, I believe the best is yet to come. Our competitive advantage combines our people who are the heartbeat of our success, our expanding network and pioneering technology. We believe these three elements will continue to propel our business to new heights in coming years. We believe our multi asset, multi-protocol, multi-sector and global business really differentiates us from our electronic peers and positions as well to capitalize on the secular shift of phone and chat-based execution to electronic mediums. As I highlighted last quarter, the entire organization recently galvanized around crafting our three-year plan, and the excitement from the teams across products and geographies was undeniable. From product to sales, finance to technology, to singular focus remains providing all our clients with an increasingly better user experience across the trade lifecycle. Serial innovation will continue to be our North Star. We're also excited by the current state of the fixed income markets, the attractive yield environment is resonating with our retail and institutional clients and bodes well for actively and passively managed fixed income. As we look to the future, we are truly excited about the team we have assembled. We're thrilled to have Tom Pluta, who officially transitioned to his President role at the beginning of the year, and we believe he will be a valuable addition as we look to grow Tradeweb's footprint over the coming years. However, our deep bench of talent goes beyond just Tom and Sara, and I believe our entire executive and operating management teams and rising stars are primed to drive our future growth. Turning to slide four. Fourth quarter revenues of $293 million were up 5.8% year-over-year on a reported basis, stripping out the 350 basis points of FX headwinds that continued to be severe, we generated revenue growth of 9.3% on a constant currency bases. The revenue growth and the resulting scale translated into 17% adjusted EPS growth and improved profitability relative to full year 2021 as our adjusted EBITA margin increased by approximately 200 basis points to 52.8%. Turning to slide five. The diversity of our growth was on display once again this quarter. While rates faced a more challenging growth environment, credit and equities led the way accounting for 61% and 29% of our fourth quarter revenue growth. Specifically, rates revenues were down 1% as growth across global government bonds was offset by a more risk-off swaps and sluggish mortgage environment. Credit posted another strong quarter driven by strong Munis and U.S. corporate credit trading. Equities posted its highest fourth quarter revenues ever driven by institutional ETFs and our efforts to diversify and grow our other equity products. Money markets set a new record fueled by growth in our retail CD franchise and continued organic growth and institutional repos. Finally, market data revenue growth was equally split across our refinitiv contract and our proprietary data products which continue to enjoy robust growth Turning to slide six. Our fourth quarter capped off a record year in 2022. Record volumes across all asset classes translated into 10.4% and 14% revenue growth on a reported and constant currency basis respectively. The scale generated by our strong top line results drove approximately 111 basis points of adjusted EBITDA margin expansion, and 16% adjusted earnings growth. And as our growth initiatives continued to scale, we maintained our tradition of consistent and focused organic investment. 2022 was a very busy year with many accomplishments to highlight. Broadly, they can be summed up as enhancing our existing capabilities, adding new clients and forging new partnerships. On the capability front, we made significant headway in integrating our NASDAQ fixed income acquisition, bolstering our EM offering in rates and credit with new currencies and adding new collateral types in repo. On the client side, specific highlights include the scaling of our credit platform to record levels, as clients continue to embrace our RFQ portfolio trading and AllTrade protocols. A similar story unfolds in equities in U.S. Treasury streaming as an expanding client base made 2022 another record year. Finally, we collaborated with S&P Global across European credit to integrate with their digital primary markets platform. Perhaps most importantly, in December, we announced our credit partnership with Blackrock's Aladdin. This collaboration is a testament to the progress we have made in credit, and should help our global credit business. We believe our investments have not only positioned us well for the future, but also helped make 2022 another banner year for Tradeweb. Moving to slide seven. 2022 continue the streak of robust revenue growth that we have worked hard to deliver for multiple years now. Specifically, 2022 showcased our portfolio of asset classes and regions that allowed us to consistently help our clients navigate a variety of macro environments and drive growth. Today, while the majority of our revenues still comes from rates, most of our growth actually comes from our other businesses. Credit and equities were highlights, accounting for 35% and 20% of our revenue growth in 2022. Regionally, we continue to see strong growth in our international business, which has grown revenues at an average of 19% since 2016, with 2022 growth of 15% on a constant currency basis. Our international revenues are currently anchored by our European business. Looking ahead, we believe Asia Pacific and more broadly, emerging markets, will continue to become a larger components of our international growth story over the next few years. We believe we have room to grow our network as we expand our clients footprint across domestic markets, expand our protocol offering, and cross-sell our leading products into fast growing domestic markets. Relentless innovation has been critical to our success. Throughout our history, we have prioritized being first to market, which requires constant investment. In the last seven years, we have invested over $500 million in technology to help shape the future of electronic markets, growing those investments at an average of 14% since 2016. As our investments bear fruit adjusted EBITDA margins have expanded nicely. Looking ahead, we expect 2023 to be another investment year. While our investments remain heavily concentrated in rates and credit, we're optimistic about the long term durability of our growth across the business, given our market share gains and pipeline of innovations. Moving on to slide eight, I will provide a brief update on two of our main focus areas, U.S. Treasuries and ETFs and turn it over to Tom to dig deeper into U.S. credit and global interest rate swaps. Starting with U.S. Treasuries. Record market share of 20% drove a 10% year-over-year increase in our revenues. The underlying dynamics were mixed. The higher interest rates fueled acceleration of our retail business was accompanied by a challenging environment across our institutional and wholesale client channels. Institutional clients trimmed the risks and traded in smaller trade lots given the heightened volatility. Despite this challenging backdrop, institutional activity on the platform remain healthy, with fourth quarter institutional average daily trades rising to record highs, up 60% year-over-year. Other important leading indicators of the institutional business remains strong. We maintained the share versus Bloomberg and client engagement continues to grow as the number of users trading in the fourth quarter increased by 6% year-over-year. Moving on to the wholesale channel, overall industry volumes were down 9% year-over-year. Our legacy streaming offering outperformed with volumes on par with the fourth quarter 2021, while our CLOB underperformed, as elevated volatility benefited the incumbent. As I highlighted earlier, we completed the clearing migration and the broker dealer consolidation in 2022, and we look forward to the migration of the data centers in the first half of 2023. After we migrate the data centers, we believe that this will be a catalyst for revenue growth as we rebuild the liquidity pool and enhance our protocol offering based on client needs. Stepping back, we believe our unique position in the market where we cater to all client channels offer a full suite of protocols, and a dynamic technology stack puts us in a leadership position to respond to and drive healthy market structure change. Finally, within equities, clients continue to recognize the utility of ETFs as an easily tradable tool to obtain exposure to a broad range of asset classes, and benchmark indices. In many cases, the ETFs could be more liquid than the underlying securities they hold. The reduction of manual touch points and automation of ETF trading continues to enable our clients to be more efficient and nimble. The liquidity in ETFs combined with client specific customized solutions have made it possible to transfer large amounts of risk with reduced manual intervention. Our efforts to lead with innovation resulted in another quarter of strong institutional revenue growth, with average daily volume of 31% year-over-year, driven by new client wins and strong industry volumes. Our other initiatives to expand beyond our flagship ETF franchise are also bearing fruit, with momentum continuing in equity options, convertibles and ADRs. Institutional equity derivative revenues were up over 10% year-over-year in the fourth quarter. Looking ahead, the client pipeline remains strong as the benefits of our electronic solutions continue to resonate. We're excited about the potential for the business after this record year. And we believe we remain well-positioned to benefit from the secular growth ETFs and our other growth initiatives scaling. Thanks Billy. I'm excited to be participating in my first Tradeweb earnings call. Despite my long history with Tradeweb, these first four months have been eye opening as a deep dive into the business with our teams. As Billy highlighted in his opening, the singular focus has been and always will be continuous improvement of our clients user experience across the trading lifecycle. We believe that our client-first philosophy was never more important than it was in 2022. From low rates to high rates, low inflation to high inflation, and low volatility to high volatility, our clients have had to deal with an evolving and challenging macro backdrop. We believe we provide that one-stop shop where clients can access over 40 products globally, numerous client channels, a diverse set of protocols, and leading pre-trade and post-trade services, all while getting the benefits of straight through processing. Looking forward, we believe we're primed to continue to grow that connective tissue, not only within our existing products and clients, but also as we expand our geographic product and client footprint. Turning to slide nine for a closer look at credit. Our global credit business produced a healthy fourth quarter with all products seeing positive year-over-year revenue growth on a constant currency basis. U.S. Corporate credit continues to face a mixed industry volume backdrop, as spreads have stabilized, while IG duration improved in December. While high volatility and FX continued to dampen the true growth across U.S. and European Credit, our Muni business continues to see strong revenue growth, a product of the higher rates driving our retail channel and continued success in gaining wallet share across the institutional channel. All in, our fourth quarter global credit revenues grew 16% year-over-year on a constant currency basis. The second best quarter in our history. We believe our U.S. credit business is here to stay and we continue to drive our differentiated strategy by expanding our client network, growing our all-to-all volumes and developing our integrated strategy across client channels. At Tradeweb, we're cognizant of the continued drive for trading speed, transaction cost reduction and the minimize trading footprint. And our strategy is working as the number of clients on our U.S. Credit platform are up 9% year-over-year. We're excited to hit another record across fully electronic IG market share, and we believe further investments in high yields can lead to a similar outcome in the coming quarters and years. Our institutional volume growth continues to be underpinned by growth in RFQ and portfolio trading. Our fourth quarter RFQ ADV grew 22% year-over-year, driven by investment grade. RFQ remains the primary protocol in the U.S. Credit market, and the ability to intelligently determine the optimal RFQ is critical, especially when there is a lack of market liquidity. The best trading technology is meaningless if you can't assess, identify and capture the liquidity that drives our clients business. Our clients are increasingly incorporating our AiEX functionality into their RFQ trading, and it's a great example of outcome focused innovation. In the fourth quarter, over 30% and 20% of our fully electronic institutional IG and high yield trades respectively, utilized our AiEX offering. This was a high watermark for the year despite the challenging macro backdrop. Expanding our RFQ presence across IG in high yield remains our biggest opportunity and we continue to see great success cross-selling the innovations we have brought to the credit markets to gain wallet share. Despite the wider spreads and elevated volatility, we continue to see strong portfolio trading activity on the platform. Portfolio trading was an offering we launched in 2019 and the protocol saw healthy growth in 2020 in an environment of low volatility. Fast-forward to 2022, we believe the question of whether portfolio trading can help clients in a higher volatility environment was answered with a resounding yes. At the core of it, the protocol provided clients with greater access to liquidity, minimization of information leakage and a higher certainty of execution. Fourth quarter ADV grew 21% year-over-year and was driven by record quarterly ADV and U.S. portfolio trading, with overall portfolio trading hitting a record in November. The underlying trends remain impressive. Globally, the number of users are up by 5%, while the line items traded were up over 40% year-over-year. The fourth quarter caps off a record 2022 where we executed nearly $370 billion in portfolio trading volumes with ADV up 22% year-over-year and up over 150% since 2020. The strength in RFQ and portfolio trading was matched by the strong growth of our anonymous liquidity solution, AllTrade. This produced a record quarter with over $110 billion in volume, which represented ADV growth of 16% year-over-year. Our all-to-all liquidity volumes saw positive year-over-year growth across IG, but faced tougher client conditions within high yield. Though ADV rebounded nearly 30% quarter-on-quarter. While high yield volumes were down year-over-year, the number of high yield all-to-all responders showed year-over-year growth, giving us confidence that we can continue to deepen our liquidity pool moving forward. We believe our collaboration with Blackrock's Aladdin will help even the playing field in all-to-all. Sessions volumes saw nearly double digit volume growth led by IG, while high yield faced tougher hit rate conditions given more one-way submission flow. Similar to high yield all-to-all, our high yield sessions ADV improved over 10% quarter-on-quarter. Finally, we remain laser focused on maximizing the value of session liquidity uploaded on our platform through newer protocols like ReMatch, which accesses our all-to-all liquidity. Our ReMatch ADV was up over 200% in the fourth quarter. Turning to the non-U.S. Credit business. Revenues grew 30% year-over-year and continued to perform well in the current market environment. Our Muni business achieved a record quarter with revenues up over 130% year-over-year, led by records across our institutional and retail offering. The strong fourth quarter capped off a record year with 2022 Muni revenues growing over 80% year-over-year. We're excited to leverage our leading position in Munis to expand our offering into the institutional taxable Munis pace, which we expect to roll out in the coming months. On the market data side, client feedback has been very positive on our AiPrice for Munis offering. We continue to make additional enhancements and have expanded the pricing into our retail platform. After a record nine months of trading, a more subdued environment across CDS produced relatively flat year-over-year growth in the fourth quarter, though up nearly 10% on a constant currency basis. Another area of growth over the coming years is emerging markets. Our focus across emerging markets rates and credit is on innovation, differentiation, and cross product adoption. We continue to develop strong dealer relationships and leverage our existing buyside client network to grow our emerging markets footprint. We believe our position as a global multi-asset class firm gives us a unique one-stop shop proposition, being able to offer EM products across cash rates and credit, swaps, CDS and China bonds to our clients. In sum, it was another solid quarter and year for global credit, and we continue to see a lot of opportunity as our institutional and wholesale platforms continue to scale and the retail business continues to thrive. Finally, we're excited about our partnership with Blackrock's Aladdin with our mutual interest to further electronify credit trading, streamline workflows, deepen liquidity, and provide more choice for our clients. We look forward to sharing more as we make progress on the integration. Moving to global swaps on slide 10, despite the relative risk-off environment in the fourth quarter, the multi-year growth story continues as swaps registered another strong year. Our fourth quarter variable swaps revenues fell 5% year-over-year, driven by a 20% reduction in duration. While client engagement levels remained at all time highs with institutional average daily trades up 39% year-over-year. Market share fell to 14.7% primarily driven by a reduction in under one-year volumes. However, we achieved the second highest share in our history in December at 18.2%. Similar to global credit, our global swaps business produced a record 2022 with constant currency revenue growth of 18% year-over-year. Our momentum in major currencies continues with record annual share in Euro, Sterling and EM denominated swaps. Over 50% of our 2022 volumes came from trades tied to new risk-free rates, up from only 19% in the year ago period. We look forward to assisting our clients as they transition off of dollar LIBOR swaps by June and then helping our clients as they transition off current Canadian and Mexican benchmarks next year. Taking a step back, the strength of our global swaps franchise has been our ability to innovate with the goal of providing improved pricing, better liquidity, best execution, and straight through processing for our clients. Successfully collaborating with our clients has helped drive our share across currencies higher over time, and deepen that connective tissue across our swaps business. The number of users trading in the fourth quarter increased by 30% year-over-year, and 29% for 2022. The strong annual growth was led by strong double-digit growth across the Euro, Sterling, Dollar, and Yen swaps. We believe we can further deepen our connectivity with clients. We are leveraging that expertise across developed market swaps and our RFQ protocol to further our penetration across emerging market swaps and our RFM protocol. We've learned that our swaps dealers increasingly prefer receiving electronic inquiries in order to price and handle orders faster, while our clients benefit from the efficiencies I described earlier. Given the success our clients have had and trading G10 swaps electronically, we are seeing increasing numbers of traders expanding their electronic execution capabilities into emerging market swaps. We saw record EM share in 2022, with revenues increasing by over 90% year-over-year, and we believe there is still a lot of room to grow. Finally, we continue to make inroads with our RFM protocol as fourth quarter ADV was up 28% year-over-year, while full year ADV reach record levels and grew 70% year-over-year. Looking ahead, we believe the long term swaps revenue growth potential is meaningful. With the market still only 30% electronified, we believe there remains a lot that we can do to help digitize our client's manual workflows, while the global fixed income markets and broader swap markets grow. Thanks, Tom and good morning. As I go through the numbers, all comparisons will be to the prior year period unless otherwise noted. Let me begin with an overview of our volumes on slide 11. We reported fourth quarter average daily volume of nearly $1.1 trillion, down 4% year-over-year, but up 3% when excluding short tenor swaps. Among the 22 product categories that we include in our monthly activity report, eight of the 22 product areas produced year-over-year ADV growth of more than 20%. Areas of strong growth include U.S. investment grade credit, munis, credit swaps, global ETFs, repos and other money markets. Slide 12 provides a summary of our quarterly earnings performance. The fourth quarter volume growth translated into gross revenues increasing by 5.8% on a reported and 9.3% on a constant currency basis. We derived approximately one-third of our revenues from international customers and recall that approximately 30% of our revenue base is denominated in currencies other than dollars, predominantly in Euros. Our variable revenues increased by 11% and our total trading revenue increased by 6.1%. Total fixed revenues related to our four major asset classes were down 5.4% and down 1.4% on a constant currency basis. Rates fixed revenues were down given the migration of certain European government bond clients from fixed to variable contracts at the end of last year and the impact of FX. Equities fixed revenues were down primarily due to a timing adjustments benefiting the year ago period and the impact of FX. Money markets fixed revenue growth was driven by global repos, and other trading revenues were down 1%. As a reminder, this line does fluctuate as it affected by periodic revenues tied to technology enhancements perform for our retail clients. Market data increased by 3%, due to growth in Refinitiv and our proprietary data products. This quarter's adjusted EBITDA margin of 52.8% increased by 221 basis points on a reported basis, and 166 basis points on a constant currency basis, relative to the fourth quarter of 2021. Similarly, our adjusted EBITDA margin for the full year 2022 increased by 111 basis points on a reported basis, and 113 basis points on a constant currency basis from the full year 2021. All-in, we reported adjusted net income per diluted share of $0.49. Moving on to fees per million on slide 13. The trends I'm about to describe are driven by a mix of the various products within our four asset classes. In sum, our blended fees per million increased 18% year-over-year, primarily as a result of stronger growth in cash, credit and cash equities, and an increase in cash rates fee per million. Excluding lower fee per million short tenor swaps and futures are blended fees per million were up 10%. Let's review the underlying trends by asset class starting with rates. Average fees per million for rates were up 21%. For cash rates products, fees per million were up 23%, primarily due to a positive mix shift towards higher fee per million U.S. Treasuries and the migration of certain European government bond clients from fixed to variable contracts at the end of last year. The positive mix shift towards U.S. Treasuries was also aided by core growth in fee per million due to the continued pick up in our retail channel. For long tenor swaps, fees per million were down 5%, primarily due to lower duration, while we continue to see growth in EM swaps and RFM. In other rates derivatives, which include rates futures and short tenor swaps, average fees per million increased over 100% due to a shift towards rates futures, which carries a higher fee per million than the group average and a core increase in OIS fee per million. Continuing the credit, average fees per million for credit increased 2%. Drilling down on cash credit, average fees per million increased 6% due to stronger growth in munis, which carries a higher fee per million than overall cash credit. This more than offset the continued duration related fee pressures in U.S. High Grade. Notably, our fully electronic U.S. High Grade volumes were a record in the fourth quarter. Looking at the credit derivatives and electronically processed U.S. cash credit category, fees per million decreased 8% driven by stronger growth in U.S. index CDS, which carries a lower fee per million than the group average. Continuing with equities, average fees per million for equities were up 25%. For cash equities, average fees per million increased by 24% due to a positive mix shift towards higher fee per million institutional U.S. ETFs. Equity derivatives average fees per million increased 8% due to an increase in convertible fees per million. And finally, within money markets, fees per million increased 17%. This was primarily driven by a mix shift towards us CDs, which carries a higher fee per millions than overall money markets. The higher fee per million retail money markets business continues to improve given the higher interest rate environment. Slide 14 details our expenses. Adjusted expenses for the fourth quarter increased 2% on a reported basis and 6.3% on a constant currency basis. Recall that approximately 15% of our expense base is denominated in currencies other than dollars, predominantly in Sterling. The fourth quarter of 2022's adjusted operating expenses were higher as compared to the fourth quarter of 2021, primarily due to increased professional fees, technology and communication and depreciation and amortization, which were partially offset by a decrease in compensation. Compensation costs decreased 6.5% due to lower accruals for performance related variable compensation. Adjusted non-comp expense increased 20.3% primarily due to professional fees technology and communication and depreciation and amortization, but were helped by favorable movements in FX. Adjusted non-comp expense on a constant currency basis increased 26.9%. Specifically, professional fees increased 49.3%, mainly due to higher legal costs in connection with regulatory and compliance matters including periodic information requests. Technology and communication costs increased primarily due to higher data fees related to increased retail volumes, and our previously communicated investments in data strategy and infrastructure. Adjusted general and administrative costs increased primarily due to an increase in travel and entertainment as we recover from the pandemic. In addition, favorable movements in FX resulted in a $2.6 million gain in the fourth quarter versus a $1.3 million gain in the fourth quarter of 2021. Slide 15 details capital management and our guidance. First on our cash position and capital return policy. We ended the fourth quarter in a strong position with $1.3 billion in cash and cash equivalents and free cash flow reached approximately $573 million for the trailing 12 months. Our net interest income of $8.4 million increased due to a combination of higher cash balances and interest deals. This was primarily driven higher by recent Fed hikes and more efficient management of our cash. We have access to a $500 million revolver, that remains undrawn as of quarter end. CapEx and capitalized software development for the year was $60 million, an increase of 17% year-over-year in line with our prior guidance. And with this quarters earnings, the board declared a quarterly dividend of $0.09 per Class A and Class B share, an increase of 12.5% year-over-year. The board periodically evaluates our dividend along with the consistency of our earnings and free cash flow generation over time. In December 2022, our board authorized a new $300 million share buyback after the company completed our original $150 million share buyback program last October. In aggregate across both programs, we spent $99.3 million during the year, leaving $275 million for future deployment at the end of the year. Turning to guidance for 2023. We will continue to invest in 2023 and are expecting adjusted expenses to range from $669 million to $714 million. The midpoint of this range would represent an approximate 10% increase when excluding the impact of FX gains in 2022, in line with our average expense growth from 2016. We believe we can drive adjusted EBITDA and operating margin expansion compared to 2022 at either end of this range. Although, we expect the incremental margin expansion to be more modest relative to last year, as overall margins are higher, and we continue to focus on balancing margin expansion with investing for the future. As Billy and Tom described, we continue to invest for the future with credit and rates remaining key focus areas with a long runway for growth. We are investing in driving new protocol adoption, growing our client footprint and expanding our geographic and product reach. Some of these investments will take some time to scale, but we continue to prize innovation and have a technology pipeline that continues to grow. We expect G&A expenses to ramp from fourth quarter 2022 levels through the course of the year as we don't expect $7 million in FX gains primarily tied to our hedges from the U.S. Dollars rapid appreciation to repeat in 2023. We expect technology and communication and expenses to grow from fourth quarter 2022 levels driven by investments in data strategy and infrastructure. Additionally, we expect continued growth of Credit AllTrade and our U.S. Treasury streaming platform. For forecasting purposes, our assumed non-GAAP tax rate will range from 24% to 25% for the year, Approximately 80% of the increase in our tax rate is driven by lower equity compensation windfall benefits tied to our stock price. The remaining increase is driven by the firm now being subject to prior tax law changes related to executive compensation. We expect CapEx and capitalized software development to be about $56 million to $62 million. We estimate that approximately 70% will be spent on software development to support our growth initiatives, and approximately 30% will be related to growth and maintenance CapEx. The midpoint of our CapEx guidance implies a roughly 2% year-over-year decline, due to prior years accelerated infrastructure enhancements. Excluding those opportunistic infrastructure investments, mid point growth will be approximately 20% year-over-year. Acquisition and Refinitiv transaction related depreciation and amortization, which we just out due to the increase associated with pushdown accounting is expected to be $127 million. Finally, on slide 16, we have updated our quarterly share count sensitivity for the first quarter of 2023 to help you calibrate your models for fluctuations in our share price. Thanks, Sara. Historically, change has created opportunities for us to help our clients improve their trading workflow, and that continues to be the ethos for our company. It started with a pandemic and a lockdown and now has morphed into inflation historically fast Fed rate hikes, liquidity concerns, a war in Europe and a pending recession. We see that some of our largest clients are now making tough personnel and cost decisions as they look to weather the next storm. In times like these, it's never been more important to be in front of our clients to help them navigate the fixed income markets in a more time and cost efficient manner. We released January volumes this morning and the secular trends powering electronification were on display again, having already facilitated more than 1 trillion in average daily volume. January volumes were up 3% year-over-year with double-digit growth across greater than one year global swaps, our biggest rates product and U.S. credit, our biggest credit product. In addition, we also saw double-digit growth across European government bonds, munis and repose. The month started off slow, but momentum picked up as we ended the month achieving the best revenue day in our history. Our U.S. IG credit share in January was 13.7%, a strong month when factoring in the strong pickup in new issue volume. Our share of U.S. high yield credit fell to 5.6% primarily due to lower industry high yield portfolio trading volumes and lighter volumes in our all-to-all network. We believe the best is yet to come with our high yield franchise and we achieved our highest fully electronic daily share to end the month. In closing, we are extremely focused on capitalizing on the growing demand for global fixed income products and on the various growth opportunities ahead of us, while continuing to strike the right balance between investing for the future and driving margin expansion to create long-term value for our shareholders. I would like to conclude my remarks by thanking our clients for their business and partnership in the quarter. And I would like to thank my colleagues for their efforts that contributed to the strong quarterly and annual revenue and volumes at Tradeweb. Thanks Billy. As a reminder, please limit yourself to one question only. Feel free to hop back in the queue and ask additional questions at the end. Q&A will end at 10.30 am Eastern time. Operator, you can now take our first question. Yes, good morning, Billy, Tom and Sarah. First, Billy, congrats again on the big C on your jersey here. But as you take off the leadership, I got to keep this question at a high level. So that your first question here. But as you take over leadership, I'm just trying to understand, what have you directed Tom Pluta to do? And where he'll focus his efforts? Will the delegation or the split be similar to what Lee and you had arranged? Really, I'm just trying to understand how the firm is run with the Weller [ph] and leadership change, transition that you are bringing? Thanks a lot Rich. And I appreciate the question. Obviously, I want to congratulate you for making in through a rather long prepared remarks movement of our earnings call. So congratulations to everyone else on the call too. High level, Rich, and I do appreciate taking that this kind of first call from you. My responsibility in a certain way is pretty straightforward, right? Being the CEO of the company, running the company, is really all about sort of what I would describe to us setting the strategic direction of the company, and then really kind of pushing and prodding and leading the company to execute at a very, very high level. And this won't surprise you at all. I'm going to do that my way with my own personality, I got actually some really good advice about a year ago from a board member who just kind of told me to sort of be myself, and I am going to be myself, as I kind of go through this journey. And so, from my perspective, what that is, is really about being relentlessly external, emphasizing and really receiving client feedback. My strong belief is that great companies make their clients happy. And I say that in a very clear and strong way. And then, when I think about, Rich to your question about Tom, when I think about Tom, obviously, what I think about is super kind of heavy duty real markets experience. So, we're going to direct him that way. So Tom is going to be running the U.S. business, which is everyone knows is this combination of wholesale, retail, and institutional, all of the different markets that funnel into that. I do think he's going to be a significant difference maker in the business, but also a difference maker, specifically around regulation, he has heavy duty regulatory experience. I think that this is a moment where that's going to be a difference maker. And I will also say, in a very strong way, we have a really good management team. And obviously, Sara with us in the room, I want to mention that. When I think about the qualities, I'll say this, because I think it's important. Hard work, passion for what we do are kind of like the table stakes of it all. I really like a little bit of the special sauce around what I would describe to you as sort of relentless optimism. I think that's a really important expression, something I'm going to say very clearly. Tradeweb is in the human behavior business. It's about changing human behavior. And I do think you have to bring that relentless optimism to the equation. So we're excited and energized and I really appreciate your question. Other thing I will just say quickly. I was sort of fortunate last night I wound up running into an industry event. I wound up running into our friends at market access. Rick and Chris, I thank them when I saw them. I always think if you say something to someone privately, you should be very comfortable saying it publicly. So I want to thank, congratulate them on their leadership transition. We are obviously competitors. But I think in an important way, we are respectful competitors. So I want to make sure I said that as well. And thanks for the question, Rich. Thank you. One moment for our next question. And our next question will be coming from Daniel Fannon of Jefferies. Your line is open. Thanks. Good morning. Hey, Billy, I wanted to chat about your comments around January. It seemed like a bit of a mixed bag started out slow. And then you said ended on a record. So maybe if you could talk about the mix of products. But that maybe means for kind of the revenue outlook and maybe momentum kind of going forward for the rest of the year? Yes. And that's a great question. I'm going to segue it for a quick second, just a little bit of a follow-on to Rich's question, right, because to put a human element on it for a second, right. As a new CEO, there's this concept of obviously, kind of like nailing your first, right. You want to nail your first town hall. You want to nail your first board meeting. You guys can judge whether or not we nailed our first earnings call. But in a human way, there's this concept of really wanting the year to get off to a strong start. And so that's something that we cared about a lot here. So a couple of things I would say about the month of January, against tough comp, and I'll make sure I kind of say that very clearly. Obviously, January 2022, was a very different market of heavy volumes kind of throughout the marketplace, a sort of green light volume marketplace. This is obviously before 400 and now 75 basis points in rate hikes, before there were kind of concerns about liquidity in the market. All of those kind of headline news is about sort of how the marketplace was functioning. The good news, as we've kind of hit this year, I think we're kind of out of sort of that market environment. And I think January 2023, from my perspective, is really what I would describe as a return to a very strong kind of normal market cadence. I think that's an important way to describe it. So, kind of headline for us around January is, against tough comps, volumes up kind of year-over-year, but obviously really, in a very important way, I would say revenues, outpacing volume growth. So, to be crystal clear, we saw revenue growth in January, up very close to sort of near double-digit growth. And obviously, from our perspective, the areas of like high focus that we have as a company, strategically, rates and credit accounted for 75% of that growth. So, all volumes not created equal. I think it's really important that we obviously, the community understands where we were from a volume standpoint, I think a pretty big delta on the on the revenue. And I want to make sure I describe that the right way. We are sort of super commercial. And it was, I think, gratifying against sort of a tough competition a year ago to produce really strong results And end of month, I think we really accelerated particularly in our credit business with a significant amount of records, as some of the strategies that we've put in place around net-net hedging, and net spotting really came to fruition. So a really strong end of the month for us, and feeling really good about how we are set up going into the rest of the year. And thanks very much for the question. Thank you. One moment for our next question. Our next question will be coming from Brian Bedell of Deutsche Bank. Your line is open. Okay. Sorry, as the intro got interrupted. Thanks so much for all the great commentary very detailed. And if I can ask Tom, given your overview of credit, maybe on the portfolio trading side, I mean, that's obviously been a great protocol for Tradeweb and gaining market share and credit over the last two to three years. Maybe talk about your vision of how that's evolving in 2023 between investment grade and high yield and we have different dynamics in those two areas. Both I guess, on a market share basis versus your main competitor there, and also on how you think the absolute level or I should say penetration of portfolio trading may evolve in 2023, especially if we get maybe wider credit spreads later in the year? Hi, Brian, thanks. Yes. I mean, overall, we're very positive on the trajectory of our credit business and expected to be a key revenue driver for years to come, revenue growth driver for years to come. On portfolio trading, specifically, as I mentioned in the prepared remarks, I think, 2022 is a good litmus test. And for this protocol, and I think, portfolio trading really was battle tested in this high volatility and difficult macro environment that we all experience and it continued to grow significantly. In my mind, it's rapidly becoming the market standard for fast and efficient trading and credit markets. If you think about the key benefits that we see or the clients see, you get certainty of execution by trading an entire portfolio of bonds in one shot, that could be maybe 100 to 300 line items on average, but we traded a record amount of line items a couple of weeks ago with close to 2000 bonds in one trade. Additional benefits, just being able to move large amounts of risk and minimizing information leakage. So it's a it's an extremely powerful tool that continues to grow in popularity. And this protocol used to be a voice product. And what we've seen is the steady electronification over time over the last few years, it's continued to grow. And we've been beneficiaries of that, and are the clear market leader. As far as IG versus high yield, not surprisingly, investment grade has led the way in electronification. But high yields, while for the pine is also growing rapidly. And we've also continued to work with clients and introduce enhancements to our protocols, which makes it even more attractive. For example, you can trade multicurrency with any combination of high yield investment grade, and emerging market bonds within the same portfolio trade, you can commingle buys and sells. And we provide analytics like PCA analysis, all which provides benefits to clients. As far as the share portfolio trading share of the overall market, I think that was your question. It's been running the last couple years around 5% to 6% of trace volumes. But I expect that it can grow further, as more clients experience the benefits. So in some of this remains a bright spot for us a focus area and a growth area within credit. Thank you. One moment while we prepare for the next question. Our next question comes from Michael Cyprys of Morgan Stanley. Your line is open. Okay, great. Hey, Billy, Tom, Sara. Question for Sarah, if I could on the margin profile. So you guys continue to put up strong margin expansion. I think it's five consecutive years now over 100 basis points expansion of the adjusted EBITDA margin here at 2022. I hear you on more modest margin expansion in 2023. But just maybe a longer term question. How do you think about what's the right long-term margin profile for the business as compared to the 51.9% adjusted EBITDA margin in 2022? Do you think it could have a six handle and what's it take to achieve that? Well, good morning. Thanks for that question. Look, I'm happy to give you some color here as you think about it. But we obviously don't provide a long-term margin target. That said, I think we've been pretty clear and pretty consistent that we think we can continue to drive long-term operating margin expansion. Obviously, this quarter we give out guidance for 2023. And we're confident that we can drive that margin expansion in the near term at either side of that range. But I do think as you referenced, we've delivered a tremendous amount of margin improvement, and at 52%, we'd expect annual increases just to be more modest. There are a number of factors that drive the scale and ultimate opportunity. And I think, just kind of taking a step back in terms of how we manage the company, the most important thing that we're focused on, is striking that right balance between investing for long-term revenue growth, and driving margin expansion. And if you think about it, especially from a long-term perspective, if we get that balance right, particularly with that focus around driving revenue growth, the business scales really well and we will really lift that overall margin. Obviously, like there are things that change that dynamic moment to moment and market to market, one of those things is on the investment side. So as we think about 2023, it continues to be an investment year for us. We're focused on that long-term growth. We're making investments in talent and technology. We've talked about this in the past. And a lot of those initiatives, particularly around rates and credit, which have been Tom referenced, we expect to continue to invest in that over coming years, given that runway of growth opportunity that we see. And maybe just the only other thing I can give you in terms of color is just really, as you think about -- thinking about the expansion, as revenue grows, there is an impact in terms of variable compensation and other variable expenses. And so, last year we grew 14% on a constant currency basis and margins expanded that 100 basis points that you referenced, as revenue moves differently, that margin expansion does correlate to that a little bit more in the near term. So that gives you a little bit more color on how to think about the margin. Thank you. One moment, while we prepare for the next question. And next question is coming from Gautam Sawant of Credit Suisse. Your line is open. Good morning, Billy, Tom and Sara. Can you please share with us your growth outlook for derivatives activity in 2023. How emerging markets derivatives uptake is progressing? And if EM derivatives growth improves prospects on the cash side? Hi, good morning. This is Tom, I'll take that one. Emerging markets remains a focus area for us in 2023. And on the back of a very strong 2022, my outlook is for another very strong growth year ahead. We lead with interest rate swaps here and we've leveraged our market leading position and develop market swaps, and our expansive network to have really great early success in the EM swaps. It's the same technology, it's the same interface. It's the same protocols that are developed markets clients are familiar with. So it's a very easy expansion into those markets. We've introduced three more emerging markets, IRS currencies in 2022, and now offer 16 on the platform. We've also made some key hires to our EM team that we're very excited about. So, we're really pushing ahead here and expect it to be very strong growth area for us going forward. More generally, in rates, because I think you're asking generally the outlook for derivatives. We're quite positive on the outlook for further electronification in swaps. In develop market swaps, the market is only about 30% electronified. And by the way, in EM, that number is about 10%. So there is a lot of upside there, compared to the level of electronification we see in say U.S. Treasuries, areas of credit, the mortgage market, certainly. And I think, the comment that I would make generally around our rates businesses. If you think about where we were a year ago, at the outset of this Fed tightening cycle, we actually came into 2022, the Fed was still in a quantitative easing process. There was an outlook for maybe a couple of rate hikes, but given how that outlook changed over the course of the year, flipping from QE to QT, the Fed hiking 425 basis points. And then another 25. Yesterday, we saw a very difficult environment for rates, volatility spiked, liquidity was challenged. But given all that, we did quite well across all of our products. Yes, some did better than others. Retail, obviously, perform much better, as rates went higher mortgages struggled a bit in the backup. But overall, we did as well as we had set out to do at the beginning of the year. What we see here now that we're seeing the prospects for the end of the Fed tightening cycle, and attractive yields is a very strong outlook for rates activity. And I think a big part of that is the sharp decline of volatility that we've seen, that should bring and bid offers, we're starting to see narrowing as well. And I think that's going to bring larger position sizes into the market, both from the sell side and the buy side. So we think the outlook is quite strong. And the other thing I'd like to say as cash is an asset class again, right? Yields over 4%, short and bonds, these are very attractive yields to all segments of the market. So, we're feeling pretty good about where the rates business is headed this year. And you guys are getting a really good snapshot to sort of Tom's kind of tightness in his content around these market dynamics, which I think is really important. The only thing I would add to an absolutely spot on response is obviously, I mentioned sort of the importance of regulation. A little bit before regulation continues to play an important role specifically in the European swaps market where we are continuing to onboard important clients in that dynamic. And we're also doing things that you guys would expect, which is continuing to provide what I would describe as really important micro protocols that are going to add new types of clients with new types of volumes attached to it. So our European swaps business is really thriving, and sort of deserves its own kind of comment around some excellent market dynamics that that Tom was providing for everyone. Thank you while we prepare for the next question. Our next question will come from Kyle Voigt of KBW. Your line is open. Kyle Voigt of KBW. Your line is open. Hi. It cut out there for a second. So just a question on the retail business. I think that was roughly 10% of revenue last quarter. Given your comment, is it fair to say that proportion can meet up again in the fourth quarter. And when we think about the growth of that, that retail business over the years, it seems historically to be a bit more cyclical with rates. I just wonder if you could kind of expand upon or outline how you can grow that business from a secular standpoint, if we begin to see rates moving lower here and the Fed begin cutting again? Sure, I'll take that one. It's Tom. Yes, the retail business has obviously been a great story for us in 2022. And we expect that to continue this year. Large backup and rates, demand for money market products and bonds has increased dramatically as yields are very attractive. Just for context, retail makes up almost 5% of our rates revenue, over 20% of credit revenues and about 15% of money market revenue. So definitely significant. And most of these revenues come from munis, U.S. credit, U.S. Treasuries and retail. I think those four add up to about 75% of our revenues. As far as comparing it to other rate hiking cycles. It's a little difficult for us to do. I mean, I think the last time rates were this high in the U.S. was in 2007, we entered the retail business, I believe in 2011. So, we don't have sort of comparisons on how that evolves with respect to our particular business. But what I can say is that we believe that the retail businesses back and will remain robust going forward. I think we're clearly in a higher inflationary environment. I don't expect that the Fed and the other major central banks are going to reverse and cut rates dramatically. So we think that the demand will remain robust, and very healthy. Munis as an asset class generally were very positive on and we're continuing to develop protocols there, not just in retail, but also in bringing in institutional liquidity to that market all on the same platform. So, we're quite positive. While we can't quite forecast exactly where markets will go. We're positive. We're very positive on the outlook for this year. And one of the things just I would just add, I think it's important is, these segments, and the way that we describe them, the wholesale channel and the retail channel and the institutional channel, they don't, obviously, across these different businesses that we are in. They don't always stay perfectly separate, right? So there's this continuing kind of blend, important blend of these segments. So we've talked in the past about what we feel is an ongoing opportunity for Tradeweb around the institutional Muni business to Tom's point. And to make it obvious point, the activity that takes place for us on the retail side in munis, we think gives us a strong head start in terms of building out that the liquidity for that institutional channel. Other thing I think that is very important that has been described before, is the fact that we have all of these retail entities on the credit side has given us a tremendous advantage in terms of building out our all-to-all network with really important liquidity providers and credit that exist in our retail world. So you see how not only is that business performing in and of itself exceptionally well, strategically, it fits us really well because of the blend that I was just describing. And thanks for the question. Thank you. One moment while we prepare for the next question. Our next question comes from Chris Allen of Citi. Your line is open. Hey, morning everyone. Just a quick follow up to Kyle's question. I wonder if you could talk about any growth opportunities from increasing retail distributions? Where you're penetrating financial advisors on the wirehouse? And are you connected to all kinds of the major retail players out there? Sure, I'll, I'll take that. We, in terms of our retail distribution, we have all the major retail wealth management firms connected to the platform and most of the regional dealer community already. But we do think that we can continue to broaden out our set of liquidity providers, but yes, we are -- we're kind of plugged in to most of the market already. Maybe I just add, which I think is getting at the underlying point as well. We have plans to add, but also we're seeing that increased activity. So with even the network that we do have, we're seeing 40% more a phase login to the system, given the interest in the product set, users are up something like 200%. So, it's a combination of both drivers that I would definitely focus on. Thank you. And one moment for the next question. Our next question will be coming from Ken Worthington of JPMorgan. Your line is open. Hi, good morning. Thanks for squeezing me in here. As we look back to 2022, we saw a noticeable acceleration in the migration of fixed income investing from active to passive similar to what we've seen in equities over the last decade. As we think about Tradeweb, from both a credit and rate perspective, is this transition from active to passive a tailwind or a headwind from both an activity perspective and an revenue perspective for the company? And where is the ongoing transition from active to passive maybe most impactful to your business? Hey, Ken, thanks for the question. I guess I'll start. The trend to passive investing has been well documented and continues to grow. We have a significant and growing ETF business that includes both equities and fixed income ETFs, the growth rate has been quite strong, and some of the market forecasts for the forwards over the next decade are also quite strong. So we are well-positioned to capitalize on that by expanding, continuing to expand our ETF business. I think this kind of highlights the diversity of our offerings across various liquidity pools, various asset classes, various channels. And as passive continues to grow, I think we will continue to benefit from that as it's a huge area of focus for us. I completely agree. I mean, I think we're particularly excited as we think about the fixed income ETF portion, which historically has been a little bit behind and those growth rates even outpacing the equity ETFs. So there are a couple of trends within there that I think we're quite excited about. Okay. But I think about sort of your fixed income or your rates business and credit business, they're flow-through back to those businesses as well? And is it positive or negative? Yes. I mean, certainly positive, right. So if the active investing continues, we're already in all those businesses in a big way and as the ETFs continue to grow, we're in rates and credit and equity ETFs and well-positioned to capitalize on that growth. Thank you. One moment while we prepare for the next question. And next question is coming from Craig Siegenthaler of Bank of America. Your line is open. Hi, good morning, everyone. This is [Indiscernible] just filling in for Craig. I was wondering to what extent you think the reduction in dealer liquidity has impacted credit RFQ volumes in 2022. In particular, on a year-over-year basis, are you seeing a meaningful reduction in the size of dealer responses or reduction in the average number of responses per RFQ? If liquidity improves, I'm trying to think about how much of acceleration we could see in those volumes? Thanks. It's been a part of the story of 2022. It's a great question, Eli. There's no question that all-to-all trading in credit is a sort of table stakes protocol and a very important of how that market has developed electronically. My general feeling is while there is some ebb and flow to where the dealers are in terms of their liquidity. They've really made a strong investment in protocol innovations that we've talked about, like portfolio trading. And my feeling is that there's a sort of a relevance or an attachment to that protocol, that's extremely sticky. My instinct is we've gotten on the other side around a little bit of that kind of liquidity concern in credit. And I do think we're going to see a rise of principal market making as we get into 2023. And we're going to see that play through the dynamic of response rates to your point in traditional RFQs. And also the pricing and the aggressive pricing around portfolio trading. I think the marketplace learned a pretty interesting lesson around the rise of all-to-all trading. My general feeling and I'll say this pretty strongly is the dealers want to play a significant role in the evolution of electronic credit trading, and they will. And so, I'll kind of answer your excellent question that way, Eli.. And thank you. I guess the thing I would add to that is, as some of the innovations that we've introduced, like AiEX give clients the ability to trade on an automated basis. That is actually sort of increase the number of trades and reduced the average trade side size and certain asset classes. And that's just a function of the way the trades are executed and really given clients control over how and when they want to execute. Thank you. That concludes today's Q&A session. I would like to turn the call back over to Billy Hult for closing remarks. So thank you everyone for joining us this morning. If you have any follow up questions, feel free to reach out to Ashley, Sameer and the team. I hope everyone has a great day and thank you very much.
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EarningCall_664
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Good morning. And welcome to Camden Property Trust Fourth Quarter 2022 Earnings Conference Call. I am Kim Callahan, Senior Vice President of Investor Relations. Joining me today are Ric Campo, Camdenâs Chairman and Chief Executive Officer; Keith Oden, Executive Vice Chairman and President; and Alex Jessett, Chief Financial Officer. Todayâs event is being webcast through the Investors section of our website at camdenliving.com and a replay will be available this afternoon. We will have a slide presentation in conjunction with our prepared remarks and those slides will also be available on our website later today or by e-mail upon request. [Operator Instructions] All participants will be in listen-only mode during the presentation with that opportunity to ask questions afterwards. And please note this event is being recorded. Before we begin our prepared remarks, I would like to advise everyone that we will be making forward-looking statements based on our current expectations and beliefs. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially from expectations. Further information about these risks can be found in our filings with the SEC and we encourage you to review them. Any forward-looking statements made on todayâs call represent managementâs current opinions and the company assumes no obligation to update or supplement these statements because of subsequent events. As a reminder, Camdenâs complete fourth quarter 2022 earnings release is available in the Investors section of our website at camdenliving.com and it includes reconciliations to non-GAAP financial measures, which will be discussed on this call. We hope to complete our call within one hour and we ask that you limit your questions to two, then rejoin the queue if you have additional items to discuss. If we are unable to speak with everyone in the queue today, we would be happy to respond to additional questions by phone or e-mail after the call concludes. Our theme for todayâs on-hold music was waiting patiently, which is what we find ourselves doing these days. The bid ask spread for multifamily assets is as wide as I can ever recall. Sellers seem to be hoping for valuations to return to last yearâs peak. Some sellers acknowledge a decline in valuations of 10% to 15%, but buyers point to a dramatically different macro backdrop now versus last year and reckon value should be lower. The result is the current standoff that wonât be resolved until buyers and sellers adjust their views on valuation and meet somewhere in the middle. Until then, we wait patiently, which is a lot easier for Keith to do than me. This brief video sums up the hours that Keith and I have spent in recent months debating the merits of waiting patiently versus making something happen now. By any measure, 2022 was the best operating environment Camden has had in our 30-year history. We exceeded the top end of our guidance and raised guidance every quarter. Operating conditions over the last two years have never been better, driven by being in the right markets with the best product and having the best teams. Apartment demand was driven by an acceleration of in-migration to our markets that open sooner after the pandemic and continue to be more business-friendly driving outsized job opportunities. And a massive release of rental demand from people who were previously at home with their parents or doubled up as government stimulus added to their savings and subsequent buying power, as a result, apartment supply could not keep up with increased demand. 2023 will be a return to a more normal housing demand market. Consumers still have excess savings and the job market remains strong. Despite rising rents, apartments remain more affordable than purchasing homes for many consumers in our markets given the rise in home prices and interest rates. Most of us donât like slowing revenue or negative second derivatives, but I think we need to put things into perspective. Apartments are and will continue to be a great business. Consumers will always need a place to live and will choose high quality, well-managed properties to live in. We are projecting 5.1% revenue growth for 2023, absent coming off last yearâs 11.2% record breaking growth, our 2023 projected revenue growth would be the sixth highest growth rate achieved over the last 20 years for Camden. At this point, Iâd like to give a big shout out to our Camden teams across America for a job well done in 2022, and I want to thank them for improving their teammates lives, customerâs lives and stakeholderâs lives, one experience at a time. Thanks, Ric. As many of you know, we have a tradition of assigning letter grades to forecast conditions in our markets at the beginning of each year and ranking our markets in order of their expected performance during 2023. We currently grade our overall portfolio as an A- with a moderating outlook as compared to an A with a stable outlook last year. Our full report card is included as part of our earnings slide call slide deck, which is now showing on the screen and will be posted on our website after todayâs call. At this time last year, we anticipated 2022 same-property revenue growth of 0.83% [ph] at the midpoint of our guidance range. As we announced last night, Camdenâs overall portfolio achieved same property revenue growth of 11.2% for 2022, well ahead of our original expectations and marking a record level of same-property revenue growth for our company. While conditions are expected to moderate during 2023, our outlook calls for same-property revenue growth of 5.1% at the midpoint of our guidance range, which would mark another year of above long-term average growth for our portfolio. We anticipate same-property revenue growth to be within the range of 4.1% to 6.1% this year for our portfolio, with most markets falling within that range. The outliers on the positive side should once again include our three Florida markets, Orlando, Southeast Florida and Tampa, with Houston and LA, Orange County falling likely below 4%. The macroeconomic environment today is uncertain and the magnitude of 2023 job growth or even job losses remains a wildcard, but we expect our Sunbelt focused market footprint will allow us to outperform the U.S. outlook. We expect to see continued demand for apartment homes in 2023, given high mortgage rates for single-family homes and a reluctance from would-be buyers to make the transition to homeownership amidst this uncertain economic environment. We reviewed several third-party forecasts for both supply and demand in our markets for 2023, and the outlook for recession scenarios and job growth or job losses varies dramatically. As such, I will spend my time today focusing more on the supply aspect and expected completions and deliveries in our 15 major markets this year. Those estimates also vary quite a bit, but our baseline projection assumes approximately 200,000 new completions across our markets during the course of 2023. Our three Florida markets, Orlando, Southeast Florida and Tampa once again earned A+ ratings but with moderating outlooks. These three markets had a weighted average revenue growth of 16.4% in 2022 and are budgeted to achieve between 6% to 8% this year. Overall, supply will likely increase in these markets and we expect completions of 12,000, 11,000 and 6,000 units, respectively. Charlotte, Raleigh and Nashville would rank next with an A rating and moderating outlooks for 2023 versus 2022. This will be our first year of reporting same-property statistics for Nashville, but we anticipate same property revenue growth of 5% to 6% for each of these three markets. New supply will continue to be a headwind this year, particularly in Nashville, but in-migration trends and overall levels of demand remain strong. Our estimates for new deliveries in these markets are 11,000, 9,000 and 10,000 units, respectively. Up next are Dallas and Phoenix, which received A- ratings with stable outlooks. Dallas should deliver around 20,000 units this year, but so far demand drivers remain strong and should allow for absorption of many new apartment homes. Phoenix is likely to see another 15,000 units completed this year, which will further temper revenue growth from double-digit levels to a more moderate rate of 5% or so. We expect Denver and Austin to fall around the middle of the pack for our portfolio with approximately 5% revenue growth and would rate them as an A- with moderating outlook, completions in Denver are projected to be around 15,000 apartments and in Austin is expected to see over 20,000 new apartments come online this year. Both of these markets have seen their fair share of supply in the past few years, but demand has been remarkably strong. Given recent announcements regarding layoffs in the technology sector, we will keep an eye on both of these markets for any future signs of slowing demand. Our next three markets, San Diego, Inland Empire, Washington, DC Metro and Atlanta earned a rating of B+ with a stable outlook. We expect completions of 10,000, 15,000 and 13,000 units, respectively, and revenue growth in the 4% to 4.5% range. San Diego Inland Empire should face less supply pressure than some of our other markets this year, but the overall regulatory environment in Southern California puts us in a wait and see mode for now. Operations in Washington, DC Metro and Atlanta seem to be more of the same and should continue at a steady, stable pace throughout 2023. Houston and LA, Orange County are two last markets with grades of B and B-, respectively, and revenue growth projections of 3% to 4% this year. Our outlook for these two markets are a bit different as we see an improving outlook in Houston versus a stable outlook in LA, Orange County. Both markets should see manageable new deliveries with 15,000 and 20,000 units, respectively, but economic conditions in Houston may be a bit more resilient with energy companies making profits and performing well. LA County was clearly -- has clearly had higher delinquencies and bad debt compared to our other markets, and we remain a bit cautious on when restrictions and regulatory issues around addictions and non-payment of rents will actually begin to improve. Now a few details of our fourth quarter 2022 operating results in January 2023 trends. Same-property revenue growth was 9.9% for the fourth quarter and 11.2% for full year 2022. Nine of our markets had revenue growth exceeding 10% for the quarter and our top three performers were our Florida markets of Tampa, Southeast Florida and Orlando. Rental rates for the fourth quarter had signed new leases up 4% and renewals up 8.4% for a blended rate of 6.1%. Our preliminary January results indicate a return to more normal seasonal trends with a blended growth of 4.2% on our signed leases to date. February and March renewal offers were sent out with an average increase of 8%. Occupancy averaged 95.8% during the fourth quarter of 2022, compared to 96.6% last quarter and 97.1% in the fourth quarter of 2021. January 2023 occupancy has averaged 95.4%, compared to 97.1% in January 2022. Annual net turnover for 2022 was up slightly compared to 2021 at 43% versus 41%, and move-outs to purchase homes were 13% for the quarter and 13.8% for the full year of 2022, down from 16.4% for the full year of 2021. Thanks, Keith. Before I move on to our financial results and guidance, a brief update on our recent real estate activity. During the fourth quarter of 2022, we completed construction on Camden Atlantic, a 269 unit, $100 million community in Plantation, Florida, which is now almost 90% leased, averaging over 50 leases per month, well ahead of expectations. Turning to financial results, last night we reported funds from operations for the fourth quarter of 2022 of $191.6 million or $1.74 per share, in line with the midpoint of our prior quarterly guidance. These results represent a 15% per share increase in FFO from the fourth quarter of 2021. Included within our fourth quarter 2022 results is approximately $0.01 per share of additional insurance expense associated with the recent winter freeze. Excluding these non-recurring insurance charges, our results would have exceeded the midpoint of our prior guidance range by $0.01 per share resulting from the faster than expected leasing velocity at Camden Atlantic, combined with lower employee health insurance claims and lower property tax rates in Texas. For 2022, we delivered record same-store revenue growth of 11.2%, expense growth of 5.1%, which included the additional insurance expense from the winter freeze and record NOI growth of 14.6%. You can refer to page 24 of our fourth quarter supplemental package for details on the key assumptions driving our 2023 financial outlook. We expect our 2023 FFO per share to be in the range of $6.70 to $7, with a midpoint of $6.85, representing a $0.26 per share increase from our 2022 results. This increase is anticipated to result primarily from an approximate $0.36 per share increase in FFO related to the performance of our same-store portfolio. At the midpoint, we are expecting same-store net operating income growth of 5%, driven by revenue growth of 5.1% and expense growth of 5.5%. Each 1% increase in same-store NOI is approximately $0.07 per share in FFO. An approximate $0.26 per share increase in FFO related to the additional NOI from our Fund acquisition we completed on April 1, 2022. This includes the additional three months of ownership in 2023 and an approximate 6% increase in NOI from the portfolio. And an approximate $0.16 per share increase in FFO related to the growth in operating income from our development, non-same-store and retail communities, resulting primarily from the incremental contribution from our nine development communities in lease-up during either 2022 and/or 2023. This $0.78 cumulative increase in anticipated FFO per share is partially offset by a $0.21 per share increase in interest expense, of which $0.08 per share is from the utilization of our unsecured credit facility to retire our $350 million, 3.2% unsecured bond that matured on December 15, 2022. We are anticipating an average 2023 interest rate on our credit facility of approximately 5.5% and $0.10 per share from the full year impact of the $515 million of secured debt we assumed as part of the Fund transaction, inclusive of the impact of higher interest rates on the $185 million of assumed variable rate debt. The remaining $0.03 per share in additional interest expense comes from additional borrowings in 2023 under our line of credit primarily to fund are anticipated development activities. Our forecast also assumes we will use our credit facility to repay our $250 million, 5.1% unsecured bond, which matures in June of 2023. An approximate $0.07 per share decrease in FFO related to our 2022 amortization of net below market leases related to our acquisition of the Fund Assets. As we discussed on prior earnings calls, purchase price accounting required us to identify either below or above market leases in place at the time of the acquisition and amortize the differential over the average remaining lease term, which was approximately seven months. Therefore, in 2022, we recognized $0.07 of FFO from the non-cash amortization of net below market leases assumed in the acquisition. An approximate $0.07 per share decrease in FFO related to equity and income of joint ventures and management fees as we now own 100% of the Fund Assets; an approximate $0.06 per share decrease in FFO resulting primarily from the combination of higher general and administrative and property management expenses caused by continued wage pressure and inflation, higher franchise and margin taxes and higher corporate depreciation and amortization; an approximate $0.06 per share decrease in FFO due to the additional shares outstanding for full year 2023, resulting primarily from our 2022 equity activity; an approximate $0.04 per share decrease in fee and asset management and interest and other income, primarily related to the earn-out received in 2022 from the sale of our Chirp investment and lower cash balances expected in 2023; and an approximate $0.01 per share decrease in FFO from the disposition we completed in 2022. Our 2023 same-store revenue growth midpoint of 5.1% is based upon an approximate 4.5% earning at the end of 2022 and a current 1.5% loss to lease. We are assuming we capture a third of this loss lease in 2023 due to the timing of lease expirations and leasing strategies. We also expect a 3% increase in market rental rates from December 31, 2022 to December 31, 2023. Recognizing half of this annual market rental rate increase, combined with our embedded growth and loss to lease capture results in a budgeted 6.5% increase in 2023 net market rents. As a result of increased supply, we are anticipating an 85-basis-point decline in physical occupancy, which results in 100-basis-point decline in economic occupancy after accounting for lower levels of rental assistance proceeds anticipated in 2023. When combining our 6.5% increase in net market rents with our 100-basis-point decline in economic occupancy, we are budgeting 2023 rental income growth of 5.5%. Rental income encompasses 89% of our total rental revenues. The remaining 11% of our property revenues is primarily comprised of utility rebilling and other fees closely correlated to occupancy and these items are expected to grow at approximately 1.5%. Our 2023 same-store expense growth midpoint of 5.5% is primarily driven by above average increases in property taxes and insurance. Property taxes represent approximately 37% of our total operating expenses and are projected to increase approximately 6.5% in 2023, primarily driven by larger valuation increases anticipated in Florida, Georgia and Colorado. Insurance represents 6% of our total operating expenses and is anticipated to increase by 12.5% as insurance providers continue to face large global losses. The remaining 57% of our operating expenses are anticipated to grow at approximately 4% as inflation and wage pressures combined with anticipated increases in marketing expenses as we face increased supply are partially offset by the positive impact of our 2022 on-site staff restructuring. We are expecting total salaries and benefits to increase at less than 2% in 2023. At the midpoint of our guidance range, we assume $250 million of acquisitions offset by $250 million of dispositions with no net accretion or dilution. Page 24 of our supplemental package also details other assumptions for 2023, including the plan for $250 million to $600 million of development starts spread throughout the year with approximately $290 million of annual development spend. We expect FFO per share for the first quarter of 2023 to be within the range of $1.63 to $1.67. The midpoint of $1.65 represents a $0.09 per share decrease from the fourth quarter of 2022, which is primarily the result of an approximate $0.05 per share sequential increase in NOI from our development and stabilized non-same-store communities, entirely offset by an approximate $3.5 per share increase in sequential same-store expenses resulting from the reset of our annual property tax accrual on January 1st of each year and other expense increases, primarily attributable to typical seasonal trends, including the timing of on-site salary increases and the lower levels of employee health insurance claims in the fourth quarter of 2022, which are not expected to reoccur in the first quarter of 2023; an approximate $1.5 per share decrease in sequential same-store revenue primarily driven by lower levels of anticipated rental assistance proceeds and sequential declines in occupancy; an approximate $0.02 per share increase in interest expense, resulting from the utilization of our unsecured credit facility to repay the December 15, 2022 maturity of our 3.2%, $350 million unsecured bond; an approximate $0.01 per share decrease in FFO, resulting primarily from the timing of our annual corporate salary increases and various other corporate accruals; an approximate $0.01 per share decrease in FFO related to our fourth quarter 2022 amortization of net below market leases related to our acquisition of the Fund Assets; and an approximate $0.05 decline in fee income related to the timing of our third-party construction activity. Our balance sheet remains strong, with net debt to EBITDA for the fourth quarter at 4.1 times, and at quarter end, we had $304 million left to spend over the next three years under our existing development pipeline. Yeah. Thanks. Good morning. I donât know if this is for Keith, Ric or Alex, but just as you think about kind of your blended spreads and kind of looking at the new versus renewal. Could you just provide a little bit more color on the 8% number that you talked about, and what sort of, I guess, concessions or discounts are you having to offer when you are sending a mandate, are people signing at that and then also the new 1% up looks kind of low, do you expect that to turn negative at all in the next, say, six months to nine months? Yeah. On -- Steve, on the renewals that are being sent out, we really donât do concessions in our portfolio. The only time we ever use concessions is on new lease-up properties where kind of its expected and itâs just sort of written into the pro forma and underwritten that way. But we donât really do concessions. We sign our leases within -- and typically sign them within 50 basis points to 75 basis points of what the renewals are sent out at. So there is some give, but itâs not a whole lot. Regarding new leases, at 1% up, we do expect that to increase slightly over the course of 2023. Seasonally it looks like we do have a return to actual seasonality and did in the certainly at the end of the fourth quarter and that will likely continue until we get closer to our peak leasing season. But, overall, we are looking for another strong year of 5.5% plus or minus rent growth, which as Ric pointed out, in standalone and without kind of juxtaposition to what we did in 2022 over 11%, that would be a really strong year for our portfolio historically. So we are looking forward to that. To your second question, we donât expect our new leases to go negative at all over the next six months to nine months. Now if we have -- depending upon what happens, what unfolds throughout the year, whether we -- our feel and the way we built our guidance was that we would have either a very -- reasonable soft landing or a mile recession and so we combine that and thatâs why we took our occupancy numbers down and our vacancy numbers up. But as far as new leases going negative, generally, if you look at historical sort of timing of seasonality, they tended to go negative in the -- in sort of November, December, January and then start a positive rise after that. This year, we didnât have them go negative during that period. Now we clearly had a significant negative second derivative on growth, but we never went negative. So assuming if you have a recession next year and we have more reasonable or more normal market seasonality, then they may go negative in December. Thatâs just new lease growth. Thanks. I appreciate you walking through all the different market outlooks. But if we kind of drill into Houston, LA and Orange County, three of the ones, I think, you are expecting to underperform a bit in the same markets that have underperformed at least for the past few years. So what do you need to see from those markets maybe structurally kind of going forward that would change the outlook and get them more towards the top end of the grade? ⦠Southern California is that, if you look at projected popular -- projected migration from either immigration, legal immigration or domestic migration, Southern California over the next three years has almost $0.5 million -- 0.5 million people leaving. And on the other hand, if you look at Texas, including Houston, we have about -- the projections show around 350,000 of new migrations. So thatâs one of the big things is you just have this drag on people moving out of those markets and moving into our markets. What could help Houston fundamentally is continued energy transition jobs that are happening here and continued strength in the oil and gas market. The oil and gas folks just to give you some numbers laid off about 80,000 people in the pandemic period and have only added back about 50. So whatâs happened is as they become more efficient, even though they are printing money right now, if you look at their earnings, but they havenât really stepped up to hire people and they become a whole lot more efficient. I think Southern California has some upside, because ultimately, when you get past the COVID measures. I mean, thatâs been the biggest challenge there is you have a huge gap between economic occupancy and physical occupancy almost 1,300 basis points. And part of that -- and I think itâs all driven by the fact that in California, you donât have to pay your rent, and so, ultimately, when that clears then which hopefully they extended it to the end of May or end of March in terms of restrictions. But, hopefully, once that ends, you will have a positive situation where you will be able to kind of run your business like a business. Today, we canât get our real estate back and people smile as they live free and drive their BMWs and Teslas and feel pretty good about the world. Thanks. I appreciate that. And then just on your opening comments on the transaction market, you mentioned the wide bid ask spread and kind of having some patients. Where would you by today, I guess, from a cap rate or an unlevered IRR basis, what would you be comfortable underwriting and transact and if the seller was willing to do it there? Yeah. The cap rate side is kind of hard to peg, because the question will be whether -- what we think the upside of the property is, a lot of times in five properties they are pretty poorly managed using revenue management wrong in a long-headed way, and we can create a lot of value from that. So we find properties that are stressed, you may be buying by the pound, not the cap rate and then we will be able to drive the cap rate up. In terms of unlevered IRRs, we have increased our unlevered IRR hurdles by at least 100 basis points, so given our cost of capital rise. So we would be looking at for acquisitions in the $0.07 kind of plus range on levered IRR basis. Hey. Good morning, everybody. Alex, I believe you referenced a $1.5 negative impact to fourth quarter FFO from lower rental assistance and I was wondering if you expect any additional impact going forward and just what you are assuming for net bad debt for this year in your guidance? Yeah. Absolutely. So net bad debt for us for 2023 should be right around 1.4%. When you think about rental assistance, so in 2022, on a same-store basis, we got about $11.5 million of rental assistance, and in 2023, we are assuming some but really negligible amounts. So the best way to sort of think about it is that, on a net basis, thereâs not much of a change in terms of bad debt from 2022 to 2023. But if you sort of back out the positive benefits of rental assistance that we got in 2023 then we are showing, excuse me, in 2022, then we are showing some improvement in 2023. And thatâs the challenge we have today, itâs very elevated and given the outlook for a potential recession, we are hoping that 1.4% will start going down throughout the year and then, ultimately, go back to 50 basis points number in 2024. So thereâs some positive growth that can come from people actually starting to pay their rent. Yeah. Got it. Understood. And then it seemed like Houston had started to see some momentum last year sort of bucking maybe the trend of some of your other markets, given it didnât have as difficult comps, but it is remaining at the lower end of your revenue growth expectations and market outlook. And I guess I am just curious whatâs really holding back Houston from stacking up better versus other markets and is there a potential for a surprise to the upside as you move through the year? Yeah. So we have -- in our forecast, we have used 15,000 completions in Houston, which the normal year in Houston that would be seen as a positive to the overall market conditions given the size of the Houston market. Interestingly enough and Ron Wittenâs number numbers, he actually has Houston job growth is basically flat or I mean zero and flat total employment over the year. And after -- itâs one of those things where we donât necessarily agree with Ron on everything and I think itâs very possible that heâs got the -- that he has the job growth outlook heâs understated it in Houston. The Greater Houston partnership came out with numbers after Ronâs latest update that indicated Houston could be as high as 60,000 or 70,000 new jobs in 2023. Thatâs quite a range between zero and 70,000. So I think when we look at our modeling and he carries that over into his rental forecast, we probably tweaked Ronâs rental forecast in Houston to reflect a little bit more dynamic situation on job growth in Houston. So I think there is a chance if the energy business continues as it is right now, which is basically almost every energy company in the country in the fourth quarter reported record earnings. If that trend continues, I just canât imagine that we are not going to see a more robust job growth situation in. Yeah. I think the other thing that could help Houston a lot is the, when you think about the federal government spending, even though we have lots of supply coming on the supply is getting shut off. We know thatâs happening right now given the current financial environment. And we have a tremendous amount of -- in Houston of federal money thatâs coming here, be it via hydrogen, carbon capture, expansion of the port and just a lot of big government projects that are going to create a lot of employment over the next 12 months to 36 months with the massive amounts of spending from the Infrastructure Bill and The Inflation Reduction Act and that Houston should benefit big time from both of those. Our turnover was down 100 basis points in January and blended lease growth increased to 2%. Is that indicative of an upturn in trend? Maybe asked another way, is there any indication that demand has bottomed and how did top of funnel demand and conversion in January compared to December or prior months? So the question of kind of where we see demand, I think that the decline that we saw between November and December was far -- it was outsized compared to normal history. We normally see a decline in occupancy and rental rates from November to December, at somewhere around the 20 basis points or 30 basis points and this year it was wide of that by 40 basis points or 50 basis points on both metrics. So thereâs clearly -- thereâs something changed in the total amount of people seeking apart -- seeking to lease apartments between November and December that was a little bit higher than what we would have normally expected. Thereâs no doubt about that. I mean we have sort of kind of made the comment internally that it felt like people a lot of our runners went home toward Christmas holidays and a fair number of them stayed at home. So but look our trends have gotten better in January. Our traffic is sufficient to backfill and to maintain the occupancy and over time increase it a little bit. We did decrease our overall occupancy for the year of 2023 from where it was last year, but last year, we at historically elevated levels and we have modeled 95.7% in occupancy for 2023, which, again, by historical standards is really still quite strong for us. One of the things that was -- I will just kind of hit it in a really broad way, because and these data points that I am going to give you right now are just really hot off the press over the last week or two. As Keith pointed out, we felt definitely a -- more a seasonal situation during the fourth quarter. But it was also, as he said, itâs sort of like people just went away in December. And when you look at the stimulus and post-pandemic demand, right? And think about this, these numbers are pretty amazing. In 2021, the industry absorbed 600,000 net new units in 2021 in multifamily and thatâs when we had the massive stimulus, lots of people have money and they moved out. If you look at the average between 2014 and 2023 or 2021, the average, there are about 150,000 people on average that made between 25,000 a year and 75,000 a year. In 2021, that number grew to 450,000. And so the same thing can be said for the 75,000 to 100,000 cohort, went from 100,000 people to 150,000 people. And then over 75 went from those were fewer, but you went from 150,000 people on average to 2.25%. And what happened was the whole market moved up in terms of people that had money because of the stimulus and because if you think about -- even if you lost your job during this pandemic, if you lost your job in 2008, 2009, you have got a fraction of your pay unemployment -- maybe 60% of your pay through unemployment insurance. The way that stimulus worked and the way unemployment was tweaked during the pandemic is you have got 110% or 115% of your pay when you lost your job. So you have this massive saving. It moved up a lot of people into the world that wouldnât otherwise have been able to afford an apartment and they all moved out to apartments. If you look at 2022, we had a net absorption of 50,000 units, right? So you had -- we had really anemic absorption. A couple of other numbers that I think are really fascinating would be, in the fourth quarter of 2008, which was a really bad time in the world, we had a negative, this is national negative absorption in multifamily of 115,000 units. In the fourth quarter of 2022, which obviously, is a lot better than the fourth quarter of 2008, we had 181,000 net loss of apartment. So 115 to 181. The 181 was so big relative to the history. I couldnât find a time, at least Keith and I have been in this business where the number was that big. And what happened, obviously, is that those people that moved up income wise have spent their money and move back and they stayed home up for Christmas instead of coming back and renewing their leases and thatâs why when you start thinking about next year. I think next year, itâs going to be a good year ex some real bad recession side of the equation. But thatâs why you canât continue to have 14%, 15% NOI growth with double-digit revenue growth when the market is going back to a more normal market. We are just getting off the sugar high of everybody has money and can go out and do whatever they want including lease apartments. Thatâs a very helpful commentary. And then in your guidance, thereâs a wide range for development starts. So maybe what macro conditions would you look for that would drive you to the top end of the range versus maybe the bottom end of the range? Thanks. There are a couple of key points. One is that, if you look at whatâs going on, the biggest sort of change in the market from a product perspective has been banks have really shut down construction lending. And with the uncertainty with interest rates, rents now are not going up fast enough to be able to offset the construction cost increases that we have had in the past. So you have a lot of models that show merchant builders dropping construction somewhere in the 40% to 50% range. If you look at starts today, they are around 0.5 million and so the folks we look at show that those starts going to like 250,000 by the end of this year, almost a 50% cut. So if that trend continues, then the way we think about the world is it takes 24 months to 36 months to build a property, you have great legacy land that makes sense for us to build on and we could deliver at a time where you have very low supply in 2026 and 2027 given the outlook for the supply to be reduced. The other thing we are starting to see is because most folks are do believe that that starts will come down dramatically this year, then you are starting to see price pressure moderate. We -- last year, there was probably -- in the last three years, construction costs have gone up over 30% to almost 40% in terms of cost. Now we are seeing it flat and then actually go down. So there could be an opportunity over the next six months where you do see some significant cost reductions and if we can get our costs down, and we believe fundamentally that supply is going to be down and the market will be pretty good in 2025 and 2026, then we are going to lean into that and thatâs where we would be hitting the top end of our development range. If sort of the interesting part is if you think about, if you have a recession, then those starts will really go down this year and costs should come down even more. So that could allow well-capitalized companies like Camden to buck the trend and develop when merchant builders canât and be able to position higher returns on developments than you would expect today in 2025 and 2026. So thatâs how we think about it. Hey. Good morning out there. My first question is going back to the same-store revenue guide. Can you clarify for us the building blocks and how the math works? I am looking at your current midpoint of 5%, 5.1%, but also considering the earning, which I think was around 5% and the market rent growth assumption that you have in your supplemental of 3%. So assuming half of that gets us into the, call it, mid-6%s. So can you spend a moment to kind of clarifying the buildup to our sensor revenue and what are the swing factors to get to the upper and lower end? Thanks. Yeah. Absolutely. So, first of all, you are right, the earn-in and we will call it the earn-in plus sort of the loss to lease that we think we can capture is about 5% and then we have market rent growth from December 31 of 2022 to December 31 of 2023 of about 3%. So, obviously, you can only get half of that. So to the 5%, you add the 1.5% and that gets you to 6.5% and thatâs what we call net market rent. Then the driver is sort of the dilutive impact to that is economic occupancy. So we are making the assumption that occupancy comes down about 100 basis points. So you take the 6.5% and you back off the 100 basis points and that gets you to a 5.5% rental income growth. Now remember that rental income is only about 89% of our total property revenues. So if you take that 5.5% rental income growth and you multiply it by 89%, you get to about 4.9% and then the other 11% of our rental revenues comes from other income and think about water rebilling, trash rebilling, admin fees, application fees, those type of items and they are so closely correlated to occupancy. And they are also -- some of them are statutorily mandated to the amount that you can actually charge and so we are expecting that 11% to grow at about 1.5%. So if you multiply those two out, you get 0.2, you add the 0.2 you are 4.9 and you get exactly to 5.1%. Got it. Got it. Thatâs helpful. Second question is on the $250 million of acquisitions and dispositions you outlined in your guide. I guess I am curious on how we should broadly be thinking about the timing in light of the sale transaction markets you outlined? Are you willing to wait for better cap rates or are you expecting better cap rates, getting calls from many -- getting more calls for merchant builders or sensing an opportunity there and then any markets that you are outlining that you are adding more to or calling from? Thanks. So I will answer the timing and then let Ric and Keith answer the second part of it. But the timing of what we have in our model is we have got it towards the end of the year and we have got them offsetting one another. So thereâs no net accretion or dilution from acquisitions or dispositions in our 2023 guidance. We just got back from NMHC and it was interesting, there were 8,500 registered people there are record for NMHC and that doesnât include couple of thousand that donât want to pay the fee, they just hang around the hoop, trying to have meetings with people trying to understand the market. And we sort of -- it was interesting because you had sort of three camps. You have the camp where the capital like -- people with capital like us and other portfolio managers and others and we were all kind of -- we are kind of waiting to see whatâs going to happen. Then you had merchant builders who still are kidding themselves that they are going to start as many properties that they thought they are going to start this year. And there are some that are that are realistic, that are actually betting on a lower number than as projected. And then you have the brokers who are all very excited about getting back to work. When you look at some of the numbers that we heard January numbers, I heard one of the national brokerage group said they did about $1 billion of sales in January of 2022 and this year they have done $80 million. And so there is definitely a -- the market is frozen to a certain extent because you have this bid ask spread and I think as the market develops, capital, we will look to try to get reasonable rates of return. Like I said earlier, I think it might be where you are buying by the pound and knowing that, ultimately, you will be able to make a reasonable rate of return, but maybe not initially in terms of you might buy lease-ups and things like that, that donât really have great return ship, you might buy at substantially below what we could replace it for today. So I do think that there is definitely a wait and see attitude and that, that will continue probably until thereâs just more clarity. I mean, when you think about the Fedâs meeting this week, they -- I think most people believe like the 25% basis points, market like it. Interest rates came down and then all of a sudden [inaudible],you have 500,000 jobs a day and 10 years back to 350 and now we are back to talking about, well, whatâs the Fed going to do now, right, a 50-year low on unemployment rate. And so thereâs just so much uncertainty that itâs hard to get conviction and when I think the market gets conviction, then you will start seeing thereâs plenty of dry powder out there and the question is who will blink first and I think itâs going to be the sellers that have to blink first. I am hoping that anyway. I agree with that. Yeah. No. I agree too. I agree with your comments. I was at [inaudible] housing too and I did speak to a handful of people in the minority who thought that, well, maybe a better spring selling season and lower interest rates in the back half of the year could result in lower cap rates. Is that a scenario that you can envision, I mean, how do you think about potentially that outcome? Well, I guess, on the one hand, thereâs a mountain of capital, right? And multifamily is a great business and people understand that. And so I guess if you have -- if the Fed can sort of thread the needle and doesnât crash the economy and rates -- forward rates look like they are going to be in the 3% to 3.5% range, I think, you could argue that cap rates might either affirm dramatically or come down some. I think that when you look at the negative leverage that people have to put on their properties today. If you look at Freddie and Fannie spreads relative to the 10-year you are at about -- you are about 5%, 5.25% and if you are going to buy a 4% cap rate, you got 150 -- 100-basis-point to 150-basis-point negative spread there and you got to figure out how do you get that negative leverage dealt with. And if you want to fix a 6.5 to 7.5 unlevered IRR, you got to bet on some pretty strong growth or falling cap rates in the future to ever make those numbers work. So there is a scenario, for sure, but itâs -- right now I wouldnât bet on that scenario. So two questions -- good morning. Two questions. First off, on California, just especially in light of what LA recently did, do you -- has your view of that market changed, I mean, I have asked you the question over the years about California and there are a lot of good qualities about Southern California lifestyle, et cetera. But it seems like the conditions there for landlords get tougher, tougher every year, now uncertainty with the good cause and whether or not further rent infections whatever. Is that a market that you still believe in long-term or your view has changed in the past year where you are like, you know what, itâs not the market that we thought it would return to, you mentioned 500,000 people returning, I mean, sorry, leaving that -- eventually thatâs something that we have to strategically assess? Yeah. So, Alex, we -- the last two years as -- and all the trials and tribulations that have come with restrictions and the eviction moratorium, et cetera. Those have been -- to me those have been a distraction from the bigger picture. California has had a challenge and has been a challenge to operate in for not just the last two years but for the last three decades or two and half decades anyway. And so thereâs a -- you have to kind of get your mind around the fact that itâs a different regulatory regime. Everything is going to be trickier. Everything is going to be a little bit stickier in terms of moving forward on new initiatives, et cetera. But thatâs something that we have lived with for 20 years. And we know how to do it. We are good at it. We have a very seasoned team in California that knows how to navigate their way through normal -- the normal regulatory morass in California. The last two years have been an exception to that for sure. But I do believe and we believe as a team that at the end of the -- at least the eviction moratorium and the ability to get control of our real estate is coming to an end. And they -- I know that they said, I swear to God, this is the last time we are going to extend it. But I do believe that the LA County extension for this last two months came with a very public announcement supported by virtually the entire council that said, we are going to do this and then really and truly no kidding, this is the last one. So whether it is or it isnât and whether it goes on for another two months beyond that, and the big picture of having operated out there for almost 20 -- over 20 years, I donât think you can -- in a business like ours, given the nature of our assets and the long-term commitments that we make. I donât think you can kind of just get emotionally wound up about what craziness the last two years have been. I think if you look beyond that, California is actually a really good story in terms of being a landlord, because itâs just as difficult as it is to run properties, itâs 3x difficult to build properties in California. So itâs kind of like you -- the new supply challenge is not going to be what it is that we have to deal with in our other markets. So California will -- I guess I am a little more optimistic than most people that will reach a tipping point in some of these places where sanity has to prevail and maybe we donât end up with the continued hemorrhage of out migration from California and things get more on a normal track. If that were to happen, you would get a great return in demand. You havenât had any meaningful amount of replacement or new product built in the last four years in terms of new starts. I think it could end up being a really good operating environment once we get past this two and half years of crisis. Okay. Second question is and Ric, you guys are always sort of the speaker on regulatory policy, obviously, we all know what the White House put out. In your view, does this make Fannie, Freddie debt less attractive if borrowers think that the government is going to use them to effect change? And second, the CFPB and FTC obviously have broader regulatory powers to go after all apartments do you fear that this is going to be some sort of overreach or your view is there are local regulations that already regulated apartments are already so tough that itâs really hard to really sort of up the ante, if you will? Yeah. So on the first question with Freddie and Fannie, I donât think itâs going to affect it that much, because when you look at those guidelines itâs -- they are really targeting lower income and trying to help there. I mean one of the things that people donât realize is when you think about the attacks that the multifamily business are getting, you have to think about who the largest entities or that evict people or public housing agencies, right, federal government and so not market rate companies like Camden. Just to give people a sense to, by the way, in a normal time, where we try to keep our residents as long as we can. We work with them to create value for them and we work on payment plans. In a normal time, out of 60,000 apartments, we may be evict 600 people a year. And a lot of those evictions are people not monetary defaults, but the persons like has a dog to bit somebody or is disruptive to their neighbors. So I feel pretty good about long-term that we are not going to be under siege. Clearly, for a politician, when rents go up 30%, they scream for rent control and they screen for, oh my god, thereâs bad people doing thing. Itâs almost like the -- when energy prices go up and gasoline is $4.50 a gallon, they think the energy companies are the villains, right? But itâs really supply and demand driver there. I think the -- we do have to be vigilant, though, because it is a politically expedient oftentimes to just say, well, we will put a cap on and we will do rent control, because that will help constituents. But ultimately, we all know that and thereâs lots of economic analysis on this, both left and right think tanks all think that rent control stifle supply, which ultimately creates the problem for folks. Good news for Camden is we are in the markets we are in. We donât have a lot of major regulatory targets on us and I think that a lot of the -- even like when you look at Florida, for example, where a couple of the markets have tried to put in rent control. I mean they are just getting massive push backs from both legally and from the state houses. So we do need to be vigilant, but I donât think we are at risk of having some massive government making us do stuff. The first one is on TRS acquisition, so with the benefit of hindsight, as you think about the different moving pieces, especially around higher interest expense now versus at the time of the transaction. How would you qualitatively think about this deal now and the net accretion from it, especially when you consider the dynamic that has also increased your exposure to markets like Houston and DC that, as you mentioned, are your B-ish, B- kind of ratings in sort of the whole deck? Well, I think, the acquisition is still a great acquisition. At the time we financed it with equity, mostly equity, we had $600 million of cash and we executed a large equity transaction to pay for it. And so, ultimately, when I think about that portfolio, it was a very low risk acquisition for us, primarily because we either built them or bought them. We operated them, so there was really no transition risk or no, oh, gee, got you risk, because you didnât know what was going on with those properties since we clearly knew everything that was going on with those properties and so from an accretion dilution perspective, it was accretive in 2022 and itâs accretive in 2023. When you look at or the walk that Alex showed in went through in our press release, the broader interest rates going up were a drag on our FFO, not as a result of that transaction per se, it was bonds coming due, they were at three, did some change that we are having to finance, at five we have some change now. So I think it was a very good transaction for us. Ultimately, we would have had to unwind that portfolio, because we had a 2026 kind of timeframe where we would have to sell the assets and so to be able to acquire really high quality properties with very little transaction risk was really attractive to us. To the issue of longer term, we want to lower our exposure in DC and Houston and the Fund transaction actually increased our exposure to Houston is -- we were willing to sort of delay that a bit to be able to acquire those quality properties. But, ultimately, we are going to grow our way, either grow or out or dispositions and acquisitions in other markets to be able to lower those exposures. And really, itâs all about trying to become more geographically diverse so that we can have less volatility in our cash flow and thatâs sort of one of the reasons why we wouldnât exit California right now, because itâs a good ballast and also could be great upside over the next couple of years once we get out of the pandemic issues. So, yeah, we will continue to focus on being more diverse around the country and move assets around. If you think about from 2014 through 2020 -- roughly 2020, we sold over $3 billion of properties and moved the portfolio around pretty dramatically during that time and changed our geographic footprint and we will continue to do that. So, hopefully, in this in this environment when buyers and sellers get closer together, we will be able to execute some of those sales and acquisitions to move to continue to diversify our portfolio. Very helpful. Thank you for that. And as a follow-up, as we think about occupancy in 2023 and the dip that you guys talked about, how much of it is emanating from higher supply versus you guys perhaps prioritizing pricing over occupancy? And then as we think about California in this mix down the line, as you said, a couple of mixed months down the line, you would be perhaps thinking about looking to get back your real estate from tenants who are not paying currently, how would you put that in this mix of how occupancy might develop? Yeah. So we are modeling occupancy thatâs 95.4% for plus or minus for 2023, which compared to our long-term average is about where we would like to operate the portfolio in any case. We have certainly been higher than that for the last couple of years. But as Ric described, the drivers of demand that sort of made that happen were very unusual and probably not likely to, hopefully donât see that kind of demand driven for that reason at any time in the near future. So I think we will -- I think we use -- we are pretty strict revenue management shop and the levers that you can pull are the primary lever is pricing to try to adjust your occupancy to maintain in the in the mid-95% -- mid- to-upper 95% range. So we will continue to take those recommendations from YieldStar. We think the inputs to the model, both on the looking at the new supply, which we know is going to be a headwind. We think we have properly accounted for that in our forecast. But the -- ultimately, itâs -- it will come down to the conditions on the ground in each individual market as viewed by the YieldStar model in terms of where the pricing actually falls. So, in California [Audio Gap] is likely to happen. That doesnât -- that in itself doesnât solve the issue of getting real estate back, you still have to go through a legal process to affect an eviction. And unfortunately, in California and several of our other markets, even those where they have long since given up on the moratorium, they are still struggling to catch up with the process of going through a legal eviction. So we are prepared to do that. We are expect to be first in line to pursue evictions, but we just know that itâs going to be some lag between, okay, we have lifted the moratorium, now you can begin the process, which in some cases, can take 30 days to 90 days depending on the jurisdiction. So it will be -- I think even after March 31, it will be a little bit of a drag in terms of time to get our real estate back. The flip side of that is, is that we think that once the gig is up for the non -- for the rent strikers that they may choose to just move out voluntarily before we evict them, because they know thereâs the end is in sight and thatâs something that they havenât had to contemplate for the last two years. So you are driving around the country, I am curious to know how is the market clearing that gets you to where you are at with revenue growth at 5.1% versus last year, obviously, we are all expecting deceleration. But is these landlords like yourself and others kind of sort of slow playing it, because of the uncertainty that lies ahead or are you seeing some sort of behavioral shifts with residents thatâs causing the market to clear -- where itâs clearing and it kind of all comes down to market rental rate growth, what you are assuming for this year at 3%. Is there a chance that we do have this soft landing or no recession or whatever you want to call it, if that market rent growth number could be something much higher than 3%? Sure. Thatâs why we have a range, right? I think and what the upside in our guidance could clearly be occupancy. I mean if you have a very positive -- the job number today was eye-popping, obviously. And if you -- if the Fed can thread the needle and keep job growth going and have a soft landing, whether itâs a landing and you keep the consumer going then, yeah, I think, our -- you have two parts of upside in that guidance. One would be the rate, right, the 3%. The other would be we probably beat our occupancy numbers. And the occupancy number is probably the one that is the -- when you think about -- when I think about those numbers, the earning is the earn-in, the 3%, thatâs what most market pundits are putting out there. And then the occupancies where we could be more -- could be too conservative given an outcome that you just -- that I just described and so there are two places where you could beat and those are really the two. So I guess the question is, is this proactive from you or are you seeing behavioral shifts from your residents that are landing you where you are at now? MAA said they are not seeing any behavioral shifts with the residents that they are really more focused on the macro and thatâs whatâs driving where there is landing right now, is that a consistent theme for you guys? I would say that based on the numbers I said earlier, where you had a negative absorption in the fourth quarter of 181,000 units in America, thatâs consumer behavior. Those are people staying home for Christmas. Those are people who got paid, all kinds of big stimulus money, had cash coming out of, because of forced savings and decided to go out and run apartment and then they spend that cash and now they are going, what am I going to do, maybe the economy is uncertain, and I am going to go back to a live with mom and dad or double up and try to save money again. And I think that consumer behavior is clear that, that has happened and we went from, like I said, 600,000 positive net absorption in 2021 and it was 50,000 in 2022 and the 50,000 when you think about it was all in the first half of the year. And if you look at the positive absorption was all in the first half and the second quarter you started having kind of flat, third quarter you had negative some and then in the fourth quarter you had a big negative. And so I would say that is a definite consumer behavior issue thatâs out there and I donât think you can ignore it. Our view -- and thatâs why we came out with occupancy falling and rent being moderated and itâs just -- and it is based on also a less robust economy in 2023. ⦠side, one of the stats that we gave in our prepared remarks was people moved out to purchase homes, which was about 13.8% for all of last year. Just to give you a refresh on that number in the month of January, that number dropped 10% -- just over 10% move outs to purchase homes. And my guess is it falls below -- falls into single digits by next quarter and we have only seen single digits on that staff for maybe two consecutive quarters during the middle of the great financial crisis. And so, I mean, we are getting to some pretty uncharted territory in terms of housing affordability and the willingness and ability of people to move out of apartments to buy homes and I donât think thatâs -- I think we are at the beginning of that cycle. I anxious to get through the call here. One real quick question for Alex, if I am doing the numbers right, you are variable rate debt exposure went from 6% last quarter to 15%. I know that you had the deal, the $550 million of secured debt. Is that a number 15% that we should be expecting for the full year or do you expect something to maybe right-size your rate debt exposure in the coming months and quarters? Thanks. Yeah. Yeah. Absolutely. So in our guidance, we are not assuming any capital transactions. Obviously, we are watching the market closely. Rates have been coming down until this morning and spreads have been tightening. So we are watching that closely. If we have the opportunity, we will take out some of this floating rate debt with fixed rate debt. But at this point in time, we are sort of operating under the thesis that interest rates are going to come down as we go through the year and based upon that it probably makes sense to push out fixing rates really as long as we can. So thatâs whatâs baked into our model, as I said, we are going to be opportunistic though and if we see an option we will take it. Hey, everyone. Thanks for taking the time. I just want to follow up on that last question, if I understand it correctly. So it looks like you can borrow today around 4.5% and have a 1% interest savings on that floating rate debt. Would you have a penalty to pay that off, and I guess, that would just be upside to guidance if you were to take it out today, but it sounds like you just want to be a little bit more, I guess, aggressive at this point, and I think, you get a little bit lower than the 4.5% I just cited? Yeah. And I will tell you, I mean, spreads came in this week alone about 30 basis points, and so if you would have asked me on Monday, I would have told you number was 48, 45 this morning, and so obviously, thatâs heading in the right direction. But we want to see -- we want to see where rates continue and whether or not we can get any better on that. On the floating rate debt thatâs associated with the Fund transaction that we assume there is a 1% penalty. Obviously, 1% is really not that much, and certainly, that can go into the math pretty easily. When we look at whatâs on our line and whatâs on our term loan, there is no penalty. So that really does give us tremendous flexibility and if this -- if the unsecured market continues to improve, there is some potential upside there. Okay. And then going back to Houston, I think, you cited supply of 15,000. Is that -- a lot of that supply directly impacting your portfolio and then if you were to look out to next year, would you expect supply to be comparable for now? So actually most of the stuff that is being built in Houston right now is not directly comparable with our portfolio. Some of it is obviously the Downtown assets and Midtown assets, thereâs been a reasonable amount of construction in both of those submarkets. But our portfolio in Houston suburban and there really just hasnât been that much new supply built in the suburban markets in Houston. It just gotten started maybe a year and a half ago and now itâs slowed considerably in terms of new starts. So I think we are -- as with most of these markets, when you see a scary headline number, on completions. A good example would be Austin, thereâs 20,000 apartments that are set to be completed in Austin this year and kind of headline number just itâs sort of you got to take a double take when you see at 20,000 starts in a market like Austin. But when you really go through the geography of where our portfolio is, such a big amount of that is in or around the Downtown area and we literally have one community that is impacted by all of that. So if -- and if our portfolio were heavily oriented to Downtown either in Houston or Austin, it would be a much greater concern than what -- than what I think itâs actually going to be. Obviously, all supply in the market matters, but itâs like throwing rocks in a pond at the margins, if itâs not near you, it raises the water level a little bit, but itâs not a huge issue unless it happens to be in the particular submarket where your assets are located. Got it. And just to follow-up on that, was it going to be -- do you think it accelerates next year or is it comparable down⦠Yeah. On -- for Houston starts, or excuse me, completions next year, we have it at 19,000 apartments completions and thatâs sound about⦠Yeah. Thanks everyone. Just wanted to touch base on -- I appreciate the build from 2022 to 2023 FFO guidance at the midpoint. I just wanted to touch on that amortization of net below market leases from the Fund acquisition. Is that like something we have to factor into in 2023 or is it fully out now that we have kind of lapped 2022? Just trying to get a sense of how we should be modeling this going forward? Yeah. It is fully out. There is absolutely nothing in 2023. So the variance that you are looking at is the $0.07 that we recognized in 2022 as compared to zero in 2023. Okay. Okay. Appreciate that, Alex. And then maybe touching base on the markets, Phoenix seems like itâs kind of some of my screens, it looks like maybe itâs a market thatâs weakening. It was interesting to see your occupancy went up sequentially. Could you kind of just provide more color around what you are seeing on the ground and how many of your portfolio is positioned versus maybe some new supply and kind of how... We have got -- we have completions in Phoenix for 2023 of 15,000 apartments, employment growth in Phoenix next year is about 26,000 jobs. So thatâs a little bit out of equilibrium in terms of job growth to new deliveries. Although the new deliveries are actually -- have actually come down pretty substantially from where they were in the previous year. So I think Phoenix is -- we have it listed as an A- market and moderating. So I think thatâs or excuse me, A- and stable, so that seems about right for the overall operating environment in Phoenix. Thank you. On your same-store revenue guidance this year, I appreciate the breakdown. But one component that seems to be missing is the renewal rate growth, especially since debt renewal versus new lease rate spread widened in the fourth quarter, and again, even more so in January. So I guess my question is whatâs the good run rate for that renewal versus new lease spread and how is that factored into your guidance this year? Yeah. Absolutely. So, for the full year, we have got renewals up about 4.9% and new leases up 2%. When you blend that out, that gets you to about 3.5% and that 3.5% picks up the market rent plus the about one-third of the loss to lease that we said we would capture. So if you think about the sort of renewal component that you were addressing, that renewal component is what you are going to find and is captured in that loss to lease and so thatâs what we are saying is that we are going to get we will get about a third of that based upon timing and then based upon leasing strategies. So when you say market rental growth of 3%, thatâs not reflective of the 2% release growth rate? How do those two tie in together? Yeah. So market rental rate is going to be the rental rate that we expect December 31, 2023 as compared to December 31, 2022, right? So you are going to pick up that component. And then the renewals, if renewals are coming up to market, that is effectively what you are picking up in the loss to lease and then the new leases if people leave and you are backfilling them, thatâs also getting picked up in the last lease. Good morning. Alex, I noticed Texas and Florida market trended double-digit expense growth this quarter. Are you basically similar expense throughout 2023 for these markets? Yeah. So when you see that, a lot of that is due to the timing of property tax refunds and sort of how that flows through the system and so, no, I would not expect that to be a sort of run rate type item. I mean property taxes are expected to be fairly high. I know you pointed to about 2.5% for the portfolio this year. But Texas and Florida property seem a little bit higher. So if not double digits, do you see the states to print in the high single-digit range? No. And if you think about the states that I specifically called out for having higher property taxes, you do have Florida, but Texas was not one of them. So you have got Florida, you have got Georgia and you have got Colorado. And those are the markets that we are anticipating having higher property tax expense and so thatâs where, if we are averaging 5.5% and property taxes make up a third of our total expenses, those markets that are going to have the higher growth in property taxes are going to have the higher expense growth. So, yeah, I would expect that once again in Florida and then Georgia and Colorado. Thatâs clear. And then I want to talk about the DC market, how is front door traffic in trending in DC relative to the portfolio average? And are you seeing any signs of people starting to migrate to the suburbs or even out of state? We certainly have seen some out migration from DC, particularly the DC proper as opposed to DC Metro. Itâs not anything like we have seen from New York or California, but I would say at the margin, yeah, we do get -- in terms of folks that show up in Atlanta for relocation purposes, itâs certainly in the top three or four from destinations. So, I think, again, more DC proper than the suburban areas and a lot of that is just driven by employers and where you happen to be your office is located in DC proper, people have been very reluctant to return to their offices, because they have been allowed us to basically work from anywhere. And if you can work from anywhere in DC proper is probably not in your top 10 places to work from if you have complete flexibility. So, yeah, I think, itâs -- we have three assets in DC proper and we certainly have seen more of that from those two assets than what we had seen prior to COVID, for sure. But compared to LA, for example, Washington, DC has positive net in migration over the next three years compared to 350,000 out migration. So itâs not as -- you donât have the back door open as big as you do in DC versus any of the other California markets. This concludes our question-and-answer session. I would like to turn the conference back over to Ric Campo for any closing remarks. Thanks. We appreciate you all being on the call today and if you have any other questions, we will be around. So just give us a call and we would be happy to give you more detail. Thanks.
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Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic Third Quarter Fiscal Year 2023 Financial Results Q&A session. At this time, all participants are in a listen-only mode. After a brief statement, we will open up the call for questions from analysts, instructions for queuing up will be provided at that time. As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the conference call over to Ms. Chelsea Heffernan, Vice President of Investor Relations. Ms. Heffernan, you may begin. Thank you, and good afternoon. Joining me on todayâs call is John Forsyth, Cirrus Logicâs Chief Executive Officer; and Venk Nathamuni, Chief Financial Officer. Today, at approximately 4:00 P.M. Eastern Time, we announced our financial results for the third quarter fiscal year 2023. The shareholder letter discussing our financial results, the earnings press release and the webcast of this Q&A session are all available at the companyâs Investor Relations website. This call will feature questions from analysts covering our company. Additionally, the results and guidance we will discuss on this call will include non-GAAP financial measures that exclude certain items. Reconciliation of these non-GAAP measures to their most directly comparable GAAP measures are included in our earnings release and are all available on the companyâs Investor Relations website. Please note that during this session, we may make projections and other forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially from projections. By providing this information, the company expressly disclaims any obligation to update or revise any projections or forward-looking statements, whether as a result of new developments or otherwise. Please refer to the press release and the shareholder letter issued today, which are available on the Cirrus Logic website and the latest Form 10-K as well as other corporate filings registered with the Securities and Exchange Commission for additional discussion of risk factors that could cause actual results to differ materially from current expectations. Thank you, Chelsea, and thank you, everyone, for joining todayâs call. As youâve seen in the press release, Cirrus Logic delivered record revenue this quarter with sales of $590.6 million driven by products shipping and smartphones. Iâd like to express my sincere thanks to the entire Cirrus Logic team, whose innovations, hard work and execution and commitment to our customers made these results possible. And on behalf of all of us at Cirrus, Iâd also like to communicate our gratitude to our customers and to all those who work with us throughout the supply chain for their continued partnership and support. In a moment, Venk is going to discuss the results in greater detail. But before we get on to that, Iâd like to provide a progress update on the strategy driving our current momentum. As most of you know, the first pillar of that strategy is to maintain our leadership in smartphone audio. And during the past quarter, we saw a significant customer interest and traction across our portfolio of amplifiers and codecs in this market. We remain on track with the development of our next-generation 22-nanometer smart codec, which we taped out during the quarter and with the development of our next-generation custom boosted amplifier. We expect to see both components introduced within the next couple of years. These new products will deliver significant performance improvements over previous generations, enabling our customers to build even more compelling and power-efficient devices for their users. One aspect of our flagship amplifier and codec business thatâs not always fully visible to those outside the company is that these products are designed in a very thoughtful and feature-rich way in close collaboration with our customers in order that theyâre able to run for numerous phone cycles following their initial introduction. In fact, over time, weâve seen the lifespan of codecs and amplifiers increased. And this means that in contrast to many components in the consumer smartphone market, we can anticipate multiple years of sales at high volumes from our next-generation audio products, providing the company with sustained revenue contribution, excellent long-term visibility and the opportunity to redeploy our highly skilled engineering teams on to innovations that target other products and markets. So this is why maintaining our long-term leadership in these product areas is foundational to our future growth. The second key element of our growth strategy is to expand the reach of our audio components and technologies, especially into adjacent markets that we believe we can serve profitably by leveraging the intellectual property and innovations that we have developed for our smartphone products. One of those markets is laptops. And in spite of the current cyclical weakness in the PC space, we see laptops largely as a greenfield opportunity, where we continue to expect our addressable market to grow significantly over the coming years. As evidence of this, in the last year alone, Cirrus Logic has been designed into more than 60 laptop models using existing audio products. And building on that momentum, during the last quarter, we saw considerable design activity around our new amplifier and codec products that have been specifically optimized for the laptop market. We expect the first platform utilizing these new products to begin shipping in the second half of fiscal year 2024. The third pillar of our strategy is to leverage our world-class mixed-signal engineering expertise to build a growing footprint of products and intellectual property in what we call our high-performance mixed-signal product lines. The significance of this facet of our strategy is that doing so expands our addressable market significantly beyond audio. And we believe that our considerable experience in mixed-signal product development and advanced process nodes, and in delivering high-performance data converters, high-precision sensing and advanced signal processing is highly relevant to a number of product domains. The fact that we have already seen meaningful contributions from products in this category, highlights that our customers also increasingly see us more broadly as a world-class mixed-signal solution provider. And today, we have more activity within our high-performance mixed signal R&D teams than ever before. During the quarter, within those HPMS activities, we saw continued strong customer engagement in the camera space. Itâs worth noting that as a consequence of increased attach rates, higher ASPs and a more favorable mix over time, we have grown the total value of our camera products in each of the last three smartphone generations. And we expect this trend to continue with our next-generation camera controller, shipping later this year. We also made excellent progress toward the introduction of a new HPMS component during the second half of this year, and we continue to see strong interest in our capabilities around battery and power. Going forward, we believe there are further opportunities to grow our addressable market in the battery and power space, both within smartphones and beyond. And indeed, during the quarter, we also taped out our first general market power product targeting laptops, which is designed to deliver more efficient power conversion in order to enable OEMs to create more powerful single fan and fanless laptop devices. In summary, in the third quarter of fiscal 2023, we continue to execute on our strategic initiatives to diversify our product portfolio and broaden our addressable market into new application areas and end markets. With a solid pipeline of products expected to be introduced over the coming years and a deep commitment to investing in innovative technology, we believe Cirrus Logic is well positioned to drive growth and capture new opportunities in the coming years. And with that, let me now turn the call over to Venk to provide an overview of our financial results for the fiscal Q3 2023 as well as guidance for fiscal Q4. Thank you, John, and good afternoon, everyone. Iâll provide an overview of our financials. Starting with fiscal third quarter revenue was $590.6 million, which was an all-time record and represents the sixth consecutive quarter of record revenue for the corresponding fiscal period. Revenue was up 9% quarter-over-quarter and up 8% from a year ago. Our strong performance during the quarter resulted in revenue above the high end of our guidance range and was driven by demand for smartphones. On a year-over-year basis, the revenue performance was driven by higher ASPs, which predominantly helped offset increased costs and to a lesser extent, additional high-performance mixed-signal content in smartphones. Iâd like to highlight the continued outstanding execution for the supply chain organization and the entire Cirrus team in helping deliver these strong results, especially in light of heightened disruptions in the global supply chain during the December quarter. Turning to gross margin. Non-GAAP gross profit in the quarter was $297 million, and non-GAAP gross margin was 50.3%. This was roughly in line with the mid-point of the guidance range we have provided. On a year-over-year basis, gross margin decreased due to an increase in supply chain costs and to a lesser extent, a less favorable product mix. Non-GAAP operating expenses in the quarter were $123.2 million, roughly flat sequentially. Iâd note that operating expenses came in below the mid-point of our guidance range despite higher revenue as higher product development costs and employee-related expenses were offset by lower variable compensation. We intend to continue to invest strategically in new product development as we see ongoing opportunities to increase our content while at the same time, controlling discretionary spending. Non-GAAP operating income was $173.9 million in the third quarter or 29.4% of revenue. And finally, on the P&L, non-GAAP net income in the third quarter was $135.8 million or $2.40 per share. Let me now turn to the balance sheet. Our balance sheet continues to remain strong, and we ended the third quarter of fiscal year 2023 with approximately $508 million in cash and cash equivalents. Our ending cash balance was up nearly $80 million from the prior quarter, primarily due to strong cash flow from operations, partially offset by stock repurchases during the quarter. Specifically, we generated cash flow from operations of roughly $181 million during the December quarter, which is about 31% of revenue, thanks to the excellent execution and collections performance by the team. We continue to have no debt outstanding. And also, Iâd note, we have $300 million undrawn on our revolver. Inventory was $152.4 million, down from $164.6 million sequentially, and days of inventory was 47 days in Q3, down 8 days sequentially as we shipped product to support our customersâ new product ramps. Looking ahead to Q4 fiscal 2023, we expect inventory to increase from the prior quarter as we fulfill ongoing demand and manage inventory ahead of product ramps later in the calendar year. Now turning to cash flow. As I mentioned earlier, cash flow from operations was $181 million in the December quarter, and CapEx was roughly $8 million, resulting in free cash flow for the quarter of $173.3 million. Free cash flow margin for the December quarter was 29%, and for the 12-month period ending in the December quarter, free cash flow margin was 26%. On the share buyback front, in Q3, we utilized $50 million to repurchase approximately 713,000 shares of our common stock at an average price of $70.14. As of the end of Q3 fiscal year 2023, we had $536.1 million remaining in our share repurchase authorization. We expect to continue to return capital in the form of stock repurchases, which we believe will provide a long-term benefit to shareholders going forward. And now on to the guidance. For the fiscal fourth quarter of 2023, we expect revenue in the range of $340 million to $400 million. We expect gross margin to range from 49% to 51%. Non-GAAP operating expense is expected to be flat sequentially in the range of $120 million to $126 million, as higher product development cost is offset by lower SG&A expense. We will continue to control discretionary spending but invest strategically in product development to drive long-term growth. On the tax front, as we have previously discussed, due largely to a tax tool effective from the start of our fiscal year 2023 that requires companies to capitalize and amortize R&D expenses rather than deduct them in the current year. We continue to expect our fiscal 2023 non-GAAP effective tax rate to be approximately 23% to 25%. We maintain our expectation that under this rule, our effective tax rate will decrease and may return to a normalized range in about five years as additional years of R&D expenses are amortized for tax purposes, absent any changes to the legislation. Iâd note that without the impact of this rule, our non-GAAP effective tax rate would be in our more typical mid-teens range. In closing, we had a strong Q3 fiscal year 2023 as we executed well to deliver these results. Going forward, we will continue to focus on the best opportunities to enable the company to grow both revenue and profitability over the long-term. And before we begin the Q&A session, Iâd like to note that while we understand there is intense interest related to our largest customer, in accordance with Cirrus Logic company policy, we will not discuss specifics about our business relationship. Thanks, Venk. We will now start the Q&A portion of the earnings call. Please limit yourself to a single question and one follow-up. Operator, we are now ready to take questions. Thank you. [Operator Instructions] Your first question today comes from the line of Matt Ramsay with Cowen and Company. Your line is now open. Thank you very much. Good afternoon, guys. I guess for my first question, Venk maybe this is for you. I wanted to talk a little bit about seasonality. Obviously, the results in the December quarter, really strong, and I think the guidance is sort of in line on a revenue basis for March, but thatâs down, I donât know, 25%, give or take, on a sequential basis, which is maybe a bit more than typical seasonality or maybe you could just clarify what typical seasonality might be at this point in the cycle. But how do we kind of think about seasonality into June? Thereâs been years where June was down sharply. Thereâs been years where June was up sharply. Iâm just thinking how â trying to figure out how to characterize that because weâre in a bit of an interesting period from an inventory perspective all the way around in the smartphone space. Thank you. Yes. Thanks for the question, Matt. And let me start and then if John wants to add to it. So as you pointed out, Matt, typical seasonality is no longer the case and especially given whatâs happened in the last couple of years with the pandemic. But having said that, as you pointed out, we had a pretty strong Q3 fiscal 2023, and that was driven by the smartphone volumes. But I would say that looking ahead, clearly, we have taken into account what the demand signals that we have as we provide guidance for the March quarter. One thing to note is that in the prior year March quarter, we did have the benefit of the SC [ph] launch, which we do not expect in this upcoming quarter. And we take that into consideration along with all the other general market signals, we have factored that into our guidance. Now as it relates to the June quarter, weâre only giving guidance one quarter at a time, and weâll deal with that at the next quarterâs earnings call. Thanks for that, Venk. Fair enough. John, I was encouraged in your script that you talked about the tape out of the 22-nanometer codec and the significant progress on the next generation of boosted amplifiers, which I think lines up pretty well for some consistent content expansion and new content for the company overall. And then on the flip side, you talked about the length of time in which your design wins stay relevant with your customer and then talks about multiple years of revenue when you win something. And Iâm just trying to put those two things together in terms of how â the current generation of those products has been shipping for a while, and youâre going to have new generations coming, so how are you thinking about the potential for ASP resets or content expansion in dollar terms as those products launch generally, understanding you canât be super specific given the customer. Yes. Thanks, Matt. Iâm not going to get into detail on the ASP front, but these are really big developments. If you look at that codec development, for example, not only a really heavy lift to get all that IP on to 22-nanometer, we undertook a serious investment in the test chip in that process, what will be the best part of five years ago by the time that product comes to market. So itâs a very significant investment. And frankly, that chip is going to be phenomenal I think in terms of power consumption efficiency, what it does for our customers in terms of enabling system design, flexibility and performance. Itâs a big leap forward, and it can be the platform for a long time. So in line with that, yes, weâd expect some ASP uptick as we get to the launch of that. And similarly with the boosted amplifiers, our goal when weâre approaching a product like that is not only to look at how we can improve the product intrinsically but also how we can save some cost and board space for our customers by integrating stuff thatâs around us on the board. And with our new boosted amplifier, weâre doing exactly that. Weâre reducing the component count that sits around the amplifier, and that gives our customers a real benefit. And again, when youâre able to deliver a benefit like that, that results in a cost saving for the customer and should result in an ASP increase for us as well. Yes, thank you and congratulations on the record results. Maybe to follow on that same topic, the 22-nanometer smart codec again and the boosted amp. You did say you expect it within the next couple of years. I mean, could you maybe be a little bit more granular? I mean is this something that we should expect within the next two years, next three years? Or is this sort of like within the next five years? Yes. And thank you for the nice comment, Tore. By a couple, we mean two, so weâre old school on the definition of a couple. We talked about the 22-nanometer codec being in design in the fall of last year. And typically, when we talk about setting aside all the work that comes before that and the test chip and so on, when we talk about the actual product, being in the design phase, thatâs typically â sorry, a couple, meaning two years out from the actual introduction in the market. Excellent. And then on the topic of the laptop market, you talked about 60 new models that you got designed into last year, I believe that was probably from your â I wouldnât call them legacy products, but you did talk about some new laptop specific products, right? So those design wins are still on the come. And if thatâs the case, would those also tend to carry higher ASPs? Yes, thatâs a great question. And youâre exactly right. To clarify that, those 60-plus design wins that I referred to are based on products which we had developed prior to targeting the laptop market as an expansion of our audio addressable market. So weâve really been doing very well with the existing product portfolio. However, you can certainly improve on that and optimize, for example, the battery architectures that we see in a variety of laptops. Iâve talked about the sound wire interface being a feature thatâs coming over the horizon there. So we have these new generation products, which are looking at addressing those needs. And I think weâll see our older products continue to run in parallel. They certainly still perform extremely well and are highly relevant. But yes, we would anticipate some ASP increase as we see the introduction of those new boosted amplifiers in particular. Hey, good afternoon. Thanks for taking my questions. I had two. Just going back to Mattâs question, I think just analyzing December, if you could just talk about the upside. I think the shutdowns were kind of happening, right, as you kind of guided, so you probably added some conservatism. So that with the beat, what weâre seeing, I mean obviously, you have content gains and you may not track that customer, but theyâre down year-over-year. I think they missed a bit on the quarter and guide. So I guess thatâs the question weâre going to get a lot is how do you beat when your customer is down, but it might be the wrong measure because you might add some conservatism. So just can you explain to me a little bit more, that would be helpful. Yes, sure, Blayne. I think we guide with all the information we have at the time, so itâs our best estimate of where weâre going to land. I think when you think about December, especially kind of how that matches up with our largest customer, and youâll forgive me, I hope, if I havenât fully passed all of Tim and Lucas comments yet, but I think the big picture is, number one, you canât always â itâs not always easy to true up our shipments with customer shipments. From our perspective, demand signals from our customers throughout the quarter were strong and sustained, and that included request for expedites, drop shipping, a lot of material and so on. The kind of things that carry additional costs. And so they really tend to be things that customers are asking for if they really need it. And so thatâs what we saw from the demand side. I think the other things that are worth keeping in mind in terms of just analyzing our results. And number one, we were on the second cycle following significant content expansion with the power conversion control chip that came in, in the previous generation, but we obviously get a tailwind effect from that. And secondly then, because our content tilts higher towards the higher-end devices, to the extent that there was any mix bias towards the premium models, that would have benefited us and the demand signals that we saw and what we were shipping were consistent with that. Thanks. And then, John, my second question, I just wanted to ask, in your shareholder letter, you talked about shipping the Gen 2 camera controller. You did a good job explaining the new codecs and amps, so I was wondering if you do kind of the same there as weâre trying to handicap maybe the content boost from that. Could you explain the different geometry, like different functionality? Any color there to help us kind of get a grasp on what the content uplift would be good? Yes. Itâs a significant feature enhancement. I think the biggest challenge around for you and for us, I think around the camera controller content, is when you take into account the differing attach rates across skews within a generation, the differing attach rates across generations, and then the different products from us ourselves with different ASPs, that gets very, very difficult to analyze. So weâve tended to talk in terms of blended ASP just the total value of the camera content. Obviously beginning at baseline back in â back three generations ago where we indicated it was in line with an amplifier, and then we saw a step up that was of the order of $0.20-ish from there. And then saw something similar beyond that. And then as we go into the next cycle, weâll see another incremental step up. But the benefits that we get from higher value content of which this is, is really elongated over a number of years because it will cascade down through the models most likely, and then wash through subsequent generations as well. And if I could just add to what John said, just as we talked about the amplifiers and other products where we have good visibility, we are in a similar position with the camera controllers just having gone through multiple generations. And thereâs also a lot of partnership with the customer to develop those products. So thereâs a lot of excitement about and visibility about this going forward. Hey guys. Thanks for the question and congrats on December. So, actually as I look at December, your revenue at your largest customer was fantastic. If you x that out and look at revenues from others it was perhaps a little lower than I had expected and maybe the lowest weâve seen in a while. I guess, could you kind of address that? Is it just because you were catering to the needs and demands from your largest customer that you couldnât necessarily fulfill the other customers? Or does that really reflect true demand in the December quarter from other customers? Thanks. Yes. Thanks, Chris. Iâll give a comment and invite Venk to add any additional color if youâd like. I think previous comments that Iâve given on how we approach the supply constrained environment, probably set the stage for what youâve observed there, which is that when we are supply constrained, what we absolutely donât want to do is leave a customer in the lurch. So it tends to be on the granular â the nature of our business is that it tends to be on the granularity of a socket. Either we bid for a socket or we donât, and if we arenât confident we can supply it, weâre not going to bid for it. So winding back multiple quarters before fiscal Q3 when we were bidding for these sockets, we were deep in the supply constrained environment, and that really limited what we targeted especially within the Android space. And so, yes, thatâs resulted in our revenue. I mean, I think great revenue story overall, but itâs tilted a little towards our largest customer there for obvious reasons. And we benefit in terms of total content value quite significantly with each of those devices that are sold. Yes. And just to add what John said, if youâll think about the business that we sell outside of the largest customer, itâs a combination of what we sell into some of the other smartphone vendors and Android, but also thereâs a general market product portfolio that we sell into the typical analog type of functionality. And as you can imagine, and we alluded to this on the previous call, the general market did see some softness, and thatâs part of also why we saw the mix between the top customer and the rest of the business. And we expect that to kind of continue, and thatâs part of our guidance for the March quarter. Okay. Thatâs very helpful. I guess, just a quick follow-up on that one. Should we expect a catch up to other customers in March? But secondly, regarding supply that you had mentioned can you talk about how comfortable you are now, particularly as weâre seeing some supply slack from others around foundry? Are you much more comfortable there? Are you going to enter into larger WSAs kind of given this dynamic or just kind of play it by year? Just anything around your supply situation and strategy would be great. Sure. On the former bit, I would stop short of talking about any catch up with other customers. Weâre excited about the sockets weâre in for sure. But given the macro uncertainty, itâs hard to â and some of this softness that weâve seen in the general market that Venk alluded to, itâs hard to be sure how thatâs likely to play out. On the supply side, we have for sure seen some easing up in certain areas, which has been beneficial to us and has certainly helped us plan to meet some of the commitments and content growth that we see ahead of us. But in some key areas of our business, especially around our high voltage products we are still supply constrained and thatâs in terms of absolute wafers and capacity for certain technologies that new forthcoming HPMS products from us depend upon. So to that extent, we still see as we look forward through the coming quarters that we have a lot of work to do on the supply side to meet the potential demand. Yes. Thank you and congrats on really good results. Just a question outside of the smartphone market, particularly around the laptop traction that youâre seeing. I think in the past you talked about the content for laptops estimated to start around $1.50 between the audio amps and the haptic drivers and the Kodaks. Iâm wondering how youâre kind of seeing both the unit penetration and kind of ASP kind of mix within that market. And you also talked about the opportunity to utilize your fast charging IP on both sides of the battery. And so I think this is an important part of the story, the diversification story outside of mobile. So just any thoughts on that market as you progress there? Yes. Thanks, Raji. And thanks for the nice comment. I think the way to think about the overall opportunity in the PC market or the laptop market for us, which is where weâre really focused within PCs, is of the SAM growth in the coming years, which we anticipate getting to over $1 billion by 2026. And thatâs going to be fueled by both an expansion of the audio SAM and the HPMS SAM. The HPMS SAM includes both haptics and then the power devices that you referred to. So there are some different categories of power devices, some in charging, some elsewhere in power conversion within the laptops. But we do see good opportunity there. And I mentioned in the â or we mentioned in the letter that we have tapped out during the quarter, our first laptop focused power part. So itâs very early days for that. I think, itâs going to be something where we start seeing the impact of that in calendar 2024. But weâre very excited about that. And on the audio side, that makes up the bulk of the SAM growth. So about two thirds of that 1 billion plus SAM is audio and about one third HPMS. But the audio side really represents a more immediate opportunity to us given, hey, where we are with products, where weâve got existing products and new generation products and the fact that there is real immediate demand for significant improvement in laptop audio. And when youâve heard laptops that incorporate our technologies, they absolutely blow the competition away. And I know that anybody that used a laptop for audio in the past five years will say thatâs fairly low bar to clear. But it really is a game changer what we can deliver in audio in that category. So we see that as being the bulk of the opportunity in the immediate term. Yes, I appreciate that. And from my follow-up, in terms of seasonality, I know thatâs difficult to kind of articulate given the volatility in the industry the last couple years. But when youâre looking at your March guide of down roughly 30%, 37% sequentially at the midpoint. How do we think about that seasonality kind of relative to historical patterns? Typically, March is down roughly around 30% and then June is also a little bit soft, and then you have a big ramp in September, December. Given that more supply is coming, we have a product cycle, how would you characterize the shape of the seasonality this year as it stands today? Yes, thanks for the question, Raji. And thanks for your nice comments earlier. So as you pointed out, right, with the performance that we had in the December quarter, obviously, we came in about the high end of the guidance range just driven by the smartphone content gains as well as the overall unit volumes. Now for the March quarter, as I mentioned in response to a previous question, we do see â we took into account, even though itâs not typical seasonality, as we pointed out, especially in the last couple of years. We did take into account that the unit volumes will be down sequentially. And another thing that played into our guidance for the March quarter, actually, two things I would say. One is the fact that we didnât â we wonât have the benefit of the SC [ph] product launch from last year. And so that accounts for a little more of the guidance decline from the prior year. And then the second aspect of it is also the general market product line that we talked about earlier, which is essentially highly correlated with the macro. And we certainly wanted to take that into consideration as we provided guidance. So itâs a combination of those things. And then, we are looking beyond the March quarter, I think itâs too early for us to tell, itâs anybodyâs guess, what the macro is going to do. But we will provide you that guidance when we get to that next quarterâs earnings call. Hey guys. Appreciate you taking the question. Thanks so much. Yes, just two quick ones if I could. Could you talk to what you what you see as the inventory environment to the extent you have visibility across the business? And then I have a quick follow-up. Thanks. Yes, so, I think John mentioned this earlier Ananda which is essentially the signals that we got from our customer as we shipped into the December quarter, would suggest that there was significant demand for the products and the overall performance for the December quarter shows that we were benefiting from the smartphone unit volumes. Now looking ahead into the March quarter, we have taken into account the combination of what is typically a sequential decline in units. And in addition to that, the macro thing, which is related primarily to the non â in the smartphone business, which I talked about earlier. So itâs a combination of those two things. Now, everything that we have seen so far suggests that we are shipping to demand. Having said that, we donât have perfect visibility into the customerâs inventory, and â but the signals from our customers seem to suggest that we are shipping to the demand signals that we get. Okay, thanks for clearing that up. Thatâs really good context. Thanks, Venk. And then, Venk, this oneâs actually for you as well as a follow-up, just the factors that will influence gross margin as we move forward here, the pushes and pulls? And thatâs it for me. Thanks. Yes, so the gross margin, as we reported in this quarter, we came in pretty close to the midpoint of our guidance range. Probably, 30 basis points higher. The way to think about our gross margin long term is we want to obviously optimize between revenue growth and profitability. Over the long haul, we certainly want to stick with the 49 to 51. Over time, we will as the mix of the product changes between how much we ship into smartphones versus what we ship into the general market, weâll have some inter quarter variations in gross margin. But the way to think about our long-term model is to be in the 49% to 51% range, such that we can continue to grow the top line at a very robust pace and maintain profitability at the current levels. The operating margin is what we hope to expand over time as we improve R&D efficiencies and control discretionary spending and so forth. But the gross margin is where we want to be. Thank you, operator. With that, we will end the Q&A session. And Iâll turn the call to John for final remarks. Thank you, Chelsea. In summary, in the December quarter, Cirrus Logic delivered record revenue with strong execution across our three areas of strategic focus. Number one, continuing our leadership in smartphone audio. Number two, broadening sales of audio components and key profitable applications beyond smartphones. And thirdly, applying our mix signal expertise to expand into new adjacent high performance mix signal markets. Weâre more excited than ever about the opportunities that we see in front of us. And weâd like to thank you all for your continued interest in Cirrus Logic. Before we close, Iâd also like to note that we will be participating in the Susquehanna Conference on March the second in New York. Please check our investor website for the details. And if you have any questions that were not addressed on this call, you can submit them to us via the Ask the CEO section of our investor website. Iâd like to thank everyone for participating today. Goodbye.
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Hello, everyone, and welcome to the New Jersey Resources Fiscal 2023 First Quarter Conference Call and Webcast. My name is Bruno, and I will be operating your call today. [Operator Instructions] Thank you. Welcome to New Jersey Resources fiscal 2023 first quarter conference call and webcast. I'm joined here today by Steve Westhoven, our President and CEO; Roberto Bel, our Senior Vice President and Chief Financial Officer; as well as other members of our senior management team. Certain statements in today's call contain estimates and other forward-looking statements within the meaning of the securities laws. We wish to caution listeners of this call that the current expectations, assumptions and beliefs forming the basis of our forward-looking statements include many factors that are beyond our ability to control or estimate precisely. This could cause results to materially differ from our expectations as found on Slide 1. These items can also be found in the forward-looking statements section of today's earnings release furnished on Form 8-K and in our most recent Forms 10-K and 10-Q as filed with the SEC. We do not by including this statement assume any obligation to review or revise any forward-looking statements referenced herein in light of future events. We will also be referring to certain non-GAAP financial measures, such as net financial earnings or NFE. We believe that NFE, net financial loss, utility gross margin and financial margin provide a more complete understanding of our financial performance. However, these non-GAAP measures are not intended to be a substitute for GAAP. Our non-GAAP financial measures are discussed more fully in Item 7 of our 10-K. Our agenda for today is found on Slide 2. Steve will begin with this quarter's highlights, followed by Roberto, who will review our financial results. Then we will open the call for your questions. The slides accompanying today's presentation are available on our website and were furnished on our Form 8-K filed this morning. Thanks, Adam, and good morning, everyone. We delivered strong results in the first quarter. This included exceptional performance during the unique weather event over the Christmas weekend. This speaks to the resiliency of our physical infrastructure and also to the talent and termination of our people. As a result of NJR's successful operation during this event, we are raising our fiscal 2023 guidance by $0.20 to $2.62 to $2.72 per share. Before we move to the quarterly results and our forecast for the year, I'd like to begin with an update on our sustainability and decarbonization efforts on Slide 3. Last week, we issued NJR's fiscal 2022 Corporate Sustainability Report, our 14th consecutive annual report dating back to 2008. The report details our goals and accomplishments in sustainability and other ESG-related areas as well as our approach to innovation, low carbon fuels, energy efficiency and environmental stewardship. I'd like to cover just a few of the reports highlights with you. We believe the fastest and most cost-effective tool to reduce emissions is through energy efficiency initiatives. Last year, we invested more than $53 million in New Jersey Natural Gas' energy efficiency programs, the highest single year investment of this type in our company's history. Running these programs is a central element to our decarbonization strategy, and New Jersey Natural Gas has long been a leader in this area. On solar, we continue to advance our leadership at Clean Energy Ventures by placing into service two milestone projects of national significance, including one of the largest cap landfilled solar arrays and the largest floating solar installation in the United States. And finally, our $20 million endowment supports our charitable foundation work. These resources enable our foundation to focus on medium and long-term partnerships that drive outcomes that make a difference for local communities and the environment. We hope that all of you have an opportunity to review the report. Turning to Slide 4. We reported net financial earnings of $1.14 per share in the first quarter, a 65% increase from the same period a year ago. As I noted earlier, we are especially proud of our company's performance during Winter Storm Elliott, which was a historic event that impacted the entire country. In our service territory, we saw temperatures fall as much as 50 degrees in just under 12 hours. The impact of these record low temperatures limited gas supply in certain locations in the U.S. At New Jersey Natural Gas, our customers were able to enjoy their holiday without curtailments. This speaks to the resiliency of our gas supply network as well as the dedication of our team, which worked throughout the holiday week and to ensure that we met all obligations to our customers. In our Storage & Transportation business, we reported exceptional operating performance from Adelphia Gateway and Leaf River throughout the winter event. At Energy Services, our long option strategy generated significant value during the volatile conditions created by the winter storm, which led to higher than expected NFE during the period. We also continue to deliver on our commitment to generate more stable fee-based revenue at that business unit as we received a $73.5 million cash payment associated with the asset management agreements announced in December of 2020. Finally, at Clean Energy Ventures, we placed four commercial solar projects into service since the end of the fiscal year, growing our installed capacity by approximately 43 megawatts or over 11%. Turning to Slide 5. As a result of this outperformance, we are raising our fiscal 2023 NFEPS guidance range by $0.20 to $2.62 to $2.72 per share. We are also maintaining our expected long-term NFEPS growth range of 79% from our original 2022 guidance, which is among the highest in our peer group. And as communicated last quarter, we expect to be at the higher end of the range for fiscal 2024. As I mentioned in my opening remarks, New Jersey Natural Gas had a strong quarter of execution as highlighted on Slide 6. We invested $91 million of New Jersey Natural Gas during the first quarter with over 36% of that CapEx providing near real-time returns. We reported strong customer growth, adding over 2,100 new customers in the first quarter compared to approximately 1,700 in the first quarter last year. We still expect to file our next rate case in fiscal 2024, consistent with the completion of our major technology investments. Moving to Slide 7. We continue to see positive momentum at Clean Energy Ventures. Since the end of fiscal 2022, we have placed over 43 megawatts of new solar projects into service and maintain a robust pipeline of future solar investments. We are encouraged with recent progress at PJM Q reform and New Jersey solar policy. In late November, FERC approved PJM's Q reform proposal. Although, we are still navigating near term delays, this process should create efficiencies and greater predictability for solar development. In December, the New Jersey Board of Public Utilities approved the state's solar successor program for projects over 5 megawatts. The goal of incentivizing at least 300 megawatts of annual solar capacity should help to broaden development opportunities in the state. Thank you, Steve, and good morning, everyone. Slide 9 shows the main drivers of our NFE for the first quarter of fiscal 2023. We reported NFE of $110.3 million, or $1.14 per share compared with $65.8 million or $0.69 per share last year. New Jersey Natural Gas saw an improvement of $3.6 million, primarily due to the impact of new base rates that went into effect on December 1, 2021, a higher contribution to utility gross margin from our BGSS incentive programs and new customer growth. CEVâs (ph) NFE improved by $3.2 million, primarily due to higher SREC and electricity sales. Storage & Transportation increased by $3.3 million largely due to Adelphia Gateway becoming fully operational in the fourth quarter of fiscal 2022 and the excellent operational performance at both Adelphia and Leaf River during the quarter. And finally, Energy Services improved by $35 million due to the execution from our team during Winter Storm Elliott. Turning to our capital plan on Slide 10. Our projections for 2023 and 2024 are unchanged from the last conference call. And over the next two years, we expect to invest between $1.1 billion and $1.4 billion across the company. We expect to tighten our CapEx projections in future quarters, particularly in the case of CEV, as New Jersey regulatory program approvals and PJM's interconnection time lines become more clear. This capital deployment is expected to support growth throughout our business units and is consistent with our long-term NFEPS growth target of 7% to 9%. Finally, on Slide 11, most of our debt is fixed, and we don't have significant maturities in any particular year. As mentioned in our prior call, our NFEPS guidance for fiscal 2023 and our long-term NFEPS growth guidance incorporate assumption of high interest rates for the foreseeable future. Thanks, Roberto. Overall, these results reflect the strength of our complementary portfolio of businesses and the value of our high integrity infrastructure. We are delivering on our strategy of derisking results, providing a more predictable base of net financial earnings with a growth rate that is at the top end of our peer group. In addition, we've been able to take advantage of opportunities in energy markets that have resulted in considerable upside to our growth targets in recent years. And finally, I want to thank all of our employees for their hard work and contribution. We expect these efforts will drive our NFE and produce strong cash flows that will support our dividend growth of 7% to 9% per year. [Operator Instructions] Our first question is from Chris Ellinghaus from Siebert Williams Shank. Chris, your line is now open. Please go ahead. Hey. Good morning, everybody. Thanks for the good quarter this morning. A lot of things have happened at like EPA and with the IRA. There's some very attractive markets out there in renewables. I'm thinking about landfill gas generation and RNG. Have any of these things changed your sort of strategic outlook for renewable investments? So good morning, Chris. Thanks for the question. I think we've been talking for a long time about the evolving clean energy market and the opportunities that it will present to a company like ours that has capabilities of developing infrastructure, bringing into service and certainly earning returns. So IRA is in support of that. And we've got the solar division. We're developing solar. It's been supportive in that part of the world. We developed the hydrogen plant, and they're certainly in the IRA, significant subsidies towards hydrogen. And we're certainly looking at RNG as well, nothing to announce there. But when you put this all together, we're well positioned to take a look and see where it makes sense for us to make investments and grow in this part of the market. So long winded way of saying, yes, we do see opportunities and we continue to search them out. And certainly, as we become more firm in the CapEx that we'll dedicate to that, we'll share that with the investors. Okay. Great. There were a couple of things in the quarter that maybe were slightly surprising beyond Elliott's impact. At CEV, you sort of noted in the press release some reduced operating costs. Can you give us a little color on that? And on the Storage & Transportation side, obviously, Storm Elliott provides some opportunity there. But also, you had Adelphia Gateway incrementally. Can you give us any color between sort of the northern and southern assets for the quarter? Yeah. I think broadly, it just points to the value of infrastructure. We're an energy infrastructure, energy services company. And as you get more demand for energy, we're able to profit from that. Energy Services was certainly the headline and their ability to take advantage of that volatility. But you also had outsized gains the utility in their incentive programs. We saw new customers at Adelphia Gateway signing up for short-term services. Leaf River as well was able to make profits from that. Electric prices has bumped up in CEV, so certainly all contributing towards the increases that we announced today. Can you give us any color on the higher CEV electric revenues? Is that more on the increased megawatt side or was that more on the commodity electric side, do you think? Hey. Good morning and thanks for the time today. I know you hit this a little bit already, but if you just want to unpack the guidance raise a little bit more, the $0.20 raise, is that -- is it the full amount of the outperformance you saw, I guess, across NJNG, Storage & Transportation and Energy Services or are there any either offsets to that versus your original plan or kind of cushion for the remainder of the year that you're leaving outside of guidance right now? Hey, Rich. Good morning. This is Roberto. How are you? So on your question, the performance that you saw was primarily coming from Energy Services, but it was not only coming from Energy Services, right? It came also from the utility with higher BGSS incentives and also from our Storage & Transportation. So it was really broad-based once again and coming from most of our businesses. But as indicated in our remarks, the biggest part came from our marketing business. Okay. Understood. And then turning to CEV here. Just I guess the first part, I see the 43 megawatts place in service. I know you referenced the landmark projects there. I also think there was a 100 megawatt change and if I'm reading this correctly on '23, '24 contract and exclusivity. Is that a timing shift across the years laid out here or are there other changes on kind of the project front in light of those PJM and New Jersey developments you referenced earlier? So Rich, I think the way to look at that is that when you look at Slide 7 and you look at the total of about 1 gigawatt of potential investments, the way that we describe them, that number -- or at least on a yearly basis or the periods that we say, it's going to go up and down. As projects come in, they get completed. As more projects come to exclusivity or some sort of a firmer commitment that we can put them part of this chart that these numbers will go up and down. But I think the big numbers to look at are we've got a very robust pipeline of investment at CEV for our solar investment. And then also, the other big number is, yeah, 43 megawatts that we're able to put in service. So we're investing money, we're completing projects, we're putting them into service and then we're continuing to develop the pipeline moving forward in this business unit. Got it. That's helpful color. Maybe just a quick follow-up there. So you referenced the positive progress with PJM and from New Jersey as well. Just curious kind of milestones going forward from here or high level timing expectations. What are you watching for this front for, I guess, that incremental clarity into the outlook said both the PJM level and the state level? Anything you can offer there on how that might unfold over this year or what else you're looking for from each institute? Yeah. I'm going to ask Amy Cradic to answer that question. And she manages our non-utility businesses and CEV, and she can speak to some of the details associated with the PJM process and certainly in the process of the state. Yeah. I would say that the PJM Q reform and the BPU competitive solicitation, they're both very positive. But our CapEx production, they're not fully dependent on those. So we're still waiting for other state policy and programs to roll out. I'll give you a few examples with TREC approvals we've spoken about in the past for some of our projects do use virtual net metering. So we'll continue to watch the progress out of that, all positive, and we see additional optionality and opportunity for our pipeline. Thank you. Good morning. Can you maybe talk about, I think, the Leaf River expansion potential? I think some midstream names out there have talked about some customer interest now, and I think the value of storage has clearly proven itself out time and again over the last, call it, 24 months. So just curious, latest thoughts on what the lease expansion is looking like? So Gabe, we have nothing to announce there. But certainly, the market dynamics with the development of LNG along the Gulf Coast, the amount of volatility and balancing that's needed down in that area is evident by the price movements that have taken place. It's certainly a very constructive and supportive market. So we're certainly looking where we can make expansion. And provided that we've got a customer that can support the capital investment that's there, we've always talked about it in that fashion. But again, nothing to announce, but it's certainly a very supportive market at this point in time. Thanks, Steve. And maybe if I can ask a little bit of a multi-faceted question here on gas prices having come down so significantly. Can you just talk about impacts to the business, whether bad debt expense, less inflationary pressures and also just the strategy on kind of hedging gas prices going forward? Because I know that you guys were fairly insulated coming into the winter anyway. Yeah. I think just to talk about the hedging strategy going forward, we've got a pretty rigid hedging strategy. That aligns itself well to being able to put fixed price gas in the storage well ahead of when volatility would really impact the market. And that's still in place now. So I would expect that, that would be helpful for us as we roll into our next hedging season, so to speak. And then ultimately, gas goes up and down in that volatility, it can be beneficial to us through prices and certainly through Energy Services and such. But it just shows that the market is resilient. And our customers will enjoy, hopefully, lower pricing if it continues in this direction going forward and certainly unit (ph) supportive of our overall business as an economic way to heat your house and provide energy. Got it. Thanks, Steve. And if I could just squeeze one more in sort of on the 1Q outperformance. Is it fair to say that if S&T outperformance kind of holds that is really in 4Q that you'll accrue, I guess, some O&M expense or G&A rather around additional comp and stuff like that so that may be an offset to some of the 1Q outperformance here? Yeah. So -- yes, you're right. Our expenses related to labor are seasonal and exactly as you pointed out, Q4 tends to be the highest. Our next question is from Sam Klau (ph) from Bank of America. Sam, your line is now open. Please go ahead. Hey, guys. Good morning. Just a quick question on your financing projections here. Just given Q1's outperformance, is there any reason why your financing activity projections haven't really changed? And also within that, why you're sort of thinking more towards increasing equity issuances over debt relative to your previous update? Yeah. So I remind you we're talking about what we're showing in terms of our projection for our cash flows. So even though we have increased our guidance, we feel we're still within the range that we show there. So that's why we haven't changed that. So that's number one. And then on your question regarding debt versus equity, as we have stated before, we have no plans to issue any block equity in the near future, and that remains true today. [Operator Instructions] Our next question is from Shar Pourreza from Guggenheim Partners. Shar, your line is now open. Please go ahead. Hey. So just wanted to thank you for the helpful responses so far and wanted to expand and clarify a bit on a couple of prior answers you provided. First off, and I guess the seasonal aspect of the fourth quarter, but again, just wanted to expand and clarify. So at the gas utility, despite the stronger customer growth and higher earnings year-over-year for the first quarter, it looks like you lowered guidance for the segment on an actual EPS basis despite the $0.20 raise for the year for the entire company. But for the segment, it looks like it's about $0.06 to $0.08 lower based on the new weightings and the higher guidance. Could you just remind us of your expectations for inflationary pressures on O&M for the year or any other potential drags that you now expect versus the November original guidance and what was baked into that? And then I have a follow-up. Good morning. This is Roberto. I think what you are referring is to the breakdown -- the percent breakdown of our NFE by BU that we show in our presentation. And for the utility, you're right, that's lower, but the reason that's lower is because the whole business is so much higher, right? So on an absolute basis, we do not expect the utility to be lower. But -- okay. Well, I just took the $2.42 to $2.52 original and then did that by 55% and also by 60%, took those numbers and then took the revised $2.62 to $2.72 and did that by the 48% and then separately by the 53% and then compared the bottom of each the -- top of each, and that's where I came up with a $0.06 to $0.08 lower. I'm not going off midpoints or averages or anything. So that's -- is there a different way to look at it? If you were to look at the guidance range for equity based on the original guidance range of $2.42% to $2.52 and what we're showing today, you would see that on an absolute basis, there are really no changes. Okay. Yeah. Let's kick it off-line then. But yeah -- no, I was just coming up with $0.06 to $0.08 lower in absolute changes from one to the next, but that's okay. So just moving on as a follow-up but not on the EPS side. After backing out the $20 million contribution from the AMA this quarter and the roughly $22 million contribution in the same quarter a year ago, looks like you had an almost $0.40 improvement year-over-year, mostly driven by Winter Storm Elliott. And I'm specifically looking here, just add Energy Services, I get that other parts of the business also contributed to the outperformance. But just narrowing in there, given that you only use half of that to raise guidance by, it seems like you've got a very, very nice buffer to start the year, something that I'm sure a lot of your peers envy given a lot of inflationary pressures and other cost pressures that everyone is encountering. Could you walk us through the top couple of potential earnings drags that you had been worried about back in November when you gave guidance and that you are now less so since you presumably still have another $0.20 or so of buffer left for the year? Yeah. So maybe the first thing to address is the buffer you're talking about, right? It's -- so the way to think about that is you have timing changes, especially coming from Energy Services as you think at how their demand charges happen. They tend to happen. So for the most part in the second part of the year where there are lower revenue, so there is a timing change that are affecting the buffer that you're discussing. And then we're just generally cautious about what could happen right now, especially with electricity prices. Yeah. I think just to add to that, I might -- to describe it as a buffer, I think there's seasonality to the number that's here. And I'm not in agreement that there's a buffer associated with our guidance or the way that you've put the numbers together. Okay. Fair enough. We can follow up off-line. Either way, it seems like you're in a good place and it seems like a good thing to have to kick the year off with. So that's why I was asking. Yeah. Absolutely. Just a final question on Clean Energy Ventures. You mentioned in the prepared remarks that you're looking to tighten the range in the quarters ahead. There's another question on it already. But just to hone in here as the final question, what are the gating items that you're currently waiting on just so we have a better sense of timing? When do you expect to have the level of visibility that you require in order to be able to narrow the range for the next fiscal year and the year thereafter? So when Amy answered the question before, she talked about cube reform and PJM and certainly some of the programs in the state of New Jersey. But mentioned that for the project pipeline that we've shown there, they're not solely dependent on those being, I guess, resolved. So we've got a capital program that we feel confident that we'll be able to execute and certainly to be positive developments to get those other programs in the Q reform completed. But again, not solely dependent on at least new programs taking place at the state in order to get our capital invested. I hope that answers your question. If not, please clarify. Got you. Yeah. No, just was trying to get a sense of whether it's sort of a next quarter or two quarters from now or that sort of thing. But I think that covers it, and I can follow up further off-line. I apologize if you touched on this earlier, but I wonder if you could talk about how the AMAs performed during the quarter. How much of that contributed to that Energy Services? Was there volatility in there like you expected or didn't expect? Just wondering on the AMAs, how that performed in the quarter. Hey, Travis. This is Roberto. So the AMA, we said before that for the year, the expected revenues are going to be similar to those of last year. And for Q1, those revenues were $20 million. And we received all the cash corresponding to the AMA already in Q1. That was about $73 million. So it -- to answer your question in a nutshell, it performed exactly as we expected. Okay. Do you have in place during the year any kind of optionality around those where you could get any kind of either or detriment? Thank you. I'd like to thank all of you for joining us this morning. As a reminder, a recording of this call is available for replay on our website. And as always, we appreciate your interest and investment in NJR. Goodbye. Have a good morning. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Have a good day.
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Greetings and welcome to the Lannett Company Fiscal 2023 Second Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Robert Jaffe, Investor Relations for Lannett Company. Good afternoon, everyone and thank you for joining us today to discuss Lannett Companyâs fiscal 2023 second quarter financial results. On the call today are Tim Crew, Chief Executive Officer; John Kozlowski, the companyâs Chief Financial Officer; and Steve Lehrer, who leads our insulin biosimilar initiatives. This call is being broadcast live at www.lannett.com. A playback will be available for at least 3 months on Lannettâs website. I would like to make the cautionary statement and remind everyone that forward-looking information discussed on todayâs call is covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act. The companyâs discussion will include forward-looking information reflecting managementâs current forecast of certain aspects of the companyâs future and actual results could differ materially from those stated or implied due to several factors, including those discussed in our earnings release. 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. In addition, during the course of this call, we refer to non-GAAP financial measures that are not prepared in accordance with U.S. generally accepted accounting principles and maybe different from non-GAAP financial measures used by other companies. Investors are encouraged to review Lannettâs press release announcing its fiscal 2023 second quarter financial results for the companyâs reasons for presenting non-GAAP financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is also attached to the companyâs earnings press release issued earlier today. In a moment, Tim will provide brief remarks on the companyâs financial results as well as recent developments and initiatives, then John will discuss the financial results. We will then open the call for questions. Thanks, Robert and good afternoon everyone. As many of you know, the Farber family has been involved with Lannett for a long time and I will begin today acknowledging Jeff Farber, who served as a member of Lannettâs Board of Directors for the last 16 years, including Chairman from 2012 to 2018. Jeff decided not to seek reelection to the Board this year. However, we will continue to benefit from his experience and insights as Chairman Emeritus. I personally thank Jeff for his support and counsel over the last several years as we have navigated through a number of significant challenges. As Chairman Emeritus, he will continue to be an advocate for the company and an appreciated voice for the Board and management team. Next, as most of you are aware, last week, we held our Annual Meeting of Stockholders. I am pleased to report that all of the formal proposals contained in the proxy were approved by our stockholders, including the reverse stock split of Lannettâs issued and outstanding shares of common stock. The Board authorized 1-for-4 reverse stock split will become effective at 5:00 p.m. Eastern Time on February 6, 2023 and beginning the next day, February 7, 2023, the companyâs common stock will trade on a split-adjusted basis. The reverse stock split is primarily intended to bring the company into compliance with the minimum bid price requirements for maintain its listing on the New York Stock Exchange. Now turning to the business overview. First, our financial results thus far in fiscal 2023 have exceeded our expectations in part due to some stabilization of our base business, welcome news after the challenging and particularly competitive environment over the last couple of years. For the second quarter, net sales, GAAP gross margin, adjusted gross margin and adjusted EBITDA were all above our expectations. Moreover, I am pleased to note that these measures increased over each of the preceding two quarters. We are also pleased to receive, as expected, an income tax refund of approximately $19 million. A bit later, John will provide additional color on our results as well as our cash position. On the operating front, we implemented last quarter another restructuring and cost saving plan to further streamline and realign our operations. These actions will result in a workforce reduction of approximately 60 additional staff positions along with approximately 40 recently vacant positions and will be implemented in phases over the remainder of the companyâs current fiscal year. We also anticipate exiting our State Road and Torresdale facilities in Philadelphia, Pennsylvania by the end of this year. Once fully implemented, the plan is expected to generate cost savings of approximately $11 million annually. A key element of that plan involved the restructuring of our R&D operations. We have begun the process of transitioning this function from an internal development department to one that partners with specialized external development and technology providers. We believe that in addition to the expected cost savings, which are largely related to overhead and other more fixed cost expenses, this model allows us to broaden the scope and more efficiently invest in more valuable pipeline products. I think itâs important to point out that our plan is to maintain our level of direct investment in actual product pipeline development. I will now turn to our pipeline and begin with updates on the biosimilar insulin glargine and biosimilar insulin aspart products. Overall, the timelines for these products remain largely on track. The annualized commercial market for these insulins continues to represent an estimated aggregate value in the billions of dollars and thus potentially transformational for our firm. For both our biosimilar insulin glargine and insulin aspart products as well as potentially other products, we entered into a supply agreement with Ypsomed AG for a pen injector delivery device in the U.S. and certain other territories. Recently, we also acquired a sublicense to a licensing arrangement between Ypsomed and Sanofi-Aventis, the holder of various patents related to the pen injector device used in the reference products. The sublicense agreement, among other things, avoids certain device litigation under the Biologics Price Competition and Innovation Act for our biosimilar insulin glargine product and improves our ability to freely market our products once approved. For our long-acting insulin glargine program, as earlier disclosed, we have completed the subject dosing of our healthy volunteer pivotal study and no serious adverse events were reported. We continue to expect top line data and analytics to be available during the current quarter. Following an FDA pre submission meeting intended to increase the likelihood of a first pass approval and potentially shorten review time, we anticipate filing the Biologics License Application around the middle of the current calendar year. Thus, a potential launch of the product mid-calendar year 2024 remains in range. Next, biosimilar insulin aspart, a fast-acting insulin. As we have said, this product generally trailed the timing of our insulin glargine program by approximately 12 to 15 months. Last month, we announced positive results from an animal study of our biosimilar insulin aspart versus the reference biologic U.S. NovoLog. The study indicated that the products were highly comparable. Following a biosimilar biologic product development Type 2 meeting later this fiscal year, we anticipate filing an investigational new drug or IND application this summer. We would then commence the pivotal trial by the fall of this year and complete the pivotal trial in the summer of 2024. If successful, we anticipate filing the BLA towards the end of calendar year 2024 and potentially launching the product in the back half of calendar year 2025. Turning to our respiratory franchise. Iâll start with generic Flovent Diskus. The FDA earlier granted our request for competitive generic therapy status and following the complex product development meeting with the FDA scheduled for April, the filling of the abbreviated new drug application, or ANDA, is expected around the middle of the current calendar year. For a generic ADVAIR DISKUS product, we continue to anticipate providing additional responses to the complete response letter from the FDA over the current â of the current calendar year, that will include results from a new clinical trial that has been initiated. New pharmacokinetic studies intended to address other matters raised in the CRL will be initiated by mid-calendar year. A launch remains possible around mid next calendar year. Finally, for generic Spiriva Handihaler, we expect that our partner will commence a pilot PK study later this year, but note that for now, they have prioritized their efforts around the generic Advair and generic Flovent development programs. We are particularly pleased to see these valuable insulin and respiratory programs advanced despite recent challenges associated with COVID in China. We thank, acknowledge and appreciate the dedication of our overseas colleagues who continue to work diligently to help bring these critical and more affordable medications to patients that need them. Turning now to near-term product opportunities, particularly those that have the potential to be more meaningful contributors to our financial results moving forward. Three partnered products remain on track for launch during the current fiscal year. Fludarabine, an improved injectable product currently in short supply is now available through our partner. We expect to launching our Fludarabine label later this fiscal year. Also on deck is sevoflurane and inhaled anesthetic product, and Mesalamine delayed release tablets 1.2 grams. Sevoflurane and Mesalamine reflect IQVIA sales of approximately $190 million and $490 million, respectively. Although actual generic market sales will be lower, both products currently reflect just three active ANDA approvals. So we believe the markets will be attractive. With regard to Sucralfate, we now anticipate a possible launch outside the current calendar year in order to respond to a recent CRL. Turning to our contract development and manufacturing business. We are on track to achieve above the midpoint of our forecasted sales range of $22 million to $26 million, which is a substantial increase over the previous year. We are also engaged with nearly two dozen parties that have expressed potential interest in working with us. So we continue to believe there is ample opportunity to further grow this business. Now related to our forward expectations, and as we noted last quarter, we continue to assume new competitors for certain in-line and pipeline products even where that competition has not yet materialized. Further, for new product launches, excluding Fludarabine, we have forecasted sales of around $6 million in the back half of this fiscal year. And finally, over the past year or so, as plant inspections picked up post the pandemic, significant FDA actions, including warning letters and import alerts, have been announced related to poor manufacturing standards at several major competitors. We are proud that at Lannett, there are only a few observations, none of them critical from an inspection at our Seymour plant in October 2022. We certainly intend to continue our exemplary record of operating in compliance with FDA standards. While we have not built upside into our forward plan based on the quality and reliability of our supply and that of our partners, we believe some of the recent stabilization of our business can be attributed to this long history of a credible and high-quality supply of the medicines we provide. To sum up todayâs remarks. For the second consecutive quarter, we reported better-than-expected financial results with net sales, gross margin, adjusted gross margin and adjusted EBITDA all above our estimates. For biosimilar insulin glargine, we anticipate top line results from the pivotal clinical trial during the current quarter and anticipate filing the BLA around the middle of the current calendar year. For biosimilar insulin aspart, last month, we announced positive results from an animal study that indicated our biosimilar insulin aspart was highly comparable to the reference biologic U.S. NovoLog. We recently implemented a restructuring and cost reduction plan that we estimate will generate annualized savings of approximately $11 million once fully implemented. And finally, we raised our full year 2023 guidance, reflecting our better-than-expected first half financial results related in part to what we believe to be an improving customer receptivity to the value of our reliable, high-quality supply of affordable medicines. Thanks Tim and good afternoon everyone. Turning to our financial performance, I will focus my discussion on our non-GAAP adjusted measures. For the 2023 second quarter, net sales were $80.9 million. This compares with $86.5 million for the second quarter of last year and $75.1 million in the 2023 first quarter. Gross profit increased to $15.7 million, or 19% of net sales from $9.7 million or 11% of net sales for the prior year second quarter. On a sequential quarterly basis, both gross profit and gross margin increased from the preceding two quarters. Interest expense rose to $13.3 million from $12.9 million. Net loss narrowed to $14 million or $0.34 per share from $15.9 million or $0.39 per share. We reported positive adjusted EBITDA of $1 million. Turning to our balance sheet, at December 31, 2022, cash and cash equivalents totaled approximately $56 million, which includes the receipt of the income tax refunds of approximately $19 million. Our cash balance was reduced by scheduled interest payments and unfavorable working capital changes, most notably, an increase in accounts receivable, which was impacted by the timing of receipts. At December 31st, total debt was approximately $659.4 million, comprised of first lien senior secured notes of $350 million, second lien notes of $223.1 million and convertible notes of $86.3 million. As Tim mentioned, we recently implemented a restructuring and cost reduction plan. We expect the plan will begin generating savings in the current fiscal year, rising to approximately $11 million annually once fully implemented. In addition, we estimate that the transition to the outsourced R&D function will result in the liquidity preservation of approximately $5 million to $8 million over the next 18 months to 24 months. Turning to our outlook for fiscal 2023, based in part on our better-than-expected financial results for the first half of the year, we have raised full year guidance. Specifically, we expect net sales in the range of $285 million to $305 million, up from $275 million to $300 million. Adjusted gross margin as a percentage of net sales of approximately 17% to 19%, up from approximately 15% to 17%. Adjusted R&D expense in the range of $21 million to $23 million, down from $23 million to $25 million. Adjusted SG&A expense ranging from $61 million to $63 million, up from $56 million to $59 million. Adjusted interest expense of approximately $53 million, unchanged. The full year adjusted effective tax rate in the range of approximately 20% to 22% down from approximately 23.5% to 24.5%. Adjusted EBITDA in the range of negative $5 million to positive $1 million, changed from negative $12 million [ph] to breakeven. And lastly, capital expenditures to be approximately $8 million to $10 million, changed from approximately $8 million to $12 million. Regarding the phasing of the quarters, we expect net sales, gross margin and total operating expenses in Q3 and Q4 to be comparable with net sales and gross margins coming down from Q2 levels. And total operating expenses in the second half of the year to be comparable to the total operating expenses in the first half. Alright. Itâs Tim again. Thank you for joining the call and as always, thanks to our employees, customers and partners, all working very hard to provide high-quality, low-cost medicines for patients. We look forward to sharing our progress on our next call. Have a good evening.
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Ladies and gentlemen, thank you for joining us today, despite short notice. We would like to start the press conference for the announcement of changes to Sony Group's Management Structure. And today I will be the Master of Ceremony. My name's Ishii from Corporate Communication Department. Nice to meet you. Now I would like to introduce to you who are on the stage, Mr. Kenichiro Yoshida, currently Director, Representative, Corporate Executive Officer, Chairman, President and Chief Executive Officer; who will assume Director Representative of Corporate Executive Officer, Chairman, CEO as of April 1st this year. And Mr. Hiroki Totoki, Director Representative, Corporate Executive Officer, Executive Deputy President and Chief Financial Officer who become Director Representative, Corporate Executive Officer, present Chief Operating Officer and Chief Financial Officer. The speeches will be made in the order of Mr. Yoshida and then Mr. Totoki, and we'll take questions afterwards. After the Q&A session, we will have about five minutes for photo session. Overall, we plan to have about 40 minutes for this press conference, and then followed by the briefing on the Q3 result. Mr. Yoshida, please take the podium. Thank you all for coming today, despite the short notice. I would like to explain the executive changes announced today. Effective on April 1st, Hiroki Totoki, currently Executive Deputy President and CFO will be appointed, President, COO and CFO, and I will become Chairman and CEO. These changes are intended to strengthen our Group Management Structure. From April onwards, we will describe for the further evolution and growth of Sony and this new management structure. First, I'd like to touch on the background of these management changes. Sony is engaged in the diverse businesses based on our purpose to fill the world with emotion through the power of creativity and technology. Furthermore, in April 2021, we transitioned to a new group architecture and established Sony Group Corporation, which is aligned with all our businesses in an equidistant manner. Our approach to business management is one where the vectors of each business are connected by the social significance of creating and delivering of candor, but also emphasizes the autonomy of individual businesses, organizations, and employees. On the other hand, in order to enhance the group's overall values over long-term perspectives, it's vital, thoroughly implement capital allocation, collaboration between businesses and business portfolio management. And to do this, I concluded that we should strengthen our management structure and proposed to the nominating committee and the Board of Directors to promote Mr. Totoki, who has deep understanding of each business operation to President and appoint him as COO. This proposal was approved today. He will also continue as CFO. This is because the CFO also needs to have a deep understanding of the business, and we believe that this role is closely related to the duties of the COO. For approximately five years since I became CEO in April 2018, he has been driving force in the implementation of growth strategy for the group, particularly from a financial perspectives in his role as CFO. His greatest contribution has been in supporting our investment for growth, primarily in two major areas. One is content IP. While we have made acquisitions in the DTC domains such as anime distribution company Crunchyroll, we have focused particularly on strengthening content IP. This started from the acquisition of EMI Music Publication in May 2018, just after I was appointed CEO, he led this acquisition including the negotiation of terms. The other is semiconductors. I regard CMOS image sensors as creation semiconductors that generate Kando. He supported our investment in this area, while managing risks through in-depth discussions, with the business side regarding demand, the competitive environment, and the development roadmaps. His other contributions included setting the ¥2 trillion framework for strategic investment in the current mid-range plan. This investment framework established by him has led to an improvement in the growth mindset of the entire group. Furthermore, there is also the repurchase of our shares, which we have positioned as a part of our strategic investment, while constantly taking investment opportunities and financial conditions into account, he had supported the repurchase of approximately ¥500 billion of Sony shares since fiscal 2018. I have worked with Mr. Totoki since 2005, when I became President of Sony. I have also learned quite a lot from him with his strategic perspectives encompassing the broader external environment. Furthermore, he has the experience of planning and founding Sony Bank himself and operating it as a Representative Director. He has accumulated a wide range of experience including directory leading a large organization as the Head of Sony Mobile for more than three years, starting in 2014. Going forward, I'm confident that he will make an even greater contribution to enhancing our corporate values as President, COO and CFO. As part of a full strengthen our management structure. We have also decided to appoint Toshimoto Mitomo as the Executive Deputy President and CSO. Mr. Mitomo possesses extensive experience in the intellectual property field, technological expertise, and strategic perspectives. Most recently, he has [indiscernible] areas including a new business development and corporate venture capital, and his leading discussions across the group in areas such as virtual production and the metaverse. At Sony, we applied our business in the Kando value chain of creating and delivering Kando, and he helps an important role in expanding and deepening the scope of this business. I look forward to Mr. Mitomo in collaboration with the Hiroaki Kitano, who was appointed CTO last year farther contributing to Sony's evolution as a creative entertainment company with the solid foundation of technologies. Sony's purpose is to fill world with a motion and its corporate direction of getting closer to people will remain unchanged. Approximately 110,000 employees who share this purpose, driving force of the Sony Group's diverse businesses. The management team will work together as one along with our employees to create values from a long-term perspectives are based on our purpose. That is all for me. Thank you. I'm Hiroki Totoki, and will be assuming the role of President, COO and CFO of Sony Group. Thank you for your attendance. I'm grateful to Mr. Yoshida and the Board of Directors for their trust in recommending and appointing me, and at the same time feel a great sense of responsibility. To introduce myself, I joined Sony in 1987, and after working in finance, including an overseas assignment in London, I left Sony in 2002 to take on the role of Representative Director of Sony Bank, a company that I led in establishing. While it was on a small scale, the experience of launching and managing a new business with a spirit of startup formed the foundations of my current value perspectives in management. Then in 2005, I moved to our ISP business Sonnet, where I took on a wide range of roles including CFO under Mr. Yoshida's leadership. In December 2013, I returned to Sony and following roles including CEO of Sony Mobile and Corporate Executive Officer and CSO of Sony. I was appointed to my current position of CFO in 2018 when Mr. Yoshida became CEO of Sony. Since then, as a member of the management team led by Mr. Yoshida, I have dedicated myself to enhancing the corporate value of the Sony group. This fiscal year is the second year of our current fourth mid-range plan. Thanks to the effort of management at each of our businesses and from each and every employee, we are focusing strong results this fiscal year, including record sales and more than ¥1 trillion in operating income. On the other hand, looking at our current business environment, there is increasing instability due to factors such as the uncertain global economic outlook, geopolitical risks, energy issues, and the natural environment. In addition, I feel an acute sense of urgency that there is a fine line between whether we can channel the rapid evolution of technology with AI as a leading example into further business growth, or conversely, whether our business will be disrupted by it. As a business environment and technology continues to undergo great change, I believe the key to increasing the resilience of the overall Sony Group is evolving our diversity. Diversity in our business and talent is part of Sony's DNA, but we must further evolve this diversity goal is to bring together people with various attributes, experience, and expertise from inside and outside the company to co-create the future by unleashing their ideas and creativity, and to continue to grow both as individuals and as a company. By leveraging the Sony Group's diversity and continuing to evolve and grow, I would like to create a positive spiral that begins with Sony being chosen by customers, which then energize our employees, enables us to attract more new talent, increases our corporate value, and ultimately enable us to give back to society. Working together with Mr. Yoshida, the Sony Group's management team, and our employees around the world, I intend to continue to develop through my efforts to the further evolution growth of our business based upon our purpose. I look forward to your continued support. From now, we would like to take questions. And time for questions and answer is about 25 minutes. And due to time constraint, we will not separate the sessions. We would like to take questions from the investors and analysts. And those who are asking questions online, please connect your phone to our branch officers. And those who have questions in this venue, please raise your hand. And those who have questions online please press one after the asterisk key on the phone. And in this venue our staff will bring you the microphone. And due to time restriction, we would like to limit your question to one question per person. So please raise your hand should you have a question. Then the far right, the second row from the front on the right Shimai Kenta from NHK. I have a question to Mr. Totoki, the new CEO. In your self-introduction, you were talking about the Sony bank, and talked about the ventures Spirit. And so will be continuing your position as a CFO and you become CEO this time, and as a CFO you have -- and so in your position as the President, what business would you like to develop and what is your wish for your new position? Thank you for the question. And so the management and also the group business will be continued and with the current mid-range plan, we have some plans for the actions. We will thoroughly, put those actions into place. And basically we would like to strengthen all aspects of our business. That's my basic thinking. Thank you. Next question, please. Person in the middle row, the third row from the front, on the right side from the side. Honda. I'm a Freelance Journalist. I have two questions, and to Mr. Yoshida. As Mr. Yoshida presented in, it is great to have the support by person who is quite knowledgeable about the finance. And at the same time, I recognize that the CFO has certain unique authority and do you think that there are any conflicts or problems for CEO is also a CFO? And it appears to me that this is rather sudden that this announcement was made. So why now? That's my second question. Let me then answer to your question. About the first question, whether the double hating of a CEO and CFO would be a problem. Well, this COO of Mr. Totoki especially is going to be a group COO not the CEO. COO and so it'll be a little bit different from a giving the direct instruction to the front-line. So this is the COO position who understands the operation very well to double hat as a CFO. When we think about the group structure of our company, I think this is reasonable and efficient. And in this group, in each part of the group, we're going to confirm the standing of each part of the business to lead the way for further growth. I think it make sense. And the second question was why now? And Sony, is now practicing this mid-range business plan or the plan. And we are right in the middle of the force, mid-range plan, and we have business planning people, but the actual management itself is being done with the long-term perspective. At the moment when we look at the external landscape the changes are accelerating. As Mr. Totoki also mentioned, the technology is changing rapidly. And also there's heightened geopolitical risks. And so, as I mentioned, capital allocation and also the business collaboration. And also the portfolio management of the businesses need to be strengthened. That's all. My name is [indiscernible] Tokyo. I have a question to ask Yoshida and this management changes will lead to a two top lectures, Yoshida and Totoki, and both of you are former financial sectors, financial areas. So, what's going to be the impact and the two top structures of the management. And the purpose of this management changes is just to strengthen our management structure and architecture. So, we assign a new COO and the capital allocation and business portfolio management and the business structure management is to be operated for sure. That's the purpose. And as CFO experience, that's quite right. And I myself has been serving for So-net, the Internet provider, serving as the supply center for nine years. So I think that the variety of experience is quite important for us to serve for the company. And he has ever worked for the start of the Sony Bank, and he has been serving as the President of Sony Mobile as well. So I do believe that he can take the privilege of his experience. Each present had a slogan [indiscernible] is focusing upon manufacturing and sales. Yoshida is to become closer to people. What is the slogan that you have in mind? Thank you for your question. I'm focusing upon growth, business and company. If growth is stagnant in various ways, one tends to fall into negative spiral. Therefore, I am focusing upon growth and realize growth, as I said in my speech, to be chosen by customers and energized people and positive spiral is to be created. So in short, it is the growth. Thank you. Thank you very much for this opportunity, [indiscernible] from Nikkei. And I would like to ask a question about the necessity of COO, this as in the comment by Mr. Sumi about the necessity of the COO, there was a discussion in the board and in the past, in the era, there was the CEO and the COO separate, and there was the split between the CEO and COO under Howard Stringer and whether they functioned or not, there's another question, but so in order to maintain the forces, I think it may be a difficult question to answer, but when you have the CEO and COO, there are some views that may be better to be separated in terms of the functions, what do you think? Well, our Sony's management, well, myself is not so much their one top management. I am part of their management team, and that's what we have been demonstrating as management of our business. So with that, as I mentioned, external landscape, there are major changes happening, the geopolitical risks and also acceleration of technology. And then also these positions move our independent position while valuing the independents, we together think about the business, to business collaboration and also the business portfolio improvement. So, we all -- the management team needs the deep understanding of the external environment. Of course, Mr. Totoki has a deep understanding of the external landscape. And with this titles of the COO and CFO and he can bring it to the higher level of the understanding and elevate it to the higher level, his understanding of the external landscape. Next question, please. My name is Nishita [ph], Freelance Journalist. I have questions and the CEO, and its positions. So in terms of the strengthening of the product portfolio is quite well understood, but would you please be a bit more specific, what we want to do? So Yoshida leadership and Totoki leadership, what they will be and how each of you would like to work for Sony Group. And probably Totoki will make another comment, and that's for the details, and that's subject to the discussions from now on. But as for business structures, we have six segments of businesses and we have to maintain and let them glow. But as for the discipline of the corporate management, we should regularly check, whether or not, those portfolios and segments are optimum. That should be the role of the Board of Directors and the Management. That's my ideas. So I'd like to make some additional comments for the questions. As for the business portfolio, should not be a static. That should be dynamic. And the diversified business means the different harvesting cycles. So, we need a cyclical revisiting, and the reviews of those business portfolios also still be update, and we need enormous power to do so. So as Yoshida said, the strengthening the management structure is quite plausible for us to carry on, and we have to raise the management capabilities, and I have to play my role to do that. Thank you. Next question. Those of you online, if you have any question, please press one, followed asterisk followed by one. Now the person, third line, third row from the front [indiscernible]. I have two questions to Totoki, Sony Group, what kind of company would you like to steer the company into your vision? And I think this is a message for the employees as well, what is your vision for the company and Mr. Totoki, personally you are something believe that you are, you think is important. Thank you very much for your question. What kind of company I would like to make Sony into? Yoshida and we defined purpose and expand the kind of value chain. And we have been sending that message internally and externally. We have to make this more concrete, ideal way would be without be having to explain, everybody can have an image as to what we have to do. That is the ideal situation. So we are going to bring this into reality. As for my belief, it's not something that big, but from before, the key of management is the courage and patience. I like this saying, many people are saying this, you'll, as one is engaged in management of company, identifying risks and make judgment, and you have to have the courage to make decisions. Also, at times, you may be faced with headwinds and also contradictions, but you have to persevere and should have patience. And I feel the need of patience. I am telling myself the importance of this always. Let's move on to the next question. So the person in the middle row on the far right, please, on the front row. Thank you very much for this opportunity. [Indiscernible] and under the new management structure, going to be the CFO and Totoki, I believe you have exerted your position as a CFO as well. What are the other concrete actions, and were there any other choices or options? Well, so this change to Sony Group's management structure. First we had a discussion with the nominating committee in July last year. And at that time, and of course there were lot of discussions, but I then talked about Mr. Totoki's strengths. And biggest strength, I think is the strong willingness for growth. And I think it is a very important key attributes that is required of the management of the company and the company growth. I think it's important for it to result in the growth of the employees as well. So that's my view, and I strongly stress that Mr. Totoki is suitable as a new leader of Sony Group. And that's what I've been repeating to the nominating committee as well as in the board meetings as well at several occasions. Let's go to the next question. My name is [indiscernible] Business. I have two questions, and you have the experience of CFO, what's your positive effect on your future jobs and how you can take the privilege of your experience as CFO and as CEO, Mr. Yoshida, what you are going to do as an CEO? Thank you and first question is to be answered by Totoki and what I'm going to do as an CEO and there are so many things for me to do. Ultimately, I have to take a ultimate responsibility sub the Sony Group and CFO experience, how those experiences will sub positively to my jobs and CFO and depending on the companies, and probably the roles might be different, even though they may carry the same name. And CFO in the Sony Group has a wide range of roles and quite deeply involved in the strategies and the management, and that's been true since Mr. Yoshida as CFO. And those experiences, should be quite positive, positively served to be the President, because we can have overall view and we can read our financial and we can take that, take leverage of those ideas through interaction with investors and analysts. Thank you. Let's move on to the next question. Anybody who are connected online, please press asterisk, followed by number one. If not, then once again, back to this room in the center, in the center, in the front line. [Indiscernible] from Nikkei ESG. I have a question to Mr. Totoki, Mr. Yoshida, after he became President, Creativity, he has been saying that, that he has a purpose of fit abroad with emotion through the power of creativity and technology, and have been working upon this, Totoki, after you become President, what would be the priority areas that you would like to address? Thank you for your question. I, myself, as Yoshida clearly defined the purpose and disseminated this purpose to the group. As I mentioned earlier, we have to make sure that the purpose takes root in the group, and we have to make some, the purpose into something concrete, purpose itself is the Kando value chain. So it is made into something concrete, Kando value chain. We create Kando and deliver Kando, and that's where we are doing our business. So we have to make this even stronger and wider in the range as well. Now, we are running out of time, so, we would like to take one last question. So, from JP Morgan Securities, [indiscernible]. Please ask your question. Thank you very much. My name is -- from JP Morgan. Now, I have one question. About this management change, Mr. Yoshida from, Mr. Totoki, each, about the Group Executive Officers, what did you tell them or what are you planning to tell them or and also to the employees, what are your messages from each person, I would like to hear? Thank you. Thank you for your question. Well, already the message has been issued, and today, as I mentioned in my speech, there's a change in the external environment, and also there are things that we need to tackle internally. I have already conveyed to our employees in the same manner I mentioned in the speech and also the purpose of the company. And also, we are going to get closer to people that will not change, and together we are going to attain further growth. And that was my message from myself too, basically I delivered the contents of my speech with a little more, meets to it, in a sense to our employees and also to the key team members individually. I had opportunities to speak to them one by one. And so I asked them for their corporation because I'll be assuming this new position. And we received a lot of feedback through the email and the messengers. I would like to take my time to read through all the messages, I'm looking forward to doing so. Thank you very much. It is time. So then this concludes the question-and-answer session. And next, there will be a photo session for the meeting. Ladies and gentlemen, let us start Sony Group Companies and Consolidated Financial Results Announcement. My name is Shin Chi [ph], from IR Group of Financial Department. I'm happy to serve as MC. And please, let me introduce, those who are on the podium. Hiroki Totoki, Executive Deputy President and CFO; and Ms. Naomi Matsuoka, Senior Vice President in Charge of Corporate Planning and Control, Support for Financial Business and Entertainment Areas; Sadahiko Hayakawa, Senior Vice President, In Charge of Finance and IR. Those three are on the podium. First Totoki San will have the floor to talk about the Q3 FY 2022 consolidated financial results, and then go down to the questions and answers. And as for the questions and answers, we will first entertain questions from investors and analysts. Then to the separate sessions from media, and in total we are planning for 45 minutes. For the related documents, we have posted on the IR website, please refer to that. So Totoki San, you have the floor. Today, I will explain the following. Consolidated sales for the quarter increased 13% compared to the same quarter of the previous fiscal year to ¥3.412 billion and consolidated operating income decreased by ¥36.4 billion to ¥428.7 billion. This operating income result was close to the record high reached in the same quarter of the previous fiscal year, which benefited from the recording of ¥70.2 billion gain on the transfer of a business in the picture segment. Income before income taxes decreased by ¥63 billion year-on-year to ¥398.6 billion. And net income attributable to Sony Group Corporation stockholders decreased [Technical Difficulty] mainly due to the impact of the increased sales of first party software, despite an increase in cost. The focus for FY '22 sales is unchanged from the previous forecast. We have upwardly revised our operating income forecast to ¥240 billion, an increase of ¥15 billion from the previous forecast. Expenses associated with acquisition for the current fiscal year are expected to be approximately ¥57 billion. 7.1 million units of PS5 hardware were sold during the quarter, and the cumulative number of units sold by the end of December exceeded 32 million. Based upon this result, we have set our sales forecast for the fiscal year at 90 million units. By optimizing our operations, we are exerting every effort to sell as many units as possible to meet the strong demand. Due to the penetration of PS5, the percentage of PS5 users in the number of monthly active users in December increased to about 30%. Engagement metrics to users who transitioned from PS5 to PS5, such as the PS Plus subscription rate game playtime and average is spending amount are significantly higher than those when they played on PS4. And we will continue to focus on accelerating transition of PS4 users to PS5. In addition, nearly 30% of PS5 users will never use PS4. So with the spread of PS5, the acquisition of new users is progressing. Although total game playtime of all PlayStation users during the quarter was down 3% year-on-year, it was up 6% compared to the prior quarter, and it was up 14% in December compared to the prior month. We believe that user engagement is on the recovery trend due to the penetration of PS5 and the contribution of hit titles in terms of software for PlayStations, the new title, God of War Ragnarök recorded sales of more than 11 million copies in the first 10 weeks after its release on November 9th, making -- marking it the fastest selling first party title ever. Looking ahead to next fiscal year, we have strong titles planned to be released for both first and third-party, including Marvel Spider-Man 2. The sales contribution of PC software is steady increasing, thanks to the rollout of our popular IP to PCs such as Marvel Spider-Man Miles Morales, which went on sale in November. As for bunch, pre-orders are steadily increasing for the Destiny 2 Lightfall expansion, which is scheduled to be released this month. On the 22nd of this month. PS VR2 will be released worldwide by maximizing next generation sensing functionality and the performance of PS5. We aim to provide a virtual reality experience like never before. In anticipation of the launch, we are preparing a lineup more than 30 titles, including Horizon Call of the Mountain, the latest title in our IP, and Gran Turismo 7, which will be upgradable to PS VR2 for free. In this way, we are seeing a steady results from the various measures, we have taken in terms of both hardware and software. And we believe that, we have created positive momentum to reaccelerate growth and the game business centered on the expansion of the penetration of PS5. Next is the music segment. FY '22 Q3 sales increased by 23% year-on-year to ¥367.7 billion, mainly due to the impact of falling exchange rate and the increase in streaming sales. Operating income was ¥63 billion and increase of about ¥7.8 billion year-on-year. The contribution operating income from visual media and platform accounted for approximately 10% of the operating income of the segment for the quarter. There is no change from the previous fiscal year forecast. Streaming sales in the quarter continue to grow steadily with year-on-year increase of 33% of the recorded music and 60% of the music publishing 7% and 28% respectively on the U.S. dollar basis. In recorded music following the first half of the fiscal year dwelling, which we had many new albums hits by artists such as Harry Styles and Beyoncé, we continue to generate hits on with oblige of 38 songs in the Spotify's Top 100 weekly global music rankings in the current quarters. And among them the singer song like this SZA's album SOS released on the December 9th, became a big hit remaining in the number one in the Billboard 200 for the consecutive seven weeks after the release in publishing, our affiliated song Lighters participated in all of the top five most streamed albums on Spotify in calendar year 2022. And we believe this part solidify Sony's positions in the industry leader. Next is the picture segment. FY '23 Q3 sales were 331.5 billion a significant decrease of 28% compared to the same quarter of the previous fiscal year, which benefited from the blockbuster release of a Spider-Man: No Way Home and U.S. Television Seinfeld. Operating income fell by significant ¥123.9 billion to a ¥25.4 billion, primarily due to the recording of the game from a transition club GNS games business in the same quarter of the previous fiscal year. And the impact of the decreased inside sales. And FY '22 forecasting sales are ¥1.400 billion decrease of ¥40 billion from the previous year. There is no change from the previous focus in operating incomes. Due to the fewer films, being released a result, mainly from the production delays blocked by the COVID-19 situations and box ops revenue in the U.S. calendar year was about 60% of the calendar year 2019. Next fiscal year Sony plans to release highly appealing films including the sequel of the Academy winning animation film of the Spider-Man: Across the Spider-Verse and the new film of Sony Picture Universal of Marvel characters following like Banham. And we also and crunchy longest paid members exceeded 10 million as the top of the -- by the end of the next years. And we have that evidenced by the release of one piece film led and following on from unchartered which recorded box office revenue of more than $400 million worldwide with more than 10 projects under the way convert Games IP to video, including Gran Turismo and God of War. The live action television drama adoption of the last of us, which began airing HBO, HBO Max and Max January 15th, began the big hit in the first episode, since its first release with the 22 million viewers. Due to this, the game of the last [indiscernible] released in 2020 and Amazon sales ranking for PS4 software in the U.S., which has the positive impact on the Gamesload. More by, in March, we plan to release the first PC game software, by using this IP. In this way, we plan to further increase strengthen our values, highly appealing IP through multifaceted exploitation of the IP into the collaboration after [indiscernible]. Next is the Entertainment Technology & Services segment. FY '22 Q3 sales increased 10% year-on-year to ¥752.8 billion due to foreign exchange rates and increased sales of digital cameras. Operating income increased ¥1.1 billion year-on-year to ¥81.1 billion primarily due to the benefit of the increased sales of digital cameras, despite the impact of decreased sales of televisions. In FY '22, forecast for the sales of ¥2.480 trillion [ph], a decrease of ¥30 billion from the previous forecast. There's no change from the previous forecast for operating income. By responding swiftly to market changes and minimizing the impact of the economic slowdown and deterioration of the market environment in certain categories such as TVs, we secured a profit for the entire segment during the quarter that was the same level as of the same quarter of the previous year. Regarding interchangeable lens cameras. Although the pent-up demand due to product shortage in the previous fiscal year is abating, there has been no noticeable negative impact from the economic slowdown so far. Our sales are relatively stable. We have been able to control the supply chain disruption caused by the resurgence of COVID-19 in China since the end of last year, so that it does not affect sales. We are closely monitoring the situation after the Chinese New Year and are taking necessary action. We anticipate that the business environment will become even more severe over the next fiscal year. Therefore, we will revise our sales plan for the fourth quarter even more conservatively and will proceed with the business operations with the top priorities being prevention of any negative impact from being carried over into the next fiscal year and acceleration of our efforts to further strengthen our business structure. Next is I&SS segment. FY '22 Q3 sales increased a significant 28% year-on-year to ¥417.2 billion, mainly due to the impact of foreign exchange rates and increase in sales of image sensors for mobile products. Operating income was ¥84.9 billion, a significant increase of ¥20.2 billion year-on-year and mainly due to a positive impact foreign exchange rate despite an increase in costs, both sales and operating income for the current quarter were recorded heights for this segment. The FY '22 sales forecast has been decreased ¥20 billion from the previous forecast of ¥1.420 trillion. There's no change from the previous forecast for the operating income. The smartphone market continues to be sluggish, center to midrange and the low end products in China. Recently, this trend has become partially conspicuous for high end products as well, but that is highly within the expectations of our previous forecast. At present, we assume that the smartphone market will recover moderately starting from the second half of this fiscal year, ending in March 31, 2024, and we are proceeding with the careful verification and assessment in preparation for formulating a business plan for the next fiscal year. On the other hand, sales of our large format high definition sensors for flagship models have grown significantly from the previous fiscal year leading to significant growth in sales for the segment. We believe that the growth in the trend towards larger size, higher image quality, higher performance mobile sensors is a major achievement this quarter. Taking this into account, we will continue to consider medium to long-term investments in increased production capacity to further expand our image sensor market share. In the automotive sensor business, we expect to double sales in the current fiscal year compared to the previous fiscal year, and we expect the sales to continue to grow in a high level of the next fiscal year as well. Last is a Financial Service segment, FY '22 Q3 financial service revenue decreased significant 24% year-in-year to ¥359 billion mainly due to deterioration in the net gains and losses on investments in this separate accounts. At Sony Life Insurance, operating income increased a significant ¥19.1 billion year-on-year to ¥54.3 billion primarily due to a reveal reversal of policy of reserves at Sony Life, resulting from the rise in interest rates during the quarter. Sony Life's new policy amount in force increased 57% year-in-year due to growth in our corporate business, and strong sales, mainly of the new individual variable annuity [indiscernible], there's no change in the previous forecast. Next fiscal year will be the fiscal year of the fourth midterm range, mid-range plan, and it will be an important fiscal year where we establish a next mid-range plan. I believe that the most important theme in the next mid-range plan is a Sony Group strategy for the further growth beyond the current tough economic cycle. And our next fiscal year, we anticipate that we will need to operate a business in the face of headwinds while each business will focus on responding quickly and decisively to the changes it faces. We also will steadily lay the foundation for the future. We plan to further evolve the diversity of our businesses and human resources, which are our strengths, enhance resilience of our business portfolio, and take on the challenges of the creating new value in the growth markets. That concludes my remarks. Now we'd like to move on to Q&A session. As we explained at the outset, first we'll be having Q&A session from investors analyst, and from about a quarter after five will be entertaining questions from the media. Those of you who have registered for asking question in advance, please connect the dial, the designating number and press asterisk followed by one. Those of you have question in the room, please raise your hand and then wait until the microphone is brought to you. Today because the time is limited, I'd like to ask you to limit your question to one per person. Now, those of you, if you have any question, please indicate now online participant, BofA Securities, Hirakawa-san, please. Thank you very much. Hirakawa from BofA Securities. About PS5 question. PS5, 7.1 million units has increased significantly, as a market consensus is about 7.5 million, 7.1 million. If you can produce more, you could have sold more, or the demand was about this level. In the 3Q, you have exceeding PS4, so what is the current situation of PS5? Thank you for your question. I would like to respond to your question. Sales unit of 7.1 million units is not a bad figure at all. However, the production and distribution problem continued. So the products are not delivered to the customers sufficiently, distribution channel at the shop front, the products are not delivered yet sufficiently. So we need to streamline the operation and so that, the units will be delivered to the customers as promptly as possible. Therefore, the momentum of demand, we are not concerned rather, we have to make sure that we can solidify the operation and we can deliver as many units as possible as quickly as possible. That's all. Thank you. Thank you. Thank you for your question. Let's go to the next question, and once again from online, Morgan Stanley, [indiscernible]. Thank you and congratulations for assuming a new position. And I have a question concerning games and three months ago, you talked about some of the focused and games, KPI is now gaining momentum, I think, and especially MAU, 112 million, and that's quite a positive, the ways, and PlayStation is recovering in the quarter. But as for the user compositions, you talk about transition from PS4 to PS5. So how do you focused the transition status from PS4 to PS5, will it gradually the increase or depending on the new titles, and the two boost, the demand for PS5 and that's for PS5 and PS Plus, the paid member increase is might be one of the main factors. And as for the next quarter, and that's almost as planned. And as for PS5, the sales increase and promotional effect should lead to the increase of the sales. [Indiscernible] players for being away from the gaming. And that should be the reason for us to see this current level of the user. And as for PS5 and the [indiscernible] reopening purchases ladder high, and that should have a time lag to see the positive effect onto the figures. So that might be because of the time lag for that membership and the reflection onto the sales and the revenue. And we would like to continue to monitor the business, and we are going to solidify the software database and so as to enhance the engagement with the users for gaming. Thank you. Thank you. Then we'd like to move on to the next question. Please raise your hand if you have a question. So, then from the venue, the person in the middle of this row. Thank you very much. [Indiscernible] Securities. I have a question about the finance area and financial services area. So the third quarter result of the new contracts, was it as expected and also the interest transition, how will it affect the performance and also the MCEV, what was the result? And in addition for the next-term, there will be plan for the change in accounting system. And at this moment, what is your view on how this may affect the performance? Thank you very much for the questions. So about the new contract value, the third quarter situation is your question. And thankfully, as I -- as mentioned in Mr. Totoki's speech, the Sony is performing quite well and new contract is increasing, and therefore the new contract values is also increasing. And that is the trend and that is to last for some time. And also interest rate shift impact, and we do have a hedging. So there, we don't expect any significant impact. And even if there may be some impact, it will be very slight. But depending on how the interest rate shift, we need to look at the different spreads. And also, in particular, the bank spread certainly will be affected. So in that sense, we would like to -- we will be increasing the profitability through that. And IFRS 17, in regards to this accounting system change, there will be another occasion for us to explain a more details about the IFRS. So please wait for that occasion. Thank you. Thank you very much. [Indiscernible]. Congratulations for the good results. Now, I have a question regarding game. Recently, U.S., Europe, and China. Macro trend is different in December results and the forecast for March and the forecast for next fiscal year and onwards, business environment, hardware, and software network in by region. What difference in trend is observed or no difference? Can you give me some hint? That's my question. Thank you. Thank you very much for your question. Game and network globally, the reservation of the economy. There is a difference by regions, but how does that impact our business at this point in time. By regions, there's is no significant difference. That's my recognition. Having said that, however, PS5 share compared to PS in Europe as compared to the United States, it is high. Our position is higher, so we are maintaining in high position in the United States. Also, in summer, there was some narrowing of the gap, but more recently our share has expanded significantly. So impact, there's not much impact of the macro economy. Having said that, however, this is something dynamic. So we have to watch carefully the situation from the fourth quarter onwards. Thank you. Thank you. And my name is [indiscernible] of JPMorgan, and I am this is. I have a question, based on your documents, and for the Q3 sales the North American the smart phone the production was the constraint, and that's for the Q4 wafer input. And that's almost on the same level of the previous fiscal year, but as for the capacity, seems to be lot smaller compared to the previous year's speakers. So, that might be decreasing factors for your productions. And so what is your perspectives for the North America market and production situations? Thank you very much. For the first part of the question, for the -- based on the customers production the changes, and we had quite minor impacts, and that's for Q4, and we have yet to identify the exact cause. So, we need to continue to monitor what's going on. As for capacity and wafer input. And actually, Q4 90% is for the operating, the utilization rate. That's for image sensor productions related the changes. Specifically, for industrial use in the Kumamoto plant. And, but that's for the others. We are going to maintain the full-fledged productions. The Q4 capacity seems to be a dropping, but because of the plant and the maintenance and the inspection. Thank you. And time is running out. So we would like to take one last question, and those from SMBC Securities, Mr. Katsura. Please ask your question. Hello, I'm Katsura. Congratulations Mr. Totoki. Now, I have one question about the market landscape, how you interpret the market situation, its dynamic and your competitors and other peers may say that it's tougher than three months ago. And your semiconductor business is doing quite well. And based on this towards next year, what is your plan? And also EDNS, I believe that the forecast is quite tough and I believe that you would like to take some measures or counter measures. And so I would like you to explain to us what you will do? Thank you for the question. And overall, economic landscape, I think that's a question. I believe last year, end of -- in comparison to end of last year, in particular, European, U.S. economy, there is an optimistic view that they may be making a soft landing and IMF forecast has been revised in upward manner. And also the equity market, financial market is the momentum is may be recovering in advance to the overall market recovery. And so the -- generally, that may be the tendency, but when it comes to the real economy from the finance market, always come -- the changes comes in delay. So the first, the fourth quarter, and also the early next fiscal year, the real economy and also the consumption trend. We need to be cautious to be prepared for any shift. And as far as our business is concerned, currently the smartphone and low end and mid end are going down, and the TVs our demand is weak. And I mentioned that, I can say that. And this is something that was foreseeable to a certain extent. So as far as we are concerned, we think we are prepared, but from the fourth quarter to the first part of next fiscal year, we are going to the right risk control. And so we're prepared for the next phase and the next momentum, so we will not be left behind then when the next momentum increases. And that is the overall view at this point in time. Thank you. Thank you very much. Now it is time. So, we would like to conclude the Q&A session for the investors and analyst. Thank you very much. Now it is time. So, we would like to conclude the Q&A session for the investors and analysts. Now we would like to start the [Technical Difficulty]. Now we would like to move onto entertaining questions from the media. Those of you who have any question in the hall, please raise your hand. Those of you participating online, if you have question, please press asterisk followed by one in this hall. Microphone will be brought to you if you raise your hand, because the time is limited, I would like to ask you to limit yourself to one question per person. Now, if you have any question, please raise your question. Now, in the middle fourth row. [Indiscernible] is my name. Not directly related to earnings announcement, about semiconductor business, I have a question. In Kumamoto, you have built, you are considering building a new plant in Kumamoto. What is the current situation of considering the plant in Kumamoto? Thank you for your question. It's not something that we have made an announcement of. So this is based upon speculation, and I would like to refrain from making, responding to the question, but generally speaking, image sensor markets growth in the mid to long-term and based upon that, consideration for expanding the production capacity is always considered not limited to specific location, but widely, we are considering that. And if there's anything that is decided, then we'll like to inform you immediately. Thank you. And I would like to move on to the next question. Next question, please. So in the center, two rows from the front and the second from the left. My name is [indiscernible]. And one question, and as for entertainment, music and pictures, and what is your strength as the conglomerate and centering around entertainment business and the macroeconomic situation has been lot improving. And that should be a driving force for you to maintain the good business performance. For the next fiscal year, and you are expecting further more solidifications of the user basis. So, what is your strength in that environment, how you can take the leverage of your corporate strength for that environment for the entertainment, related to being conglomerate. And we may have, you may have a conglomerate discount, that might be negative factors for you. And if there is any discount, discounting factors, how are you going to minimize those factors and how you should address to those the elements? Thank you for your questions. And as to the strength being conglomerate, we have the diversified businesses, diversified businesses, probably that they are not so closely related. So, and all of the sectors do not go along at the same time. So, and that should be one of the strengths for us to have multiple businesses. That's the same concept of the portfolio management. As for conglomerate discount, there should be many people saying different things. And as I talked in the presentations, as for the entertainment, three businesses, we have the Transmedia and we have a quite strong synergy effect between the different business areas and that that's almost visible in the financial figures. And we can expect some good circulation and the benign cycles for the bottom up the effects. So that should be another strength of ours. And in addition to that, and we have the technologies. Sony is a technology company, that's one of our uniquenesses. And how we can take the leverage of those technologies to entertainment business. The Metaverse should be one of the topics that's represented by the Metaverse. So, that's our activity. So for the new digital experience and that entertainment, that should be a core factors of our future business. Thank you. [Indiscernible] inventory level at the moment, for the other game and the electronics point of view. And so when we think about the market, I believe you may have to be conservative in planning on the inventory level. So, how are we to analyze your inventory level from the perspective and for the gaming, you have a high level of inventory, and we judge that, it can be mobilized and so what is your view on the inventory? Thank you for the question. So I would like to share, add some information statement about the inventory level and for the game and network service for this third quarter sales, production sales is increasing. That is why it is, the inventory is building up significantly. And even if there's the sales and the demand for a long time we were not able to deliver products smoothly. So, we therefore increase the production capacity significantly and produce the products. And we are in the middle of delivering this products. And in regards to the game and entertainment service, we are not worried about the inventory level actually, and the inventory level when we think about the sales momentum and also the PS4, so now the seasonality, now that it's in a fourth year in the past with the simulation, the inventory itself made increase in the monetary value. But in comparison to the PS4, the product unit price is much higher. And at PS4, we decreased the price in the fourth year. And so the monetary value seems to be higher than what actually is. And when it comes to ETS, in the previous briefing, I mentioned that the inventory level at the end of the second quarter was rather high, and we worked on the reduction of the inventory. We managed to achieve a goal, to a certain extent, we are still working on it, but it is however slightly higher than what we think is appropriate level. So into this quarter, we would like to reduce the inventory and for I&SS, the CapEx optimization and also maximizing the business scale. And for that matter, we are taking a policy to have a high level of inventory as part of the investment. And for that, the CapEx timing can be delayed. That's all. Thank you. Game segment, early made a comment. I'd like to confirm this fiscal year PS5 sales target is 18 or 19, you have already increased in 19. Yes, it is 19 million units. It was 18 million, and we raised 19 million, 18.5 million. We say 18, and it is 19. So we have raised the target. Thank you. And the time is running short and would like to entertain one last question. And on this row on the right and the fifth from the front. My name is [indiscernible] talked about, image sensor business and you are going to enhance the production capacity and will it be for the other applications that mobile products. Thank you for your questions. That includes the other products, the mobiles but mobile image, image sensor products, the driving force for the most of the growth, that we have some other segments as well. Thank you.
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EarningCall_669
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Welcome to the Regeneron Pharmaceuticalsâ Fourth Quarter 2022 Earnings Conference Call. My name is Shannon and I will be your operator for todayâs call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Ryan Crowe, Vice President, Investor Relations. You may begin. Thank you, Shannon. Good morning, good afternoon and good evening to everyone listening around the globe. Thank you for your interest in Regeneron and welcome to our fourth quarter 2022 earnings conference call. An archive of this webcast will be available on our Investor Relations website shortly after the call ends. Joining me today are Dr. Leonard Schleifer, Co-Founder, President and Chief Executive Officer; Dr. George Yancopoulos, Co-Founder, President and Chief Scientific Officer; Marion McCourt, Executive Vice President and Head of Commercial; and Bob Landry, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will then open the call up for Q&A. I would like to remind you that remarks made on todayâs call may include forward-looking statements about Regeneron. Such statements may include, but are not limited to, those related to Regeneron and its products and businesses, financial forecast and guidance, development programs and related anticipated milestones, collaborations, finances, regulatory matters, payer coverage and reimbursement issues, intellectual property, pending litigation and other proceedings and competition. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected in that statement. A more complete description for these and other material risks can be found in Regeneronâs filings with the United States Securities and Exchange Commission including its Form 10-K for the year ended December 31, 2022 which we expect to file with the SEC on Monday, February 6. Regeneron does not undertake any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. In addition, please note that GAAP and non-GAAP measures will be discussed in todayâs call. Information regarding our use of non-GAAP financial measures and a reconciliation of those measures to GAAP is available in our financial results press release and our corporate presentation, which can be accessed on our website. Once our call concludes, Bob Landry and the IR team will be available to answer any further questions you may have. With that, let me turn the call over to our President and Chief Executive Officer, Len Schleifer. Len? Good morning to everybody and for those of you experiencing the optic freeze, I hope you are staying warm. Our strong fourth quarter performance kept remarkable year of Regeneron, highlighted by significant achievements that better position the company to deliver sustainable growth and shareholder value. Fourth quarter 2022 revenue increased 14% compared to the prior year when excluding the impact of contributions from REGEN-COV and Ronapreve underscoring the commercial strength and increasing diversity of our business. We also made several important advances across our pipeline during the quarter, notably the submission of a Biologic License Application for aflibercept 8 milligrams in neovascular age-related macular degeneration or wet AMD as well as diabetic macular edema, or DME, positioning us for a potential U.S. launch in late August of this year. Additionally, we received FDA approval for Libtayo in combination with chemotherapy as a first line treatment for advanced non-small cell lung cancer, making Libtayo only the second PD-1 or PD-L1 antibody approved in this setting, regardless of the patientâs histology or PD-L1 expressions level. We also presented data from our rapidly advancing oncology pipeline, including fianlimab, our LAG-3 antibody in combination with Libtayo in advanced non-small cell lung cancer, odronextamab, our CD20xCD3 bispecific in B-cell lymphomas and linvoseltamab, our BCMA x CD3 bispecific in multiple myeloma. Finally, Dupixent was approved for prurigo nodularis in Europe. Briefly reflecting on 2022, we ended the year with three strategic imperatives that we felt we had to accomplish in order to position the company for long-term growth. First, we had to fortify the medium and long-term outlook for our retinal franchise. Based on the positive results that we reported in September 2022, we believe aflibercept 8 milligrams has the potential to change the treatment paradigm for patients with wet AMD and DME by becoming the new standard of care for these patients, positioning Regeneron for prolonged leadership in this category. Second, we needed to maintain and grow DUPIXENT leadership across a variety of Type 2 allergic diseases. 2022 turned out to be a phenomenal year with Dupixent global net product sales approaching $8.7 billion and growing 44% at constant currency. Despite new competition, Dupixent maintained a leading market position in atopic dermatitis, asthma and nasal polyps and was also approved in new indications, geographies and younger populations, which George will detail shortly. Collectively, these 2022 approvals meaningfully expanded the Dupixent commercial opportunity, allowing the addressable population to increase by approximately 225,000 patients, bringing the total addressable population to over 7 million patients globally. And third, we wanted to make significant progress towards becoming a leader in immunooncology and 2022 turned out to be a crucial year. Key to this long-term goal was requiring Sanofiâs share of global rights to Libtayo, an antibody discovered by Regeneron, which was a necessary step towards realizing the full clinical and commercial potential of this foundational therapy. It also enables us to unlock combination opportunities from promising candidates in our oncology pipeline, including with our LAG-3 antibody, our costimulatory bispecifics and our CD3 bispecifics. Looking ahead, we expect 2023 to be another notable year with significant incremental progress across these imperatives as well as in other areas of our business. We are preparing for a potential U.S. launch for aflibercept 8 milligrams in late August given prescribers decade plus experience with EYLEA. And now with the 48-week data for aflibercept 8 milligrams, which demonstrated comparable efficacy and safety to EYLEA, but with longer treatment intervals, we believe that over time there is an opportunity for aflibercept 8 milligrams to become the new standard of care for wet AMD and DME. We expect Dupixent to continue to strengthen its leadership position across approved Type 2 allergic diseases based on its differentiated mechanism of blocking both interleukin-4 and interleukin-13. In 2023, we have an opportunity to reach even more patients with potential regulatory approvals in new diseases, geographies and younger populations that could add another approximately 500,000 patients globally to the biologic eligible population. Additionally, we look forward to the upcoming readout of our first Phase 3 study of Dupixent in COPD in the first half of this year. In oncology, we expect to continue rapidly advancing our pipeline. For our LAG-3 combination with Libtayo, we are moving forward with expansion beyond melanoma to include lung cancer and potentially other solid tumors. For our costimulatory bispecifics, in combination with Libtayo, we are continuing dose expansion in our Phase 1/2 PSMAxCD28 program in advanced prostate cancer. We also expect to report additional Phase 1 data from our EGFRxCD28 program in solid tumors and to present initial clinical data for our MUC16xCD28 program in recurrent ovarian cancer. And within Heme-Onc, we anticipate second half regulatory submissions for odronextamab in follicular lymphoma and diffuse large B-cell lymphoma as well as limvolseltumab in refractory multiple myeloma. In 2023, we also plan to rapidly move forward with clinical development of our next-generation COVID-19 antibody, which we believe could help protect the millions of vulnerable patients who were unable to map a sufficient immune response from vaccination and treat those who require other alternatives. Activities enabling clinical manufacturing have commenced and we expect to enter clinical development later this year. In closing, 2022 was a pivotal year at Regeneron and we expect to continue making significant progress in 2023. Our strategy remains focused on investing in our internal R&D capabilities which has historically generated a high rate of return. We remain confident in our near and long-term growth prospects with approximately 35 pipeline candidates currently progressing through clinical trials. We will also continue looking for opportunities to complement these internal efforts by exploring potential collaborations. With our commercial capabilities continue to drive revenue growth and our strong financial position, Regeneron is extremely well positioned to continue delivering breakthroughs for patients and value to shareholders. Thanks, Len. I would like to briefly walk you through our pipelineâs progress in 2022 and touch upon what lies ahead in 2023. In ophthalmology, we presented pivotal â positive pivotal results for aflibercept 8 milligram in wet AMD and DME. These trials showed that aflibercept 8 milligram extended dosing intervals to every 12 or even 16 weeks for the vast majority of patients through 48 weeks without compromising the visual improvement or safety seen with EYLEA. These are truly unprecedented and potentially game-changing results who have not â which have not been achieved using any other anti-VEGF agents. Moving to Dupixent, in 2022, Dupixent became the only biologic approved in atopic dermatitis, for infants as young as 6 months of age, the first treatment for prurigo nodularis and the first treatment in the United States for eosinophilic esophagitis. And just this week, we obtained the European Commission approval for eosinophilic esophagitis as well. In addition, we submitted a supplemental BLA for chronic spontaneous urticaria and shared positive Phase 3 data in children with the eosinophilic esophagitis. Dupixent is now approved in 5 related Type 2 allergic conditions. And our data shows that these diseases are mediated by IL-4 and IL-13 driven Type 2 inflammation. Because many patients suffer from systemic Type 2 inflammation, they often suffer from several of these diseases concurrently. And thus, Dupixent has the potential to holistically address these patients multiple Type 2 conditions for which Dupixent is approved. While many other immunomodulators are associated with worrisome immunosuppression and carry boxed warnings, Dupixentâs safety profile supports its approval in infants. In 2023, we are looking forward to the initial results of BOREAS, the first Dupixent Phase 3 study in patients with chronic obstructive pulmonary disease, or COPD. Our Dupixent COPD Phase 3 studies have enrolled patients with elevated blood eosinophils aiming to select for patients with COPD driven by Type 2 inflammation. The BOREAS study passed an interim futility analysis in 2020, an encouraging event, which triggered the start of the replicate Phase 3 NOTUS study. We are looking forward to the readout of BOREAS with the primary endpoint of annualized rate of acute, moderate and severe COPD exacerbations expected in the first half of â23. Moving on to oncology, 2022 was an important year for our oncology programs. Libtayo was approved by the FDA in combination with chemotherapy in first-line non-small cell lung cancer, irrespective of histology or PD-L1 expression levels, an achievement met by only one other PD-1 or PD-L1 targeting agent. Libtayo is also emerging as an essential backbone of our oncology pipeline as several programs in combination with Libtayo are starting to yield encouraging data. First, I will discuss our LAG-3 antibody, fianlimab in combination with Libtayo, where we have recently shown positive data from a second confirmatory cohort of PD-1 naive metastatic melanoma patients and reported encouraging results from a smaller dataset in non-small-cell lung cancer patients. These initial results suggest that the fianlimab Libtayo combination has a potentially best-in-class profile in melanoma. And we are advancing broad pivotal programs in both melanoma and lung cancer. Phase 3 studies in metastatic melanoma and adjuvant melanoma are already enrolling and we have plans to soon initiate another Phase 3 study in perioperative melanoma as well as Phase 2/3 studies in first-line advanced as well as perioperative non-small cell lung cancer. Other notable Libtayo combination used from this year was the early but very encouraging data with our PSMA by CD28 costimulatory bispecific in advanced metastatic castrate-resistant prostate cancer, a tumor type considered immunologically cold with multiple recent Phase 3 failures demonstrating that prostate cancer is largely unresponsive to anti-PD-1 therapy in other end as well as in other types of chemo combination. In our proof-of-concept study of our PSMA by CD28 costimulatory bispecific, we observed first evidence that combining this new class of bispecifics with anti-PD-1 can confer profound responsiveness to tumors previously thought to be cold and unresponsive to anti-PD-1 therapy with 3 out of the 4 patients treated at the highest dose levels showing greater than 90% reductions within 6 weeks of initiating combination therapy in the prostate cancer biomarker PSA. Following up on these early but exciting results, we are continuing to enroll patients in this study and we are planning to present additional data at medical meetings in 2023. We also presented our first clinical data for a CD3 bispecific in a solid tumor for ubamatamab, our MUC16xCD3 bispecific in development for advanced ovarian cancer. As a single agent in a Phase 1 dose escalation study in heavily pretreated recurrent ovarian cancer patients, we observed a 4% overall response rate with a 31% response rates in a small subset of patients with high MUC16 expressing tumors. We expect initial dose escalation data later this year for ubamatamab with Libtayo as well as for our MUC16xCD28 costimulatory bispecific with Libtayo in advanced ovarian cancer. We also expect updated clinical data for our EGFRxCD28 costimulatory bispecific in combination with Libtayo in various solid tumors later this year. Moving on to our hematology oncology pipeline, at the American Society of Hematology, or ASH Annual Meeting, we presented new data from odronextamab, our CD20xCD3 bispecific as well as linvoseltamab our BCMAxCD3 bispecific. For odronextamab, we presented pivotal Phase 2 ELM-2 data. Odronextamab in third or later line relapsed or recurrent follicular lymphoma has a potential best-in-class efficacy profile with 82% of patients responding and 92% of these responders achieving a complete response with encouraging durability. Our optimized step-up dosing regimen has improved odronextamabâs safety profile while retaining efficacy similar to the prior dosing regimen. In third or later â in relapse or recurrent diffuse large B-cell lymphoma, odronextamab demonstrated efficacy regardless of prior CAR-T experience and a safety profile generally similar to that seen in follicular lymphoma. We are planning regulatory submissions in the second half of 2023 for both indications, which we hope will support potential accelerated approvals. In 2023, we anticipate initiating several Phase 3 studies in follicular lymphoma and diffuse large B-cell lymphoma, including in earlier lines of therapy. These trials will serve as confirmatory studies which could potentially support conversion to full approval. We also expect to initiate a proof-of-concept study of our CD22xCD28 costimulatory bispecific in combination with odronextamab in diffuse large B-cell lymphoma, which we hope could further add to the anticancer benefit for these patients. For linvoseltamab, our BCMAxCD3 bispecific antibody we presented efficacy and safety data from our pivotal Phase 2 study in third or later line multiple myeloma at ASH. Early, deep and durable responses were observed in patients with high disease burden and these responses may improve with longer follow-up. In 2023, we plan to initiate a confirmatory Phase 3 study of linvoseltamab in second line multiple myeloma and are on track for a BLA submission in the second half of the year. As with odronextamab, we plan to initiate combination studies for linvoseltamab with costimulatory bispecifics in the near future. Iâd also like to update some additional clinical programs. Our antibody blocking Factor XI for anticoagulation and our antibody that activates the NPR1 receptor for heart failure are both completing proof of mechanism trials. Moving on to Regeneron Genetics Medicine, regarding our collaboration with Alnylam and siRNA Therapeutics, we are planning a broad and multi-pronged approach to develop treatments for NASH, nonalcoholic steatohepatitis. We are initiating a Phase 2 study of ALN-HSD and NASH patients with genetic risk factors. We also dosed first subjects in the first-in-human study of another siRNA medicine in development for NASH, ALN-PNP, which targets a different gene and can be potentially combined with ALN-HSD in appropriate patients. We have discovered additional NASH targets, which we have validated using our Regeneron Genetics Center, including side B, which will potentially be the next NASH therapeutic candidate to enter the clinic. With regard to our collaboration with Alnylam for central nervous system targets, our initial dose escalation study is ongoing. Our collaboration with Intellia and CRISPR-based therapeutics, this is expected to progress further in 2023, building on continuing data readouts from the Phase 1 study of NTLA-2001 in transthyretin amyloidosis in both cardiomyopathy and neuropathy patients, which provided the first demonstration in humans that CRISPR-based technologies can deliver up to 90% reduction of the pathological gene product for over a year. Regarding our gene therapy efforts, our collaborators at Decibel Therapeutics recently announced that a clinical trial has been authorized by both the U.S. FDA and the UK MHRA for DB-OTO, a virally delivered gene therapy designed to restore hearing to individuals with otoferlin-related hearing loss. A Phase 1/2 study in patients 2 years of age and younger is expected to initiate in the first half of 2023 with initial data from the first cohort of patients anticipated in the first quarter of 2024. Iâd like to conclude with our next-generation COVID-19 efforts. As we recently announced, we have identified a potent broadly neutralizing COVID-19 antibody, which, unlike other neutralizing antibodies find outside of the so-called receptor binding domain, or RBD, of the spike protein. This antibody retains activity against all the viral variants seen throughout the pandemic because it binds to an atop that has remained highly conserved, greater than 99.9% across all known variants. The vast majority of antiviral antibodies generated as a result of vaccination or due to natural infection target the RBD domain, which results in overwhelming selective pressure driving the emergence of these resistant variants. We hope that by targeting this unique and conservative to outside of the RBD this antibody will also retain its activity in the face of future variance. We plan to initiate clinical trials to test this antibody this year, and we are looking to develop it in both treatment and prophylactic setting. In conclusion, Regeneronâs R&D engine continues its productivity, including the early-stage pipeline. Just in the first weeks of this year, we have initiated clinical studies for two new drug candidates and we anticipate clinical trials starting or IND submission for up to 10 new therapeutic candidates this year as well as for additional indications for candidates that are already in the clinic. Thanks, George. The fourth quarter capped off a strong year of execution and growth, delivering results across our commercial portfolio. We expanded into new indications, which, coupled with our existing business, is expected to drive meaningful growth in 2023 and beyond. We look forward to several important potential approvals and subsequent launches this year, providing additional opportunities for growth. Starting with EYLEA, where we announced in January, fourth quarter U.S. net sales of $1.5 billion, full year 2022 net sales were $6.3 billion, representing 8% year-over-year growth and outpacing total growth of the anti-VEGF category for the year. At the end of the fourth quarter, EYLEA category share was approaching previous levels of approximately 50% of injections. This followed the short-term shift earlier in the quarter where EYLEA was negatively impacted by a temporary increase in use of off-label compounded Avastin. During this time, there was a short-term closure of a not-for-profit patient co-pay assistance fund, which reopened later in the quarter. We believe we have substantially recovered from the issue encountered in the fourth quarter. We continue to expect competitive pressures but remain confident in Regeneronâs overall retinal franchise as we look forward to our potential upcoming aflibercept 8-milligram launch. In summary, our retinal franchise leads the anti-VEGF category with EYLEA as the current standard of care and aflibercept 8-milligram, if approved, offering a differentiated clinical profile that can potentially shift the treatment paradigm. Turning to Libtayo. Total fourth quarter global net sales were $169 million, growing 44% on a constant currency basis. In the U.S., net sales grew 36% to $110 million with contributions across all indications. In advanced non-melanoma skin cancers, we continue to build our leadership position in the PD-1 class. In lung cancer, Libtayo continues to see steady growth in utilization in prescribers. Customer ordering has accelerated following the chemotherapy combination approval last November. We are working to maximize launch uptake by increasing depth and breath of prescribers. Early launch indicators are positive community and academic centers have welcomed Libtayoâs expanded role as an important treatment option in advanced non-small cell lung cancer. There are more than 200,000 new cases of lung cancer per year in the U.S. alone for which Libtayo is an important treatment option. Outside the U.S., Libtayo net sales grew 60% on a constant currency basis to $59 million driven by steady demand growth and additional launches as we secure access and reimbursement globally. We continue a targeted approach to extend our global commercial footprint in priority international markets. designed to maximize opportunities for Libtayo and potential future medicines. Finally, turning to DUPIXENT, where in the fourth quarter, global net sales grew 42% on a constant currency basis to $2.45 billion. In the U.S., net sales grew 44% to $1.94 billion, with strong growth continuing across atopic dermatitis, asthma, nasal polyps with additional contributions from recent launches in the eosinophilic esophagitis and prurigo nodularis. DUPIXENT is well positioned to expand market penetration and drive revenue growth across established new and potential future indications in 2023 and beyond. Atopic dermatitis DUPIXENTâs largest indication continues to rapidly grow across all age groups, firmly establishing DUPIXENT as the preferred systemic therapy for patients with moderate to severe disease. There continues to be rapid uptake in younger populations, further confirming DUPIXENTâs differentiated efficacy and safety profile. Weâve also seen meaningful early adoption in prurigo nodularis where DUPIXENT is the only FDA-approved medicine for this debilitating disease. We expect ongoing uptake of DUPIXENT as the launch progresses and physicians identify patients need. DUPIXENT continues to perform well in the highly competitive biologic asthma space with steady market share gains and strong growth in total prescriptions and new patient starts. In nasal polyps, DUPIXENTâs differentiated clinical profile continues to drive uptake as the leading first-line treatment option in patients requiring systemic therapy. In the eosinophilic esophagitis, the launch is going exceptionally well finally offering physicians and their patients a treatment to effectively manage the underlying mechanism of the disease. Patients treated with DUPIXEN have experienced dramatic improvements in their symptoms and quality of life weâve seen rapid uptake across both gastroenterologists and allergists. We also continue to advance our clinical efforts in younger patients where there is also substantial unmet need. Outside the U.S., DUPIXENT net sales worth $513 million, growing 37% on a constant currency basis, driven by rapid uptake across approved indications and launches in new geographies. In Europe, DUPIXENT was approved for prurigo nodularis in December. And earlier this week, DUPIXENT was also approved for eosinophilic esophagitis. We expect these new indications to contribute to DUPIXENTâs ongoing international growth. In summary, during 2022, we executed on our core focus to deliver life-changing medicines to patients. Our commercial initiatives and strategies are driving increases in market penetration for our in-line brands and optimizing the potential of new and upcoming launches. Taken together, we are confident in Regeneronâs future and are well positioned to deliver long-term and sustainable growth. Thank you, Marion. My comments today on Regeneronâs financial results and outlook will be on a non-GAAP basis, unless otherwise noted. Regeneron ended 2022 with a strong fourth quarter with continued execution driving positive results across the business. Excluding contributions from REGEN-COV and Ronapreve, fourth quarter total revenues increased 14% year-over-year to $3 billion, driven by growth across our core brands. Fourth quarter diluted net income per share was $12.56 on net income of $1.4 billion. Beginning with collaboration revenue and starting with Bayer. Fourth quarter 2022 ex-U.S. EYLEA net product sales were $839 million, up 7% on a constant currency basis versus fourth quarter 2021. Total Bayer collaboration revenue was $355 million, of which $324 million related to our share of EYLEA net profits outside the U.S. Total Sanofi collaboration revenue was $836 million in the fourth quarter and grew 61%, driven by DUPIXENT. Our share of profits from the commercialization of DUPIXENT and KEVZARA was $619 million, an increase of 60% versus the prior year. We also recognized a $50 million sales-based milestone in the fourth quarter of 2022 due to achievement of $2.5 billion of ex-U.S. sales of antibody collaboration products on a rolling 12-month basis. Finally, we recorded Roche collaboration revenue of $396 million in the fourth quarter for our share of gross profits from ex-U.S. sales of Ronapreve related to a previously signed contract. Moving now to our operating expenses. Fourth quarter 2022 R&D expense increased 43% year-over-year to $911 million, driven by the impact of the Libtayo transaction with Regeneron now recording all R&D expense for Libtayo and our full 50% share of antibody collaboration R&D spend for DUPIXENT and odronextamab, as well as additional costs incurred in connection with the companyâs late-stage pipeline and increasing clinical manufacturing activities and higher headcount-related costs. SG&A expense increased 17% year-over-year to $579 million due to higher headcount and related costs, incremental costs to fully support the global commercialization of Libtayo and higher contributions to an independent not-for-profit patient systems organization. Product gross margin in the quarter increased to 93% as compared to 86% in the prior year. The improved gross margin was driven by a favorable change in product mix and no longer having to pay Sanofi for their share of U.S. Libtayo gross profits. Finally, fourth quarter 2022 effective tax rate was 11.3% compared to 12.6% in the prior year. Shifting now to cash flow and the balance sheet. For full year 2022, Regeneron generated $4.4 billion in free cash flow, favorably impacted by our first quarter 2022 payment from the U.S. government for sales REGEN-COV that were recorded in the fourth quarter of 2021. We ended 2022 with cash and marketable securities less debt of $11.6 billion. We continue to deliver on our capital allocation priorities in 2022 by deploying approximately $3.4 billion towards business development and share repurchases while continuing to fund our internal R&D efforts. In 2022, we executed approximately $1.3 billion in business development initiatives, including the acquisitions of Checkmate Pharmaceuticals in the exclusive worldwide rights to Libtayo. We also purchased approximately $2.1 billion of our shares in 2022, including $431 million in the fourth quarter. This morning, we announced a new $3 billion share repurchase authorization reflecting our continued confidence in our business and our pipeline. We remain buyers of our shares at current levels, and this new authorization enables us to continue returning capital directly to shareholders. Iâd like to conclude with our initial financial guidance and outlook for 2023. We expect 2023 SG&A spend to be in the range of $2.13 billion to $2.2 billion. This primarily reflects the full year impact of global Life tile commercialization expenses, the build-out of our international commercial infrastructure in select markets and higher headcount to support our growing organization. We expect our 2023 R&D expense to be in the range of $3.725 billion to $3.925 billion. As George mentioned, we have numerous strategically important development programs advancing in 2023, including late-stage studies for our fianlimab, Libtayo combination in melanoma and lung cancer in confirmatory Phase 3 studies for odronextamab, both in FL and DLBCL and linvoseltamab in myeloma. In addition, we continue to advance programs in our early pipeline across multiple therapeutic areas including with collaborators such as Alnylam and Intellia positioning us for long-term growth. This range also includes the full year impact of the Libtayo transaction, we are now recording all development expenses for Libtayo recognizing our full 50% share of development expenses for DUPIXENT in itepekimab. COCM is expected to be in the range of $720 million to $800 million, similar to 2022 reflecting the gradual phase-in of a new Regeneron developed manufacturing process for DUPIXENT that is designed to improve drug substance yields. We expect our capital expenditures in 2023 to be in the range of $825 million to $950 million. These expenditures will support the continued expansion of our manufacturing facilities, including ongoing construction of a fill/finish facility as well as the previously announced expansion of R&D facilities at our Tarrytown, New York headquarters. Finally, we anticipate 2023 gross margin to be between 90% to 92% and our effective tax rate to be in the range of 11% to 13%. In addition to our full year financial guidance, we expect higher interest income in 2023, given our greater cash balance plus higher interest rates as compared to last year, which will favorably impact other income and expense. We also expect 2023 other revenue to be slightly lower than 2022. Finally, as I said in November, we no longer expect to record any material other operating income or expense in 2023 are beyond absent a new transaction. In conclusion, Regeneron continued to deliver robust financial results in 2022, and we are well positioned to drive continued growth in 2023 and beyond. Thank you, Bob. Shannon, that concludes our prepared remarks. Weâd now like to open the call for Q&A. [Operator Instructions] Shannon, please go ahead and poll for questions. Thank you. [Operator Instructions] Our first question comes from the line of Tyler Van Buren with Cowen. Your line is now open. Hey, guys. Good morning and congratulations on the results and thanks for the question. Regarding EYLEA, it would be great to hear the latest on what you are seeing in the marketplace with respect to [indiscernible]. Apparently, Roche is not seeing switches from [indiscernible] back to EYLEA despite what we are hearing from the KOLs. So any additional color there would be helpful? Hi, Tyler. Yes, and let me comment that certainly, EYLEA performance in the market, as I reported, continues to be very strong, a quick reminder on the year growing at 8% to $6.3 billion and certainly a very strong competitive performance. We are conscious of competition in the marketplace. But to give a bit of an update, we continue to hear that first nAb use has been modest and results, in some cases, have resulted in patients switching back to other agents, including EYLEA probably most frequently EYLEA. Certainly, we look forward to continued efforts on EYLEA this year is the standard of care. And as you know, from many of us talking to KOLs, theyâre incredibly enthusiastic about the launch â potential launch of aflibercept 8-milligram coming later this year. Okay. Alright. Sorry. So I was just wondering if you could comment on COPD and what you view as clinically meaningful in terms of result there. Other companies have reported sort of 15%. But I think in the past, youâve talked about that as not being a particularly high bar. So maybe you could just talk about how you view clinical meaning from this. Thanks. Well, we powered our futility analysis as well as our clinical trial to deliver what we believe would be clinically meaningful benefit if the study proves positive, which we hope it will. And remember, weâre going to be looking at both exist patios, but also improvement in lung function. So it will be a sort of integration of the benefit that patients can receive from both those measures. I remind you that in other settings in asthma, in particular, DUPIXENT has distinguished itself from other immunomodulators and delivering pretty substantial improvements in pulmonary lung function. So itâs not only all about exacerbations, but we hope to have significant improvements in exacerbations as well as in lung functions which will hopefully provide important benefits to patients. Hi, guys. Thank you very much for taking the question. You do have some APP data on the horizon here with Alnylam. I would love to kind of hear your thoughts on how youâre thinking about that. And if we should be thinking about that as more just a proof of concept or as a potential product opportunity even with intrathecal delivery? And if, I guess, more of the former, how much of this is sort of a gating factor to really kind of expanding the effort here potentially dramatically across a number of CNS diseases. Thank you. Well, as you say, the important thing about that aspect of the Alnylam collaboration is together, we were hoping for the first time to see if we could develop technology that would actually allow us to do whatâs been done now by Alnylam and others in the liver to bring it to other tissues, particularly to the central nervous system in this case. So this â the first study, which is focused on APP is really a proof of concept that can we get this technology to work, we view it as a potential sort of platform enabler, meaning that if we see anything here and obviously these are challenging things to be first and to do something that nobody has ever done before. And itâs obviously very early in the program. But the goal is to establish proof of principle that this type of technology, which looks like it can be pretty effective in the liver, chat and work outside of the liver, particularly in the CNS. So this would be a platform enabler. Hey, guys. Congrats on all the progress and thanks for taking my question. So with the potential approval coming this December, I am curious how we should be thinking about the launch cadence for high-dose aflibercept just considering some elements like the introduction of pre-filled syringe, the J-code and maybe your overall strategy and how you are thinking about converting market segments and where you are initially focused? Thanks. Give us a second. We will disconnect all the Roche people on the call, so we can get you our strategy. In all seriousness, obviously, there is a lot of thought thatâs going to go in between now and what we hope will be our late August approval on pricing, on rollout, on targeting, on strategy, etcetera, etcetera. But we are working on that. We have to get our label. We have to get it approved, and we will have everything else ready to go. The initial launch will be with a vial and then we hope down the road, not too far with the pre-filled syringe. Marion, I donât know if you want to give away any of the secrets at this point. I would just say that we have a highly experienced team in commercialization, and we certainly will be ready for the launch. And in the meantime, we are very focused on our participation in the market today with EYLEA. But certainly more to come, and we absolutely look forward to the potential launch of 8 milligrams. Obviously, the Vabysmo launch has not turned the market sideways on us. Itâs real competition. But that, I think there is a window thatâs sort of closing for them to compete against 2 milligrams, we hope and then 8 milligrams, we hope could become the standard of care. So, lots to look forward to later in the year. Hi, guys. Thanks for taking the question. Maybe a follow-up to Mattâs question, can you just speak to what you saw in the pre-specified interim efficacy analysis of the BOREAS trial and just any additional color on the level of benefit versus placebo that triggered the initiation of the NOTUS trial? Thank you. All I can say is that we powered it to deliver would be a clinically significant improvement. There was a combination of measures of exacerbations and lung function improvement, and we havenât disclosed what those numbers were. Good morning. Thanks for taking my question. With regard to the oncology portfolio, what do you consider the most meaningful milestones for the next 12 months and particularly here the PSMAxCD28 asset? Thank you. Well, we obviously have some important submissions we need to get in later in the year, as we mentioned, for our CD3 bispecifics. And we need to continue to get data later in the year with more patients with PSMAxCD28 bispecifics as well as from some of the other costim bispecifics. And we have to move aggressively enrolling the additional studies we planned for LAG-3. So â and we have to make Libtayo even more successful, we hope in the marketplace around the world. So, lots to do. I donât know if George or Marion have anything else to add there? Yes. I think itâs â it was really critically important for us to validate individual agents in each class. That was our strategy. We wanted to develop the best-in-class checkpoint inhibitors, such as our PD-1 antibody, Libtayo, such as our LAG-3 antibody, fianlimab. We wanted to establish three bispecifics that we are best-in-class and that we are working in hem/onc settings, but also in solid tumor settings. And then, of course, we want to validate that this incredible principle of co-stimulatory bispecifics that we introduced into the world, which were truly magical in animal studies with essentially working like turnkey agents to synergize with the other two classes in animal studies that that we could reproduce that sort of activity in humans. And to us obviously, it takes years to get to that point, but we feel we are in a very exciting position right now because, as I have said, the individual classes are validated. We are starting to see impressive combination opportunities. We talked about combining two checkpoints, combining our LAG-3 with PD-1, where it looks like we have maybe taken first-line melanoma to a different point where patients can get a lot more benefit from this combination. And now having validated those, we are expanding much more broadly. Same thing with the CD3 bispecifics, we are growing that franchise now that we have shown that our platform works, and we are working both in hem/onc and outside in solid tumor settings. And the fact that our first costim bispecific delivered the sort of exciting early data that it delivered really gets us â very excited about the possibility now that we have this whole rollout. We have several of these costim bispecifics in the clinic, clearing their dose escalation safety settings, and we are now going to be rolling out data from these combinations, more data from the PSMA, costim bispecific in prostate cancer in more patients, but we are also going to be reporting on a series of other costims, including not only in combinations that we already talked about in solid tumors. But in the hem/onc space, where we are very excited, obviously, about our CD20xCD3 bispecific by itself and our BCMAxCD3 bispecific by themselves, that Len said. We are both filing for those hopefully by the end of the year, but also initiating earlier line studies. But just as importantly, we are going to be initiating combination with these costim bispecifics, which we think yet again, if these continue to work like they work not only in the animal models, but now how they are looking in the early human study, these could really leapfrog the individual agents to a whole place where they are really changing the practice of medicine and delivering much more benefit to patients, which is what we are all about. Yes. I donât think Georgeâs point, can be overstated. Cancer cures in serious advanced tumors are still far and few between. And there is still tremendous need which makes this a very dynamic treatment marketplace because people want that extra benefit because itâs not like they are getting cures. We havenât cured lung cancer or we havenât cured most serious cancers. So, the ability to have foundational individual treatments and then get more by combining them really does position us to leapfrog to use Georgeâs word in the treatment paradigm out in the world because patients and their doctors are very sensitive to improve outcomes because there is still tremendous, tremendous need. Good. Thank you for taking my question. Maybe staying with COPD, so talking to some KOLs and reading some papers. It seems like IL-13 has some implication into fibrosis as well. Now, so the question is, do you think there could be a beneficial effect of IL-13 blockade and its impact on fibrosis on COPD-4 and above blocking inflammation? And if yes, do you think a 1-year trial would be enough to see that? I think you bring up really interesting points. We were actually involved in some of the experiments years ago that showed that IL-13 could actually cause fibrosis in animal models. And certainly, we do believe that long-term, like in many of the diseases that we have studied so far, that the benefit of Dupixent and blocking both IL-4 and IL-13 can continue to accrue for the patient in terms of preventing the chronic inflammation that results in so much of this remodeling that you talked about. We believe this may be true in asthma. And we are actually involved in programs and studies to show that some of the same things that you are talking about will also benefit in that and you will prevent long-term remodeling that decreases lung function over time in structural changes in the asthmatic patients and we believe that, that may also be true, of course, in COPD. But first, we need, as you say, the shorter term studies to be positive, but we do believe that if they produce the type of data that we hope if Dupixent type data, we are hoping it could in COPD, that longer term studies, like you say, could end up showing even longer term benefits in terms of exactly the type of remodeling and fibrotic changes that result in permanent loss of function, lung function in these patients. So, we think that you are totally right, but it will probably, as you say, take longer term studies to actually pick that up. Hi. Good morning and thanks for taking the questions. I wanted to sort of push a little more on the COPD readout. And just trying to understand whatâs underpinning your confidence here. It certainly feels like you are more enthusiastic than what we are hearing out of Europe. Is this primarily based on the threshold set for BOREAS interim and these were sufficiently robust that you just â you feel good about the ultimate result, or is there something else you can point us to? Thanks. Yes. I wouldnât over under-read our situation right here. And it almost doesnât matter because Regeneron is a data-driven enterprise, and we are all going to see the data coming up, we hope later this quarter. We are totally blinded to the evaluation that was done on the interim analysis. We have said we set it at a reasonable bar, but it was only a fraction of the patients. So, you never know how this is going to turn out, we would not be as confident about something like this compared to another classic Type 2 inflammatory disease. So, you have that on the negative side. But on the positive side, you do have the fact that we have selected patients who have eosinophils and we had this interim analysis. Bottom line is we look forward to the data as well as you do. Thanks. Maybe a broader question on the VEGF retinal market. Last year, at AAO, there was a lot of discussion and debate around the potential impact on the retinal specialist practices if intravitreal therapies for geographic atrophy are approved. And some folks were talking about, just back of the envelope, this could drive a pretty sizable like 30%-some increase in injection volume, the practices just from treating geographic atrophy patients. As you guys think about this dynamic, we have heard some KOLs sort of offer up potential fix to that, that they would move in a more accelerated fashion to longer duration, longer-acting therapies for wet AMD. Are you guys seeing that? Is that something that we should be thinking about in terms of a driver from short-acting to longer acting? Yes. I mean I think despite all of these practice aspects, the primary driver will be that patients would prefer to get a needle in the eye less frequently. With every time you put a needle in the eye, there is a risk of inflammation or more serious complications hemorrhages, detachments, things like that. So, the less you have to do that and get the same benefit is better for the patients from the needle in the eye perspective. And itâs better for the patient from the number of times they have to come to the doctorâs office. These are elderly patients. Frequently, they have to have a caregiver. From a practice perspective, certainly, as many doctorsâ offices are overwhelmed by â in the number of injections that they are giving and that they could free up time with if you could get the same result. From a practice point of view with less frequent injections, certainly that would free up more time and would drive them. But I believe at the end of the docs do make the decision with their patient on this primarily because less injections in the eye are just stapled and more convenient for the patient. Well we also shouldnât lose sight of the fact that if treatments for geographic accuracy become much more take off and become much more prevalent that they do have a side effect. They are actually increasing levels of macular edema in these patients, which will of course, necessarily treatment there as well. Great. Thanks so much for the question. Just on the costim platform, I guess once you land on the right dose for these products, do you expect that there could be accelerating filing pathways given the few options available for most of these patients â or do we still need to think about needing to go slowly even with the registrational studies as you are kind of balancing, I guess safety versus efficacy. Thank you. Well, we certainly believe that when you are in something where there is tremendous medical need and no alternative, that there will be opportunities to move for accelerated approval. We are all aware of the new FDA guidelines that they want you to be underway with your pivotal studies are well underway, I think is a phrase they use. So, we are taking that into account. But there is no question that if we can reproduce the efficacy that we saw in these late-stage prostate cancer patients. There is not only the need, but there will be a mechanism to get that to patients as quickly as possible. Remember, the main issue as you referred to, is being mindful of the safety. And of course, we are doing everything we can to mitigate that. But remember, thus far for the most part, there has been an extremely tight linkage of safety and efficacy. That is the adverse events occurred in those patients who were having the substantial benefit. So, that makes the risk/reward even more attractive from a regulatorâs and doctorâs and frankly, a patientâs perspective. But the short answer is we think we are not going to go too fast where one would be reckless. We have to be careful. But we do think there is an opportunity for an accelerated approval if we follow the new approach the FDA has laid out. Great. Thank you for squeezing me in. So, just a follow-up on the prior question. So, for your MUC16, CD28 and MUC16 is a great combination, what are you expecting regarding the safety profile and how do you think about that type of combination efficacy and safety vice versa as CD28-CPI combo? And just a follow-up to that, I know the FDA was concerned back in the day about dosing up with CD28 is superagonist, like do you think that your initial data might alleviate some of the needs of the low doses for CD28 bispecifics? Thanks. Well, a lot of good questions in there. I will start from the end first. For sure, when we started the program, there was very serious concerns about previous experience with general CD28 activators that activated all over the body that resulted in really horrific situations for patients, which almost killed the field. We invented this new approach to tightly limit where we were limiting CD28 activation right at the tumor surface and so forth. And of course, there was a concern from the FDA, which is why, as you said, they made us employ a very, very conservative dose escalation program. We had to go through five or six dose levels just to get to where we thought were the active dose levels where we then start to see the rather dramatic antitumor activity that we began to report. We are hoping that as we get more experience and show that what we had demonstrated pre-clinically is really holding true in humans. In fact, the side effects that Len was talking about immune-related adverse events are totally unrelated to the sort of toxicities that were seen with non-specific CD28 superagonist in the past. They were really much more on target and on mechanism that is we were generating a presumably a polyclonal T-cell response against the tumor and some of that cross-reacted to tissues in the patients, and thatâs what we were seeing. So, we are hoping that increasingly we might be able to move a little bit more quickly through some of these dose escalation stages to get to the active doses with these other agents. What we are seeing so far, as we have presented in our posters on MUC16xCD3 that right now itâs having an acceptable safety margin. And we also hope to see that when combined, either the CD3 combined with the MUC16xCD28 or when the MUC16 is combined with Libtayo that we will see the same sort of things that we saw with the PSMAxD28 that we will be getting, hopefully, market synergy and increase in the antitumor activity with hopefully a satisfactory safety window. And but that remains to be seen, and thatâs why we are carefully going through the combination studies and the dose escalation studies. But once again, I mean just to say how I mean exciting it is for those of us who have been working on these programs for over 10 years to be at this point where the individual agents and the individual classes are now validated and we now get to mix and match these things. And as Len said, the history of the field is when you have active agents and you start combining this, you can then leapfrog and get to the next level that would change the practice of medicine for these cancers. Thatâs what we are aiming to do to try to save more lives, extend more lives, and itâs an exciting place to be in. Thanks George. Thatâs all the time we have for today. Thanks to everybody who dialed in and for your interest in Regeneron. We apologize to those remaining in the queue that we did not have a chance to get to. And as always, the IR team is available to answer any questions you may have. Thank you once again and have a great day and a nice weekend.
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Thank you very much for waiting out of your busy schedule. Thank you very much for taking time to attend Mitsubishi Motors Third Quarter FY '22 result announcement. I would like to introduce today's speakers. Koji Ikeya, Representative Executive Officer, Executive Vice President and CFO. In addition, we have Hiroshi Nagaoka, Representative Executive Officer, Executive Vice President and Yoichiro Yatabe, Representative Executive Officer, Executive Vice President, and Noriaki Hirakata, Executive Officer, Individual General Manager of Corporate Strategy Management Division, joining here for Q&A session. So today, we would like to present our results for third quarter fiscal year 2022. And then, afterwards we'd like to take your questions. The meeting is scheduled to end at 7:30 in the evening. Ikeya please. Please turn to Page three. So this is Ikeya speaking, the Vice President. And good evening, everybody. Thank you for taking time out of your busy schedule to participate in our Q3 FY '22 results meeting. The environment surrounding us is becoming increasingly uncertain, including the situation in Russia and Ukraine, where the exit is still unknown and the resulting disruption in logistics soaring energy prices as well as facing global inflation at a level not seen in recent decades and the sharp rising interest rate to control them and also concerns over the global recession. In this business environment. Our business performance showed a significant year-over-year improvement mainly due to continued efforts to improve the quality of sales and to improve our profitability despite the yen's appreciation toward the end of the year. The net sales for the Q3 FY '22 increased 27% year-on-year to Â¥1805.3 billion. The operating profit improved significantly year-over-year to Â¥153.7 billion, and the OP margin remained at high level 8.5%. The ordinary profit was Â¥154.7 billion, due in part to the impact of foreign exchange rate and net income was Â¥130.8 billion. In the third quarter alone, net sales were Â¥647.1 billion, operating profit was Â¥69.1 billion, the OP margin was 10.7%. The ordinary profit was Â¥53.4 billion, and the net income was Â¥48.1 billion. The retail sales totaled 630,000 units on a global basis. Please turn to Page four. This slide explains the factors behind the only changes in the operating profit for the third quarter FY '22. The volume and mix selling price improved a Â¥53.4 billion mainly due to increase in its sales in ASEAN and other reasons which have been our focus and also highly profitable region, and also the progress we made to improve selling prices in each country. With regard to sales expenses, despite an increase in advertising expenses from the normalization of economic activities in each country. Sales expenses continued to improve by Â¥17.2 billion in total, due to a large decrease in incentives mainly in North America. In procurement cost, shipping costs the impact of rising raw material prices, but partially offset by procurement cost reduction activities. However, together with increases in transportation cost and factory expenses, the procurement cost, shipping costs resulted in overall deterioration of Â¥54.5 billion. The R&D expenses increased as planned to prepare for the introduction of new models starting from next fiscal year onwards, with a year-on-year increase of Â¥11.7 billion. In other expenses an improvement in after sales in domestic subsidiary performance resulted in a positive impact of Â¥13.2 billion. With regard to Forex rate, as you see on the slide, the impact of the U.S. dollars and Australian dollars were significant and had a positive effect of Â¥80.2 billion year-over-year. So far, although there was a tailwind in the exchange rate, we have managed to absorb increase the material cost, logistics cost and R&D cost by carefully selling our products mainly in our focused regions amid vehicle supply constraint and pursuing strategy to improve our net revenue. As a result, the operating profit increased by Â¥97.8 billion year-on-year even excluding the Forex impact, our profit increased by nearly Â¥18 billion. Next Page five. This slide explains the factors behind year-on-year changes in the operating profit for the third quarter of fiscal 2022. The volume and mix selling price improved by Â¥15.2 billion, thanks to increased sales in ASEAN, which have been our focus and also our highly profitable region as well as effects of improved selling prices in some regions. Sales expenses improved by a total of Â¥7.3 billion, mainly due to a decrease in incentives in North America and Japan. Procurement cost and shipping costs deteriorated by Â¥19 billion in total, due to efforts procurement cost reduction activities, which absorbed a raw material price hike and deterioration in factory expenses and logistic cost. R&D expenses increased as planned and as a result deteriorated by Â¥3.4 billion year-on-year others improved by Â¥7.7 billion mainly due to an improvement in aftersales business and domestic subsidiaries performance. With regard to foreign exchange rate, the overall trend of yen's depreciation continued and the duration in the cost currency type was reversed in other currencies, including the U.S. dollars and Australian dollars, resulting in the positive effects of Â¥30.6 billion year-on-year. In total, the operating profit increased by Â¥38.4 billion year-on-year. As cumulative third quarter profits continued to increase even without the impact of exchange rate. Please turn to Page six. Next, I would like to explain our global sales volume for the third quarter FY '22. The retail sales were 630,000 units down 8% year-over-year mainly due to the impact of a constraint and production volume caused by a shortage of semiconductors in other parts, as well as a shortage of vessel availability. The decline was substantial, particularly in China, which maintained a zero COVID policy and in Europe due to a smaller model lineup as well as the impact of the suspended car supply due to the Russia and Ukraine issues. The sales volumes in North America were also significantly impacted by the car supply shortages. From the next page, I would like to discuss the sales status of our core markets and North America as well as Japan. Please turn to Page seven. First of all, I would like to explain our mainstay ASEAN region, and cumulative Q3, the retail volume increased by 17,000 units, which is a driver of improved OP margin. So first, Thailand. Thailand completely abolished immigration restrictions in October last year and has been accepting more tourists, therefore, we expected the market to recover. However, the demand did not fully recover due to factors such as flooding in some regions and the decline in purchasing power caused by inflation. We achieved year-on-year growth in unit sales with our core models, such as XPANDER and PAJERO SPORT and secured almost the same market share as in the previous year, amid an increasingly harsh environment with competitors introducing new models. We continued to focus on improving the quality of sales introducing digital tools, strengthening our sales platform and prepare for new models that to be launched from next fiscal year onwards. In Indonesia, the demand slowed mainly in the passenger car segments because of the intermittent interest rate hikes since last September inflation and fuel price hike resulting from the reduced fuel subsidies affecting on the consumer sentiment. On the other hand, the demand for the commercial vehicle segment remained steady at core prices and the results related to prices remain high. We did not follow the intensifying price competition. But we will carefully communicate to our customers focusing on event marketing which we accelerate. As a result our unit sales have been gradually increasing along with the new XPANDER CROSS. Meanwhile, the commercial vehicle segment although the orders were [fine] [ph], retail sales declined due to vehicle supply constraint and also delay in getting approval for TPD in the fourth quarter. However, the import quota issue has already been resolved. And that will contribute to the retail sales in the January-March period. While closely monitoring the uncertain macroeconomic environment we will continue to implement appropriate sales measures, striking the balance between the sales volume, profit and loss and market share. In the Philippines, despite the tightening of monetary policy by the Central Bank due to the continued rise in policy interest rate, that is an attempt to control the highest level of inflation we have looked in for the first time in 14 years. And also the consumer sentiment improved due to an increase in remittance from migrant workers and also a decline in employment rates. And those have supported people's willingness to purchase automobiles in addition to strong orders for the new XPANDER which was launched in last May, and the sales of MIRAGE and MIRAGE G4 was significantly higher than planned due to relaxation of the bank loan examination amid the robust demand, we will continue to experience nervousness because of unstable supply and availability of fresh inventory affecting the sales performance. However, we will strive to extend sales by strengthening our face-to-face sales, which are gradually coming back. Next Vietnam, the market as a whole is slightly sluggish due to a reaction to the last-minute surge in demand from April to May last year. However, we enjoyed favorable sales of the new XPANDER which was launched in last July and both sales volume and market share extended. We will continue to have the new XPANDER as our core model. And we'll aim to achieve our full year plan by expanding sales of TRITON which is performing well with relatively stable supply and inventory and also OUTLANDER which is performing well since we introduced the annual change model. The Malaysia market continues to be firm, and we continue to see strong sales and the order backlog has been gradually resolved. So next Page eight. In Australia, the overall demand improved to the fiscal 2019 level when the impact of the COVID was minimal. In this environment, we were significantly affected by car supply constraints similar to peers. We made our every effort to eliminate vehicle supply constraints by negotiating with logistics companies and changing equipment specifications to avoid the restricted part supply portions. In addition, the new OUTLANDER has been extremely popular resulting sales increase year-on-year basis. The vehicle supply constraints continue, and we still have many back orders. We will work to minimize order cancellations through meticulous follow up. I'll repeat it again. So we will work to minimize order cancellation through meticulous follow up for customers who have been waiting for a long time or who have experienced significant delivery delays. Let me continue. In New Zealand, although demand was driven by PHEV EV models boosted by the Clean Car discount initiative. On the other hand, total demand fell below the previous year due to a decline in consumer sentiment in the background of rising inflation rates and the decline in demand in the commercial vehicle segment which has a large amount of CO2 emissions due to the impact of the introduction of CCD program. Under these circumstances, we gained our market share year-on-year by strengthen sales of ECLIPSE CROSS PHEV model and OUTLANDER PHEV model, which are subsidized by the CCD program from the beginning of FY '22. Going forward we will continue to focus on supplying PHEV series which in strong demand and conduct promotional activities related to PHEV to drive market expansion as the PHEV leader. Please turn to Page nine. Next, I would like to talk about the current status of our North American business. In the North American market. So it has not recovered yet due to a decline in demand caused by the shortage of vehicle supplies that was caused by semiconductor supply constraints since the previous fiscal year. While cumulative Q3 sales volume have remained negative compared to the previous year. Total demand in the September-December quarter has exceeded against the previous year. And we have begun to see signs of recovery from the sales decline due to the inventory shortage. We prioritize to deliver the limited inventories we had to dealers for retail sales in the first half of FY '22 which has resulted in a significant decrease in the fleet sales from the previous year, resulting in a decrease in total retail sales year-over-year. Sales of OUTLANDER our main core model also was sluggish due to a lack of inventory. But inventory conditions have begun to improve since Q3, we will strengthen our sales by conducting marketing activities for ICE and PHEV models together. While a negative impact on the economy from the rapid monetary tightening by SRV is becoming a concern, some manufacturers are raising incentives after seeing inventories normalizing resulting in intensifying the competitive environment. We strive to maintain the quality of sales that was improved by the new OUTLANDER and secure sales volume appropriate for our scale or business. Please turn to Page 10. Finally, I would like to explain the status of our domestic market. Although demand in Japan has surpassed 100% year-on-year for four consecutive months since September, showing some signs of recovery, although it did little by little. In addition to the new OUTLANDER PHEV model and the ECLIPSE CROSS PHEV model, we expand our electric model lineup by launching mini cars eK X EV and Minicab MiEV, which resumes sales in November. We also enjoyed the strong audits for all of those products. On the other hand, due to vehicle supply constraints coming from the shortage of semiconductors, we actually making customers wait. Going forward, we did not expect material cost hike and also semiconductor shortage problem will be brought under control in the short-term. And we expect this will continue to have an impact on our production and unit sales. In this environment, we will strive to further increase sales by introducing products that embody the characteristics of Mitsubishi Motors, in addition to the long serving of PHEV and BEV and other electric vehicle series. And we will also strive to improve the quality of sales by focusing on enhancing servicing quality and customer service quality. Please turn to Page 12. In the third quarter for fiscal 2022 we continued to maintain strong momentum through the first half achieving favorable results. Although there was a favorable impact from the foreign exchange rates, we believe this is a result of our concerted company-wide efforts to resolve issues. Nevertheless, uncertainties have been drawing to an unprecedented level due to the factors like continued unstable operating environment and the possibility of worried global economic downturn as well as volatile FX market. Based on a careful consideration for the impact of these factors, the full year earnings forecast revised in November will remain unchanged. Only net sales have been revised from Â¥2.53 trillion to Â¥2.48 trillion in line with the revision of the wholesale volume. Please turn to Page 13. We have revised analysis of the operating profit variance forecast for FY 2022 from the previous fiscal year as shown on the slide in accordance with the current situation. Despite the attainment from the exchange rates, we are expecting to counteract the impact of soaring material cost by our sales efforts. Regarding the impact of volume and mix and mix selling prices. The forecast for the wholesale has been revised to reflect the impact of the shortages of vehicle supply to-date and to the overall positive impact of Â¥75.8 billion is affirmed. With regard to service expenses. The effect of curbing the amount of incentives has been more sustained than expected and we expect an upturn of Â¥15.6 billion in total. In the procurement and shipping costs, although we will pursue the procurement cost reduction activities as planned, we expect a total deterioration of Â¥94.6 billion and due to the rise in both material prices, soaring material costs, including semiconductors and the deterioration in transportation and factory related costs. And on the expenses, are projected to increase as planned and we anticipate an increase of Â¥11.3 billion and in others we anticipate worsening of Â¥13.6 billion on the assumption that personal expenses and local procurement cost will worsen and general expenses will increase. As you can see, the impact of exchange rates has been revised in line with the current exchange rate level and an upturn of Â¥110.8 billion is expected. Please turn to Page14. As a result of a review and the factors being changed in the operating profit forecasts for FY 22, the elements that have changed we have shown on this slide. Regarding the impact of volume and mix selling prices, we have revised forecast for wholesales to reflect the impact of the vehicle shortage to=date. As a result, we have seen a deterioration of Â¥6 billion from the volume. Sales expenses are expected to improve by Â¥7 billion is reflecting the sustained effort of driving the amount of incentives amid the vehicle supply shortage. The impact from the foreign exchange rates is expected to be Â¥1 billion worth considering the factors such as appreciation of yen in the expected amount announcement for the modification of the monetary easing at the Bank of Japan meeting held in last December, amid this peeking out of the prolonged appreciation of U.S. dollars. The other elements have generally in line with the previous analysis. Please go to Page 15. Digital shortage of semiconductors and other parts, production constraints are more widely affected than initially estimated, and a worldwide shortage of vessels are also impacted. As a result, we revised our sales volume forecasts from 908,000 units to 866,000 units. Mainly we have changed our forecast in China, where the demand remains sluggish due to the government remain a zero COVID policy until the end of last year. And in ASEAN and North America, where the impact of vehicle supply shortages were relatively large due to the lockdown in Shanghai and the semiconductor shortage. The vehicle supply shortages despite the signs of recovery in an unstable condition and we are still facing the difficulties in handling. However, we are making every effort to achieve our revised status volume forecast by carefully selling attractive EV lineups that embody Mitsubishi Motors uniqueness, such as eK X EV, OUTLANDER and OUTLANDER PHEV. which have been steadily rolling out globally and expanded. Please turn to page 17. About the business highlights, the all-new eK X EV which has been well received since it was launched in last May has won the 2022 to 2023 Japan Car of the Year and the Kei-Car of the Year organized by the Japan Car Over the Year Committee. This award together with that Car of the Year 2022, 2023 award from the Japan Automotive the Hall of Fame, same ended RJC Car of the Year for 2022 to 2023 run by the Automotive Researchers and Journalists Conference of Japan or RJC that made us Triple Crown win in Japan which is a great honor for us. We believe that these results are the evidence that the electrification technology that we have honed over the years and our underlying strength in car manufacturing have been highly evaluated. We will continue to deliver vehicles that embody Mitsubishi Motors and that's a combination of safety, security, comfort and environmental friendliness. While contributing to the realization of a Carbon Neutral Society. Please turn to Page 18. Team Mitsubishi Ralliart which received technical support from us participated in the Asia Cross Country Rally or AXCR 2022 that run from November 21 to 26 in Thailand and Cambodia with a TRITON which is the drifty one for the best cross-country vehicle. One of the two finished in the first place and the another finished in the fifth place. For this year AXCR, we build on the high reliability and durability of the TRITON by tuning the engine and chassis and entered the rally with specifications relatively close to the production car. Even so, the two TRITON rally cars delivered powerful driving and brought superb performance. We'd like to see to the knowledge we gained through our participation in AXCR, back into the development of production vehicles and way to be Mitsubishi vehicles that are even tougher, more powerful and more reliable. Please turn to Page 19. On Friday, January 13 to Sunday, January 15, we showcased our new DELICA MINI light super height wagon at the Tokyo Auto Salon 2023 one of the largest customer car event in Japan. The new DELICA MINI is a powerful styling allied Super Height Wagon, unique to SUV with a design theme of daily adventure. With the growing popularity of outdoor leisure in recent years, the concept of DELICA series will be filled with light super height wagon and the new DELICA MINI will began to sell in coming May. We started the reservation orders on Friday January 13, and have already received around 4000 orders, which we made a good start. The new DELICA MINI is scheduled to be exhibited at the Osaka AUTOMESSE 2023 at INTEX Osaka on February 10 to 12. Mitsubishi Motors booth will continue to propose the appeal of environmentally friendly, safe, secure and comfortable Mitsubishi vehicles with the theme of the next era adventure. The final page. Page 20, three years have passed since the spread of COVID-19 infections, but it seems that we are finally heading towards the end in conjunction with the implement in the vaccination ratio. On the other hand, the macro environment surrounding us seems to be increasingly uncertain due to the situation in Russia and Ukraine, where there are no prospects for solution energy prices, which are rising rapidly as a result, raw material prices soaring, inflation at unprecedented levels, but it rises in interest rates to curb inflation and the concerns about the future economic downturn. The environment surrounding the automotive industry itself is also changing on a daily basis. Why do we still cannot be optimistic, the semiconductor supply system is gradually enhancing. The global shortage of vessels is, however, not showing a sign of subsiding and it is likely to take certain amount of time to resolve that shortage in vehicle supply. Under these circumstances, our performance has improved substantially year-over-year, due to the benefits of our efforts to improve profitability, which we have been pursuing since last year. Although the environment surrounding us is changing day-by-day and difficult to deal with, we will continue to make every effort to further improve our profitability and achieve the forecast for FY 2022, the final year of the current mid-term plan. Thank you. We apologize for the sound and also the image problems that we experienced. So now we would like to move on to the Q&A session. But we apologize but English lines only for listening. [Operator Instructions]. So from the Mr. Naruse from the Okasana Securities. So this is Naruse speaking from Okasan Securities. Can you hear me? So I'm sorry that I have to turn off my camera. But so since I'm the starter, so I would like to ask a question related to the summary of Q3. So first of all, thank you Ikeya San thank very much for giving us a thorough explanation. And I'm very impressed with OP rate more than 10% and I know Forex did help. But I would like to ask, is there any one time seasonal or one-off reasons why these numbers are really good? And also, we see a lot of improvement from Q2 to Q3. So in addition to the Forex, you mentioned about working on reducing the incentives in the U.S. but still, you have managed to raise the profit significantly from Q2. So can you elaborate a little bit more on how we're contributing to this good result from Q2? And you mentioned that so, you did not revise the profitability forecast because of the uncertain environment and also the Q4 and forecast a lower number. So Q2, Q3 to Q4 the trend of the profitability. Is that because of only the forecast, or would you share with us about if your original assumptions remain the same or not? And the second question is about your next MTP. So I know the dividend is not yet finalized. And next year onwards, you have a series of new launches. So I understand various activities that are underway. But what is the level of profitability are you aiming for next year onwards for the next MTP, you enjoy the really good profitability in Q3, so we understand what are the activities that are planned for next year onwards, but if you could give us more like a numerical reference for what you are planning to achieve through those activities next year. So those are the two questions. Naruse San, thank you very much. So this is Ikeya speaking. I would like to reply to your first question. So your first question is about, for the Q3 the numbers are really good. And so you want to know, what are the one-off elements that are contributing in these numbers or are they our real performance to earn. And then also about the full year, so we believe that it will slow down in Q4. But I would like to comment a little bit on that as well. So first of all, Q3 we have managed to enjoy. So 69 billion. So that was a really good number. And it will be right as well above 10%. So for the trend in a one-off is, it meant if the Forex, the Japanese yen, change to on the appreciation side, so 143 yen for the Q3. And compared to previous year, that itself was worth 30 billion. But even excluding the Forex impact, compared to the previous year, our performance was better, the revenue was higher. So last year was 31 billion and excluding Forex, it was still 39 for this time, so we did improve. The initiatives, we rolled out mainly in ASEAN, and then also the company-wide profitability improvement activities, those are now bearing fruit, I believe, and also in ASEAN region. COVID, so for the last two years, we struggle because of the because of the COVID situation. But for OP right now it's close to 11% for the Q3. One is the demand orders, some degree of difference, but 10% or 20%, the recovery in the economy in general, each country know them, and then also models like TRITON which is close to the end of the lifetime. We are rolling out various initiatives and also XPANDER is contributing a lot of development not only in Q2, but ASEAN recovery is really contributing to our performance in Q3. So that's what I believe. And then also about North American market, if you look at the profitability, it's high as well. The market situation is now slowly but changing and we are continuing to control the incentives and then controlling the incentive levels to other Japanese OEM level and also various marketing measures being implemented as well. So there is some one-off forex impact as well. But even excluding that, I think we can say that all the initiatives we have been promoting really coming into fruition in Q3. And then, also another one, for Q4, we believe they do like 165. And I'm sure I mentioned about this earlier, but between Q3 to Q4, the reasons for the decrease are that -- so there's like -- simple about a 500 drop. But as you know, the Japanese yen, well, because of the change they need policy by the Bank of Japan, the Forex assumption is now being affected or changed about say the change from Â¥143 to Â¥129. So, if you calculate the difference and that corroborate the difference. And then also another point is that majority of like payment settlements are slated in Q4 mainly for the steel and also [indiscernible] and EV related raw materials, those prices are still high. So, Q3, if you remove the Forex impact, steel, the situation was good. But in Q4, the Forex impact and also the raw material cost negative impact will be booked in Q4. And then also the various other factors that we are monitoring in the market. But we will continue to rigorously control the fixed cost. So, we say 170 billion is what we are aiming for. So, that's the say, my comment for the Q3 and also the full year forecast. So Ikeya, of course, we cannot give you any numerical reference for the next MTP. But like Ikeya mentioned for about Q3. So looking at the models available in Q3, it's not that we're competing with branding model, for example, TRITON has been in the market for seven, eight years. So but even for those older models, we are working together with our sales colleagues and make sure that we ensure certain profitability or sales, prices. And so it's in the U.S. as well. They manage to stay strong in Q3. And if you look at data, you can tell Japanese OEMs with like a brand-new models, actually, we incentive is like similar to those level and our customers are still purchasing from us. So it really shows our sales efforts. And what's going to happen in next term is that we believe that we can further strengthen our sales efforts. So we haven't really clearly mentioned about we are planning to have a say, new models launch next year, so our cash cow models will be renewed, and then also the negative impact coming from these semiconductor supply. We believe that will be resolved gradually. And then, we'll be able to actually compete in the market with the brand-new modelâs next term. So of course, we need to brace for what is going to happen with Japanese yen appreciation, for that negative impact we cannot control. But for other areas, we will continue to steadily roll out our initiatives. So that's all I can say right now, although Japanese yen is getting stronger, but it doesn't mean that we don't have any cards to play. So we don't expect the Japanese yen situation is going to create a havoc in our business. Thank you. Sorry, my microphone was muted. Thank you very much. Just one, so that the dividends and also the return to shareholders, what's your plan right now? I'm sorry, my question is not very specific. So, for us, we have no -- whether we are going to pay dividend is not yet decided at the moment. But as we reported to you that dividend issues like in the resources because we are earning more profit. At the same time from our overseas subsidiaries, we are receiving dividends and we have positive and we're making profits. So I think we do have a sufficient in resources in order to restart paying resources for the dividend. But if we are going to restart paying the dividends then it has to be sustainable. And within the framework of growth strategy, we want to confirm that it will be sustainable. So within this fiscal year, we want to come to, if we wish to come to a decision to restart paying out dividends. Hello, good evening. This is Hakomori speaking from Daiwa Securities. I have two questions. So first one is about the sales volume you revised downwards by 40k. And I think it is mainly because of the semiconductor part supplies and also the vessel availability. So, I would like to receive an update on those issues, although you said you have seen time recovery? And then, second question is that, so from Â¥50 billion drop between 3Q to 4Q. And half of them coming from Forex difference. And then also, there's an increase in material cost in Q4, but although you try to partially offset with controlling the fixed cost. So, the cost which you expect to see an increase, I would like to ask how conservative your assumption is, because historically, you usually generate profit in Q4. So, but now you're saying that Q4, your revenue will shrink, and it doesn't really ring a bell to me. So that is why I would like to ask for your perception on this. First of all, so I think for the first one, the semiconductors and also the vessel availabilities, and raw material prices, like market trends. So those comments I've already touched on, but I can elaborate a little bit more. So how we see is, for the semiconductor issue, so now, we've been saying that it will recover, but then it didn't recover as fast as we thought it would. But in the second half, finally, we are starting to see a sign of recovery. So meaning that the degree of negative impact is becoming less, but still, there's a gap between the supply and the demand. So compared to the amount that we need, of course, that will not be fully supplied. And that situation probably will continue for this year, next year as well. So compared to last year, so there was a negative 77k. And then, 64k, so there's a difference, and second half is 13k. So in the Q4, we believe that negative impacts will be reduced gradually. But we're also struggling to secure enough vessels for transport and this is in COVID situation. And like I do know, the supplies of the vessel like -- the validated vessels been reduced overall in the global market. And I think that situation probably will continue this year next year as well. So probably 80,000 in total is a full year impact. Though the impact that we believe to take place in Q4. So as I mentioned earlier, there are various negative factors throughout the year, but especially for Q4, the settlement for raw material purchase takes place in Q4, mainly steel. So there's a seasonality between Q1, 2, 3 and 4. So Q4 tends to get hit harder than other quarters for the raw material prices, but in the past few years under the tight raw material supply situation. I think that is highlighting more the seasonality in Q4. So like you said in the past, yes, there were times where we had a profit -- more profit made in Q4. But we worked on to equalize the profitability throughout the year instead of just concentrating the profitability generation in Q4. And then, the second question, did I answer to both the questions? Yes. My name is Yuzawa from Goldman. I have two questions. Number one, about inventory levels, would you please give me the update? I understand there are some supply constraints. But toward the end of last year, retail, there are some regions that it was a bit weaker. So, I want to know, the updated status. And that was somewhere between 20,000 to 30,000. That was a figure I got in September, the range. So, in about the inventory and the timing of when it can be normalized, could you please give me the answers. And the second question is, in the USA, I understand, we know the prices in the destination, but your margin is at a very high level right now. You said that they were able to like control, the profit margin, but in the coming one year or two years in the U.S., what is the outlook? End of '23, you are going to launch new models in ASEAN. But do you think you can maintain this high level of profitability in the U.S. going forward? Thank you. Thank you very much for the questions that Mr. Yuzawa. The first question was about the inventory. And we usually disclose our total inventory, how was the level towards the end of last year and also our outlook on the stock level. Total inventory in distribution and including other inventory. Our adequate level is about 310,000 units or three monthsâ worth of inventory as we announced before. It was two years ago, at the end of March 2021. We were able to reduce our excessive inventory remarkably down to 310,000 units. At the end of last year, it was down to 250,000 units. But because of the supply shortage 230,000 units at the end of June, and at the end of September, it was 255,000 units. At the end of December last year, it was 270,000 units increase over 15,000 units. Overall, we were able to improve or recover our inventory level to that level and about 15,000 units. And because of the demand-supply balance for semiconductor improved and we were able to improve our inventory level to 270,000 units. However, it's not you know, sufficient for the supplies and so forth towards the fourth quarter. And then, I think this is still the end of the fourth quarter. This situation will continue that's our view. Unfortunately, concerning the U.S. the profit outlook in the coming one or two years. First of all, I want to tell you something, there is like regional profit. And based on how you account, your profit, in FX impact it's not in the scope for Q3 FY 2022. So there was a question about -- there was any long-time impact that you said, yes, FX. So FX impact is, all accounted in the U.S. It looks amazing from analyst viewpoint but some of that should be counted in Japan, but it's not converged into U.S. So profitability by region, maybe our method is too simple, which is misleading. And of course, next year FX rate changes, then we have to change how we book profitability otherwise our profit looks so low in the U.S. So we have to see this from the consolidated viewpoint. But finally in the U.S., our dealers have enough inventories and customers can come into our showroom and we have in there enough stock so that they can buy in our showrooms. And we know below the line, above the line incentives and we did not properly allocate our resources. We need to devise better ideas for marketing approach so that we can expand ourselves. Yes, we are impacted by FX. But looking at the coming year, we assuming there will be major change in the U.S., the answer is no, we don't expect a major change in the situation in the U.S. That's all. Maybe you're on mute. Thank you very much. My first question, I understood your answer. Well, as a follow up question. Retail situations performance in Thailand and others, it looks weak. So I understand this is -- there's no concern on the demand side. This is Yatabe speaking. I want to answer that question. To give you a conclusion first. We want to prioritize our profitability. We want to value our profit, not only profit, but also brand. In Thailand, as we have been explaining, so far, towards the end of life of our current model. But you have to bridge to the next model in the middle of last year, we have raised the prices, [indiscernible] in market share has been probably a little bit going down. But we want to make sure that we want to sell the client models to get ready for the next model. In XPANDER service performance is strong. Indonesia, they are mixture of reasons. In market share within ASEAN market, total demand is flattish in Indonesia, especially like a subsidy fulfills and so forth from different perspectives. The overall market is quite tough at the moment. But for us yes, we did have a supply issue in addition to that. Like in a finished product, input from other markets, we have to get approval from the Indonesian government, but we were not able to get approval as we planned. So we expected higher status volume there. However, we were not able to achieve that level. Next is about XPANDER. Our competitors, they will launch new models, or the Korean carmaker is going to launch their new model too. So there are those effects, pricing wise. There are so many activities going on in the market, but we are not following them. We want to keep our current price and there is a big gap between their price and our price right now. Of course there are some going down, but we need to endure this situation and we have to keep fighting. That's all. Did I answer your questions? So about sales and cost, I have one question each for the sales and the cost. First of all about the sales, depending on the market, I guess the demand the robustness and the demand varies. For example, Australia, Oceania, I believe that the demand is quite solid, but the U.S. sales are looking at that. So some of the inventory day is 60 days over but still I see a 10% drop. So OUTLANDER is, an old data set inventory dated 70 days. So I know partially you mentioned that the goods are not really delivered to the site, the location of the dealers, so they are in transit, or they are at the port and because of that you don't count them as an inventories yet. Or the U.S. the environment is becoming more competitive. So you need to do more sales promotions in order to create a retail sales. So if you could give more information about especially in the U.S. and Oceania, like a bigger regions, because you were explaining about the ASEAN. So if you could tell about each characteristics of the market when it comes to demand. And then also about the third quarter and also the fourth quarter raw material prices, you mentioned that there are some seasonality to what that from, but when you compare the raw material costs between this year and also last year, and what should we expect as a deterioration of the material costs for the year to come and also for the fixed cost? I believe that fixed costs will increase because of the cost of dye for the new models. But in the Forex situation is not as favorable as it was before. So I would like to know, what are the area of the fixed costs, which you think are controllable? Thank you. This is Yatabe speaking. For the first question, I'd like to reply. It's about Australia. So the demand is quite solid, the overall demand is quite solid, and so is our sales. So from the supply perspective, because the ships do need to deliver. So because of the we actually have a quite a high back order was like several months. I mean, meaning in the higher number of the months. Actually, we have all of the backorder in Australia. So honestly speaking, if I could find a more vessels, I would like to send those vessels to Australia, to be honest. And then, about the U.S., for the second half, so compared to the last year, second half. In particular, the supply of OUTLANDER we have managed to recover. So, finally, the vehicles are arriving in the U.S. market, one after another. So we have been maintaining the current sales activities. But of course, we will monitor our competitors and do what we need to do for the sales activities, but because we're not going to go beyond our means. And for this year, we didn't -- we hardly did any fleet business. almost zero unit close to zero unit. So, but the retail, we have managed to sell the same level as the previous year. So we'd like to maintain that momentum. So that was for the first question. And the second question especially for next term, about the fixed cost and the cost related topics, like how should we consider them, of course, we will -- we are working on that as we speak. But the overall mindset as you know, back in 2020, we have brought down our fixed cost level significantly. And then, since then, because we did a 20% reduction in fixed costs, and we applied, so the 20% reduction over one year. So that really became a momentum for activities in 2020/2021. And also in addition to that, the profitability improvement activity is now generating more as an add on. So that's how we have been doing so far. And that overall approach, we're not going to change next year. For the fixed cost controlling is the modulation is very important. So when I say modulation, for next year, we will have more newer models coming into the market. So like you mentioned new models will come in advance. So it's in Japan, the other company. So for those of course a fixed cost will increase to prepare for those new models. And then also the indirect labor costs. Overall, it is about trends in order to counter the inflation and others like we do need to do what is necessary for our growth strategy, capital outlay, and so on. So for those in the relative term, of course, those elements will increase. But of course at the same time, we do need to look and place a cap overall for the cost and then work on other like a general expenses. But overall, because next year we'll have a series of new models because of that, we will have more burdening on the cost including depreciation, but like Hirakata San mentioned various initiatives we have been working on in mainly at the end, if not will bear fruit specially for the launches of new models next year. And of course, we do need to make sure to manage the costing. And also we do need to take into account the interest rate and also, the market situation is always still uncertain depending on the countries in ASEAN, some countries decided to raise interest rate, and also the Forex, as the Japanese Yen is on the appreciation side now. So the negative impact coming from the market situation as well, but we would like to respond to each of them in the appropriate manner. Thank you very much. And about the raw material, overall, next year, because this year the raw material cost did increase a lot. So for next year, do you regard that level to be the same this year no further increase? So this year, because we are still working on budget for next year, so we cannot comment in detail of that. Same time last year. So [indiscernible] price did go up significantly, but now they're stable. And then, the situation, a trend is different for raw material type. So last year, when the incident happened, Russia and Ukraine, I don't think we have that significant, like a difference. It will take place next year. But we'll have some of the increase and decrease depending on the raw material, but I don't think to the degree of when we had the breakout of the war. The fixed costs will increase and also the Forex will work not in your favor. So that means that you'll continue to work on controlling the cost and bringing down the cost with the launches of the new models. Yes. Thank you very much, Kunugimoto San. So we are approaching the time we are supposed to finish. So this is the end of the Q&A session. And also this is the end of it. Thank you very much for your participation today despite your busy schedule. Thank you.
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EarningCall_671
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I would now like to hand the conference over to your speaker today, Nicoletta Russo, Head of IR. Please go ahead. Thank you, Sharon, and welcome to everyone who is joining us. Today, we plan to cover the group's full year 2022 operating results and 2023 guidance, and the duration of the call is expected to be around 60 minutes. Today's call will be hosted by the group CEO, Mr. Benedetto Vigna, and the Group CFO, Mr. Antonio Piccon. All relevant materials are available in the Investors section of the Ferrari corporate website. And at the end of the presentation, we will be available to answer your questions. Before we begin, let me remind you that any forward-looking statements we might make during today's call are subject to the risks and uncertainties mentioned in the safe harbor statement included on Page 2 of today's presentation, and the call will be governed by this language. Thank you, Nicoletta, and thank you, everyone, for joining us today. In this call, we will discuss in detail 2 things: the result of the full year '22 and priorities and guidance of year '23. It has been a year of celebration, progress and innovation for Ferrari. And for this, I would like to thank all the women and men of Ferrari for their outstanding work, all our partners who have helped us considerably during the past challenging years during which we had the opportunity to strengthen our relations with many of our suppliers, and last but not least, all our clients for their continuous trust in our brand. During our 75th anniversary years, among the many different moments, a milestone that signaled our company's evolution, I would like to highlight the following 3. Firstly, we unveiled 2 exciting models, the 296 GTS in April and the Ferrari Purosangue in September. These models strengthen an already astonishing product range that both meets and exceeds our customer demand for design, performance and driving trials. Secondly, we presented our strategic plan. It was June for '22, '26, setting transparent, concrete and measurable goal. Thirdly, we outlined our journey towards the carbon neutrality within 2030 through a scientific and holistic approach. We are clear on our overall carbon footprint and we have a defined road map moving forward. From a financial perspective, we ended the 2022 with a remarkable set of results, setting a new record across all metrics, with EUR 5.1 billion revenues, strong net profit at EUR 939 million, and more than EUR 750 million of industrial free cash flow generation. I will address, first racing where our origins lie, then sports cars where we have evolved and at the hand, lifestyle, our new ventures will continue to elevate our brand. Let's start with the racing world. 2022 was an important year for Ferrari in the racing activities. We celebrated memorable victories in the Endurance Championship and we unveiled 2 new racing cars. The 296 GT3, the successor of the most winning Ferrari in history, the 488 GT3 and the 499P, our new Le Mans Hypercar signaling our return to the top tier of the FIA WEC in 2023 after 50 years. In Formula 1, we proved that our competitive edge improved during the last season, and it was encouraging for us and the million of funds to see our drivers taking more places on the podium. Clearly, our goal is to achieve the ultimate price and the entire team, together with Fred, who recently joined us, are working relentlessly in that direction. In sport, we are engaged in 3 championship, F1, Endurance and SRO. We continue to lead the way in terms of bridging the real world with the virtual world. How we do it? Well, by having our own Esport headquarters in Maranello, where our Esport drivers, share programs and activities with our Scuderia Ferrari Driver Academy. And this is 1 important way to engage the younger generations. Now after all the racing activities, let's talk about our beautiful high-performance and unique sports cars. And let's focus on our future, our order book. We continue to enjoy strong demand across all regions, with an overall order portfolio continuing to be at an all-time high and covering well into 2024. Our sports car product portfolio continues to have a strong traction on all fronts with the 296 family and Purosangue, driving the net order intake. The Purosangue order intake has been extraordinarily high, well beyond our expectations. But the enthusiasm of our clients is expressed also by their attendance level at all our events. In fact, in 2022, we had an unprecedented number of unrivaled client engagement experiences. On the bread events side, we extended our Casa Ferrari hospitality in several global venues and in Australia, we had, for the first time, our Universal Ferrari concept. On the dynamic events, we ranged from our cover capes to our engaging track activities. One for all, the Finali Mondiali, we held in Imola in the last quarter, which was definitely a great success and brought more than 40,000 funds altogether. All of these client experiences are designed to continue to fuel the passion and a sense of belonging within the Ferrari family. Among the innovation of 2022, it's worth mentioning, too, the first edition of the Cavalcade icon with the participation of 80 Ferrari Monza, both SP1 and SP2, coming from more than 20 nations. And the first Ferrari GT Tour Women's edition with 26 ferrarista, coming together to take part in an exclusive road trip in Ibiza. And now, after the sports cars, let's talk about lifestyle activities. Here, we are determined to keep on working to extend our heritage and values in the wider luxury industry. Four highlights worth mentioning for 2022. One, we continued our journey in brand elevation through 2 fashion shows with strong and positive reviews from press and clients; two, we grew our assortment on high image items such as the jumpsuit and traffic builders, such as Gallo Modena collection launched at Monza Grand Prix to celebrate the 75th anniversary. Three, we further consolidated our licensing agreements in line with our luxury positioning. And last but not least, we reached a record level of visitor at our museum, welcoming more than 600,000 guests in 2022. As you can see, last year, we made many steps forward in racing, sport cars and lifestyle. And in 2022, we also detailed our commitment to reaching carbon neutrality by end of this decade. And we are also proud to have committed to set science-based targets. The focus is not only on the impact of driving our sports cars, but also in our entire supply chain and production facilities. In years, we are working very closely with all our suppliers. In 2022, we also completed several projects in terms of carbon neutrality. From the new fuel cell plant and photovoltaic system at Maranello to the main innovation identified by our colleague, such as the adoption of new filters in our foundry, saving more than 250 tons of aluminum per year and the dispersion recovery in our engine testing process. All these initiatives implemented in 2022 led to a reduction of approximately 5% of energy consumption per car. This is a remarkable result, and I'm really proud to underline that no CapEx was required, only brain power of all the colleagues. All of these developments as well as the record result of the years have been possible thanks to the passion, to dedication of all the Ferrari people and to reward their achievement in line with the company's strong performance indicators, I'm pleased to announce the yearly competitive award of up to nearly EUR 13,500 for our employees. I'm also proud to share that for the fourth year in a row, Ferrari confirmed itself as 1 of the best place to work, thanks to career opportunities and welfare services we offer to our employees. We live behind a year characterized by global tensions, geopolitical conflict, supply chain issues and cost inflation. With our people, clients and partners, we've been able to weather through these times, thanks to the collaboration, will to progress, continuous learning, focus and confidence that sets us apart. And now we are ready for 2023. It will represent another significant step of our journey, during which we will continue to execute our strategy with the highest determination. Four, four are the priorities for 2023. We will compete at the top in the different racing championship. We will continue to enhance our client experiences both on track and on road and reaching them with 4 new model launches. We will broaden the lifestyle client base with a coherent and integrated offering of personal goods and unique experiences, and we will further accelerate the innovation pace with a strong focus on electrification and HMI as proved by the 4x higher number of patents that we filed in 2022 compared to 2021. We look ahead at 2023 with enthusiast, energy, agility and confident humility required in these challenging times. Thank you, Benedetto, and good morning or afternoon to everyone joining us today. Let's start on Page 5 with the full year 2022 highlights, showing a very strong year with double-digit growth compared to 2021 and representing a solid foundation of the new business plan. These record earnings exceeded our latest guidance, thanks to a better business performance, personalization and a tailwind from foreign exchange rates also in the last part of the year. Having said that, I would like to highlight our most remarkable achievements. EBITDA of EUR 1.773 billion, and EBIT of EUR 1.227 billion with margins aligned to guidance reflecting product mix and the evolution of our D&A. Net profit of EUR 939 million resulting in a diluted EPS of EUR 5.09 and an industrial free cash flow generation of EUR 758 million. Turning to Page 6, you can see the details of the 2022 shipments. The product portfolio over the year included 9 internal combustion engine models and 3 hybrid models representing 78% and 22% of shipments, respectively. The deliveries increase was mainly driven by the Ferrari Portofino M and the SF90 family as well as the 296 GTB and 812 Competizione, which were in the ramp-up phase. The deliveries of the ICONA pillar were lower compared to the prior year as the Ferrari Monza phase out in Q1 and first few units of the Daytona SP3 commenced in Q4. All geographic regions grew compared to 2021 as we continue to serve an impressive order book across all models. As customary for Ferrari, the geographical allocation was deliberate and followed the pace of introduction of new models, particularly Mainland China, Hong Kong and Taiwan continued to post high double-digit growth versus the prior year. I'll just remind you that the greater weight of the region is supportive in absolute value, while dilutive in terms of percentage margins. And this is more visible in the gross profit of Q4 when Mainland China, Hong Kong and Taiwan reached 14% of total shipments. On Page 7, you can see the walk of our group net revenues growing 16% at constant currency. As explained throughout the year, change in cars and spare parts was driven by higher volumes and personalization. Personalizations were at around 18% in proportion to revenues from cars and spare parts. Engines was negative, in line with the reduction of supplies to Maserati, which will stop in 2023. Sponsorship, commercial and brand reflected the better prior year Formula 1 ranking and the contribution from lifestyle activities, led by retail sales and museums visitors despite lower sponsorship. Currency had a positive impact mostly related to the U.S. dollar and the Chinese yuan. Let's move on to Page 8 and review the change in our EBIT year-over-year, explained by the following variances. Volume positive for EUR 261 million reflecting the shipment increase of approximately 2,000 units versus the prior year. Mix and price variance, negative for EUR 16 million mainly impacted by lower deliveries of the Ferrari Monza SP1 and SP2, partially offset by the increased contribution from personalizations, country and range model mix. Industrial and R&D expenses grew EUR 116 million during the year due to higher depreciation and amortization as well as direct and indirect cost inflation mainly from energy and aluminum. The latter became particularly visible in Q4 as we supported our supply chain. SG&A were negative by EUR 47 million, reflecting communication and marketing activities, lifestyle and corporate events as well as our organizational development. Finally, Other was negative EUR 49 million, mainly explained by the variance in contribution from racing activities and nonrecurring items as well as the reduced engine shipments to Maserati. This was partially offset by better contribution from lifestyle activities. The total net impact of currency was positive for EUR million. Turning to Page 19 -- 9 apologies. Our industrial free cash flow generation for the year reflects the strong profitability and a positive contribution from working capital and other, mainly related to the collection of Daytona SP3 and 812 Competizione on advances. This was partially offset by EUR 806 million of capital expenditure in line with guidance. In the year, the capitalization ratio of our development expenses was 45% increase versus the prior year as we enter the development phase on a number of future models and per effect of the budget cap in Formula 1. Net industrial debt as of the end of December 22 was EUR 207 million, decreased by EUR 90 million compared to December '21, reflecting the solid industrial free cash flow generation, net of the share repurchase program and dividend payment. To conclude on Page 10, we outlined the guidance for 2023, which targets solid growth and consistent progress in profitability. The main drivers are as following: mix will be extremely strong, thanks to a very rich product portfolio, full year contribution of Ferrari Daytona SP3 and continuous positive effect from personalization. Price will positively contribute throughout the year, in line with the mid-single-digit price increase communicated in Q3 to counterbalance the impact of the current cost inflation. D&A will increase in line with the start of production of new models. Revenues from racing and lifestyle activities will show a limited improvement. And industrial free cash flow generation will be sustained by our profitability, partially offset by capital expenditures, slightly higher than EUR 800 million, and negative working capital in its broader meaning, mainly due to lower deposits on limited series models along with the reversal of those already collected in the previous 18 months. The tax rate for the year is expected to be around 22%, that is higher than in 2022, mainly because of the introduction of new rules on the patent box regime. The underlying assumption on the exchange rate of the U.S. dollar to euro is that it will fluctuate around 1.10, implying an overall neutral foreign exchange effect compared to 2022. This foreign exemption, together with the net impact of price actions taken to offset energy and raw material cost increases, explains most of the improvement in absolute terms between the 2023 guidance versus the previous EBITDA target of EUR 1.8 billion to EUR 2 billion. Percentage profitability will be growing over the course of the year, with Q1 currently expected to be the softest quarter driven by the planned development of our product and country mix. This is also linked to the allocation of deliveries to Mainland China, Hong Kong and Taiwan designed to be front-loaded. Lastly, cost inflation remains largely unknown. In this context, we are relentlessly executing the strategy we outlined at the Capital Market Day as committed and focused as ever. The 2023 guidance represents another solid step on the trajectory to 2026. [Operator Instructions]. We will now take the first question. And your first question comes from the line of Stephen Reitman from Societe Generale. I apologize for the background noise. Two questions, please. You commented that the order intake has been much higher than you had anticipated on the Purosangue. Could you comment on if there are any regional differences and particularly interested in the reaction in China to that product? And secondly, also on China itself, we saw that China took up a larger share of total sales, quite a strong acceleration there. Accord of the numbers I'm looking at, it seems that the growth was driven particularly by the V8, the by the F8 Tributo and I guess, 296 GTB. Do you think this already indicates an increasing desire of Chinese customers also to accept the sort of the 2 super sports car concepts as well which has obviously been maybe an issue in the past. Apologies, we had some problem with the audio. Can you kindly repeat your second question? We got the 1 on Purosangue. Yes. After Purosangue, yes. On the -- sorry, on China, again, looking at the growth of your sales in China in 2022, according to the data I'm seeing, it looks like it was driven primarily by the F8 and 296 GTB rather than the Roma. I was just wondering, do you think this indicates a growing acceptance of Chinese customers for the 2-door -- 2-seater sports car concept, which has obviously been something that's held Ferrari back in the past, maybe in China. The first 1 was the acceptance of the traction of Purosangue all over the region. And I have to say 2 things. It has been the acceptance, it has been higher than what we were thinking, and this is true across all the regions, okay? This is 1 important message. The second one, coming to the China let's say, the preference of Chinese clients toward our cars forecast. I have to say that we don't see a special pattern because we see clients interested in our ICE as well as in our hybrid. Consider also that we manage deliberately, the delivery of the cars for that region. But we don't see a clear pattern of selection of car. I have 3, please. So on 2023, on the guidance, I was wondering, should we see it as sort of a one-off super strong year, a bit like 2022 was a weaker transition year? And basically, because I look at the 2026 guidance. And I'm trying to understand if we should expect the growth forward -- going forward to be somewhat linear? Or we could find a subsequent scenario where, again, we could have another transition year, where we could see some pressure on the margin. So are you going to be able to comp this year super strong price mix. I personally would say yes, but I will be keen to hear your view. Secondly, on pricing, can you talk us through the philosophy on how you decide price models? I'm asking because in the past, I remember there was this rule of thumb that each car was a bit more expensive than the predecessor and with a higher margin contribution. And these increases were usually a mid-single digit. But when we look at -- if you think about the laws of supply and demand, given this extremely strong demand that you're seeing, it feels that maybe a new approach is needed. So I was interested to hear how you think about of setting prices for a new product? And lastly, a shorter 1 on the Daytona, sort of staging that we should expect over the next few years. Is it going to be quite evenly distributed over its life cycle? Or is it -- 2023 going to be like a heavier year for Daytona? Thank you, Susy. I'll take the third 1 and then the first and the second 1 will be with Antonio. So the third one, the Daytona, we are starting as planned. And you can, yes, assume that it's more or less evenly distributed. The first and the second, Antonio will comment more. Yes. 2023 guidance compared to 2026. I think there are 2 elements that should be taken into consideration. The first 1 is that we already mentioned at the Capital Market Day that the plan is front loaded, which means basically, you cannot assume a linear development, but it's rather a jump at the beginning and then a smoother growth. Secondly, some of the assumptions that were outlined at the Capital Market Day, obviously need to be updated once we get closer and closer. And 1 of the first is obviously the impact of pricing compared to where we were at the Capital Market Day, we had an adjustment in Q3 that we, I think, were public about. Another 1 is the impact of foreign exchange rates. I think we said at the Capital Market Day, we had assumed 1.15 as the average U.S. dollar to euro exchange rate. And this 1 is based on 1.10. So this set of assumptions, of course, will be revised from time to time depending on how and where we go. The second question is on pricing strategy. I think on this we have been quite careful in defining it, depending on the model and its distribution over time. And obviously, we are -- we take care about the demand and the order book that we have for the various models. So the price increases that have been applied in Q3, have been applying differently to selected markets and models. If I may, to the next questions, I kindly ask to state clearly your questions since we are having some audio problems. The first 1 is a bit broad in general. I mean we rally we don't often think about the macro issues, because you create your own demand in a way. But if you think about the creation of -- and concentration of wealth in the last few years, that clearly has been a driver of demand for you. I think you're uniquely placed to have a view on this topic. So I was wondering if you could share your thoughts on what we should expect in terms of concentration as well in demand for the next year? And what are you assuming in your target? The second one, I would like to go back on pricing. You mentioned that the '26 targets have some assumption on pricing and you have taken pricing to offset cost, but am I right in assuming that even if costs have to go down, I mean, you're not going to be lowering your prices, right? So pricing should be sticky for you. Just a comment on that, please. And then last one for Antonio, please, on the R&D expenses. What happened in Q4 because the number was very, very low. And how should we think about this cost for 2023, please? I hope I was clear. Maybe, Giulio, I'll start with the second and the third one, from the last one, R&D expenses. You're right. There are 2 reasons. One is that as we go more and more -- we enter more and more into the development phase of new models, we switch from pure innovation expenses to development expenses is obviously a different accounting treatment. So this may explain changes in the allocation of the hours and time by our engineers. And obviously, the fact that we are capped in terms of development costs on the chassis in 2022 has also an impact because obviously, you spend more at the very beginning of the year and rather less at the end. The second before last, I think, was on pricing. You are perfectly right, and thanks for adding to my answer before because I spoke about pricing without obvious obviously mentioning that pricing also has to take into account where costs are going. I simply said inflation is unknown and known. Meaning, obviously, we make assumptions in that respect. And on that basis whether right or wrong, obviously, we try and be careful, but we cannot predict where it will go. And this is another element to be taken into account. And that's why we do not add anything more in respect of 2026. Coming to the first question, Giulio. As you said, our view on the concentration of wealth in the world. Well, this is a trend that everyone can read on any newspapers. What I can tell you is that for us, what is important is that we keep always unique and we keep always exclusivity for our cash. I think that what our founder said, we want to sell always 1 car less than the market demand was true, is true and will be true. So concentration is happening. Yes, it's up to us what we are doing to manage properly the demand to keep it always exclusive. Wonderful end of the year. I love the guidance of '23, obviously. Just a couple of quick ones on the model. How should we think about personalization versus 18% in 2022 as we look out this year and you think about the mix of cars. And I'm wondering, does this guidance include getting the Keystone sponsor back in Formula 1 that exited last year? And then I guess a bigger picture question as we think through the numbers. So the guidance is for EBITDA margins around 38% this year. I think the long-term plan is 38% to 40%, obviously, this is the kind of year that has many, many tailwinds for profitability. Most importantly, the supercar mix is always helpful. Can you speak to what would be the upside case that would take margins from the level you just guided us to this year at 38% to the high end of that range at 40%. What are some of the things that are incremental to the P&L this year that would support that higher margin range from here? Yes. On personalization, the way we model it is basically we assume that as a rather constant proportion to revenues. You have seen over the last few years, we have been flat between 17% and 19%, depending on the models. So the assumption we are making -- and I think I mentioned the same at the Capital Market Day. And this is obviously mostly related to the development of the mix. The higher the price point, the lower the proportion of personalization to the overall revenues. So it depends on the mix, basically, but that is the assumption. With respect to the development of margins, the big jump was already there in the original guidance and then development over time, once again, absent any consideration, any further consideration on additional price changes and cost changes is that this will drive our trajectory to what we mentioned and gave the guidance to 2026. So the mix is really the driver there. Okay. The marketing sponsor for Formula 1? Is that getting the Keystone sponsor back in Formula 1 that was missing last year. Is that included in this guidance at this time? We included, Michael, sorry, because we had some troubles, too, here, actually. The electronic is always a problem. Unfortunately, sometimes electronics, you cannot rely on it. No. The sponsorship, we keep enlarging our sponsor base. We keep diversifying our sponsor base. And you have seen that in the last week, we announced new sponsors. And all the plan and the guidance that Antonio showed you is all coherent with also what we see on the evolution of sponsorship. So all the picture, the picture is considering all the elements, including the sponsorship evolution. It's Thomas Besson from Kepler Cheuvreux. I have 2 simple questions, please. Could you help us understand the pace of ramp-up for SP3 and Purosangue. You've highlighted that mix would be the -- by far, the biggest driver for '23, it's totally clear. But I mean can you give us some direction on the number of units planned per quarter? Is your indication that Q1 is a softer quarter largely linked with the fact that you'll have a lower share of SP3 and Purosangue, for instance? And the second question, you've mentioned ForEx as neutral in '23 versus a fairly disinvesting '22. Is it too early already to make an assumption for '24 ForEx impact? Or can we already assume that it should be a small negative? I'll take the first 1 and -- so the Purosangue, this is the year we are ramping up the production. We had an important milestone end of last year that we met successfully. So we are ramping up as -- clearly, this is the ramp-up year, so we will be lower than 20% of the total volume production, but we will -- and we will ramp up along the 4 quarters so that to reach the right production volume by end of this year. So everything is on track, and we are moving according to the plan. Antonio, you take the second. Yes. On your second question, Thomas, I think it's too early to say, honestly. Visibility is already a complex element when looking at 1 year for the foreign exchange rate. Obviously, if you compare to the average assumption that we made on -- on the plan to 2026, in principle, mathematically, yes, but reality will be a different thing, and it's too early to say now. The first 2 questions, I just wanted to clarify a couple of points from earlier on the call. So earlier, you did mention that the Daytona would be relatively evenly distributed. Can you just confirm, is that over 2023 and 2024? Or does that also include 2025? The second question was just on the specials, at 3% of 2022 volumes that equates to around 400 units. Is that the right kind of level to think about for this year as well? Or as you ramp the Competizione Aperta,should we expect that number to be higher? And then the last question I had was just with respect to the other line in 2022 Obviously, it was a negative, and you did mention some nonrecurring items. Could you perhaps just quantify how large the nonrecurring items were there, and any detail on what they relate to would be much appreciated? George, I will leave the last one, the nonrecurring items to Antonio. I will manage the other 2 related to the product. Well, just is important clarification. When we are talking about any new model going production, clearly, there is a ramp-up phase. And then there is a stabilization. This is true for all the products we do. So in these years, we will ramp up these new cars, and we will have an increase and then a stabilization over the course of years. When I talk about every distribution, I talk about every distribution in quarters when the production is stabilized. This is the year where we run the Daytona and also the same applies to Purosangue as your colleague asked before. For the nonrecurring items, Antonio, you can take it. The nature of that -- first, do not forget this is a variance. So it means the difference between the nonrecurring of this year and the nonrecurring of the previous one. Last year, we had some positive nonrecurring mainly related, if I remember all of them correctly to the release on some provisions in respect of previous recall campaigns or excess provisions on that. Release of provisions in respect of bad debt that were previously accrued. And this year, particularly in the last quarter, has been our nonrecurring costs in respect of the organization of the company. So that is it. All in all, throughout the year, I think it amounts to -- in terms of the difference is a negative of EUR 30 million year-over-year. This is Matthias on for Adam. But within your industrial free cash flow outlook, you highlighted some negative working capital and rising CapEx impact. Can you dimension out each of these for us? So in terms of like how much CapEx and what's the order of magnitude on the working capital outflow? Sure. I mentioned earlier on that capital expenditure for 2023 is targeted to be above EUR 800 million, slightly above that number, so slightly higher compared to 2022. Working capital is expected in its broader meaning, that is including the -- I mean the lower cash-in coming from the fact that we had collected deposit in advance in 2022 is in the region of EUR 100 million or so. Great. And then as a follow-up, for the Purosangue, you lost some cost inefficiencies in the prior year, but there will also be some ramp-related costs this year, I presume. So it's not really clear whether the year-over-year impact on adjusted operating margins is going to be positive, negative or neutral. So how should we think about the Purosangue impact on margins for this year? I take this question about the Purosangue. What I would like to underline is that here in Ferrari, the product development process is very robust. So thanks to our -- the way we qualify, we validate the cars, any new car we have. I mean when we go in production, the product is very well tested and is mature. So we do not expect any surprise in this direction. I think this is 1 of the key assets of our company, is the maturity and the stability of the product development process. On the guidance, I know very well, you do not provide any volume guidance. But am I right in assuming volumes ex Purosangue roughly similar to last year in '23 or slightly up, plus the Purosangue, considering Daytona will offset Monza. And on the free cash flow, you already answered, Antonio, on the net working capital. Could you split the impact of down payments that you have underlining your guidance? And if this kind of down payments will become mainly recurring going forward? Or should we see a decline at a certain point. And if I may, very last on the single-digit price increase, offsetting inflation. So roughly EUR 200 million inflation, but you also mentioned during the call, that the cost inflation is unknown. So I was wondering if you were referring to next years or also the current year, and specifically, I ask you if you have any comment on the cost of labor because we know -- the negotiation is ongoing in Italy. So it takes probably time and you cannot talk about, but just to understand what you can comment about it. Martino, I leave the second 1 is the most difficult 1 to Antonio. Now the first one, I understand your curiosity to understand what we will do exactly. And I would do the same thing in your shoes. Also, you cannot -- we cannot disclose exactly what we want to do by each specific model. So we have to wait still 12 months to see what we will do in 2023 in this direction. The free cash flow and the other question, I will leave to Antonio. I'll be disappointing, Martino, for a number of reasons. No, first. In terms of your question on working capital, I can't give you the exact size of the negative outlook on the deposits. And going forward, our assumption obviously depends on the mix that we are assuming year after year because as you know, we collect deposits on strictly limited series. So it very much depends on how many we will have for sale in each single year and we'll start collecting in advance. I said at the Capital Market Day that I remember very clearly that I mentioned the fact that over the planned period, this is going to be a wash. So there are years when we collect more and others where we have relative outflows, meaning less collections than it could have been otherwise. The second question, I think, was in respect of inflation. I said it's a known unknown. Obviously, when we make price adjustment, we look at the future -- we try and look at the future and make our best guess based on the data points that we obviously have, I mean, so we have assumptions. Then reality will be different by definition. In respect of labor cost, obviously, even there, we mad an assumption, but the negotiation around the new labor agreement is still ongoing. So we'll see what the final outcome is, we made assumptions around the number, which is what we currently think is more probable. But I cannot be more specific on this. Tom Narayan, RBC. My first 1 has to do with electrification. I was curious if there was any updates post the June Capital Markets Day especially related to the new e-building development. And with electrification, we get this question a lot, but just wondering how you would respond to what is Ferrari's kind of method of distinguishing itself with electrification. And obviously, you can enhance the product, but just love some color on that. we've heard that it ultimately has to do with exclusivity, too, as a luxury retailer. If Hermès was forced to not sell leather bags and then other substrate people would still buy Hermès bags regardless. But I'd just love to hear more on how Ferrari can use electrification to enhance its product offering. And then the second question is just a quick one. Capital return. How do you think about capital return specifically as it relates to share buybacks? Okay. Thank you, Tom. I'll take the first 2 and the last one, Antonio will comment. So the electrification, you may remember that in June last year, we said that we will unveil our electric -- Ferrari electric cars in 2025. And what I can tell you that we are fully on track with our -- with the project. The team did a lot of progress in the second half of the year. And we work a lot here on many dimensions when it comes to efficiency and the supportiveness of the car that are going to use this, let's say, engine and axle. We also said that we will do internally, manufacturing internally, strategic component. What does it mean? We will do internally in our e-building. By the way, if you come here, you will see it growing pretty fast. I was there this morning with the responsible of the infrastructure, and it's growing like a mushroom. This you can see, in this building, we will do the axle, will do the inverter. And we will also assemble the cell to make our own battery. So the building as the product is proceeding as planned. And I have to say that this is, let's say, the result, as I said also in my part of all the work of all the team that is fully dedicated to this important project. Now, when you talk about any technology, what is important is not the technology, but the way you use the technology. And here, in Ferrari, when we've developed the cars, we always make them unique, distinctive looking at 3 dimension, the design, the performance and the driving trails. What we are doing constantly, when we develop these electric cars, we keep in mind that we have to start from the client, the client is the center, and we have to start from the driving trails. So when it comes to acceleration, braking, gearbox, sound, all these are dimensions that we are developing. And keep in mind during the -- for electric car. So the product strategy as well as the use of technology as well as all the infrastructure that we need to produce. Well, this is according to the plan, and there is no surprise. And we are, to say, satisfied where we are and we keep pushing. Antonio? With respect to the strategy and capital return. For that, we should get back to what I explained at the Capital Market Day, meaning over the planned period, we thought our cash generation has been largely deployed for return to shareholders, 50% in the form of larger dividends and 50% approximately in terms of share buyback. We also mentioned that depending on the evolution of the plan, we could have adjusted or confirmed the plan, but this is what we outlined in terms of target for the next 4 years. . And your next question comes from the line of Anthony Dick from ODDO BHF. Apologies, Anthony, your line is very quiet. Can you please speak up? Okay. Sorry about that. My first question was a clarification on the Daytona SP3. At the time of the release, your commercial team was quoted... Apologies to stop you. We really have some problems. Can you talk a bit slower and make sure that you split all the words. I guess on the Daytona SP3, at the time of the release, your commercial team was quoted in the press saying that you targeted in 2024 for the deliveries of the Daytona SP3. I was just wondering if that was a time line that you still had in mind. And the second question was on the Formula 1 business. I was just wondering if you could provide more color on the outlook, both on the top line and the bottom line for that business? Because, well, the sponsorship revenue is obviously a bit hard to predict, but I don't know if you were expecting to sign or sponsorships in 2023. And then with the increased revenues coming from the commercial rights owner and also reduced costs from the engine freeze. I'm just wondering what kind of incremental EBIT contribution we can expect over the coming years from that line of business. Maybe I'll start from the second. If I get your question right. With respect to the evolution of the revenues, we said we expect 2023 to be very much in line with 2022. So no major changes there. With respect to the development of the cost base on the chassis in the budget cap on the chassis, there have been some adjustment for the inflation. So you may expect that it is going to lead to higher expenses there. While what is frozen in terms of development of the power unit is just the development cost, not the running cost, okay? So I wouldn't mention more than that, but I think I'll give you the -- some data points. Question, if I understand well, Anthony, was about the life cycle of Daytona. Well, we do not disclose this kind of detail. But I mean, you can try to make a model based on the previous ICONA, but as you can understand, these are very important information that we like to keep here a little bit protected. We will now go to our last question. And your last question comes from the line of Daniel Roeska from Bernstein. I've got a strategic 1 more on the brand extension. Could you comment on how you think that the target groups for the luxury sports cars on 1 end and then for the extension of luxury lifestyle products and events on the other hand, how do they kind of overlap? Or how do they not overlap and kind of enhance each other? Thank you for this question, Daniel. I think that I mean during the Capital Market Day, we said that we are operating with our luxury car. We are operating in a small part. There is a much bigger part in the luxury space that is untapped by us. We are talking about a part that is remarkable. The estimation we exchange, we view at the time was around the $300 billion, and we see also according to the latest result that is growing. So it's important for us that since we believe Ferrari is a way of living that goes beyond the sport cars. Well, we believe that for our -- for the elevation of our brand to also enlarge the client that we are addressing. This is very, very important. And that's the reason why, let's say, we are very determined and committed for this year to a larger customer base and also to enhance and to offer new experience and also a new product. So this is very, very important, and this is 1 of the important priority of 2023. In that context, maybe, what are you expecting from your dealers? Do you envision kind of format changes? Do they need to move more to city centers kind of what's the relationship of that lifestyle extension and kind of your traditional retail outlet, how do you bring that together? I think, look, the dealer and let's say, we put together the sports car and the lifestyle when it makes sense to put them together in events and experience that are going across all the brands. This does not imply that we have always to put together the 2 dimensions in every space where we operate, okay? So clearly, we aim to make the experience of our clients in our dealership more and more luxury. This is 1 fact. This does not mean that we will sell hats in the dealership. Thank you. Thanks to all of you for your time today and for your questions. 2022 has been a year rich of events and achievements and sets a robust foundation for this year, for 2023. And we look at it with even greater enthusiasts, energy and confident humility. I wish you all a good afternoon. Thanks a lot for your attention. Thank you so much.
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Good morning, ladies and gentlemen, and welcome to the Advanced Drainage Systems Third Quarter of Fiscal Year 2023 Results Conference Call. My name is Bailey, and I'll be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Mike Higgins, Vice President of Corporate Strategy and Investor Relations. Sir, you may begin. Good morning. Thank you for joining us today. With me today, I have Scott Barbour, our President and CEO; and Scott Cottrill, our CFO. I would also like to remind you that we will discuss forward-looking statements. Actual results may differ materially from those forward-looking statements. because of various factors, including those discussed in our press release and the risk factors identified in our Form 10-K filed with the SEC. While we may update forward-looking statements in the future, we disclaim any obligation to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. Lastly, the press release we issued earlier this morning is posted on the Investor Relations section of our website. A copy of the release has also been included in an 8-K submitted to the SEC. We will make a replay of this conference call available via webcast on the company website. Thank you, Mike, and I appreciate you all joining us on today's call. As you saw from our press release issued earlier this morning, the demand environment we are facing today is challenging. We're seeing domestic construction demand slow, due to rising interest rates and inflation, which in turn is causing uncertainty in the market and slowing the release of projects for shipment and order rates. Before I provide more details on the current environment, I want to talk about the brand promise and value proposition, which have never been more relevant. As you have heard me say many times before, our reason is water. We protect and manage water, the world's most precious resource, safeguarding our environment and communities. This business is driven by water and sustainability as a pure-play water company, the need for ADS and Infiltrator products is as important today as it was a year ago. We have a runway for long-term growth in both the storm water and on-site septic wastewater markets, due to the value proposition and from converting projects from traditional materials to environmentally friendly solutions. We also use a high volume of recycling materials, which allow us to better manage our material costs and we are the largest consumer of recycled plastics in North America, giving us additional scale to manage cost and financial performance. We are effectively executing our material conversion strategy. ADS and Infiltrator provides superior products and solutions, which set us apart from the competition from capture to conveyance, storage and treatment, ADSâ comprehensive suite of products is designed to meet the needs of customers for the entire life cycle of a raindrop. ADS and Infiltrator products install more quickly than traditional materials, saving the contractor labor and time, lighter weight materials are safer on the job site than they have traditional materials, which are much heavier and require additional machinery to unload and install. As part of the material conversion strategy and broader value proposition, we have a vast sales and engineering team in the field working with contractors and civil engineers every day to ensure our products are specified on project plans. ADS products go-to-market through Waterworks distribution partners that extend our sales coverage, thereby ensuring we have great visibility into local construction activity. The value proposition is so much more than simply our superior products and coverage. From a service standpoint, we have internal engineering services and design tools to assist civil engineers in their site design for underground construction. Through ADSâ company-owned fleet, we deliver directly to the job site and in fewer truckloads than traditional materials. That's a big advantage for our distribution partners as we enable an asset-light model for ADS products. It is also an advantage on the job site especially in areas of high security like airports or in traffic sensitive areas like highways, fewer deliveries means less job site disruption and better logistics costs. Last, effective capital deployment remains a key pillar of our strategy. Because of the long-term opportunity for growth, we will continue investing in growth regions and products, as well as productivity initiatives including automation and safety. We continue to execute our M&A strategy, including tuck-in acquisitions such as Jet Polymer and Coltec, which support our recycling and Allied product strategies. Lastly, we remain committed to shareholder returns as Scott will discuss in more detail. Let me now shift gears to the challenging demand environment we are facing. Through October and November, demand continued largely at the pace we expected after the last time we spoke to you. In December, nonresidential and residential demand slowed significantly. In addition to the slowdown in the Northeast and the Northwest that we talked about last quarter, we began to see weakness emerge in other geographies like the Midwest and the West more broadly. From a macro perspective, we look at the same data issue. For example, the Architectural Billing Index has been showing signs of declining for the past few months. Similar indicators are negative and expected to remain weak for most of calendar 2023. Now let's transition to results for the quarter. Consolidated net sales declined 8%, the ADS business was down 3%, primarily due to weakness in the non-residential market and shipments to retail partners. The 30% decline in Infiltrator sales was a result of reduced housing starts and completions and the last of the inventory destocking, which completed in the fiscal third quarter as we previously communicated. As we look at the significant change in market dynamics that impact construction activity, since the beginning of the fiscal year, interest rates nearly doubling and significant inflation, there is no doubt this is creating uncertainty in our construction end markets. This combination has slowed down demand for the ADS and Infiltrator products, and we expect this challenging demand environment to persist through the majority of calendar year 2023. This slower market environment creates two key areas of focus: one, lower demand volume; and two, higher absorption costs. Lower demand volume will partially -- will be partially offset by material conversion and growth strategies, including the priority focused states and new products. We will address the higher absorption costs through headcount reductions, plant closures and manufacturing improvements. We will continue to hold the favorable pricing we have established for the products and services we provide to our customers. Importantly, we remain committed to the 28% to 29% adjusted EBITDA margin range we communicated at Investor Day in March of last year. We have a number of levers we are working to execute margin performance during this period of slower end market demand. We are optimizing the network, closing three facilities by the end of March. From our peak, we are taking out approximately 15% of the manufacturing and transportation workforce through reduction in attrition. We have also eliminated temporary labor and minimized our overtime. In transportation, we are removing many of our high-cost lanes and reducing the use of third-party logistics services, both of which we use quite frequently during periods of higher demand. We are doubling down on improving productivity through our commitment to continuous improvement initiatives. This includes investment in automation, improvements in downtime and better training and tools for our employees to drive higher overall productivity. Lastly, we are rightsizing inventory to reflect current demand levels, which is contemplated in the guidance issued today. While we look at all cost control measures, we will also continue investing in our business to ensure we exit the current environment in a stronger competitive position. This includes continuing to invest in high-growth areas in the priority states. The recent Texas Department of Transportation, approval for the use of thorough plastic corrugated pipe is evidence of the additional market participation opportunity and the strength of ADS' market leadership. For your reference, Texas is the largest storm water market in the U.S. We will also continue to lean in on markets that we know will grow in calendar 2023, like the infrastructure market, due to the Infrastructure Investment and Jobs Act, industrial manufacturing, such as onshoring EVs and batteries, as well as the agriculture market, which remains strong. In summary, the strength of our model remains intact and the brand promise and value proposition have never been more relevant. We continue to generate significant cash flow in our excellent financial health. Thanks, Scott. As Scott mentioned, our sales were down 8% in the quarter, due to weakness in both our domestic residential and non-residential end markets. The decline in single-family housing starts -- that started in May and sequentially worsened throughout calendar â22, continues to impact demand for our Infiltrator products and is beginning to impact the ADS residential business as well. Looking into ADSâ residential business, as we got into December, we experienced slowing demand for the first time in fiscal 2023. As homebuilders pause on lot development due to the decline in housing starts and the current uncertainty in the market. While we are a cyclical company and as such, are impacted by the lower end market demand, it is important to highlight secular growth trends around the Infrastructure Investment and Jobs Act money that would be coming into play during calendar â23, onshoring and nearshoring trends, as well as the recent Texas Department of Transportation approval for the use of thermoplastic pipe. As we have consistently demonstrated, we will continue to outperform our end markets, due to our material conversion strategy, innovative solutions package, our large national distributor relationships and partnerships and our national workforce. It is also important that we take appropriate cost containment actions that reflect the lower demand environment we are experiencing. As Scott noted, these actions include: first, optimizing our footprint with the announced closure of three facilities; second, reducing our head count by approximately 15%, elimination of temp workers, as well as significant reductions in overtime work; third, manufacturing efficiency and productivity initiatives; and fourth, the elimination of high-cost transportation lanes. The majority of the savings resulting from these actions that I just noted will be realized in fiscal year â24. Regarding our profitability in the quarter, I wanted to highlight that despite the lower demand, we were able to expand our adjusted EBITDA margins by 130 basis points year-over-year. We experienced favorable price cost in the quarter, driven by continued favorable pricing year-over-year, as well as favorable material input costs. Our ability to maintain favorable pricing is something we earn every day through our value proposition to our customers, as well as investments in the business that we continue to make. Moving to slide six. We generated $534 million of free cash flow year-to-date compared to $93 million in the prior year. We had more than $1 billion of liquidity at the end of the quarter, of which over $400 million was in cash. Our trailing 12-month adjusted EBITDA to debt ratio is at 1 times at the end of December. From a capital allocation perspective, we remain committed to investing in the business, strategic M&A and returning excess cash to our shareholders. Our target leverage ratio is currently 1.5 times, given the current market uncertainty we are experiencing. Examples of investing in the business include debottlenecking our recycling operations, continued automation of our pipe manufacturing plants, accelerating our material science and engineering capabilities through our new world-class engineering and technology center that we are currently constructing in Hilliard, Ohio, as well as investing in Florida and the Southeast, where we continue to see strong growth. As I noted, we are targeting a leverage ratio of 1.5 times, returning excess cash to shareholders through our share buyback program and recurring dividends. Through December 2022, we repurchased 3.8 million shares of our common stock for $375 million. This leaves $625 million left under the current share repurchase authorization as of the end of December. We plan to continue the share repurchase program here in the fourth quarter and based on our current leverage -- look to accelerate the pace of such, here in the near-term. Moving to our expectations as we close out fiscal 2023. We have updated our guidance based on order activity, backlog and current market trends. We currently expect our fiscal year 2023 revenue to be between $2.975 billion and $3.050 billion, representing growth of 7% to 10% from fiscal 2022. Based on that revenue range, we expect adjusted EBITDA to be between $850 million and $890 million, representing growth of 26% to 32%, compared to last year and margin expansion of 420 basis points to 480 basis points. All in, the strength of our model remains intact, and we remain confident in our ability to outperform our end markets by increasing market share while also remaining committed to the adjusted EBITDA margin target of 28% to 29% we noted at our Investor Day back in March. The investments we are making now will ensure we improve upon our strong competitive position and prepare us to come out of the current downturn and an even stronger position. The most that make ADS the market leader we are today have not changed. Our total installed cost benefit and solutions package continue to make us the premier manufacturer for our large national distribution partners. Our large sales force and manufacturing footprint encompass the entire United States, which are further supported by our distribution relationships and the company-owned fleet. In addition, we can control our costs better than our competitors due to our use of recycled materials and our recycling footprint. Thank you. [Operator Instructions] The first question today comes from the line of Michael B. Halloran from Baird. Please go ahead, your line is now open. So a couple of questions here. First, can you just give a little more context to the downdraft that we saw in December here and put it in context to a couple of things. One, what the backlog looks like? I certainly saw the comments on the order book starting to normalize towards call it, normal lead times. But what kind of visibility does the backlog give you at this point? Are you seeing any cancellations on that side. And then secondarily, have you seen any shift in that dynamic December versus January or shift in tone in the customer conversations? Can you just maybe help more on the non-res side of the business than the other pieces because I think that's where the more pronounced change was relative to what we would have expected coming out of the last quarter? Okay. Got it. This is Scott B. Good morning, Michael. So as we said, October, November cruising along. And in December, really midway through, just short and midway through the month, things just stop shipping. There was -- I mean this was across the board geographically and in most all market segments. I think some of that was people just not wanting to bring in inventory or put material on job sites before the end of the year. Certainly, the retailers were slowing down for that reason. They're kind of coming off tougher comps, but that do-it-yourselfer thing weakened. But the non0-residential piece really stuff quit shipping to job sites and distributors, those last really 15-days. There's some weather in there in some key areas of the country, too, that didn't help, but it wasn't all driven by that. Sentiment today versus back in December, well, things started up. January kind of came in like we thought it was going to come in. January is always a tough month. You got to start the year, you got to get up on pace. So it was about like we expected at both companies. I wouldn't say sentiment has gotten a lot better, though. It didnât got worse, but I would -- we just don't hear people or see order rates improving or any big green shoots. There are still projects coming along. We're so kind of good quoting activity, all that kind of stuff. But I would not say that everyone feels in this industry that kind of the uptick is coming back. That said, as we talked about with you guys a lot, that bottom right corner of the map, the Florida, the Southeast on over to Texas up into the Carolinas, remains still strong year-over-year and going quite well. We're very encouraged by the activity we've even seen so far from a kind of project pursuit and quoting in Texas. And that really only had that approval since November. So we -- that was when the gun kind of officially sounded. Yes, Mike Higgins. I think your question, too, about the backlog, I would characterize the backlog at both companies is coming off to kind of pre-pandemic levels, some more normalized. No, that's helpful. The margin side, relative to how the revenue shook out, margins were quite resilient. Obviously, the commentary about the sticking to that 28%, 29% kind of range is encouraging. Just a little context on how pricing is tracking? Are you seeing sequential changes in pricing? And then maybe put that in context of how the price cost side of things have tracked because it seems like that's held in very well. Yes. Hey, Scott C. here, Michael. The pricing resiliency of the company and based on that value prop is truly amazing. And we've proven it over time, but I would say that value prop, the inflationary cost environment really have come into play really well, and we continue to see that. I think we also talk about how much of our quoting and pricing is based on a project-by-project basis, geography, costs, everything else and by product. So again, we continue to see the ability to drive on certain products, in certain geographies, pricing even up sequentially. So it's holding in there. I think on your broader question on price/cost in general, absolutely, the pricing piece is hanging in there and up year-over-year. And we're really starting to see that resi cost come off like we knew it would, and we've got good visibility as to what's on the balance sheet. But again, we saw that starting to come through like we thought. And then we'll see even bigger piece of that started coming off the balance sheet here in Q4, which again is reflected in our guide. When you look at that midpoint of that Q4 implied guidance, you see that our decremental margins are more in that 25% range as opposed to that 30%, 35% range we normally talk to. And again, it's the strength of that price/cost dynamic. And then last one for me. Could you put the cost saving initiatives in context. One, any dollar number you're willing to provide, but secondarily at the Analyst Day, you guys talked about, what was it, 7%, 8% kind of capacity growth type range. I'm guessing some of these capacity reduction moves are in areas that you're maybe considering moves all along. But how does this change the thought of what that capacity curve looks like over time? Or does it even and it's just shifting the timing and shifting the areas? So Scott B. here, let me answer that capacity question. And I would call -- think about Infiltrator, flattening out some stuff pushing out versus what we previously considered in call it, the March Investor Day or on the trip down there. In the ADS side, probably still capacity being added in Florida, the Southeast, the places that are showing a lot of growth, maybe some minimal changes around and then the plants that will close and -- or things that we've been -- it's been on our list, we've now had the opportunity to go to. You want to talk about that? Yes. I'd say on the cost side, we're not giving specific dollars, Michael. But the way that we kind of put the guardrails around it or frame it up, right? We talked about the three plants that are coming out. We talked about 15% of our headcount. The way I'd give it a little bit more context is about two-thirds of the total cost outs that we're targeting will be in that cost of sales variable cost area and about a third of those cost-outs that we're currently targeting would be in the SG&A fixed cost arena. So -- and right now, it's based on kind of what we saw, especially in December and proving out in January coming in, as Scott said largely as we expected based on that current lower demand environment. We think this is the appropriate level of cost outs at this time. Thank you. The next question today comes from the line of Matthew Bouley from Barclays. Please go ahead. Your line is now open. Good morning, everyone. Thank you for taking the questions. I wanted to stick to the margin side. That encouraging comment you made around, kind of, committing to that 28% to 29% margin. I just wanted to press on that a little bit. Was that a comment to say thinking about calendar â23 or fiscal â24 for you guys? In a scenario where demand is lower, which seems to be what you're alluding to into calendar â23 that you could still sort of keep margins flat year-over-year? And if that's the case, is that basically reflecting both the cost containment actions, as well as deflation or just any, kind of, parameters around that and just how you guys are thinking about sort of the calendar â23 given all that? Matt, it's Scott here. Yes, we're trying really to be very careful and not give guidance for next year yet. But you're absolutely spot on. When we think about the 28%, 29%, it is that point estimate at the end of fiscal year â25, as we talked about back at the Investor Day, in March. That being said, the midpoint of our guidance for this year, the new guidance range we're out there is 29%. And as you look through kind of the cost-out actions, our price cost dynamics mix of portfolio and product. Basically, we see line of sight here over the next two years to get there. Do we expect a significant degradation in margins and then a large recovery to get there, no. So that's the way I would kind of guide you in how to think about it. We don't see that. It's more of kind of that -- it might be a little saw to quarter-by-quarter as you go, but it will be a march from where we are today to kind of keep it in that 28% to 29% margin. But that's what we have line of sight to today. Thank you. The next question comes from the line of Garik Shmois from Loop Capital. Please go ahead. Your line is now open. Hi, thanks. I wanted to ask just -- I think there was a comment around January. I think there's 1 comment that was made with respect to sentiment improving here. But then on the other hand, your shipments are still reflecting kind of a weakening demand environment. So I'm just kind of curious I know it's just 1 month, but is this more on the residential side, the improved sentiment? Or just maybe if you can expand on that observation a little bit more. Okay. I'll give it a shot. This is Scott B. December was bad. January came in largely as we expected not as bad as December, kind of a year-over-year thing. But I wouldn't say sentiment has changed for the -- in some dramatic turn or anything like that. I think sentiment remains a little cautious and pace remains muted of orders versus prior year. That said, we're still quite busy quoting and pursuing jobs. I mean, things haven't like nothing is coming to a standstill, I guess, that's what I was trying to indicate there that we remain at very good levels of quoting. It just seems that even when they turn into an order, it take you much longer for that order to get released for shipments, which is some of that uncertainty, we -- you feel in us around that. [Multiple Speakers] we've talked to many of you guys here recently, and it's clear that there was accelerated demand from the, kind of, reopening of the economy from COVID that, kind of, accelerated demand has clearly come off and so the analogy we've been using is we've been running at kind of 20 miles an hour over the speed limit. It's clear that demand has come back closer to that speed limit where that uncertainty still is there and maybe, kind of, creeping up is, does it stay -- the pace of activity stay, kind of, at the speed limit? Or does it drop somewhere below it. And I think that's kind of the easiest analogy maybe to frame or put context around it of kind of what we're seeing and then how we see that moving forward. So hopefully, that helps. No, it does. I wanted to just follow-up just on the decremental margin comment. The 25% expected versus a more normal 35%. Just recognizing some of the cost outs that you're highlighting today, the price cost is still remaining positive. Just kind of curious as to how sustainable this 25% decremental margin might be when you look out. I know we're not in formal fiscal â24, but to the extent you could speak to this new decremental margin. Yes. Normally, what we'll say is that from a decremental margin perspective, take kind of your incremental margin assumption, use it on the way down as well with obviously adjusting because of price cost or any other dynamic that you need to. So I think right now, as we look at Q4 and we look at that decremental margin, you've got continued favorability price/cost. We still have inflationary cost pressures coming through on the manufacturing and transportation side of the house, and we'll continue to deal with that as we round the corner into fiscal year â24. So again, Garik, the way I'd say it is I would use your incremental margin and then based on your assumption around price cost, adjust that. So that's how we look at it. Great. And then just last question. Just curious on the slide deck that you talked about the Dodge Start outlook across several different non-residential categories, the commercial institutional and manufacturing side of manufacturing, obviously, looking to be a lot weaker than the other two. Just wondering if you could maybe talk about your mix across those three categories as it stands right now and where you see some opportunities to perhaps outperform the broader Dodge data? Yes. Garik, Mike Higgins again. So I would say our sales today are weighted heavier towards that commercial and institutional categories. I would -- in the manufacturing, even though that's down 43%, that's really due to kind of lack of some large petrochemical type facilities that started this year that don't repeat next year. But with that said, I would say we see opportunity in that manufacturing. That's Scott made the comments on the earnings call, that's where you see a lot of activity. Clearly, chips and EV and batteries get all the headlines, but we've seen a lot of activity projects starting to ship around other manufacturing and industrial type construction and plants. So automotive, food processing, PP&E, in addition to those things like chips, EV batteries, et cetera. But then the other comment I would make, those dollars are a bit kind of, I guess, offset by the kind of inflation that's rippled through all kind of construction and building products, kind of, square footage next year is expected to be down, kind of, low double-digits. So that puts a little context. And that would be in that commercial and institutional where that kind of dollar volume looks relatively flat on a square footage basis, it's actually down kind of low double digits. Thank you. The next question today is a follow-up question from Matthew Bouley from Barclays. Please go ahead. Your line is now open. Hey. Thanks, guys, sorry, I think my call dropped during my question previously. So what I wanted to ask was back on the pricing side, and you guys gave really helpful color around sort of your own value proposition and kind of what gives you that pricing power and clearly, what's kind of in your control? And my question is sort of what's out of your control. What are you seeing in the competitive environment, whether it's on the concrete side? Or other producers of HDPE and polypropylene pipe. Just how are your competitors sort of adapting on the pricing side to this end market softness? And what do you think the impact would be to you guys? Matt, Scott Barber here. I'd say we've seen very good discipline, particularly on the -- where we compete against traditional materials. And where we have seen higher demand like Texas and the Southeast and Florida and those kind of places. I think our pricing is very solid. We haven't seen any, what I would call, degradation in pricing in our HP products, which are primarily positioned against the traditional materials. That's our higher-performing gray pipe. So we feel pretty solid around that one, let's say. The traditional corrugated plastic pipe except for a few spot places where we've had to go and address an issue or two, which was more due to lack of our ability to supply in very high periods of demand maybe a year ago, we haven't seen a lot of pricing degradation. It's usually as customary. I mean it kind of comes down into some of the agricultural regions where you might have very localized competition. So I kind of sum all that up, and we've contemplated a little bit -- we contemplated this in our plan for both the fourth quarter and as we're pulling together next year. And we still can hold the -- our price cost position, we can still hold those margins that we were talking about, and we wanted to give a lot of color in that today so that people kind of understood how we're positioning and looking at this over the next year or two. So all in all, I'd say we feel pretty darn good about where we are on that, and we'll continue to work our work our model that we can control and execute that pricing plan. The other thing we've seen, Matt, is that the concrete guys have gone up a couple of times with price increases of their own this year like we knew they would. So which I think we predicted, yes. Got it. No, that's really helpful. And just one more on the resi side. Obviously, you spoke at length about the infiltrator resi piece, but just in legacy ADS on the land development side and given everything that's going on with homebuilders here. Just what are you seeing and thinking about over these next couple of quarters on the land development business within legacy ADS. Matt, Mike Higgins. I would say kind of go back to what Scott said earlier in terms of strength and it's geographically mix. I think we continue to see good strength of activity in the Southeast, pretty good activity continuing in Texas, where we've seen softness is geographically, like we've talked about, kind of Northeast New England the Northwest and kind of over the third quarter, this has kind of seen the weakness emerge more broadly in the West and in a couple of key states in the Midwest. As we kind of move forward, we'll -- again, we'll keep a close eye on it. Clearly, the forecasts are for slower housing starts next year, but kind of based on what we know today, we think those areas that have showed kind of continued strength over the past couple of years will be more resilient and that being kind of Southeast Texas, Florida be more resilient than kind of more mature areas for us like the Midwest and the Northeast. Thank you. The next question today comes from the line of John Lovallo from UBS. Please go ahead. Your line is now open. Hey, guys. Good morning. This is actually Spencer Kaufman on for John. Thank you for the question. Maybe the first one, net sales were down 8% year-over-year. Can you guys, kind of give a breakout of the contribution between price and volume on a consolidated basis? And what was the impact in the quarter from the destocking at Infiltrator? Yes. So I think when you look at the revenue, pricing was up on a year-over-year basis, drag in volume created that negative downdraft, which led to the down 8. I would say it was relatively minor. It was over kind of by the end of October, early November like we communicated on the previous earnings call. You know, most of that down in Infiltrator for the quarter was just the completions slowing down year-over-year, not a lot of destocking left in the third quarter. So it's 90%. Okay. Appreciate that. And if we just look at the 4Q implied revenue guide of down 12% to 23% on a year-over-year basis and the adjusted EBITDA outlook of, let's call it, $118 million to $158 million. That seems like a pretty wide range for just one quarter, particularly when you guys are already a month completed here. I'm just hoping if you could give a little bit more color on some of the puts and takes of getting to the high-end and the low range of those guides. Yes. No, it was purposeful, right? Obviously, sensitive to kind of the uncertainty in the dynamic market. With some of that resi weakness spilling over in the non-res, it just felt like the right thing to do to be prudent to have a little bit broader range. But I think the color that Scott gave earlier, January, the way Q4 unfolds for us typically is 30% of the quarter is January, 30% of the quarter is February, 40% of the quarter is March. So the context that we gave with January on the revenue side coming in largely as we expected gives us confidence, at least in the range that we've gone out with and where we are. But it was purposeful to leave it a little bit broader range right now and thought that was the best thing to do. Okay. Makes sense. And if I could just squeeze one more in here. I mean you guys have talked about that you expect demand to be a headwind for the majority of calendar year â23. And you on the call earlier, you reiterated your margin targets from the Investor Day, but more curious on the sales side of it. You laid out the 10% CAGR, is that still on the table? And if so, what's going to sort of cause the reacceleration in demand to get there? Yes. I think the 10% plus CAGR is still on the table. I wouldn't say that it's off. Obviously, as we've talked about our comments related to calendar â23, you have to remember our fiscal year begins on April 1. So when we see kind of this trend through Q4 which takes us through March, we see certain of those trends continuing at least through kind of our first and second quarter, which takes us all the way to the end of September. So that's kind of how we look at it, how we think about it, which takes us kind of to most of the way through calendar â23. Again, it goes back to the breadth and depth of this lower demand environment that we're in. It depends on your forecast and how you currently view that. Our view is that it's going to continue, like we said, through kind of those first two quarters and potentially a little bit longer, but that you'll start seeing kind of a recovery as you get toward that back end of calendar â23. At least that's the way we're currently looking at it today. Thank you. [Operator Instructions] There are no additional questions waiting at this time. So I'd like to hand the conference over to Scott Barbour for any closing remarks. Please go ahead. All right. Thank you. And we certainly appreciate all the good questions today and your participation in the call. We look forward to catching up with you as we move on into the latter meetings today and at the upcoming conferences. So thank you.
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Good day and thank you for standing by. And welcome to the OneWater Marine Inc. Fiscal First Quarter 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 today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jack Ezzell, Chief Executive [ph] Officer. You may begin. Good morning, and welcome to OneWater Marine's fiscal first quarter 2023 earnings conference call. I'm joined on the call today by Austin Singleton, Chief Executive Officer; and Anthony Aisquith, President and Chief Operating Officer. Before we begin, I'd like to remind you that certain statements made by management in this morning's conference call regarding OneWater Marine and its operations may be considered forward-looking statements under securities law and involve a number of risks and uncertainties. As a result, the company cautions you that there are a number of factors, many of which are beyond the company's control, which would cause actual results and events to differ materially from those described in the forward-looking statements. Factors that might affect future results are discussed in the company's earnings release, which can be found on the Investor Relations section of the company's website and in its filings with the SEC. The company disclaims any obligation or undertaking to update the forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. And with that, I'd like to turn the call over to Austin Singleton, who will begin with a few opening remarks. Austin? Thanks Jack and thank you everyone for joining today's call. Before we get into the quarter, I want to thank our team for their continued efforts in response to Hurricane Ian. We continue to help our communities impacted by the storm to rebuild, but the process is far from over. As of today, all of our stores are open, but several are operating in limited capacity. We expect sales activity in areas heavily impacted by the storm to remain lean until homes, docks, and storage facilities can be repaired. Lost volume has yet to be recovered, as many customers still do not have anywhere to put their boats. The timing of this recovery demand is difficult to project, but we will continue to support our team and the community. Turning to our quarterly results, the first quarter played out largely in line with our expectations. We once again delivered record revenue in the quarter and gross margins of 30%. Importantly, we saw an 86% growth in our service parts and other businesses, which is demonstrating our evolving business model that is diversifying us away from the more cyclical boat buying cycles. As we discussed last quarter, our customers are returning to normal pre-COVID buying patterns. With the supply chain improving and lead-times decreasing, many customers no longer feel the urgent need to preorder their boats months in advance of the season. That said, overall demand remains healthy, as evidenced by our backlog that is up over the prior year, strong store traffic, and robust activity at the boat show so far this season. I want to spend a few minutes discussing quarterly results. And what a returns historical seasonality means for OneWater. Sales for the first quarter grew 9% on top of a 57% increase in the prior period. Same-store sales were down 14% in the quarter, following same-store sales growth of 28% and 38% in the first quarter of 2022 and 2021 respectively. In a typical seasonal environment, we have realized lower sales and higher levels of inventory in the first quarter, which is typical of the smallest quarter of the year. Looking back to the 2017 to 2019 period, the December 31 quarter represented about 15% of our annual sales and 10% of our annual EBITDA. Our parts and service business continues to grow organically and has also benefited from a number of strategic acquisitions over the last 18 months. The diversification of our businesses supported gross margins in the quarter and will enable us to maintain our track record of profitable growth regardless of industry or economic cycles. During the quarter, we also completed the acquisition of Taylor Marine centers and Harbor View Marine. Taylor Marine is an award-winning dealer with strong reputation and complements our presence in the mid-Atlantic US. While Harbor View fortifies our presence in the Florida Gulf Coast market. The acquisition pipeline remains robust and going forward, we will remain opportunistic, while we monitor the macro economic environment and imply a thorough analysis to any potential transaction. Based on where we stand today, all signs are pointing to an upbeat selling season in 2023. Boat shows to-date have been strong, traffic is good, and demand remains intact. Additionally, gross margins are holding up and customers are not resisting the current interest rate environment. At the same time, there's considerable macro-economic uncertainty and all the recent industry data is down. It is not clear if it is the impact of historical seasonality or consumer demand. With so many unknowns, we think it is prudent to revise our outlook for the fiscal year. However, we believe consumer sentiment holds interest rates level out and macro conditions improve, we have an opportunity to outperform. While we know there are a lot of questions out there around the health of the consumer and the current demand levels, we will be back here in a few months with a bit more clarity on the peak selling season. Finally, we announced last month and Mitch Legler will retire as Chairman of the Board. I would like to thank Mitch for his tremendous contribution and guidance to OneWater over the last several years through the IPO and a period of rapid growth. In line with our succession plan, John Schraudenbach, currently serves as Vice Chairman of the Board, and we expect John to be elected as Chairman at our upcoming annual meeting. I look forward to working with John in his new capacity and ensuring the continuity of leadership and governance. Thanks Austin. During the quarter, we experienced a change in customer buying cadence, rising interest rates, and a decline in the macro economic environment and the impacts from Hurricane Ian, yet we still capitalize on the solid demand to drive growth. We were able to key in on consumer trends at several boat shows during the quarter, where we logged strong activity. Manufacturer rebates and discounts made a return to boat shows, resulted in a more normalized pre COVID pricing environment. Additionally, customers did not seem to be deterred by higher interest rates. In fact, a vast majority of the sales made at the Atlanta Show were financed. As Austin mentioned, with the normalization of certain parts of the supply chain, many customers no longer feel the sense of urgency to lock in a deal months in advance. This is especially true for the smaller standard units for inventory has normalized. However, there are still extended wait times for larger, more sophisticated votes in excess of 30 feet. Fortunately, we have the right portfolio of innovative products, a strong sales team, and the right tools to get customers across the finish line into the boat of their dreams. Total inventory at the end of the first fiscal quarter increased 112% to $527 million compared to a year ago, driven by the return of seasonal inventory built and acquired businesses. While we remain optimistic about the future, we're also closely monitoring our inventory levels in relation to retail sales. Should trend shift beyond expected seasonality, our proprietary tools will allow us to adjust our orders and inventory stocking levels. Furthermore, our flexible operating model enables us to swiftly align our cost structure with the new levels of demand. We have said it several times, we have not seen a material shift beyond return to seasonal -- seasonality. Retail and boat show demand remains robust, but we continue to keep our fingers on the pulse of the consumer at activity to identify and make any necessary changes. Our service parts and other business contributed significantly to the sales and gross margins in the quarter. Despite macro-economic pressures and seasonality, our service parts and other businesses was also challenged by the destocking that occurred with big box retailers that had a buildup inventory in response to the supply chain delays. This area of the business continues to be an important growth driver for OneWater and now accounts for 16% of the total revenues and 22% of the gross profit on a trailing 12-month basis, consistently growing over the last few years. This contribution remarks a significant shift in our diversification, offering a stable high margin revenue profile to OneWater. As we return to a more cyclical environment for boat sales, we will rely on the stability of this business to smooth out our overall gross margins. In summary, demand remains healthy as the industry returns to traditional sales cycle and the supply chain continues to recover. Our flexible business model allows us to adapt to the dynamic operating environment to continue providing excellent service to our customers, while driving value to our shareholders. Thanks Anthony. Fiscal first quarter revenue increased 9% to $367 million in 2023 from $336 million in the prior year quarter despite a 14% decrease in same-store sales. New boat sales fell 2% to $232 million in the fiscal first quarter of 2023 and pre-own boat sales increased 4% to $56 million. We continue to benefit from our emphasis on growing our higher margin parts of our business, which contributed substantially to our results in the quarter. Service parts and other sales climbed 86% to $70 million, driven by contributions from our recently acquired businesses. Finance and insurance revenue continues to pace with new and pre-owned boat sales. Gross profit increased 9% to $110 million in the first quarter compared to the prior year, primarily driven by margin insulation offered by our service, parts, and other revenues, partially offset by a shift in the mix of the size of the boat sold. Gross profit margin remained flat at 30% compared to the prior year. First quarter 2023 selling, general, and administrative expenses increased to $78 million from $59 million. SG&A as a percentage of sales was 21%, an increase from the fiscal first quarter of 2022. In a normal seasonal environment, SG&A is typically higher in the December quarter related to the level of sales and marketing activity associated with boat show participation. In addition, this year the average cost per show increase when compared to boat shows we attended in prior years. We expect these levels of promotional activity to return as we revert to a more traditional sales cycle. Additionally, we expect our SG&A to be higher than historical levels as we integrate acquired parts and service businesses. Operating income decreased 15% to $27 million compared to $31 million in the prior year, driven by higher SG&A and expenses associated with our acquisitions. Adjusted EBITDA decreased to $28 million compared to $41 million in the prior year. Net income for the first fiscal quarter totaled $11 million or $0.61 per diluted share, down 51% from $23 million or $1.45 per diluted share in the prior year. Contributing to this decline was also a $10 million increase in interest expense, which was $12 million in the quarter up from $2 million in the prior year. This increase is a result of the rising interest rate and an increase in the average borrowing on our debt facilities. Turning to the balance sheet, as of December 31st, 2022, total liquidity was in excess of $100 million, including cash on the balance sheet, availability under our revolving line of credit, and floorplan credit facilities. Total inventory was $527 million as industry-wide supply chain constraints continued to ease in the first quarter. I would like to remind you that we are currently approaching the peak of the seasonal inventory bill that typically occurs in February and March. Long-term debt as of December 31st, 2022 was $464 million. Adjusted net debt or long-term debt net of cash was 1.8 times trailing 12 months EBITDA. We are comfortable with our liquidity and leverage position and continue to monitor the macro environment as we manage our capital allocation. Looking ahead, we believe it's prudent to reduce our annual guidance to reflect the uncertainty around the macroeconomic environment and the potential impacts on the marine demand. As a result, we are now guiding same-store sales to be flat to up mid-single-digits compared to the prior year and expect adjusted EBITDA to be in the range of $200 million to $225 million, with earnings per diluted share to be in the range of $7.50 to $8 per share. These projections exclude any additional acquisitions that may be completed during the year. Our strategy from a capital allocation perspective has not changed. We are focused on reinvesting in the business to accelerate organic growth, pursuing strategic M&A opportunities, paying down debt, and repurchasing shares, while maintaining appropriate levels of leverage. As always, we're methodical in our approach and we'll put our cash to work where it will drive long-term shareholder value. And our first question comes from the line of Joe Altobello with Raymond James. Your line is open, please go ahead. Thanks. Hey, guys. Good morning. I guess the first question, maybe a housekeeping item for Jack, the comp number, did you break that opportunity units in price in the quarter? Yes, I would say that during the quarter, we saw some increase in price and then a decline in units. It was -- I'd say units would be down in the mid-single-digits. Okay, that's helpful. And then I guess in terms of the guidance and the quarter, you mentioned the quarter was in line with your expectations. Talked about a strong selling season, positive boat show activity, and healthy demand, yet your cutting your guidance really dramatically. And I know you talked about the macro cloud your outlook. But is it that much cloudier versus three months ago? Or are you concerned that there may be more than just seasonality going on here? Well, I think it's too early to know that Joe, and I think that's a little bit of our issue. I think if we were to come out today and raise our guidance or less than like it was or lowered it, I still think there's a lot of doubts out there on what we're saying. So, if we to take it did $12, people just said we were crazy. If we left it alone, the naysayers were still said that, we're wrong. And so we went back to the model and really line items spent a lot of time on going through, we know there's going to be more new boat compression, margin compression. And so we kind of factored that in and just went and said, hey, look, let's take a conservative approach based off what we know. And let's get this right, and get it in line so that we don't have to come back, next quarter or in the, or in the last quarter, and adjust, adjust down again. And so I think we're just taking a little bit more conservative approach. We just don't know today, we feel like, it's seasonality because the demand, as far as internet leads, door swings, things back up at the manufacturers, just where everything sits, it feels like seasonality, but we just can't answer that just yet. I mean, I think we'll have a lot clearer picture in three weeks. It could be Yes. I mean, I mean, geez, we've been on for the last year and a half that we're in a recession. So I think we kind of looked at it and said, let's get this right. So we don't have to keep coming back to it and make an adjustment. And so we really spend a lot of time on the model going okay, well, what if margins compressed to this, and we kind of looked at it, and it took a pretty conservative approach to it just because we don't want to have to come back again. The only thing I'd say a two on the models and just kind of looking out there at consensus. Looking at consensus, most people have a Q2 higher than Q4. And again, that's not our typical seasonal cycle, right? Our -- difficult seasonal cycle is Q1 and Q2 are the smallest quarters of the year. Q3 is the largest. And then Q4, is a little bit bigger than Q2. So there's some of that cadence out there. And that, I just want to point that out. Thank you. And one moment for our next question. And our next question comes from the line of Drew Crum with Stifel. Your line is open, please go ahead. Thanks. Hey, guys. Good morning. So I'm the same store sales and obviously several factors that contributed to being down 14% in fiscal 1Q. The updated guidance would suggest that you think that metric improves over the course of fiscal 2023. I just want to confirm that and understand what's driving and confidence behind that assumption? Yes. Yes, definitely. The backlog gives you some confidence to it, but it's the seasonal change, right? I mean, yes, we had a 28% and a 38% December comp, the last two years. And so in order to return to a normal seasonal cycle that that dynamic has to change. And, so we would, we would, I'm not surprised that it was, was where it was at. I think next quarter is, we were up against some pretty heavy comps in the in the second quarter. Last year, we were 8%. We were 57%. The year prior to that, so there's some tougher comps there. But I think if you look at trends were softer comps in the back half a year in those larger quarters. I also think that in prior years, as we as we worked our way through the season, inventory availability became, a lot leaner. And I think what you see today, as you see the traditional seasonal build will have boats now for the start of the selling season. And then as manufacturers send us more product and replenish, we'll have product to carry us through the end of the season, versus, inventory supplies, falling short as we get to the September quarter. Yes. January was positive. Again, that's, again, we're cautiously optimistic with the data out there. I think if you look at, some of the SSI data in December quarter, I think it average being down around, 28%, 30%. So as being down 13 is considerably better than them. But, it's just, there's just a lot of unknowns out there and a lot of cloudiness in the forecast. Got it. Okay. That's helpful. And then Austin, in your preamble, you talked about M&A a little bit, I think. Just want to get a better understanding of what the current thinking are stances on that, a few months ago, you decided to hit the pause button, and we're going to rely on some of the January boat shows to gauge the health of the industry. Are you at a point now where you can share more definitively what the company's plans are for the balance of fiscal 2023? And if so, what is the strategy? Yes, we were probably going to end up holding tight. So there's more clarity in the macro. Like we've all said through the -- our opening remarks and answering the questions. I mean, both shows were good. We're hearing that not only the boat shows that we're in, but we're hearing that from other people in the industry. They're doing shows that were not in Milwaukee, some of the other bigger shows have been pretty good, and sediment remain strong. But we're still dealing with, a big inflated, in our opinion, new vote margin out there. So, that needs to normalize somewhat. And I think right now, just with the overall macro, for us to hold steady for the next, 90 120, maybe 180 days, and kind of watch and see how this unfolds. And we're watching it on a daily basis. I mean, things can change pretty quick. But I don't think we're in any hurry to go out there and do a deal. Just to do a deal. I think it's prudent for us to continue to build cash on the balance sheet. But we are going to be opportunistic, if something that's just too good at the right price comes along. But getting back into our normal cadence is not something that we're ready to do just yet. Thank you, and one moment for our next question. And our next question comes from the line of Michael Swartz with Truist. Your line is open, please go ahead. Hey, guys, good morning. Just a few follow-up questions on the guidance and it doesn't look like you took down your comparable store outlook too much in the update here. Give us a sense of how you're thinking about the bottom up build with that comparable store outlook in terms of your industry outlook. Today, maybe we're versus where it was when you first gave guidance, pricing, mix, shared gains, anything of that nature that you can kind of help us with? Yes, I would say if I think about, the December numbers that a December quarter, SSI data, that may and everything that's come out kind of related to that probably has been a little bit more negative than it was as of September. I think that all the feedback that we're seeing, like Austin mentioned, with respect to for traffic and lead generation, et cetera, has been positive. So, we're trying to be, cautiously optimistic. And so I think that that leads us to outperform in the industry, I think it's going to be I think you'll start to see unit volumes level off. And, I think price will still be a factor, but much too much less degree than, the recent years. Okay. That's helpful. And then I think you made, Austin, you made the point that you expect new boat margins to spin, which is I think what most people have expected? Can you give us a sense of, as it pertains to your guidance, maybe what your how you're thinking about that now maybe relative to pre COVID or prior to -- or versus maybe some of the elevated margins we've seen in the mid-20s, the past two years or so, like? How should we actually think about boat margin this year as it pertains to the guidance? Yes, I'll let Jack speak to that. I mean, we threw around a bunch of numbers, I don't know what he ended up putting in the model to kind of get us to the number, what we what we ended up settling on, or what he ended up settling on in the model. But me Anthony and Jack, once we got done with the Atlanta Boat Show, spend a lot of time talking about, Lauderdale, what we've seen since Lauderdale, through these, these first boat shows in January. And one thing that was pretty evident is there was a lot of promotional pricing for manufacturers, a lot more than we expected right off the bat, we expected them to kind of ease into that which in a way is good, because it allowed us to maintain our margins, and use those promotions as the discount. But that's like phase one. And so it just continues to go from there. As I've said many times, a third of the dealer network out there has zero to offer the consumer but price, and they usually sell they can usually get a sell on price the first time, and then they never sell that customer another boat because they don't have anything else to offer them. So you'll continue to see that a road promotional pricing from the manufacturer use usually leads the way which that doesn't work anymore than these, just say these lower side, dealers will start discounting on their own. So they'll start working on their margins. And we have to kind of follow suit. So when you start thinking about, let's say, 30 feet down, 35 feet and down, that'll move a lot quicker than what Anthony was speaking about earlier in his opening remarks about the bigger stuff that still got the longer build times. It's still got a backlog. So we'll start to see that a road. But Jack, I don't know what you ended up putting into the model. What you ended up selling? Yes, I think is, as you look at, how we ended up this quarter, obviously, as you work through the quarters throughout the year, we'll see margins fluctuate quarter-to-quarter as you sell different types of boats, different parts of the year. But I think that we're definitely discounting and bringing margins down a bit. Again, not drastically, but certainly taken a haircut on them. And again, that's what we've seen to-date. And as that's where we're modeling it. The other thing I'll point out, right is just to reemphasize the point we've made a handful of times, despite this haircut on the new boat margins, we're seeing used boat margins hold up well, we're also seeing that our expansion into parts and service, those expansions that higher margin business, really supporting our overall margin and keeping it that 30%. And so I think the likelihood of us staying at that 30% plus are in and around there, 29, 31 is a likely range. Yes. One of the thing real to, we've said this a lot in the past, boat shows are our largest -- our lowest margin business. That's why we've never really liked it. I mean, you got to be competitive. You got to go in there and you make it worth the money in an effort that you spent on that. So you ended up coming out of a boat show with some of your lowest margins. So we got some needy deals still in the pipeline, that are coming in, that are sold. We're still working as hard as we can to get every dollar out in consumer. And that's one of the things that, I would say that the takeaway was, I mean, we've got to get back into the true discipline of selling and not just we're taking. And we're really working hard with the team and the teams really stepped up. I think the whole entire sales staff saw coming out of the boat shows that hey, it's not like it used to be, we have to get back to be the elite sales team that we were and we're going to step up our game, because nobody's going to beat us. But that this quarter coming out of those boat shows that's always been our lowest margin business. Okay. And then just one last question for me, maybe for Jack. I think you said inventory was at $500 plus million in the quarter, is there any way to look at just in terms of the new boat inventory? Maybe what that looks like on an apples-to-apples or same-store basis relative to pre-COVID? Just to give us a sense for excluding acquisition? Yes. We've dug into, we've tried, I don't have a same-store inventory number per sequential. And, again, we've been looking at weeks on hand. We're currently at 16, 17 weeks on hand, which is influenced a little bit by acquisitions. But if I go back to 18, 19, which is a little influenced by acquisitions, we were at 24 weeks. So it's -- again, we're at that seasonal peak, right. So you'll see it at the highest as we -- from now into February, March, a lot of times, it depends on whether as to exactly when that spring season kicks off, and the volumes we get out. But I think we're close to the peak, and then we expect to see things go out. But I think on a comparable basis. I think the other piece, I think that you're getting that too, right is there's a good chunk of our inventory related to parts and service business. And I don't have that number in front of me, but I'll work to get that out to you and maybe get it into some of the future releases. Thank you. And one moment for our next question. Our next question comes from the line of Craig Kennison with Baird. Your line is open. Please go ahead. Hey, good morning, guys. Thanks for taking my question. Just wanted to follow-up on Hurricane Ian, I'm wondering if there's a way for you to look at markets affected by the hurricane versus markets that looked were unaffected by that catastrophe and maybe parse the same-stores sales environment in that context? Yes, I mean, we looked at it a little bit. I looked at it more on the, I guess, I'll say the either side and those stores were down about $2 million, EBITDA and it's -- you had a lot of -- we're still carrying a lot of expenses, paying our people, rebuilding. So I think it's certainly contributed to it. But again, I didn't want to go through a lot of effort to try to say, oh, the hurricane caused this much revenue, because it just isn't something that is easy to track. And then as we move forward, right, it gets even more complicated as to when the customers come back in the market, and that replenishment cycle hit. So, it certainly is impacting the numbers, like we said many times, if we met miss a truckload of deliveries the last day of the month, that could also a big boat or two can also impact same-stores a couple points. No, I was just saying we're seeing a lot of consumers in that as markets, fill that docks and things like that. So there's still a lot of business to be had there. Thank you. [Operator Instructions] And our next question comes from the line of Griffin Ryan with D.A. Davidson. Your line is open. Please go ahead. Yes. Thanks, guys. I was just wondering if you could talk about the availability of used boats, and what the current demand looks like for them? Yes, I'd say, availability has gotten a little bit better. I think you see that a little bit in our results where pre-owned was up. And I think the market continues to be strong for pre-owned. Anthony, if you have a different sense. Yes, I mean, it's something that we continually go after. I mean, itâs -- there's a great market and we continue to grow the business in that direction where we have, we're employing buyers and that's all they do is trying to source boats and things like that. So it's a -- there's a tremendous amount of upside that we continue to go after and focus on, and there hasn't been any slowing of it whatsoever. Okay, great. And then can you just talk about to mention and just seeing in the value segments compared to the premium segment right now? Well, I think that as we've been talking about the seasonality portion of it, where the value segment over the last two years, it didn't matter whatnot people were buying. And I think we're going back to more of a seasonal type thing. That's why we're seeing the build in our most type boats. But the recent Atlanta Boat Show few weeks ago, the value both versus were selling as good as it did in the past. So I think it's our businesses just turning more back to seasonality. Yes, that value customer tends to be the person who comes in on a Wednesday and they want to be in their new boat by the weekend, and a hook and roll almost, and so those are the people who -- it was pretty abnormal for those people to be customers in the December and March quarters versus coming in April 1 looking to get out of the water on the first sunny day. Thank you. And I'm showing no further questions. So this is going to conclude today's question-and-answer session. Ladies and gentlemen, this is also going to conclude today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
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Ladies and gentlemen, the First Quarter 2023 Siemens Gamesa Results Presentation Conference Call has started. Now I would give the floor to Mr. Jochen Eickholt. Good morning to everybody, and thank you all for joining this call at early times, in some parts even of Europe, it's still very early. I have the pleasure of being joined here today this morning by our CFO, Beatriz Puente. And together, we will take you through the company's results for the first quarter of this fiscal year. And as always, after that, of course, we shall be happy to also take questions. So if I may move us to the key points, Chart #4. Many of those key data already were communicated over the last couple of days actually. The order intake for Q1 was in the range of â¬1.6 billion, that led to a totaling of a backlog of â¬33.7 billion. For the onshore side, perhaps relevant information is that we continue to see the pricing levels in our -- moving into our direction, we had the so called ASP in the range of â¬0.95 million per megawatt. And if we compare it for the entire fiscal year, we then have â¬0.88 million per megawatts. The commercial activity does reflect the impact of the overall environment our clients are in. And we continue to have negotiations in onshore which are longer than anticipated. And we also have in offshore, a kind of standard volatility, and we'll come to that a little later. Of course, it needs to be mentioned that we continue to drive actually for the increasing level of protection of our contracts versus the inflation effects. On the performance side, Q1 revenues of â¬2 billion and the EBIT pre PPA and I&R of minus â¬760 million that was communicated on, of course, that was then showing the impacts of our periodic monitoring of the situation of the installed fleet, and we had to observe some increasing failure rates there. So, part of that also, I mean, from an accounting perspective needs to be considered as lower revenue. The impact is mainly on the service side. The overall picture of Q1 is showing that we are, as planned by the way, impacted by the -- by higher cost levels as planned. But of course, some discussions on inflation compensation also continued to take place. The execution of the projects is taking us to some difficult questions around the onerous project and we'll come to that a little later on. The Mistral program is moving forward in the end of the day as planned. So, the 5.X is moving or the development of the 5.X, the development of the maturity of the 5.X when it comes to industrialization and manufacturing that is going on as planned. We spoke about the Mistral program with new organizational concepts behind it that was introduced January the 1st, and is in full swing and up and running. And we also make progress as planned on the restructuring part. One element here is that also it was publicly communicated that we reached the agreement in Spain. Last week, we had the approval of the EGM for the delisting. So that process also is in the end of the day, moving on as planned. And I have to repeat that, of course we do foresee strong long-term prospects for the wind industry. But of course short-term, the situation for us continues to be difficult. And there is in many cases further activity needed to optimize that situation. Perhaps, on the next page is perhaps relevant for these discussions continues to be that we indeed have a high recognition for our ESG performance. We've had top rankings by quite a number of different rating agencies. We can say that in those top rankings, we also sometimes are really leading or really among the leading groups. So Sustainalytics or Standard & Poor, the sustainability assessment that led to substantial performance indication for us. And that continues to be the case, and also our activities will focus around those parameters which are behind that. So, if I then move on to the Page 7, we mentioned that in the end of the day, the backlog on the right side remains more or less stable, some slight changes, but I think that is nothing unusual as such. You also realize if you compare the order intake of the Q1 of '23 versus the Q1 of '22, a slight decrease. However, again, may I remind us that in the offshore side, for instance, one single project typically is in the range of above a gigawatts and therefore, also relevant revenue behind that. So if one project shifted, then obviously, the effects are a little bit like shown here. The volatility, which we observe is, however, standard, nothing extraordinary. If I may take our view onto the onshore business, we here see that indeed, also on the order intake side, we have a slight decline. Again, this is nothing too concerning for us. But it's also reflecting our approach towards being slightly more picky to be slightly more selective and to continue to drive for protection of our contracts. 74% of the Q1 order intake actually was based on the Siemens 5.X platform. If you just look at the average selling price, the average selling price is an important parameter, and it's going forward and it's developing nicely. However, we also have to see that the ASP as such is not the only parameter we need to look at. If we want to assess the advantage or the -- if we want to assess the attractiveness of a contract. So depending on region and scope, we can see fluctuations in the sales price of more than 30%. While in that sense, leading to the same profitability. So the ASP is an important parameter. It's not the only one, which is needed to assess the attractiveness of an order intake or offer contract. If we move on to offshore, again, nothing too extraordinary to be mentioned. We last year had substantial order intake. We foresee that also for the current fiscal year. Q1 here did not lead to contracts. However, it should be remembered that we continue to have a substantial order pipeline of 7.5 gigawatts. And that's also currently in, how shall I say, in the status where we try to develop the maturity of that towards the contracts. 52%, that is Page 10, 52% of the Group backlog comes from service and that continues to be the case. And we now have 83 gigawatts under maintenance. Out of that 70 gigawatts are in onshore and 13 gigawatts are in offshore, the retention rate is 64%. So that also in -- is kind of in line with our expectations. And also on the order intake side, we sometimes have more volatility than typically expected at all times. However, again, in my view, nothing really concerning at all. Thank you, Jochen. Good morning, everyone, and thank you for joining us today. If we go to Page 12, we have a summary of our financial performance for the quarter. As you can see no changes on the numbers that we provide at preliminary results. Group revenues increased roughly 10% year-on-year to â¬2 billion. In comparable basis and excluding the currency impact, revenues will have increased circa 9%. Offshore WTG with revenues at nearly double year-on-year was the main source of growth at Group level as we can see on the next page. Revenue growth as we have explained also has also been impacted by the outcome of our periodic analysis and technical assessment of our component failure rates in our installed fleet in the amount of â¬687 million, out of which you do have the breakdown. 104 have impacted the service business and the rest remaining mainly onshore. This impact is the result of course of following our POC accounting. The Group ended this quarter with negative EBIT of â¬760 million, reflecting the severe impact of this technical evaluation which impacted at group level, up â¬472 million. And beyond this impact, the Group performance of EBIT level continues to reflect what we already anticipated, which is higher cost based on the execution of our WTG projects. And we will have more information on Page 14. Below EBIT, the parameter integration and restructuring costs amounted to â¬63 million in this quarter. And the cost increase reflect what we explain is the progress in the restructuring program that we have. As you know, we have already reached a pre agreement in Spain. Financial expenses increases to roughly â¬26 million -- has increased, driven mainly by higher average interest rates and of course, the gross debt levels in the core. In the period, our tax income reflects a positive â¬21 million, is driven by our operational performance and also the capitalization on our specific deferred tax assets. As we reported, our net income amounted to negative â¬884 million in the quarter. Moving to a specific as parameters on the balance sheet on key cash flow metrics. Siemens Gamesa has invested in the period â¬166 million in CapEx. The CapEx is roughly a split 30% to 70% between product development and manufacturing capacity on Tucson equipment. And important to highlight that we continue to invest roughly two-thirds in offshore. This is in line with our strategy, of course to invest for the future growth of this sector and us living with our offshore capabilities. We've got a net debt of the Group, it stands at â¬1.9 billion and a working capital negative â¬2.7 billion. If we move for more to give more color on the revenue performance of the Group in Page 13. As I explained before, offshore revenue growth was the main driver of the revenue growth of the Group with a increase of 80%, with total amount of â¬829 million. You probably recall when we explained also the results of our last quarter, last year that our activity in offshore was heavily impacted by the supply chain disruptions and also the lack of our key components in our manufacturing facilities. This has significantly improved, saying that is still the supply chain has not been fully normalized. Revenue growth in off shore, as I explained, also reflect significant growth both in terms of revenues and also manufacturing activity that nearly tripled this quarter. So now 250 megawatts to roughly 698. The decline in onshore revenues, roughly 20%. Revenues decline comes from the combination of lower manufacturing activity and installation capacity. As we explained, also geographical mix also impacted the revenues with a higher contribution from APAC, and therefore also the lower scope in the project. And that has been also lower average selling price. And also the negative adjustment I already covered, that has impacted this segment. Revenues remain flat year-on-year which amounted to a period of â¬428 million. So as I said, is heavily impacted by the reduction of our revenues because the periodic technical evaluation that we did roughly for reduction of â¬104 million. Excluding that, of course, you can see that there's still a strong underlying performance on service growing over 20%, driven a combination of higher post-warranty growth in our warranty fleet, and also under maintenance and also higher spare parts and sales, which is important for us, for the growth prospects of service. If we move to Page 14, not, again, providing the numbers of the impact of our assessment on the install fleet has been roughly â¬472 million, out of which â¬187 comes from the revenue adjustment that I mentioned before. And the rest is impacting also of course, EBIT and is here impacting the service division with the total amount of â¬346 million. Beyond the impact that I explained, as we have explained in the Activity Report, the main reasons of the EBIT performance are aligned with our expectation on higher costs inflation that we have seen for the last 2 years. Also, the execution of the onerous project in on shore, and also the impact of course of ramping up our facilities and our new capacity in offshore. All these elements have has been partially compensated by the positive impact of higher pricing. And that is, of course, our priority as Jochen has explained. And also higher revenue and also productivity gains. Despite the performance that is impacting us on EBIT, it's worth mentioning, as Jochen has said, that Mistral is well on track, helping us on the short-term to have the path to profitability of the company and also to stabilize the 5.X platforms and also dealing with of course, challenging market conditions. In terms of also addressing, the supply chain challenges, our priority continues to be to improve the terms of the contract. As Jochen also cover and also of course, to have higher protection against inflation, and that applies to both new orders for onshore and offshore. Later on, Jochen will cover the status of Mistral program. If we move to Page 15 to cover also the Group leverage. Cash generation and our financial discipline continues to be, of course, our priority. As we anticipated, also cash flow generation in '23 will be impacted by the operational performance of the Group and also the priority to continue investing for the growth of the company. The cash impact of the outcome of our installed fleet evaluation for '23 will be limited, where we will provide our best estimate, which is mid to digit figure in this year. And the cash outflow per year in the coming years will be very much dependent on, of course, the action plan and also the alignment with our clients from that plan, because we want to make sure of course that will guarantee the best performance for our clients. Net debt position of the core is still around â¬1.9 billion. And the increase is mainly driven by the operational performance with negative gross operational cash flow of roughly close to â¬500 million, â¬497. And investment on CapEx as I mentioned before. We continue to maintain a very strict control of our working capital, as it reflected also on the balance sheet. And despite the net debt increase, of course, for us, it's important to maintain the liquidity of the company. We have â¬4.4 billion of trade lines. We have thrown roughly â¬2.3 billion. We maintain on the balance sheet cash at the end of the period of â¬1.2 billion and under for total liquidity available for the group â¬3.3 billion. And now after coming in the key of isometrics, Iâm of course happy to answer later on any questions you might have. Please let me hand over to, Jochen, to cover the outlook of the industry very positive, and also our mistral status. Thank you. Thanks, Beatriz. So if I may take us to Page 18. Our view onto the market is and continues to be very positive. We see all the signs of political will and also in the markets. The demand and what is typically communicated on is a massive increase of wind installations. What we continue to observe as well is that there are some difficulties in translating that into, how shall I say, real positions in our order book. So short-term, there continue to be difficulties and we'll come to that a little later. But mid to long-term in my view, the market perspectives remain to be outstanding. In the end of the day, those targets which are communicated, which continue to be communicated on in relation to both energy sovereignty and the climate change, those targets will lead to a substantially positive development in the market. If I may take us to Page 19 then. There's of course a couple of things we need to be looking at. Please remember that not only we have difficulties on our profit line, but also our competition has similar effects. To date, our industry the development has been characterized by slow permitting, we continue to observe grid constraints, we continue to have regulatory uncertainties in many cases and also the auction mechanisms still do not focus enough on the overall political target, which is behind that. So that means that in total the OEMs have seen sizable losses. We have had reduction in employment in many cases. And we also observe that investment decisions are slowed down or the speed of that is slowed down or investment decisions are postponed. So, so far we continue to observe that the political will, which I expressed all over are not really materializing. So, if we would want to make to move forwards in line with those targets, in our view, it needs to be understood that wind is a pillar in the energy system of the future, an important one. And the size of that pillar continues to be too small in relation to our overall ambition level. We need to consider our industries, when it comes to other aspects of the political discussion these days. We need to consider our industry as of strategic importance. In other words, we need to make sure specifically in Europe, that the knowhow on innovation and the resources for scaling up the -- the wind pillar, that -- those structures are in place and so far, it continues to be rather difficult. We have to make sure that the targets really turn in real opportunities. So permitting needs to be accelerated. There is -- for instance, European Union member states, a rather fragmented view on these situations. And also when it comes to auctions, which are one way to define which developer is looking after which wind farm. This needs to be made clear that secondary effects like those ones related to manufacturing and employment also can be considered. We need to make sure that the supply chains continue to be stabilized. We need to make sure that inflation compensation, specifically in terms of higher inflation, is an integral part of the agreement of all levels of the supply chain. Specifically, also when it comes to off take agreements for project developers, because what we do observe is that also on our customer side, there is an increasing level of concern around the viability of the agreements which are offered in auctions. We want to make sure that domestic innovation and technology competence are really supported. We want that to be part of the auction criteria when it comes to auctions. And in the end of the day, it also needs to be stated once more that we are in global competition. And we need to make sure that actually we operate on level playing fields, because in some parts of the world, there are mechanisms, support mechanisms for some of our competitors in place, which make it very difficult to compete at equal levels if you wish -- level playing fields. If I may turn to Page 20 and summarize it rather quickly, you please remember our Mistral program, in all the dimensions we are making progress and with the end of the day as planned, so the 5.X platform we are making progress also when it comes to installation volumes and delivery times. The new contracts I told that or I said that we are going to be slightly more picky even slightly more selective. So there is a better protection against volatility and inflation. The new operating model is running actually very smoothly since the beginning of January. And the simpler leaner organization and the optimization of our structures, of our cost structures also moves ahead as planned. So with that, I would like to say thank you once more for your attention and we're happy to answer questions. Please go forward. Good morning, Jochen and Beatriz. Thanks for your time. My question is for Jochen. You have been demanding state intervention and policy support since quite some time and yesterday there were some proposals by the European Commission to relax stated rules and to accelerate renewable deployment. What is your initial take on the proposals? And do you see any need to adapt to your Mistral plan, particularly on the restructuring side, given you may be able to get some state support in near future? Thank you. Sure. In my view, the discussion around the most recent days, in fact, are to be seen in connection with the overall response from Europe towards the IRA. We feel that this has gone in the right direction, but perhaps not sufficient yet. This is one miss probably my view continues to move on in the original -- in its original design. Thank you. Thanks very much, everyone. Good morning. I had a question for Beatriz, please. On the working capital, I noticed that there's been a step up again, in the contract liabilities, even though the order intake in this quarter doesn't appear to have been too high. Is this a reflection of the order intake in Q4 delayed slightly or something else? Thank you very much. Thank you, Vivek. Nothing extraordinary on this Q. I mean, as we know, we continue working on, of course, cost control, and also, of course, on some working capital, measures that we put in place last year. Also, of course, the adjustment that we made on the books, adjusting for the hit that we have on the â¬472 million, a portion of that is also impacting us, because a portion is short-term. As I said a small amount of the â¬472 million for the reasons I mentioned. And then you also have the long-term, so it's impacting us well. Prepayments for us, it's standard on the bigger contracts on offshore on, it will be a significant contributor on the cash of this year. Good morning. Thanks for taking my question. And this is regarding the change in contract terms. And we've discussed this before, but I wanted to know if you could provide maybe a bit more details around what shareholders are you able to really put new term indexation on? And also, how much longer do you think those negotiation will have an impact on order, because you do know that this has weighed on the ongoing tech, thank you. Well, thank you very much. In the end, thee negotiations are individual. And in the years also, then the contracts have an individual scheme. However, we have to perhaps remember that when it comes to raw material and the discussion we had until the middle of last year, we are exposed to raw material fluctuation by about 1/3 of the cost level. Because as you will perhaps also remember, I mean, there's many things are many times where we buy raw material at some later value at stage, if you wish, so we don't buy raw materials at all times. Now the inflation takes us takes us beyond that level of raw material protection. So we need to be protected in other cases for a variety of reasons there as well. And we of course targets to have as much as possible, of the overall cost base protected against then inflation. So that leads to additional inflation protection, when it comes to securing the volumes against current -- currently discussed indices. And the range is going to be substantially higher. We're going up to 80% of that cost level. Thank you. Hello. Good morning to you all. Thanks for the time. I will ask my question relating to cash flow for next year or for the '23, '24 period. Could you please break down how you see the main elements of cash flow developing into 2023 to incorporate more specific comment around your central assumptions for capital investment, working capital movement and provision utilization? Thank you. Thank you, William. It's a very good question. But we don't provide as you recall guidance for '23. And, of course, that's pretty much -- your question is pretty much linked to performance of the company, and of course, cash. What we can tell you is -- what we have said in the past and we've proved to do so that we maintain a basic control of cash flow, of course, maintaining the liquidity and now fully alignment with Siemens Energy for that purpose, and that we continue invest in on the future of the company, of course, aligned with the profitability of the business. So we will continue to invest it as far as we can afford that. And we have proved in the past that that we have been able to manage that. Good morning. Let me ask one question then on the U.S. I mean, we're hearing that maybe we have to wait until the end of Q2 before we have all the details from the tax authorities around the U.S IRA. I mean, where are negotiations on the U.S? And at what point will you be pulling the trigger on expanding capacity in the U.S? Thank you. Well, the timing you provide on the IRA, in my view, is perhaps even rather optimistic, so it made last longer, but that remains to be seen and that is pure speculation. What we do observe right now is that the IRA leads to a much higher level of, if you wish, fantasies on several customers. And therefore the discussions become much more future oriented towards them also projects which are both new and also the retiring ones. And in this context we already have taken the decision that the hibernation of our two manufacturing plants in the U.S that this decision is reversed. We are about to reopen those factories earlier than anticipated because we see a stronger demand in the U.S. So right now there is nothing around pulling the plug or something, we see the opposite trend. Thank you. Hi. Good morning, guys. Thanks for taking my question. A couple of questions, basically. So one is on your performance of your WTG segment. So if I look at the profit margins in that particular segment, even excluding the exceptional items, so it was one of the worst quarter you had in that particular segment, despite a sharp increase in your offshore business. So can you please comment a bit more on that? Because last year you made significant amount of provisioning for onerous contracts. So how does that matches with this performance? If -- and if you look at the provisions, so there is no major decline in the provisioning as well. So that is the first question. And second, I will ask you after this one. Question regarding the performance of the WTG, of course, as you said, even excluding the impact on the technical assessment that we did. It's also impacted, but what we said higher cost base that was expected. We, of course, did the assessment for our plans on Q1, and we will continue on that. So that is playing that. And that's the reason we continue to protect our contracts going forward. And also the execution of the onerous contracts in our show as well. And if you see the underlying performance of Q1, it is quite similar to the underlying performance on our Q4 last year. So not simply unexpected for us. It is more continue execution of our trades with, of course, a higher cost base that we have. In terms of operational performance, as we have explained, the installation of the 5.X. And of course, the output production of also of our facilities in onshore is well aligned with our expectations, even slightly better as well. Good morning. Thank you for taking my question. I just want to [technical difficulty] whether you're seeing any improvements in the permitting process within Europe during the last few quarters. And if so, could you please highlight which countries you are seeing the situation improved? Thank you. While we do see a more explicit political will in improving that. And the concept of overriding public interest and some related questions, we believe will certainly take us forward. And we had seen those effects in Middle Europe. So we saw that in Germany, we see them in the northern countries. We see similar trends coming up in South -- Southern Europe as well. But there we are lagging behind a little bit. I would reckon that takes another quarter or two. And then we have to see that in some cases, we operate permitting in federal structures. So even if central governments then kind of pave the way towards improvements here, we still have to see that on a regional or county basis, even permitting also needs to be speeded up. And that is sometimes the difficulty which we are confronted with. Thank you. Yes. Thank you very much for the follow-up. I just like to ask if you will share your expectations around volume, installation volumes for onshore or offshore in '23? But if you're not happy to talk about that as a forward-looking statement, can you please put more color on the reasons why or the areas where you found increased costs to complete your service contracts? And why we should now be confident that you have put this issue behind us? Thank you. Well, thank you very much. Yes, so forgive me, forward-looking statements and guidance is what we cannot provide today. On the occurrence of the service related issues, this indeed is a broader scope of things on installed fleet, taking us back sometimes to even prior to 2010. And there was a reassessment on those things we did. Now it's not so easy for me to speculate on things I don't know of. What I can tell you is that it's nothing where we can have highlights or lowlights, if you wish, around specific components or platforms. This is not the case, it's a broader variety of things. We will tackle those in line with our obligations. And on those things we detected, I'm confident that this is it. But again, it's very difficult for me to speculate on things I don't know. Hi. Thanks for the follow-up question. So this is regarding the better protection which you guys are building in your pricing and contract. So can you please share some more insight like are you guys now better prepared in dealing with the similar kind of circumstances which we faced in the last couple of years for the future? In my view, absolutely, yes. We've first of all increased risk contingencies in our projects all over the portfolio, yes. But then again, we put much more focus on T's and C's on resulting liabilities. And we also put much more focus on, as I said, inflation compensation effects. And they may come -- these inflation compensation effects may come at various levels. So, it can be around the material discussion, it can be around the pricing discussion with the customer. It can be a mix and we tried to apply all levers which we have at our disposal. In the end of the day the previous discussion -- in my view of the previous discussions we had around, if you wish a fixed price project, can only be answered positively if certain provisions are then taken. And that may, however, have some impacts on the pricing which is then needed. So in my view the contract we want to go for going forward has to have these variable elements in it. And they have to be dimensioned adequately in order to cover for those effects. And we are increasingly put that in place and increasingly successfully. So in my view going forward, this is why I'm referring to also to look at the entire value chain and perhaps also sometimes have a look at our customers. Also their -- in their off take agreements my recommendation is that provisions for inflation compensation need to be taken right from the very beginning, otherwise it will be difficult. And we see that trend, we see that thinking. We're making progress here. But of course, it's not implemented everywhere and in all places, but this is what we're working on. Thank you. Thank you for the follow-up. Just wanted to ask about supply chain, you do highlighted for the offshore path where you have a lot of components. Do you see a real improvement you think is going to impact the entire year on a couple of quarter? What kind of visibility do you have on supply chain here? Thank you. Well, we've put rather systematic mechanisms in place in order to monitor the, how should I say, the rise of a risk of under supply at early stages and we've put task forces in place to make sure that this kind of is mitigated. We use all levers here as well. So sometimes we also continue to have, how should I say, joint procurement efforts, for instance, with Siemens Energy and sometimes even with Siemens. So these things are all being used. And, again, the number of critical components went down dramatically. It's not zero and going forward, I reckon that to continue to be stabilizing because in the end of the day the supply needs to be there, otherwise, the whole supply chain will kind of fail. I do not see that. I see that component wise we're making progress. Thank you. Just a follow-up on that -- just to understand you say in the release new order signed have much greater protection against inflation. Can you give us an indication of how many of the Q1 orders have that? Does that then now apply to every single new order, 100%? Well, at former events I spoke about the -- how should I say much more stringent, much more strict approval process we have in place. I would be -- it's difficult for me to say how many percent that is in terms of order intake. But in total, as I said, we continue to design our approval process in a much more selective manner. And therefore the trend is increasing. Often I find it difficult not to have -- to respond on clear numbers of volumes and stuff. Yes, thank you. Thank you. Ladies and gentlemen, there are no further questions. I will now give back the floor to our speakers. Thank you. Well, thank you very much then. Thank you very much to all of you for again, being here at early times of the day. And as always, I find the quality of the exchange remarkably sophisticated. So thank you very much for this intensive and good dialogue. We stay in touch in many cases. Thank you very much to all of you for attendance. Bye-bye.
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Good morning. And -- good morning. Welcome to Alfa Lavalâs Fourth Quarter Report. And we are in a newly inaugurated studio in Lund, so transmitted from here first time. Hope all will work well. Together with me, I got Fredrik Ekstrom, our CFO, and we will run through the normal presentation. You will lose our team picture during the actual presentation and then we will be back in full picture as we move into the Q&A session. I also want to alert you that due to a bit of time pressure on the schedule today, we will have to run the Q&A a bit shorter. So approximately at 10:45, we will have to discontinue. So I hope you can have some understanding for that. And with that, as always, let me go to a couple of introductory comments. Now, first, obviously, as you have seen, demand remains strong in Q4 with record levels of order intake across several businesses. The outlook also remained positive overall. Secondly, the global supply chains continue to stabilize with solid invoicing and improving cash flow in the quarter especially towards the end. But thirdly, the energy transition drives demand beyond normal growth rates and existing capacity limits. To support our customers -- customer base, we announced the largest investment decision in our history yesterday amounting to SEK3.8 billion. In balancing the decision between a weaker global economic outlook and supporting the global reduction of carbon emissions, the climate was the winner. Finally, we charged SEK440 million in the quarter. The earlier announced restructuring program is progressing as planned, with changes in the Marine Division and the Energy Division. We have also provided for all our remaining exposures in Russia as the wind-down of our existing operations continued as earlier announced. The decision in February 2022 was to stop all new orders, cancel all sanctioned contracts on the order book, the legal entity is gradually becoming non-operational as we move into 2023. And with that, let me go to the key figures. Both order intake and invoicing grew in fourth quarter with approximately 15% organically. Sequentially, the growth was about 4% organically on order intake, slightly better than expected and guided. Earnings improved on the back of higher invoicing with some downward pressure on the margin. The main margin challenge was related to the specific businesses included in the restructuring activities. Going then on the divisional level starting with Food & Water, we had a good quarter overall with good demand and an exceptional invoicing. A few end markets and China specifically were a bit weaker in the quarter. Margins held up well, supported by good performance in the engineering business, both regarding Desmet and our own food system, reaching double-digit profitability both of them. Going to the Energy Division, the strong demand in the invoicing trend continued in the quarter, supported by several applications related to the energy transition. The margin decrease compared to last year was mainly due to the Business Unit Welded now being restructured. The cancellation of the Russian order book and the earlier softness in the fossil investment cycle created significant utilization and load issues in Business Unit Welded, improved order intake in Q4 and the planned actions and restructuring is presumably improving the situation during 2023. The Marine Division had a very strong demand and a record quarter in terms of order intake, supported across most of the portfolio, both in applications related to sustainable shipping and the more traditional offshore business. Specifically, demand improved for cargo pumping in late December with improved factory load expected from Q3 and onwards. The margin improved sequentially in the Marine Division due to mix and volume, but we still have some work to do during the first half of 2023. As indicated before, the second half of 2022 and the first half of 2023 is likely the bottom of this cycle when it comes to the margin development. Moving on to Service, grew to record levels and beyond our expectation. The trend was positive across all three divisions. As said many times during the last six years, the work to strengthen our service offering is paying off. In addition, we may have an element of pent-up demand from the period of the pandemic, supporting the growth numbers even further. Then on to the regional picture. All regions, including China as a whole, had a good development in the quarter. Russia is now removed from the comparison going forward, but even with Russia included in Q4 2021, the numbers for Eastern Europe was still positive year-on-year. A final comment on the order intake as a whole. If you consider the last three quarters, it puts us on a running rate of approximately SEK60 billion on average when it comes to order intake. After hovering around SEK40 billion plus in 2020 during the pandemic, the growth is exciting, but also somewhat challenging. Customer service remains the priority for us, resulting in higher than normal operating costs. If demand remains stable, we should gradually resolve the imbalances in our supply chain as we move into 2024. Thank you, Tom, and good morning. During quarter four, we have delivered a record amount to our customers, in part due to the improving supply chains and in part due to the high backlog and order intake we have had over the last 12 months. Sales closed at an all-time high of SEK16.5 billion in the quarter and SEK5.1 -- SEK52.1 billion for the year. The gross profit has in most business units had a good development in the quarter. Our pricing initiatives have offset a good part of the inflationary pressure and the overall margin also reflects a positive mix in capital sales. Invoice backlog with orders taken prior to 2022 and low factory loads in Business Unit Welded Heat Exchangers and Marine Pumping Systems affect the margin negatively. The underlying negative contributions are being addressed through the restructuring programs that Tom mentioned in his introduction. Sales and administration expenses were SEK2.1 billion during the fourth quarter and SEK7.9 billion during 2022. The full year corresponds to a 15% of net sales. If you exclude currency effects and acquisitions, sales and administration expenses increased approximately 10%. That increase shows a return to normal levels after the pandemic years. The cost for research and development during the fourth quarter corresponded to 3% of sales, an increase that marks a return to pre-pandemic levels and increased innovation ambition. Earnings per share were at SEK10.89 by the end of the year, compared to SEK11.38 the year before and corresponding adjusted EPS numbers are SEK12.78 versus SEK12.98. Q4 sales of SEK16.5 billion represents a growth of 41% compared to last year, of which 14% was organic growth, 11% currency related and a final 16% related to acquisitions where Desmet contributed with SEK1.9 billion. Summarizing 2022 sales reached SEK52.1 billion, which is 27% better than 2021, of which 11% was organic, 10% currency and 7% structural, of which Desmet represents SEK2.5 -- SEK2.1 -- SEK2.5 billion. It has been a turbulent year with continued supply disruptions, capacity imbalances, lockdowns, rising inflation, rising interest rates and continued uncertainty driven by Russia-Ukraine war. Given this, it is reassuring that the demand from our customers remains strong and prioritized. Sales in quarter four yielded an adjustment -- adjusted EBITDA of SEK2.5 billion, corresponding to 27% growth, of which 6% was currency related. That yielded a margin of 15.3%, which was diluted by FX with 0.6% and structure driven dilution of 0.5%. The overall margin reflects that our pricing initiatives to a considerable extent have offset inflationary pressures and a positive impact from capital sales mix. The low factory loads and backlog orders taken prior to 2022 are affecting the margin negatively. Adjusted EBITDA for the year ended at SEK8.2 billion, which is 16% higher than 2021 with a currency component of 5%. From a cash flow perspective, the increasing EBITDA contribution is materially offset by working capital movements. Record high sales have increased accounts receivable with SEK2.1 billion and decreased the balance of advanced payments as sales are recognized with a heavy impact in quarter four and for the year. Supply chain disruptions have eased towards the end of the year. However, COVID lockdowns in China and the war in the Ukraine have created uncertainty that continues to persist in high inventory levels. Initiatives to reduce and optimize have already been started and will continue during quarter one 2023. Nevertheless, the cash flow is impacted negatively with SEK3.1 billion on a full year basis. Cash flow from operating activities in quarter four amounted to SEK1.7 billion and SEK3.3 billion for the year. CapEx of SEK1.9 billion were primarily allocated to capacity increasing initiatives and acquisitions to the tune of SEK3.7 billion included Desmet at SEK3.4 billion, Scanjet at SEK237 million and BunkerMetric SEK13 million, closing quarter four and the year with a positive cash flow and free cash flow. We are increasing our CapEx guidance to SEK2.5 billion to SEK3 billion per year over the next three years to four years in order to capture growth opportunities in the area of energy transition and service. In quarter four, we have also quantified and charged two comparison distortion items and cost provisions. The first one related to the restructuring program covering Marine Division and Business Unit Welded Heat Exchangers as communicated in the last earnings call. The program will address capacity imbalances in the supply organization and reposition for future business. A restructuring charge of SEK367 million has been charged in the fourth quarter and the expected payback in approximately two years. Closing backlog in quarter four shows the first modest reduction of a historically large backlog with a book-to-bill in the period of 0.96. The acquisition of Desmet and Scanjet increased the backlog with SEK5.7 billion at the time of acquisitions. Excluding currency effects and adjusted for acquisitions, the order backlog was 30% higher than the year before. On to some guidance, as mentioned before, CapEx guidance will increase to SEK2.5 billion to SEK3 billion per year. Currency impact is expected to be positive based on currency rates per closing of 2022. Amortization of step-up values continues with a modest increase in 2023 to start declining in 2024 with current structure. Tax rate guidance remains in the span of 24% to 26%. The Board of Directors proposes a dividend of SEK6 per share, equal to the dividend of last year and to be voted on the upcoming AGM. And then a final guidance, we going forward are going to change the way we report our divisional numbers going from EBIT through adjusted EBITDA level. This to simplify how we communicate with the market. Below follows a conversion in anticipation of the quarter one report where we will implement this change. All right. Thank you, Fredrik. And then to the outlook statement and let me first say that of course, we are acutely aware of the concerns on the macroeconomic situation in the years to come. We see how the business down cycle is affecting many parts of the businesses on the consumer side. On the industrial side, we still havenât seen those effect and we havenât seen them in Alfa Lavalâs end market. So in that perspective, we see an unchanged situation as we move into Q2 sequentially compared to Q4 on the Group as a whole. We may see some variations between end segments and divisions. Specifically in the Energy segment, we expect an unchanged demand, in the Food & Water Division we may see somewhat better conditions and in the Marine Division after an all-time high and super strong situation in Q4, we may see somewhat of a softer market conditions coming into Q1. Hello. Thank you. Gustaf Schwerin with Handelsbanken. On the strong Marine orders in Q4, how much do you think the alternative fuel contracting explains the organic step-up year-over-year? How many of the capable vessels in contracting are actually installing the additional equipment you believe? And maybe also on the pumping systems, were you surprised about the timing of the large orders and are you getting feel as the tanker ordering is really picking up here? Thank you. Yeah. The trend is clear towards multi-fuel solutions. I donât have the percentage numbers exactly on my hand. But the trend is going in that direction. It does impact us positively as we indicated several times. So you are correct in your assumption. It is a contributing factor to this. But, all in all, we see a pretty strong demand across the Board. So it was not a unique feature in the growth story for the quarter, but itâs certainly pointing in the right direction. And I remind you that this is also part of replacing the old historic back -- order backlog specifically for boilers that we are now moving into -- related to new orders and multi-fuel and so forth. On the cargo pumping, as I tend to say, every quarter is a surprise. The lead times on those orders in terms of dialogue with customers tend to be very short. So we have been cautious and anticipating anything. And in fact, the main part of the orders came in second half of December. So in that sense, it was a good ending on the quarter, we knew that there is a good demand out there in the pipeline and so it was good for us to see. Hi. Great. Thank you for taking my question. And I just wanted to go back to your CapEx announcements. So I know you mentioned this was driven by sort of strong energy demand, but I am wondering, is this backed by current orders or future sort of expected market developments? And I guess on the back of that, given that you are doing this, how much room is there left for sort of M&A or cash distribution? Well, letâs start with dividend policy. The dividend policy is not expected to change in any way. We have a guidance on that when it comes to share of net profit. So that has not been under debate. I think for M&A, our balance sheet remains strong. But I think -- so I think the aspects on M&A is less about the balance sheet and more about the fact that, of course, the -- itâs got to be attractive acquisition targets in order to compete with our organic opportunities and so the bar is set high at the moment. When it comes to the CapEx, obviously, there is a lead time in implementing the changes. We have an unusually accelerated process for implementing the program. So we will be far into completing a lot of this as we reach the end of 2024. So in that sense, of course, itâs future order, but we are not making this type of capital allocation without a tight dialogue with customers and expectations on the market. Great. Thanks. Maybe just kind of going back to your first answer, will you be revisiting your buybacks anytime soon then? Well, in hindsight, maybe we should have made a different call, but we were looking at an over loaded balance sheet at the time and not a clear pipeline on M&A either. So we wanted to show that we were diligent when it came to how we look at our cash and our balance sheet buildup. As we see it now, I think, buybacks will be far into the future before we are back in that situation again. Yeah. Hi. Thanks for taking my question. My question would be on the sequential improvement of margins in Marine even from a relatively low base. I was wondering if you could comment on the moving parts, whether it was FX hedges improving price cost issues on boilers improving or the operating leverage on tankers, so what got better in Q4 versus Q3? Thank you. Yeah. Itâs a relevant question, as we -- as -- I think as I said the last time, when itâs bad, itâs sometimes not as bad as good and when itâs good, itâs not always as good as it looks. There are moving parts in this. I think sort of we are not out of the trough. Thatâs what I want to be clear about. We have a couple of quarters now with when we would -- remaining to work with low load on cargo pumping and we will be in transition when it comes to the restructuring and we do have elements of the order book left to deal with from the oil pricing. So structurally it has not changed. What has changed is that I think the demand situation has certainly accelerated. The mix has been in the quarter going favorably. The service growth is bigger than expected and stronger than expected. And all in all, I think, we are progressing on the cost side in a good way. So I think what you should interpret the margin development sequentially is that, I think, we have it under control. We know where the problems are. We feel confident we have a way forward in 2023. And so, for me, it was more a sign of that we will -- we are in a level from which we can build the future platform and thatâs okay. We may have some up and down variations in the next two quarters or so, but 8% last quarter was probably as bad as it possibly could get. Thank you. Just my question was around the Services business. So you have obviously seen kind of very strong Services growth this year, 15%, even stronger in Q4. So I just wanted to understand, could you maybe help us understand a little bit whatâs happening here? Is this sort of more a case of price than volume, is this kind of disproportionate to one division rather than another, is it your own kind of internal initiatives coming through or do you think you are kind of broadly growing in line with customer activity levels? I am just trying to understand a little bit better kind of the moving parts behind what looks like a very strong number? Yeah. The -- I think there might be a small element of pent-up demand that is coming through in 2022. I donât think itâs a big cyclical element, but we see it in the Marine Division that onboard services, for example, that was obviously down during a period of time is catching up. We also have a situation where a lot of the ship owners are in good profits, freight rates are, generally speaking, good and so there is a big eagerness to keep the vessels in good shape at this moment. So there are some factors here that is supporting an underlying service volume that is better. But you are also correct that, of course, and this is an issue when you look at our numbers and anybodyâs numbers at this point in time with big currency swings and an inflation that is affecting cost, but also prices, the volume analysis is a bit different than it has been historically. So thereâs clearly a price element on the Service business that you need to take into account. I am not going to throw a specific number. There are variations depending on service scopes and so forth that affect these numbers. But I think you can safely assume that 5% plus is probably somewhere north of that is -- or price adjustments, if you want to think about the volume side. I think what is good⦠⦠from our point and then let me just finish off by saying that, when we look at all the service scopes, whether it is service work, spare parts, whatever, the trend is pretty similar across the Board. So I think itâs a fairly broad-based service growth trend we are looking at at the moment. And so if I could have a quick follow-up just on the Energy margin and I understand you completely said when we went into this year that sort of 21 was -- 21% was sort of not where, it was too high and not where it should be. We have obviously exited this year at a bit lower kind of close to 16%. We are averaging 18% at the full year -- 18.3% at the full year. So I just wanted to get a sense of when you look at the Energy margin, I feel like this quarter is maybe a bit lower than where it should be normally, but is that sort of 18% the right sort of level that we should think about in aggregate? I am just trying to sort of understand a bit how to think about what you would view as a more normalized margin for your energy business going forward? Yeah. And as you know, I donât like to guide you when it comes to your margin assumptions. But what I would say is that, the -- a fairly big difference between the 18% and the current level is related to financially nonperforming units, so everything else being. So I would say if I look at the rest of our portfolio, margin development has been relatively stable over the last -- well at least the last year and maybe even a bit beyond that. So the movements that we see are generally speaking related to Business Unit Welded and the big and the capacity and low utilization level that we faced coming into 2022. Could you just help me understand, so what is it about Welded Heat Exchangers that mean they are particularly weaker? Is it some kind of change in customers, I donât sort of fully -- I donât know enough about to know exactly what drives? And I will take that as a, because we are a bit under time pressure. So I will take that as the last question from you. But if you look at our Energy Division, the Welded applications are the ones that are, by far, mostly exposed to the fossil industry. Thatâs the main application for Business Unit Welded and prior to 2022 where we already entered a lower demand cycle from the fossil industry and so we saw that. Then one of the major countries, as you well know, when it comes to the fossil side is Russia, and consequently, we had a big order portfolio related to Russia and that was all canceled and scrapped, both the formal order book and the signed contracts that were not formally booked. So in fact, we wrote off a very significant amount of orders in February last year and that left us with a number of units with exceptionally low capacity utilization. So that was -- that is the operational problem for this year. The strategic decision though and that you are well aware of since we -- since a couple of years back is that, we have a view that the fossil side will follow us another cycle or so, but moving towards 2030, probably, this is going to be a very minor part of our business portfolio overall and what we can transit in the existing portfolio from fossil to green is probably one way or another slowly, but surely being evaporating from our portfolio. And that transition from fossil to green is also work that is being done now. They are not also related to some cost and implementation changes. So that is why that unit specifically is experiencing the situation much, much worse than the rest of our business portfolio. Yeah. Morning. Itâs Sven from UBS. First one is on Food & Water. Tom, I was wondering if you could give some more granularity, because the comment you made on dairy, brewery was a bit weaker, and you said at the same time, Q1 is going to be a bit better in food. Is that driven by sort of a recovery in those two or would you expect the brewery and dairy to stay softer than the other areas? Well, we are going to have a huge challenge in brewery in Q1. I think here we booked or was it in Q2 we booked a large order. Sorry, my mistake. But we are going to have a comparison distortion on brewery this year since we booked the SEK700 million order last year. So comparative numbers will be a challenge. But no, I donât see it so much as a specific end segment. Overall, the trend is positive. I think the open issue is how we will see the China development in this year. That is, I think, the strategic theme. We had a bit of a weakening tendency in China, as I said a number of times from third quarter onwards last year. And we will need to see now what happens with the business sentiment and the development in China after the COVID situation now itâs dealt with. So I think if we see a structural upside on Food & Water above and beyond what we have been experienced recently, I think, China is the place to look for. Understood. And if I may just quickly follow up on what you have said on the Marine Services earlier more forwards looking, because if we look into this year, we obviously have the IMO regulation on EEXI, CII potentially taking out some older capacity, which is maybe a bit more service active for you, but at the same time, the fleet is growing on the container side. I mean, have you formed an opinion yet how that could turn out for you overall net positive, net negative or too early to say? No. I think in principle this is a net positive. You are right that the expectations on scrapping going forward will accelerate. We have actually been, I think, in 2022 on a historic low when it comes to scrapping good freight rates, ships coming to end of life was still worthwhile to keep on the seas. So I think, all in all, we have to expect that. No matter what we will see an increased scrapping and certainly related to the environmental regulation, this will be an acceleration. So, all in all, I think, this is -- itâs good for the planet. Itâs good for our business and the Service. We are not particularly concerned on impact on Service. I donât feel that the age of the fleet is the determining factor on this. The Service intervals are rather regular and I donât see that the age profile on the fleet has a major impact on how the service will go in 2023. Thank you. Hi, Tom and Fredrik. And the first on the new investment ramp, itâs a big step-up, great to see obviously underpins the strong outlook. We know growth out there is broad-based. But is there, Tom, any particular area across heat pumps, carbon capture, data center, hydrogen and so forth, that sort of explains adding more capacity, because we obviously have the IRA, Europe is being stressed, want to do their own IRA, I mean, I just want to understand incrementally a little bit better? Yeah. I think the IRA discussion is a little bit overdone. I think the U.S. decision is, generally speaking, good for industry. We are operating within U.S., as well as outside. So I think from the trade and point of view, I think, we should take it a bit easy and itâs good news, generally speaking, what the Americans have done and then, of course, there are some practical challenges on that. On the investment program for various reasons, we donât want to be too detailed, but itâs clear that heat pump demand with key global key accounts is an important part of our investment decision. Okay. No. Thatâs good. And just a question for you, Fredrik. The Desmet, we knew that half of the annual sales would be recognized this quarter and that this should normalize as integrated into Alfa, the revenue recognition wonât be as conservative going forward. How will that change now going forward, is that already in the first quarter, which should sort of normalize or just help us a little bit about the phasing there now into the first? It will be a normalization that will continue during the year. We wonât make any major changes simply because we are occupied with the integration of Desmet on a more structural level, and obviously, on a business level. So the financial part will happen during the year, but you will see towards the end of the year a more normalized percentage of completion in line with the Alfa Laval standards. Okay. Thatâs perfect. Very, very quick final one on Food & Water. Tom, itâs a solid underlying margin. Can I just ask if you had any impact from China, this was the division that saw most of the pressure during the second quarter during the lockdown and now we have the sick leaves as they open up, we hear that from others. Did this impact the revenues or margin in December for Food & Water? Not too much. I -- we managed to operate reasonably well in China. So while we certainly did have an infection rate that was astronomical from December 1 to January 15 about, all in all, we managed the situation quite well. So I donât think thereâs a big rebounds on that from a delivery point of view⦠Yeah. Hi. Just a minor question on your guidance on PPA amortization related to Desmet. In your guidance there, what have you assumed for Desmet going forward and then the step-down in 2024, is that mainly related to Framo or is there something else as well? Well, itâs a normal aging of the step-up values or the price purchase allocation as you want to see it. So what we see is that a lot of the companies that we have acquired over the last 10 years are starting to fall out of that amortization, and therefore, you should see the drop in 2024, 2023 is still sort of propped up by Desmet, and of course, how we have done that evaluation of what is step-up value and what is goodwill, well, thatâs an internal one. Thank you and good morning. So I want to come back to your CapEx guidance. You will invest almost SEK10 billion over the next three years. What impact will this have on your production capacity or sales capacity and what kind of payback time should we expect on these investments? Well, itâs a very good question and there are obviously some concerns in terms of the degree of transparency we do on everything here. But we -- letâs say that, we communicated the decision. We already -- as you could see this year, last year, we were at about SEK2 billion in CapEx implemented that is charged to us, paid out and thatâs the issue with adding capacity that the decision has a lead time until itâs completed. So I think when we reach the SEK2 billion where we -- and we are probably not going to be all that far away from that also in 2023, although we are upping it. It takes some time for us. But in general terms, it -- we are running at high capacity and it allows us the continuous expansion and growth story that we are in. But I am not going to give you a finite number as to where we will be capacity production wise three years from now. But this assures that we continue to grow at a good level in some of our core businesses and that was the first question. And the second question was⦠Whatâs the payback. Letâs see, but letâs put it like this. Typically speaking, when we are evaluating investment proposals, the payback times in manufacturing that we tend to look at, at somewhere around six years. If itâs 10 years, itâs going to be a lot of sustainability related issues for us to go ahead. So you should assume that when we look at our internal rate of return and payback numbers, those are typically the ones that we are looking at. Then sometimes itâs a bit better and sometimes marginally worse, but around there. What I would say on this one, though, is that, we are in this package specifically relatively equipment heavy, which is a good thing. We have earlier worked with footprint investments where we had a reasonably high share of real estate versus equipment, and obviously, thatâs not a good mix for payback. So in this sense, we can now -- and thatâs why we are expanding in existing sites so that we as much as possible can optimize the share of equipment. Itâs faster for us to implement and the payback is somewhat better. Okay. Thanks. I think when you launch the bigger CapEx program the four years ago [ph], I think you mentioned at the Capital Markets Day that the return on capital employed on those core organic growth initiatives normally were about 50%. So you expect quite good returns also on the investments that you plan to do now I guess? Yeah. Thank you. And then my second question is on the backlog. Itâs now standing at SEK37 billion and if you look at the composition of when the backlog is going to be delivered, itâs around 35% of the backlog that will be delivered later than 2023. And if you look at the backlog composition in previous years, it was closer to 20% to 25% of the backlog that would be delivered later than next year. What is explaining this change, is it specific business segment end market or have we seen lead times growing across many different areas? Well, I would say that in general, we have an increase in lead times. But I would also say that, I would remind that for the year, we had a book-to-bill of 1.12, which means we have been building backlog during 2022. And certainly, that -- the backlog that was built during quarter four certainly then falls into the category of spilling over into 2024 and I think thatâs more what you see in your backlog analysis. We may also have a bit of an effect on Desmet and the order book we bought, which is a project business with typically somewhat longer lead times. So that may affect the percentage split a little bit as well. Good morning, everybody. Two questions, please. One, could you give us some color and commentary on capacity? At the Capital Markets Day, you talked about capacity constraints in certain growth areas, and perhaps, overstaffing, overcapacity in other areas. If you could just comment as to where you have seen improvements or growing constraints qualitatively? Second question on inflation -- wage inflation specifically, do you have a view for this coming year or the quarters as to whether thatâs going to accelerate and how should we think about that? Thank you. Yeah. The capacity balancing is, in my career, the most complicated I experienced in the sense that on the same day almost we are making our biggest CapEx decision in our history, and at the same time, we are releasing approximately 5% of our employees from areas, which is under changed. So this transition from something to something else is very visible in our business overall and itâs a very happy story but itâs also a difficult one for many parts of organization where we have big changes being happening as we speak. So, but of course, overall, it is a very good demand situation for the Group. We are -- the general comment on capacity, I think, is in the Marine Division, in general, we are quite well set when it comes to capacity. Although we are going high in some areas, we are quite well set. In Food & Water, if we look back, which is heavy on rotating, that has been actually a fairly heavy part of investments that we have done over the last few years and there depending on where demand goes, we may have somewhat of a better situation in 2023, but we certainly donât have a lot of slack in that. So utilization levels are high, but at the moment, reasonably balanced. And the area over the last year and moving into 2023, 2024, which is just most concerned when it comes to capacity utilization is related to the Energy Division and predominantly then the Heat Exchanger part of our business portfolio. So thatâs sort of the view on the situation. Well, the -- I think, the jury is out how this economy will cool down by the central banks. At the moment, the labor markets are still very strong. As you know, in the U.S., there is still more open position than available labor. And so we are assuming for 2023 wage and salary inflation that is higher than normal. Itâs not all that new to us, because if you operated in India, China and emerging markets, we are used to relatively high wage and salary inflation levels, and we are trying to work with productivity and automation the same way in those markets as in others although the actual labor cost historically has been lower. So itâs not -- my main concern for 2023 onwards is not related to wage and salary levels in terms of inflation. It is that we get some stability when it comes to currency situation, when it comes to commodities market and all that. And I think we are going to have to live with a shortage of the labor pool at least during 2023 and maybe onwards if the economy is not cooling more and that would be my inflationary precaution. With that, we have time for one last question. So, please. Yeah. Hi. Just a quick follow-up for me, so -- which is connected to what you were saying before. Clearly, the order book that you have in Energy and Food & Water is quite large and you are adding capacity. So I was wondering if I think about the organic growth that we could see in 2023 and 2024 especially for these two businesses, how much can we expect this to be given your plans and given you have a capacity utilization already quite high? If you knew me better, you wouldnât ask the question. I will not guide you on the growth level. We -- what I would say is that, we have a corporate growth target of 5%. We achieved that over the last few years. We are investing in capacity, which should give you an indication that we donât consider we are at the end of the growth journey. But when it comes to forecasting where we are going to be, I leave that in your knowledgeable hands. And with that, Iâd like to thank everybody. Sorry to cut it a bit short today, but you all have Johanâs numbers. So if there are follow-up questions, he will be on standby. Thank you very much.
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EarningCall_676
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Good afternoon, everyone. Welcome to our conference call held in Health in connection with the publication of our Annual Report for 2022, which we released this morning. As always, we have Soren and Rene with us, and they'll walk you through a presentation of our results and outlook; then we'll turn to Q&A. Presentation has also been uploaded to our website, so you can find it in there. As usual, we plan for the call to last no more than 1 hour, including the Q&A session. So besides Soren and Rene, we have the IR team, which is myself, Mathias Holten Moller and Peter Pudselykke. And over to yours, Soren. Yes. Thank you, very much, Mathias, and welcome everybody. Let's hit right into it. The agenda for today is financial highlights, briefly on our sustainability efforts, and key events for the year; then diving a bit more into Hearing Healthcare, Communications; and then Rene will handle financial review, will speak to outlook, and then the Q&A. The financial highlights for '22 is all-in-all 10% growth for the group, half of it from currencies, 4% from organic, and then 1% from acquisitions. So clearly a growth year. However, a small decline in the gross margin and a decline in EBIT, also in the margin which is due to the weaker-than-expected market growth in both Hearing Healthcare and Communication and that, of course, also translates into the free cash flow , which is both because of lower earnings but also normalization of working capital. Sustainability advancements in '22, outside being the kind of company, we are working in in hearing health, then we have 2 other focus areas, and that's diversity, equity, and inclusion where we have seen an increase in women and gender balance in top management teams as well as our top management group, and then climate effort and green transition where we have seen effort now and clear goals being established for both '25 with a 50% reduction of our renewable electricity and 100% in 2030. We are a relatively low consumer, so our own scope 1 and 2 emissions are something we, of course, focus on now and then later we follow with the with scope 3. Key events in the second half is, of course, increased macroeconomic uncertainty is the biggest. It has profoundly impacted our business in a negative way in both young healthcare and Communication. And then China, where we saw a change in policy towards the end of the year which lifted restrictions, but where we saw the unexpected effect of very high virus numbers, and with that a number or many staff at home and the customers that couldn' t meet up, but a necessary transition from a lot of restrictions to a more open society, so all in all positive. We have seen further margin gains in Hearing Aids and Diagnostics in second half, particularly in the US, but the weaker-than-expected market have negatively impacted growth in Hearing Care. However, we saw all in all a significant sequential increase in the organic growth from Q3 into Q4. Communications, weak growth, particularly attributed to gaming but also in enterprise where we saw some slowdown in Q4 and where for the whole business the normal seasonality did not materialize. Key financial figures, organic -- for second half, organic growth for the group of 3%, 6% in Q4, back to the acceleration in fourth quarter, and Hearing Healthcare did 5% for the half year and 8% for the quarter, driven by very strong performance in Hearing Aids and Diagnostics, whereas Hearing Care on the half year contributed negatively to the growth, but in fourth quarter positively. Communication down for the half year 13%, for Q4 '23, but please keep in mind that there's also where you normally have a seasonality, so a hockey-stick that didn't materialize, more than a worsening of the situation. But it is a very tough market for gaming, and again also enterprise saw some negative growth in Q4. OpEx increased due to acquisitions and further investments in R&D. That is still key to growth and future success, and we continue to invest in that and then some -- to some extent also higher inflation that impacts, of course, some of the groups' cost lines. EBIT was a decline of 12%, basically due to negative growth -- organic growth in Hearing Care and Communication, so a relatively fixed cost base, but as you know, we have taken measures also to lower the cost base to create a better balance between top line growth and cost base. Outlook for '23, at this stage, very brief. Organic growth of 3% to 7% and an EBIT of DKK3.6 billion to DKK4 billion. A little more details on Hearing Healthcare. I have spoken to the organic growth rates, but gross margin declined due to primarily geography and channel mix, as well as mix effects in Hearing Aids, and with that also an increased share of rechargeability higher than originally planned due to channel mix development and this, of course, have a slightly dilutive effect. Also, some of the channels have lower ASP, so we have had to sell more units to get to the organic growth -- the high organic growth. OpEx grew 17%, 6% was organic, and there is limited short-term flexibility. However, we have done things in hearing and Hearing Aids to reduce some of the cost elements. The acquisition of Sheng Wang added almost -- acquisitions added 6%, but most of it related to Sheng Wang. EBIT was down 8%, and the margin down in Hearing Healthcare 4% -- 4.2 percentage points, and it is driven by Hearing Care and the lower than originally anticipated revenue and only short term -- limited short-term OpEx flexibility. The Hearing Aid market we have statistics from around 2/3 of the markets now, and as you can see from the table, we have seen a continuous decline in the growth rate. Also, when you compare to back to '19, it is across the board [ that we ] in fourth quarter, except for the rest of the world, which is in this context is a smaller proportion, saw negative growth. That's something, at least, I cannot remember that we have seen in the past, so it is a negative market, and we have seen Europe sequential slowdown driven by Germany, France -- France, more naturally -- North America is basically the commercial market, but now also VA had, of course, higher comps in last year, but also they are a decline. So we have also seen in the period a larger-than-expected, or we believe a larger-than-expected normal ASP decline due to unfavorable geography and channel mix. So all in all, not a strong Hearing Aid market, but even more importantly then underlines the performance element of Hearing Aids, which in Q4 grew 11% in total, including sales to own retail, but to external customers 14%. This is both across the Oticon and Philips brand. We have seen that it is entirely unit growth, so ASP is basically unchanged from last year, and as we have worked with the increasing prices, it means that it has been offset by exactly channel and geography mix changes. We also today announced the launch of a new premium platform which will start here in February '23. But you can see also in the graph to the right, the solid over the years development of the Hearing Aid business quarter by quarter. And Oticon Real is the flagship product in the new portfolio. It builds on all the things we started with Oticon Opn and on top of Oticon More. It still centers around the ability to even in the most difficult listening situations hear things naturally all around you, but where things are much better balanced, now also include sounds that have a tendency to be very disruptive and annoying for the user. The neural network can identify these and make sure they are better balanced to the surrounding. So full portfolio in right and miniBTE's 3 price points, all brands, we are ready to roll it out basically in the coming weeks. Hearing Care continues negative impact from macroeconomic uncertainty, especially in markets dominated by private pay or very high share of private pay. We have seen improved growth rates in Q4. We come in at an organic growth of 1%, but that is mainly due to lower comparison figures and not as such a fundamental change to the performance of the business. However, we do see a better traction on lead generation and have some good hopes here for the beginning of the new year. Positive revenue contribution from acquisitions, broad based, but in particular North America, Germany, Japan, and China. And, again, a continued growth of the Hearing Care part of the group. Diagnostic continued very strong performance. It delivered 7% organic growth in the fourth quarter and basically a continuation of what we have seen. The reason why it have might been a little softer or one of the main reason for little softer than maybe the other quarters was the situation in China. That also significantly impacted the Diagnostic group. Communication EPOS, a challenging year and continue to be. Organic growth of negative 13%. Also, some pressure on gross margin, which is partly an exchange rate element as all cost of goods sold are bought in dollar not all of it sold in dollar and higher-than-normal freight rates continue to be an issue. Very modest OpEx growth in order to protect the EBIT, but not enough. It has worsened since '21, but we are very busy with trying to ensure a better balance. And as the initiatives were announced in November, even though they were in size -- maybe absolute size the same across the different business areas, the impact on the EPOS business was most profound, of course, due to the relative size. So in Q4, minus 23% and below expectations on gaming. However, enterprise being a little more stable, but a number of customers seems to have pushed the actual purchase past the year change, and we are now rolling out the video solutions, the Vision 1 and 2, and we expect them to contribute to growth in '23. Thank you, Soren. So putting a little bit more flavor to the financial numbers, we start out by looking at the income statement for second half year of '22, and repeating our gross profit of DKK7.6 billion and a gross margin of 74.3%, down 1.5 percentage points compared to last year. And likewise, the operating profit or EBIT of DKK1.6 billion and an EBIT margin of 15.9%, which is segmented into our Hearing Healthcare that does an EBIT margin of 18%, whereas our Communications business has an operating loss of DKK129 million and an EBIT margin of minus DKK25.4 million. If you look at the adjusted growth, reported 11% is an organic growth of 3%, acquired of 2%, and a significant impact from exchange rates of 6%, whereas if you look at the operating expenses, you would see that the underlying growth organically of 6% predominantly comes from continued investment in R&D that amounts to 12% organic growth, whereas on the distribution side, the growth is predominantly driven by 7% from acquisitions and also 5% from organic growth. Looking further into our gross profit, it increases by 9%. And as I mentioned before, the operating margin decreases by 1.5 percentage points, driven by predominantly the Hearing Healthcare where a channel mix has been seen, basically selling more in government, less in private, more towards export markets versus the U.S., and then broadly across all geographies and channels, a significant higher level of rechargeability. Adding to this, we have seen a slight negative impact from exchange rates. We continue to see some impact of a dynamic supply chain situation related to higher freight charges, but it is becoming less pronounced than previously. We also see some impact of higher-than-normal wage inflation. However, as we have also said previously, not in any dramatic way. Further commenting on the operating expenses. The growth in local currencies was 12%, of which half, meaning 6%, related to acquisitions. And this is, of course, predominantly Sheng Wang, our Hearing Care business in China, and Inventis, our newly-acquired diagnostics business. The organic growth in OpEx was 6%. And it was predominantly again related to our continued investment in R&D to secure technological leadership, as well as 5% organic growth in Hearing Care where we short term did have only limited flexibility to adjust the cost base to the organic growth level. On that notion, we took cost reduction measures in Hearing Aids, Hearing Care, and Communications. By end of year, we estimate that this will amount to approximately DKK100 million in annual cost savings from '23, and it had very limited effect in '22. EBIT for '22 is in relation to -- when comparing to '21, down 12%. And just reminding ourselves that '21 numbers were extraordinarily strong due to a tailwind from the French Hearing Healthcare reform and also temporary savings. Looking at the EBIT margin of 15.9%, that's a decline of 4.1 percentage points compared to second half year of '21. That is driven by lower profitability in Hearing Care and Communications where we, in both instances, had a limited ability to adjust our cost base to revenue that was below our expectations. And when it comes to end of year, we would highlight China as a particular geography across business areas where we saw a significant impact from actually the reopening of the society, which we deem to be a temporary effect. On cash flow, we had a strong second half year after a more modest first half year where we normalized working capital, saw a strong second half year in terms of cash flow and a relatively high level of acquisitions driven by, again, Sheng Wang as the primary driver of that. CapEx is slightly above our medium- to long-term expectations due to investments in production facilities in Poland and Mexico. Looking at the balance sheet, compared to end of first half year, we see a 9% increase, and compared to full year end of '21 we see a 20% increase. That 20% increase is 5% organically and 13% from acquisitions, predominantly under goodwill, and only 2% from exchange rates. Net working capital in the second half year declined by 11%, which was mainly due to a decrease in prepaid expenses following the full acquisition of Sheng Wang. Our net interest-bearing debt at yearend is DKK12.7 billion, and we have a gearing multiple of 2.9, which is above our medium- to long-term expectations of 2% to 2.5%. Yes. And first of all, around the market, we expect to continue to see macroeconomic headwinds. In the Hearing Aid market, we expect the unit growth rate to be slightly below the structural 4% to 6%, and it's the best we have for now, the normal negative ASP development coming from various mix effects. In the market for audio equipment, we see still very high uncertainty, and we cannot really predict the growth rate. We expect still enterprise to be more stable than gaming. But that's it for now. In Communications segment, as basis or based on that expect a modest positive organic growth, but negative in the beginning. It is our effort in video equipment and a number of product launches we have coming that should support organic growth. We also expect EBIT to be less negative than in '22. We have taken certain measures on the cost side, and with a modest organic growth we will see an improvement of EBIT. Due to a high level of attractive options on the acquisition side, we expect the level of bolt-on acquisitions in '23 to be slightly higher than normal. And our gearing multiple at the end of the year is, therefore, expected to be around the high end of our medium- to long-term guidance of the 2x to 2.5x. And higher than normal -- despite of the higher-than-normal cost inflation, we expect to grow group's OpEx less than revenue, and that is simply the way we have built things for '23. We go into the year much more cautious than we did in '22, and again, have already taken a number of steps to reduce some costs, but also, again, the way we look at further expansions. It is very conservative and modest plans we have as long as the market development is like it is. So, therefore, we can also cope with the expected inflation. The discontinued operation, Hearing Implants, is still expected to close in second quarter of '23, resulting in a payment of DKK700 million -- of the first DKK700 million out of a total of DKK850 million. And the matrix is organic growth rate of 3% to 7%; acquisitions around 3%, and that's what we know for now, more could come; FX at minus 1%, as we know the currencies as of today; EBIT DKK3.6 billion to DKK4 billion; net financials, negative around DKK600 million. So this is an increase coming naturally from the higher debt and the higher interest rate; and then also an increased effective tax rate; and then as I said, gearing multiple between 2 to 2.5, but most likely around the higher end of that [ interval ]. No share buyback, we are focused on bringing down debt and the gearing multiple, and also to be able to do relevant and necessary acquisitions. Profit after tax from discontinued business, negative around DKK100 million. Thank you very much and good afternoon, everyone. So I have three, please. The first one on guidance. So I think it's fair to say that we were all positively surprised for you calling the Hearing Aids market growth not far from the usual 4% to 6% in units while we see, let's say, current market conditions, not really showing sign of improvement yet. So could you walk us through your reflection when it comes to market growth? Basically, what makes you confident about the market rebound in 2023? And also if you can give more color about the base case scenario for the 3% to 7% organic growth in your guidance, basically, where you expect to take share and especially at the top end of the guide. The second one is on profitability. So guidance, again. You guide for, let's say, 200 bps higher EBIT margin next year at the midpoint of the range, up to 250 bps at the top end. And this despite a more challenging H2 this year, margin down sequentially, which is rarely -- which has rarely happened in the past. Just what makes you confident that you can bring up the margins so much this year? And last question, very quickly, Rene, as you mentioned, high level of attractive opportunities when it comes to acquisitive growth. Does it refer mostly to bolt-on and retail store acquisitions, or do you see other kind of larger opportunities this year? That was a lot of questions also in [indiscernible]. So I will try to handle as many as possible. The unit growth, it is below the structure, but I still think you can see, even though it has been negative in the second half and it still comes out very close to the structural expectations for the past three to four years, so there is a resilience, there is a certain rhythm, and you also have markets that still have opportunities; China, just one example from being severely impacted during the year that has passed. So it is our best take that with the general stability and so on, we will not be in the 4% to 6% but slightly below, whether that's then 2% or 3%, I think that time will show. And then base case versus top end, that is, of course, part of the uncertainty that is the market growth rate. But other than that, it is, of course, also some full year effect of things we have already gained. I'm sure you can see the momentum that we are currently seeing, especially in the Hearing Aid wholesale business and the Diagnostic business. And, yes, we expect those to continue, but of course, with some uncertainty. And therefore, I think they are part of it. And then also the consumer sentiment to Hearing Care and the Communication, but mostly the Hearing Care, I think that's where you see the uncertainty in the range. I don't know, Rene, if you will comment on the EBIT. I can do it as well, but I think you can put flavor to that. Just add to the, let's say, the margin improvement that is implied by our outlook, that's very evident. And I think it's all the things that Soren mentioned but also the fact that you can say we have -- we come out of '22 with a very strong momentum on the Hearing Aids side. We continue to have strong momentum on Diagnostics. We have clear expectations that contrary to '22, we would see a positive organic growth in our Hearing Care business. And that is a big, big swing factor for the group margin as it constitutes 40% of our business. And that's something where we have different expectations than what we saw in '22 for sure. So there are many drivers of also margin expansion in our business. And then lastly on Communications. It is also there our expectations to have less of a loss than what we had in '22. And in general, again, conservatism in going into the planning for '23, we have a much stronger focus on working out of the established cost base and growing it further, so I would add that in. And that altogether gives us comfort that this is the translation we should see from continued strong organic growth. And then on the acquisitions, it is within distribution. It is a bolt-on to what we do already, and that is where we see opportunities and have a number of things done already. So this is -- just to confirm that consolidation on the retail side, distribution side continue to be a key play in our sector, and we are firm in continuing to be part of that. Yes. I think I have 2 or 3. I would like to start with your momentum that you're seeing in Q4 and that you're seeing also -- expecting to see again in 2023. You have clearly benefited from the KS 10 contract being removed and Sonova exiting Costco. How are you thinking that this is going to translate into 2023 on top line growth and on EBIT margin? Then the second question, [ loose ] from that, you have seen quite a strong pickup in momentum in third-party sales. Can you maybe elaborate a bit more what you're seeing in the market? Is it a broad-based market share gain, or is it more head to head with specific competitors where you think you're taking more shares? I don't know if you're willing to comment on that. And then the third question is really on how is Europe behaving with regards to trading down? For the longest period of time, we haven't really seen a impact on trading down. Is that something that you're starting to see? Yes, Maja, well, it is obvious that the change in the U.S. market when it comes to Costco is an opportunity that we have pursued and benefited from. And we see it as -- there seems to be no new changes. Of course, it is with uncertainty, but we have no visibility that this is not a new way of operating the business. So at least for now, that's a tailwind for us. Of course, when we come to fourth quarter, we don't expect the same tailwind from growth there. But that is part of the guidance, but also with some uncertainty that it can change up or down. I cannot really speak to the EBIT translation on single customers and so on. But it is, of course, one of the areas where it's very incremental sales and doesn't release a big step-up in cost base, more people on the phone, and more in the stockroom and production lines and so on. But that's just to build the volume. So the incremental is, of course, positive for EBIT. The external sales to third party, yes, it is broad-based, and the broad-based is bigger than the change in Costco. So, it is basically almost all markets where we have seen market share gains. So I feel very comfortable about the momentum where it's coming from. Still there's not full transparency. We will see as the various players that come out with numbers, bring their numbers out, and then we can get a better overview of that. Generally speaking, I would also say outside Europe trade down is not the main effect. There is something on units total, meaning some people postpone or wait. But I would still say the biggest effect is channel shift towards channels where the pricing is lower or there is more reimbursement, I don't have to pay anything. There is a bit of trade down, but I think I've said many times, it's really difficult to take apart whether that's because you have a strong offering or whether that's the market because we have very few markets where there's any insight to what the actual mix is in the market. And generally speaking, it's quite stable. I have two, please. If I can follow up on guidance. How do you see the phasing of growth over the course of the year? And for the market as a whole, do you not consider a similar level of volatility in '23 as we saw in 2022, but potentially for a longer part of the year? And on margin, are there any one-offs to bear in mind in terms of margin guidance, say, FX or dilution from M&A? And secondly, could you talk about the key buckets of cost inflation and what your assumptions are for wages as well as COGS and to what extent you're seeing some normalization this year? Yes. I will speak on the volatility and, Rene, you can dive into some of the others. No, we don't -- of course, it's uncertain and the uncertainty is there, but the dramatic change happened in the transition from, let's say, during second quarter into the second half. And, yes, then the comps will start to change and so on. So we will, of course, see the comparison figures being higher in the first quarter and also due to the way '22 developed in fourth quarter, but second and third, there would be good growth. But then, of course, on top of that, the organic growth does come during the year as we benefit from product introductions and so on. So there is a bit of phasing where you would say the middle section is probably the strongest. And then, Rene, if you... Yes. So on one-offs, I would say, when it comes to FX, it is year-over-year on an EBIT level neutral. There's a slight negative effect on top line, but due to hedging, it becomes neutral on the EBIT line from '22 into '23. When it comes to dilutive effects of acquisitions, I would not really highlight that as a particular topic since it is bolt-on acquisitions to businesses that we already, you can say, are in, and therefore, representative of how we look today as a business. Wages... Maybe, also, as the organic growth rate is at least right now bigger in Hearing Aids and Diagnostic in comparison to Hearing Care, there is also the opposite effect from that, I would say. Exactly. When it comes to inflation on wages, what we experienced is in line with what -- or consistent with what we have communicated in our previous calls is that, yes, it is slightly higher than what we normally see. But just to quantify it on a global level, we are maybe in the range of 3.5% to maybe up to 4%, but it is in that range, and that might be 0.5 to 1 percentage point higher than normal. But that's on a like-for-like basis. And to some extent, we, of course, mitigate that by looking at our global footprint of people and where do we sit. And, therefore, it will not have the same overall effect on our cost base. On the cost of goods sold, also, we are, you can say, to some extent protected by the fact that a lot of the materials that we buy are particular to -- either to us or to our industry, and thus, say, less volatile when it comes to a spot market by at least when it comes to the Hearing Healthcare business, the situation is slightly different on Communications. So also, there are some impact from inflation, but not a lot. That's very helpful. If I could just follow up on the transition that you talked about from second quarter to second half. That was mainly a U.S. weakness that the market saw. How are you thinking about the relative strength of U.S. versus Europe in 2023? Yes, Europe is just, in general, more resilient due to higher level of reimbursements and so on. And the majority effect in U.S. is also what I would call it, a channel mix change. More people have benefited from their own personal health insurance or managed care growing. That's just an example of the channel shift that is more profound than the actual unit growth, and that's unit growth development. So back to whether it's unit growth or whether it's channel shift, I still think the majority of the effect we see on our own numbers come from channel and mix effect, it's rather than the market being down in units back to my initial comments that the market also in U.S. is relatively resilient when it comes to the number of people that seek help. I also have a couple. So first, can you comment on how you've seen the market develop here in Q1, whether there are any changes to the trend from what you reported for the market or estimated for the market in Q4? And then the second question is sort of a split question to your EBIT margin guide. So my understanding is that you're basically guiding that most of the EBIT margin expansion should come from OpEx growth that is slower than top line growth. Can you explain that? Is that a reflection of, say, faster growth in Hearing Aids than Hearing Care? Or what is the underlying driver of that lower OpEx growth? Christian, well, we cannot comment on Q1. It has barely closed, and we don't have statistics that tell us anything, so we cannot speak to that. On the EBIT margin split, yes, the scalability fundamentally is stronger in Hearing Aids than it is in Hearing Care, of course, outside short-term, negative market development where there's simply fewer people, you could say, in each store. When we drive a strong organic growth, we do see a scale effect on the Hearing Aid business. And again, the way we went into the year being more conservative on what we assume we can and will do on further growing the company's investment in R&D and global infrastructure, et cetera. So it is also a more conservative approach to the year when it comes to the OpEx that's part of changing this balance between top line growth and OpEx growth. Yes. And adding to that, you've seen the DKK100 million of expected savings in OpEx based on what we have already done of initiatives. And then I would add that, in particular, in second half year, say, revenue and cost base for our Hearing Care business was significantly out of balance compared to even our normal range. And that, of course, is also a key activity and assumption for '23 that that is rebalanced, so to say. And when it comes to market, no, we don't have market data as such, but we have seen nothing in January that would lead us to believe that, let's say, neither the market nor our own guidance should be impacted by that. Okay. Makes sense. And maybe just to confirm my understanding here. So the interpretation is not necessarily that you are guiding that Hearing Aids should grow faster in local currency than Hearing Care, including M&A for the year? Just on the growth rate. Could you give us some flavor on how the inventory levels in your supply chain are looking, i.e., was the growth helped by restocking by some customers towards end of the period? And I know usually it's not a practice to comment on current trends, but I'm sure while setting this year's guidance, you must have seen trading in the recent weeks. So would it be fair to assume that the momentum you saw towards the end of the year has continued? I'm sorry, your line is not really good. I think I got the first question, but the second, I'm not really sure. Regarding supply chain and inventory and components level, we are in good shape. That's the headline. There can always be one small area, and it has been the longest drag has been in the Communication business where due to shipping and China's -- built in China and so on, there has been still some constraints. But for big picture and the group as such, and especially the Hearing Aid side, we're in good shape. The second part of your question, I simply didn't get. Maybe you can try to repeat it. Yes. So the second question is basically, have you seen the growth rate continue to 2023 what we saw the performance in Q4. That momentum in [ clearing ] rate has continued in 2023? I think it's quite a structural what happened in Q4. So, yes, this is the run rate of the business now. So yes, it continues. Quick follow-up on the Costco. Can you help us please size the sales tailwind from Costco in Q4 2022, please, and exactly what's your expectations for 2023? Second, on EPOS, can you maybe give us a number or quantify a bit more your comments around the less negative EBIT for 2023? And maybe some details on the timeline for when you are expecting to bring this business to breakeven. Lastly, still on the Communication business, you point to the rollout of some video collaboration devices that should help to accelerate growth in 2023. Yet, this is one segment that has been particularly impacted by weakening of demand, the enterprise segment. So what's the underlying growth for your enterprise Communication business story if we want to exclude this type of new launch? Okay. I think got most of your questions. Again, the line was not too strong. The U.S. big retail business is looking at Hearing Aid revenue only, organic growth in the ballpark of 3% to 5%, meaning half for the group round numbers. So that's for '23 as well on a run rate basis what you should have in mind. EPOS, we don't -- we are not more specific on the guidance. But, of course, if you assume a modest organic growth and a good effect from the cost initiatives and, of course, a continued very close eye on the cost side, then it is meaningful but it is not making it anywhere near breakeven in '23. And we basically don't comment on that right now. We need to see growth and also an improvement in the market before we can really start guiding on that. Video, we cannot take apart the enterprise. Of course, it's small. It's a totally new segment we go in. So the majority of the growth has to come from the existing business and not the video systems. They're just an important part of building actual growth. On the other hand, it's a segment where we don't sell anything and where we see good growth. There is being bought and installed video equipment installed in many more beating rooms as people are starting to -- have returned to office work and so on. So it is a growth driver, but it's not the predominant growth driver. Okay. If I can just squeeze in one follow-up, on the DKK600 million of negative financial expenses, should we assume that as a run rate from 2024 onwards? And is there a cap on this level of expense, or could this go higher as the interest rates will pick up? And lastly, on share buyback, any plans to resume that or timeline for resuming the share buyback? Yes. So on interest rate, you can say it's a function of our debt and what our -- financial expenses is a function of our debt level and interest rates. And I have no particular insight on what the interest rate would be in '24. But assuming it would be the same and debt level would be the same, then that financials would also be similar. So in terms of debt level and share buyback, currently, we are at 2.9x leverage. It is our clear ambition to bring it down within our guidance range to 2% to 2.5%. And once we are there, as we generate excess cash, it would be natural to again resume share buyback activities. But for now, we don't see that as something that we would do in '23, but it might well be on the table for '24 depending on the outlook at that point in time. Two questions, please. So maybe if you could just give -- ask for an update in terms of what you're seeing in terms of your own or market activity very early in 2023 because I know December was quite weak for the market. Just wondered if any bounce back in January. And secondly, you point towards higher M&A. I just wondered if that was because of the tougher market conditions and whether that was being reflected in asking prices. David, I think big picture, the way we saw sales development in Q4 that's aligned into '23. So the same level of business growth, I would say, that's how we start the year. And then M&A, it is also our own, again, appetite in participating in consolidation on the distribution side. We have started to be more active in Germany, as an example, and came a little late. So that's also a sign of -- we have seen good opportunities there and have closed some of them and building a -- trying to build scale in Germany, so we try to do it fast. Other than that, it's -- I don't think it's a big change to pricing or what is for sale or that the macroenvironment push people to sell their business. This is just, I think, also an element of normalization after COVID and us being still firm on our strategy to join the consolidation that's obviously taking place. Perfect. And then maybe just one housekeeping one, please. Just in terms of the tax rate, certainly a bit higher than we had in our model. Is that something we should be thinking about going forward as well? Well, at least for '23, this is the level you should think of. And one of the -- the 2 major changes is that there was a temporary, you can say, additional deductibility on R&D expenses in Denmark. It is within the, you can say, it's on the government program to reinstall that, but that's obviously out of my hands, but that's at least an opportunity for it to improve. And the second part is limited deductibility of interest expenses also in Denmark. Longer term, that's, of course, also something that we can work structurally with, which, of course, we intend to do, and so that's also an opportunity to improve. But again, nothing that I can guide specifically on. So I wanted to ask, in Hearing Care, you have exited selected managed care plans in the U.S. which had a negative impact. So can you please elaborate on that? And also Diagnostics saw some growth deceleration in Q4 in the U.S. And U.S. is a big market share of Diagnostics, so can you also shed some light there? Yes. The managed care plans is the storyline that it's not all managed care plans but the share of managed care in our Hearing Care business in U.S. had grown to a level that was not sustainable. And secondly, most of it came from a third-party administrator that's owned by one of our competitors, and the share of Demant Hearing Aids on those contracts were just too small, so it doesn't make any financial sense. So it is a transition we're going through, a transition where we do less managed care and nothing with these particular plans and, of course, builds and back to changing the business model, build a stronger pipeline, fulfilling it with private pay patients, which are still the majority in the U.S. market. And that's the transition we are in and which we are seeing some traction on. On the Diagnostic, the deceleration in Q4 is not U.S. based. That is primarily due to China. That was very weak year-end due to the changed corona policies. So not something structural. Yes, we have a high market share in many markets, but we also do a lot to expand the market, in particular within [ balance ], which is still a treatment that's underdeveloped in many markets. So the Diagnostic group is spending a lot of resources and energy in teaching the world how to build a proper and appropriate balance treatment in many countries and, therefore, see good growth rates in a segment like that. And there are segments where our growth or our share around the world is not -- is still relatively lower than the average, so there are still good growth opportunities. It's Mattias Haggblom with Handelsbanken. Two questions, please. So firstly, on the net financial guidance of DKK600 million. Given the net debt you exited '22 with and the net debt you more or less guide for at the end of '23, given your gearing comments, I end up with a pretty high average interest rate to get to the DKK600 million. So any more comments to help me think of your net financials and the rates? And then secondly, 74% of your borrowing is in Danish kroner and given what you just said on deductibles for interest rates and limitations in Denmark, can you talk about any imminent maturity of your debt that could enable you to shift that to more tax-friendly currencies? Yes. So a little bit more considerations regarding financials, other than it all being in round numbers, is that you are right when you look yearend-to-yearend debt ballpark, but you need to look on average debt throughout the year, which has been increasing significantly during '22, i.e., the average debt in '23 would be higher than on average in '22, and that's what you pay an interest on. And then secondly, of course, also a significant part of financials is credit card fees, which is also seeing a, you can say, an increase and not just from, you can say, pricing or interest level but also from activity level. So that's a couple of additional elements. And then I would say without going into the details, of course, we look for opportunities to optimize our global financing setup and also when it comes to, in particular, deductibility of interest expenses that is part of the considerations. But I think that's as detailed as we can discuss it. I just had two. One was just on your conviction around, I guess, positive organic growth in the Communications business in '23 in light of your comments that enterprise was slowing through the fourth quarter. Just wondered what you were expecting for that bit of business as you head through the year. And then the second was just around the ongoing M&A comments you made. How do you balance that desire to do further M&A with the current leverage and higher interest costs? As couple of people mentioned on the call already, they do seem to be going up quite a bit from where consensus was. Was there any thought process between dialing that back and trying to bring the leverage down any quicker? Yes. Let me take the first one. What I tried to say around the Communication is enterprise business and demand is a B2B, so it is fundamentally more stable than a consumer type of business than gaming. And yes, we saw some slowdown towards the end of the year, but I think many companies try to optimize spend and cash flow, et cetera. The trend we still believe is healthy. And therefore, that's the more stable of the 2 businesses. And with new equipment and new products coming out, I think the opportunity to deliver growth there should be solid. I think the main uncertainty in the Communication business do still center around the development of the gaming market. And M&A is always a balance between opportunities. There's definitely also M&A opportunities we shy away from. And I think as we have spoken to earlier, we are also very conscious that it's acquisitions of good quality and not just pick up anything. So we are more selective. I'm just saying that the activity level, in general, is still high in the sector. And it is important that we continue in the markets where it is key to build profitability by achieving a certain level of scale. And then, of course, we do -- definitely we are very focused on bringing down our gearing. And that is a primary target for the group to get down in our near, at least, and best of all within, our mid- to long-term guidance on that. So, ladies and gentlemen, I think with that, we have to conclude the call. We are at the 3 PM mark here in Copenhagen. So thanks very much for joining us and participating with questions. Let us know if you have more, we'll be happy to follow up. We'll be on the road and in conferences over the next couple of weeks and months, so look forward to seeing you on the road. Have a great day.
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EarningCall_677
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Good morning, and welcome to the Littelfuse Fourth Quarter 2022 Earnings Conference Call. With me today are Dave Heinzmann, President and CEO; and Meenal Sethna, Executive Vice President and CFO. Yesterday, we reported results for our fourth quarter and a copy of our earnings release and slide presentation is available in the Investor Relations section of our website. A webcast of today's conference call will also be available on our website. Please advance to Slide two for our disclaimers. Our discussions today will include forward-looking statements. These forward-looking statements may involve significant risks and uncertainties. Please review yesterday's press release and our Forms 10-K and 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations. We assume no obligation to update any of this forward-looking information. Also, our remarks today refer to non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided in our earnings release available in the Investor Relations section of our website. Thank you, Trisha. Good morning, and thanks for joining us today. Let's start with highlights on Slide four. 2022 was truly an exceptional year for Littelfuse, as we continue to expand our leadership in high-growth end markets with significant new business wins and strategic acquisitions. We delivered record revenue of $2.5 billion, up 21% over 2021, as each of our business segments grew sales double digits. Adjusted earnings per share was also a record of $16.87, an increase of 28% year-over-year. We launched our five year growth strategy in early 2021 and have delivered strong performance within the first two years, as shown on Slide five. Our strategy targets double-digit average annual growth, coupled with sustained profitability and leveraged earnings growth. We have averaged 32% revenue growth with organic revenue growth of around 20% and average adjusted earnings growth of 60%. I am particularly proud of our success as we navigated the unprecedented operating environment. I want to thank our global teams for their hard work and persistent commitment to serve our customers and significantly grow our business. Meenal will provide additional color on our strong financial performance. Moving on to Slide six. Over the last two years, we have deployed approximately $1 billion in capital for acquisitions, adding approximately $500 million in annualized sales to further strengthen our technologies and capabilities and diversify the end market in the geographies we serve. With the ongoing diversification of our business, we have expanded our addressable global market opportunities to over $20 billion. During 2022, we significantly advanced our strategic business initiatives within the structural growth themes of sustainability, connectivity and safety. We drove content and share gains in high-growth end markets, both organically and through acquisitions. We acquired C&K Switches, strengthening our global presence across industrial, transportation, datacom and aerospace end markets, and then expanding our software and firmware capabilities within transportation and industrial applications. In addition, our integration with Carling Technologies is well on track. And we made substantial progress capitalizing on strong demand across commercial vehicle end markets to drive significant growth. Organically, we are investing to support continued growth in both customer-facing aspects of our business as well as in manufacturing capacity and productivity. During 2022, we advanced our ESG program initiatives, reinforcing our commitment to our long-term strategy. We set goals to increase our associate diversity and are proud of our progress shown on slide seven. We believe our recognition by Forbes as one of America's best midsized companies, and by Newsweek as one of its most responsible companies further substantiates our performance in the environmental, social and corporate governance areas. All of our achievements to date play a crucial role in building on our strong business foundation. The evolution of our capabilities to better serve our customers equips us to tackle new challenges and opportunities in the future. We have a strong track record of achieving best-in-class results and expect to deliver our ongoing performance consistent with our growth strategy. Before we get into business design wins, I'd like to start with customer and market dynamics we are seeing, starting with our channel partners. Our Electronics book-to-bill continues to run below 1.0. We are seeing Electronics distributors accelerate their reduction of inventory levels as supply chains and lead times normalize. We expect these inventory reductions to continue through the second quarter at current POS levels. Our Industrial distribution partners are operating within normal inventory levels. Within end markets, we continue to see ongoing softer demand across various electronic markets, including consumer-facing areas, [indiscernible] and telecom applications. End market demand remains healthy across renewables, industrial automation and safety and electrification of vehicles and charging infrastructure. We delivered solid performance within passenger vehicle end markets during 2022. However, this was overshadowed by unfavorable foreign exchange and inventory unwind at Tier 1s and OEMs. Absent these combined headwinds, our automotive technology portfolio across all of our businesses outgrew the market by 600 basis points. Considering the volatility of the automotive industry over recent years, we are proud of our long-term performance. Over the last three years, we have delivered double-digit content outgrowth. Looking ahead, despite our outlook for a flat global car build in 2023, we expect to continue to outperform the market based on significant design wins in electrification and electronification. In commercial vehicle end markets, we continue to see stable demand across material handling, agriculture and construction equipment and heavy-duty truck and bus. With our successful integration of Carling throughout 2022, we fulfilled a strong backlog to achieve 20% growth over its previous stand-alone year. We now see a short-term inventory rebalancing of Carling products at distributors and in customers. Meenal will provide additional color on our outlook. Now let's move on to business design wins during 2022. The global structural themes of sustainability, connectivity and safety are complementary and are driving innovation and growth across the Industrial, Transportation and electronics end markets we serve. Given our diversified technologies and capabilities, we play a significant role in the advancement of these themes. Within our Industrial end markets on Slide eight, we expanded our global leadership presence based on technical expertise and high-performing technologies. Our capabilities are critical to enabling customers high-voltage applications focused on sustainability and safety. In renewables, for solar, wind and energy storage systems, our company-wide portfolio and a variety of new products won a significant business to grow our market share. In the area of safety, evolving electrical standards require our application expertise, and innovative solutions to achieve compliance. We substantially grew our market position with major restaurant chains and manufacturing companies. In Commercial and Residential HVAC, systems are required to meet energy efficiency and safety standards and a broad portfolio of secured sizable business. Efficiency and safety requirements also pertain to electrical infrastructure, motor drives, power supplies, factory automation and manufacturing equipment where we grew our business. Our product content and rates of new business wins is increasing with leading customers, and we expect this to continue based on our capabilities and intensifying focus on enabling applications around sustainability and safety. Turning to our Transportation end markets on Slide nine, our investments for growth are extending our leadership position. We are partnering with our customers to drive key developments in the electrification and electronification of passenger and commercial vehicles. Our joint collaboration focused on sustainability, connectivity and safety drove significant new business. In passenger vehicles, we continue to grow with major OEMs based on our global technical support and strength of our product portfolio. As a result, our average content across passenger vehicles has grown to $7. Our ability to continue our growth is supported by our design wins. Across vehicle platforms, we secured over $550 million in new design wins over the life of the programs. Over half of these new business wins are on electrified platforms. We won significant business in electrification within battery management systems, high-voltage power distribution and onboard chargers. In electronification, we captured a substantial business in ADAS, infotainment, telematics and comfort convenience applications. We also continue to expand our business in traditional low-voltage applications, our design wins, extended pipeline of new business opportunities and expanding technologies for electrified platforms to support the continuation of double-digit content outgrowth. In commercial vehicles, we made significant progress integrating Carling and see a broad range of growth opportunities ahead of us. We leveraged our expanded offerings to win global business with major OEMs. In electrification, we grew our business in trucks, buses and two and three wheelers within battery management systems, onboard chargers and powertrain control modules. In broader commercial vehicle markets, we increased our product content on heavy-duty trucks, material handling, construction and agricultural equipment and rail traction for training. With off-board charging infrastructure to support passenger and commercial vehicles, our engineering capabilities and differentiated range of products in power semiconductors, fuses, relays and switches, secured significant new business. Overall, electrification and electronification are important themes in the Transportation industry that are helping to reduce emissions and improve efficiencies, connectivity and safety. We are confident in our abilities investments in e-mobility will strengthen our market leadership through greater product content and growth. Moving on to Slide 10. Sustainability, connectivity and safety are drivers of growth in the electronics end markets. We leveraged our global reach and broad portfolio, further enhanced with C&K and Carline who have extended relationship with OEMs to secure a multi-technology business wins. With the ongoing push towards energy efficiency and battery power [indiscernible] business and appliances and hand tools. Greater connectivity requirements drove new business in data centers, telecom infrastructure and building technologies and automation. Our products are vital to safety and protection of human life as we secure business for security systems and a variety of medical device. We are extremely well positioned to expand the proliferation of our electronics content across a wide range of applications focused on sustainability, connectivity and safety. A pipeline of new business opportunities is robust and expanding with our acquisitions. We look forward to building on our collective market positions with our various industry-leading brands. Our combined success of winning business will serve as a platform for continued growth. Our new business wins represented a diverse range of end markets, applications and geographies. We also continue to build a pipeline of identified new business opportunities as we see our customers' engineering teams return to focus on new product development. Now that customers have worked through many supply chain challenges, they have pivoted back to new design in activity, which is accelerating. We are well positioned within this design-rich environment, which will drive long-term business wins. We fully expect that the organic growth from the new business activities, coupled with our acquisitions will enhance and sustain our long-term growth. Thanks, Dave. Good morning, everyone. Happy New Year, and thank you for joining us today. Let's start with Slide 12. Revenue in the fourth quarter was $613 million, up 11% versus last year. Sales were up 4% organically after adjusting for acquisitions, foreign exchange and last year's 14th week. GAAP operating margins were 15.4% and adjusted margins 17.4%, expanding 40 basis points versus last year. Fourth quarter GAAP diluted earnings per share was $3.74 and adjusted diluted EPS was $3.34, up 6% over last year. Turning to Slide 13. we finished a record year with sales of $2.51 billion, up 21% versus last year. Sales were up 11% organically after adjusting for acquisitions, foreign exchange and last year's 14th week in the fourth quarter. GAAP operating margins were 19.9%. Adjusted operating margins finished at 21.6% and adjusted EBITDA margins were 26.4%, both expanding 250 basis points in the year. Incremental operating margins for the year were 34%. We finished the year positive on price cost, continuing to demonstrate the value we bring to our customers, while managing our cost structure. GAAP diluted EPS was $14.94, adjusted diluted EPS was $16.87, up 28% versus last year. Our full year GAAP effective tax rate was 15.7% and adjusted effective tax rate was 17.4%, finishing slightly better than our expectations. Our business model amplifies the continued strength of our cash generation. For the year, operating cash flow was $420 million and free cash flow $315 million, both records for the company and growing 12%. Our free cash flow conversion from net income was 84%, a bit lower than our historical trends as we've maintained higher inventory levels, aligning to our customers' needs and supply chain challenges. We have a strong balance sheet and capital structure, ending 2022 with over $550 million in cash on hand and net debt-to-EBITDA leverage of 1.2 times. This gives us ongoing flexibility to continue allocating capital for both growth and return to shareholders. During 2022, we invested over $600 million back into our business through strategic acquisitions and capital expenditures, and we returned $56 million to shareholders through our ongoing quarterly dividends. Let's move to fourth quarter and full year segment highlights, starting with Electronics on Slide 14. Within the quarter, organic growth was 2%. We saw continued strength across Industrial end markets and electrification themes, partly offset by softer demand across various Electronics end markets. We also saw an increasing trajectory in channel inventory reductions as we exited the quarter. We ended the quarter with operating margins just shy of 25%, expanding 160 basis points versus last year. We capped the year with organic revenue growth of 12%. Margins finished at nearly 29% for the year and adjusted EBITDA margins at 33.5%, both expanding 500 basis points versus last year and well above our segment target range. We finished the year positive on price cost as our teams balanced price increases to offset ongoing inflationary costs. Moving to our Transportation segment on Slide 15. Our Passenger Vehicle business grew 5% organically in the quarter and was down 1% for the year. Our content growth for the year was masked by customers continuing to reduce inventory levels. Within Commercial Vehicles, sales for the quarter were up 7% organically and up 9% for the year as we delivered on content growth while leveraging strong end markets. We saw a sequential sales decline into the fourth quarter, largely from our Carling business. Following several quarters of strong demand from pent-up backlog, we experienced fourth quarter slowdown from Carling customers also adjusting their inventory levels. Within the quarter, operating margins finished lower than our expectations at 3.5%, but we maintained double-digit EBITDA level. Margins were weakened by 200 basis points in unfavorable foreign exchange effects as well as excess cost from lower production volumes. For the year, operating margins finished at nearly 9%, while adjusted EBITDA margins were a solid 15%. We continue to focus on both sides of the price/cost equation, implementing price actions to cover ongoing inflation and reducing cost to better align our operating structure to expected volumes. We expect margins to progressively improve in the coming quarters. On Slide 16, our Industrial segment had another strong quarter of double-digit organic growth, with organic sales finishing up 20% for the year. We continue to see strong demand across most end markets and number of wins in new and higher growth end markets. Operating margins finished at 16% for the year and adjusted EBITDA margins close to 19%, both expanding 700 basis points. Our teams have focused on continued operational execution aligned to the volume growth and pricing actions to offset inflationary trends. Turning to the forecast on Slide 17, I'll start with our view of the market landscape. We're seeing a broad range of signals across our end markets, ranging from continued growth across key mobility themes, Industrial and Commercial Vehicle markets, offset by weakness across many of our Electronics end markets. We expect increased inventory rebalancing at our distribution channel partners continuing through the first half of this year, affecting our Electronics segment. We also expect a continuation of customer inventory reductions affecting our Transportation segment. Inflationary trends continue largely in resin-based materials, energy costs and wages with some offsets from reduced transportation costs. With this backdrop, we expect first quarter sales in the range of $575 million to $605 million. At the midpoint, that's a total sales decline of 5% and organic decline of 11% versus last year. We expect sales to decline across both the electronics and transportation segments due to the inventory reduction at our customers and channel partners. We expect a partial offset with growth in the Industrial segment. We project adjusted EPS to be in the range of $2.73 to $2.97, which includes a 19% tax rate. As a reminder, first quarter last year was a record for the company due to mix and elevated backlog and a much more robust macro environment. This creates a challenging comparable for the first quarter of 2023. Sequentially, we expect first quarter adjusted earnings to decline 15%, reflecting the segment mix of electronics sales declining sequentially, partially offset by sales growth across the Industrial and Transportation. Turning to Slide 18, I'll add some color for the full year 2023. Last quarter, we estimated foreign exchange to have a $50 million negative sales impact for the full year. At current rates, we don't expect foreign exchange to have a material impact to our 2023 sales or earnings. For the year, we expect to maintain our company average operating margin within our long-term target range of 17% to 19%, but may vary by quarter out of the range. By segment, we're projecting Electronics operating margins to average over 20%, Industrial in the upper teens and Transportation improving through the year with double-digit operating margins in the back half of the year. In addition, we're projecting $64 million in amortization expense and about $40 million in interest expense at current interest rates. We're estimating a full year tax rate of 18% and we expect to invest $110 million to $120 million in capital expenditures. In summary, the continued broadening of our portfolio, end markets and geographies have enabled us to drive profitable growth across the company. While we may see some near-term macro weakness and customer inventory reductions impacting parts of our business, we will continue balancing both the short term and the long term. Our near-term focus will be on margin optimization, prioritizing our transportation segment. And our long-term priority remains investing for content growth and share gains into high-growth end markets. Our strong balance sheet and cash generation abilities give us the ongoing foundation to invest for value creation. I'd like to thank our diverse teams and partners around the world for their innovation, capabilities and dedication in driving a record year for our company. Thanks, Meenal. In summary, on Slide 19, our talented associates, investments for growth and operational excellence have delivered record performance in 2022. Our track record of double-digit sales and earnings growth over the last five, 10 and 15 years speaks to the resiliency of the Littelfuse's business model and the strength of our growth strategy. Over this time, we have expanded our leadership and presence in high-growth end markets, technologies and geographies which has diversified our business and improved the resiliency of our profitability. But we may see some near-term market challenges, we are better diversified today and have honed our playbook to successfully manage through dynamic environments. Our experienced teams, investments in diversification position us for continued growth and will deliver ongoing substantial value to all of our stakeholders. Hi. Good morning. First question regarding the outlook for the Electronics business. You're talking about channel inventory correction. Could you give us an idea of what the channel inventories look like versus normalized levels? And what makes you think things are going to sort of bottom out in Q3 or Q2? The distributors are talking about having elevated levels up again this quarter. It sounds like it's going to take longer for them to work it down. So what kind of visibility do you have into that? Sure. Thanks, Matt. And we've talked historically about the fact with our electronics distribution channels that kind of on average across the globe and across the different types of distributors. 14 to 17 weeks is really kind of our normal range that we choose to operate. And what I would say is that it varies, our weeks of inventory varies across the product lines. We have some of our core product lines that are a couple of weeks above that range. We also have some other product lines like our power semiconductor products that are on the bottom end of the range, and have really strong backlogs. So it's a bit of a mixed bag between them. But clearly, there's accelerating actions by our distribution partners to drive their inventory levels down. I know you were on calls with Avnet and Arrow's released today. And obviously, their inventories are pretty high. Right now, while our distributors book-to-bills are slightly below one. POS is still hanging in at a pretty good level out there. So kind of all of our views are really based on where are we at the current POS levels across the globe, and how does that drive our inventory actions for us. Obviously, you saw a little bit in the fourth quarter where these actions began to take place. So already inventory corrections were taking place in the fourth quarter. They're certainly accelerating into the first quarter. So it's our current view at the current POS levels and things like that, it should work our way through that through the kind of the first half of the year. But the reality is, as you know, cycles are kind of difficult to predict, and it's been a pretty unpredictable last two or three years, and it may be unpredictable this year as well. That's why we're kind of really looking one quarter out. Fair enough. And then regarding the operating margin guide for the year of 17% to 19%, you're starting off in the low 16% range as you're guiding here. And I would think that Electronics would continue to be depressed or even maybe margins down in the June quarter. So what's going to drive those margins back to that 17% to 19% range? Sure. Thanks, Matt. It in part aligns to what Dave just talked about, right? Which is, as we look out and look out at the landscape at current dynamics and current POS levels, specifically around Electronics, we would expect from where we sit today, a couple of quarters continuing of inventory destocking, but if POS levels continue to remain where they are we would see improving margins as our sales aligns to that. The other thing is in some of our prepared commentary I also talked about improving Transportation margins, and also talked about really maintaining margins in our target range across our Industrial segment. So the combination of all that gives us confidence when we think about total company aligned to that range on average for the year. Good morning, Trisha. Thanks for taking my questions everyone. I want to start with the margin question on Electronics. It's more of a mechanical question really. Could you just help us understand how that business should flex as growth turns negative here to start 2023? Specifically, we're hoping to tease out any differences between the passive side of your portfolio in the semiconductor business. I know the latter has some higher capital costs. So I just want to understand the margin dynamics given your sales guidance. Thank you. Yes. I mean overall across our Electronics segment, right, margins -- the margins in that segment are the strongest across the portfolio. So when we see flexes up in growth, we get very strong incrementals and then the opposite happens on the decremental side. So there are different varying margin ranges across all of our products. But in general, we just look at the Electronics segment in aggregate. And know that compared to maybe other parts of our portfolio, like Transportation or Industrial, stronger incrementals and so also on the flip side some higher decremental margins. And as -- I know there were some of the questions about Q3 to Q4, we see that Q4 going into the Q1 forecast, and that's really what we're seeing there as we see that sequential sales decline going into the first quarter. Thanks for that Meenal. And then staying with margins, could you [Technical Difficulty] just to the level of growth that you're contemplating to get to high teen margins in the industrial business this year. I know you've been targeting that. Longer term, I just wanted to understand growth dynamics and to what extent integration, especially Carling is being potentially reflected in that commentary as well incrementally. Thank you. Sure. Let me just [Technical Difficulty] high levels we think about segments. We talked about from where we sit today, the Industrial markets remain strong. So we remain positive on that segment and where we sell into Industrial markets. We're confident in our above-market content outgrowth coming through across Transportation. We think that will be solid as well even across our Electronics segment, right, where we're selling into a lot of markets that cover Electrification, that cover Industrial markets, et cetera. We expect to continue that to be [indiscernible] what we're seeing today. Couple that with ongoing work that we're doing across Carling with synergy realization, with C&K synergy realization. And just in general, work that we're doing around the Transportation margin profile overall. That's really what continues to give us confidence in that 2023 target in that 17% to 19% range. Hey, good morning. Thank you taking my question and congrats on the record 2022. So, I guess I wanted to, I guess, hone in specifically on gross margins. You gave a lot of helpful color on the operating margin line. I was hoping you could give us a little guidance on what we should be modeling for gross margins, particularly as it sounds like utilization rates are coming down and there is inflationary pressures. I guess Iâm trying to understand the trajectory of that line and what that implies for OpEx for the year. Thank you. Yes. We don't usually provide any specific guidance around gross margin. So I'll come back to what I was talking about with our different segments. In general, when we think about stronger growth on the top line, with the capacity that we built across our network, across the company, we tend to see good variable margins stronger across electronics with the higher margin profile but still very, very solid across our Transportation and Industrial. So when we see growth, the margin profile ends up being good, that comes through the gross profit line. I would say just some OpEx commentary in general through the past few years despite the amount of sales growth we've had, we have definitely leveraged -- we've had good leverage on OpEx, and we have not like other companies you hear out there, we didn't add to the same level as others did. So we feel pretty good about our OpEx levels. We continue to invest for organic growth trajectory, short term and long term. But we'll continue to monitor the situation and the broader environment. If we have to make adjustments in OpEx, we'll do that. Got it. Thank you. I appreciate the color. And I guess I wanted to -- also on the channel digestion topic that you are on inventories. It's well above where you've typically run, but it's also a very different environment after a couple of years of shortages, and you've done a bunch of acquisitions. I guess -- you mentioned where levels are in the channel and what the target is there. Can you provide any similar metrics of how you're thinking about your on-books inventory and where we should expect that to move the next couple of quarters? Thank you. Sure. I think that's -- it's a great question. And I think the challenge that we deal with like many of our customers deal with is it's been a pretty volatile time over the last two or three years. And there's still a lot of volatility going on in the fourth quarter with the COVID situation in China and major disruptions going on there that took place kind of in the fourth quarter, it seems to be rebounding nicely after people are coming back after Chinese New Year. But I think the question mark for ourselves, too, as demand continues to be still relatively robust on us. What level of increased inventory do we carry versus maybe our historical norm? Keeping in mind that we, like many of our customers and other peers, a lot of that increase in inventory is not volume related, it's cost related, because we've dealt a lot with a lot of inflationary cost in our materials and our components that we're acquiring. So there's a big step-up that takes place just not in volume, but actually just in the inflationary cost. So that's reflected in a higher level. But also volumes are up as we've kind of dealt with higher demands and that volatility. For sure, it's an area that our teams are working on, and we would hope over the course of the year to begin to burn that level down -- to begin to kind of come back to a more normal environment as we kind of exit the year. I think that's an opportunity for us and our teams. Good morning, team. Maybe also a follow-up on the margin discussion from end and specifically, the Electronics segment margin, you're guiding to above 20% for the full year, really impressive in light of the channel destocking. So, if we take a step back, can you walk us through what has changed structurally in your Electronics business that sets you up in this destocking period versus prior cycle downturns? Sure. Thanks, David. Yes, a lot of it I've been talking about the past several quarters, right? There's a lot of structural work that we've done over the past few years as we've added capacity, we got to the point where we've added capacity. And we've been able to improve our outlook through the capacity we have. So just financially, what that does is that, it helps us drive better margins. You can drive more production, more capacity out of your same footprint. So that's been a positive. As always, we don't talk about all this anymore, but we continue to do footprint work through the past few years. So versus where we were in 2019, we've got a more streamlined footprint of a lot of things we've done, we had talked about that as part of the [indiscernible] integration, and that was the last piece. So that's how they're -- and then other work I talked about productivity initiatives, which are part of our DNA of things that we've done. So a lot of that has definitely helped. And then the last piece is, we've gone through a couple of years now of price realization really to offset some of the inflationary pieces. And yes, I would expect that we'll get back to some normal trends in pricing that will be a little erosion, but I don't expect that to happen overnight or quickly, and we still feel good about where we are today. Okay. Got it. Thank you. Last point, can you still be or do you expect to still be positive price costs in electronics in 2023? Or should we model that rolling over a bit this year? Yes. I think from where we sit today around our thoughts on both pricing and where inflation is going. I would say, from a company perspective, we'll probably be closer to neutral. Again, that's where we sit today. We talked about it in the prepared commentary, there's still pricing that we are going after with customers because our costs continue to go up, so there's pricing there, but not necessarily on the electronic side. Okay. Thank you. And then maybe if I could squeeze in one more. On the Transport business, and I appreciate the color on the ongoing customer inventory unwind there. We're starting to see signs of supply chain improvement in autos that's enabling some better production and capacity utilization. So in light of that, where are we in the process with the customer inventory unwind? How is the visibility to that into 2023? Yes. So clearly, we also see that -- in talking to our customers that some of their limitations on supply chain are beginning to ease. There's still some out there, but some are using, and that's a positive sign, certainly. We've gone through a fair amount of inventory rebalancing in our Passenger Car business in the course of 2022. And what I would say is we're through the bulk of it. We do expect to continue to see some inventory correction in the first quarter, maybe it bleeds into the second quarter, but for the most we see working our way through it in the first quarter. But we're through the bulk of that in the passenger car side. We mentioned in the prepared portions as well. On the commercial vehicle side, we also saw where there's some inventory rebalancing, particularly on the Carling products. So the Carling business that we acquired. I mentioned it, but -- if you take our Carling business in 2022 compare it to the stand-alone year under the previous ownership, we grew that 20% last year, which was very significant. When we acquired the business, it came with a really strong backlog. The teams worked very hard to ramp up production and capabilities, and that's one of the values that we bring sometimes to acquisitions as the disciplines and the ability to drive things at the factory level. And we were quite successful at doing that and grew that business 20% from when we acquired it. So customers have been dealing with long backlogs there prior to our acquisition. We've cleaned that up. And then the customers and distribution partners have reached that point where, okay, well, now lead times are significantly lower. You guys are delivering very rapidly on that. So therefore, they're pulling back a little bit on inventory, too. We see that also kind of impacting -- continue to impact a bit in the first quarter as well. Good morning. And congrats on navigating the difficult environment here. So just a couple of quick things. And -- I'm sorry. Okay. Good. And not to proverbial dead horse here, but on the inventory level Iâm kind of curious if you are seeing or maybe a change in rationale from your customers in terms of the levels that they carry. And if we're burning inventory back down to maybe an elevated level that they're carrying now versus what would be a normalized level? And just kind of how you think about that at those levels [indiscernible] Yes. I think it's a great question. It's a question we ask ourselves. And we talk with customers often and when we talk with our distribution partners and what they're seeing with the end customers. I think it's our assertion right now that in customers probably carry a bit elevated inventories compared to they were pre-pandemic. Now, they're not going to carry at the level they've been operating in the last few months, so there's going to be some bleed down of that that's certainly impacting our business. But our current assertion is, they'll still keep a bit elevated because of the volatility we've experienced, which is -- it's been many different aspects that have impacted. It certainly got kicked off by COVID, but many other aspects, whether it's fires and semiconductor fabs in Japan or freezes in Texas and things like that. It's not a lot of volatility. And so I think our belief is that there will be slightly elevated inventories that our end customers carry for the foreseeable future. Okay. Very helpful. Thank you. And then maybe secondly when you touched on China just a bit earlier, it sounds like you're seeing some indications of a recovery effort the Chinese New Year. Just maybe curious about that geography, how you're thinking about demand trends there? And is that an area that could be potentially maybe a little stronger than what you were thinking now as that economy recovers? Yes. I would say it's a bit early to kind of -- to take much of a position on that yet. Certainly, at our own factories and our own suppliers and even kind of our core customers we're dealing with. The rebound and returning employees after the Lunar New Year has been pretty positive and has had kind of surprisingly robust. In some ways, there was nervousness about that. So we're seeing that as a positive sign. I think certainly on our teams, our teams in China have been phenomenal in dealing with the situation of early in 2022, having zero COVID policies to -- in the back half -- back end of the year where very high percentages of employees who had COVID and dealt with those disruptions. Our teams managed through that really effectively with the strength of our teams in China and has kind of recovered relatively quickly. So I guess I would say how does that impact potential demand in China in the back half of the year? What I would say is, I'm hopeful -- we're hopeful that, that might pretend that there could be an improvement in demand in the Chinese market as the year goes on. But I think it's kind of early to call that for sure. . Good morning. Yes, thank you. So a few questions, and I'll copy my predecessors reference to maybe risking beating a dead horse. But there was a question about decrementals, and I believe it was related more to the Electronics segment. But when I looked across all of your segments, change in revenue versus change in operating income, 3Q to 4Q. I mean there was kind of a pretty high decremental in each of those segments. So I was just wondering if you could take a step back and maybe described some buckets where, I don't know, mix issues or the lower volumes in Transportation. But overall, I mean, what do you think were the key elements in kind of a 70% or so decremental kind of company-wide 3Q to 4Q? Thank you. Sure, David. So stepping back on to some of the questions we've got, but if I aggregate it all, versus where we were a quarter ago. We definitely saw some additional and accelerated destocking in some areas. Dave has been talking about the channel destocking we saw, definitely accelerated as we got through the quarter going into Q1. And I talked about earlier the fact that with Electronics being our strongest margin segment, the decrementals on that also tend to be higher than the company average. So that's one. Weâve also talked about the fact that we saw continued destocking in auto and new destocking as we got into the end of the quarter with Carling customers because of the strong backlog and we were able to meet all of the customer demand. That also had an incremental reduction as well. And so when we talk about this element of destocking, what does it mean, it's a combination of the fact that sales come down, we're producing less. And in some cases, the environment changed rapidly within this past 90 days or so. So you've got sales dropping and you've got what we call stranded production cost. As you're reacting, you're trying to react very quickly, but you're watching this all happen real time. So with all that additional production cost. I would say the last piece also on our Industrial segment, and we had the same thing happened last year. The team really tried to pull in shipments out of China before the Chinese New Year. Good thing, given everything that has been going on. And so we incurred some extra logistics costs in that period then get washed out with additional sales in the next quarter. So it's really the combination of those, I'd say that's the 80:20 to the whole mix. Great. Thank you. Next question would be about the comment, I guess, regarding design wins for off-board charging. And my recollection is you've discussed that opportunity in terms of Tier 1, Tier 2, Tier 3, where the lower two tiers kind of a single-digit dollar opportunity per unit, but the highest tier is triple-digit dollars more per unit. So I was just wondering if you could characterize the overall quality of your design wins in terms of the percentage that might be in that highest -- highest dollar opportunity tier. And then secondly, any idea or any sense of a timeline or when a design win in that area kind of converts into production shipments and revenue? Thank you. Yes. That's a relatively complex question because the dynamics and the types of customers that are engaged in the off-board charging and things like that. Some of them are moving very rapidly and their design cycles are relatively short, can be a year or so to get from design to revenue more typically is a couple of years. There tend to be long design cycles in that space. So it can be, I would say, designed into production there one to two years. I think that's probably generally a good way of looking at it. And it's evolving differently in different regions of the world as well. So I think we have kind of a healthy mix. We're focused on Level 2 and Level 3, right? Level 1, the opportunity is, yes, there's a little bit there, but that's not our focus. It's Level 2 and Level 3. Level 2 by far the highest volume space and opportunity. And we continue to look for other additional technologies that we can bring to that space. And expand our TAM even within the Level 2 charging as well as Level 3. Level 3, obviously, per unit, the content opportunity is significantly higher. But design intensity tends to be much higher at the Level 3 charging. Because these are pretty complex systems that require really strong coordination between the systems within the unit. And so they require a higher level of engineering engagement. So I would say we're spending a higher level of time there because of the complexity and what it takes to support those sorts of design wins. So I think we're well positioned. We're working very crisply with all the leaders out there and then the really long tail of a lot of players who are not the leaders in the industry that we support in other ways. So we feel good the engagement. We think there's more things we can do to expand our TAM within those applications as well. Okay. Great. And then last question would be big picture question maybe about China and not so much the lockdowns and reopening, but I think the -- during the fourth quarter, the current presidential administration issued a broad set of restrictions on technology trade with China. And I was just wondering from your perspective how that may have affected your business or that of your customers. So my guess is not too directly, but maybe there were some indirect factors that you have to adapt to in terms of supply chain or customer -- maybe your customers have to make some adjustments, and that's extended some delivery dates. But just broadly speaking, how has the prospect for a longer-term set of restrictions on technology trade with China. How has that flowed through your thinking about operating your business and prospects, let's say, over the medium term? Thank you Sure. First and foremost, the enhanced restrictions that have taken place and even now that there seems to be agreement in the Netherlands and in Japan on further restrictions on tool sets and things like that into China. They have no direct impact on us. The technologies that we produce in China or sell into China, we tend to be on the power side, protection side of things. From a technology, they're really a bit technical here, but they're dealing with high voltage and voltage with stand, which means you operate in a much different way than you do in the high-end logic sort of applications. So lines and features in our world are quite large. Most of the restrictions that are taking place are on the more advanced, really small features and semiconductors that enable some of the advanced logic-based types of technologies. It's just not the world we play in. So from a direct perspective, it doesn't impact us. From selling into the customers, I would say the areas are going to start to hit the hardest are really the high-end electronics and communication side of things, those sorts of areas. We sell into those spaces. Consumer-facing is not a big outsized portion of our business. So we don't see that impacting as hard. So overall, I would say the challenges in the political -- geopolitical environments are not a positive outcome. We'd like to see those be a little more compatible when working between the regions for the long term. But in the near term, we don't see any meaningful impact to the business. Thanks for your questions, David. That concludes our Q&A session. Thank you for joining us on today's call and your interest in Littelfuse. We look forward to talking with you again soon. Have a great day.
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EarningCall_678
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Good morning. Thank you very much for your interest. I'm joined today by Onur Genc, our CEO, and Rafael Salinas, BBVA CFO. As in previous quarters, Onur will start reviewing the group figures and then Rafael will go through the business units. Then we will move to the live Q&A session. Thank you, Patricia. Good morning to everyone. Welcome and thank you for joining our 2022 results audio webcast. I hope you have had a great start to the year. So let me just jump into it. Slide number three. So I'll start with that page by highlighting the outstanding results of the year. First, in going through the lines on the page, we have made significant progress in the execution of our strategy, focused on profitable growth. We are accelerating our profitable growth. At the same time, we are leading the digital and the sustainability space. We have ended the year having acquired more than 11 million gross new active clients, a new all-time record; 78% of our unit sales have been done digitally another all-time high. And we are also at the frontline of the industry in terms of sustainability. In 2022, we be channelled â¬50 billion in sustainable business; again, another record. Second line, we have achieved the highest annual net attributable profit ever â¬6.6 billion, an increase or 31% versus 2021, which represents also a 48% increase in our earnings per share. Third, we continue delivering on our commitment to profitable growth and value creation for our shareholders with ROTE, return on tangible equity of 15.3% and then exceptional -- exceptional 19.5% increase of tangible book value per share plus dividends. All of this obviously is allowing us to significantly increase the distributions to our shareholders for a total amount of â¬3 billion, which is equivalent to â¬0.50 per share. While at the same time our CET1 ratio continues comfortably -- very comfortably above our target of 11.5% to 12%, as you know, our target. These highlights are what I would be expanding upon in the coming pages, but just to reiterate, the common theme of all the numbers in this page is that we are growing and we are growing in a profitable way. Moving to Slide number four; new customer acquisition, so our relentless focus on this, growing our franchise, the healthiest way to grow our business. Our focus on this has allowed us to acquire 11.2 million gross new active clients in 2022, more than doubling the client acquisition that we had five years ago and this has also allowed us to reach at the bottom of the page to reach more than 67 million active clients in stock in 2022. Additionally, the share of those acquired through digital channels has also increased from 7%, as you see on the page in 2017 to 55% in 2022. This 55% we do think it's a clear differentiator versus most of our competitors out there. Moving to Slide number five, our leadership in digital, it has also proven to be essential and differential again in serving our customer base. Let me again put some figures to this on the page. On the left hand side of the page, you see that we have almost 50 million mobile customers, a figure almost three times higher than 2017 and the record 70% penetration rate on mobile. And at the same time, our digital sales as I mentioned, it has reached 78% in terms of units and 61% in terms of value. This leadership in digital obviously translates into higher client satisfaction. As you can see on the right hand side of the slide, the Net Promoter Score is continuously improving in the group, it clear leadership positions across the main countries or the footprint as you can again see on the page and in the last year we have improved our customer satisfaction by five percentage points, which is very strong. Slide number six; the other piece of our strategy that we put a lot of energy, a lot of efforts on sustainability. We are also in our view trendsetters in sustainability. We maintain the top ranked European bank position in Dow Jones Sustainability Index. This is the third year in a row. And as you can see on the left hand side of the page, we have set clear targets in our goal of achieving net zero by setting decarbonisation targets in the key CO2 intensive industries. And we are very serious about this, how to achieve these goals, how they achieve these alignment goals, obviously by accompanying our clients in the process and supporting them with investments for decarbonisation. As such, we do think sustainability is also a great business opportunity. And again, as you see on the on the page, in 2022, we channelled more than â¬50 billion in sustainable business, totaling â¬136 billion cumulative since 2018 and we remain aligned with our increased target of channelling cumulative â¬300 billion to sustainability by 2025. Then page number seven, I'm going to walk you through starting from this page through the financials. 2022, obviously, it has been a great year. We delivered the highest annual recurrent and reported in both of them profits ever of our history. So we're very happy with that result. In the bars at the centre of the slide, you can see the upward evolution of our annual results. So beyond the fact that it's the highest; the trend that you see in this page, in my view is impressive. 2020, â¬6.6 billion of recurrent profits, 31% higher than the â¬5.1 billion that you recorded in 2021, which was already in again an exceptional level and these results, it brings our earn -- it bring our earnings per share up to â¬1.05 with an increase of 48% year-over-year, obviously significantly higher than the growth or the profit. Thanks for the share buyback that we have been executing in 2022. And lastly, let me note that for comparison purposes, all these figures they exclude the non-recurring impacts reported on those respective years, but in any case, if you want to see them, we put those reported figures at the bottom of the page as well. And again, even on those numbers, we are posting our best ever reported profit. Slide number eight, our tangible book value per share plus dividends, it continue the outstanding evolution closing at 7.79%, a 19.5% increase year-over-year. I believe in this presentation, we have a lot of impressive figures, but this growth, 19.5% growth in tangible book value per share plus dividends, it is one of the most impressive figures in my view in the presentation. And regarding profitability on the right hand side of the page, we continue to improve our excellent profitability metrics, reaching 14.6% return on equity and 15.3% in ROTE. With these numbers, we believe, at the end of those nine months, we have also compared it, but we believe we are still one of the most profitable European banks out there. In fact, again, the highest ROE bank in Europe among the 15 largest European banks at the end of the third quarter and we keep advancing, we keep advancing on these metrics. Slide number nine, I do think it's an important one, in managing our business, we always compare ourselves in every single geography, in every single business to competition. Competitive success is what we're after. So how do our numbers at the group level? How do they compare with competition? So on Slide number nine, we wanted to highlight again, the exceptional comparative performance of our profitability and efficiency metrics. So on the left hand side of the slide, our tangible book value per share plus dividends growth of 19.5% that I just explained, it compares with the 3.8% for the average of the peer group, and then the peer group, you have it in the footnote, it's the largest 15 European banks. In the centre of the slide, our mid-teens ROTE of 15.3%, again, compares very favourably with the 7.4% for the peer group. And lastly, on the right hand side, one of the key elements of our success in our view, our strong efficiency levels, it stands out at 43.2% versus the 62.8% of our peers. So comparatively also, we are creating a very good picture as you can see on this page. Slide number 10 In terms of the details of the financials, I'm going to go very quickly from these and maybe just the headlines. As we are going to be looking into them in the next few pages, but in the summary of the P&L and the financials, and the results is first, outstanding core revenues and activity growth number one. Second, in the page, our improving and industry-leading efficiency ratio as we just discussed; third, highest annual operating income ever also; fourth, very solid asset quality metrics with cost of risk clearly aligned with our guidance and lastly, our strong capital position, comfortably, very comfortably above our target range. So let's just jump into them. Slide number 11. Looking at the summarised P&L of the year. Again, there are many numbers in this page, but I would like to highlight the excellent evolution of gross and operating income improving 22.9% and 29.2% respectively, driven by strong core revenues evolution and positive jaws in the case of operating income. So beta positive growth figures. Also in this page, it's important to note the evolution of impairments, very good evolution of impairments with asset quality remaining solid in this profitable growth context. Slide number 12, you have the quarterly P&L, year-over-year comparisons. The second column from the left is the year over. What stands out is the impressive 47.5% increase in operating income, again driven by the strong core revenues and positive jaws, which then leads to an excellent net attributable profit growth of 29.8%. In terms of the quarterly evolution, which is the second to last column in the table on the right, gross income and operating income, they increased 6.6% and 4.2% respectively, versus the third quarter, despite, obviously, as you know, being negatively affected by the once in a year deposit guarantee fund contribution in Spain. We do it at the fourth quarter, as you know, and given that the quarterly comparisons at revenue numbers is a bit misleading, but even with that, we have grown our revenues. All in all, fourth quarters, 2022 reported an up net attributable profit is â¬1.578 million as you see on the page. Slide number 13; there are too many -- there are too many numbers on this one, but as I said, one of the clear highlights of the year and of the quarter has been revenues. I don't want to dwell too much on the page on the details, but please, please do register the excellent trend in the revenues, the trend curve, for example, net interest income, quarter after quarter, quarter after quarter, we are increasing our revenues and we are breaking new revenue records, which I think is again very positive. Page number 14; let me do a quick deep dive on the net interest income growth, especially Spain and Mexico, so that you can also see why we continue to be quite optimistic for the quarters to come in 2023. So there are some signals of the future in this space for you. On the left hand side of the slide, you can see the strong loan growth for the group, which has accelerated obviously since last year; so, 13.3% versus the 5.6% of 2021, so, very good growth in activity. And in the center of the slide, you can see the improvement in the customer spreads for Spain and for Mexico, our two core geographies. In the case of Spain, it has strongly picked up during fourth quarter to 221, following obviously the recent increase in the interest rates. We have been telling you that it takes a bit time in Spain to get -- to reflect the higher rates into the spreads and that's clearly happening in Spain and again there is more to come. And for Mexico, again in the center of the slide, interest rates have been increasing for several quarters. Lending yields and customer spreads, they have a longer track record of an increase in a very consistent manner. So you also see a very positive curve, trend wise, quarter after quarter, there is an improvement in that number for Mexico. As a result of all of this, obviously, on the right hand side of the slide, you can see the strong NII growth, both quarter-over-quarter and also year-over-year in both countries; 26% in Spain, 35% in Mexico in constant Euros and quarter-over-quarter numbers, 17% in Spain and 8.5% in Mexico, very positive, very positive figures. Slide number 15, is around costs and the jaws. On this page, I would highlight the fact that once again we end the year with positive jaws, with gross income growing obviously more than the costs. Costs are growing 15.5%. That also remains well below the blended inflation rate in our footprint. So as a result of all of this, you can see our efficiency ratio, the best among our European peers, further improving to 43.2% from the 46% levels of last year. Slide number 16, asset quality. It remains solid in this growing context. First of all, NPL ratio on the right at the bottom of the page, it continues to improve NPL, including the effect of a debt sale that we did in Spain in the fourth quarter and also due to very good underlying performance of the portfolios. In this context, impairments increased in the quarter due to higher requirements from the macro models updates. As you do every quarter, we do the macro updates and also as a consequence of cautiously setting additional provisions in certain portfolios, sectors more vulnerable to the macro situation, leading to this quarterly increase, but still resulting in a cost of risk of 91 basis points, which is within guidance and obviously below pre-COVID levels. Our coverage ratio, the other key number on the page, decreases slightly to 81%. This is again partially due to the aforementioned debt sale that we did in Spain in the fourth quarter. It was a highly provisioned sale and highly provisioned book that we sold. As a result it had this impact obviously in the number, a part of it, a part of the decrease is explained by this. Slide number 17, as we have repeatedly stated, we have a clear focus on value creation for our shareholders, which guides all of our decisions. In this regard and in line with our payout policy, I'm quite happy to announce that the proposal to be sent to the next Annual General Meeting contemplates the distribution of total amount of â¬3 billion for 2022. This payout is equivalent to a total shareholder remuneration of â¬0.50 per share, and it's split among a total cash dividend of â¬0.43, which is 39% higher than last year in terms of the cash dividend, which again also implies that â¬0.31 to be paid in April, 2023, subject to the approval of the Annual General Meeting, obviously, and complimenting the â¬0.12 per share cash dividend that we have already distributed back in October. In addition to this cash dividend of â¬0.43 per share, we will be proposing a new share buyback program of â¬422 million, equivalent to 1.1% of BBVA's market cap. We have been growing -- we have been growing profitably -- we have been generating capital organically, and as we have been saying consistently in the past few years, we are determined and clearly dedicated to share that profitable growth with our shareholders in terms of higher remuneration, as you can see here, you are seeing clear growth in the numeration to our shareholders. Slide number 18, our capital, our CET1 fully loaded as of December 22, remains at a very strong level of â¬12.61. Needless to say, again, much above, comfortably above our target range of 11.5% to 12%. In terms of the change in the quarter following the waterfall, main impacts; first, obviously our strong results generation, that contributes 47 basis points with the ratio. Second, the dividend and the 81 [ph], it detracts 20 basis points, and then the third, 25 basis points due to a relatively contained RWAs growth. And last the bucket of others of 14 basis points it's positive, positively impacted in the quarter by the market related impacts, and especially by the credit in the OCs due to hyperinflation. And these positives are more than absorbing around 20 basis points, negative impact due to the final batch of so-called regulatory impacts, model updates and others for the year. So we have compensated for the 20 basis points impact and as you -- if you remember, we have done a 10 basis points throughout the year in 2022. So the 30 basis points impact of regulation and model updates is basically already incorporated into our capital figures. In January, 2023, the second box, second bar from the right, we have a relevant positive one-off due to a release generated by the reversal of the NPL backstop deduction for 19 basis points, which would increase our CET1 ratio to 12.80% pro forma. So you see that pro forma number also on the page. At this point and in a full year view, let me stress that once again, our ability to generate organic capital is impressive in my view. It has allowed us to keep financing the desired profitable growth. We have grown a lot in the year. It has allowed us to remunerate our shareholders with an increasing momentum, and we still ended up the year with a yearend CET1 ratio well above the upper part of our target range. It all goes back to the profitable growth mandate that we had and that we have been sharing with you. And Page number 19, I'm not going to go into it, but it basically is telling us that all the long-term targets that we announced in the Investor Day in November, 2021, we are clearly in line to meet those goals. Thank you, Onur. Good morning, everyone. As Onur said, we are very happy to present outstanding result for the year '22. I would like to highlight asset management and very positive contribution for all the franchises, focus on delivering on our commitments and to exceed the objectives set at the beginning of the year. We will now comment on the performance of our main franchises. In the last quarter, I will provide our guidance for 2023. Let me begin with Spain. Slide number 21. Some business trends and strong result evolution, continuing the fourth quarter, closing up an excellent year. A positive loan growth with significant market share gain in the year, both in consumer lending 140 basis points, and in commercial 76 basis point, continue shaping up a more profitable lending mix. That translate into very solid dynamics in terms of P&L. Pre-prohibition, profit hits double digit growth in '22 above 13%. The main driver here is the NII, which clearly accelerated in the fourth quarter reaching high single digit growth year-on-year above expectation. Interest rate increases are positively supporting the NII are more expected to come in the following quarters as you will see in our guidance. Despite the positive growth in banking services and insurance fees, total commissions are affected by lower asset management fees due to market evolution. Expenses decreased by 4.1% year-on-year, a figure that shows our cost control commitment in a contest of higher inflation and growth in activity. All-in, significant improvement in our efficiency ratio to 47.5% in '22 from this 51.7% last year. On the asset quality side, the cost of risk improved to 28 basis points in '22, driven by solid underlying asset quality trends throughout the year, while higher impairments in the last quarter as Onur mentioned are mainly related to the macro scenario update and additional adjustment in certain portfolios after updating our level of conservatism in the models. To sum up, very strong result, reaching close to â¬1.9 billion on our recurrent basis. For '23, we expect similar positive dynamics. NII trend should accelerate further as a higher percentage of the portfolio resets as rates, in this context, we are updating our 2023 NII guidance to grow at low 20s, and fees will slightly grow subject to market volatility. After years in a row of continued cost cutting in Spain, we are expecting expenses to increase around mid-single digit in '23, while efficiency will continue to improve. Our expectation for the cost of risk in Spain is to stand around 35 basis points in 2023, slightly higher in the new economic scenario, but a manageable increase taking to consideration the strong provision effort than during the pandemic, the degree of leverage of the economy and our product new loan origination policies. Slide 22, turning now to Mexico. Once again, we are happy to share with you on a standing set of results, a strong loan growth in the year, balance among retail and wholesale segments, benefiting from positive economic momentum in the retail segment and hybrid working capital needs in the commercial segments in an inflationary environment. In terms of P&L, fantastic year in Mexico, the net profit reaches a record figure sitting â¬4 billion due to an impressive revenue growth close to 26% year-on-year, driven by a strong NII growth supported by long growth and higher customer experience, that has increased 71 basis points during the year, benefiting from an effective repricing of the asset sites, while the cost of the deposit remains well contained. Some performance in fees, growing at high thins based on our higher volumes in credit cards and transaction ID and payment services, and a very positive year on improving efficiency to outstanding 31.7% efficiency ratio. And finally, very solid risk metrics with the cost of risks improving to 247 basis point to the full year, while the NPL ratio continues to decline, and the coverage level increases to almost 130%. For 2023, we expect activity dynamism to continue and the loan book to grow at double digit. We see clear opportunity to continue growing in the country, and we are well prepared to take advantage of them. Based on those solid dynamics and an effective prime management in the context of higher rates, WE are expecting the NII to grow mid teams in 2023 above loan growth. Expenses, we'll be growing at double digit in '23, and we will continue investing in the country to reinforce our leadership in all states, products and segment, but maintaining positive jaws. On asset quality, although we expect some quota potential deterioration in the risk metrics, our solid starting point make us to estimate the cost risk to stand below 300 basis points in '23. Slide 23, regarding Turkey, in terms of activity, I would like to point out the significant de-dollarization of the balance sheet during the year. The leverage of foreign currency loan continuum where targets lead deposit grew strongly favored by the conversion of foreign currency deposits about the growth of the TL loans book. On the P&L, the net profit in the full year '22 stand at â¬509 million driven by good underlying business trends at a better than expected FX evolution. On the quarterly basis, the net profit continue to improve in constant terms in the fourth quarter, driven by the increase in trends in growth income; thanks to higher core revenues, NII supported by activity growth in Turkey and free growth mainly for payment service and brokerage, and a lower quarterly high proliferation adjustment, impacted by the depreciation of the Turkish lira during the last month of the quarter. Finally, asset quality trends improved throughout '22. Progressive decline in the MPA ratio, thanks to the strong recoveries and limited provisions and a higher recovery level over the year. Financial impairments increased in the quarter due to the macro update, while underlying trend remains sound. The cost of risk stands at 94 based point for the full year will contain. Finally, for '23, what can we -- what can we expect going forward? The first is that we will continue to manage the bank following a present and anticipatory approach of how we have done since we took control in 2015. Our priority will continue be to preserve the value of the franchise and his fundamentals, both from the capital and liquid perspective. Having said this and highly uncertain environment, we expect BBVA to contribute to the P&L in '22 in line with his contributions in 2022. And finally in South America, Slide 24, the regions maintain a solid performance in terms of revenues. NII growth is the main driver of the P&L in '22, with a strong growth throughout the year, supported by sound loan growth and higher rates. A strong performance fees supported by activity developments across the board and despite inflationary pressure and the increase in cost, efficiency continues to improving to 46.4% ratio at the end of the year. As in the rest of the year, Greece indicator remains sound with NPL on coverage improving in the year and cost of risk remain broadly flat at 170 basis point in '22. All in, net profits in the regions exceeded â¬700 million in the year, more than 80% as compared with the last year results. And for 2023, our guidance, we expect the cost of risk to be below 200 basis points in the region, and we expect the efficiency to improve, aligned with our long-term targets. Thank you, Rafa. We're a very performance-oriented organization based on numbers and metrics. We always promise that we'll be done in half an hour. So I have two more minutes. So I will skip Page 26. The only summary that I have for you is that as on behalf of the really wonderful teammates that we have at BBVA on behalf of the whole team, we feel very, very happy with what we have delivered in 2022. And we have -- we have had our best year ever on multiple dimensions, not only on profits, and the team is very motivated and energetic to do even more and that's page number 27, the guidance. Looking also, what excites me more is because 2022 is already gone, is that as we look into the coming year and as we have seen the first numbers coming along at the beginning of the year, we are quite positive on what we are seeing and you see that in the guidance. On the right hand side of the slide, Rafa all went through them. So I'm not going to go through those, but by country, all the key fundamentals of our business, they have been performing quite well. Obviously, we have to be cautious. We do see still some uncertainty in the macro environment and that will obviously affect our business, but overall, quite positive as you have listened to from Rafa and as you see on this page. At the group level, all of this, it translates into a few things. For the group, we expect core revenues to grow at mid-20s in constant euro. We don't have it in the guidance here, but depending on obviously the FX evolution based on our own estimates of the FX evolution in terms of the current Euro revenue growth, we expect it to be in the mid-teens, which again, is a very, very positive figure, and again, reflects our optimism going forward. It goes back to our strategic focus of profitable growth. It goes back to serving the most profitable segments, but we are quite positive on core revenues. Then on costs, we expect to grow around average footprint inflation, focus on the jaws as always. In some countries we are investing, but in general still below the average inflation is what we are aiming to do. And lastly, cost of risk, we are expecting it to be around a 100 basis points based on the readings that we have at the moment. Again, we have to be cautious, but based on what we see, we are quite confident that we can guide you around a 100 basis points. Good morning, and thank you for taking my questions. Firstly, on your group cost guidance, which is to grow around average inflation based on the footprint weighted by operation expenses, can I just confirm that the number you expect this to be then is around 16% your weighted average inflation across your geographies. And then on ROTE, the print this year was 15.3%. Your target for 2024 is 14%. That's looking a little bit redundant to this stage. I think that the net of all your new guidance implies that ROTE in 2023 will be higher than in 2022. Can you confirm that's the case and can I push you to give any guidance that's firmer than that? And if not, can you guide when you're next we're next likely to hear an update on your 2024 ambitions. Thank you. Thank you, Benjamin. On the -- maybe on the costs, you can lay a view Rafa on the ROTE, on the return on tangible equity. You are very well, right? Our original goal was 14%, as we have said, November, 2021. When we set it up, we heard many comments saying that, isn't it too aggressive? Are you going to be really able to do it? And so on. And we are already above that. So it's set three year plan that we have had, and that three year plan we are already on in the first years, we are not even half of the planning period yet. The only thing I can tell you is we are not revising those figures. But as you can also see from those pages, in multiple of those metrics, not only in return on tangible equity, but the target customers, the customer growth, definitely the tangible book -- tangible book value per share plus dividends, we have a clear positive upside potential and hopefully we will clearly beat the goals that we have. So, in short, let me not mumble with the words, but the goals, we are not going to revise them because it's a three-year plan. We are only in the first year, but we have a clear positive upside on all of those metrics. Regarding the costs, the 16% inflation, we are guiding around debt inflation. But Rafa, do you want to comment? No. It's just, that, I mean, you are right Benjamin on the numbers. The weighted average inflation that we are projecting, our research department is projecting for next year just slightly above 15%. So it's just that between the 15% what in the high, in the heightened levels. So around the 16% that you mentioned, Benjamin, maybe one addition to this cost number, when you would see it in the coming months and quarters, as you have seen also this year in 2022, in Mexico, we are slightly or we are above inflation in terms of costs. We do see an opportunity still in Mexico of growing further our position. That's what we have been doing. We have been gaining market share consistently year after year and also in 2022. There's a discontinue in the market. One of our competitors is being sold and so on. In this context, we do think that an investment, a further investment into Mexico, which might lead into remaining in costs above inflation, is very well justified. So that's one of the drivers of this around inflation. But overall for the group, then we will make it in such a way that we will be around inflation. But in Mexico, you might see a bit higher figures than the average inflation. Yes. Thank you for taking my questions and congratulations for the results. First I want to ask first about the deposit beta. In Mexico, 25% in the fourth quarters local peers are closer to 35%, 40%. I wonder if you think that you will be able to maintain the gap and what beta do you expect in '23. In Spain, you can comment on what terminal deposit beta you pay for '23, '24, if you will believe that BBVA will be above or below the sector average. Any color you can give on the deposit mix would be great. And second on capital, if you can update on the regulatory headwinds left for '23 please. Thank you. Very good. On the Mexican situation, you already mentioned that Francisco, but as you can see on the page, the policy rate at the moment, as you know, is 10.5%. Our blended cost of deposits is 2%, 2.07%, as you see on the page for the country for the fourth quarter average. And how is that possible? That's possible because again, a big part of the deposits that you can see is demand deposits, and these are all transactional deposits. I did mention to you in the previous calls that we do have a really wonderful franchise in Mexico. 40% of the salaries in the country go through BBVA in terms of amount 40%. That helps us in transactionality. We have a wonderful acquiring franchise for the SMEs and so on. We are a cash flow oriented business. We are a technology digital oriented business, and we are really in the transactional business of our clients. In that sense, the demand deposits for us is the key number here. And as a result of that, we have 100 basis points difference, positive difference in cost of funding versus our competitors already. So given the transaction nature of those deposits, the deposit details that you see here, obviously there will be some further maybe increases and so on, but the deposit betas would not change much. Regarding Spain, the assumption that we have at the moment is obviously there are three, three parameters here. What percent of demand deposits, again, a big part of our deposit base will move to time. So the percentage of, or the amount that would be subject to interest rates, number one amount, number two, what would you pay to those -- to that piece? And number three, the timing. When are you going to start doing that? Given the really high liquidity in the system and you might have seen it, but even if you take into account the full payment of TLTRO, there will still be a lot of liquidity in the system. In that context, our estimated beta is a combined beta of what percent will go to time deposits and how much you will pay to it is around 20% to 25%, the combined beta. And we are expecting that the pressure is not there at the moment and it'll be later in the year if there is any. And we are going to be, as we are going to be watching competition very closely, but we don't see that competitive pressure yet. To cut the long story short, the dynamics are quite positive because of the very high liquidity in the system, even after you take out the full TLTRO from the balance sheets of the banks and the combined beta estimate that you see in our guidance is 20% to 25%. Regarding the regulatory impacts, I did guide you on the regulatory impacts for 2022 to be less than 35%. I'm not sure -- I'm not sure whether it was very clear in the speech around the presentation. This year, we have done 30 basis points. In the capital figures that you see, we have a 30 basis points impact from regulation, model updates and everything else. So we delivered or we -- the thing that we were telling you that we would do by the end of the year, we have done that. And that's 30 basis points already in the numbers. Now regarding 2023, the model updates and so on, it's done, but there are other things, as always. Our expectation is that you see in the presentation that we have a pro forma 19 basis points positive impact due to MPL backstop. That 19 basis points positive impact from MPL backstop will be consumed by other impacts coming from further regulatory topics in 2023. Again, in simple terms, and in short, the expectation is that the 19 bps of positivity coming from MPL backstop will be consumed by some other topics in 2023, but we don't expect anything more than that because we have already done all the model update related impact in our figures. I'm back on Mexico and perhaps a little bit more around the fee momentum which is still very strong this quarter. If you could just maybe talk a little bit more detail about the dynamics there on the card side and your expectations in the 2023, should we expect that to remain as strong as it has been in recent quarters? Equally on net interest income, obviously the guidance is to grow NII above loan growth. I know you've already touched on the beta, but I guess in terms of the -- on the margin side, is that being driven by a change in mix on the loan book side towards higher margin products? And equally, what are your rate expectations for Mexico going forward, embedded in that guidance? Thank you. The first question was on the fees. There's a problem with the line today. So on the NII, let me start with the NII, which I think is the second one. If the first question was on the fees, let's talk about that as well, and maybe Rafa, you can talk about it. If it's something else, please let us know. Benji, there's a problem with the line today. On the NII, as we said, it's coming from two things. When you look into the Mexican loan evolution in the year, you see a higher growth in areas of better margins. So consumer has increased by 16% year-over-year. Stock, credit cards has increased by 20.7%, 21% SMEs has increased by 20% and so on. So the mix to higher spread products is helping obviously number one. And number two, 40%, 40% zero, around 40%, let's say that way around 40% of our loans, especially on the corporate commercial side is linked to interest rates and interest rates going up. It used to be, as, you know, 5.5% at the beginning of the year. It ended 10.5% at the end of the year. That has led obviously to some of this impact as well. Some of that repricing continues because, some of the latest increases were done very recently. We do expect another 25, 50 basis points to come. Our BBVA research estimate is that there might be another 25 basis points in the next meeting of Mexico. So that that will continue. And depending on whether that stays at that level or so on, the impact from the rates will come along as well. But the mix effect is also very important and the mix effect is what we also intend to maintain for the coming year. We will be growing more in the commercial SME credit card consumer portfolio. As you can see in 2022, the pieces that grew the least is mortgages and public sector, which typically comes with lower margins. So the mix effect is under our control, and we will continue on that path and the interest rate impact will also be there because the curve is still very, very high. On the fee income, Rafa? On the fee income in Mexico next year, at the end of the day, we are still believe we are going to have a good performance. We don't -- we don't have a guidance in terms of a growth rate, but clearly it is not going to be -- it is not as affected as the market component because of the weight of the asset management component in Mexico. In fact, the big portion of the fees related with payment services and brokerage. We, given the level of transactionality that Onur mentioned, I think we still believe that we are going to have a double-digit growth on that. Clearly there is a little bit less than 20% weight on the asset management fees that clearly is going to be depending on market evolution, but still some growth in face in Mexico is here. Hi. Good morning. Thanks for the presentation and taking our questions. I have two. The first one is an outlook for loan growth in Spain. You seem to have increased new production in mortgages from the third quarter. Do you see the market better? And how do you see growth in new production evolving in the beginning of 2023? And then the second question is on the shareholder remuneration. Can we assume that buybacks will now be part of shareholder remuneration in the coming years? What was the reason to put part of remuneration as buybacks this time? And also with the strong capital generation and excess we currently have, could you consider an increasing payouts in the coming years? It's actually three questions, Max, but they are all very good questions. So yes, so the after for 2023 for the loan growth in Spain, we guided you in the page as the flat growth. You asked about mortgage specifically. We actually expect mortgage to deleverage a bit. So there will be negative growth in mortgages in our expectations, in our base case expectations. As you said, the production has increased for us in the fourth quarter. but it is mostly because of the baseline impact. Because in the third quarter -- in the second and the third quarter, we didn't like the pricing dynamics in the market, and we were basically out. And we came back in once the rates are up, we came back in, in the fourth quarter. It was specific to more to BBVA. We do expect the new production to be relatively soft in the coming year for mortgages, but more importantly, given the rates and given the fact that the stock is very much variable rate mortgages in Spain, 75% of the stock is variable rate mortgages. We do see early payments and so on a bit. Given all that, it's not going to be a major negative but slightly negative balances in growth in mortgages. But when you sum them all up, we still do expect a positive growth in consumer. We expect clearly a positive growth in -- although there is some prepayment dynamic there as well. But for companies, mid companies, especially, we do see a clear dynamic of growth there because there is inflation. We see a clear working capital need related lending activity, quite strong lending activity in that segment in Spain. Overall, when you sum them all up, our guidance to you is flat. Regarding the buyback, will it be a part of the shareholder payout going forward. If you remember last year, when we -- 2021, in the Investor Day, when we announced our new payout policy, we said we are increasing our payout policy. At the time, it was 35 to 40. We took it to 40 to 50, and we said, as compared to before, we are also adding this sentence into our payout policy, saying that going forward we do have the flexibility of doing a piece of the payout in terms of share buyback. So will it be a part of the payout policy going forward. It already is. We already injected it into a payout policy. But what is our intention? Our intention is to do a piece of the payout in buybacks going forward as well because we do think looking into the dynamics of our business. I mean if we do our own, and we do think we are quite objective in that valuation, all the cash flows going forward and so on are fair value. Our fair value is much higher in our view than the share price that we have. As such, and also given the fact that we are, at the moment, currently traded below book value, it's accretive in terms of tangible book value, it's accretive for our shareholders. So for those reasons, we would like to have a piece of our payout in share buyback. But we do also have a large amount of retail shareholders. So we will always also prioritize the dividend as the cash dividend as the core part of our payout. Again, as you know, 40% to 50%, this is not a policy. This is not -- but maybe a guidance and intention that can help you in thinking through this. The 40 to 50, the 40%, as we have done this year, will always come in terms of cash dividends because we do have, again, this retail customers, retail shareholder base who depend on that cash dividend. We do have the clear, clear intention to continue on an increasing path of cash dividend increases year after year, a consistent pattern of strong and hopefully increasing cash dividends, 40%. And then the remainder we intend to do some share buybacks. So that's kind of the mix that we have in our mind at the moment. Was there -- the third question? Increase in payout. We just increased it, Max, a year ago. So it's obviously on the table. But we -- let me be very clear on this topic because it's important to us. We told you very clearly when we sold the U.S. business, that number one, we have a capital target of 11.5% to 12%. We confirm and stick to that target very clearly, 11.5% to 12%. That is our target. Number two, we told you that we don't like to operate with excess capital, and given our target, if you do have excess capital, we do have two -- a few things to do with that excess capital. Number one, grow our business profitably, number two, remunerate our shareholders in a very positive and a very favorable way. What we said, these phrases that I'm just repeating to you, is what we are committed to, very clearly, which means if we continue to operate with this excess capital, our intention, 1,261, pro forma 1,280 versus the upper end of our range of 12%. We are very committed to, as we have said before, to grow our business profitably organically in such a way that we create even more organic capital for our shareholders and/or to remunerate our shareholders, which implies that given again where we are, given the expectations that we have given the guidance that there might be other programs of extraordinary payments to our shareholders going forward. But this 40% to 50%, again, we just changed it. But whatever the excess capital is not through maybe 40% to 50%, the annual payment program that we have, but through other extraordinary measures, we are committed to give it back to our shareholders. Can I have two very quick follow-ups and then a question. So you said the 20%, 25% deposit beta in Spain, is that the average for this year or the end of the year? And in Mexico, I missed it if you gave your rate assumption, I apologize for that. And then hopefully, that's very short. And then the question is around Turkey because the trends in Spain and Mexico are very strong. In Turkey, you said flat profits for this year, which is reassuring. But considering at the beginning of this year, admittedly, we're going to hyperinflation, you were saying breakeven. Now you feel confident the â¬500 million is the profit. We've got elections mid-May and that creates uncertainties. Can you maybe reassure us why you're confident that you can be that profitable? And what's behind that confidence? And what happens if there's an adjustment in currency? What are you baking in? Just a general reassurance behind that assumption. Okay. So the 20% to 25%, it's not full year. It's not average for the year. We are assuming that in the second half of the year, to be specific, as of May, as of June, in that period, this dynamic will kick in. And then the dynamic kicks in, 20% to 25% will kick in. That's the guidance. So maybe starting with the second quarter, take it in that way. But our -- given again the competitive dynamics and the liquidity in the market, I do think that we have an upside on that assumption. What we are telling you is not our expectation. What we are telling you is what we have baked into the assumptions for the guidance. If it's worse than that, it will affect. If it's better than that, which is actually my base case, then we will see that it will be a better figure than the guidance. Mexico rate assumption, we are not giving it that -- you didn't miss it. I didn't give it. The guidance that we have for Mexico NII is grow at mid-teens. Very clear, mid-teens growth in NII. All of that is baked into it. Regarding Turkey, you are asking for reassurance. You are saying that how can you be that confident and so on. overall, in the guidance, I'm going to read it to you literally, Turkey. In a highly uncertain environment, contribution could be similar. I mean -- this is as much flexibility as we can bake into the sentence. It's very uncertain in Turkey. And our expectation, looking into the again, how we started the year, looking into our bank there, which is a very strong bank, we do feel that the system has to come up into a new balance at some point. But given the strength of our franchise, some profitability has to be there. Otherwise, the banking system will be hurt and so on, and we are one of the strongest in the whole banking system in terms of capital, in terms of the customer franchise and so on. Given what we are seeing at the beginning of the year, we do have this clear expectation that we do have this expectation. Let me take out the clear expectation that we will repeat 2022. But there are a lot of uncertainties. We have to see the elections, we have to see the evolution of the monetary policy. At the moment, as you can see, the policy rate is 9% in a country where inflation is 65%. We do think that this will change at some point. When it changes at that point, which is our base case, then the interest rates will go up, deposit rates will go up, and you might be left with a loan book, which might not be priced as quickly as deposits, and you might be seeing some losses even in those periods. This is what we have all baked into our guidance and into our planning. And despite all that, we still see a profit output coming from Turkey. But we have to see the elections and we have to see how the monetary policy evolve. After that, the only thing that we know is that we are managing the bank in a very prudent, and as Rafa said, in a very anticipatory manner. The duration, the maturity of our loan book has been coming down. We are going for short term, short term, short term, but there will be a repricing of deposits at some point when the policy rate normalizes or changes. We are managing it in such a prudent way, and we have such a great bank that we do think that we can give you that guidance. But in terms of language, you can add as much flexibility into that language that you like because the uncertainty level in Turkey is obviously very high at these days. And we are clearly aware of those, and we have injected some of that assumptions into our planning. It was a long answer, but basically saying that Turkey is very uncertain. This is our best guess, an informed best guess, but it's our best guess at the moment. Yes, here is Sofie from JPMorgan. So I also had 1 follow-up clarification question and then two questions. So my first clarification would be that when you said that gross revenues adjusting for FX to be mid-teens growth or imply roughly mid-teen growth, what FX are you using? Your estimated FX rate in 2023, or the current kind of end of 2022 FX rate? So that would be the clarification question. Then my first question would be that if we look at the free float of guarantee and where the share price of guarantee is currently trading and the fact that it's not part of the benchmark anymore and my understanding is that, that's hurting guarantee a little bit in Turkey, did you kind of consider a free float optimization for guarantee in Turkey, I reduce your stake in guarantee from the current 86% level. And then my final question would be that after the elections in Turkey, there are some expectations that interest rates in the current -- in Turkey could increase quite substantially from the 9% current levels. you have around â¬8.5 billion of bonds in Turkey. What capital impact would you expect from every 10% increase in interest rates in Turkey? Very good. The first one is very quick. We use the forward curve always. But as you can see, the NII of the group is very much composed of mainly Spain and Mexico. -- if you put the forward curve of those, you would immediately get to those guidance that we are giving to you in current euros. But we don't have our own estimate. It's the market forward curves that we use in our planning exercise in our guidance. Second question is, would you refloat guarantee. Sofie, we just bought it, and regarding that deal, we have had multiple discussions in the past, whether it was a good deal and this and that. And now there are some of -- it was very negatively perceived by the market, let's be very honest about it. But then given the share price now, we bought the shares at 15%. Today, it's around 25%, and the currency is more or less the same. People are saying to us that, oh, you do have an opportunity here. So it's actually a very good deal now. Some of the people are telling us the other way around. And none of them, in my view, is right. We don't know whether it was a great deal or not in this very short term. And we are not very short-term investors. We are not trading on floating, refloating, taking it back now that we have 25, we sell it, we are not that player. We are a strategic long-term oriented value focused bank. And we have done the deal because in the long term, we do think that there is value in that franchise. We do think that there are big risks, but we do think that those risks were already factored into the price. And we do think that it was a great value for our shareholders, and it was better return to our shareholders versus other alternatives like share buyback. That's why we did the deal. And we are consistent with that. We are long-term shareholders. We would not be refloating in the short term and trading, that's not who we are in this type of strategic assets. Then elections, what is the -- Rafa, do you want to take it, but we have â¬1.7 billion of fixed bond portfolio. It depends on how much the fixed bond portfolio moves. Obviously, there might be some capital impact, but it's very absorbable, very removable. It's already in the planning. First question is Spain and deposits. You've seen inflows of roughly 7 billion in the quarter. Can you explain a bit what's that? Is that corporate deposits? Is it a volatile number? And if you can explain what your strategy on deposits is going to be, do you have a target for loan-to-deposit ratio in Spain. The second question is in Mexico NII. Two small here. The first one is the -- when do you see the peak on customer spread and how -- if you can elaborate a bit on the competitive side on your loan book, just by categories, whether you are being able to pass through higher rates particularly on the corporate side and on mortgages where you're being quite competitive, I believe. Also in NII Mexico, the book, it looks like you've been adding bonds. Do you have a target in terms of the size for your bond portfolio in Mexico given where rates are and where rate expectations are moving? And finally, capital. You got 11.5%, 12% target. Do you think that is an adequate capital position or target given that a lot of the capital that you're building is in Turkey and is effectively trapped. And if I remember correctly, writing it off would cost you around 40 basis points. So is that a buffer that we should be effectively adding to your target? Martha, in relation with the growth in the customer deposits in Spain that we have in the last quarter is mainly, mainly related with demand deposits. And it's also quite related to the new customer acquisitions. So at the end of the day, it's just more than â¬10 billion that we have increased coming from new customers in the format of demand deposits. We have seen also an increase of around â¬3 billion in time deposits, as I said, it's just a lower and mainly coming from commercial banking. Regarding the Mexican NII, have you seen the peak yet, we don't think so. Our planning, that's why we are guiding you in the guidance that we are going to grow at mid-teens. Why is that? Because the mix change is still happening because -- the repricing is still happening even for the last batches of rate increases that were done in Mexico, we still have some time to reflect all of that to our clients. And there might be some more rate rises to come, as we said. Given that the peak is not reached yet in our view. Adding bonds to our ALCO book, it's â¬12.4 billion of an ALCO book we have in Mexico as you might know. The latest increases in the last quarter, we only increased it by around â¬200 million. So that's going to be more or less the range. I mean we would be a bit opportunistic or a bit tactical on this one. We don't expect large increases into our ALCO book yet. We are a client-oriented customer-centric business. We do have so much very attractive customer franchise business in Mexico that we would rather grow in our Mexican customer franchise. And if you do have some opportunities, which we do, we believe we do have some, but we would rather use that liquidity and capital growing with our customers. So ALCO portfolio book increase would be limited and opportunistic going forward in Mexico as well. Then 11.5% to 12%, is that good enough, the 40 basis point walk-away scenario in Turkey, should we added back to the goal -- the walkaway scenario is 39 basis points as you say, 40 basis points, but we don't think you should be adding it to our capital target whatsoever. Martha, I really encourage you, I'm sure you looked into it in the past. But if you take 10 years, 20 years, or earnings profile of BBVA, or more importantly, organic capital generation of BBVA. Again, 10 years, 15 years, long enough period. Even five years, you can do it because it gives more or less the same messages. What you see is that BBVA always faces a problem here and there. We're a diversified global retail bank, 1 year it's the elections in Mexico and the fluctuation that comes with it. The other year, it's Argentina. The other year, the Spain, there's a problem with mortgage floor closures and so on. Now these days, it's Turkey. And we have seen a lot of innovation on how to manage macro economy, given our presence in these different countries. We have seen a lot. I mean some of the things that we see in some of the countries that you mentioned, we really have seen them because BBVA, we do have the experience. We had a 164-year-old bank and so on. But to cut the long story short, given the fact that we are used to this, even in that context of different crisis here and there, our organic capital generation capacity has been proven to be resilient and more importantly, the fluctuation, the standard deviation of our earnings of our capital generation has been very limited compared to pure European banks, for example. In that context, when you look into our, again, goal of 11.5% to 12%, let's take the upper end, 12% as a reference year. as compared to our requirement of 8.60, 340 basis points is the gap. That gap is also one of the highest. It's higher than the average of the large European banks. Given the fact that our requirement is that low, and it goes back to that fluctuation or the organic capital generation variation from one year to another, in my view, we do think that 11.5% to 12% is already a very comfortable target. So I wouldn't be adding this and to that number because we have, in our modeling and our planning, when we look into different countries and figures, we do think that 11.5% to 12% is the right capital target to have. And in that sense, in my view, you should not be adding the 40 basis points, but obviously, it's your call. Just a very small follow-up, really. On capital, if you could also update your Basel IV impact and give us a bit more color on the plus 14 basis points from other items in Slide 18. If you could break it down, please, because it looks like there is very large swings within that. On NII, again, a follow-up, if you could please provide us when which forward curve have you used abate to set your interest rate expectations in each geography. And if you could provide us by geography, the betas, deposit betas today and where you expect them to be in '23 and '24 on average so that we can make our own assumptions rather than taking just the guidance as reference. And finally, what do you expect in terms of inflation in Turkey for '23. You did ask all the parameters of your model, but it's very fair and they are all the right parameters to look into. The forward curve, what forward curve do we use, we use it basically at the end of the year planning period. So it's the December forward curve that you see. But the forward curve of today, again, what matters there is the Mexican peso. At the end of year number versus today, a month from the planning, it didn't change too much as far as I know, the currency curve. Then the Basel impact, Rafa, do you want to comment on the Basel impact? Basel IV, I think we haven't provided any guidance, but I think what is clear in our case is that our -- the impact of Basel IV is going to be much lower than the industry average. If you analyze the EBA estimates the Basel IV impact that is just on average of around 260 basis points for the European banks. In our case, it's going to be well, well below a completely different scale. Maybe because in our case, we have a high-density risk-weighted assets. A big portion of those are already calculated with the standard models. And in fact, some of the low default portfolios are going to release some capital on the new framework. So at the end of the day, we are only going to be slightly affected on the financial review of the trading book, FRTB and in operational risk. So but at the end of the day, the impact is going to be very, very limited. And Andrea, regarding the 14 basis points impact or other, you were asking on this one, I will give you the details so that I can avoid your detailed question on beta. But on 14 basis points, the market impact is around 10 basis points, FX, 2; and then fixed income and equity was zero actually, but eight plus two, the market impact was 10 basis points positive. Then hyperinflation accounting around 20 basis points because as you know, in Argentina, in Turkey, we add back the hyperinflation losses that we registered in P&L into OCs. That's why we always say that from a capital perspective, it's neutral. That's around 20. And then the regulatory impacts, as I did mention to you, in the quarter, on top of the 10 that we did in the first nine months, we did a 20 basis points negative impact from regulation, bringing some -- and there is some other minor impacts when you sum them up, it gives you the 14. Then the betas, the key beta really Andrea, that matters at the moment is Spain, and I gave you all the numbers around it, the combined beta that we estimate when we see the pressure is going to be around 20%, 25%. It's for the rest of this year that we have put into planning, again, starting with the second quarter. That's the key one. And regarding Mexico, again, I already gave you the guidance number. The beta number there is a bit different. But what I can tell you is that the 2% that you see in the cost of funding at the moment, we do expect some slight increase on that one, but not much. If you go to 2018 in Mexico, another time period, a recent period where you have seen higher rates, at that time, the policy rate, if I'm not mistaken, was 8.5, 8 or 8.5, in that range. In that period, our cost of funding peaked around 2% again. So this is not like, oh, my god, there is something unusual here. No. I mean it goes back to the franchise that we have. to the transactional deposits that we have in Mexico. The fact that most of our deposits is demand deposits and transactional deposits is basically telling us that the beta is a relatively small figure in Mexico. And then what is the inflation expectation for Turkey, the BUA research number, we always stick to our independent research entity on this one is around 45%. I just have one question on the competitive landscape on the loan book in the same. I mean, we have seen a bit of a slowdown in the pressure in mortgages, at least as the perception I have. Just wanted to see how do you see the market competing into 2023. And if there is any kind of in spreads? And second, a more financial question. I just wanted to understand, and I am sure that you understand the benefit of IRB models, but I mean the fact that we have [indiscernible] doesn't lead you to believe at some stage to move to standardized models and stop dealing with all these kind of regulatory headwinds single year and quarter. Ignacio, regarding the loan growth in Spain, again, we are guiding for flat for next year. The reason is, again, mortgage will be, in our view, negative next year. But again, the working capital needs of companies especially is leading us to believe that there might be some growth there. There might be some growth in consumer book and so on. Just to be -- maybe to be helpful to you, in terms of the new production that we have for different books in Spain, the fourth quarter production was 3% higher than the third quarter of the year, it was 8% higher versus the fourth quarter of last year. So quarter-over-quarter or year-over-year on the flow of new production has been relatively positive. And when I look into the positivity, for example, let's focus on quarter-over-quarter. Very small businesses, PMS, 5% up the production. Midsized companies, 6% up. So in those segments, given the need for working capital, we do see some positive dynamics. As a result, all of that, we are guiding you towards the flat growth that we set in the guidance document. Then the standardized models versus advanced models, you pressed our button on this one. This is something that we are working on. This is something also -- it's a discussion with our supervisors saying that simplifying the model landscape might be helpful. And that's something that we would be working on in this coming year, to be fair. Carlos from CaixaBank here. A couple of questions from my side as well. The first one is actually just a bit of a follow-up in terms of your guidance. You're guiding towards core revenues of mid growth of mid-20s, which basically above the guidance to better in for NII and fees in both Spain and Mexico. So might hear is this explained by a very strong performance expected in Turkey and in South America? Then second question on capital, which would be -- we believe more detailed one or a small detail, is the share buyback announced already from the capital ratio, or is that an impact that will come through next year? Already deducted. We deduct when -- we announce things, we deducted. On the first one regarding the guidance, it's not Turkey and so on. Carlos, you see it also in the country-by-country guidance. In Spain, we are also -- for NII, we are guiding in current euros. Obviously, it's a euro country. growth at low 20s. Growth at low 20s is obviously, given the NII weight in the total group NII, it feeds in. For Mexico, we are putting in growth at mid-teens, again, which then feeds in. And those two countries are the key. Then for the others, we do have growth in constant terms, but we do also bake in the forward curve of the currency. In that sense, it's already factored in. So mid-20s is gross, is constant euros. But in current euros, as I'm telling -- as I told you at the beginning of this call, is that we are expecting mid-teens. It's mainly because of the fact that both Mexico and Spain continue to be very strong. The first 1 would just be on Spain and looking at the current level of your for those with variable rate mortgages 2023 will obviously be quite a dramatic change in in mortgage payments. What level do you think would imply stress levels or have a material impact on cost of risk or require further write-downs of real estate assets? And then a second question just on capital and potential capital return, you very clearly indicated your targets and also very clearly indicated your policy or approach to that with the pro forma January first level being 12.8 and presumably with the outlook for additional organic capital generation in the early part of the year. At what stage do you think you'll be revisiting this potential incremental capital return? Will you be waiting for the second half of the year? Is it something you want to wait and see where the numbers finish at the end of the year. Maybe if you could just give us some idea of what you're thinking is around timing. Daragh, thank you for the questions. On the first one, you should know that the key -- the mortgage portfolio in Spain, we are relatively positive despite all the rate rises that we are seeing. So we're asking for a threshold that the NPLs will then go up significantly and so on. We don't think it will matter too much today of 3.5, 3.36 versus the 4% Euribor and so on. The reason being when you look into obviously the cash flow for the client, the load on the client, what matters is if you have a variable rate loan that was originated with recently, those are the loans that is most exposed, because the loans that you have given 10 years ago, 15 years ago in variable rate loans, the principal in the quarter in the installment is now much lower. As a result, the increase in the monthly installment will not be that high if the loan that you have gotten is relatively old. When we look into that portfolio, in the last five years, 80% of the mortgages that we granted in Spain, 80% were fixed already. So our loan portfolio, variable rate mortgage portfolio, dates back to many years ago. In that sense, the increase in the installment will not be that high. In that sense, 3.36 of today, or it can go up to more 4%, it will not make a huge difference in our view in terms of sensitivity. The second question, at what stage would you return the excess capital back. This is a question that we cannot answer apologies. It's basically any time. And whenever we feel the need, we'll do that. But I'm repeating once again that our commitment, our target is 11.5% to 12%, repeating it for the third time. And the excess capital, as we have said before, we are committed to either grow very profitably organically in our business or return it to the shareholders. And the timing obviously, depends on the conditions and so on. So I would not be giving a specific data on this one. I've got two questions. So first one is just picking up on the last point. You're funding your growth organically. You're adamant that 12% is enough, but you are still at 12.6%. So why did you not -- why did you decide not to distribute more this year? And the second one is on the guidance. If you could just give us the equivalent FX assumption for the cost growth if it grows from 15% to 16% inflation? How much do we need to take off for devaluations? On the forward curves in the planning period forward curves, maybe, Rafa, you can help. Regarding the first question, why not higher than now, Britta, I mean we have a payout policy of 40% to 50%. We are delivering the upper end of that range, already â¬3 billion, â¬0.50 per share. Very representative, but straight to the point number. And I'm going to repeat it for the fourth time because the question comes again, is we are committed to our 11.5 to 12, and we will return it back to our shareholders through other extraordinary measures and so on in the coming periods. You should not get anything from this in the sense that why not more? We are already doing a lot. I mean we are growing our cash dividends by 39%, 39% increase in the cash dividend. We are doing a piece in share buyback and so on. So it's already at the upper end of the range. We are already committed, and we have repeated it many times that we will give it back to our shareholders through other extraordinary measures on the guidance and the forward curves. I don't have with me. I mean the forward curves, but at the end of the day they are just the differential rates on the different geographies for the year. So we will provide you with the exact data, but at the end of the day, it's just equivalent to the differentiator of rates that we are seeing on the different economies with the euro. We can share that number because it's the market information. So maybe, Britta, if you can touch base with our IR team, they will give you the specific figures. A couple of questions for me. One, if you could update us on your currency hedging policy, both on P&L and what's the percentage of a subsidiary where you're hedging this year. And on capital, what's the cost of the hedging of the capital supply hedging that we have against book value this year? Second, on Mexico, again on NII, you've touched on the customer that you still see upside in the customer spread, but what about the wholesale funding cost? When you look at the comparative versus peers, the system in Mexico has seen a big increase in wholesale funding costs along with interest rates, where BBVA Mexico seems to be lagging behind that process. So could you explain why that happened? How you kept that funding cost so low and whether you expect that to catch up with interest rate levels at what time? And quickly sorry, lastly on M&A. Turkey, you said that you want to grow profitably if the opportunity emerged in Turkey in the context of post collection, some restructuring of the banking system in the country, a good use of your capital be to gain some market share in Turkey. As you know, I mean, in terms of hedging, we haven't changed our policy. I think we are hedging the sensitivity to the capital ratios. In average we tend to be 70% hedged in terms of the capital that we have in the different currencies. At this moment, I think we are around a little bit above 75% in Mexico 78% and 50% on capital on the sensitivity to capital to the currency, 50% in Turkey. So and in terms of the hedging policy for the variability of our P&L to FX evolution, we maintain our policy to hedge on average between 40% and 50% of the aggregate results that we have in the different currencies. So we haven't changed that. Clearly, probably the main -- the only change that we have done during the year, as you can imagine, is in Turkey, given the fact that there's a significant deduction that we are doing on the P&L because of the hyperinflation accounting. At the end of the day, we are combining the capital hedging policy with the P&L hedging policy in the case of Turkey. Also increasing the amount of hedging that we do through options in order just to combine volatility hedging with also with the current traditional hedging of the carry with the forwards. Regarding the wholesale funding, you asked about Mexico. First of all, in our funding -- maybe on the hedging for Mexico, you should know that the key -- from a P&L perspective, the key risk that we have is obviously Mexican peso, and even the very strong levels of Mexican peso, you have already hedged once again. Maybe to repeat the message, we have once again hedged a good part of the P&L to come along from Mexico already in our books this year. Regarding the wholesale funding in our funding plan, Rafa, we have 1 to 2 billion to issue maybe possibly in Mexico, depending on the market conditions, obviously. But the liquidity of Mexico is such that we have deposit funding, and it's so strong and the wholesale funding impact within the balance sheet that we have in Mexico, it's going to be marginal. So I wouldn't be too much worried about it or so on. It's a small figure in the context of the balance sheet that we have in Mexico. Profitable growth, market share, should we be planning or thinking about after elections in Turkey to do so? Let's see how the elections come out, and we have to be in this mood of cautiousness and prudence in Turkey, in our view. So it's too early to comment on those types of things. We have to see what comes out basically. Two questions, please, quick ones. First, can you please provide the amount of excess deposits that you hold at ECB right now? What's the balance on and your maturity profile? This is one. And the second one, can you please provide some metrics on the budget you have allocated for these different new operations in European countries? Yes, how much capital you have committed for this investment in new European operations like Italy or new ones that you might decide to open? I mean on TLTRO, as you know, we have already amortized 30%, 1/3 of the portion. We still have 7 billion maturity in March, 16 billion maturity in June, and a 3.5 billion maturity in March 2024. In terms of our liquidity, we have plenty of equity, so this is already included in our liquidity and funding plan. And probably the only point that we will need to think a little bit in the coming weeks is whether we smooth a little bit more the profile of the maturities as we did in December when we early amortized â¬5 billion, probably we will try to also to do something similar in this first quarter of the year in order just to -- probably to reduce the peak that we have in June, but only as a way to shape the profile of the maturities so that we don't have any kind of job on our liquidity ratios. Perfect. And then how much capital have you [indiscernible] in different initiatives, it depends on the initiative. But as a bucket, I don't know what you mean. But Italy, let's be very specific on Italy, you asked about Italy. Again, it's an investment that we are doing through our Spanish franchise, meaning we are using the infrastructure systems, people and so on of Spain to take what we have in Spain because in terms of the mobile application, we do think that we have something really unique. We took that to Italy. As such, given the fact that we are leveraging what we already have, the investments are really, really limited. I can tell you let me give this -- to build that bank, it was basically less than â¬20 million, which is in the context of what we have is very limited. One of them was already addressed on capital distribution, but my second one is on asset quality. Is there any upside to your cost of risk guidance of 100 basis points? If asset quality remains as resilient as you've been flagging so far, could we see some release in provisions as tailwinds to earnings? Or alternatively, do you have some downside risk? I've seen that you have a rather unchanged proportion of exposures classified under Stage 2 versus what you had last quarter, around 8% of gross exposures are already under special vigilance. But is there any downside risk to your guidance from future procyclicality headwinds, or is this already embedded in your numbers? Pamela, very quickly, it's already embedded into our numbers. That's the guidance. Obviously, we are looking into an uncertain environment. What will happen to inflation, whether the central banks will keep increasing the rates, if that's the case, whether that will have a secondary effect on the NPLs. And obviously, there are a lot of uncertainties, but everything is included in our planning. I should reiterate once again that since the COVID times, we have put in beyond the business as usual, the loans go bad, we take provisions. There are clear rules, and those rules are never compromised. Beyond the business as usual, we have put close to â¬1.2 billion of provisioning into what we call the macro modelling and also what we call post model adjustments and so on. Some of this is clearly allocated to certain portfolios. Some of it is unallocated, but that â¬1.2 billion and â¬300 million of that is actually non-allocated, which is pure buffer. That's another safeguard that we have regarding the guidance that we have. It's a quick one to finish off. It's just another question on efficiency improvements and it's sort of a follow-up to Britta's question earlier, but for 2023 costs, should we really just focus on the positive jaws comment within the guidance; i.e., a sort of stable to slightly improved to income ratio rather than solving for the cost growth in current euros? Because I think if we use the same FX adjustments on costs is on core revenue guidance and you'd get to around a 300 basis points improvement in the cost-to-income ratio, which seems like a lot, and obviously, there's a difference in geography at FX mix on costs and on revenues. I will reiterate, Chris, very clearly what we have in the guidance still in constant euro level, costs to grow around average inflation again, I mentioned it very briefly, but maybe in Mexico, this is not going to be the case. But at the group level, in blended number, it will be around this. Yes, focus on the positive jaws, which is a very important management discipline at BBVA. But I would also keep the costs in constant terms to grow around average inflation. We stick to that one. So if it means an improvement in the efficiency ratio, it means an improvement in efficiency ratio, because the income profile of Spain and Mexico, in our view, is going to improve further in 2023. So thank you very much, Chris. Thank you, Onur, Rafa, and thank you, everyone, for all your questions and your interest. We finish it here. Let me remind you that the entire IR team are available to answer any further questions you might have. Thank you very much.
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EarningCall_679
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Good day. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Arrow Electronics Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions]. Thank you. Thanks, Rob. Good day, and welcome to the Arrow Electronics Fourth Quarter and Full Year 2022 Earnings Conference Call. With us on the call today are Sean Kerins, President and Chief Executive Officer; and Raj Agrawal, Senior Vice President and Chief Financial Officer. During this call, we'll make forward-looking statements, including statements about our business outlook, strategies and future financial results, which are based on predictions and our expectations as of today. Our actual results could differ materially due to a number of risks and uncertainties, including the risk factors in our most recent 10-K and 10-Q filings with the SEC. We undertake no obligation to update publicly or revise any of the forward-looking statements as a result of new information or future events. As a reminder, some of the figures we will discuss on today's call are non-GAAP measures. We have reconciled those to the most directly comparable GAAP financial measures in our earnings release. These non-GAAP measures are not intended to be a substitute for our GAAP results. You can access our earnings release at arrow. -- investor.arrow.com, along with our CFO commentary, the non-GAAP earnings reconciliation and a replay of this call. Following our prepared remarks today, we will be available to take your questions. Thank you, Rick, and thanks to all of you for joining us today. Before I talk about our most recent results, I wanted to reflect a bit on the past year in total, which continue to present Arrow with unique market conditions and challenges. It was truly special to lead this great company and our 22,000 dedicated employees as we met those challenges head on and help both our customers and suppliers succeed in this environment. In turn, we have delivered the strongest financial results of any year in the history of the company. And while I'm extremely proud of what we've accomplished, I know that the market conditions continue to evolve as we enter 2023, we'll be faced with new challenges and opportunities through which Arrow will continue to differentiate itself in the markets we serve, reflecting the commitment, strengths and aspirations of our entire global team. Now turning to our results. I'm delighted to report that the fourth quarter was in line with our expectations and one of our best quarters ever, despite some challenging conditions. Our sales grew by 8% year-over-year on a constant currency basis, fueled by both growths in our global components and our global enterprise computing solutions businesses. In our Global Components segment, sales grew 6% as compared to last year on a constant currency basis. While demand for electronic components and associated design, engineering and supply chain services generally remained healthy in the West. We did experience softer demand in Asia relative to our sales guidance, especially in China. It's important to remember that we are not too concentrated in any one area. We're proud to service a variety of industries and provide products from a diverse group of suppliers to a diverse group of customers around the world. Additionally, design and engineering capabilities remain a key part of our strategy and our ongoing investments continue to contribute to our success in all three regions. As we discussed last quarter, supply and demand conditions have been moderating somewhat. However, we are comfortable with our near-term outlook based on the quality of both our inventory and our backlog. While conditions may continue to moderate as we enter 2023, we remain focused on helping our customers secure the products they most need. Both the Americas and European regions produced strong year-over-year growth as both regions experienced healthy demand across several major end markets and industries, particularly industrial, transportation, aerospace and communications. In the Americas, we are continuing to see normalization in our shortage market services as supply continues to improve, this contributed to the sequential sales decline in the Americas and was the primary driver for margin compression in our global components business overall. Sales in our Asia region declined due to weakening demand in most end markets. We believe demand will likely remain soft in the near term as the region recovers from COVID-related disruptions and market headwinds. Despite the sales decline in the fourth quarter, design activity was quite robust and will no doubt contribute to our longer-term prospects in the region. With our diverse portfolio of customers and suppliers, along with our differentiated services offerings, we believe we are well positioned for when the market in this region eventually recovers. In the enterprise computing solutions business, we delivered year-over-year sales growth for the third consecutive quarter. Sales for the fourth quarter grew 12% year-over-year on a constant currency basis and finished above the high end of our guidance. Hardware supply constraints are easing somewhat, and demand remains strong for most of our key technology categories, we continue to see strength in cloud, software and enterprise IT content and are well positioned for the transition to IT-as-a-Service. In Europe, we experienced strong growth in all of our markets and technologies. In the Americas, our growth came primarily from strength in security, compute and infrastructure software. We continue to measure this business on operating profit growth, and we are pleased to report full year growth of 4% year-over-year. Before handing over the call, I want to reiterate my confidence in our ability to help our customers and suppliers meet the challenges that lie ahead. While supply and demand conditions may continue to moderate over the coming quarters, we believe that we'll retain much of what we achieved over the past few years in terms of scale, capabilities and an improved margin profile. We'll continue to help our customers and suppliers and in doing so, we are confident that we will continue to generate attractive returns. With that, I'll now hand the call over to Raj to provide more details on our results and our expectations moving forward. Thanks, Sean. Fourth quarter sales grew by 3% versus prior year or 8% on a constant currency basis. Changes in foreign currencies impacted sales growth by approximately $357 million year-over-year, which was less than our expectation of $420 million. Sequentially, the business grew by 1%, and currency impacts were minimal. The average euro-dollar exchange rate for the quarter was $1.02 to one EUR compared to a previous expectation of $0.90 to one EUR. Fourth quarter gross margin of 12.9% was down 40 basis points year-over-year, driven mostly by the normalization of shortage market activities we began to see in the third quarter. Sequentially, our margins improved by 10 basis points due to favorable product mix in the enterprise computing solutions business. Operating expenses as a percent of sales were 7.2%, down 20 basis points year-over-year and 10 basis points sequentially. Interest and other expense of $62 million has significantly increased year-over-year and sequentially due to higher rates on floating rate debt and higher borrowings, but was in line with our prior expectations. The effective tax rate for the quarter was 24.8%. This was slightly higher than our prior expectation of 23.5% due to timing of certain items within the year. For the full year, our effective tax rate was 23.8%. Both the fourth quarter and full year rates are within our long-term range of 23% to 25%, which we continue to see as our appropriate target range going forward. Turning to cash flow and the balance sheet. Our fourth quarter operating cash flow was $109 million. Our cash cycle of approximately 66 days increased three days from the third quarter and 12 days year-over-year primarily due to inventory increases, which are largely related to pricing. As a reminder, our inventory investments allow us to support customer demand, and we have continued to generate strong returns in the process. Our return on invested capital and return on working capital remain well above pre-pandemic levels. At the end of the quarter, net debt totaled $3.6 billion, and our liquidity remains very strong at approximately $2.3 billion, including cash of $177 million. Our strong financial position and flexible balance sheet positioned us to repurchase $300 million of shares during the quarter. At the end of the fourth quarter, our repurchase -- remaining repurchase authorization stood at $329 million. We are also pleased to announce that our Board of Directors has approved an additional $1 billion to our share repurchase authorization. Returning cash to shareholders through our stock repurchase plan remains one of our priorities, and this authorization reflects that commitment. Please keep in mind that the information I've shared during the call today is a high-level summary of our financial results. For more detail regarding the business segment results, please refer to the CFO commentary, which we published on our website this morning. Also note that the CFO commentary includes information on our fiscal calendar closing dates. Now turning to guidance. Midpoint sales and EPS guidance reflect a continuation of current market conditions, which we have discussed, particularly the impacts of normalizing shortage market activities. Midpoint global component sales reflects an expected decline of 7% compared to prior year and 5% on a constant currency basis. Our forecast suggests enterprise computing solutions will grow 3% and year-over-year and 6% on a constant currency basis. We estimate that the strengthening of the U.S. dollar compared principally to the euro will result in a reduction to sales growth of $182 million and EPS growth of $0.13 compared to prior year. Compared to the prior quarter, we estimate that the impact will be a positive $175 million to sales and $0.11 to EPS. Thanks, for taking my question. Sean, I wanted to start with a high-level question. I mean when you look at end market demand today versus 90 days ago, I mean, how would you say -- I mean, are things materially weaker? Or are they the same? Or -- and how do you see that trending over the next quarter? And then specifically on the components side, I think you said bookings were below parity in all regions. Is that concerning? And do you think backlog will continue to decline? Or do you think that, that can also grow over the next couple of quarters? Sure, Ruplu. Let's start with just our feelings about the market overall. And I would say it's sort of mix. If you look at our guide for the first quarter, we're basically at or above normal seasonality in all of our Western markets. So maybe not quite as broad-based in the West as it was maybe 90 days ago, but we're still seeing activity levels in things like transportation, industrial, aerospace and defense and medical device sectors holding up and certainly, other sectors like compute, communications, consumer and things like lighting slowing down. Obviously, demand trends in Asia, specifically China, have been impacted by market headwinds and COVID disruption. It obviously was initially all about consumer and PC, but that's now bled into other key verticals as well. But by and large, we still see enough activity in the West to feel good about our outlook in the first quarter. And to that point, your question about backlog, look, our backlog is down from its all-time high, but it's still well beyond historical levels. Our teams do a pretty good and active job throughout the world to continue to validate that backlog. And we believe the majority of it is still firm versus forecasted. And that work yields or has yielded certainly more reschedules and pushouts than cancellations. So we feel pretty good about the backlog. And as we said earlier, the quality of our inventory to support the guidance we've shared. Thanks for the details there, Sean. Maybe I can ask Raj, a couple of quick questions. On the inventory, it looks like sequentially, it was up 5%. I know you're guiding -- there's some seasonality in the March quarter. But can you just talk about like what drove the increase? And as you think about this year and free cash flow and working capital days, how should we think about that? Do you think inventory remains high for a while? Or do you think that we're at the point now where it's peaked and it can actually come down and free cash flow can be better? Yes, Ruplu, I would say that the majority of the increased inventory, whether it's quarter-over-quarter or year-over-year is driven by pricing environment that we've been in. And so actually, what's driving it. We do -- as Sean said earlier, we have a good, strong backlog. We think we can sell through most of the inventory. And it's hard for me to say what the peak level is going to be, but we continue to have good demand in the West, and that's really what we're looking at. And from a cash flow standpoint, I think we're going to -- we'll generate some cash flow this year just given the market dynamics. But overall, we feel good about where we sit. And Ruplu, I would just add some color to that, which is, look, I look at inventory as a function of customer service especially in this environment. So we really spend as much time as we can to help our customers deliver on their production schedules even as they change. And as you might imagine, there's a fair bit of change in this environment. But I look at the increase in Q4, for example, I would call it, for the most part, modest. But I think a healthy inventory investment now will set us up for attractive returns in the future. Okay. That makes sense. And finally, if I could just ask. I think one concern that many investors have is our margins at their peak I mean, as suppliers lower their prices, I mean, when you see ASP pressure? And how you think about margins. And in that context, if you can give any of your views on how you think margins can trend. But also, do you have cost levers and I guess my question is on general risk management. Like if we go into a recession or a slowdown, do you think OpEx as a percent of sales or as a percent of gross profit still has -- you have levers to lower that, meaning you can take more cost out. So just your thoughts on your ability to manage your costs and how you think margins will trend maybe in a deflationary environment or in a recessionary environment? Thank you. Thanks for all the detail. Sure, Ruplu. So of course, I always like to talk more about growth and cost, but I'll start with the second part of your question, we feel like our OpEx is fairly well managed. As you can see, we landed at historical lows on both a percent of sales and a percent of gross profit basis. We've got all kinds of levers in place to make sure that we're protecting our investment priorities and continuing to work on structural cost over time. You were obviously going to be very surgical in this environment. If things were to slow more dramatically, I think we know where to go. And remember that variable cost in a more recessionary environment would come down substantially. I think to the first part of your question, and it's the right one, we spend a lot of time looking at how the complexion of our business has changed over the past couple three years, and as the supply/demand market continues to normalize, I can tell you that we feel pretty confident about our ability to retain some of the structural benefits that we built into our model. So I can't sit here today and say exactly when the market will fully normalize, but it will, and we'll reach something that we might call a steady state. When we do, I'm confident that operating margins in our components business are going to land well north of the last long-term target we set for that business. And for those of you that maybe weren't as involved, that was 5% at the time. I think now we're looking at something in the range of 5.5%, all the way to maybe six points. So the reason we have conviction around that is because of the structural investments we've made over time. And I can talk a lot about engineering resources that help us capture design win margin potential. We think there's still runway there. I can talk about supply chain capabilities and what that's doing to help us serve our customers in different and value-adding ways. I can talk about design services, which are especially interesting to some of our larger OEM customers for which we enjoy really accretive returns. So there's a real thought behind that statement. And I think while you might want to ask by when, and we won't commit to a time frame, again, the market's got to normalize, but we feel really good about the next target range for that business. Yes. Thank you. Good afternoon, everyone. Just a little bit more color in terms of what you're seeing kind of like the Western markets are holding up better. Your big competitor last night is seeing below seasonal demand in all regions, although like you calling out Asia as the weakest area, and they're seeing an inventory correction start to play out across their business. It doesn't sound like you're seeing in that yet? Are there any -- other than your commentary about some pushouts and no cancellations. Anything else you're seeing there or your book-to-bills are going negative in those markets? Well, as I think maybe the CFO commentary or some much suggested, book-to-bills are below parity in all three of our regions. But Matt, I'll go back to what I shared about the guide, again, in most of our Western markets, we're at or above normal seasonality in our Q1 outlook. China really is the only place where we're sub-seasonal here. From an inventory perspective, as I mentioned, I never like to see it creep up, but I have confidence in what it will help us deliver. Our Asia Pac team funny enough kept inventory flat sequentially quarter-over-quarter. So we are managing that as well as we can under the circumstances, especially while we try and juggle the balance between working capital and customer service. I think we're in pretty good shape on that front moving forward. Okay. And in components, you talked about weakness in that shortage market in North America, which makes sense. Do you think that's bottomed in terms of fundamentals there? Or is that going to get weaker before it bottoms? Matt, I think we're getting closer. I think we'll still see some of that pressure in Q1, but then I think we'll see that become less impactful over the balance of this year, assuming all else remains equal. Okay. Great. And just a question on ECS where it looks like you've had nice strong results, still good demand drivers. But we are hearing some concern about the backlog and as that build as component shortages get easier, the backlog working on and forward. Are you seeing that in any of your businesses? Or do you have any kind of outlook in terms of IT spending for the year as you're talking to your customers? Sure. Maybe I'll start with your question about backlog. I think in my opening comments, I talked about the fact that the hardware supply chains are easing somewhat. It hasn't completely flushed and our backlogs are still close to all-time highs in that business. So there's still a ways to go, but it was nice to see some relief in the fourth quarter. And I think we'll see some relief throughout the year. I think the broader market, while it was rebounding from the pandemic, I think, has maybe moderated somewhat at least call it mix. We talked about supply chains cloud adoption is slowing somewhat at least from its pandemic levels, given some recessionary concerns, we have seen some evidence of slowing sales cycles surrounding enterprise IT more generally. But at the same time, pipeline is related to cybersecurity, infrastructure software, things like digital automation, they're all still pretty active and healthy. So while we're not super bullish about the growth outlook for the year, by no means, do we see it going south. Thank you, Sean. Sean before you were at Arrow and before COVID, there were some supplier consolidation, some supplier changes about using distribution, not using distribution giving more value-added demand creation, giving less value-added creation to the distributors. I'm just wondering now that hopefully, if we exit COVID and hopefully get to more normalized supply chain, are you seeing or having discussions with suppliers for any changes? And are they positive, negative or no changes. I'm wondering if there's actually more opportunity? Or is there like more consolidation? Or kind of what's going on because the past three years have been challenging for everybody. Thank you. They certainly have. Thanks, Jim. So maybe take your question in a couple of pieces. I mean, first, from a consolidation perspective, that's a little tough for us to call. Consolidation will likely continue in the industry, but we don't have any specific knowledge of anything in play. We've tended to benefit from some of that and at times, maybe get heard from some of that. So that one is a little bit tough to call. But from a program perspective, look, we're always having conversations with our suppliers. Our suppliers are always looking at ways in which they can work with us to rely on more of our capabilities I would say, in general, not less. I do believe there's more demand creation potential in the overall semiconductor supplier market in total. We saw our demand creation mix improved year-over-year. We look at design activity every quarter pretty closely throughout the world, and we see design registrations, design wins still going up. So while you might from time to time catch wind of a supplier that's looking to trim the margin profile in their channels, I'm comfortable that there's plenty that still place a lot of value on the engineering investments we make for demand creation and give us a chance to be rewarded accordingly. So I think the outlook for that particular piece of the question is still very valid and very promising. Great. Thank you for taking my question. First, I'd like to ask about the trend in lead times broadly. I think it's clear that they're coming down, but I wonder where you think we are in that normalization process. Are we somewhere in the middle innings? Or are we still in the beginning of that process. Would you expect that to continue throughout the year? And then I have a follow-up. Hi, Will. So it's funny because I think you read some headlines specific to certain components of the technology mix and people broadly assume the supply constraints have gone away. But we still see it as very mixed. I mean, lead times have come in, in certain cases. But on average, the lead times we see across our whole electronic components business is twice the pre-pandemic average. Now that's down from some of the higher levels at one set at, but it's still not sufficient to satisfy the backlog that we still see. So I call it mix on a technology basis. Hard to say when it all fully normalizes, I don't see that happening probably anytime soon. Maybe it will gradually improve throughout the year. Don't know. We really don't want to speculate too far ahead of the quarter in front of us and maybe just a little bit more. Remember, all the capacity investments that we read about over the past couple of years, that takes time to materialize and really change the structural in a supply formula for the industry in total. So I think it's still going to be kind of mixed and it's going to be a little bit of an ebb and flow here over the course of the year. But we're going to focus mainly on what we can see over the next 90-plus days. Okay. Thank you. As a follow-up, Arrow has a well-known significant supplier that went through a consolidation process with distribution partners, I think, a couple of years ago now. But they've been pretty aggressively deploying some features in their sort of supply chain, if you will, for example, a new distribution center in Europe, where they're doing same-day delivery. They've developed these APIs for customers to hook directly into their website. I wonder, it seems relatively clear that this is targeted at the types of services that you have provided to their customers and to your customers over the years. I wonder if you see this as a threat that's sort of materializing to that portion of your revenue today or if it's something in the future? Or if you just don't think that this is going to have a meaningful impact on your business? Thank you. Yes. Well, look, I'm not going to claim makers here. But I think you can appreciate, we would never talk about any of our suppliers in particular. So I can't really help you a whole lot with that one. I can say that overwhelmingly, as I said earlier, most of our conversations with most of our suppliers are all about how we can help them do more. So I feel pretty good about what that means for us, not just now but into the future. Yes, thanks for taking the question. In the past, you guys have talked about kind of a customer survey on the number of customers that don't have enough inventory or have too much inventory. Is there any color you can provide on where we stand in the kind of results of that survey? Sure, Joe. I guess the short answer is mixed. We continue to perform the survey of late, it's been really hard to see any consistent patterns. You'll see the numbers move around a little bit 1 quarter to the next for those that say they have too much versus those they have -- say they have too little. And then you'll see it move again in the other direction in Q4. So I would not place a whole lot of stock in what that's telling us in this environment because this is such an abnormal supply environment. So it's a little less predictable for us. We're the line on lots of other vectors that we have access to, including our backlog and including our inventory turns, et cetera. Okay. That's helpful. And then on the share repurchase program that you guys announced. Is there an expiration to that authorization? And then how do you think about balancing that activity relative to your working capital need just given the increase in short-term borrowing rates that we've seen kind of flow through your interest expense line? Joe, this is Raj. There is no expiration to that share buyback authorization, which is similar to what we've done in the past. So no change there. And our capital priorities continue to be the same. And so if we have a need to invest in the business, that will be our first priority. And then we always are looking for the right kind of M&A opportunity at good returns. And then -- to the extent we have excess capacity, we'll buy back our stock, and that's really what we've been doing. And in terms of short-term rates, we've taken that into account. That's certainly driven up interest expense in the fourth quarter, but the things that we're doing more than pay for that incremental cost. So I think we're positioned well. And there are no further questions at this time. Mr. Rick Seidlitz, I'll turn the call back over to you for some final closing comments. All right. Thank you, Rob. I just want to thank everyone for your interest in Arrow Electronics, and wish you have a nice day. Thank you.
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Ladies and gentlemen, good day, and welcome to the Q3 FYâ23 Earnings Conference Call of Sun Pharmaceuticals Industries Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] I now hand the conference over to Mr. Abhishek Sharma, Head of Investor Relations and Strategic Projects. Thank you, and over to you, Mr. Sharma. Thank you. Hello, and a warm welcome to our third quarter FY 2023 earnings call. I'm Abhishek from the Sun Pharma Investor Relations team. We hope you have received the Q3 financials and the press release that was sent out earlier in the day. These are also available on our website. We have with us Mr. Dilip Shanghvi, Managing Director; Mr. C. S. Muralidharan, CFO; Mr. Abhay Gandhi, CEO, North America; and Mr. Kirti Ganorkar, CEO, India Business. Today, the team will discuss financial performance for the quarter, business highlights, and respond to any questions that you may have. For ease of discussion, we will look at the consolidated financials. The call recording and the call transcript will also be put up on our website shortly. The discussion today might include certain forward-looking statements and these must be viewed in conjunction with the risks that the business faces. You are requested to ask two questions in the initial round. If you have more questions, you are requested to rejoin the queue. I also request all of you to kindly send in your questions that may remain unanswered today. Thank you, Abhishek. Welcome and thank you for joining us for this earnings call after the announcement of financial results for the quarter FY 2023. Let me discuss some of the highlights. Consolidated sales for the quarter were at INR111,001 million, recording a growth of about 13.1% year-on-year, driven by global specialty, Emerging Markets, and India. Our continued focus on top-line growth, operational efficiencies, and business continuity is producing results. For Q3, our global specialty revenue was at $235 million, up 28.4% year-on-year. Ilumya and Winlevi were the key growth drivers for the quarter. In January 2023, we announced the launch of SEZABY in the US for treatment of neonatal seizures. Specialty R&D accounted for approximately 26% of the total R&D spend for the quarter. Abhay will give you more details on the specialty business later. I have been talking to you about our intent to increase our specialty footprint, especially in our core therapy area of Dermatology, Ophthalmology, and [indiscernible]. One condition in Dermatology that doctors find particularly difficult to treat is Alopecia Areata due to limited number of approved -- I mean, effective approved treatments available. With that background, let me now briefly touch on the recently announced Concert Pharma acquisition. On 19th January, Sun Pharma entered into definitive agreement to acquire Concert Pharmaceuticals Incorporated. This acquisition adds a late-stage asset, deuruxolitinib, for treating Alopecia Areata to our global specialty portfolio. The transaction is expected to be completed in the first quarter of calendar 2023. Our immediate priority would be to follow Concert's plan to submit a new drug application for the lead asset to the US FDA in the first half of calendar 2023. We can take questions on Concert today, but you need to keep in mind that we will have to restrict ourselves in what was disclosed in the press release issued at the time of announcement, given that the transaction would require requisite regulatory approvals and the tender offer for the US-listed company is expected to commence soon. In summary, we will not be able to guide to peak revenue estimates for the lead product. We will also not be able to guide projected R&D spend to bring this product to market. However, it's important to note that additional costs are expected to be incurred in R&D before the product gets commercialized. We are excited to widen our specialty offering in dermatology, and plan to launch that asset across US and other global markets in near future. We will be very happy to bring this product for patients globally. Thank you, Mr. Shanghvi. Good evening, everyone, and welcome to all of you. Our Q3 financials are already with you. As usual, we will look at key consolidated financials. Gross sales for Q3 are at INR111,001 million, up by about 13.1% over Q3 last year. Material cost as a percent of sales was 25.3% lower than Q3 last year due to better product mix, including higher specialty sales. Staff cost stands at 18.4% of sales, while staff costs in percentage terms were lower over Q3 last year. The increase in absolute values attributed towards merit increase, consolidation of the Alchemee acquisition, and expansion of sales force in India. Other expenditure stands at 30.6% of sales, higher than Q3 last year. The increase in other expenditure is attributed towards higher selling and distribution expenses, consolidation of the Alchemee business, and higher R&D. As indicated over the past earnings calls, the expenses have seen an increasing trend on account of normalization of business activities. On Halol, we have indicated earlier that Halol shipments in US accounted for approximately 3% revenues before the site received import alert. Apart from the loss of revenue for approximately three weeks in Q3, there is an increase in expense because of the import alert. This is primarily on account of provision-related inventories and some other items. EBITDA for Q3 was at INR30,037 million, including other operating revenues, up by 15.2% over Q3 last year with resulting EBITDA margins at 26.7%. We reported strong margins despite normalization of expenses and impact of sales force expansion in India. Reported net profit for Q3 was at INR21,660 million, up 5.2% year-on-year compared to Q3 last year. Adjusted for one-off effects in both the periods, net profit growth was higher than the EBITDA growth for the quarter. Reported EPS for the quarter was at INR9 per share. Let me now discuss the key movements versus Q2 FY 2023. Our consolidated gross sales were higher by about 2.7% Q-on-Q at INR111,001 million. Material cost at 25.3% of sales and staff costs at 18.4% of sales, almost similar to Q2 levels. Other expenses at 30.6% of sales were higher compared to Q2 FY 2023. Increase in other expenses Q-on-Q was driven by higher sales and distribution expenses, and increase in R&D spend. EBITDA for Q3 stands at INR30,037 million, up by about [1.6%] (ph) compared to Q2, and EBITDA margin for Q3 was at 26.7% compared to 27% for Q2. Reported net profit for Q3 stands at INR21,660 million. Now, we will discuss the nine-month performance. For the nine-month period ended 31, December 2022, gross sales were at INR325,533 million, a growth of 12.1% over the nine-month period last year. Excluding COVID product sales for the nine-month last year, overall sales are up by about 13.6%. Material cost for nine months was at 25.8% of sales, lower year-on-year mainly driven by better product mix, including higher specialty sales. While staff costs as a percentage of sales were similar to nine-month last year, the increase in absolute value is on account of annual merit increase, consolidation of the Alchemee business, and expansion of the field force in India. Other expenses were at 29.1% of sales is higher than nine-months last year on account of higher selling and distribution expenses, and consolidation of the Alchemee business. EBITDA for the nine-month was at INR88,447 million, a growth of 9.8% over the nine-month last year with resulting EBITDA margin of 26.8%. Net profit for nine-month was at INR64,891 million, up 6.6% over adjusted net profit of nine-month last year. As of 31, December 2022, net cash was $1.8 billion at consolidated level and about $621 million at ex-Taro level. Let me now briefly discuss Taro's performance. Taro posted Q3 FY 2023 sales of $139 million, flat over Q3 last year, and net profit of $7.3 million. For the nine months, sales were at $426 million, up by 2% over nine-month last year. Net profit for nine-month FY 2023 was $18.5 million compared to $30.9 million for nine-month FY 2022. Taro's financials for Q3 FY 2023 and nine-month FY 2023 include the consolidation of the Alchemee business. Thank you, Mr. Murali. Let me take you through the performance of our India business. For Q3, the sales of formulations in India were INR33,919 million, up by 7.1% year-on-year. For this nine-month sales were at INR102,390 million, up by 10.3% like-to-like basis excluding COVID product sales of nine-months last year. India formulation sales accounted for about 31% of total consolidated sales. There were no COVID product sales in Q3 FY 2023 and negligible COVID product sales in Q3 FY 2022. We continue to witness good growth across multiple therapy areas in chronic and the sub-chronic segment for the quarter. Sun Pharma is ranked number one and holds 8.5% market share in over 1,800 billion Indian pharmaceutical market as per AIOCD AWACS MAT December 2022 report. Corresponding market share for the previous period was 8.2%. As for SMSRC MAT October 2022 report, we are number one ranked by prescriptions with 12 different doctor categories for Q3 FY 2023. For Q3, we have launched 25 new products in the Indian market. The sales force expansion has helped us to declutter our portfolio and we have been able to expand our prescriber base in key therapeutic categories. We are also increasing penetration in metros, Tier 2 and Tier 3 towns. Focus in near term will be to continue to improve the sales force productivity. Thank you, Kirti. I'll briefly discuss the performance highlights of our US businesses. For Q3, our overall sales in the US grew by about 6.3% over Q2 last year to $422 million. The main driver of growth was the specialty business, driven by Ilumya and Winlevi. US accounted for over 31% of consolidated sales for the quarter. Specialty sales have also grown compared to September 2022 quarter and we remain excited on growth opportunities in the current portfolio. Let me now update you on our US generics business. The Sun ex-Taro generics business has marginally declined on Y-o-Y basis due to stoppage of US shipments from Halol in December 2022. Over the last year, this business has gained some combination of new products, market share gains for existing products, and better supply chain management. For quarter three, we launched two generic products in the US on an ex-Taro basis. Thank you, Abhay. I will briefly discuss the performance highlights of our other businesses, as well as give you an update on our R&D initiatives. Our formulation sales in Emerging Markets were at $257 million for Q3, up by around 7.7% year-on-year. The underlying growth in constant currency value was at about 14%. Emerging Markets accounted for about 19% of total sales for Q3. Formulation sales in rest of the world market, excluding US and Emerging Markets were $189 million in Q3, higher by about 4.8% over Q3 last year. The revenue of $189 million includes a milestone payment received of $12.5 million. Rest of the world market accounted for about 14% of consolidated Q3 revenue. API sales for Q3 were INR5,154 million, up by around 9.4% over Q3 last year. We continued to invest in building our R&D pipeline for both, the global generics and specialty business. Consolidated investments towards R&D for Q3 FY 2023 stands at INR6,702 million, 6% of sales, and this compares to INR5,471 million, 5.6% of sales for Q3 2022; and INR5,710 million, 5.3% in Q2 2023. Our current generic pipeline for the US market includes 96 ANDAs and 13 NDAs awaiting approval with the FDA. Our specialty R&D pipeline includes four molecules undergoing clinical trial. We should be able to update the status of this trial in our next call. The R&D investments have increased compared to Q2 and we expect a continued ramp-up of the same. R&D investments are likely to increase, both for our specialty and generic businesses. The Board has declared an interim dividend of INR7.5 per share for the year FY 2023 against INR7 per share interim dividend for the previous year. Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] First question is from the line of Naushad Chaudhary from Aditya Birla Sun Life AMC. Please go ahead. Yeah. Hi. Thanks for the opportunity and congrats on a decent set of number. Firstly on Concert Pharma, I understand, so I don't want any specific number, but directionally, if you can help us understand in terms of the cost structure and R&D spend. The intensity would be similar to calendar year 2022 in calendar year 2023, or should it directionally come down or go up? If you could give us the direction in terms of cost structure intensity. No, I think it's difficult to give information in context of what you call limited information we have and also a need to kind of be cognizant of the restrictions. But conceptually, you need to keep in mind that they have announced that the Phase 3 trial is complete, and they are in the process of filing the product or they wish to file the product in the first half. Okay. Secondly, on the other expenses, was there any one-off in this quarter or was there any cost related to Concert acquisition, which may not be there in the coming quarters or was it a normal cost structure? So it was a normal cost structure as said in the readout. It was on account of the normalization of operations. There is no one-off or anything related to the transaction. And last, just a clarification. If I look at our specialty business, the revenue share sequentially have moved up meaningfully, but if I look at the gross margin, which looks flat. Can you help us understand this math, sir? So as far as the cost is concerned, while we agreed that the specialty business has increase, it will help us to improve the margins. However, cost is also function of products and other geography mix. So as a result of which -- what we can say is that [indiscernible] what is trending is as per our overall expectations. Sorry to interrupt you, Mr. Manudhane. Sir, I would request you to please repeat your question. There was some audio lag. Thank you. Okay. This is with respect to the R&D cost on the specialty front. So that has been increasing for the past three quarters now. So is it to do with the new indications for Ilumya? Yeah. I think we've guided that we had challenges in terms of ramping up their clinical studies because of the COVID, and subsequently, because of the war in Russia as well as Ukraine. So that had affected recruitment of new subjects. So I think I had explained that. We will gradually find a way to identify new sites and find a way to accelerate the recruitment. That's interesting. Sir, just on your comment in terms of intent to increase the specialty footprint, so if either in terms of the number of MRs or in terms of the absolute cost increase, if you can help us [indiscernible] for FY 2024? No. I mean, what I shared is that, our increasing focus on growing the specialty business. I mean, that doesn't necessarily mean that we would be strengthening the field force or anything at this point of time. Understood, sir. And just secondly on the India business whereas there has been an addition of a good sales force, there has been 25, 30 launches on a quarterly basis for almost three, four quarters now. But 3Q FY 2023 seems to be subdued at 7% year-over-year. So any particular you would like to call out? So I think the quarter three was slightly below the market, that is 7.7%. But if you look at our MAT December growth, which is higher than the market. So MAT, like we are growing -- market is growing at 7.7% and we are growing by 11.3%. So in the quarter three, what has happened is like, as you know, Istavel and Istamet, these were the two products we licensed from [Mark] (ph) and they went operated in the month of July. And after that, we have made this product affordable. So these were big brands where we have made the product attractive and make it affordable for the patient. So we have lost some topline, but at the same time, we are maintaining our market share in terms of units. So that has impacted our growth in quarter three and as well as we have some challenges in one of the business unit in gastro where the growth were not as per expectations. But other than that, all other therapy areas, either we are in line with market or growing better than the market. Yeah, that's -- our continuous effort is wherever we see some of the areas not growing as per our expectations, we try and address some of these issues. They take time also, it's not the next quarter it will get addressed. But over a period of couple of quarters, I think they should come back to growth in line with market. Good evening, and thank you for taking my question. First, just one clarification on other expenses. I think in your opening remarks, you said that there was some kind of inventory provision related to the products being not supplied from Halol, et cetera. So would you able to quantify that? Okay. And there are no kind of failure to supply penalties or the remediation costs, et cetera, included in other expenses? Whatever in terms of needs to be considered in the current quarter has been considered, relevantly hedged, and then they are not significant enough. Okay, perfect. My first question basically is on Winlevi. So I think this product has featured as a kind of growth driver for specialty sales for the first time. Is there any particular thing that has changed in the US, which is kind of helping us grow faster in this product now? Because as far as we are concerned, whatever prescription data we follow is generally showing quarter-on-quarter, more or less kind of flat prescription data. So is there anything fundamentally changed there sir, for Winlevi? So the prescriptions that you see today are more profitable than in the past quarter because there has been an improvement in access. I mean, having said that, I mean on various calls I've said that improvement of access is an ongoing process. There is no finite time to completion of that, it will happen all through the course of the lifecycle of the product. And we have a long way to go in terms of improving that even further. Okay. So is it fair to say we have like on-boarded a big kind of PBM right now in this quarter? We have on-boarded a big pharmacy benefits manager or an insurance company who is managing their PBM on their own. But we still see there is a lot of scope. I think we have to see. I mean, there are competitive dynamics even amongst the payers. Whether it helps us, time will tell. But we certainly would try our level best to convince the other payers also to cover the products. Perfect. Thank you. And second question on deuruxolitinib. Given there is another molecule with a very similar kind of chemical structure approved, will this be counted as a new chemical entity for us? Yes. Thank you for taking my question. Two questions on the Concert acquisition. First, if I were to think about the lead asset here, are we -- is -- how do you think about reimbursement arguments [indiscernible] coverage for the product. There was -- it seems this could be seen as more -- not fully, but more cosmetic use versus medical use. That's my first question. And second, how does this product fit into our existing presence in Derma with Ilumya and the other products? Just trying to understand the additional investment that would be required to commercialize this product outside the R&D investment that you mentioned? I will respond to the first part. I mean, from a science and medical perspective, AA or Alopecia Areata is clearly not a cosmetic condition. However, like what you said, a lot of payers, not doctors, but definitely payers, they have that kind of a prescription in mind. And I think the task for us even prior to launch will be to sell the Concept and make payers understand that this is a medical condition and not a cosmetic condition. And then therefore try and get [Technical Difficulty] I think in that, I think the doctors that we are speaking to [indiscernible] are pretty clear and they will also be helping to put out that story. Understood. But is the additional R&D that you mentioned prior to commercialization associated with us helping -- to help get better formulary coverage when we launch the product? So data that we will generate from the R&D effort will be used in various forms. The same data will be used with [indiscernible] and in a modified form used with payers and PBMs, and even the buyers of the product. So data is data, it is how you present it to relevant audiences that will make a difference and eventually how all elements of the market dynamics, the interplay and have a positive impact on the product. Understood. And my second question, how does this product fit into the existing footprint that we have in derma from a sales force perspective, doctor coverage perspective? So, Mr. Shanghvi, he also said in his readout, I mean we have covered in psoriasis we have products in acne [indiscernible]. This was one unmet need. So it enhances the basket of offerings that we have for dermatologists and doctors who treat dermatologic conditions. So I think from an indication perspective, it is a clear fit into what we already do. And there is a significant overlap between the [indiscernible] that we need and the [indiscernible] who are likely to be treating Alopecia Areata. Understood. And just one last clarification on the R&D spend. Is the R&D -- additional R&D included in the guidance that were have mentioned in the past of 7% to 8% of sales or should we look at -- is it over and above that? Because I think we will look at all the products in different stages of development, like what I also shared with you. We should be able to also share some clinical outcome, progress with some of the other studies so that we will give that guidance. Hi. Thank you, and good evening, everyone. Sir, is it possible for you to talk a bit more about Halol situation in the sense that: A, for the 14 exempted products, would you be able to restore all the sales? B, would you be using the site for non-US markets? And C, how many ANDAs have been filed from your pending approval? Or any color around any high-value products, so are you looking to site switch? So I think Abhay can give more information about the exempt product and what kind of sales we will be able to maintain. But we will look at what you call the important products, approved or in the process of getting approval for switching or filing from additional sites. Sameer, to add to what just Shanghvi said, a lot of business that we will be talking about regaining or losing will be product-specific, and the situation is still a little fluid I would say. Second it will be, obviously, to retain all of it, but I don't think all of it, some of it you can assume will be lost to competition. Okay, sir. Very clear. And would you be using this site for non-US market or you would first rather get it back in remediation? So, I think we are in touch with the other regulatory agencies, but site is being used for supplies to other geographies. Okay. Okay, great. Sir, second question is on the specialty portfolio. And Abhay, the prescriptions for Winlevi had kind of dipped around if I remember correctly, October-November. And they have been inching up. So I think they are back to 8,000 a week. But before that it used to be 9,000 to 10,000. So we are still not back up. So just any thoughts on that? And second also on Ilumya, if I see the IMS dollar data for 3Q, which is October, November, December. It's just flat quarter-on-quarter versus our primary sales being up. So anything to read through or it's just a bit of an aberration? So the first part to your question, I mean prescriptions are moving up. Not at the pace that you would like, but they are moving up. And I think the -- we have made some changes to our coping plan and then we had improvement in the access. So, I'm pretty confident that the growth trajectory we will be able to maintain. And this is about your question on Winlevi of course, Sameer. On Ilumya, I mean personally, I don't see a challenge because of the channel that we are strong in, that was the medicine benefit channels. Not all of that sale you see in the IMS will be completely reflected. So if I see -- and of course, on the call, I cannot discuss, but if I see the sales till yesterday, for the month of Jan, I feel pretty strong that the positive momentum will continue. Okay. No, just wanted to understand this import alert situation better. So currently what I understand is, 14 exempted products are not being sold and there are some activities that would be required to get these products enter the US shore. So is that understanding right? And what is the value of these 14 products? So batch by batch, the products that we have in India, we have started releasing to market after discussions with our quality team as well as external consultants [indiscernible]. And for the fresh product which we are getting from India, as you said, there is a process to be followed which weâll follow and try and fulfill the needs of the market. And, I mean product-wise and category-wise, we don't give our number. So, I can't really give an answer to your question of the exact contribution of these products. So of the $155 million, is it half of the products sales or is it less than half, some direction will help. And when you say batch by batch, it is the FDA, I mean, you are releasing batch by batch or they are accepting batch by batch? If there can be any clarity there? So I think you should have clarity that it's a decision by the Sun quality to release the batch. FDA doesn't accept anything. Okay, okay. And sir direction on the 14 exempted products, it could be less than half or around half of your $155 million sales? And overall, I think the revenue modeling you have corrected that the total impact on the overall company sale is not more than 3%, that should give you some direction. Right. And sir, when you said that you have taken some provisions, so is it adjusted with COGS, or is it line item with other expenses? How should we think about that? And going forward also how -- is all the provisions taken yet? No, I said the, whatever we have baked-in in the current quarter in the COGS and other expense line is not very significant [indiscernible]. Okay, lovely. And lastly on our RoW and AM sales, so dollar term I was looking at two-year CAGR and three-year CAGR, it remains 2%, 3% kind of CAGR dollar terms. So is there any focus in terms of additional launches or is it because of the high COVID base or how should we think about growth in RoW and AM? No, I think the growth is significantly more than 2%, 3%. I don't have three-year data in front of me, but if I understand the relative percentage that the emerging market has -- other markets have on the overall company performance it's not -- it's actually gaining in terms of overall share. So in spite of growth in other markets, it's growing faster. Good evening. Thank you for taking my question. Just looking at global specialty sales Q-o-Q, $200 million has gone to $223 million, I'm excluding the milestone. That's about $20 million-odd, but when I look at non-Taro US formulation, it's flat, right, $282 million -- $283 million. So just wanted to understand growth of specialty US versus non-US? It looks like there has been a bigger contribution from non-US. I'm obviously making an assumption on non-Taro generics, but just wanted your thoughts. I mean, we have the data. You don't -- but, I think for a specific reason, we are not sharing the detailed guess. And I understand that it creates a challenge for you to trying to estimate. Our own general feedback is that, I think the business is growing both in US as well as in other geographies. Thank you, Dilip. But just anything on RoW, because intuitively it seems to have grown faster. So have we done better in any of the other markets? I think that's where the underlying question was. Got it. So I meant non-US as even Europe. So if there is something that's happening incrementally in Europe, either to Almirall or others. That is also something that would be useful to know. No, I think Almirall is doing quite well with the product and that is why they triggered the milestone. But, I don't see dramatic difference in the performance. And you need to know that in Europe, what happens is that different countries based on a different point of time when they get reimbursement, the sales pickup. Got it, sir. Helpful. Just a second question on the Concert deal from a financing perspective, I think I missed the ex-Taro cash balance for the quarter or the December end. How will we be financing it? And just the next few steps, if you could highlight, what should we be looking out for? So, we've already given our -- in the press release in terms of the options we have in terms of financing the transaction. So beyond that, we will not going to comment how we will be funding this transaction at this point of time. And the process is also have been shared which has been filed with Concert also. So which is out into public in terms of what we are following being a listed entity. Yeah. Thanks for the opportunity. So I believe in initial readout. The year-on-year increase in specialty was to driven by Ilumya and Winlevi. So what could have led to quarter-on-quarter increase? Are Ilumya and Winlevi -- is it mainly because of Ilumya and Winlevi or has there been a benefit from seasonality and stocking up as well, because dermatology portfolio usually have a favorable seasonality in 3Q? So I was [indiscernible] in the initial readout, you mentioned that the year-on year increase in specialty was mainly led by Ilumya and Winlevi. So I just wanted to check are these the two factors for quarter-on-quarter increase as well and would seasonality and stocking up [Multiple Speakers] Okay. Okay. And my second question is on Concert acquisition. So there is an ongoing litigation that is going on between Insight and Concert. So would the outcome of this event be a material one in order to launch the product on time? Or is it something which is already taken care of? Yeah. Hi, thank you for taking my questions. The first question I had was on Concert acquisition. So the cash balance of Concert seems to be at $140 million. So how will you be treating this cash balance? And will this -- will the cash balance in Concert will be fungible for Sun Pharma going forward or we'll be using this only for Concert? Okay, that's helpful. And on the generic pricing erosion for Taro, we just wanted to understand on given that the operating income has picked up this quarter versus the last quarter. Do you kind of see this trend continuing for Taro? And how do you see the generic pricing trend for the ex-Taro business in terms of new product launches and market share gains in existing products? So Taro has -- I think in their release said that they continue to see pricing challenges. I think beyond that for us to respond on this call would not be appropriate. Hi, thanks for taking the question. Sir, first on the SEZABY launch, if you can just provide us some sense of the opportunity, the way we are seeing this opportunity for this product going forward? So we believe it's a very good product in an innovative [indiscernible] indication of the neonatal seizures where there was no approved product and only [indiscernible] products are available. And therefore, I think we licensed it from SPARC. Just launched it literally last week to [indiscernible] but we are obviously very [Multiple Speakers] Sorry to interrupt you, Mr. Shanghvi. This audio -- sir, this is the operator. Mr. Shanghvi, the audio is not clear from your line. So I don't know how much you got of what I said. I think we believe it's an important product and in neonatal seizures, which is a very serious indication, an approved product is something that gives comfort to the doctors and institutions as well as to the caregivers of the patients. So I think we are very well-positioned doing a good product [indiscernible] going ahead. And then just following up on that, the grandfather products which are unapproved products which are there, is there a timeline for the FDA to remove them from the market or how does that process grown? It's some modeling which we did, but it is not definitive, how it can be looked at by the FDA. For different products it could be treated differently and it is also a function of [indiscernible] able to believe that there will not be any drug shortage and the new product will be able to cater the demand of the market. So this is not a laid out procedure that once you get an approved product for a -- in a category [Multiple Speakers] There is no laid out procedures that within X number of months or weeks. The existing products are asking to go out of the market. There is no such established procedure. But it's something that we will have to work with FDA, convinced them and it's a process that we will have to go through. And second is, on this exclusivity period, how long do we -- exclusivity do we get on a molecule like this? It is a regular 20 -- commercial exclusivity will be how long this kind of product? Thank you, Mr. Agarwal. We request that you to return to the question queue for follow-up questions. We'll take the next question is from the line of Vivek Agarwal from Citigroup. Please go ahead. That question is related to deuruxolitinib. So, sir, can you also comment on the safety profile of the drug? How this is compared to some other product? No, I think, whatever is in the public domain, based on which, I think it's a relatively safe product with, I would call, benign kind of side effect profile that was reported in the studies that are in public domain. The Phase 3 studies, I think are in line with our -- maybe in the line with that. So, I think it's a safe and very effective product. That's why I think I talked about this in a context of best-in-class product. Thank you. The current participant has left the question queue. We'll take the next question from the line of Damayanti Kerai from HSBC. Please go ahead. Hi. Thank you for the opportunity. My question is on Halol again. So what kind of remediation cost you foresee for resolving the pending issues there? And also, how do you see US generic sales trending over the next few quarters ex Halol. Do you think you have headroom to minimize impact of sales lost at Halol from other facilities? Not anything we shared at the time of sharing the information about Halol is that based on this, we expect the impact to be less than 3% and -- of the total sales, and we are not changing or raising our guidance because of this. Now... So, I think we are not sharing specific information, but there will be a certain amount of consults and remediation cost associated with bringing the facility back in compliance. There may also be some new investments which may be required. So -- but that's part of the remediation process. Okay. And any timeline, like what you're targeting by when you can see resolution of issues because this plant has been under FDAs could be for some time now. No, I agree with you that it is been under scrutiny, and [indiscernible] for a very long-time. So we need to find a way to resolve the issue. And that's what we're working for. Okay. My second question is on Taro financial. So the SG&A associated there seems to be trending at around $50 million a quarter. So how should we see this cost going ahead? I understand that this includes Alchemee. But if you can comment on SG&A number for Taro? So, Taro has published the results. They also given the press release. Being a public company, I don't think we'll able to share more information than what they have shared. Also this is milestone income, but in a regular quarter where do you capture this number, if there is no milestones, say, like normal contribution coming from Almirall? Hi, good evening. Most questions are answered, just one question. Dilip like you shared the revenue contribution from Halol, would you be able to do that regarding the Mohali facility as well, because there is still some FDA issues going on there? I mean, I don't have the details with me. But, I mean, we don't either gave out revenue from plants or from separate businesses. Halol we gave out, because I think it's important for investors to be able to evaluate the impact. Understood. Yeah. And just question on SEZABY. Would you be able to define the market in terms of number of patients treated a year for this implication et cetera, something like that? Yeah. I mean I don't have the number in front of me, but yes, that number is available, please do [indiscernible] I mean I will share this with Abhishek post this call and maybe you can connect with him offline and get that. Good evening, thanks for the opportunity. On the Concert acquisition, will you be able to comment on the purchase price allocation with the consideration of $570 odd million reflect largely as intangibles on our balance sheet or will there be a significant goodwill creation? And the intangibles will be amortized over what period, if you can give some color? So we -- as we explained in the opening remarks, from 19 January we signed a definitive agreement. The contraction has to close, which we had to close probably in the first quarter of this calendar year. Once it's completed, we will do the [indiscernible] purchase price accounting at the same relevant things to be taken care. Okay. And from an accounting standpoint, these payouts associated with the CVRs, will there be a liability created on our balance sheet for these potential payouts? There are multiple options available to treat these type of continued value rights, which we evaluate along with the consultants at the time of finalizing the purchase-based accounting. Okay and then one question on generic [indiscernible], we have disclosed a settlement for that product. Any color that you could share on the timelines for launch? Will this be in FY 2024 launch for us or is it much later? No. All we have said is that, we are on-track as per the settlement with the innovator to launch. And there is no change to that in the quarter. Yes. Thank you for the opportunity, sir. Just first question on the Concert again. Sir, how critical is the long-term tolerability study for the success of the molecules, sir? That is one. And secondly, sir, this is just a lead molecule that is what we are acquiring through this acquisition or there is potential other platform technology as well as the product opportunity that we are acquiring? So I think the key focus or interest for us was deuruxolitinib and its proximity to market and its ability to help the Alopecia Areata patient who are currently not having any approved -- good approved product for treating that condition. However, the company also has licensed products to other companies and they have some products which are not even licensed, but they have intellectual property. So, I think as we develop better sense and understanding, we will share if there is any significant additional opportunity that we are able to identify from the pipeline. And this is a cash free, debt free kind of acquisition, sir, or -- because, just wanted to have a more clarity about the cash number that what we are seeing in the [Multiple Speakers] Sure. Okay. My next question is on the cost side, sir. So basically, we are seeing a kind of a some impact obviously on the other expenses front and that could be because of multiple factors. But I'm just trying to understand to what extent this is led by, let's say, status underperformed. Because it is Alchemee acquisition post that, obviously, we are seeing some impact on the cost side. So if you can share on that front? We already in the readout said that the increase in other expense is driven by the higher selling and distribution expense across various geographies, higher R&D spend and also the consolidation of Alchemee business. Separately, we will not be able to give any number of what's related to Alchemee. There's no other components which is lying in the other expenses. Okay. Because if we just adjust the licensing income, then the cost structure even look slightly deteriorated. So that is why -- should this licensing income -- sorry, this milestone income would be a kind of a pure cash component? [Multiple Speakers] Adjusted for that cost structure looks slightly deteriorated that is why? Okay. Got it. And just last one question, sir, relating to the R&D. Now considering the kind of a nature of our activities and the intent to expand our specialty portfolio, so, let's say in, next two year period the R&D spend mix towards the specialty would be to what extent of the total R&D spend directionally? No. I think we've shared with investors that our focus is on creating a significant additional engine of growth through specialty business, and we have been diligently building that business and that business will require investment in new clinical studies R&D. So we will commit all of that whenever that becomes necessary. But we don't give guidance beyond the next year. So, that's where, I think I have the challenge, but directionally, I think we would be strengthening our ability to execute on various specialty related investments. Yeah. Hi, good evening. Sir, I just had one question on the India business. Would it be possible to give a split for the pricing-led, volume-led, and [indiscernible] led growth for this quarter and nine months? No, I think, actually the -- with the -- what you call syndicated research [Havex] (ph), as well as IQVIA give you that [indiscernible]. Thank you. The next question is from the line of Niket from Motilal Oswal AMC. Please go ahead. Niket, your line is in talk mode, please go ahead with your question. Niket, your line is in talk mode, please go ahead with your question. As there is no response from the current participant, we'll move onto the next question from the line of Sumit from [RDA] (ph). Please go ahead. I don't know what ANDA approval for Cariprazine. Is that a public domain information? I don't know. We don't give information related to future products. Hi, I have two questions. The first question is on the nature of other expenses. Dilip has commented that selling and distribution costs have gone up in this quarter. So wanted to understand what has led to this increase in some of this initial costs for the quarter and is it a structural increase? So, selling and distribution expenses, I mentioned that we increased across geographies. However, we also mentioned specifically the field forces expansion is fully complete in beginning of this fiscal for India. So obviously in the current year you will see the full expenses related to S&D for those new fields force added. That's why overall you're seeing an increase in higher S&D spend. Of course more related with new field force expansion as, obviously, the full-year impact is there, plus also the related spend on to S&Ds relating to the field force. Okay. Understood. The second question is on the Halol site. I mean, we continue to face trouble in this. So my question is, Shanghvi, that -- what is the core reason for this repeated issue at Halol? I mean most of it will, of course, will be retrospective, but what have we done to like to address it over the past few years? No, I think clearly whatever that we thought we needed to do we've done, but it was not adequate. So, we need to strengthen our ability to ensure that the expectation of the regulatory agency are met. We believe that we've now put in appropriate focus and structure so that we should be able to meet the expectation of agencies. I think that at the same point of time, we need to also keep in mind that a large number of our other facilities supplying to the US are in compliance and we continue to what you can grow our business in the US, in spite of significant pricing pressure, as well as, what you call, challenges in the marketplace. So is it because, I mean, we all understand Halol is one of the large and old complex which has got like [indiscernible] production. Is it because of it being an old plant or is it because of shortage of proper skill sets or is it because of evolving standards of FDA? And is this something which I mean the practices here, is it something that you would be having across your other sites earlier because of which we could -- it could be a systematic issue which are to be addressed? No, I think the company policy is that whatever changes we make in one plant if it is applicable and related to other facilities, it is automatically put in priority for implementation in that facility. Now, Halol rather than being an old plant, I think we have made huge consecutive investments and it's become a very large and complex facility. So we have to find a way to reduce the complexity. Hi. Thanks for the follow. So just a quick question. The product which have a lot of interest is Semaglutide and Liraglutide. And it could be interesting market. So any thoughts you can share. I can see that Sun is among the four to six filers for this product. Do you think it can get competitive, you still think it's going to be attractive opportunity. Just your thoughts would be great, sir. The semaglutide is far away Sameer, I think, Liraglutide is relatively recent. But my expectation is that, by the time the patent expires and we can come to the market, a large part of the current, what your call, patients would have moved over to [indiscernible]. So to that extent, we have to at residual market at the time of patent expiry. Okay. That's great, sir. It's very helpful. And just one more if I can on [Diroxo] (ph), and that is -- it's a JAK1 and JAK2 inhibitor and we have this [indiscernible] in the market. So is that pricing -- and other JAKs -- Are those pricing service a good benchmark for our product? I know it's just some time, but any thoughts on that? [Multiple Speakers] assumption, but we have no -- we have no firm decision taking for where the pricing could be. [indiscernible] No. I think the idea would be to develop a comprehensive understanding on the price at which we can fully benefit from the value of the product and also patients have ability to access an effective treatment option. Thank you. The next question is from the line of Naushad Chaudhary from Aditya Birla Sun Life AMC. Please go ahead. Thanks for the follow-up. A few quick clarifications here. Firstly, in the press release we have mentioned that the adjusted for one-off, the PAT growth in this quarter was higher than EBITDA. So can you just help me on what was the one-off for last year same quarter? For last year same quarter, we have disclosed several inter stock refund and that was [indiscernible]. Those two that that have been adjusted. Okay. Okay. And In terms of the net MR addition in nine month of this financial year, can you share that number as well? Yes, that's in India market, late addition. We have completed the MR addition, like 1,000 MR we have already in this financial year. So that part we are completed. The line for the current participant got disconnected. We'll move on to the next question from the line of Kunal Dhamesha from Macquarie. Please go ahead. Thank you for the follow-up. So just one [indiscernible] with the current kind of legal data we have, would we be able to apply for approval outside US with the current legal data here? Yes, I think we have to evaluate country by -- geography by geography. Some geographies may require additional studies. Some geographies we may be able to file the existing [indiscernible]. So we have to take -- if it needs extra investment, we have to take country by country decision, which is a large enough product for us to seriously look at potential across Europe. Okay. And those additional studies will be more like a bridging studies or kind of a full-fledged trial that we need to conduct. At least for a bigger geographies like Europe. My understanding is that Europe may not require additional study because quite [indiscernible] in this study were also in Europe. So it may not require a separate study. I'm talking more about Japan, China and these countries where maybe what studies will be required we have to get interact with the regulators and develop and understand. Sure. And just one more [indiscernible] after it has been kind of classified OI, has there been any communication with US FDA in terms of further Capas, etcetera, you would have submitted. I think there is a structured process about updating every year of this particular response foray three and what we are doing. So that -- and there is a certain periodicity on data that we follow. Yes. Thanks for the follow-up. Just trying to understand the Taro cash. I understand Taro has a separate company, but you are the promoters and Taro is not hosting any calls anymore. I mean, how do we think about utilization of that cash? Can they use this cash for similar asset acquisitions like you did in the specialty side or you -- it's been there for long and it's accumulating. So what are the thoughts as a promoter? So the idea would be to find a profitable end use of the surplus cash, so that it can be put to use. And we constantly evaluate opportunities both in Sun as well as in Taro. Taro also has a separate business development group and they also constantly evaluate opportunities. So hopefully, if I think with the rash mineralization of valuation, we should be able to do something. Thank you. Ladies and gentlemen that was the last question for today. I now hand the conference over to Mr. Abhishek Sharma for closing comments. Thanks, everyone, for joining in today. Kindly reach out to the IR team for any remaining questions that you may have. Good night, everyone. Thank you. Ladies and gentlemen, on behalf of Sun Pharmaceutical Industries Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your line.
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EarningCall_681
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Good afternoon. My name is Diego, and I will be your conference operator today. I would like to welcome everyone to Starbucks First Quarter Fiscal Year 2023 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Tiffany Willis, Vice President of Investor Relations. Ms. Willis, you may now begin your conference. Thank you, Diego, and good afternoon, everyone, and thank you for joining us today to discuss Starbucks' First Quarter Fiscal Year 2023 results. Today's discussion will be led by Howard Schultz, Interim Chief Executive Officer; Brady Brewer, Executive Vice President and Chief Marketing Officer; and Rachel Ruggeri, Executive Vice President and Chief Financial Officer. And for Q&A, we'll be joined by Frank Britt, Executive Vice President, Chief Strategy and Transformation Officer; Sara Trilling, Executive Vice President and President of Starbucks North America; Michael Conway, Group President of International and Channel Development; and Belinda Wong, Chairwoman of Starbucks China, who is joining us today from on the ground in China. This conference call will include forward-looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factors discussed in our filings with the SEC, including our latest annual report on Form 10-K and quarterly reports on Form 10-Q. Starbucks assumes no obligation to update any of these forward-looking statements or information. GAAP results in first quarter fiscal year 2023 and the comparative period includes several items related to strategic actions, including restructuring and impairment charges, transaction and integration costs and other items. These items are excluded from our non-GAAP results. All numbers referenced on today's call are on a non-GAAP basis unless otherwise noted or there is no non-GAAP adjustment related to the metric. For non-GAAP financial measures mentioned in today's call, please refer to the earnings release and our website at investor.starbucks.com to find reconciliations of those non-GAAP measures to their corresponding GAAP measures. This call is being webcast, and an archive of the webcast will be available on our website through Friday, March 3, 2023. And for calendar planning purposes, please note that our second quarter fiscal year 2023 earnings call has been tentatively scheduled for Tuesday, May 2, 2023. Now before I turn the call over, let me first say thank you to Howard. Because in our short amount of time together, I have witnessed a relentless focus on our culture while not compromising results. You have reinforced the importance of dreaming bigger than others may even think is possible. And for that, I will forever be grateful. And so now the floor is yours. Howard. Thank you, Tiffany. I did not expect that. Thank you very much. Good afternoon, and welcome, everyone. I'm pleased to comment on the strong financial and operating results Starbucks reported today, highlighted by record quarterly sales of $8.7 billion, up 8% over last year, up 12%, excluding foreign exchange, a stunning 10% comp growth in the U.S. and North America, 5% comp growth globally. And except for China, very strong sales and comp growth in every international market we are in. We posted strong results despite challenging global consumer and inflationary environments, a softer quarter for retail overall and an unprecedented COVID-related headwinds that unfolded in China. Credit belongs to our partners around the world who continue to successfully satisfy record demand in our stores while delivering an elevated Starbucks Experience to our customers. In China, COVID-related mobility restrictions and a spike in COVID infections following the end of zero COVID resulted in comp sales of minus 29% for the quarter, 4x worse than what we expected. Weak sales combined with the cost to support the health, the safety and well-being of our partners, our first priority, negatively impacted total company earnings by $0.06, resulting in Q1 EPS of $0.75 per share. Despite short-term headwinds, we are confident that the end of Zero COVID marks the beginning of China's emergence from three years of pandemic, puts the country on a path to reintroducing normalcy and routine back into people's lives and positions the country to resume pre-COVID levels of consumer, social and economic growth. We also believe at the end of Zero COVID will enable renewed consumer activity in China and recovery of our business in the back half of fiscal 2023. Our view is informed by patterns of post-COVID behaviors we have seen in countries around the world as consumer activity accelerates as years of pent-up demand is released. Today, our stores in China are again open without restriction and our partners are back at work. Many have been infected and recovered from COVID. Noteworthy is that we saw a meaningful sequential improvement in sales and traffic as we move through January as people began resuming aspects of their pre-COVID lives, including gradually returning to our stores. More on China shortly. Our performance in Q1 underscores the success of the investments we are making in our people in extending our global leadership around everything coffee and in relevant innovation that together are driving sales and transaction growth around the world. Starbucks is more relevant globally today than ever before in our history, ideally positioning us to successfully execute our ambitious growth agenda and have roughly 45,000 stores delivering best-in-class returns around the world by the end of fiscal 2025. On today's call, I will highlight the drivers of our performance in Q1 and provide an update on the progress of our reinvention initiatives. I will then provide granular details specifically around the shape of our business in China and shine a bright light on the positive correlation between increases in consumer activity in China and the recovery of our business. Next, Brady will detail the beverage, food, mobile, digital and store innovation that drove record demand for Starbucks Coffee in every market outside of China in Q1. And he will speak to our record holiday performance, the strong growth in U.S. Starbucks Rewards membership sequentially and year-over-year and the extraordinary record of $3.3 billion loaded on cards and gifted in the U.S. We entered Q1 with roughly $2 billion globally waiting to be spent in our stores, increased Starbucks Rewards membership and card loads serve as both a current annuity and the future driver of our business. And then finally, Rachel will highlight our Q1 financial and operating performance and speak to the confidence we have in our full-year 2023 guidance despite the significant impact from China, and we'll turn the call over to the operator for Q&A. Let me begin with North America. The record demand for Starbucks Coffee in North America, we've reported on our Q4 call accelerated in Q1 and through holiday. Despite the difficult operating environment that most retailers, particularly brick-and-mortar retailers experienced in the quarter. Average weekly sales in the U.S. company-operated stores reached a record high in Q1, exceeding the prior record set in Q4 of fiscal '22. This is -- this next line, I think, is just -- even when I read it, I'm surprised, with eight of the 10 highest sales days in our history recorded in the quarter. Consistently strong demand drove revenues up 14% to a quarterly record of $6.6 billion and a comp sale of 10% over last year. And Q1 momentum has continued in Q2. Active Starbucks Rewards membership in the U.S. exiting Q1 totaled over 30 million members, up four million members or 15% over last year and up 6% sequentially. Loyal Starbucks Reward members drove a record 56% of tender, up 3% from last year, reflecting increased customer engagement throughout our system. Our convenience channels, Mobile Order & Pay, drive-through and delivery continue to fuel our business, delivering 72% of U.S. revenue in Q1. We continue to add high returning drive-throughs that attract new customers, expand our footprint and drive new customer occasions. Our over 6,600 store U.S. license business posted similar strong results with 32% revenue growth and double-digit comps across all operating segments. What's interesting to me is while grocery retailers are representative segment within our licensed business experienced traffic and spend related headwinds across their store base in Q1, their Starbucks business proved to be the bright spot bringing incremental traffic into their stores and driving sales for us as well. We continued to roll out Starbucks Connect enabling licensed stores to offer all Starbucks Mobile Order & Pay and Rewards benefits, expanding the value offering we provide our customers and licensees and enabling us to capture demand across our broader store portfolio. Starbucks Connect is proving to be highly incremental, and we see great upside for it. Cross-functional teams continue to successfully execute against our reinvention initiatives and our reinvention investments are having a measurable positive impact on our business, evidenced by an 8% improvement in U.S. hourly retail partner turnover. Improved turnover correlates to more stable store environments, elimination of new hire-related costs, particularly training and measurable improvements in productivity, speed of service and partner customer experience scores that we're already seeing. Our Q1 performance demonstrates that our reinvention plan investments are the right investments that we are making and are delivering results and creating shareholder value, providing us with tremendous confidence in the revenue, margin and EPS expectations that we shared at our Investor Day. Let me turn to international. Outside of China, the momentum we saw in our International segment exiting Q4 continued in Q1. Excluding China and foreign currency translation, revenues for the quarter are up 25% and comps were up 11%, fueled by recovery consumption in Japan and a rebound in tourism activity across our EMEA markets, following the lift of COVID restrictions. One great example is Alshaya. Alshaya is our license partner in the Middle East for the last 23 years and among our largest international licensees with over 1,800 stores across 13 markets. They reported their strongest quarter with the Starbucks brand ever in Q1. We added 370 new stores in international in Q1 and now operate 18,700 stores across 84 markets, 43% company-operated and 57% licensed. Strong growth in our international license business reflects the outside returns the Starbucks brand delivers to our licensees, driving increased investment by our licensees in our business and growing customer engagement with our Starbucks brand around the world. Turning to channel development. The Starbucks brand relevant innovation and seasonal moments are resonating with our customers and driving sales and occasions around the world, resulting in a 15% increase in channel revenues in Q1 over last year to $478 million. We continue to hold the #1 dollar share in U.S. at-home coffee and in Q1 outpaced dollar sales growth in North America ready-to-drink category overall, again demonstrating the unique power of the Starbucks brand. In China, Starbucks received the ready-to-drink new product launch of the Year award for the introduction of Bottled Frappuccino Oat Latte. We will continue to delight our customers with exciting new beverage innovation in the months ahead, including with the launch of Starbucks ready-to-drink Pink Drink inspired by the overwhelming success of Pink Drinks served in our retail stores and certain to become a customer favorite, especially with our young customers and our Gen Z audience. Let me begin the discussion around China by saying that Starbucks has been in China now for over 24 years, and that our confidence in the future of Starbucks business in China and our aspirations for the market and our partners has never been greater. We exited Q1 with almost 6,100 Starbucks stores across 240 cities, and our newest class of stores continue despite the challenges we've had to achieve best-in-class returns and profitability. And we remain on plan to have 9,000 stores in China by the end of 2025. Our belief in China is based on our leadership position in the market, our relationship with our partners and the trust that we have among our Chinese customers and the market and our brand position. Since 2020, our Starbucks China team has been navigating the most acute COVID-related mobility restrictions and disruptions anywhere in the world, while at the same time, developing the flexibility to execute under any COVID scenario. By leading in together in service of their customers and fellow partners, our China team has navigated every challenge obstacle and volatility that COVID had put in their way, building more capability, flexibility and operating muscle with each unexpected test. That flexibility and operating muscle, coupled with deliberate investments that we've made throughout the pandemic, supported our business in Q1 and will increasingly drive efficiency, productivity, profitability and shareholder value and enable us to deliver an even more relevant and elevated Starbucks experience to our partners and our customers in the years ahead. As I shared on our last call, our recovery in China gained momentum in Q4 of 2022 despite severe mobility restrictions in many of our larger cities. We saw sequential improvement in all key operating metrics driven by the success of mobile and digital technology investments and expanded delivery capabilities built during COVID that made it easier for our customers to engage with us and better enable us to serve them. The direct positive correlation we saw between increased consumer activity in China and sales in our stores and the speed and consistency with which our business was accelerating, gave us great confidence moving through the quarter. However, in September, a new wave of COVID spiked resulting in further increased mobility restrictions, new mobile, digital and delivery capabilities enabled us to partially offset the reduction in store traffic in September. However, in early December, Zero COVID was lifted and COVID infection spiked across China, resulting in a dramatic decline in consumer activity across the country and causing the most severe COVID disruptions any retailer had encountered. For us, at its peak, nearly 1,800 Starbucks stores were closed during that month. As a result, comps in Q1 declined 29% with a 42% comp decline in December alone. But like consumers everywhere, our customers in China are creating a full return to familiar pre-COVID routines and lifestyles and huge consumer demand in China is waiting to be unleashed. Early indications are that it is beginning to happen in our largest cities now with many Chinese recovered from COVID, people returning to work, border and travel restrictions lifted, mall traffic and retail store activity on the rise and consumers reintroducing social activity back into their daily lives. We saw the strongest level of sustained customer activity we've seen in years in the run-up to and during Chinese New Year festivities. As Rachel would share, we are expecting the second half of fiscal 2023 in China to be stronger than the first half but uncertainties remain and the better part of valor is to remain cautious around precisely when our recovery in China will take full flight. However, when it does, pattern recognition, the return on pre-COVID routines and the adoption of new post-COVID routines will become self-evident in China, and customers will flock to Starbucks stores to enjoy moments of reconnection their favorite Starbucks beverages and the premium Starbucks experience our partners in China deliver. And Q1 headwinds will shift to tailwinds. We've seen this pattern repeat in markets around the world, including the United States. Despite the challenges and the uncertainties of the last three years, Starbucks' commitment to China and to our partners and business in China has never wavered. Almost 25 years after entering the market, I remain more confident than ever that we are still only in the early chapters of our growth story in China, and I'm looking forward to being with our China partners for the first time in years when I visit the country this Spring. Laxman's immersion continues to go spectacularly well. He and I engage daily as he absorbs more about our company and business and he wins the hearts and minds of Starbucks partners everywhere. Only weeks from now, Lax will take full control of the company and together with our leadership team, bring reinvention to life, guide Starbucks into a new era of growth and begin writing the next chapters of our storied history. I cannot be more confident that Lax is the right CEO at the right time for Starbucks. And Starbucks Coffee Company domestically and around the world is in great hands with him as the CEO. This -- my last earnings call is very special for me and a powerful emotional reminder of the intersection of my life at Starbucks. It was 1983, walking the beautiful streets of Milan at the inspiration for what Starbucks could one day be and made first struck me. 40 years later, I'm not sure where the years have gone. 40 years later, we have over 36,000 stores around the world, serving over 100 million customers each week. Along the way, we have created opportunity, cared for and improve the lives of millions of Starbucks partners and made progress against my goal of creating a different kind of company, a company steeped in humanity, humility and respect, where everyone is welcome, and we embrace the belief that our differences make us better and stronger. And a company unlike any company, my father ever got a chance to work for, but there's much more opportunity and much more work ahead. Finally, while Starbucks has launched many successful coffee beverages over the years, my Starbucks journey will come full circle when I return to Milan later this month to introduce something much bigger than any new promotion or beverage. While I was in Italy last summer, I discovered an enduring, transformative new category and platform for the company, unlike anything I had ever experienced. The word I would use to describe it without giving too much away is alchemy. We won't unveil details today, but it will be a game changer, so standby. Many people have asked me if my final earnings call as Starbucks CEO is bitter sweet, it really isn't. Starbucks business and brand, the quality of our coffee, the relevance of the Starbucks partner and customer experiences have defined us since our founding in 1971 and have never been better or stronger. And our future has never been brighter. It will be my pleasure to take a front row seat as Laxman leads Starbucks into and through the exciting new era of growth ahead. Thank you, Howard. I know I speak for so many when I say thank you for your relentless pursuit of elevating the Starbucks customer and partner experience. Your leadership to our reinvention has us well positioned to continue advancing towards our biggest aspirations with Laxman and our strengthened leadership team. Good afternoon, everyone. I'm incredibly proud of our strong Q1 performance across all markets. Today, I'll focus on what we saw in the U.S. this quarter. In addition to the strong customer demand for Starbucks overall, our results benefited from last year's strategic pricing actions and increased food attached with record sales for both Sous Vide Egg Bites and breakfast sandwiches. Our product portfolio and innovations continue to resonate with customers, especially our cold, customized beverage innovation. Beverage sales increased 13%, led by our strength in the espresso category, with featured holiday beverages like the Caramel Brulée Latte and sugar cookie almond milk latte contributing to growth. Customized beverages continue to be a differentiator with customers all year long. Modifier sales were up 28% year-over-year in our U.S. company-operated stores, showing that customers are visiting Starbucks for beverages customized to their preferences that they cannot find anywhere else. The strength and relevance of the Starbucks brand continued to accelerate this holiday season as we surpassed, as Howard said, 30 million active Starbucks Rewards members, we drove record-breaking mobile order usage at 27% of transactions in the U.S. company-operated stores, and we reached an all-time high in the population of our weekly total active customer base. We also saw more than $3.3 billion loaded on Starbucks cards in the U.S., exceeding last year's record results and setting a new record. In fact, our gifting business was so strong that the unit sales of Starbucks Cards were greater than the next four brands of gift cards combined. This not only drives new Starbucks Rewards registrations, but it also drives our business in Q2 as evidenced by the high 56% Starbucks Reward tender that we saw in our U.S. company-operated stores at the end of the quarter. Said another way, during the holiday season, Starbucks truly becomes the currency of kindness and it drives our business. At the heart of Starbucks is uplifting human connection. This is a core part of our reinvention, and we accelerated our reinvention investments in the quarter, driving continued improvement in our industry-leading partner retention. We're also committed to elevating the customer experience. And within the quarter, we launched our first Starbucks rewards -- Reward Together partnership with Delta Airlines, which offers members of both Delta SkyMiles and Starbucks Rewards, new ways to earn rewards. On December 8, we also launched the Starbucks Rewards Odyssey experience in beta to select members. Odyssey members have been invited to partake in multiple Odyssey journeys driving increased engagement and loyalty from our members and now ownership in their loyalty experience. We also announced the national expansion of our partnership with DoorDash, which alongside Uber Eats also provides us the ability to serve customers in a convenient way and enjoy Starbucks wherever they are. And we announced changes to our Starbucks Rewards redemption tiers, which not only supports critical program growth and discount efficiencies, but it also allows us to add increasing value relevant to our members by making popular items like cold coffee, more attainable, the changes that our members have praised. Finally, we're furthering the value delivered to our SR members by bringing them coffeehouse culture and content through a new series in the Starbucks app called the Starbucks Daily, which will launch with [indiscernible] this month. In short, Starbucks is an incredibly strong brand and one that is poised for growth. Thank you, Brady, and good afternoon, everyone. Let me begin by saying that I am very proud of what we achieved in Q1 with nearly every business contributing to our strong performance. The remarkable strength in nearly all major markets and channels across the globe led to outperformance across our metrics when excluding the headwinds in China. Our Q1 consolidated revenues of $8.7 billion were another record quarterly high, up 8% from the prior year or 12% when excluding an approximately 3% impact of foreign currency translation. The revenue growth was primarily driven by 5% comparable store sales growth, 5% net new store growth over the past 12 months, impressive momentum in our U.S. and international licensed stores as well as our channel development businesses. When excluding China and the impact from foreign currency translation, revenues in all three of our reporting segments continued to expand double-digit, demonstrating the demand of our diverse portfolio and power of our innovation as we focus on our new era of growth. Q1 consolidated operating margin contracted 60 basis points from the prior year to 14.5%, primarily driven by investments in growth in labor, part of which represent the reinvention plan, inflation and deleverage in China. The contraction was partially offset by pricing in North America and sales leverage across markets outside of China. The deleverage in China was more significant than expected, while other margin drivers were largely in line with our original guidance. Q1 EPS was $0.75, up 4% from the prior year, including an approximate $0.06 dilutive impact from the headwinds in China relative to our original expectations. Although we anticipated China's recovery to be nonlinear, the headwinds in Q1 were larger than our prior estimate by approximately $0.06 due to the unforeseen changes in COVID restriction and infection spikes. The significant strength across our global portfolio, however, largely offset the impacts from China's performance, keeping us on track to achieve our fiscal 2023 growth targets, as I'll discuss in a moment. First, I'll provide segment highlights for Q1. North America delivered another quarter of all-time record revenue in Q1 of $6.6 billion, up 14% from the prior year, primarily driven by a 10% increase in comparable store sales, inclusive of a 9% increase in average ticket, net new store growth of 3% over the past 12 months and very strong growth in our U.S. licensed store business. Our U.S. company-operated stores had a record revenue quarter with 10% comp growth in Q1, fueled by strength in digital, innovation, and record holiday performance as both Howard and Brady shared. In addition to the continued strength in ticket, the number of unique customers grew 10%, setting another all-time record and further expanding our reach. Let me also highlight the very strong performance of U.S. licensed stores this quarter, which posted revenue growth in excess of 30% and 15% system comp growth over the prior year Q1 with strength across the portfolio. Performance was particularly strong in retail and travel as pre-COVID behavior normalcy returns, with U.S. licensed store revenue indexing at roughly a 140% of pre-pandemic levels. Grocery also experienced strong growth, powered by the continued rollout of Starbucks Connect despite the overall decline in customer traffic across the rest of grocery store industry. North America's operating margin was 18.6% in Q1, contracting 20 basis points from the prior year, primarily due to previously committed investments in labor, including enhanced store partner wages and benefits as well as inflationary headwinds, partially offset by pricing and sales leverage. While Q1 operating margin declined sequentially from Q4 fiscal 2022, driven primarily by seasonal sales mix shift, we gained productivity through reinvention, including improved partner retention and equipment rollouts, paving the way for progressive margin expansion in the latter half of fiscal 2023 and years to come. Moving to international. The segment delivered revenue of $1.7 billion in Q1, down 10% from the prior year or up 2% when excluding a nearly 13% unfavorable impact from foreign currency translation. The revenue growth was driven by sustained momentum across all major markets outside of China as well as an 8% increase in total store count over the past 12 months. The growth was partially offset by a 13% decline in comparable store sales, including a 29% decline in China. Although China posted a comp decline of 29% in Q1, the heaviest decline of 42% was experienced in December with pressure carrying into Q2, all of which was well below our original estimates, as mentioned in my opening. Just to give you a little color, at its peak, nearly 1,800 stores or close to 30% of our portfolio were temporarily closed due to sharp fall in traffic and labor shortage because of partners falling sick to COVID. Outside of China and excluding the impact of foreign currency translation, our diverse international markets across the globe continued to outperform in Q1. Once again, these markets together achieved double-digit comp growth, driven primarily by transactions. Their revenue grew 25% in the quarter when excluding a 17% unfavorable impact of foreign currency translation with successful holiday campaigns across all regions. Operating margins for the International segment was 14.3% in Q1, down 400 basis points from the prior year, mainly driven by deleverage in China, but partially offset by strong sales leverage across other global markets and the resulting business mix. Shifting to channel development. The segment's revenue grew 15% to $478 million in Q1, driven by double-digit growth in both the Global Coffee Alliance and our global ready-to-drink businesses. Within the Global Coffee Alliance, newer platforms continue to be key drivers of growth, including Starbucks by Nespresso and Starbucks Creamers. Our ready-to-drink lineups are fueled by core platforms in our international markets and robust innovations in the pipeline. Sustainability was also top of mind for the segment, trailblazing recyclable, multi-serve iced coffee bottle made from recyclable plastic. The segment's operating margin was 47.4% in Q1, up 350 basis points from the prior year, primarily driven by strength in our North American Coffee Partnership joint venture income. Now moving to our guidance for fiscal 2023. Let me take a few minutes to go deeper on the implications to our business from the challenges we're facing in China. In January, China's comparable sales growth was a decline of approximately 15%, which was an improvement from a decline of 42% in December. While we're seeing early positive signs of momentum rebuilding, headwinds related to COVID still exist in the market and are expected to impact the full Q2. As a result, we anticipate the negative impact on the operating income in Q2 to be comparable to or greater than Q1. Although we previously projected China recovery as early as Q3 of this fiscal year, we do not have clear line of sight into the timing of recovery and believe China's contribution as a percentage of our fiscal 2023 consolidated operating income to be lower than our original guidance assumed. However, our long-term opportunity in China is very strong. We expect the market to see meaningful sales rebound once recovery is in full swing. Until then, we continue to stay focused on the long-term growth opportunities that China will deliver while weathering the short-term and transitory challenges. Now even with that backdrop and taking into account the uncertainty of China's recovery timing, our fiscal 2023 guidance remains unchanged. As a few point of clarification on guidance, in China, we now expect negative comps to continue through the second quarter, followed by improvement in the balance of the year. Another point of clarification is that China store growth remains unchanged as we execute our strategy to expand in new cities. Also, our guidance continues to include the impacts of significant investments related to our reinvention plan and inflationary pressures which largely remain comparable to what we had originally anticipated. Lastly, our guidance reflects the latest projection of foreign currency translation with approximate two and three percentage point unfavorable impacts on fiscal 2023 revenue and earnings growth, respectively. This reflects an improvement of approximately one percentage point on both revenue and earnings growth relative to our previous expectations. Additionally, in terms of quarterly shape, operating margin is expected to decline sequentially in Q2, near prior year level driven primarily by the COVID-related headwinds in China. We still expect margins to expand in the back half of the year, improving sequentially in Q3 and Q4 as sales leverage, pricing, productivity gains from reinvention as well as recovery in China begin to contribute to positive margin expansion as the year progresses. We continue to expect the quarterly EPS shape to roughly mirror the shape of operating margin with a sequential decline in Q2 and a meaningful step up in the second half of the fiscal year. Lastly, we also remain committed to returning approximately $20 billion to shareholders by the end of fiscal 2025 between share repurchases and dividends. Our repurchase program resumed in Q1 of this fiscal year and will accelerate as reinvention gains ground. Since the inception of our dividend program, 51 quarters ago, our annual dividend growth has averaged greater than 20%, and our dividend payout rates near the top percentile of growth companies of our size and our scale, which is an exceptional complement to our long-term EPS growth target as high as 15% to 20%. In summary, here are key takeaways for my discussion today. First, our business and our brand are strong and strengthening every day as demonstrated by the record sales in Q1. Next, our Q1 performance serves as proof point that we are progressing nicely against our strategy, inclusive of our reinvention plan and delivering the results we projected. And finally, we will continue to innovate in the critical areas of digital, product and stores as our new era of growth is just beginning to unlock, and we are excited about what lies ahead, including welcoming Laxman as CEO this spring and on our second quarterly earnings call. Now before I close, I want to express my sincere gratitude for a hard work of our Starbucks Green Apron partners across the globe, including those in China who serve our customers in a way that only Starbucks knows how. Also, with this being Howard's last earnings call, I would be remiss if I didn't take a moment to thank Howard for his vision to create a company that is truly different, where value is created for all. I know that I speak for many of us when I say we will honor your legacy while taking the company to the next level, all in making you, our partners, and our shareholders proud. My question is just on -- as I think about the U.S. comp clearly strong, up 10%. I'm just wondering if you can talk a little bit about the traffic you're seeing today versus maybe pre-COVID. I think we all recognize that the sales are well above pre-COVID levels in total. But clearly, the average check has been the driver of that. I'm just wondering if you can -- how you get comfortable with the fact that the brand is as strong as ever, whether you're able to look at the number of beverages sold. Maybe that's a better indicator or how you think about the business, again, when you strip out obviously the outsized menu pricing that's been taken. And just as an aside, Howard, I think everyone was looking up Alchemy real quick since you made mention, I'm just wondering what specifically we're talking about as the definition seems to be transformation of matter? Would love to get any kind of incremental color you want to give? Thank you. Sure. Let me start with that. Thanks, Jeffrey for the question. In response to your question around traffic, our 10% comp, as you know, was largely driven by ticket. Our transactions, transactions per store per day, which is how we measure the health of our business are still below pre-COVID levels and actually slightly below prior-year. But what's important is we saw our traffic, TSDs as well as our units and overall ticket grow in our highest demand period. So our morning daypart and our midday, which is up till about 1'o clock saw a year-over-year increase of both transactions and units as well as ticket. In addition to that, those dayparts are also in line with 2019 levels. So why that gives us encouragement is our reinvention plan is squarely rooted at creating capacity in our busiest dayparts. So as we start to move along our reinvention plan, it's going to help us increase that capacity while creating a better experience for our partners and our customers. So that gives us a lot of confidence that our growth objectives and our ambitions for this year and beyond are well suited. And our next question comes from Sara Senatore with Bank of America. Please state your question. Sara, your line is open. Okay, thank you. I was wondering, Rachel, if you could just talk briefly, you mentioned China was a $0.06 headwind. So ex that, certainly, earnings would have actually been better than we were thinking. Could you just talk maybe in order of magnitude where internally you might have seen surprise? Is it the fact that U.S. comps came in a bit higher than your long-term guide has been? Is it from the other -- is it from the other geographies or segments. I just am trying to understand kind of how to think about that. And a related question, I think you said last year, China was about 25% of what it normally would be. Are you able to give us any kind of gauge of what it might look like this year, given its slower to ramp than maybe you had anticipated? Sure. Thanks, Sara. In terms of the question around Q1 and what drove our business outside of the headwinds in China. So if you took headwinds out, to your point, we would have been above expectations. It's a combination of things. It's stronger performance in our U.S. business, which is inclusive of our U.S. license. So our U.S. company operated as well as our U.S. license. It's also growth across our international markets. So excluding China, we had tremendous growth across our markets, which really speaks to the diversity of the depth and diversity of our portfolio. We also had tremendous growth in our channels business. In addition to that, we saw some favorability in terms of foreign exchange, smaller, but that was also a combination. So it was all of those factors together, that would have given us a stronger Q1 than what we had originally expected. Now when you think about that as it pertains to the balance of the year, we're able to reaffirm our guidance because even though we're seeing headwinds in China, and we continue to believe we'll have strong momentum across the other businesses. You can imagine there are a lot of other factors at play continuing inflationary pressures, economic challenges. So the combination of all of that gives us confidence that reaffirming our guidance is right given the position we're in today. Rachel, I wonder if Michael can just give us a little bit more color on how strong the international was across the board. Yes. Thank you. To the question, I would say definitely our markets outside of China performed even better than we thought. Just to note a year-ago, most of our markets we would have said is fully recovered. And so what we're seeing now with this 25% growth is growth over growth and performance over performance. And we were also expecting in some markets to see the economy inflation slow demand and it hasn't. So as Howard talked about the tailwind, we are seeing a true tailwind and continued recovery coming out of the pandemic in all of these markets. Just for example, Latin America, we're seeing revenue growth of over 50%; EMEA, over 20%; U.K., which is a company-operated market, is having double-digit comp growth; Asia-Pacific, over 20% revenue growth, and we actually crossed 5,000 stores across that region. And then Japan, which is our third largest company-operated market is also continuing with significant growth. This is our eighth consecutive quarter of strong revenue growth, driven by not only product but actually digital. Within Japan, we are rolling out the digital flywheel, Mobile Order & Pay is fully penetrated. We've doubled our sales of Mobile Order & Pay over the last quarter. And we just introduced multi-tier redemption, which has shown success in the U.S. We're seeing a significant improvement here as well. So as we think about going forward in these markets, we see more tailwind. The international travel is just starting to come back as they start to go to other markets as well, we're going to see further tailwind going forward. And just to answer your other question, Sara, last year, we had expected China to be about 25% of the total company operating income, which is generally where it landed, we'll expect maybe closer to 50% based on what we know today. Thanks and congratulations, Howard. Two big picture questions that often come up with long-term investors. I don't know if this is quite the forum, but maybe a quick comment on each. One would be how you're thinking about the brand and how it would do in a recession? Should we have one? Why would go perhaps better than 2007 and 2008. And then secondly, I think we can all agree that Zero COVID is the biggest factor with China. But any sort of metrics that make you feel confident that the brand would have a full recovery, people ask about competition in China? And any sort of metrics around brand scores or anything that gives you confidence that you'll have a full recovery would be helpful. Thanks. David, thank you. Belinda is on the call, and she's sitting, I believe, in Shanghai, and I think she'd be best suited to answer your question regarding China recovery, the situation that she's seeing on the ground. So Belinda, can you respond to that first. And then Brady will talk about the brand. Yes. Thank you, Howard. Hi, thank you for the question. Starbucks brand relevance remains as strong as ever, and we're best positioned to capture the growth opportunities ahead. Our latest brand tracker shows Starbucks remains Chinese customers' first choice in the away-from-home coffee category. Also, Starbucks is the brand leader in terms of brand affinity, visitation and frequency. And despite all the COVID disruptions we faced in Q1, our customer connection score also reached another record high in Q1. So our strong operating muscle and the strong relationships that we have with our customers and our partners and the strength of our brand, really, we are best positioned and so ready to recover and accelerate the growth of our business. And I would say that there's no other competitor that can match the competitive advantages that we have, the quality of our coffee, our brand strength, our connection, our unique third place and our omnichannel capabilities, our national footprint and the digital ecosystem and supply chain excellence that we have built. Thank you. Yes. As we think about weathering a recession in the U.S., it really comes down to two words for us, and that is momentum and innovation. And I'd say that when I say momentum, it's about relevance and resilience. And as we think about relevance, if we look at the last quarter, we have more customers in total population than ever in the U.S. They're very highly engaged. If we look at share of wallet and spend, 56% of our transactions were from our reward members. And just as Belinda said, in China, our U.S. customers see Starbucks as their first choice for coffee with leading affinities. So from a brand standpoint, we're in a very strong position. When we look at resilience, last quarter, we saw not only ticket growth but transaction growth, even in the face of the macroeconomic headwinds. So in terms of momentum, we see that carrying into the quarter ahead and the year ahead. And then I'd say innovation, as I mentioned, so product, we see continued strength in our future innovation road map and our existing strategy around cold, customized and plant-based beverages, and it comes down to beverages that customers love that they truly can only find at Starbucks. And that was true throughout the pandemic, and it's true right now. With digital, our digital platforms have been very sticky with customers. And we're just making those better as you look at things like Odyssey and Reward together. And then earlier in the presentation, Rachel shared about equipment, it's just making the job more efficient for our partners, unlocking even greater quality and more customization. So if you take that momentum and that innovation, it just reinforces that we're a very strong brand right now, looking ahead, despite any economic headwinds, we're still poised for growth. I would just add one thing that I think we both said in our prepared remarks, but I think it's worth repeating. At a time when people are generally trading down, and there's a lot of discounting going on, we had the highest average ticket, I believe, in our history in the month of December. And so we don't see ourselves in a situation where we need to discount heavily, and we don't see a situation where our customers are trading down. And I think the strategic advantage we have, which we talked about in the last call is customization and how our customers are creating their own proprietary beverage and that adds to the ticket and obviously adds to the value perception that customers believe they're getting at Starbucks. Hi, thank you very much. Obviously, three years for the China consumer dealing with COVID is a very, very long time. And there's at least some concern that consumers' behavior maybe slightly beyond the short-term, it may be affected in terms of how people kind of interact and gather and what have you. So I wanted you to kind of comment on what you think about that? Or if you think you'll be busier than even ever. And if there's any types of leading indicators or green shoots, maybe talk about Macau or talk about Hong Kong or maybe even some markets, small markets or big ones within China that have largely dealt with this last COVID wave, again, not just looking at the aggregate numbers, but specific end market numbers where you can talk about how the consumer now that the infection is going to be over for them for quite some time is now using your brand. Thank you so much. Again, I'll yield to Belinda. But before I do, I think between myself and Rachel, we've been very clear that we want to take a very conservative view, especially in the near-term. In the back half of the year is where we see the return to some level of normalcy. Listen, we don't have line of sight, and I don't think anyone does on how quick things are going to respond. We just have pattern recognition for many other markets. And also, Belinda has shared with us, and we've seen the numbers of what's happened to the run-up and during Chinese New Year, which was quite robust. And so I think, John, I think we're going to be very careful, very sensitive. We are going to be on the ground in China and see for ourselves in the next month or two. And we have been very directly involved with our Chinese team trying to support them, but they've been under a lot of pressure. We just don't know. So Belinda, I think you should just give your color and what you believe is going to happen from your perspective. Thank you, Howard. Yes, I'd love to give some colors on what's going on in China right now. What we're seeing is that we're seeing very encouraging recovery momentum starting January, with strong sequential weekly improvement as Howard has said, and fantastic traffic during Chinese New Year holiday, and that traffic really is covering all cities, all dayparts and all trade zones. That's including transportation and tourism, and that's the trade zones that we've been suffering quite a bit in the last three years. So that's revised again. But bear in mind, and like what Howard just said, we're still in the very early stages of our recovery journey and then the country has just opened up. So we do have short-term uncertainties, and we need to be cautious and the recovery may remain nonlinear. But on the ground here, I'm happy to report that people are going back to work at their offices. You see foot traffic recovering and ramping up in commercial areas. You see people going back to cinemas to watch movies, and there's just a lot more social activities and gatherings, right, starting to and domestic trips and now starting with international as well. So -- but most importantly, we're seeing customers coming back to our stores. They're returning to our stores to enjoy the Starbucks Experience. And I want to say that all our stores are open and can operate fully now without any restrictions on operations or operating hours, and we can now fully reengage meaningfully and consistently without any disruptions with our customers and our SR members to drive visit in frequency and deliver our best Starbucks experience. We can now go full steam with our new store development, and we can continue to maximize our omnichannel capability and opportunities to be a part of our customer new regular routine post-COVID. So all are very promising signs. And I just want to end by saying Starbucks is best positioned to capture the future growth opportunities ahead in China. And I'm so confident and more confident than ever of delivering the plan and strategies we shared during Investor Day and achieve 9,000 stores by 2025. Thank you. Rachel, just given that China is a 100% company operated business, I wanted to learn about how we should think about the reopening -- the operating leverage of the reopening. Is it fair to say that when you return to 2019 China sales volumes that you -- that would allow you to get back to 2019 China store level margins? Or is it wrong to think that margins can rebound above this level when you get back to 2019 volumes, just given the inroads you've made with digital and other efficiencies in the business. And what I'm really trying to get at here is that if the China sales recovery gets back to 2019 levels, does this allow you to return to the prior long-term operating margin target of 17% to 18%? Thanks. Sure. What I'd say, Andrew, is that we do expect to have margin expansion in China, and that will be driven by the recovery as well as the growth we're seeing beyond recovery. But in terms of a margin expectation, we would expect margin to actually be different than what we saw in 2019 as you see the growth in digital. Just to give you an example, in 2019, digital was about 10% of overall sales in the market. It's now closer to 50%. So that has a different margin structure to it. We know it leads to more overall dollars in overall volume, but it does change the margin structure. But despite that, when you take China and where we're expecting from a recovery standpoint, both this year and beyond, that leads us to the solid margin expansion we're talking about for total company this year as well as the progressive margin expansion that we spoke about at Investor Day. So it will be one part of the whole collective that will allow us to have that expansion over the long-term. Great. Thanks. And Howard, I echo the congrats as well. I wanted to ask about the labor dynamic in China. I know you guys indicated tonight that there was some staffing challenges with the surge in COVID. But just trying to think in the months and quarters ahead, do you expect to see any staffing shortages. I know you've built a lot of stores since pre-COVID. Just trying to understand the staffing situation in that market and the ability to meet demand when it does return? Yes. Thank you for the question. The labor shortage from December was mainly because of our partners with COVID infections and there are all -- they have all returned back to work. We do not have any labor shortage issue, and we're ready to rock and roll in hiring more people to get ready for our new store opening. So and I just wanted to highlight the fact that we have been taking care of our partners in the last three years and this year and in the last quarter, you could see that we have all-time low turnover rate and people are staying with us. And so far, I don't see any issue at all with our hiring or our people staying with Starbucks. So thank you. Thank you very much. I wanted to ask about Starbucks Rewards. So you continue to grow double-digits even at 30 million-plus members. How much opportunity do you think exists for further growth? And what are the barriers to transition non-rewards to reward members? And then just related, I know that you guys are planning to change the redemption value in the rewards program for the first time in a few years. Can you just talk about the reasons for the changes? Thank you very much. Great. Yes. Thank you very much, Lauren. I appreciate the question. We do see continued opportunity. If we just look at this past year, our SR membership base grew 15% in the U.S. and globally, we're seeing significant growth across our different markets as well. So we see not only that, but it's about 56% of transactions in the quarter. So we see a lot of headroom and relevance for the program. Part of that was accelerated with our launch and starts for everyone a couple of years ago when we lowered the barrier and complexity to enter the program. And we've seen that be a continued contributor over the last couple of years since we launched it. So that takes us to the more than 30 million members we have today. It's not only 15% growth over a year, 6% growth in that membership in the U.S. just quarter-over-quarter. So we see lots of reasons to be optimistic about the opportunity, and we're seeing that prove out in the numbers. In terms of the changes that we just made. Within Starbucks Rewards, we really look at that program as offering two things, both product and experiential benefits. And so we're really looking at both sides of the equation. The experiential benefits that you've seen us out of the quarter were things like reward together, the Starbucks Odyssey program and other special events, whether it's the opening of the Empire State Building and offering members the first chance to go and see a store like that. So we really try and add experiential benefits to the program to make people feel genuinely valued for being their Starbucks customer. On the product side, what you've heard are changes related to our reward redemption tiers. And the purpose of that is a couple of things. From an economic perspective, the redemption tiers and the changes we're making there better align the cost of product redemptions to our current pricing. And by making that change, it will create discount efficiency, which helps us to continue to grow the program while effectively managing margins. So that's the two dimensions we look at it on. We see just lots of opportunity left. We have an incredible road map ahead. So we're just going to keep driving the program and I think our customers will have a lot to celebrate in the years ahead. Thank you and congratulations again, Howard. I want to expand a question that was asked earlier regarding the staffing level, but now expanded and maybe focus on the U.S. situation. So the labor market is still relatively tight. So can you share some update on the level of employee retention, turnover and staffing versus 2019. And perhaps if you can also comment on the evolution of the sentiment on partners and the connection scores now that you're unfolding your level of investment? Yes. Thank you for the question. As a fundamental part of the reinvention agenda, as you know, is labor stability, lowering turnover and increasing throughput. And we are pleased with the traction we are starting to see in retention specifically. We've improved hourly partner retention rates by over 5% versus prior year same period. We've improved over 8% versus the highest turnover period, which was in Q2 of '22 and this reduces the time and the investment required for additional new hires and it helps stabilize operations, and we're now running in a pre-COVID level relative to the stores being open. As far as the labor market at large, as you well know, the sector does face challenges relative to capacity and talent and the record low unemployment, 3.5%. However, we continue to see and experience strong and consistent overall applicant flow to support our store hiring with the typical seasonality. Our data continues to show that we are the employer of choice in retail at top tier, including the 100 percentile relative to benefits. And finally, we see lots of opportunities to continue to make Starbucks the best job in retail. And we have a very robust master plan as part of the reinvention agenda to make sure we can deliver on that brand promise to our partners in the same way we do with our customers. Thanks for taking the question. And best wishes to Howard on what's next. Curious if you could just two things. First, talk about any incremental pricing that might be planned for fiscal '23, particularly in the U.S., given that inflation while moving lower, in aggregate is still pretty sticky. Wondering your thoughts on pricing has changed? Then secondly, if you could dig into the progress the company has made on testing the Siren system in the U.S. and when investors can expect any sort of initial feedback on expected returns and say, the impact on stores going forward? Yes. Thanks, Jon. So in terms of incremental pricing, our comp and our revenue in North America right now, largely in our U.S. business is benefiting from pricing that was taken in back half of last year. So we're benefiting from the annualization of that pricing. As we comp that this year, we'll start to see our pricing levels normalize more to historical level ranges than what we had seen previously. And typically, our pricing had been taken in line with inflationary pressures. So given that we're seeing inflation, we're still seeing inflation elevated relative to prior years below FY '22, but we're starting to see it soften slightly. So we don't have expectations that we'll have to further that pricing increase. And instead, what we'll see is, we'll start to see pricing normalize to more historical levels by the back half of the year. Yes, absolutely. So thank you for the question. So we're continuing to roll out equipment innovations to help make the work easier for our partners, and of course drive efficiency and ultimately enable partners to better serve our customers and do it with grace. I mean no more are we in a position to roll out single pieces of equipment over a multi-year time horizon. No way, no thanks. It just can't happen given the unbelievable demand that we're seeing in our business. And so, so far, we've deployed handheld order points in 54% of our stores, cold beverage labelers in 81% [indiscernible] espresso stations 94% and the new warming ovens in 90% of our stores. So all the sides kind of those handheld order points, which are very, very useful in drive throughs are going to be rolled out fully this year. And we're seeing the benefits of that across the board. Our drive-through window times, as example, are up, as is our Mobile Order & Pay uptime, just two examples of that. I think in Q1, we completed our automated ordering for food and lobby, which removed task time and freed up energy to again focus on customers. And we've got more in the hopper. We're really just getting started as we look to reinvention to continue to drive throughput in our stores. And in close, I'd just say, we've seen all-time highs in productivity. The one thing I would add, just to finalize your question is that the Siren system is expected to be more of a '24, '25 implementation rollout. So we'll start to see the returns there, which are part of what drove our growth ambitions over the longer-term is supported by further equipment rollout in terms of that level of efficiency and productivity. Yes. Thank you. Maybe just to finish, I'll ask about channel development briefly. You've obviously seen quite strong growth there, quite good margins as well. How much do you expect that to continue? How does that kind of factor into your outlook for this year? Yes. Thanks for the question. Yes. We did have a very strong performance in this quarter. From a top-line perspective, we had 15% growth that was driven by global our Coffee Alliance, our at-home coffee, where we maintained the number one share. But there was some pricing in that, and we think that's going to moderate through the course of the year. Also, we had strong North American coffee partnership performance in the quarter. Some of that also had some one-to-time benefit as we were standing up a new Coleman. So that will benefit us going forward, but we won't expect some of that to continue. So what I would say is that we benefited from a number of kind of seasonal and onetime factors. We do remain optimistic about the growth and the profile and we'll probably settle into what we have seen in the past. We have a lot of great things coming. We're launching our new Pink Drink, which we talked about at the Investor Day, which should help our ready-to-drink business and our at-home coffee business continues to be strong as we are maintaining number one share. And if I would just add, we continue to believe that channel development will be a mid-40s margin business, which is really strong, and that's what helps us in terms of being able to reaffirm our guidance on a full-year basis. Someone told me a week ago, this was my 108th not consecutive, but earnings conference call. I don't know if that's an award or not. But as many people on the phone that I've learned -- I've known many, many years, thank you for your friendship and support of Starbucks. This past year has been a gift for me. And I leave, I think, with the company, with the win that it's back with his tremendous leadership team. And Laxman, I'm thrilled that you're here. So thank you all very, very much. Really appreciate the opportunity, and thank you again for your friendship and support. Thank you.
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Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Quarter 4 2022 Financial Results Teleconference. [Operator Instructions]. And for opening remarks, I will be turning the call over to the Vice President of Investor Relations, Dave Fildes. Thank you, sir. Please go ahead. Hello, and welcome to our Q4 2022 financial results conference call. Joining us today to answer your questions is Andy Jassy, our CEO; and Brian Olsavsky, our CFO. As you listen to today's conference call, we encourage you to have our press release in front of you, which includes our financial results as well as metrics and commentary on the quarter. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2021. Our comments and responses to your questions reflect management's views as of today, February 2, 2023 only, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-K and subsequent filings. During this call, we may discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast and our filings with the SEC, each of which is posted on our IR website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. Our guidance incorporates the order trends that we've seen to date and what we believe today to be appropriate assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including uncertainty regarding the impacts of the COVID-19 pandemic; fluctuations in foreign exchange rates; changes in global economic and geopolitical conditions; and customer demand and spending, including the impact of recessionary fears, inflation, interest rates, regional labor market and global supply chain constraints, world events, the rate of growth of the Internet, online commerce and cloud services and the various factors detailed in our filings with the SEC. Our guidance assumes, among other things, that we don't conclude any additional business acquisitions, restructurings or legal settlements. It's not possible to accurately predict demand for our goods and services and, therefore, our actual results could differ materially from our guidance. Thank you for joining today's call. As Dave mentioned earlier, I'm joined today by Andy Jassy, our CEO. Before we move on to take your questions, I will make some comments about our Q4 results. Let's start with revenue. For the fourth quarter, worldwide net sales were $149.2 billion, representing an increase of 12% year-over-year, excluding approximately 360 basis points of unfavorable impact from changes in foreign exchange rates and above the top end of our Q4 guidance range. We've seen that during periods of economic uncertainty, consumers are very careful about how they allocate their resources and where they choose to spend their money. Throughout Amazon's history, we have found that our focus on the customer helps to set us apart in times like these. This past holiday season, customers came to Amazon for great deals, fast delivery and our widest-ever selection, bolstered by nearly 2 million third-party seller partners who sell on Amazon. Enterprise customers continued their multi-decade shift to the cloud while working closely with our AWS teams to thoughtfully identify opportunities to reduce costs and optimize their work. In our worldwide stores business, with the ongoing economic uncertainty, coupled with the continuation of inflationary pressures, customers remain cautious about their spending behavior. We saw them spend less on discretionary categories and shift to lower-priced items and value brands in categories like electronics. We also saw them continue to spend on everyday essentials, such as consumables, beauty and softlines. Our teams worked hard to offer low prices and secure millions of deals for customers in Q4, including our first-ever Prime Early Access Sale in October and the more traditional Thanksgiving to Cyber Monday holiday weekend. These global sales events outperformed our expectations as customers responded to millions of deals across our growing selection. Third-party sellers remain a key contributor to that expanding selection. In Q4, sellers comprised a record 59% of overall unit sales. Sellers, vendors and brands continue to look to Amazon's advertising capabilities to reach customers in the always competitive holiday season, even as the macro environment required them to scrutinize their own marketing budgets. We saw good growth in advertising revenues in Q4, up 23% year-over-year, excluding the impact of foreign exchange. Prime membership continues to be a great value for our customers, and improving our Prime benefits is a continuous part of our investment strategy. Along with competitive pricing, broad selection and faster delivery speed, we've seen Prime members respond to our expanding entertainment offerings. During the quarter, we completed our first season of The Lord of the Rings: The Rings of Power, the most watched Amazon original series in every region of the world, reaching over 100 million viewers and driving more Prime sign-ups worldwide during its launch window than any previous Prime Video content. We also finished our inaugural season as the exclusive home of Thursday Night Football, reaching the youngest median age audience of any NFL broadcast package since 2013 and increasing viewership by 11% from last year among hard-to-reach 18- to 34-year-olds. In aggregate, we invested approximately $7 billion in 2022 across Amazon Originals, live sports and licensed third-party video content included with Prime. That's up from about $5 billion in 2021. As a reminder, these digital video content costs are included in cost of sales on our income statement. We regularly evaluate the return on the spend and continue to be encouraged by what we see, as video has proven to be a strong driver of Prime member engagement and new Prime member acquisition. Moving on to AWS. Net sales increased $21.4 billion in Q4, up 20% year-over-year and now representing an annualized sales run rate of more than $85 billion. Starting back in the middle of the third quarter of 2022, we saw our year-over-year growth rates slow as enterprises of all sizes evaluated ways to optimize their cloud spending in response to the tough macroeconomic conditions. As expected, these optimization efforts continued into the fourth quarter. Some of the key benefits of being in the cloud compared to managing your own data center are the ability to handle large demand swings and to optimize costs relatively quickly, especially during times of economic uncertainty. Our customers are looking for ways to save money, and we spend a lot of our time trying to help them do so. This customer focus is in our DNA and informs how we think about our customer relationships and how we will partner with them for the long term. As we look ahead, we expect these optimization efforts will continue to be a headwind to AWS growth in at least the next couple of quarters. So far in the first month of the year, AWS year-over-year revenue growth is in the mid-teens. That said, stepping back, our new customer pipeline remains healthy and robust, and there are many customers continuing to put plans in place to migrate to the cloud and commit to AWS over the long term. Now let's shift to worldwide operating income. For the quarter, we reported $2.7 billion in operating income. The operating income was negatively impacted by 3 large items, which added approximately $2.7 billion of costs in the quarter. This was related to employee severance, impairments of property and equipment and operating leases and changes in estimates related to self-insurance liabilities. This cost primarily impacted our North America segment. If we had not incurred these charges in Q4, our operating income would have been approximately $5.4 billion. We are encouraged with the progress we continue to make in streamlining the costs in our Amazon stores business. We entered the quarter with labor more appropriately matched to demand across our operations network compared to Q4 of last year, allowing us to have the right labor in the right place at the right time and drive productivity gains. We also saw continued efficiencies across our transportation network, where process and tech improvements resulted in higher Amazon Logistics productivity and improved line haul fill rates. While transportation overperformed expectations in the quarter, we also saw productivity improvements across our fulfillment centers, in line with our plan. We also saw good leverage driven by strong holiday volumes. Overall, it was a strong effort by the operations team, and we look forward to making further headway as we head into 2023. We remain focused on driving cost efficiencies throughout the network and reducing our cost to serve our customers, while ensuring we maintain an outstanding customer experience. Circling back to the 3 large charges during the quarter. Let me share some additional color, starting with the job eliminations we initiated during the fourth quarter. As we consider the ongoing uncertainties of the macroeconomic environment, this led us to the difficult decision to eliminate just over 18,000 roles, primarily impacting our stores and device businesses as well as our human resources teams. As a result, we recorded estimated severance cost of $640 million. These charges were recorded primarily in technology and content, fulfillment and general administration on our income statement. Next, we recorded impairments of property and equipment and operating leases, primarily related to our Amazon Fresh and Amazon Go physical stores. We're continuously refining our store formats to find the ones that will resonate with customers, will build our grocery brand and will allow us to scale meaningfully over time. As such, we periodically access our portfolio of stores and decided to exit certain stores with low growth potential. We'll also take an impairment on capitalized costs and associated values of our leased buildings. The impairment charge in Q4 was $720 million and is included in other operating expense on our income statement. We continue to believe grocery is a significant opportunity, and we're focused on serving customers through multiple channels, whether that's online delivery, pickup or in-store shopping. Lastly, during the quarter, we increased our reserves for general product and automobile self-insurance liabilities, driven by changes in our estimates about the cost of asserted and unasserted claims, resulting in additional expense of $1.3 billion. This impact is primarily recorded in cost of sales on our income statement. As our business has grown quickly over the last several years, particularly as we've built out our fulfillment and transportation network and claim amounts have seen industry-wide inflation, we've continued to evaluate and adjust this reserve for both asserted claims as well as our estimate for unasserted claims. We reported overall net income of $278 million in the fourth quarter. While we primarily focus our comments on operating income, I'd point out that this net income includes a pretax valuation loss of $2.3 billion included in nonoperating income from our common stock investment in Rivian Automotive. As we've noted in recent quarters, this activity is not related to Amazon's ongoing operations but rather the quarter-to-quarter fluctuations in Rivian's stock price. As we head into the new year, we remain heads-down focused on driving a better customer experience. We believe putting customers first is the only reliable way to create lasting value for our shareholders. Everybody, this is Andy. Just before we start with the questions, I just wanted to say it's good to be with you all on the call today. I thought I might jump on the calls from time to time moving forward. And given that this last quarter was the end of my first full year in this role, and given some of the unusual parts in the economy and our business, I thought this might be a good one to join. So thanks for having me. I have two. Andy, I want to ask you, just the first one, you've been in the seat for a while. As you sit there, what are your key focal points, product categories or investment priorities that you're most focused on to drive durable multiyear growth in that North America retail segment as we recover? And then the second one, just sort of staying on the North America retail side, how do you think about the potential margin potential of that business over the next few years as you sort of grow into the warehouse? And what are the warehouse network? And what are the efficiency factors to get you to those goals? Brian, this is Brian. First, let me just start with your second question. On the -- sorry, can you hear me? On the expectation for retail margins, especially in North America, what we've said is when we look back to our cost structure pre-pandemic, we were just in the end of 2019, early part of 2020. We're just starting to roll out one-day shipping in North America, and we had an expectation of what our cost structure would look like. That has changed quite a bit in the last 3 years now due to a doubling of our network expansion. I think you've heard me tell this story on different calls. But essentially, we're now trying to, again, regain our cost structure that we've had in the past, balance the -- and get more efficient on the assets we've added in the last 2, 3 years now and also look at all the investment areas that we are working on to drive growth, continuing to look at them where we need to make course corrections, where we need to change things up. And we expect that, again, a lot of the improvement will be in North America operations costs. We made good headway in 2022. We always want to make more, and we're going to be working on this definitely through 2023 and beyond. But we hope to make and expect to make big improvements in 2023. Yes. And I'll start just at a broad level, priority-wise, the connective tissue for everything we do across the company, including in stores in North America, is we realize that we exist to make customers' lives better and easier every day and relentlessly went to do so. And being maniacally focused on the customer experiences, always going to be a top priority for us. At the same time, and this is true in North America as well as across the entire business, we're working really hard to streamline our costs and trying to do so at the same time that we don't give up on the long-term strategic investments that we believe can meaningfully change broad customer experiences and change Amazon over the long term. As I addressed directly the North American stores questions, I think our -- probably the #1 priority that I spent time with the team on is reducing our cost to serve in our operations network. And as Brian touched on, it's important to remember that over the last few years, we've -- we took a fulfillment center footprint that we've built over 25 years and doubled it in just a couple of years. And then we, at the same time, built out a transportation network for last mile roughly the size of UPS in a couple of years. And so when you do both of those things to meet the huge surge in demand, you're going to -- just to get those functional, it took everything we had. And so there's a lot to figure out how to optimize and how to make more efficient and more productive. And then I think at the same time, if you think about doubling the number of fulfillment centers you have and then adding a very large transportation network and you realize that all of those facilities have to link together to get products to customers, that's a pretty big expansion in the number of nodes in the network. It becomes a little bit different network. And so to figure out how to be really efficient across all those links and have them be highly utilized and to get the flows in those facilities working the right way, it takes time. So we're working very hard on it. I'm pleased with the progress we made in Q4, and you can see that in some of the results. But that work will extend into '23. So that's first. I think the second thing, priority-wise, I would talk about is just speed. We believe that continuing to get products to customers faster, makes customers happier, and they also converted a higher rate when they can see promises of deliveries that are faster. I think selection will always be a very high area of focus for us. We work with hundreds of thousands in the U.S. and millions overall in the world of selling partners. In this past quarter, 59% of the units sold were from our third-party selling partners, and we work very hard to provide unmatched selection. And that matters a lot to customers. I think pricing being sharp is always important. But particularly in this type of uncertain economy, where customers are very conscious about how much they're spending, having the millions of deals that we put together with our selling partners in the fourth quarter was an important part of the demand that you saw, and we'll continue to work really hard on being sharp on pricing. And then just the customer experience improvements that we're working all the time, whether it's adding Buy with Prime that allows Prime users to use their Prime benefits on other websites than just Amazon; or adding RxPass in the health care space, where our Prime customers for $5 a month can get all the medicines they're using in unlimited fashion; or whether it's just even in our apparel business, where when you're looking clothing you might buy, being able to see virtually your shoes with that outfit to see how it looks and it changes your customer experience, your buying experience, we will continue to work very hard on those customer experiences, and we have a lot more planned. Also for Andy, I have two. Just first, how would you evaluate your efforts in grocery thus far? I know you're -- it's a big, huge market. You're attacking it different ways. What are the key steps here that you're focused on to drive greater market share? And then secondly, how should we think about the strategic importance of some of these emerging bets type of areas like health care and Kuiper and autonomous vehicles, among others? On the first one on grocery, I'd just start by saying that we think grocery is a really important and strategic area for us. It's a very large market segment, and there's a lot of frequency in how consumers shop for grocery. And we also believe that over time, grocery is going to be omnichannel. There are going to be a lot of people that order their grocery items online and have it delivered to them, and there are going to be a lot of people who continue to buy in physical stores. But you're going to also see a hybrid of those, where people pick out what they want online and pick it up in stores, or people are in stores and there's something that's not in inventory in the stores, so they go to their app or to a kiosk and order it to be delivered from online. And so I think having omnichannel is going to really matter. And I think that we have a pretty significant-sized grocery business. I think people sometimes don't realize that and that we've been building for a long time. It's continuing to accelerate, and I kind of see it broken into a few pieces. If you think about the online grocery offering, we have a very large business there. It looks different from the typical mega physical grocery store. But if you think about the aisles in a grocery store, from packaged food to paper products to canned goods to pet supplies to health and personal care items to consumables, we have a very large business there that continues to grow at a rapid clip and then we think will continue to grow. But it doesn't have a big market segment share in perishables. And if you really want to have significant market segment share in perishables, you typically need physical stores. And we have kind of 2 different offerings there. For what I think is the very best organic physical store experience and selection, we have Whole Foods, which is a very significant-sized business that's continuing to grow. I really like the progress that, that business has made on profitability in the last year. And I like what I see in front of it, and I think that's a very -- it's a premium product, but it's a significant business. It's a good business for us in the grocery space. I think if you want to have a mass physical store offering, you need a different offering. And that's what we've been working on with Amazon Fresh, and we have a few dozen stores so far. We're doing a fair bit of experimentation today in those stores to try to find a format that we think resonates with customers. It's differentiated in some meaningful fashion and where we like the economics. And we've been -- we've decided over the last year or so that we're not going to expand the physical Fresh doors until we have that equation with differentiation and economic value that we like, but we're optimistic that we're going to find that in 2023. We're working hard at it. We see some encouraging signs. And when we do find that equation, we will expand it more expansively. But I think that we have a very significant opportunity in the grocery segment. I think we're building a pretty broad grocery network across online and physical, and you're going to see us continue to work on it. Maybe I'll ask one big picture of Andy and then just a housekeeping matter to Brian, if I can. Andy, keeping on this theme of sort of big picture and strategy and your perspective, I'd love to get your view on the international e-commerce businesses. Obviously, you're in a range of geographies with a wide variance of maturity and different investment cycles. Can you give us your perspective on how you see Amazon's global e-commerce footprint today? And how investors should be thinking about the mix of growth and margin evolution in those international businesses in the years ahead? And maybe, Brian, if I can just ask a quick follow-up. In the Q1 operating income guidance that you gave, I think there's some confusion among investors as to where you might be capturing some of the restructuring charges from the announcements that the company has made on employee count between Q4 and Q1. Can you just clarify what was captured in Q4 versus what might be included in the way you frame the Q1 operating income guidance? Sure, let me start. This is Brian. Let me start with that second part. So as I said earlier, we took a $640 million charge tied to the position elimination that we announced in Q4. A lot of that fell into Q1 into mid to late January. So the way to think about it is for the terminations in January, the salaries for the first 3 weeks are covered in operating results for Q1. But the period after that, where there's weeks or months of severance coverage, job placement, a lot of those costs are what the $640 million charge was in Q4. So I hope that helps. And on the question about international e-commerce, we're very enthusiastic about the business we're building there. I think just perspective, if you look at the compounded annual growth rate from 2019 to '21, in the U.K., it was over 30%; in Germany, it was 26%; in Japan, it was 21%. And the fact that we haven't given back that growth, and these are all net of FX, but if you look at even the last couple of quarters where we're continuing to grow and we haven't given back some of that growth, a meaningful amount of market segment share has shifted to our global established e-commerce territories, and we're excited about that. Now we're -- at this stage, we're big enough in our developed international territories that when there's something significant happening in the macro, we're going to be impacted as well. And if you just look in Europe as an example, the inflation is higher than most places, and the impact on Europeans for the war in Ukraine is more significant, and also the energy prices and hikes there are more significant. So you can see that in some of our growth numbers. And then you look at our emerging countries, and these are -- they're all a little bit different in all -- in a little bit different stage as you recognize in the question. But if you look at countries like India and Brazil and the Middle East and Africa and Turkey, Mexico and Australia and a number of those types of countries, we like what we're seeing. They take a certain amount of time. There's a certain amount of fixed investment you have to make when you enter a new geography, and then you have to drive a certain amount of revenue to be able to cover that fixed investment. But they're all on the right trajectory and following trajectories that roughly look like what we saw in North America and our established international geographies, and we think it's the right investment and believe we're going to have a large profitable international e-commerce business. Great. Maybe one for Andy and then one for Brian. AWS, if you look at the revenue growth of mid-teens, it implies it could be flattish and even down this quarter. So maybe talk about what's driving that. Is it workload changes? Are there some clients that are shifting? Anything on the market share you could comment on? And then second, when do you think this could recover? Like what's the time frame? And would you expect margins to come back when revenues reaccelerate? I'll leave it at that. Thanks, Justin, for your question. This is Brian. Let me start with the -- what we're seeing at the customer level. So as I've mentioned, continuing -- it's across all industries. There are some points of weakness, things like financial services, like mortgage companies that do. As mortgage volumes down, some of their compute challenges or compute volumes are down. Crypto is -- lower trading in crypto. And things tied to advertising, as there's lower advertising spend, there's less analytics and compute on advertising spend as well. But -- so there's . But by and large, what we're seeing is just an interest and a priority by our customers to get their spend down as they enter an economic downturn. We're doing the same thing at Amazon, questioning our infrastructure expenses as well as everything else. And we -- there's things you can do. You can defer -- you can switch to lower-cost products. You can run calculations less frequently. There's just -- you can do different types of storage on your data. So there's ways to alter your cost and your bill in a short period of time. I think that's what we're seeing. And as I said, we're working with our customers to help them do that. And again, we're seeing ourselves at Amazon. So I'll let Andy add some color on kind of the general trends in AWS, but that's more what we're seeing at the customer level right now. So I would just add -- I mean, I think Brian covered a bunch of it. I think most enterprises right now are acting cautiously. You see it with virtually every enterprise, and we're being very thoughtful about streamlining our costs as well. And when you are being cautious, you look for ways that you can find -- you can spend less money. And where companies can cost optimize or, in some cases, they may be used to doing analysis over 90 days of information and they say, "Well, can I get away with it for 2 weeks, doing 2 weeks' worth," it's not necessarily the best thing long term. But a lot of companies will do that when they're in uncertain economic situation. And the reality is that the way that we've built all our businesses, but AWS in this particular instance, is that we're going to help our customers find a way to spend less money. We are not focused on trying to optimize in any one quarter or any one year, we're trying to build a set of relationships in business that outlast all of us. And so if it's good for our customers to find a way to be more cost effective in an uncertain economy, our team is going to spend a lot of cycles doing that. And it's one of the advantages that we've talked about since we launched AWS in 2006 of the cloud, which is that when it turns out you have a lot more demand than you anticipated, you can seamlessly scale up. But if it turns out that you don't need as much demand as you had, you can give it back to us and stop paying for it. And that elasticity is very unusual. It's something you can't do on-premises, which is one of the many reasons why the cloud is and AWS are very effective for customers. I think -- and I've spent a fair bit of time with the AWS team on this, and we look closely at what we see. We have a very robust, healthy customer pipeline, new customers, migrations that are set to happen. A lot of companies during times of discontinuity like this will step back and think about what they want to change strategically to be in a position to reinvent their businesses and change their customer experiences more quickly as uncertain economies emerge, and that often means moving to the cloud. We see a number of those pieces as well. And we're the only ones that really break out our cloud numbers in a more specific way. So it's always a little bit hard to answer your question about what we see. But we, to our best estimations, when we look at the absolute dollar growth year-over-year, we still have significantly more absolute dollar growth than anybody else we see in this space. And I think some of that's a function of the fact that we just have a lot more capability by a large amount, with stronger security and operational performance and a larger partner ecosystem. So I think it's also useful to remember that 90% to 95% of the global IT spend remains on-premises. And if you believe that, that equation is going to shift and flip, I don't think on-premises will ever go away, but I really do believe in the next 10 to 15 years that most of it will be in the cloud if we continue to have the best customer experience, which we have to work really hard at an event which we're working to do. It means we have a lot of growth in front of us in the AWS business. Maybe a bigger high-level question here just around Prime member engagement and just seeing third-party seller services growth accelerating in the quarter. And I believe it was mentioned that customer is spending more on everyday essentials, which may be a relatively new use case. Talk just a little bit more, maybe Andy and Brian, just around how engagement is evolving here for Prime members and really how this has grown wallet share over time and where this is going. Yes. Thanks, Ron, for your question. I would say that the Prime membership is -- remains strong and so has the dollars purchased per Prime member. It varies a bit by geography. But in general, if you step back, we had some very large video properties that we had launched last year, Thursday Night Football and Lord of the Rings: Rings of Power. Both of them had record sign-ups for Prime membership. And we know that, again, investments like that will help with not only a new member or new Prime member acquisition, but also retention. And we see a direct link between that type of engagement and higher purchases of everyday products on our Amazon website. So the health of Prime is very strong. As Andy mentioned earlier, we are continuing to work to get our speed of delivery up to get more one-day shipments. And we think that will also be well received by Prime members. But it's a combination of price selection and convenience. I think we've made inroads on all of them, especially with the third-party selection that's been added over the last few years. So I think testament to that is the sales that we had in the fourth quarter. In a very competitive and deal-driven environment, people came, Prime members and others came to Amazon to do their shopping. So we're encouraged by it. Just to add really one piece here, which is just, if you step back and think about a lot of subscription programs, there are a number of them that are $14, $15 a month really for entertainment content, which is more than what Prime is today. If you think about the value of Prime, which is less than what I just mentioned, where you get the entertainment content on the Prime Video side and you get the shipping benefit, the fast shipping benefit you can't find elsewhere and you get the music benefit, you get the Prime Gaming benefit and you get the photos benefit and you get the Buy with Prime capability, use your Prime subscription on websites beyond just Amazon and some of the grocery benefits that we provide, and RxPass like we just launched to get a number of medications people take regularly for $5 a month unlimited, that is remarkable value that you just don't find elsewhere. And we will continue to add things to Prime and continue to experiment with lots of different features and benefits. But it's still early days. And as we continue to make the service better and better and fully featured, we see people continuing to spend more at Amazon across our various businesses. So we're optimistic about it. Two questions. Brian, just any color on why mid-teens is kind of a holdable growth rate for AWS over the next couple of quarters, given what looks like pretty clearly, continuing deterioration in enterprise demand? And then, Andy, I wonder at a high level if you could just talk about how your priorities may have changed or the company's priorities may have changed over the last year or so as you've been the CEO. And it looks like there's a bit of a peel back on devices, a peel back on physical stores, except for groceries and then maybe a little bit more of a lean in on health. And I'm not quite sure what you're doing with entertainment content spend like that. Maybe it's the same, maybe it's a little bit more. But just at a high level, how would you say your priorities have changed or are different than the prior CEOs? So on the AWS growth rate, I'm not sure I can forecast for you with any level of certainty what is going to happen beyond this quarter. You kind of -- this is a bit uncharted territories economically. And as we mentioned, there's some unique things going on with the customer base that I think many in this industry are all seeing the same thing. So I don't have a crystal ball on that one, but we are going to continue to work for to be there for our customers. And as I said in the earlier comments, we do have new deals. We have new workloads coming to the cloud. The value was there. And whether there's short term, perhaps short-term belt tightening in the infrastructure expense by a lot of companies, I think the long-term trends are still there. And I think the quickest way to save money is to get to the cloud, quite frankly. So there's a lot of long-term positive in tough economic times. Saw that in 2020 when volumes for customers shifted very quickly. It led to a resurgence after that and probably acceleration of people's journeys to the cloud, and we'll just have to see if that happens again with what we're seeing today. Yes. I would say I think for any leadership team, each era is different, and it's often meaningfully impacted by what's happening around you. And I think that if you look at the last couple of years with things like the pandemic and the labor shortage in 2021 and the war in Ukraine and inflation and uncertain economy, good leadership teams look around and try to figure out what that means and how they should adjust their businesses. And so if you look at -- in the early part of 2022, I think we realized that as we tried to make sure we met the surge in demand for consumers and sellers and having to make decisions in 2020 for what fulfillment network investments we're going to make in 2022, we just had more capacity than we needed. And you saw us in the early part of 2022 delay some of our builds and mothballed some of our facilities to try and be more economic. And I think when we look at some of our physical business investments, physical store investments, I think there were just some areas where we didn't have conviction that they were going to be big needle movers for Amazon. And so that's why we closed down our 4-Star bookstores. And as we got into the early part of the summer, where we start our operating planning process, we -- and there was a lot of things happening in the macro economy, we started that process with the high-level tenet of we want to find a way to meaningfully streamline our costs in all of our businesses, not just their existing large businesses, but also in some of the investments we're making. We want to actually do a pretty good, thorough look about what we're investing and how much we think we need to, but doing so without having to give up our ability to invest in the key long-term strategic investments that we think could change broad customer experiences and change Amazon over time. And you saw that process led to us choosing to pause on incremental headcount as we tried to assess what was happening in the economy, and we eliminated some programs in fabric.com and Amazon Care and Amazon Glo and Amazon Explore. We decided to go slower on some -- on the physical store expansion in the grocery space until we had a format that we really believed in rolling out and we went a little bit slower on some devices, and until we made the very hard decision that Brian talked about earlier, which was the hardest decision I think we've all been a part of, which was to reduce or eliminate 18,000 roles. And so those were all done with an eye towards trying to streamline our cost but still be able to invest in the things that we think really matter over the long term. Now we have a way of looking at investments that is different maybe from some other companies. I'm not saying it's right or wrong. It's just the way we look at it, which is when we think about big areas to invest in, we ask ourselves a few questions. We ask, if we were successful, could it really be big and move the needle at Amazon, which is a high bar at a place like Amazon? Do we think it's being well served today? Do we have a differentiated approach? And do we have some competence in those areas? And if we don't, can we acquire them quickly? And if we like the answers to those questions, we will invest. Sometimes, that leads to very logical extensions for people. When I got to Amazon 25 years ago, we were a books-only retailer. And when we expanded into music and video and electronics, that seemed pretty natural to people. Amazingly, people were very surprised we were expanding into tools. That seemed far field for people, but it turned out not to be. When we launch something like Buy with Prime, I think people see that as more predictable. That process has also led us to less predictable investments. And I remember, I had a front-row seat in the AWS experience, having worked with the team and led the team from the very start. And I remember both externally and internally, there were a number of people who wondered why we were doing that. It was so different from retail only. But think about how different a company Amazon would be today if we hadn't invested in AWS. And so that informs some of the other meaningful investments we're making beyond our stores, in retail and advertising and AWS businesses. I think that while we've gone slower in some devices and things, we still -- when we look at the answers to those 4 questions, we are very enthusiastic about our investments in streaming entertainment devices, our low Earth orbit satellite and Kuiper, health care and a few other things. And I think that do I think every one of our new investments will be successful? History would say that, that would be a long shot. However, it only takes one or two of them becoming the fourth pillar for Amazon for us to be a very different company over time. So I think it's very worthwhile. We're going to continue to invest. We're going to be very thoughtful about how we streamline our costs, and I think you see a lot of that, but we're also going to continue to invest for the long term. Thank you for joining us today on the call and for your questions. A replay will be available on our Investor Relations website for at least 3 months. We appreciate your interest in Amazon, and we look forward to talking with you again next quarter.
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Greetings. Welcome to Asbury Automotive Group's Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen only mode [Operator Instructions]. Please note that this conference is being recorded. At this time, I'll turn the conference over to Karen Reid, Vice President and Corporate Treasurer. Ms. Reid, you may now begin. Thanks, Rob, and good morning, everyone. As noted, today's call is being recorded and will be available for replay later this afternoon. Welcome to Asbury Automotive Groupâs fourth quarter 2022 earnings call. The press release detailing Asbury's fourth quarter results was issued earlier this morning and is posted on our Web site at investors.asburyauto.com. Participating with me today are David Hult, our President and Chief Executive Officer; Dan Clara, our Senior Vice President of Operations; and Michael Welch, our Senior Vice President and Chief Financial Officer. At the conclusion of our prepared remarks, we will open the call up for questions and will be available later for any follow-up questions. Before we begin, we must remind you that the discussion during the call today is likely to contain forward-looking statements. Forward-looking statements are statements other than those which are historical in nature, which may include financial projections, forecasts and current expectations, each of which are subject to significant uncertainties. For information regarding certain of the risks that may cause actual results to differ materially from these statements, please see our filings with the SEC from time to time, including our Form 10-K for the year ended December 2021, any subsequently filed quarterly reports on Form 10-Q and our earnings release issued earlier today. We expressly disclaim any responsibility to update forward-looking statements. In addition, certain non-GAAP financial measures, as defined under SEC rules, may be discussed on this call. As required by applicable SEC rules, we provide reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on our Web site. We've also posted an updated investor presentation on our Web site investors.asburyauto.com highlighting our fourth quarter and full year 2022 results. Thank you, Karen, and good morning, everyone. Welcome to our fourth quarter and full year 2022 earnings call. 2022 was a record year for Asbury. We generated $15.4 billion in revenue, up $5.6 billion from 2021. Our adjusted EBITDA for the year was $1.3 billion, an increase of over $500 million and we expanded adjusted earnings per share by 38% to $37.66. We sold over 300,000 vehicles in 2022 and hit a milestone in number of cars we serviced at over 3 million. All of this is a result of our long term trajectory to manage effectively through our growth even at a much larger size. Looking back to 2017, we were a company with $6.5 billion in revenue. We have grown responsibly to over $15 billion in 2022. We have refined and maintained our operational discipline throughout this period going from an adjusted SG&A to gross profit profile of 69.1% in 2017 to 56.8% for 2022. Through continuously enhancing our execution and optimizing our portfolio, we have been accretive and efficient while more than doubling the size and power of the company. Turning now to our results in the fourth quarter. We grew adjusted EBITDA by $71 million to $319 million, an increase of 29%; expanded adjusted EPS from $7.46 to $9.12, an increase of 22%; delivered an 8.2% adjusted operating margin; increased revenue by $1.1 billion to $3.7 billion; and grew gross profit by $196 million to $738 million. Our gross profit margin was 19.9% and our adjusted SG&A as a percentage of gross profit was 56.7%. For the full year 2022, we generated $987 million of adjusted operating cash flow, an increase of $355 million over last year, which speaks to our robust business model. At the end of December, we had $1.5 billion in liquidity. Even with large acquisitions in recent years, we have been diligent about our debt levels to support our long term growth. Adjusted net leverage has decreased a full turn from 2.7 times at the end of 2021 to 1.7 times at the end of 2022. Our strong cash flow, liquidity and balance sheet allows us flexibility and muscle to deploy our strategy. It enables us to be opportunistic with potential acquisitions or share buybacks. As announced, we repurchased 1.6 million shares during 2022 for approximately $300 million. Our board has approved an increase to our share repurchase authorization about $108 million to $200 million. We continuously evaluate acquisition opportunities that make sense for Asbury. We believe based on the last several acquisitions that we have shown discipline and held ourselves accountable to our robust criteria for opportunistic growth. In December, we divested the North Carolina stores as part of our continuous portfolio optimization. These nine stores represent an estimated annualized revenue of $590 million. We are opportunistic, strategic and thoughtful regarding our capital allocation and maximizing our returns to our shareholders. Our guest centric model also relies on providing a high level of commitment to our team members by offering best in class benefits, including equity awards to our teammates in our stores, which is unique among our peers. Our team members have also been giving back to their communities as volunteer hours were up nearly 70% year over year to our volunteer time off program of up to 40 hours per team member. Finally, I would like to thank all of my team members for an incredible year and a strong start to 2023. It is your hard work and dedication that provides a great guest experience and strengthens the performance of our business, but the best is yet to come. Thank you. I'll now hand the call over to Dan to discuss our operating performance. Dan? Thank you, David, and good morning, everyone. I would also like to extend my thanks to all our team members for their extraordinary results in 2022 and their commitment to consistently delivering an exceptional guest experience. My remarks will pertain to the same store performance unless stated otherwise. Starting with new vehicles. Our new vehicle inventory ended the quarter at $254 million, which represents a 20 day supply. Our day supply fluctuated by segment with domestic being at 30 days, import at 13 days and luxury at 21 days. Even if missed continued supply constraints, our new vehicle volume was flat year over year while we grew new vehicle revenue by 3%. New average gross profit per vehicle decreased $704 from the per year quarter. For the full year 2022, we increased new vehicle gross profit by 7% year over year. On a PBR basis, it increased by $1,348 or 30% to $5,815 for the full year. Turning to used vehicles. Used retail revenue was down 5% from the per year quarter as the expected choppiness to the market persisted. Used retail gross profit per vehicle was $1,842 for the quarter, a decrease of $840 from the per year quarter. Our used vehicle inventory ended the quarter at $202 million, which represents a 26 day supply. Our used to new ratio for the quarter was 101%, down from 108% from the prior year quarter. Shifting to F&I. We delivered another strong quarter with an F&I PBR of $2,233, an increase of $241 compared to the prior year quarter. In the fourth quarter, our total front end yield per vehicle decreased on a year over year basis by $474 per vehicle to $5,984. Moving to parts and service. Our parts and service revenue increased 12% in the quarter. Customer pay revenue built upon its momentum with a 13% growth and we expanded its gross profit by 14%. Now turning to Clicklane. Please note that for Clicklane, we are reporting on an all store basis. As a reminder, this was the first quarter which included LHM in Stevenson sales since our full rollout. We sold an all time record of over 8,400 vehicles through Clicklane in the fourth quarter, a 67% increase year-over-year and a 24% increase over the previous best, which was last quarter. For the full year 2022, we generated approximately $1.1 billion of revenue from Clicklane with over 27,500 vehicles sold via our fully transactional online tool. We expect to generate $2.5 billion in revenue for 2023 from Clicklane across all stores. A key differentiator for Clicklane is our loan marketplace, which works with 51 different lenders, banks and credit unions to give the consumer the power to select the finance offerings that are best for them. In the fourth quarter, we optimized our F&I menu to 2.0 by presenting a bundle of suggested products, which are tailored to the vehicle, the location and the customer's usage. This allows the Clicklane consumer to be informed and let them select the best choices for protecting their asset. We are also adding functionality in the first half of 2023 to bring in new features, including enhanced integrations with OEM captive finance arms. During the fourth quarter, over 92% of our transactions were with customers that were incremental to Asbury's dealership network. Average transaction time remained roughly in line with prior quarters, 8 minutes for cash deals and 14 minutes for finance deals. Total front end PBR of $3,518 and an F&I PBR of $2,001, which equates to $5,519 for total front end yield. The average Clicklane customer credit score increased quarter-over-quarter to [7.26], which is higher than the average credit score at our stores. 87% of those that applied were approved for financing. 77% of customers received an instant approval while an additional 10% of customers require some offline assistance. The average distance of a Clicklane delivery from our dealerships was 18.6 miles, giving us the opportunity to retain our new customers in our parts and service department. Clicklane customers are converting at more than double the rate of traditional internet leads. And while we won't see the full potential until inventory levels normalize, we are seeing strong early results. Our top conversion rates among individual stores were executed at 20% for domestic vehicles, 28% for imports and 48% for luxury. In our journey to become the most guest centric automotive retailer, we know the most important differentiator we have is the level of service we provide. Consistently delivering an exceptional guest experience builds trust amongst our clients who in return reward us with loyalty and retention. Thank you, Dan. To our investors, analysts, team members and other participants on the call, good morning. I would like to provide some financial highlights for our company. For additional details on our financial performance for the quarter, please see our financial supplement and our press release today and our investor presentation on our Web site. Overall compared to the fourth quarter of last year, adjusted net income increased 24% to $202 million and adjusted EPS increased 22% to $9.12. Adjusted net income for the fourth quarter 2022 excludes expenses of $2.7 million related to a significant acquisition that did not materialize and gains on dealership divestitures net of $202.7 million, primarily related to the North Carolina stores, all of which netted to $6.83 per diluted share. For reference, we received $322 million in cash proceeds for the sale of these divested stores. Adjusted net income for the fourth quarter 2021 excludes acquisition expenses and acquisition financing expenses of $28.9 million or $1.02 per diluted share. Our effective tax rate for the full year was 24.4% versus 23.7% in 2021. We anticipate our 2023 tax expense to be approximately 24.5%. For 2022, we generate adjusted operating cash flow of $987 million. Excluding real estate purchases, we spend approximately $95 million on capital expenditures for the full year. We expect this to be approximately $200 million for the full year 2023 as we continued to plan CapEx related to our 2021 acquisitions. Of this $200 million, about $20 million is related to replacement of lease properties. For the quarter, TCA made $28 million of pre-taxed income, which included $4 million of net investment income. TCA generated $80 million of pre-tax income for the year. We anticipate a full rollout of TCA products to our remaining stores by the end of 2023. For GAAP, we are required to defer the commission receive of dealerships for TCA products over the life of the contract. To maintain comparability, we will continue to reflect the commission received for such sales in the dealership segment at the time of sale and record the deferral of that income in the TCA segment. With the ownership of TCA, while the overall profitability of the transaction is higher the timing of income recognition is deferred and amortized over the life of the contract. We expect the negative deferral impact to last two to three years. Due to the deferral of the income associated with these store rollouts, we expect TCA to generate $25 million of pre-tax income for 2023. Our balance sheet remains strong, as we end of the year with approximately $1.5 billion of liquidity, comprised of cash, excluding cash and total care auto, floor plan offset accounts and availability on both our used line and revolving credit facility. Also, at the end of the year, our proforma adjusted net leverage ratio stood at 1.7 times down from 2.7 times at the end of 2021. We generated robust cash flow -- by generating robust cash flow we were able to quickly lower our net leverage ratio after our large acquisition in 2021, and strengthen our balance sheet to provide flexibility to achieve our strategic goals. We'll continue to monitor the M&A market as we believe there are potential opportunities that would enhance our already strong dealership portfolio and we will look to return capital through share purchases. Since the start of 2022, we have repurchased approximately 1.7 million shares for $308 million. As David mentioned earlier, our board has approved an increase to our share purchase authorization of $108 million to $200 million. Finally, I would also like to join David and Dan in thanking our team members at Asbury, for not only a strong quarter but another strong year. Your hard work and dedication drive our excellent performance. Thank you, Michael. As we look to 2023, we believe we are well positioned in a market where the average age of the car is over 12 years old and day supply begins to build. Also, our fixed operations continues to be strong we anticipate this will continue for 2023. We are planning our business for a SAR in the mid $14 million range. We believe with our disciplined cost management and agile expense structure heading into 2023, we can adapt to changing conditions, including one with a recovering if uneven day supply for the industry. Finally, our robust cash flow and balance sheet enables us to have both the flexibility and strength for us to be opportunistic when it comes to well our well diversified revenue streams and when it comes to acquisitions and buybacks. This concludes our prepared remarks. We'll now turn the call over to the operator and take your question. Operator? David, I want to start on the new vehicle side of the industry. Obviously, earlier this week, large OEMs started reporting, talking about carrying 20, 30 days lower inventory than historical levels. Your inventory is slowly building up to the mid 20s. I guess could you update us on how your conversations are going with the OEM partners? And how do you think about the trajectory of inventory? Maybe shed light on how you think that evolves through â23 and maybe into next year, that'd be great. I'll start with the fourth quarter. Our volume numbers are a little deceiving, because while the day supply was where it was in the quarter, our largest volume luxury and import stores had single digit day supply, so that really governed our ability to grow what was there. As we walk into 2023, we're still -- have over 35% of our inventory coming in pre-sold, so it's still a robust pipeline. I think it's going to be a different year for all manufacturers. I think some are going to come back a lot sooner with day supply, and some it'll take them most of the year to catch up to it. So I think it depends upon which brand you're talking about. And amongst our peers and ourselves, it's going to really come down to the mix of brands that we have. So we anticipate a quick recovery in the first half of the year with Stellantis, and then another domestic. But it's going to be a slower uptick as it relates to say Toyota and Honda. And as we think about the GPU implications of that, obviously, I think new GPU is better than most expected this quarter, barely declining sequentially. I mean, what have you learned about the ability to price as inventory improves and how do you think that relationship, that inverse relationship with inventory shake out through the year? What I'll say the last few years have been difficult to navigate it from a prediction standpoint between COVID and supply chain issues and so on. But I'll tell you, all the conversations the last few quarters have been when does it get back to 19 levels, I just don't see that. â19 have a $17 million SAR, we're forecasting less than a $15 million SAR. You can look back over history, when SARs are below $16 million, margins hold up pretty well. We think a lot of the OEMs have learned from their day supply, but that doesn't mean you won't have spikes at certain moments in time. I think they've been real comfortable with not bringing large incentives to the market. If inventory does back up on a day supply, I assume they'll come forward with incentives. And again, because the average age of the car is over 12 years, while we think it's not going to be a gangbuster year, we anticipate margins to hold pretty well. It will certainly vary by OEM depending upon day supply. But as we look at Asbury as a whole, we think it'll be a pretty good year for new car margins for us. And then last one for me, maybe Michael, jumping over to the balance sheet. You paid down a lot of debt. I think the buyback update was encouraging last week. I wanted to ask just for some color. I mean, you guys were active divesting stores in 4Q. How should we think about capital allocation but also just the portfolio going forward? Are we done with divestitures, are you back to being a net acquirer in the market? Any update there on use of capital as we move forward. I'll start with it and then Michael can jump in. Michael referenced in the script that we had $2.7 million in cost from an acquisition that didn't materialize. I've said it for many quarters. We're very focused on our assets and our portfolio of stores that we have. And we're always trying to maximize our opportunities in acquiring things that are accretive to our platform and divesting of stores that might not necessarily be performing at the highest level. The divestiture of the North Carolina stores was partly due to the anticipation of the new acquisition coming on and making sure we maintained our balance of cash flow and kept our leverage proper. When that didn't materialize, we had already been under contract to sell the North Carolina stores. It leaves us with a lot of capacity, so $1.5 billion liquidity and a very low leverage ratio. So we have plenty of capacity if acquisitions materialize this year to deploy that capital or if per share buyback. So leaves us in a good place for 2023 for capital deployment. Maybe just to follow-up on the GPU question, David. And I know this is a little bit unfair but also kind of fair because it's important. How do you see new vehicle GPUs progressing as we go through the course of this year and where might they ultimately land? And sort of as a corollary to that, how much of the variable compensation you pay to your sales folks is linked to that dollar gross, meaning there's kind of a natural reduction in SG&A as that gross comes down over time? So John, it's complicated, right? I mean, every year no one's predicted the year coming. Well, there's been a lot of unique things going on. But what I'll tell you, in the fourth quarter, one of our domestic brands, the day supply, I would say, got back to close to normal levels. And the gross margins with that brand were significantly higher than what they were in 2019. So we have confidence that our margins will be significantly higher in â23 than they were in â19. But certainly, you can tell it's fallen off from prior year results. So we think it'll be healthy. We think it'll be well above â19. But it's really going to be a story of how each particular brand comes back and when they come back. But because of a SAR below $15 million and all the things I've stated, we think it's going to be a pretty good year for new car margins. And John, on the SG&A side. You're right, a lot of the commission, a lot of the pay in the stores is tied to the gross profit is generated, and so there's a natural kind of fall off in the SG&A to match up with that fall off in any gross profit decline. The other thing I'll add, John and you're talking about new but I'll bring up used as well. It cost us X number of dollars to do a transaction. So to chase volume with lower growth really deteriorates or hurts your SG&A. So we're very thoughtful about not necessarily chasing volume but really looking at each one of these cars as an asset and trying to get a fair return for it while not letting aging catch up to us. And then on Clicklane, I think you said two things that were kind of sort of opposite. You said, I think that 92% of the customers of transactions were new to Asbury, but then you said vehicles were delivered within 18 miles, which could indicate they're already in your market. So I'm just curious where the Clicklane customers are coming from. Was that statement, correct, maybe I misheard something there, the 92% were incremental. And if they're within 18 miles, it sounds like they're just coming from another brand as opposed to another dealer maybe. I'm just trying to understand where these folks are coming from, because it sounds like you're going to have a good bump up here in potentially incremental revenue from Clicklane? So John, I'll do my best to answer that. If you need a follow up, please take it. That 92% incremental means these are local customers that were doing business with other dealer groups that chose to leave the brand or the dealer that they were doing business with to come over to us. We believe they made that decision, because of the ease and transparency of being able to transact online instead of sitting in a showroom. At some point over the years that number will fall off a little bit as the market catches up with transactional tools. But that 90 -- we love the fact that it's local. We don't want to sell a car 500 miles away, we will on certain occasions. But the parts and service business, the retention, the relationship is really what we're into. So we focus on really a 50 mile radius around our rooftops and we try and do our Clicklane transactions within that space. So 92% new customers to us, meaning they were doing business with other local competitors that we compete against in that market. So just a follow up then. I mean, you're saying $1.1 billion to $2.5 billion on Clicklane year-over-year for â22 to â23, right? So $1.4 billion in incremental, just shy of 10% and that's about 9% incremental coming from Clicklane alone. Do you expect that to remain that incremental in â23? Because I mean that's almost like that's a 9% increase in your base revenue for 2022. It's a kind of a big statement. Some of it's timing. We added LHM and Stevenson in the fourth quarter. We didn't have them in the Clicklane numbers most of the year. We've been on Clicklane software for a couple years. Anytime a store or a market goes on Clicklane, it takes them a full year to get the conversion rate up right. So you're catching up to the conversion for the stores you added. We're assuming SARs going to increase a little bit. We're going to have a higher day supply of new at some points during the year, which is going to increase the sales as well. And as we're experiencing with the tool and then our sales incrementally going up, it's just logic based. If you could spend 15 minutes purchasing the car very transparently from your living room, would you rather do that than spending two and a half hours in a showroom. So the additional $1.4 billion, if you will, is the full company being on it for a full year. The legacy store is improving slightly on conversion and the other new acquisition stores increasing their conversion rates throughout the year. I appreciate you being humble, but it is $1.4 billion incremental, and it is a question of timing. But I mean, it is incremental, so it's pretty impressive performance. Just lastly, on the net leverage, I think you guys you said you were at 1.7 times at the end of â22. You've been at 2.7 times at the end of â21. How should we think about where you want to target that and where that could go to if there was another large deal that came available to you? So we're comfortable, at three times if, if we had the right deal out there, but something that kind of 2.5 times is probably our ideal place in this margin environment. And I would say, John, we we're not aggressively trying to acquire things. 80% of the things that are put in front of us we don't even look at. We are really very disciplined upon looking at acquisitions that are accretive for us. So we're not going to feel the force of having to acquire things to hit a certain target, it's more important that we add value assets to the portfolio that certainly benefit our shareholders. I want to focus in on used vehicles, so pricing seems to be somewhat stabilizing here in January. One, do you think that's sustainable and then two, what do you think kind of trends are as you look out over the next several months this year? We are seeing the use car valuation and pricing stabilizing. We also go to keep in mind we are approaching our selling season for a lack of a better term, and also what comes with the tax credit. So we feel that the big valuations that we saw Q3 into Q4 will definitely stabilize. And now there's still going to be pressure from an availability standpoint. But we believe that the market has stabilized in some capacity, but still some depreciation still coming along. And then for my follow-up, just curious on interest rates, if that's having any impact either favorable or not on attach rates in for the financing? We have not seen a major impact. Obviously, there is always concern when you look at the average payment to own a car across the nation. And when you try to add whether it is whatever you want to protect the asset with from an F&I product, it does put pressure on a monthly payment. But we have not seen any negative impact that is of concern at the store level. One of the things that I mentioned on the call was we have our loan marketplace. We not only deal with our captive lenders but we also deal with local lenders, institutions and credit unions. So that gives us flexibility to be able to provide the best rate out there for our consumer. This is Daniela Haigian on for Adam Jonas. So Tesla came out with a 20% or so price cut, and while that doesn't necessarily compete with all the name plates you're selling, in some of the stores you might have some comparable products. So we're curious to see whether you saw any real time impact on prices, demand or showroom traffic whatsoever after those cuts? The first thing when we saw that announcement was take a real quick assessment of what kind of inventory do we have from a Tesla standpoint across the stores. The good news it was below 60. And in most cases they were fresh rates, we were able to adjust. We did adjust the pricing of the cars to make sure that it was brought down to the current market condition, and paying a close emphasis on retailing those cars. As far as impact on EVs that we sell, respectfully, I believe that that just speaks to the strength of the franchise system and the integrity that we have within the system selling EVs, and being a good distributor for the end consumer. We haven't seen any material impact on EVs sales with any of our brands, because of the repricing of Tesla. Not to say it won't come at some point in time, but we also anticipate incentives to come out throughout the year as well. So just want to follow up on the SG&A comments. I understand there was some seasonality from 3Q to 4Q typically, but looks like expenses were down $20 million quarter-over-quarter on a $30 million gross profit decline quarter-over-quarter. Is this kind of a general rule of thumb to think about when looking into 2023 and as GPUs moderate, particularly on the new vehicle side? Just trying to understand like how should we think about that drop through and based on whatever assumptions we make on GPU? And I have a follow up. I would say, we have a history of being very disciplined and cost efficient. We've been working for years at our legacy stores at productivity per employee and really getting our transactional cost down for sale. All of our new acquisitions naturally aren't at the same level that we are from an efficiency standpoint. So we look to work in â23 to really get all those efficiencies that we have in the legacy stores, which we believe is a potential slight tailwind for us. And maybe on parts and services, strong growth again here in the fourth quarter. Curious how we should think about the puts for 2023? What is likely to be the key limit to growth, is it still technician hiring? And also pricing has been a key contributor to growth last couple years. And with product supply improving and maybe some cooling and inflation, how should we think about or how are you planning in terms of growth for that particular business segment this year? I assume, most like us, we never have enough techs and we can always use more. I think what you're seeing with the dollars increasing has more to do with the aging of the car. As the cars age, they need more work and certainly parts costs go up every year. So as we look at â23 from a growth standpoint, at least at this point, we donât think it's going to look very similar to what our results were in â22 as far as growth. We don't see it slowing down or leveling off. People are holding onto their cars longer. And if the jobless rate increases over time that will certainly have an impact on parts and service, but we believe that'll be a positive impact. Maybe just one last one. You reiterated the $55 EPS plan, we're still in a somewhat weak used car demand backdrop. You mentioned $14.5 million SAR, it seems like getting to 55 from $38, still 50% EPS growth, it would need a pretty sharp recovery in the industry, both new and used. So outside of Clicklane, what else gives you confidence in this current backdrop where prices are still high, rates are high due to supply for used cars like to get tighter in the medium term. What gives you confidence in those targets? And is it reasonable to assume that you see an earning decline this year before moving higher again, or you don't see that happening to that path to $55? If I miss a piece, please come back. We think that 90% of the market are stores that are opportunities for acquisition, that it's really only 10% of the market that's owned by large groups like ourselves. So there's plenty of potential for acquisitions. We also think naturally over time in the next few years, the SAR will continue to grow. So between the combination of the SAR growth over the next few years, the opportunity with acquisitions, the efficiencies with Clicklane and our ability to lower SG&A over time, I wouldn't say so much in â23, but over time with the use of software and tools to become even more efficient, we think all those things still give us the potential and the opportunity to get there. Fast forward out, if acquisitions aren't great the next few years and SAR doesn't recover, your point is valid. We just don't -- we think it's too early to make that call and we still see the next three years growing SAR, and our opportunity to acquire more stores and get better with our software. But maybe just on 2023, your comments on parts and services, consistent growth, $14.5 million SAR and still relatively strong GPUs. Is it safe to assume that earnings might not decline this year with that kind of backdop? You know, it's a fair question. You have the interest rates, you have your floor plan costs, you have different things that'll come up on you naturally. Your healthcare costs go up every single year, so your cost per employees go up as well. And as I sit here today, I don't have a guaranteed timeline for â23 how each manufacturer is going to recover with day's supply. As we sit here today, we truly believe that the new car margins will hold up well throughout the year, but that could be altered. I mean, it's been an odd last three years. On the used car side, you've seen margin fall pretty good, but we don't think it's going back to â19 levels, because you still have a supply issue in the marketplace where it's been depleted the last few years. So while we think it may not potentially be quite as strong as it was prior year, as we sit here today, we don't think it'll be far off of 2022. On the parts and service, could you talk about traffic versus ticket in the quarter, sort of what was price versus volumes? Part of it was price, but we also saw an increase in our customer pay, RO count throughout the quarter. When you look at, just break it down by the different segments, every segment saw an increase, and domestic was relatively flat, maybe down 2% from an RO count. So we're seeing the traffic coming into the stores and we keep our schedulers, online appointment schedulers, wide open for a lack of a better term so that we can service the customers when it benefits them and not when it benefits us. And we're seeing the results out of that. And Bret, one thing I would point out, because we're a relatively small company a year and a half ago, we simply -- we almost doubled the number of rooftops we have in a year. And we spent years working on the legacy stores to really get up to production and efficiency within our shops. We now have that same opportunity with all those acquisitions. So we think we got a nice tailwind over the next couple years working with our great teams up those markets at becoming more efficient and growing that business. And then on SAR your forecast of mid 14s. Is that more production constrained or demand constrained? I guess, when you think about the puts and takes, is it -- what is the normal -- with natural SAR be higher if vehicles were available, or do you just sort of see a smaller group of buyers able to afford in this environment? Yes, it's the question to ask and it's a tough one to answer. I made the comment, over 35% of our incoming product is pre-sold. You go back to â19 levels, you were nowhere near that number from a pre-sale standpoint. So still selling -- pre-selling 35% plus of your inventory before it hits the ground tells you that demand is still pretty good. I don't want to be a broken record, but again, that average age of the vehicle being over 12 years creates an opportunity, and you have a resilient job market. And with that average age of the car and them not being able to purchase cars the last couple years because of availability, we think that there's an opportunity to continue that steady growth. We don't think we get back to the $17 million SAR, because production won't be there. There's still supply constraint issues that are out there and you still have a lot of OEMs converting R&D and working on a lot of launches of EV vehicles over the next 12 to 18 months. So I think it's a combination of a lot of things. Certainly, the economy could shift and change where demand drops dramatically. We're just not seeing that at this point. And then one quick question on leasing something that obviously has not been a hot topic in the last couple years, but as affordability from an outright purchase standpoint gets to be more challenging. Do you think there's likelihood the OEs sort of step in and facilitate more leasing to drive volumes, or is that just not a topic lately? Yes, selfishly, I certainly hope so. That leasing business is important to us because we retain the customers in the brand. And it's important to the OEMs, because they retained them within their brand as well. There hasn't been that incentive in leasing, because the product hasn't been out there and it hasn't been available and it's been a way for the manufacturer to retain the earnings, which was great. We think over time leasing has to get feathered back into it. When is it happened by what brand, it's really going to depend upon availability. But naturally, your luxury segment would be the first to benefit from leasing returning. Going back to -- David, you had talked about wanting to get the most out of every vehicle. But just looking at the new vehicle category, the three new vehicle categories, looking at imports, it looked like more of the opposite happened there in that only import had unit growth, but GPU, percentage wise, fell the most. And just given the tight Toyota, Honda inventory, I was a little surprised by that youâre not going as high in pricing there, because you want to preserve some import volume? I wouldn't say it plays out that way. You have a lot of brands within the segment. The brands with the single day supply had extremely high margins, so we don't think that was a major issue. I get your point as far as the gross profit falling off. But we still think for import that's $3,800 or in that vicinity is a very strong number on imports. So again, it's going to be a competitive market. I don't see Toyota and Honda having a high day supply this year, so that will equate to higher margins. But there maybe some other brands within that import segment that have a higher day supply. But again, as you can see, to your point with the falling margin like that, we're still generating over 8% operating margin and we still have a very efficient and healthy SG&A percent. And with Toyota and Honda, their inventory has been an issue for a long time now industry wide. I mean, how much communication are they giving you and is it purely chip shortage, is it chip plus still some COVID absenteeism? I mean, what do you think driving it mostly? Look, it's frustrating to us, it's frustrating to our consumers, it's quite honestly frustrating for them. We're fortunate to represent these brands. They communicate really well with us as best they can. And it's typically in 30 day increment as to what we'll see and then there's conversation and talk about what potentially we could see in the first half of the year. Sometimes they hit those [targets], sometimes they don't, unique things come up with supply chain issues. A lot of these parts come from all over the world and depending upon what's going on, it could have a negative impact at a moment in time. And I know you said demand still strong. But just curious how worried are you, maybe back end of the year, high interest rates become an issue at that point? I can only answer it this way. If the Fed raises one or two more times at 25 basis points, we think we'll be just fine. I think something catastrophic would have to happen in the marketplace for us to alter our belief in what's going on. If there was another war out there or something significantly got worse, if COVID came back to extreme levels like it did when it launched, that would dramatically change things. But as we sit here today with all the things we've already discussed, age of the car park, the job market, we believe itâs -- not that retail, automotive won't be affected like other industries, we think we'll fare better than most throughout the year. And just one more, if you don't mind on acquisitions, you referred to that deal that fell through as significant in size. And just generally speaking, I know you can't comment on a specific deal. But when you tell us something like we're pursuing a large acquisition or a significant acquisition, should we still assume that it's significantly smaller than Larry Miller's size? I'll try and navigate this one at the best I can. Most opportunities aren't the size of LHM, they're extremely rare. So you have everything between one rooftop and 60 rooftops. This probably would've been somewhere in the middle of the two. It was a very healthy size acquisition, but not the size of Miller. Okay. This concludes today's discussion. We appreciate your participation and look forward to speaking with you after the first quarter. Have a great day.
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EarningCall_684
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Good afternoon, and welcome to the Patriot Transportation Holdings Incorporated Earnings Call for the First Quarter of 2023. At this time all participants are placed on a listen-only mode and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mr. Rob Sandlin, President and CEO of Patriot Transportation. Sir, the floor is yours. Thank you. Good afternoon and thank you all for being on the call today and for your interest in Patriot Transportation. I am Rob Sandlin, CEO of Patriot Transportation and with me today are Matt McNulty, our Chief Financial Officer and Chief Operating Officer; and John Klopfenstein, our Chief Accounting Officer. Before we get into our results, let me caution you that any statements made during this call that relate to the future are by their nature subject to risks and uncertainties that could cause actual results and events to differ materially from those indicated by such forward-looking statements. Additional information regarding these and other risk factors and uncertainties may be found in the company's filings with the Securities and Exchange Commission. Now, for our first quarter results. Today, the company reported a net income of $485,000 or $0.14 per share for the quarter ended December 31, 2022, compared to net income of $6,439,000 or $1.74 per share in the same quarter last year, which included $6,281,000 or a or $1.70 per share from after tax gains on real estate. Operating revenues for the quarter were $22,850,000 up $2,279,000 from the same quarter last year, due to rate increases, higher fuel surcharges and improved business mix. Miles this quarter were down $299,000, partially due to the closing of our Nashville location and the lower driver count. Operating revenue per mile was up $0.66 or 17.5%. Compensation and benefits increased $1,121,000, mainly due to the increased driver compensation package, mostly offset by lower driver count and a reduction in support staff. Depreciation expense was down $203,000 in the quarter and gains on sales of assets was $66,000 compared to $360,000 gain in last yearâs quarter. The operating profit for this quarter was $620,000 compared to $8,541,000 in last yearâs first quarter. For the Summary and Outlook, looking back at our 2022 year, we focused on adding business with new and existing customers that meets our stated goal of adding quality business that provides for an acceptable return on investment. As we began our 2023 year, we added business with new and existing customers throughout the quarter and have new business opportunities booked going forward into the second quarter. We had $7,800,000 of cash at the end of the ï¬rst quarter with no outstanding debt. Interest rates continue to rise in the calendar for 2022, which will put more pressure on those in the industry with large outstanding debt. We will add 73 tractors during our year and received nine during the quarter. 44 of the tractors will replace our existing company ï¬eet and 29 will replace lease tractors with company owned tractors. We believe replacing the 29 leased tractors with company units will provide a better ï¬nancial result and is a good use of our cash. We will only add a small number of trailers during 2023 and hopes that inï¬ation declines going forward, and replacement prices, price surcharges also decline, allowing us to replace more trailers down the road at a lower price. We will continue to focus on our driver hiring and retention. During the quarter, we raised pay on our drivers in most of the markets where pay was not adjusted late in our 2022 year. The results among our drivers with a year or more of seniority has been very positive, resulting in low turnover among this group of dedicated professionals. New driver acquisitions while slightly improved, continues to result in high turnover, but with slightly better results than this time last year. As general freight spot rates have declined, we have experienced the ability to put on more owner operators in several markets and will continue to monitor and balance this with company drivers. In closing, we are on target with our safety goals for the ï¬rst quarter of the year and we'll continue to focus to keep preventable incidents and costs in check. Generally, the petroleum and construction industry business increases during our second quarter, and we believe we are positioned well to take additional advantage of seasonal volume increases, along with committed new business. Thank you. [Operator Instructions]. Thank you. Our first question is coming from Christian Olesen with Olesen Value Fund. Please go ahead. Thank you. I just wanted to see if you guys could talk a little bit more about your other goals, plans and expectations for rate increases in the first calendar quarter of 2023 and maybe the following quarter as well? Yeah Christian, thanks for being on the call and for your question. I think the best way to answer that is we have budgeted the majority of our price increases in the ï¬rst and second quarter of this year, and they are going along as planned and we feel like the market is still allowing for additional rate. Certainly, some of that is continuing to help us cover this added driver cost, but also some of the inï¬ation that we're seeing, but I would say so far so good. Okay, great. And in terms of driver pay, could you comment a bit more on that, just the pressures in the industry overall, is it abating much? And is there any difference comparing tank truck drivers to truck drivers more generally? Yes, I think you can always draw. The ï¬rst thing I would say is you can always draw a comparison between the over the road driver that is out there for, let's say weeks at a time and our drivers in the tank truck industry, particularly ours that are more regional in nature and they are mostly home at night. I think from a compensation standpoint, our drivers typically do better than a new driver that's over the road, plus their home with their family. So I think we got a little bit of an advantage there. That is the way that most people break into the industry though, is getting in that long haul side of the business. So they've got to want to change jobs, and in fact I was talking to one of our drivers last year that was out on the road for 16 years, and he's really happy to be home. He was gone six weeks at a time, and he's working for us, and he said he's making more money. So that's kind of a real life example there. The driver pay increases that we did so far this year and we had planned, where four â five or six of our terminals that had not had driver pay increases in the latter half of the year. And so while we've seen some, I would say we've raised the pay a lot over the last, since April of '21. I think we save between 25% and 35%. And so we think the biggest part of that work is done. Certainly, with inï¬ation where it is, there's going to be some expectation on a routine basis to do something, but I think real large chunks of that are behind us. A couple of questions if I could. Usually on these calls you give us some idea of the number of drivers and any that youâve added. I was wondering if you can provide that information and Iâm also curious about how those efforts that you had to recruit and get new drivers into training, how those are progressing or have they largely petered out because it was not delivered as you might have expected. So yes, so we are currently at roughly 360 revenue producing drivers, from somewhere in the 350âs to start the year, so a slight improvement there. And as far as really kind of started seeing it mostly in the second half of January, which is fairly typical for the trucking industry and everybody stays put through the holidays, and then in January is when people start making changes. And so we've actually seen our drivers in training in the last couple of weeks up in the mid-30s whereas prior weeks before that, we were in the mid to upper 20s, so that's it. So a leading indicator, we'll see what happens, because they have to get through training and stick, but it certainly would be a positive trend if it continues. Okay, yes, some of the things I've been reading have been saying that the worker pool has been increasing, and I'm wondering if you're seeing that too, but it sounds like seasonality might mask some of that. It does a little bit. We don't see much movement in December, but the other thing that we've seen is that with spot freight prices coming down, we've seen some owner operators come back to the tank segment. And we've got more owner operators running today than we did when we began the ï¬scal year. And so we're monitoring that and trying to make sure we keep that balance where we like it. So that's a positive thing, because we've got freight for those folks to haul, so we'll continue to monitor that and see what happens. Okay, great. And then just a quick question if I may on insurance. A lot of the stuff I read saying that the commercial vehicle, at least on the reinsurance segment is getting somewhat diï¬cult or has been diï¬cult to place, and I know you guys do self-insurance. But I'm just wondering where you come out on balancing the risks and the rewards with that? Wondering if there was a price at which you might think about producing your deductibles or anything like that? I would say that right now we run those numbers, maybe not every year. We run them enough to know that there is a sizable seven figure gap between what we would spend if we were to lower our retention significantly versus what we are spending today in the premium plus our cost. So weâve looked at it and so I donât see us. We kind of feel like we are in the sweet spot on the risk and the work comp is something I guess. The work comp we decided to get a $0.5 million deductible a few years back and although we did have one claim that really surprised us last year, that still if you look at the math over history appears to be the right place to be for expenses on top of premium. It's been a pretty hard market and so any movement in that with a lower deductible over the past three or four years would have been really expensive. And then to take on more risk, looking at it the other way, there really wasn't the payback on the premium, again because of the hard market. You weren't getting rewarded as much. So we've kind of stayed where we've been for a while in those groups, but it is something we continue to look at. Yeah, and our renewal this year was not â it was not terrible. It wasn't like it had been in the last few years with everything being. You know our renewal on the primary was under 10% and kind of in that mid-teen range on the upper layers. Great! That's good to know. Last question and then I'll let it go. I know you said that in general, freight rates have been coming down and you've been adding new business, and I'm just curious, you know are you ï¬nding it more diï¬cult given that maybe you're ï¬nding the competition a little sharper? And I'm just wondering how you're balancing that out or how you're able to get additional business, I guess? Yeah, let me clarify, just to be sure for you and others on the call. When I say spot freight rates coming down, that's for the general freight industry and not for us, and that's where a lot of those owner operators have been working. So when you read the different trade magazines and the trade journal stuff about spot freight prices, that's not really going to be indicative of what's going on in the tank truck industry. Hours are going up, and if you look at our revenue per mile and our quarterly announcements that we've been making. Our freight rates are up dramatically over the last two years and we don't see any reason for that to decline. It's certainly not going to decline for us, because we're going to partner with people and customers that are looking for quality service and they want to guarantee that they've got that supply, compared to selling diesel fuel or gasoline at a margin, the freight portion of this thing is while it adds up to a lot of dollars on a per gallon basis, it's pretty small, comparatively. So we're really not seeing any rate pressure downward. You indicate the revenue was up because of rate increases, higher fuel charges and improved business mix. Could you elaborate on the improved business mix? What are you talking about there speciï¬cally? Sure. Yes, I'll give you a couple of examples. So one of the things that we talked about as we were downsizing our business and trying to then right size everything and improve margin, was to go out into the marketplace. Let's say that we can't add a driver capacity, and in a given market, we've got x number of drivers. And we have to decide how are we going to make that business more proï¬table. Then we go to our partners and say, âlook, we've had driver pay go up, we've got inï¬ation, we got this, and we need a rate increase of x and if they said, well, that's just more than we can stand, then what we would do is work with them to exit or downsize and if they can get somebody to haul it for them at a low price, and we can add business with somebody else at a higher price, then that's what we've done in a number of different markets. But, do you see that continuing in terms of swapping out low margin customers for higher margins customers or are you kind of reaching the end of the road there? I hope we are reaching the end of the road. There may be a pocket or two with that. But we really are and have aligned ourselves with some good partners and good customers and folks that we've done business with for a long time, and I think the whole world has had to wake up a little bit to the supply chain and driver shortage and that it's real, and it's frankly not going anywhere anytime soon. And so I think our customer base and the tank truck industry realizes that it's really important to get their products to the end user. And so there are always cycles in business, but I think we're in a cycle where they understand that and they are going to be willing to pay a reasonable amount of money for us to make a reasonable return on our investment. Okay, okay, that makes sense. Good. In terms â you mentioned the driver count 360 or so. What was the turnover for the most recent quarter? 73% and John, what's interesting is we're turning over very few of our drivers that have more than a year's service. Most all of that churn is in that ï¬rst year driver. Right, but that's pretty close to what you were a year ago, right? Weren't you around 72% in Q1 a year ago? Itâs now where we want it, but we are going through a lot of gyrations and just trying something new all the time to see what we can do to impact that new driver so that it has more staying power, because we spend a lot of money training these folks and so we're really spending a lot of time and energy there. Okay, all right, good. On the CapEx side, could you explain the economics behind replacing versus - replacing lease with owned trucks, you said better ï¬nancial results. Could you talk us through why the results are better by owning a truck as opposed to leasing it? I mean, quite frankly it's come down to the fact that they are building in a significantly higher cost of the tractor, and then they are throwing interest on top of that than what we can purchase ourselves. You remember the difference when we ran those numbers. John, I can't remember the numbers. We ran all of that, and the other thing that's going to happen is initially when you lease that truck, you're paying out â over the life of that truck, you're paying x number of dollars or cents per mile for maintenance. So when we put these trucks on, for the ï¬rst two years, we're going to see a signiï¬cant, at least the ï¬rst two years, we're going to see a signiï¬cant reduction in that maintenance cost as well, because we're just going to be doing routine PM type work. When you're getting later in life, that thing might swing around a little bit in the other direction, but when we ran that whole model, it was quite substantial and we got on the phone with the leasing companies, ï¬nance guy, and he even agreed that in our, with what we were doing, it probably made more sense for us to own trucks. If you're borrowing money, with interest rates higher, the leasing companies are looking to get imputed interest rate into their number, that's pretty high. And when we have money in the bank, it just makes less sense for us to do that. It was 80%, okay, and now it was 73%. Okay, that's good, that's ï¬ne. We haven't seen the Q yet, but what was the CapEx for Q1? $2 million net, and the total is going to be $12 million, so that leaves about $10 million. How does the $10 million unfold over the next three quarters, roughly? So the way the trackers are coming in is weâve got ten a quarter, provided that they deliver them on time from one of our vendors and then the lease tractors are spread over about three months across the third and maybe ï¬lter a little bit into the fourth quarter. But I think most of that's going to hit in the third quarter and that's the 29 trucks. Thank you. There are no further questions in the queue at this time. So I will hand it back to Mr. Sandlin for any closing comments you may have. Thank you, and thank you all for your interest in Patriot Transportation. We look forward to talking with you next quarter. Thank you, everyone, and this does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day and we thank you for your participation.
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EarningCall_685
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Good day and thank you for standing by. Welcome to the Exco Technologies Limited First Quarter 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, Darren Kirk, President and Chief Executive Officer. Please go ahead. Thank you, Michelle. Good morning, ladies and gentlemen. Welcome to Exco Technologies fiscal 2023 first quarter conference call. I will lead off with an operations overview. Matthew Posno, our CFO, will then review the financial aspects of the quarter before we open the call for questions. First, I'd like to make some comments about forward-looking information. In yesterday's news release and on page two of the presentation that we have posted to our website, you'll find cautionary notes in that regard. While I won't repeat the contents, I want to emphasize that the cautionary notes apply to this discussion today. So we again made great progress, advancing our various growth initiatives during the quarter, which is evident in our very strong top line results. We continue to see solid demand for our large and complex tooling and related solutions as well as our assorted interior trim and accessory products. Importantly, key drivers here are the accelerating adoption of electric vehicles and the broader environmental sustainability movement, both of which are in early innings. We are more confident than ever that Exco is entering into a multiyear period of heightened demand growth for which we are exceptionally well positioned. With regards to our specific investment plans, I'm pleased to report that Castool has essentially completed construction of its new facility in Mexico and delivery of machinery and equipment has commenced. We expect this plant to be operational in our third fiscal quarter, providing much needed capacity and better positioning us competitively within Latin America and the Southern U.S. Installation of new equipment that will upgrade and enhance our heat treatment capabilities across the segment continues, and we expect these pieces will be fully operational by the end of our second quarter. This equipment will give us unmatched competitive advantages while significantly reducing our own carbon footprint. Elsewhere, Castool's plant in Morocco remains in a ramp-up phase and is making terrific progress, while the large mold group has completed the installation of all equipment and crane capacity to handle molds of extreme size. Lastly, our plant expansions within our Automotive Solutions group are complete and all equipment to support new programs are operational. At this time, we have no change to our prior CapEx guidance for the year of $47 million. Overall market conditions continued to improve during the quarter, with automotive industry volumes increasing modestly and production flows stabilizing in both North America and Europe. This positively impacted our own efficiency, particularly in our Automotive Solutions segment, which demonstrated continued recovery in both sales and margins. Consumer demand for new vehicles is holding up well despite the financial squeeze from inflationary pressures and rising interest rates. We have seen early signs that OEMs are responding to the changing environment by increasing incentives and in some cases, reducing vehicle prices. This bodes well for automotive suppliers as these actions will help support sales volumes should economic conditions deteriorate further. Microchip supply is improving, though the industry is likely still months away from being fully recovered. Independent industry experts forecast a 5% increase in overall volumes for both North America and Europe through calendar 2023. We would expect our Auto Solutions segment to generate higher sales growth than this as we continue to launch previously awarded programs. Looking at it further, quoting activity is robust across the segment, which will support our growth over the longer term. With respect to our own input costs, we continue to see signs of slowing inflation or disinflation. In fact, in some aspects of our business, we have begun to see pockets of outright deflation, which is the case for certain transportation costs, steel and some other commodities. Labor rates, however, remain a challenge, particularly in Mexico, which pushed through a 20% increase in minimum wage in December. With these factors in mind, we continue to take specific pricing actions where possible in order to restore and protect our margins. We, of course, remain extremely focused on further improving our own efficiency, which is ultimately the clearest path to margin enhancement. Within our Casting and Extrusion segment, we saw strong demand for new die-cast molds, while rebuild work is continuing to pick up. This is true for both powertrain and structural programs and of course, our additive operations continue to gain meaningful traction. In fact, in January 2023 our large mold group recorded its highest ever level of monthly order intake in our backlog to sales ratio is currently sitting at record levels. Demand for consumable extrusion tooling did begin to weaken during the quarter as extruders responded to softening global macro conditions. However, extrusion demand in a number of end markets, such as automotive remains firm. As well, Castool's capital equipment sales within the extrusion end markets remain very strong as does demand for its consumable die-cast tooling and systems where we are clearly gaining significant market share. Margins in our Casting and Extrusion segment remain well below potential as we absorb start-up losses at new operations, incur elevated levels of depreciation from recent CapEx activity, navigate through operational disruptions as we install new equipment and continue to catch-up some inflationary pressures. Difficult conditions in Europe also weighed on segment margins. However, more recent data points are encouraging, including a significant reduction in energy costs and realization of initial synergies within the Extrusion Tooling group. We are very optimistic our segment margins will see recovery from here through the remainder of the year. With regards to the cyber incident that affected our large mold group's three plants during the quarter, I will provide a few comments: First, I will say this was a very sophisticated attack on our network. I want to emphasize that Exco is committed to data security and has taken this matter very seriously. Upon learning of the incident, we took immediate action to secure our systems and mitigate the impact to our data and operations. I'm pleased to report that our operations have now been fully restored and shipments to our customers have not and will not be materially interrupted. We are still fully assessing the financial impact of the situation, but at this time, expect production downtime and other costs associated with the incident will reduce our earnings per share in Q2 of this fiscal year by between $0.01 to $0.03 net of expected insurance proceeds. We do not expect material additional implications for future quarters beyond Q2. I would like to thank our customers and partners for their patients as we remediated the situation and of course, our employees who work tirelessly to restore our network and operations expeditiously. Lastly, I'm sure you noticed with last night's earnings release, our Board of Directors elected to maintain our quarterly dividend at $0.105 per share. The Board supported continuing our dividend at this level rather than increasing further, which Exco has done 14 times in the past 13 consecutive years. I want to point that continuance of the current dividend level in no way reflects the lack of confidence in Exco's expectations of future profit growth. Rather, I would emphasize that we see significant growth opportunities in our core business and are motivated to preserve our capital to fund such growth. In that regard, we will prioritize the use of surplus near term cash flow to reduce our current indebtedness. Thank you, Darren. Good morning, ladies and gentlemen. Consolidated sales for the first quarter ended December 31 were $139.1 million, an increase of $38 million or 38%. Over the quarter, the consolidated impact of exchange rate movements increased sales by $6 million. Adjusting for the impact of foreign exchange, first quarter sales at our Automotive Solutions segment increased $11.6 million or 21%, and the Casting and Extrusion group sales were up $20.4 million or 45%. Consolidated net income for the first quarter was $4.5 million or earnings of $0.12 per share compared to $2.7 million or $0.07 per share in the same quarter last year, a 67% increase in net income. The effective income tax rate for the quarter was 21% compared to 26% in the prior year period. The change in income tax rate in the current year quarter was impacted by geographic distribution and foreign rate differentials. The Automotive Solutions segment experienced a 27% increase in sales in the first quarter or an increase of $15 million to $70.3 million from $55 million. The increase -- the sales increase was driven by higher vehicle production volumes and fewer program launch delays as supply chain disruptions eased in the quarter. North American industry vehicle production was up 8% compared to a year ago and European industry vehicle production was up 4%. Sales increased at all four of the segment's operations and with continued ramp-up in our new programs. First quarter pretax earnings in the Automotive Solutions segment totaled $7.2 million, which is an increase of $3.8 million or 112% over the same quarter last year. The segment's higher pretax profit is due to the 27% increase in sales and improved overhead absorption, partially offset by continued pressure on wages, materials and transportation costs compared to the prior year period. The Casting and Extrusion segment recorded sales of $68.8 million in the first quarter compared to $45.8 million last year, an increase of $23 million. Halex sales were $11.6 million. These results were impacted by December holidays, the Russian conflict in Ukraine and weakening economic conditions in Europe. Demand for our extrusion tooling and associated capital equipment outside of Europe remained relatively strong due to both industry growth and ongoing market share gains. However, signs of slowing market activity exist through the quarter. In the die-cast market, demand continues to improve as industry vehicle production recovers, new electric vehicles and more efficient internal combustion engines/transmission platforms are launched and customer inventory levels increased. Exco's additive 3D printed tooling continues its strong contribution as customers focus on greater efficiency with the size and complexity of the die-cast tooling continue to increase. Sales in the quarter were also aided by price increases, which were implemented in order to protect margins from higher input costs. Pretax earnings in the Casting and Extrusion segment of $1.9 million declined modestly compared to the prior year quarter. The decline was driven by $1.9 million higher depreciation, startup costs at Castool's heat treat operations and new market, continued outsourcing heat treat costs in our extrusion tooling group, while new equipment is being installed and higher raw material, energy, freight and labor costs due to inflation, particularly in Europe. Exco generated cash from operations -- operating activities of $10.8 million during the quarter and $5.6 million of free cash flow after $3.4 million of maintenance fixed asset expenditures. This free cash flow, together with the company's cash balance was used to fund fixed assets for growth initiatives of $4 million and $4.1 million of dividends. Exco ended the quarter with $18 million in cash, $110.7 million in bank and long-term debt and $41.9 million available in its credit facility. Exco's financial position remains strong. As such, the company's balance sheet and availability under the existing credit facility provides continued support for our strategic initiatives. Our strong financial position, combined with our free cash flow provides a foundation for management to pursue high-value growth capital expenditures, dividends and other opportunities that may arise. Thank you. [Operator Instructions] And our first question comes from the line of David Ocampo with Cormark. Your line is open. Please go ahead. Darren, you talked a bit about casting and extrusion margins improving throughout the year, especially as some of these onetime costs are eliminated and inflationary pressures ease. But when you take a look at your backlog, maybe excluding Halux, is the margin profile in the backlog getting closer to your long-term target of 20%? Or how should we be thinking about getting the bridge back up to 20% here? Yes. Sure. Thanks for the question, David. So the backlog that I'm addressing there is really in the large mold group. And I will say that there is a good recovery underway in the pricing environment for that business. It's been a very difficult time for the past several years. But the backlog that we have to date is at much firmer pricing, and we expect it's going to go a long way to restoring our margins toward our target of 20% for the segment. And do you expect the pace of improvements to be pretty even? Or is it going to be more front-end loaded than back-end loaded? So that -- it's probably going to be more back-end loaded, but that's just one feature that's going to help restore the margins. I mean, there's been a drag on the margins from the very difficult conditions in Europe. We are seeing signs of easing there. I don't think you should expect the margins to pop back up in that isolated regard, but it should certainly demonstrate some good improvement in our Q2. We do still have some front-end startup losses in our new plant. And we've had a tremendous amount of inefficiency from kind of replacing all of this heat treatment equipment within the group and having to outsource and that has implications for lead times and sales. So you can't downplay the impact that all of these things have contributed together. And so it's -- given the number of moving parts, I'm not going to give you a road map through the end of the year, but rather, I just refer to what I said during my script and that we expect that the margin is going to have improvement from here through the year. No, that's helpful. And then large mold, you touched on it briefly there about the backlog, especially with the good tailwinds from EV. But when you look at the backlog, is there anything in there that's related to the large molds that you've alluded to in the past, especially as you're installing new machinery and crane work there? Yes. Installing that new equipment and the upgraded crane capacity has been a significant part of our strategy there. And there certainly is a lot of activity in that backlog that is going to take use of that capability. So yes, we are seeing demand already, and we expect that demand will grow strongly over the next several years. Yes. And then maybe competition in that area. I mean, it does seem like an area that has above average growth relative to the sector. So are you seeing more of your competitors invest in this equipment? Or is this something that you guys are doing kind of on a sole basis? I would say that the very few competitors have this capability. I'm not aware of what other competitors are specifically doing to upgrade their capabilities to match the standards that we have. I think it's going to be very difficult for them to do. There's a lot of capital that's required in order to compete at this level and your customers demand a supplier like us that is extremely high quality. So as things get larger and more complex, it all plays to our strengths. And so, we expect that will increasingly be evident over the next several years. Thank you. And one moment for our next question. And our next question comes from the line of [Sklar Peter] (ph) with BMO. Your line is open. Please go ahead. Hi. Thanks for taking my question. So in the earnings remarks, you mentioned that you've seen some market activity slowing down, while at the same time your inventory levels have increased. So can you guys help us understand which part of the market is experiencing a slowdown? And why it's not impacting your strong demand outlook? So just to clarify, and you're right, there were some comments. We've seen some markets slowing down and some picking up. So the large mold and die-cast production areas have certainly been heating up. And within the extrusion area, we are seeing a little bit of cooling down in the market in certain sectors that we supply. So I think that kind of covers what your question was. Darren, you ... Yes, I would just add to that Yes. I mean building and construction, as you would expect, is significantly influenced by the rising interest rates. And we're starting to see some slowdown there. But that business is highly, highly diverse. And while building the construction, which is a large end market is perhaps down a bit. Automotive and many other transportation and green energy sub-segments are showing strength. So altogether, we've seen total demand kind of back off a little bit, but I will also say that things are pretty temperamental in that business, it's difficult to get a good read of where we are seasonally. December is typically a relatively soft month and we are seeing things come back actually quite a bit stronger towards the end of January. So we'll see where it goes, but that's some kind of color around what's happening in the extrusion part of the business. I would also add that Castool kind of sells a number of consumable components to extruders, but also a lot of capital equipment, which have a longer lead time and time focused. And that capital equipment business is -- it's continuing to remain very strong and further looking out beyond the immediate time frame, there are a number of new and large presses, extrusion presses going in globally, and that kind of gives you a good indication of where things will go on a longer time basis. Got it. And then you just slightly touched upon a weaker -- like the first quarter and the fourth quarter, it's generally weaker with you. Like we can understand during COVID that this pattern wasn't as prominent, but like going forward do you see that the first and the fourth quarter would be weaker going forward from now. So it's hard to say what a regular cyclicality of our quarters is, as you know, between COVID and the semiconductor and supply chain issues. I mean traditionally, our fourth quarter there are summer shutdowns, especially in Europe and less so in North America, but in North America. And then in our first quarter, Christmas and December holidays, I'll call it, have certainly impacted. So I'd say that's normal, but I don't know what normal is nowadays. But that's kind of typically shipping days and so on. Yes. Okay. And just finally on how much of the margin pressure in the casting and extrusion segment is attributable to the input cost inflation that you're seeing? Quantifying that is difficult. It's got a number of moving pieces. And to some extent, it's offset by price and it is a sizable component to be sure. And then you've got to work hard to further improve efficiency in order to recapture that lost margin and then price increases have to be part of the equation. And then hopefully, we see a continuation of the certain deflation trends that are becoming evident. The price of steel is starting to go down and the price of some of our energy sources is also going down and some other commodity input costs are seeing certainly disinflation, but even some deflation. So I mean, I can't give you, unfortunately, a specific margin percentage. But I could say it's a material impact at the front end here. Got it. And just an additional question on that one. So you said you put forward some price increases. Does that reflect in this quarter? Or are we going to see some margin improvement because of the price improvement in the next quarter? Yes. You mentioned that you put forward some price increases. So my question was, does that price increase reflect -- is that price increase reflected in this quarter? Or we can see some margin improvement because of the price increase in the next quarter? Yes. I mean, you'll see some of that price increase, it was evident in the current quarter, but you'll see continued improvement from that regard in subsequent quarters as well. Great. Thanks, Michelle, and thanks everyone for joining us today. We look forward to discussing our Q2 results in another 90 days or so. Talk to you then.
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EarningCall_686
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Good day, ladies and gentlemen. Welcome to the NOV Fourth Quarter 2022 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 follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for todayâs conference call, Mr. Blake McCarthy, Vice President of Corporate Development and Investor Relations. Sir, you may begin. Before we begin, I would like to remind you that some of todayâs comments are forward-looking statements within the meaning of the federal securities laws. They involve risks and uncertainty, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or later in the year. For a more detailed discussion of the major risk factors affecting our business, please refer to our latest forms 10-K and 10-Q filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a U.S. GAAP basis for the fourth quarter of 2022, NOV reported revenues of $2.07 billion and net income of $104 million. For the full year 2022, revenues were $7.24 billion and net income was $155 million. Our use of the term EBITDA throughout this morningâs call corresponds with the term adjusted EBITDA as defined in our earnings release. Later in the call, we will host a question-and-answer session. Please limit yourself to one question and one follow-up to permit more participation. For the fourth quarter of 2022, NOVâs revenues grew a solid 10% sequentially and fully diluted earnings were $0.26 per share. EBITDA increased to $231 million or 11.1% of revenue with sequential flow-through somewhat impacted by continuing supply chain challenges, incremental cost to expedite key orders and less desirable mix. Consolidated book-to-bill was 111% on 16% higher sequential shipments out of backlog. Compared to the fourth quarter of 2021, incremental EBITDA flow-through was 29% on a very strong 37% year-over-year revenue growth. For the full year 2022, NOV generated $679 million in EBITDA on $7.2 billion in revenue, which included $332 million in renewable energy-related revenue. Incremental flow-through was 26% on 31% year-over-year growth. 2022 was a good year for NOV, our team executed well in the face of continuing extraordinary challenges. We introduced new products that we developed through the downturn that improve the efficiency, safety and environmental impact of our customersâ operations, including several greenhouse gas emissions reducing technologies and an edge computing platform is the foundation for several new digital products. EBITDA marched up steadily quarter-by-quarter as revenue grew, and we benefited from the cost reductions of prior years. We push prices higher, more successfully in some product lines than in others. While EBITDA margins improved, frankly, we are disappointed in the magnitude of our price driven margin expansion so far. Our marketplace remains competitive, as our competitors seek to load plants after the pandemic lockdown decimated volumes. But nevertheless, we have been successful in clawing back discounts and achieving significant pricing increases. However, the ramp in inflation we saw throughout the year has driven our costs up materially. While we still have ways to go, we are much, much closer to earning acceptable returns on capital, and it is early days in what we are confident will be an extended upcycle. For the world, 2022 was an eventful year in a string of eventful years. It was a year of learning about constraints. We learned that when economies reopen, after being closed for a pandemic, knock-on effects and unforeseen constraints are created which reverberate far into our future. We started the year hopeful that 2022 will see an end to the chaos of the pandemic and the wrecking ball that the economic shutdowns brought to our industry in 2020 and 2021. Remember negative oil prices and the lowest rig counts on record, following hundreds of oil patch bankruptcies and downsizing that saw tens of thousands of years of valuable experience, leave the oil field. We were hopeful that 2022 would finally bring our industry a respite to heal and rebuild. Unfortunately, the fragility of our energy situation blew up on us with the outbreak of hostilities in Ukraine, which spiked energy prices and prompted renewed urgency and oilfield recovery. Thatâs what exposed the manning obstacle course of constraints, through which the industry must navigate in order to ramp production. The industryâs constraints underpin our long-term bullish outlook. We foresee further growth ahead in demand for NOVâs products and services for the next several years, but we also see some near-term challenges, as more healing and rebuilding is needed. The downturn eroded a great deal of offshore drilling capacity. Many desperate offshore drilling contractors cut maintenance to preserve cash, laid-off experienced workers and cold stacked rigs. Collectively, the industry scrapped 386 offshore drilling rigs since 2011. Sadly, it didnât work. Almost all offshore drilling contractors still went through bankruptcy, and many today are owned by frustrated ex-bondholders forced to become equity owners. They want their money back and the sooner the better. So, when E&P companies eyeing higher commodity prices decided to reenter the offshore drilling market to finally develop their blocks after an absence of several years, they discovered in mass what a daunting challenge we faced to restart long idled offshore drilling assets, particularly when the asset owners have limited capital and limited appetite to invest in. There is seemingly no lack of demand for these assets. Rising development activity in Brazil and West Africa, new basin development in Guyana, shallow water activity in Mexico, the Arabian Gulf and India, brownfield tiebacks in the Gulf of Mexico and the North Sea, and promising expiration areas emerging in Namibia, Suriname, and the Eastern Mediterranean present a great deal of offshore drilling need. Thereâs plenty of demand for years to come, but right now there are two constraints, money and supply chain. The freshly restructured offshore drilling contractor industry has little access to or appetite for external capital to rebuild itself. Despite 30% headline project cost increases since 2020, E&Ps are becoming more confident in their economics in the energy security challenged new reality we are living in. But theyâre finding one more cost that they need to dial in, and thatâs a way to finance the refurbishment of offshore drilling rigs through higher day rates and mobilization fees. National oil companies and integrated majors supplemented by shipyards offering bareboat charters and importantly eastern hemisphere sovereign wealth funds are the emerging sources of capital that we foresee underwriting the big offshore drilling restart. The second constraint is supply-chain, broadly. COVID-driven workforce disruptions, lack of critical components, and expensive unreliable freight have injected new execution risk into all shipyard projects in Asia and elsewhere, and not just for offshore rigs, FPSOs also face higher execution costs and risks as we hear from our Completion & Production Solutions customers. Despite these challenges, our Rig Technologies teams successfully completed 15 offshore rig reactivation projects in the fourth quarter, mostly jack-ups. And we are pleased to launch 23 new reactivation, recertification and upgrade projects on offshore rigs during the quarter. Weâre seeing rising interest in more floater activity, which is not surprising with drill ship day rates squarely in the mid $400,000 per day range. While a long way from anything approaching new build economics, it is clear that high demand is driving the industry steadily towards recovery. Early projects are the bare minimum, but as industry demand rises and capital sources solidify, we expect customers to use the reactivation time spent in shipyards to upgrade with items like a second subsea BOP stack to comply with BSEE regulations for instance. Rig Technologies revenues from the offshore grew 22% sequentially and Completion & Production Solutions revenues also grew 22% sequentially from offshore customers. Wellbore Technologies offshore revenues were up 5% as well, enabling NOV to post a consolidated 18% sequential increase from all its offshore customers. Turning to international land, for the first time in a dozen years, day rates and oilfield services pricing are on the rise. Unlike North America, most international land markets did not retool themselves up to higher levels of technology in the super cycle of 2004 to 2014. Phase 1 of the U.S. shale revolution was for the replacement of the land rig drilling fleet with higher capability AC rigs and the buildout and a fit for purpose frac-spreads. International markets never took that step, relying instead on older technology and used equipment. Thatâs beginning to change in places like the Middle East and Argentina, where national oil companies are frustrated with materially lower efficiencies compared to North America. Iâm pleased to report that the first two high spec rigs delivered by our new plant in Saudi Arabia are performing very well, and interest is growing from other land drilling contractors in the region. We also see rising demand for newer coiled tubing equipment as well as the directional drilling kit, bits and drilling motors that we offer in key international land markets. While Chinese competition in these markets can be fierce, these products offerings are head and shoulders better, and national oil company bureaucracies are waking up to the idea of buying on value and service as opposed to strictly buying on price. So to summarize, we are bullish on international land markets and offshore for 2023. Consolidated international land revenues increased 13% sequentially for NOV with all three segments showing strong growth. But now, letâs talk about North America. Our consolidated revenues from North America land customers increased only 1% sequentially. After rising sharply in the first part of the year, U.S. rig count now found a near term ceiling, a touch below 800 rigs constrained by among other things the availability of labor. North American E&Ps are citing service availability as the biggest risk to achievement of their production targets. But our oilfield service customers tell us that crew availability is the real root cause. U.S. oilfield wages in West Texas and North Dakota are up 20% to 50%, along with higher per diems, higher oil based mud bonuses, higher overtime as crews that are chronically shorthanded and they work extra hours to cover the unfilled positions. But new hires are hard to find, and the crews that are successful in hiring new green hands are less safe and demonstrably less efficient. $4,000 per ton casing is another constraint, and itâs contributing to 40% higher cost per foot for E&Ps. Dwindling Tier 1 drilling location inventory in the reversal of double digit well productivity gains in terms of barrels per foot of lateral that fueled the rapid run-up in U.S. shale production several years ago are also emerging as constraints to production growth. And like the international markets, capital is scarce and expensive. Even the rising equipment utilization across North America in 2022 brought mercifully higher pricing, enabling land drilling contractors and pressure pumpers to begin earning much improved returns on capital, the industry is hesitant to invest. For instance, U.S. high-spec land rig day rates around $40,000 a day can generate 20% capital returns on new build rigs for efficient contractors. However, new capacity editions so far have been scarce owing to capital, labor and supply chain constraints. On the other hand, pressure pumpers are cautiously investing in frac fleets given the higher wear and tear that simul fracs and 24/7 operations are placing on their spreads. They see the need to replace equipment theyâre consuming every day at accelerating rates. It doesnât hurt either that the returns on new frac fleets are approaching 40%. Importantly, though, they are self-funding these investments. This is external capital is still very difficult to access. Given the myriad of constraints 2022 has exposed, itâs no surprise that year over year U.S. production growth fell well short of the 2016 to 2019 era, and even fell short of greatly reduced expectations despite a massive drawdown in DUC inventory. Now, add to the constraints I mentioned, the emerging North American gas oversupply caused by constrained LNG export capacity out of the U.S. and rising gas oil ratios in shale basins as they mature, and we foresee additional pressure on E&P economics and diminishing urgency to drill in North America. Higher pricing across the board will likely still lead to an overall increase in year-over-year E&P spending, but our outlook for 2023 North American land remains a little cautious in contrast to offshore and international land markets where investment urgency, utilization and pricing are rising. Longer term, weâre bullish on all basins in all areas, including North America, as a serious global structural shortfall in production becomes more evident. This returns me to where I started. Constraints are everywhere in this industry. Years of limited exploration and reserve replacement now restrain the industryâs ability to ramp production quickly as the pipeline of developments has dwindled. FIDs in 2020 and 2021 are down 80% from 2009 peaks. Nevertheless, this is beginning to change. The events of 2022 taught us just how crucial the capital-intensive industry we serve is. Oil and gas is the industry that powers all other industries. Our way of life would not exist without it. Every upcycle shares some common trades. The cutting of maintenance expenditures and laying off of hard-working oilfield employees during down-cycles creates an urgent need to rebuild capabilities and teams and iron as we first enter an upcycle. But never before has this industry faced the constraints we face today. From raw materials to finished components to workforce to freight to availability of capital to higher interest rates to hostile political pressure and tightening regulations, pivoting back to growth will be as daunting as it ever has been throughout the industryâs 164-year history. Iâm convinced that these extraordinary constraints will elongate this upcycle. They will take many years to overcome. But we simply must overcome them to restore the critical energy security required for economic growth and improving standards of living, particularly for those living in energy poverty. Thatâs why Iâm so very proud of the NOV team. Our employees are smart and hard working. They know the world is counting on them. They innovate and create solutions. They hustle and work the problems. They get it done. And Jose, Blake and I are grateful to each and every one of them. Jose? To quickly recap the quarter, NOVâs consolidated revenue grew 10% sequentially and 37% year- over-year with all three segments posting their highest revenue since the fourth quarter of 2019. While North America drove most of the growth during 2022, as Clay noted, momentum in international markets has been building throughout the year and outpaced North America in the fourth quarter, resulting in 14% sequential revenue growth in international markets and 4% in North America, which included strong growth in offshore Gulf of Mexico. Adjusted EBITDA for the fourth quarter totaled $231 million, or 11.1% of sales, representing an incremental flow-through of 20% sequentially and 29% compared to the fourth quarter of 2021. Weâve recorded a credit of $8 million in other items during the fourth quarter, primarily related to positive margins realized on previously reserved inventory, which we deducted from Q4 EBITDA. With the improving market environment, we may continue to recognize such credits and EBITDA adjustments in 2023. Additionally, we expect to complete the termination of our U.S. defined benefit pension plans in the first quarter, for which we expect to recognize a pretax noncash charge for the recognition of all actuarial losses and accumulated other comprehensive loss which was $8 million as of December 31, 2022. During the fourth quarter, eliminations and corporate costs at the EBITDA level increased $11 million due to higher levels of intercompany transactions, expenses associated with the buyout of a JV partner and year-end true-ups to employee benefits and other accounts. We expect eliminations and corporate cost to return to the $60 million range in the first quarter. Despite the increase in working capital arising from strong revenue growth, cash flow from operations was $154 million in the fourth quarter. Capital expenditures totaled $66 million, resulting in free cash flow of $88 million. As is often the case, we expect a meaningful seasonal use of cash from operations in the first quarter, but we expect to be free cash flow positive for 2023, the magnitude of which will be mostly determined by the rate of revenue growth during the year. We have a strong track record and remain committed to returning capital to our shareholders while maintaining a bulletproof capital structure. Since mid-2014, we have returned $4.7 billion of capital of our shareholders through share repurchases and dividends. And since mid-2015, we have reduced our gross debt by $2.6 billion. As a reminder of our capital allocation hierarchy, we first and foremost seek compelling organic investment opportunities, which historically have provided us the greatest risk-weighted returns as we can appropriately leverage our installed base of equipment, existing manufacturing capacity, global distribution infrastructure, digital platforms and world-class R&D facilities. With the improving market environment and the progress we have made in new product development over the last several years, we see increasing numbers of attractive organic opportunities and are, therefore, increasing our capital expenditures to approximately $275 million in 2023. Next on the list of prioritizations is M&A, where we employ a disciplined returns-focused process. We approach M&A as an opportunistic means to accelerate already defined organic growth initiatives. This means that we avoid being in a position where we are pressured to complete an acquisition, reducing the likelihood that we overpay. We prioritize high rate of return, sustainable long-term growth opportunities that leverage our core competencies. But as previously noted, we are committed to returning excess capital to our shareholders, whether itâs through increasing our dividend or a share repurchase program. While our balance sheet remains solid, the recent anticipated near-term uses of cash to fund meaningful growth in our businesses, along with an M&A environment that is looking a bit more constructive means that we are not ready to increase return of capital to our shareholders at this time. We will continue to monitor sources and uses of cash as the year evolves and maintain a regular dialogue on this topic. Moving on to segment results. Our Wellbore Technologies segment generated $762 million in revenue during the fourth quarter, an increase of $21 million or 3% compared to the third quarter and 32% compared to the fourth quarter of 2021. Revenue growth was driven primarily by the second straight quarter of solid improvements in demand for our key drilling technologies in the Middle East, partially offset by a North American market that has plateaued and lingering supply chain challenges that delayed deliveries of drill pipe and motors. EBITDA grew to $146 million or 19.2% of revenue with soft flow-through due to a less favorable mix, lingering supply chain difficulties and associated costs required to expedite critical customer orders. Our Grant Prideco drill pipe business realized modest top line growth that was limited by supply chain disruption, including delays in receiving steel and coating materials, which resulted in customer deliveries slipping from Q4 to Q1. Incremental flow-through was also limited due to a significantly less favorable product mix. Despite these challenges, Grant Prideco posted its highest revenue quarter in three years and received its greatest volume of orders for any year since 2014. Orders improved 25% sequentially with strong demand from the Middle East and a notable pickup from offshore markets. Our ReedHycalog drill bit business saw a meaningful decline in revenue during the quarter, driven primarily by a large Q3 shipment to Asia that did not repeat a drop-off in Canadian activity and weather-related delays in the U.S. Despite supply chain challenges that are restricting deliveries of roller-cone bits, the business continued to realize solid growth in the Middle East and in geothermal markets as is highlighted under the significant achievements in our earnings release. Our downhole tools business reported revenue growth in the low-teens, led by a significant pickup of fishing tool sales into the Middle East and Asia Pacific. After realizing significant improvements during the third quarter, the operation had challenges procuring certain high-grade steel and elastomers needed for its high-spec stators, adversely affecting sales and rentals of the business units drilling motors. Despite the supply chain challenges and the resulting less favorable product mix, pricing increases instituted earlier in the year allowed the business to maintain respectable EBITDA flow-through. Our WellSite Services business posted a small sequential decrease in revenue primarily due to strong shipments of MPD equipment in Q3 that did not repeat. The decline in MPD sales was mostly offset by solid results from the business unitâs legacy operations. And weâre seeing growing opportunities for both our solid control and MPD offerings in offshore markets, including Mexico, Brazil, West Africa and Guyana and growing momentum in key land markets in the Middle East. This improving outlook was reflected in strong bookings for MPD capital equipment orders, which should serve as a growth catalyst for this business during 2023. Our Tuboscope business delivered a solid increase in revenue driven by the operationâs fifth straight quarter of double-digit growth in its coating operations. The business realized strong demand for pipe coating services in the Middle East and Asia for its Thru-Kote pipe sleeves in the Middle East and for glass reinforced Epoxy TK liners in Latin America and Europe. The business also continues to realize growing demand for its TK-Liner systems in geothermal applications and recently secured contracts for two new geothermal projects in Denmark, which will add to our total of more than 28 miles of large diameter TK lined pipe that we have delivered for geothermal applications since 2020. Our M/D Totco business posted another quarter of solid growth with outsized incrementals led by a strong improvement in the unit surface data acquisition operations in the Middle East, North America and Europe. This growth was partially offset by a small decrease in revenues from our eVolve wired drill pipe optimization services, resulting from capital sales in the third quarter that did not repeat. Outlook for our eVolve services remains bright with several customers signing new contracts and with demand for this service building in the Middle East. The unit is also realizing greater adoption of its latest Max digital product offerings which are currently installed on over 150 rigs utilizing over 800 of our Max Edge devices to simultaneously provide real-time data analytics in the field and at the operatorâs office. Additionally, we recently launched our Max Completions offering, which is remotely monitoring a frac job in the Williston Basin for a large independent operator. While weâre in the infancy of providing digital solutions, which drive higher levels of efficiencies for both drilling and now completion operations, M/D Totcoâs success in developing industry-leading digital solutions beyond its legacy data acquisition systems has already allowed the business to achieve its highest revenues and EBITDA in eight years, and the outlook remains bright. For our Wellbore Technologies segment, we expect demand for our key enabling drilling technologies to be supported by improving global oilfield activity, driving continued growth for the segment in 2023. However, we do expect seasonality to serve as headwinds to Q1 results, resulting in revenue and EBITDA for our Wellbore Technologies segment in the first quarter to be roughly in line with fourth quarter results. Our Completion & Production Solutions segment generated revenues of $738 million in the fourth quarter, an increase of 8% from the third quarter and an increase of 34% from the fourth quarter of 2021. Adjusted EBITDA increased $10 million sequentially and $64 million from the prior year to $66 million or 8.9% of sales. Sequential EBITDA flow-through of 18% was negatively impacted by a lower margin product mix. Relative to the fourth quarter of 2021, flow-through was 34%, resulting from improved execution against supply chain-related challenges, better absorption in our manufacturing facilities and improved pricing. Orders increased 13% to $557 million, the highest quarterly bookings the segment has achieved since 2014. Also of note is that this was the segmentâs eighth straight quarter with a book-to-bill over 100%. CAPS backlog at the end of the fourth quarter was $1.6 billion, up 8% sequentially and 24% year-over-year. Our Intervention & Stimulation Equipment business posted a strong increase in revenue, achieving its highest level since Q4 of 2019. The business is seeing a notable transition in demand from reactivations and refurbishment-related aftermarket work to new capital equipment sales resulting from our customersâ need to replace tired equipment with more efficient assets. As Clay mentioned, access to capital remains difficult for the industry. But the good news is that many of our customers are now generating healthy cash flows, their confidence in a sustained recovery is increasing, and many are now looking to lock in limited delivery slots that require substantial lead times. These factors combined to drive another solid quarter of order intake and the fifth straight quarter in which the business grew its backlog. Asset replacements, new technology to improve efficiencies and economics, lower emissions and longer laterals drove our order book in the fourth quarter. After selling our first new coiled tubing unit into the U.S. in three years during the third quarter, we received orders for 6 new coiled tubing units, 3 of which are destined for service in North America. We also saw a notable increase in demand for 30,000-foot large diameter pipe with 0.276-inch wall thickness to support completions of ultra-long lateral wells in West Texas. As noted in the press release, we booked 20,000 hydraulic horsepower of our eFrac pressure pumping equipment, and we also sold six hybrid electric IMAX wireline trucks as more customers see the opportunity to not only reduce emissions but to also lower their total cost of ownership by using our latest technologies. Also encouraging is that we are beginning to see higher demand from international markets, particularly from the Middle East. Our subsea flexible pipe business posted a mid-single-digit increase in sequential revenue. Margins compressed slightly as the effects of improving throughput were offset by a less favorable mix of projects. Orders for the quarter remained strong and resulted in the unitâs sixth straight quarter with a book-to-bill greater than 1. Equally important, we are realizing increasing pricing power as much of the spare capacity in the market has been absorbed or committed and customer demand continues to rebound. Our XL conductor pipe connection business experienced a significant sequential increase in revenue driven by strong execution and product deliveries to support several large projects in Latin America and the Gulf of Mexico. While we expect the typical seasonal pullback in deliveries during Q1, strong orders and steadily improving offshore activity should support a solid year for this operation. Our Process and Flow Technologies business posted a slight sequential increase in revenue. EBITDA was mostly flat after a strong rebound in the third quarter. While the effects of supply chain difficulties, shipyard constraints and inflation continue to pressure margins and push bookings to the right as operators recalibrate cost assumptions, recent customer conversations give us confidence in increasing FIDs which should result in a much stronger 2023 for this business. Our pump and mixture operations experienced a sequential decrease in revenue due to outsized shipments of pent-up orders from the lifting of COVID lockdowns in China during the third quarter that did not repeat. Bookings improved 55% sequentially and included a large equipment package for a pepper processing plant in New Mexico that will be able to process 30 million pounds of Cayenne Pepper Mash per year. NOV will provide 120 fiberglass storage vessels, each equipped with Chemineer agitators to achieve optimal mixing, 13 Moyno progressive cavity pumps to handle transfer loading and unloading and our GoConnect digital monitoring and control system to provide the customer with real-time equipment and process data to fine-tune operations, maintain quality and ensure equipment reliability. The unit also won an award to provide 24 Moyno progressive cavity pumps for sludge transfer and polymer pumping applications at a wastewater facility that will treat over 450 million gallons of wastewater per day. Despite the strong industrial orders in Q4, weâre sensing that our non oil and gas customers are growing more cautious due to uncertainty in the macroeconomic environment. Our fiberglass business posted flat revenue but delivered more than a 300 basis-point improvement in EBITDA margin due to a healthy increase in higher-margin offshore scrubber deliveries that more than offset the effect of the seasonal decline in fuel handling equipment sales. Orders remained strong and in addition to the previously mentioned tanks for the pepper processing plant the unit booked a large order for a semiconductor manufacturing facility in Texas. The strong order intake resulted in the business delivering its eighth straight quarter with a book-to-bill over 1 and an all-time high backlog going into 2023. For our Completion & Production Solutions segment, we expect seasonality and several large projects that are nearing completion to result in a mid-single-digit decrease in revenue with decremental margins in the 30% range. Our Rig Technologies segment generated revenues of $620 million in the fourth quarter, an increase of $109 million or 21% compared to the third quarter and 44% compared to the fourth quarter of 2021. The strong sequential growth was led by our aftermarket operations. Four straight quarters of growing spare part bookings combined with improving global supply chains, led to a sizable increase in shipments. The segment also posted a solid increase in capital equipment sales, which benefited from the delivery of a new land rig to a private drilling contractor in the U.S. and from a higher rate of progress on rig projects in Saudi Arabia. Adjusted EBITDA improved $36 million sequentially to $88 million or 14.2% of sales. New capital equipment orders increased $135 million or 113% sequentially and totaled $254 million. Book-to-bill was just below 1 times, a result of the 27% increase in revenue out of backlog during the fourth quarter. Total backlog for the segment at year-end was $2.79 billion, an increase of $26 million over the prior year. Fourth quarter orders were highlighted by bookings for the designs and jacking systems for two wind turbine installation vessels and a new BOP stack for a harsh environment semisubmersible rig. While demand for conventional rig equipment has improved three straight quarters, bookings remain subdued as contractors are still reticent to make large capital commitments. Encouragingly, both utilization and day rates for all major classes of rigs continue to improve. Land rig counts increased by 43 or 3% sequentially, almost all in international markets and average day rates continued to improve, up another 11% on average in the U.S. during Q4 as contracts roll off and rigs repriced to leading-edge rates. Contracted offshore counts improved 4% sequentially with jackup rig utilization reaching 80% and drillships 78%, resulting in higher day rates and longer duration contracts. These improvements should translate into better cash flow and growing confidence and outlook for our customers over time. While equipment orders remain modest, demand for our products and services is heading in the right direction, and the industry cycle is going through its normal progression at a very measured pace. It starts with simple reactivations of highly capable warm stacked rigs that moves to less capable cold stacked rigs, which require more effort to reactivate and often need upgrades to compete for work. Then, once fleets reach sufficiently high levels of utilization and day rates and operators seek higher productivity through newer and more advanced technology, demand for newbuilds will eventually take hold. Weâre moving through this natural cycle in both the land and offshore markets, and that progression is reflected in our results. Revenue from land customers in our aftermarket operations bottomed in Q3 2021 and has increased 92% from the trough. With leading edge day rates for top-tier land rigs north of $40,000 in the North American land markets, returns are now at a level well above newbuild economics. While we delivered a new land rig to a private U.S. contractor in Q4, capital discipline remains strong, particularly among public drillers who still have stacked rigs to reactivate, and weâre not expecting many more orders for new builds in North America this year. Customers remain focused on being disciplined and on driving efficiencies in their operations. However, weâre increasingly fielding calls inquiring about our new technologies that can potentially alleviate some of their pain points, including our ATOM RTX fully automated robotic system and our Maestro drilling power management system, which allows contractors to optimize power and fuel consumption during drilling operations and minimize emissions. In international land markets, the availability of modern rigs that can be cost effectively upgraded is significantly more limited. As a result, we have recently seen a meaningful improvement in the number of discussions we are having with customers regarding new rigs, particularly in the Middle East, Latin America and Asia. Aftermarket revenue from our offshore drilling contractor customers bottomed in the fourth quarter of 2021 and have increased 58% since that time. While we are not yet having discussions related to new floaters reflecting the longer cycle nature of the deepwater market, we are having discussions related to orders for new jack-ups. Additionally, there are meaningful opportunities for customers to continue reactivating and upgrading stacked rigs and to complete the 14 drillships that have been stranded at shipyards in Asia since 2015. We believe these rigs can be acquired and fully kitted out between $300 million to $350 million, a price which should produce a strong return for contractors in a $400,000-plus day rate environment. We estimate NOVâs addressable opportunity to properly equip and finish these rigs ranges anywhere from $20 million to $125 million per rig, while access to and cost of capital for rig contractors remains challenged, it is improving and a customer recently acquired one of these stacked rigs. All of these opportunities may take some time to materialize, but will eventually come. In the meantime, our volume of work from reactivations, recertifications and upgrades of the existing fleet continues to grow. As Clay touched on, we completed 15 such projects in the fourth quarter, including the reactivation of 9 previously stacked jack-ups. Additionally, we received awards for another 23, leaving us with a current backlog of 83 projects. In our wind business, the market for installation vessels remains strong as evidenced by the two orders for NOVâs proprietary NG-20000X vessel designs and jacking systems we received during the fourth quarter. We expect to see a decrease in demand for new wind orders in 2023, but we still expect a few orders this year and see a significant shortfall in available vessels needed to meet the forecasted demand for turbine installations in the â26 to â27 time frame. If this forecast holds, it should translate into nearly a dozen additional opportunities over the next several years for NOV. While 2023 is expected to be a year of growth and improved profitability for our Rig Technologies business, we expect seasonality and the timing of projects to result in first quarter revenues contracting 10% to 15% with decremental margins in the 30% range. Hey. Clay, going back to your comments about the offshore side and kind of the need for incremental investments and obviously the lack of capital or willingness to spend capital by some of the current owners, how do you see that playing out in terms of you mentioned who the ultimate providers of capital may be. But when you think about that just playing out and time frame of this playing out, how do you unpack that? Itâs a great question. In our view, itâs already starting to play out as the major integrated oil companies, as the big national oil companies who need the offshore rig industry to go back to work and perform drilling services are sitting down with those providers. I think theyâre being told, hey, youâre going to have to pay much higher day rates, youâre going to have to be much higher mobilization fees. Youâve seen day rates for 7th gen drillships, for instance, double year-over-year and now starting with the 4 handles pretty common. And so, I think thereâs just this recognition of reality here that this industry, offshore drillers have been beat up pretty bad through the downturn and have limited access to capital, and someone is going to have to pay for that. So the oil companies, I think, are the first ask on this. Thereâs other participants here as well. I mentioned, I think, in my prepared remarks that some of the shipyards that are sitting on rig construction projects that were stranded through the downturn are offering bareboat charters on those to drilling contractors, such that the shipyard can go out and find the capital to complete those projects, get those things out of their yards, transfer -- make those assets available to drilling contractors to operate them. And then, another potential source of capital that we think is going to play an increasingly bigger role, are these sovereign wealth funds, which have very deep pockets. And theyâre in these countries that rely on the petroleum industry to fund public services to balance their government budgets and so forth. And so, they donât appear to have the sort of constraints on lending to the industry that other provider -- more traditional providers of capital have. Great. Thatâs helpful. And then just as a follow-up, when we think about kind of how things have unfolded over the last two or three years, obviously, NOV has made a lot of overhauling of the cost structure through the downturn, which is, Iâm sure, enhancing margins as revenues start coming back. And as we think about this going forward, you mentioned supply chain issues and constraints there and just cost inflation around at plus pricing, which youâve been working on clawing back pricing from where we were before. But maybe just a little bit of color on kind of where pricing sits on average because I know it varies by product line. But kind of where we sit now versus kind of pre-COVID levels? And as I think about margins going forward, how much room do you have in pricing versus just your volume? Yes. First, I appreciate the question. Weâre very focused on -- the short answer to your question is, prices arenât high enough. We -- in 2019, we started taking a lot of costs out of our organization north of $900 million a year. Then, we hit the pandemic shutdown with demand really falling away to almost nothing and discounting happened, right? So, we track pricing, among other ways through like looking at baskets of products that we sell on an apples-and-apples basis. And -- so for many of those, we found that they felt kind of mid-teens by late 2020 or early 2021. Since that bottom, weâve been pushing on pricing very intentionally. Weâve talked on prior calls about that and have successfully clawed back most of those discounts. Thereâs lots of products that are priced now higher than they were in 2019. But the problem is that inflation has eroded a lot of that potential margin increase. And so, when we kind of step back and reflect on our financial results, given the heavy, heavy lift thatâs happened here on taking $900 million out of our cost structure, the erosion of that through inflation, the recovery of pricing, margins arenât really where they need to be yet. And so, one of the big focuses weâre going to have in the coming years continue to push on pricing, to continue to work towards an acceptable level of margins. But, as you correctly point out, weâre not out of the woods yet on supply chain disruptions. Weâre still seeing inflation in a lot of areas that we work, thereâs a lot of pressure on costs. And so, weâre going to have to really continue to maintain a very high level of focus on pricing and trying to get to an acceptable margin. Just I want to follow up on orders. You talked a lot about kind of growing momentum in subsegments and maybe some conservatives -- outlook and some others. So I donât know if you can maybe just kind of take a moment and walk through both kind of Rig Tech and CAPS, just real quickly, and maybe point to things that the investment community should be paying attention to and focus on when we think about potential for growth in those segments in â23. And I guess, I donât know if youâd want to comment, if you think that orders could actually be up for both segments in â23 as well. Yes. Iâll ask Jose to chime in on that as well. But broadly speaking, we -- as I said in my prepared remarks, weâre a little cautious on outlook for North America. Heretofore, through 2022, most of our intervention stimulation equipment order book has really been driven by North America. We kind of see that pivoting over in 2023 and more interest coming out of international markets, specifically the Middle East, which previously was more focused on used equipment and pricing there hasnât been as good. Weâre hearing opportunities to improve pricing and also a desire to put higher technology equipment into certain regions in the Middle East and elsewhere around the world. So, weâre pretty excited about that. The other side of the Completion & Production Solutions order book really are producers, mostly focused on offshore projects. And last year, projects felt like they were moving to the right a lot because of the high levels of inflation. I mentioned 30% sort of overall headline project cost increases werenât uncommon. Itâs a big sticker shock to a group of engineers at an oil company who have been working on a project for several years. I think as we move into 2023, the sort of lesson weâve learned about energy security, I think thereâs growing confidence around the highly constructive supply-demand outlook. And so, our gut feel is that operators are getting more confident about doing FIDs. I think, youâre hearing that from others in our space, too, that their expectation around FIDs, particularly focused on international gas and are moving forward. And so, our expectation is that has a pretty bright outlook as well. On the rig side, yes, I mean obviously, offshore is looking up, but still a lot of hesitancy here really of all drilling contractors about putting a lot more capital into their rig fleets. But if supply demand gets tighter and tighter and tighter, day rates tend to get pressured up. And so, our expectation is that the demand may grow. One real interesting area though is in the area of workover. Weâve had a surprising level of interest and demand for those, and thatâs within Rig Technologies. I think we sold something like 7 or 8, much higher spec workover rigs focused on longer laterals and a few other areas. But -- anyway, itâs across the board, both segments, given the challenges that the oil and gas industry face in the coming year to restore energy security, itâs a pretty good backdrop, I think, to start from. Clay covered it extremely well, maybe just one or two other things to sort of weave in. I mean, obviously, the market environment continues to improve. Weâre looking forward to maintaining really good bookings in â23 to what extent it really depends. And I think some of the commentary that Clay provided gives you an indication that there will be a little bit of a change in mix, particularly related to some of the offshore projects within CAPS. We can see some of our business units where we have had some of those projects kind of pushed to the right, pick up a little bit in â23. So, weâre looking forward to that. And then lastly, related to rig, just to tack on to Clayâs commentary, you mentioned or requested insights in the things that people should be looking for. And I think our commentary sort of gives you a flavor that weâre seeing very steady improvement in our rig business, obviously started with the aftermarket businesses. Theyâre both well off of their bottoms. But also from a capital equipment perspective, weâll -- weâve been seeing a lot of volatility in our bookings quarter-to-quarter, primarily related to the very large chunky bookings that weâve had in the offshore wind space. Weâve had three really nice quarters in a row of improved bookings at the conventional rig capital equipment business. And one of the things that kind of distorts the booking -- how you look at book-to-bill there is this massive backlog that we have associated with our Saudi rig manufacturing contract, which was that $1.8 billion of backlog, if you sort of strip that out in terms of the revenue produced by it and just sort of look at the quarter, excluding contributions from that facility, book-to-bill was a little bit over 100% from a conventional rig capital equipment standpoint. And so, weâre hopeful that continues to trend upward as we move through 2023. Okay. I appreciate the color. Maybe one quick follow-up. Investors seem to also be focused on kind of the Rig Tech aftermarket opportunities as the offshore activity was picking up. So, maybe if you could just speak to -- I guess, Iâm assuming that they had some nice growth last year. And given what you talked about, I think it was 23 -- you launched new -- 23 new reactivations in the fourth quarter. When you look at the opportunities for â23, whatâs out there? Do you think itâs going to be more heavy shallow water or deepwater reactivations and some new builds? And how should we think about the aftermarket business in â23 versus â22? Yes. I mean broadly, as the offshore drilling industry goes back to work, theyâre going to need more aftermarket spares. Thereâs certainly kind of a flush level of demand going into reactivations a little bit. The industry got really good at cannibalizing spare parts off of idled rigs and weâre rebuilding that to some degree. But 37 jack-ups contracted by Aramco, for instance, for Saudi Arabia, going to work higher levels of activity in Brazil. That all takes a lot of aftermarket to support. One of the big headwinds we faced in 2022 throughout the year was supply chain disruption of our aftermarket business. And what you saw in Q4 was the dam broke a little bit, better availability of casting since our manufacturing group really got after a 26% increase in their shipments into our aftermarket organization helped sort of underpin a 20% -- roughly 20% sort of spare parts sequential improvement in revenue there. That wonât necessarily repeat in Q1, but weâre making good progress and feel pretty good about the balance of the year. You touched on some of the underpinnings of this offshore cycle within Rig Tech with some of the bigger ticket items like floater reactivations, the stranded drillships between guys like Samsung and Hyundai [ph] and NVO jack-ups. I guess with these type of individual orders and the incremental floater demand that could be over 30 rigs over the next few years, what do you think the annual order potential is for Rig Tech a couple of years out? Thatâs a really hard question to answer, Luke. As Jose just said, it tends to be really, really lumpy. I would tell you the upward trajectory is good. And our expectation is we should continue to build momentum, supporting global drilling operations of all pipe and in offshore. But thereâs been so much downsizing thatâs happened since 2015 here. Our expectation is that we can really step up and generate good financial returns by supporting the industry globally without the rig newbuilds that we saw in kind of the prior super cycle. They come terrific. Weâre prepared to grow and provide whatever the industry requires and hopefully, that will come to pass. But the basic sort of blocking and tackling of drilling does work through a lot of spare parts. Itâs a high margin, high incremental business for us. As well, we continue to innovate around a lot of technologies and products for the oilfield. Jose mentioned our ATOM RTX robotics system that weâre introducing this year, super excited about that. We sold that into both land and offshore operations. Weâve got a couple of different emissions reduction technologies, our Eco Booster hydraulic system, our PowerBlade regenerative energy capture system, our Maestro system, all help both land and offshore drillers reduce their greenhouse gas emissions. And so, I think thereâs great opportunities for that. And then lastly, we talked a bit about digital solutions that we have available that I think will help shape order. So, weâre -- as opposed to just providing iron, which we did a lot of in this last super cycle, I think the next up-cycle, itâs going to be smarter iron and higher value-added iron, which I think will pave the way for higher margins and higher returns. Got it. And then maybe on the stranded drillships, you talked about what the content value could be to you kind of $20 million to $125 million a rig, on the -- floater reactivations weâve seen the offshore drillers quotes. But what could the content value be to you guys kind of per rig from what you see right now? Yes. Every rig is different. Theyâve been sort of stacked in different ways. Theyâre at different levels of completion. So, this is sort of the notional revenue range that Jose provided for kind of the rig reactivations. But as I mentioned, one of the bigger ticket items in that is potentially a second subsea BOP stack, which is like a $50 million way to make the rig compliant with the latest BSEE regulations. Good morning, team. And congrats on the good orders here. I had a couple of cash flow questions. And the first is, just as you think about 2023, can you walk us through some of the moving pieces? Recognizing free cash flow is super challenging to forecast in a growth environment like weâre in right now, but maybe you can walk through the different components ranging from working capital to other considerations that you want us to have dialed in for â23. Sure thing, Neil. Itâs a good question because there certainly are a lot of moving parts and pieces as we sort of think about 2023. And first and foremost, related to the near term, as we talked about in our prepared remarks, Q1 typically is a good seasonal use of cash with a number of payments that need to get made within the quarter. And then, the free cash flow tends to pick up, particularly in the second half of the year. But as we think about 2023, particularly, one of the tailwinds to us is hopefully continuing improvement from a supply chain perspective. However, with where weâre sitting right now, weâre still making sure that weâre doing everything that we possibly can to live up to our commitments to our customers. And at times, that means maintaining buffers within our inventory base, overstocking in certain key critical areas that obviously is a drag from a working capital perspective. Also, weâve had really, really strong growth during -- to this point in the recovery, and we expect to continue to have strong growth through â23 and hopefully well beyond. So to be determined precisely how much normal working capital that will consume, combined with the ongoing supply chain issues. And then probably lastly, as we sort of look at the transition from â22 to â23, our revenue mix is going to become much more internationally weighted. And so international operations tend to have longer cash conversion cycles, combination of larger projects, things take a little bit longer to work through the system, meaning slightly higher levels of inventory to meet those project orders as well as longer DSOs associated with the international client base. So, thatâs kind of the headwind. And then otherwise, as you know, a lot of the things that we do are very large-scale projects that have large progress payments along the way and/or completion payments. And those are sorts of things that can make material differences from one quarter to the next. And so, thatâs why we generally try not to get too terribly excited about free cash flow from one quarter to the next, but are really confident that weâll have a build in working capital during the course of the year to coincide with the growth in top line, but ultimately, all that working capital translates into free cash flow in the future. I would like to add, too, our historical working capital intensity at 25% this quarter in the high 20% range is much better than it was before the prior super cycle. So, I think the organization has made a lot of progress in becoming more efficient around our working capital requirements, required to support top line growth. Yes. Thatâs very clear. I think Clay, thatâs - a follow-up. You guys have a terrific balance sheet here, and you made some comments around M&A. So, I just want your perspective on whether you would leverage that balance sheet to opportunistically add to the portfolio? And to the extent that is something youâd consider, do you see any logical areas for addition? Well, weâve been very clear, Neil, over the years about the need for a strong balance sheet. And I would say, again, weâre not forecasting new builds anytime soon, but you go back to the last super cycle from 2004 to 2014, our top line grew 6.5-fold pro forma for our DNOW spin. And so the sort of the top line growth potential here is very, very high and it does take working capital to support that. So we need to be very careful to make sure that coming off bottom that we donât pile on leverage. Weâve done a great job delevering through this downturn. And while itâs -- the M&A space is getting really interesting and there are a number of stranded assets out there the PEs and other sponsors have had for a long time and are kind of looking to exit creating opportunities, weâre going to be -- weâre going to continue to be very cautious, very careful, very focused on risk management through this process and make transactions that we do will be smart. Good morning, everybody. Two things for me. One is -- I donât know if you have comments around this or not, but weâve heard of a couple of manufacturers, one manufacturer whoâs effectively financing new builds on the frac fleet side, on the [indiscernible] side. How does this -- how do you think about that and how do you think about that sort of impacting your order flow, if at all? I think weâre really good at developing technologies. Weâre really good at manufacturing. We do that efficiently. We manage costs. I donât think weâre very good at banking and financing. And I really, really -- given my balance sheet comments around Neilâs question, I think we -- I think everyone should be very, very careful about financing in this space, deeply cyclical and potentially fraught with peril. So yes, weâre well aware of in a couple of product categories where we face competitors that, for whatever reason, have put deals on the table. And I think coming out of really low volumes during the pandemic, that sort of prompted a lot of desperation. And so, weâll see how that turns out for them. But we donât need to practice. And we actually do this for financial returns, and we think the highest and best use of our capital is not investing in our customersâ fleets. That makes sense. I just wanted to get your views. And the second, just on the wellbore side, can you just remind us when we think about the international versus North American mix? Just sort of how we should be thinking about growth in light of your comments on both the international and the domestic side as we think about â23? Thatâs about 50-50, Stephen. And you heard my comments around sort of our outlook for both areas. I did -- I want to be clear, although weâre not necessarily expecting an activity increase in North America and I think the pressure on gas, you could even as modest decrease, we do expect that overall North American investment by E&Ps and overall revenue for NOV probably should be up in 2023, and thatâs because pricing marched upwards across North America for most all participants in oilfield services throughout 2022. So, that kind of year-on-year comparison, that all kind of hangs together. I think the most -- some of the most recent surveys point to kind of mid-teens year-on-year E&P, CapEx on drilling and completion work in North America. But I think itâs going to take that level of spending increase just to keep activity flat, if that makes sense. Thank you. That does conclude the Q&A. Iâd like to turn the call back over to Clay Williams for any closing remarks. Thank you, Valerie. I appreciate everyone joining us this morning and look forward to speaking with you again on our next earnings call in April. Have a great day. Thank you. Ladies and gentlemen, this does conclude todayâs conference. Thank you all for participating. You may now disconnect. Have a great day.
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Good day, and welcome to the Western Union Fourth Quarter and Full Year 2022 Results Conference Call. All participants will be in a listen-only mode. After todayâs presentation there will be an opportunity to ask questions. Please note this event is being recorded. Thank you. On today's call, we will discuss the company's fourth quarter 2022 results, our financial outlook for 2023, and then we will take your questions. The slides accompany this call and webcast can be found at westernunion.com under the Investor Relations tab and will remain available after the call. Additional operational statistics have been provided in supplemental tables with our press release. On our call today is our CEO, Devin McGranahan; and our CFO, Matt Cagwin. Today's call is being recorded, and our comments include forward-looking statements. Please refer to cautionary language in the earnings release and in Western Union's filings with the Securities and Exchange Commission, including the 2021 Form 10-K for additional information concerning factors that could cause actual results to differ materially from the forward- looking statements. During the call, we will discuss some items that do not conform to generally accepted accounting principles. We have reconciled those items and the most comparable GAAP measures in our earnings release attached to our Form 8-K as well as on our website, westernunion.com, under the Investor Relations section. Good afternoon, and welcome to Western Union's fourth quarter 2022 financial results conference call. Our reported revenue in the fourth quarter was $1.1 billion, and excluding contributions from Business Solutions, decreased 6% on a constant currency basis. This growth reflects a negative impact of 3 percentage points from the suspension of operations in Russia and Belarus continued softness in our retail business as well as our new branded digital marketing strategy, which includes promotional pricing. Adjusted earnings per share was $0.32 in the quarter compared with $0.64 in the prior year period, which included a contribution of $0.08 from Business Solutions and $0.06 from operations in Russia and Belarus. The decrease in adjusted EPS was driven lower by lower operating profit and a $0.05 negative currency impact and a higher effective tax rate, partially offset by lower share count. We continue to focus on maximizing cash flow and on returning capital to our shareholders. In 2022, we returned over $700 million to the shareholders, including $175 million of share buyback in the fourth quarter. Matt will further discuss our financial results in more detail and provide an update on our 2023 financial outlook. On the macro front, 2022 is a challenging year for many businesses with interest rates rising to the highest levels in over a decade and global inflation at the highest point in multiple decades. Despite that backdrop, our customers continued to show their resilience with constant currency principal per transaction up 4% in the fourth quarter and the full year. The IMF updated their global growth forecast last week. They now expect GDP growth of 2.9% in 2023, which will be down from 3.4% in 2022. We have come to believe that remittance volume closely tracks with global GDP growth. As such, global remittance volume continues to remain strong, according to the World Bank's most recent migration and development brief, which was published in November. They estimated that global remittance flows to the low and middle income countries grew at 5% in '22 and project a further 2% growth in 2023. We continue to monitor macroeconomic variables that could influence our business, but our expectation is that the backdrop for 2023 will remain similar to what we have experienced in 2022, and we have included these assumptions in our 2023 outlook. Last October, we launched Evolve 2025 strategy to return Western Union to growth by becoming the market leader in providing accessible financial services to the aspiring populations of the world. To achieve this goal, we have been working to revitalize our core retail and digital remittance businesses in launch new products and services to expand our value proposition to our 120 million plus customers around the world. In August, we outlined our plan to accelerate investment in the back half of the year. We achieved this goal with increased investment in our technology platforms and in our digital marketing. These investments are focused on building core new technology to better enable world-class customer and agent experiences. As we highlighted yesterday, improving customer retention is an important driver of returning Western Union to positive growth. We are laser-focused on creating world-class experiences across our channels and products that will make it easier for customers to want to transact with us the first time and every time after. While our investment levels were heavier in the fourth quarter than I would expect on an ongoing basis, we recognized that in order to compete with many of our digital-first competitors, we need comparable customer experiences. And we'll want to continue to iterate and innovate every step of the customer journey. A few notable examples of investments in the fourth quarter include: First, in our digital bank, in February of 2022, we launched a digital bank in Germany and Romania with the goal of creating a digital wallet-based payment platform. As we evolve our model from a transaction-based relationship to an account-based relationship, we expect to see increased customer engagement through more frequent interactions and ultimately improve customer retention. We believe an account-based model will provide us with a better platform also for the expansion of new products and services. In Q3, we expanded our digital bank offering to Poland, and in Q4, we added Italy. By ending send-and-receive country pairs, we are experimenting with how this approach can maximize the benefits of our 2-sided network. The project is progressing. And the countries we have now launched, we have a total of approximately 150,000 onboarded customers. Our goal for 2023 is to expand our digital wallet and financial ecosystem to a number of additional markets. And in the fourth quarter, we made investments to enable us to launch our digital wallet in 2 additional European countries as well as our first 2 launches outside of Europe, including the United States, the largest remittance end market in the world; and Brazil, the largest economy in Latin America. In addition to our digital bank, in the quarter, we also still continued the development of our new retail point-of- sale system. We believe this new POS will improve both agent and customer experience and will help change the trajectory of our retail business. We began a pilot of the new POS in select locations in the U.S. in December. And we believe that removing friction from our retail transaction process will improve not only transaction abandonment rates but will allow our agent partners to serve more customers, ultimately creating a better experience for both our agents and our customers. Finally, driven by our new go-to-market strategy in the U.S., we made the decision to invest increased investment in our marketing program in digital customer acquisition in the fourth quarter so that we could test and learn. We added additional dollars behind the strategy in the United States and also rolled out similar strategic programs in a few European markets as we continue to scale the program worldwide. As we discussed at Investor Day, returning our digital business to positive customer and transaction growth is our top priority. We are shifting our approach for maximizing revenue per transaction, maximizing customer acquisition and growing customer lifetime value. This change has required us to rethink our approach to new customer offers and our approach to maximizing top-of-funnel effectiveness on every marketing dollar. I am pleased to tell you we believe it is working. We reported to you last quarter that new U.S. outbound branded digital customers increased 26% year-over-year in the month of September. Today, I am pleased to report that, that momentum we saw in September continued through the fourth quarter with new U.S. outbound branded digital customers up 30% year-over-year, which is now contributing to an improvement in our transaction trends as well. In Q4, we saw U.S. outbound branded digital transactions grow at 5%, a clear reversal of the decelerating trends we've seen in the business earlier in the year and the fastest transaction growth rate since the fourth quarter of 2021. Growing customers and transaction is important, but so is increasing customer lifetime value. In the near term, increasing retention is the lever and our focus. By simplifying repeat send experiences and increasing our ongoing CRM efforts, we are starting to see improvements. As a case example, if we look at fourth quarter retention rates for our newly acquired U.S. outbound September cohort, going back several years for comparison, the 90-day retention rate for that cohort is the highest we've ever seen. Not only are we acquiring now more U.S. outbound branded digital customers, but we are retaining those customers at a higher rate than we have in the past. While it is clearly too early to definitively say what the ultimate lifetime value of these new customers will be. Early results show promise as typically around 75% of the full year retention value is captured in the 90-day retention rate. Given what we are seeing with transaction growth and retention rates among this new cohort, we believe these new customers are clearly value accretive even at a lower revenue per transaction. The last topic that I'd like to discuss is the success we are seeing in Latin America, which has continued to perform with double-digit revenue growth in the fourth quarter. Latin America is a great example of where we are improving our distribution both via owned locations in conjunction with our agent partners. As we discussed on the second quarter call, our corporate-owned locations in Brazil, while only 5% of our retail footprint, accounted for over 50% of the revenue in that country. In 2022, we opened over 50 new corporate- owned locations in Latin America, including new locations in Argentina, Peru and Brazil. Given the right mix of distribution like we have in Latin America, we are seeing results. In Q4, LACA saw 16% new cross-border customer growth with cross-border monthly active users up 11%. Marginally increasing our footprint of exclusive Western Union branded corporate-owned and concept stores in high-volume locations allows us to better control the customer experience, increase the number of products and services we offer, promote the retail to digital escalator, and assist with the eventual adoption of our digital wallet and our financial ecosystem. Importantly, we are able to add these kinds of locations at attractive economics with low capital and oftentimes generate above corporate average operating margins. Our goal is to concentrate corporate-owned and concept stores in high-density areas of the network while continuing to maintain and expand our extremely broad and valuable agent footprint. Given the success we have seen in Latin America, our plan for 2023 is to open another 50 corporate-owned locations in the region and also expand this model of controlled distribution into other parts of our network. Europe in 2022, we opened 15 new concept stores across the region and 1 new corporate-owned location in the Central Madrid train station. In a quick update, Melody, our partner in Rome that we highlighted at Investor Day, will now have 7 stores live, branded Western Union, that includes a new store in Italy that she is opening this week. She and we together are enabling us to better serve the Filipino community across Europe. Before I turn the call over to Matt to discuss our financial results in more detail, I would like to highlight a few key partnerships. First, we are pleased to announce the signing of 7-Eleven stores across Mexico. Mexico is one of the largest inbound remittance markets in the world. And we look forward to offering our remittance services at over 1,800,711 locations across the country. Next, we are pleased to announce the extension of our long-term and exclusive relationship with the Rite Aid, signing a new 5-year partnership. Rite Aid is one of the leading consumer retail stores in the United States and a long-term valuable partner of Western Union. Finally, I'm very pleased to announce that Matt Cagwin was appointed the Chief Financial Officer of Western Union. Matt joined us in July of last year as the Head of Business Unit Financial Planning and Analysis and served as the interim CFO since September. Matt brings a wealth of experience to the role, most recently serving as the CFO of the Merchant Acceptance division of Fiserv First Data. Thank you, Devin. And good afternoon, everyone. I'm pleased to be here with you today to walk through our fourth quarter results and our 2023 financial outlook. Information for the full year results can be found in our press release and the attached financial schedules. Fourth quarter results were in line with our expectations and our 2022 adjusted full year financial outlook, although well below what we believe to be our long-term potential. Overall, 2022 was a challenging year with the start of the conflict between Russia and the Ukraine, the increase in macroeconomic uncertainty given high inflation, rising interest rates and slowing global economy. We also announced the migration of 2 key retail European agents, the first of which that took effect in Q4. While headwinds will continue into 2023, we are confident that we can move the needle in the right direction as we continue to lay the building for our Evolve 2025 strategy. We'll go through our 2023 outlook in more detail shortly. Before I do that, let's move into the fourth quarter results. Fourth quarter adjusted revenue was down 6% to $1.1 billion. The suspension of our operations in Russia, Belarus impacted the revenue by 3%. Q4 included a number of dynamics, including the net impact of promotional pricing activities, and the loss of a European agent, which negatively impacted our revenue by 2% in the quarter and was partially offset by the growth of other and a 1% benefit from Argentina inflation. Adjusted operating margin was 15.8% in the quarter compared to 24.9% last year, which was positively impacted by 60 basis points from the inclusion of Business Solutions last year. Full year operating margin was 20.4%, landing in the midpoint of our range of our outlook. As Devin highlighted earlier, we accelerated investment in the quarter, supporting our Evolve 2025 strategy, including the expansion of our financial ecosystem, the implementation, scaling of our new go-to-market branded digital strategy and the design and build of our new point-of-sale system. The decrease in fourth quarter operating margin was driven by lower revenue, the rollout of our new brand digital strategy as well as the increase in technology investments. The adjusted effective tax rate in the quarter was 14.7% compared to 12.1% in the prior year period. The increase in adjusted effective tax rate was primarily due to discrete tax benefits in the prior year period. Now moving on to adjusted EPS, which was $0.32 in the quarter compared to $0.64 in the prior year period. The decrease in adjusted EPS was primarily driven by lower operating profits, a $0.05 negative impact of currency, a higher effective tax rate, partially offset by lower share count. And now turning to our C2C segment. Revenue decreased 9% on a constant currency basis, driven by softness in our retail business and promotional activities related to our new branded digital go-to-market strategy. Transactions in our C2C segment declined 12% in the quarter. Russia, Belarus negatively impacted revenue and transactions by 3 percentage points and 9 percentage points, respectively. When you look at our branded digital business, revenue declined 6% on a constant currency basis. In contrast, transactions grew 2% by our new go-to-market strategy, which was launched in the U.S. during the third quarter. Earlier, Devin spoke about how our strategy drove a 30% growth in new U.S. outbound branded digital customers in the quarter and reversed a decelerating transaction trend that we have seen in the business for a number of quarters. And in the fourth quarter, global new branded digital customers grew approximately 14%. Now moving on to the regional results. In the fourth quarter, North America continued to decrease 7% while transactions declined 2%. The U.S. domestic business and the U.S. outbound business to Russia continued to be a drag on our results. While revenue was also adversely affected by 4% from the promotional price activity in the quarter, as discussed earlier. We were pleased by the continued momentum that we saw in our new U.S. outbound branded digital customers. We saw a 3 percentage point transaction growth in North America brand into digital business, which was a 600 basis point improvement versus Q3, which we believe is another proof point that our strategy is moving us in the right direction. Revenue in Europe and CIS region was down 17% on a constant currency basis with transaction declines of 31%. Russia and Belarus adversely impacted adjusted revenue by 8 percentage points and transactions by 26 percentage points. The region continues to face difficult macro backdrop, competitive pressures and was impacted by the loss of a key retail agent during the quarter. Even with the agent loss, revenue trends improved in the fourth quarter versus the first half of the year, excluding the impact of Russia and Belarus. Revenue in the Middle East, Africa, South Asia region, [indiscernible] on a constant currency basis, while transactions decreased 5%. Softness in retail and digital-right label businesses were partially offset by growth in our branded digital business. Revenue growth in Latin America and Caribbean regions accelerated and was up 13% in the quarter on a constant currency basis with transaction growth of 8%. The solid performance in the quarter was led by strength in Ecuador, Venezuela and Nicaragua. And finally, revenue in APAC region was down 14% on a constant currency basis, with transaction declines of 12% due to softness in Australia, Japan and Korea. Now turning to other revenue, which primarily consist of retail bill payments in Argentina and the United States and retail money order in the U.S., which represents 7% of the total company revenue and grew 20% year-over- year on a reported basis. During the fourth quarter, we completed the closing of the second closing of business solution divestiture, transferring the United Kingdom operations. The third closing, which includes the European operations, is currently expected to occur in the second quarter of 2023, subject to regulatory approvals. As a reminder, we've already received the full proceeds from the sale. Now turning to cash flow and balance sheet. In 2022, we generated $582 million of operating cash flow, which included a transition tax payment of $64 million paid in the second quarter. These transition tax payments resulted from 2017 U.S. Tax Act and will increase annually over the next 3 years and stop after 2025. In 2022, we also returned $713 million to shareholders through a combination of dividends and share repurchases, continuing our strong track record to return capital to our shareholders. Today, we announced that our Board of Directors approved a $0.235 quarterly dividend payable on March 31, 2023. We also went up our capital expenditures, which were down -- which were $208 million in 2022, which was down 3% versus 2021, with a mix shifting from agent signing bonuses to more software development. And finally, at the end of the quarter, we have cash and cash equivalents of $1.3 billion and debt of $2.6 billion, down roughly $400 million from a year ago. With our leverage ratio now sitting at 2.4 times and 1.2 times on a net basis, which supports our strong balance sheet position and provides us flexibility for potential M&A while we target to maintain our investment-grade credit rating. And then finally, as part of our ongoing operating expense deployment program to optimize our expense base, in 2022, we invested approximately $50 million. This program allowed us to increase our funding in various strategic initiatives like building out our digital wallet, our financial ecosystem and creating our new point-of-sale system, enhancing our digital transaction platform, and creating an integrated omnichannel experience. We are already making good progress on reallocating expenses in 2023, and I look forward to providing additional updates as the year progresses. Now moving to our outlook. Today, we reaffirmed the 2023 adjusted financial outlook we provided at our 2022 Investor Day. Our outlook assumes no major changes in macroeconomic conditions, including changes in foreign currency. We expect adjusted revenue to be down 2% to 4%. As I mentioned earlier, 2023 will face headwinds from Russia, Belarus in Q1 and the loss of 2 European agents throughout the year. We expect the adjusted operating margin to be in the range of approximately 19% to 21%. In the first half of 2023, we expect margins to be below our full year range as we continue to make product investments, expense redeployment related to our cost efficiency program and lapping the impact of Russia and Belarus. And finally, adjusted EPS is expected to be in the range of $1.55 to $1.65. Expected year-over-year decrease in adjusted EPS includes $0.18 related to the sale of Business Solutions, agent losses, Russian and Belarus and currency impacts. Lastly, we would like to provide an update on our 4 key performance indicators that we talked about at Investor Day. In 2022, we improved retail retention by 46 basis points year-over-year. Our goal is to improve this metric by 200 basis points annually, driven by technology improvements, and improvements in our agent and customer experience. Our second performance goal is to grow our new branded digital customers by double digit. Given the success of our new branded digital go-to-market strategy, I'm pleased to report that we've achieved a 14% new customer growth in the fourth quarter. Our third KPI is a 20% omnichannel customer growth. This metric was flat year-over- year in 2022, in line with our assumptions as we believe we need to make improvements to our customer journey and loyalty programs before we'll be able to meaningfully improve our omnichannel customer growth. And finally, the last center we talked about at Investor Day was our ecosystem. Our ecosystem added 15,000 customers a month on average over the past 3 months. We believe our longer-term goal of 100,000 a month will be possible with the rollout of large consumer bases like the United States, Brazil, and we look forward to launching our digital wallet in those countries in the coming quarters. To recap, last year, we delivered our adjusted full year financial outlook and launched our Evolve 2025 strategy, which aims to put us on a path toward sustainable long-term growth. So far, we've made good progress on laying the foundation of our strategy, including accelerating investments and look forward to providing more updates as we continue our journey. I appreciate you guys going through all the detail here. So the LACA acceleration, I thought that was really interesting. You noted 3 countries, but is there a way to elaborate on some of the acceleration and maybe the attribution in terms of what you've done to create that and whether or not that is sustainable or applicable to some other region that we should be tracking here? Tien-Tsin, thank you for calling in today. LACA is a great example of when our strategy comes together, how it can be successful. And so there are 3 elements going on in LACA. One is, as I highlighted, the investment in optimizing our retail network and in making sure that we have high-quality distribution in the right places to serve our customers. The second, as you can see, LACA is starting the evolution that's happened in much of the rest of the world to go digital. And we are positioned well in many of those countries, particularly in Brazil, Argentina, Panama. And so we've seen very strong digital growth. The third is we have a strong operating model in LACA, and we've invested marketing dollars in increasing our brand awareness and the effectiveness we have in those markets, which is paying dividends. Tien-Tsin, just as you think about it, those are the 3 large ones that are driving it. But as Devin just highlighted before, we're seeing high double digit, low triple digit growth in our digital business, and we're seeing very solid growth across most of the region when you look at from retail standpoint. I think we believe its quite sustainable and early returns I would say, 2023 will show strong performance in LACA, again, as we saw in 2022. I appreciate the complete answer there it definitely stood out to us. So my quick follow-up, if you don't mind, maybe for you, Matt, you compress on the CFO on the take over here. Just on the first half, I think you mentioned it would be below full year range. I just want to make sure I caught that correctly from a modelling standpoint. I know there's a lot of investments going on with additional banks, and whatnot. So I just wonder if we caught that correctly. Absolutely, you did. So I would view Q4 here as a low watermark, but our -- just to reiterate our guidance was 19% to 21%. We'd expect to be below that for the first half of the year and then progress into the range and close up in the range for the full year as the year progresses. The trend we're seeing on the digital customer acquisition, specifically in the U.S. outbound, was obviously very strong. And it continued to move in the right direction from last quarter into this quarter. I guess maybe just in a bigger picture way, if you can talk to revisit the strategy of what's working there? What kind of lag effect you'd expect us to see around that turning into transactions? And then I know there's been marketing and pricing initiatives that obviously impact the yield. Maybe just touch on the timing and when that all cash goes up. And so what kind of trends we should be looking forward to in digital again in 12 months? Yes. So Darren, it's great to hear you. Thanks for joining the call. We are excited about the work that first, we did in the U.S. and now we're starting to see similar, although a little bit more muted results in other places in the world where we've launched the program. The program has 3 fundamental levers. First, as you highlighted, being in the market and being competitive with new customer offers and making sure that new customer segment pricing again reflects market and competitive reality. The second is to optimize our marketing funnel efficacy, getting the mix right, getting dollars downloaded in the funnel and making sure that we are creating the highest return for each marketing dollar. Finally, we are optimizing the new customer experience and targeting people's ability to get through our onboarding and KYC process with as few as steps as possible, which is increasing conversion rates for new customers to Western Union. Those 3 elements and different mixes we use around the world depending on where we are from a market position, and we are seeing strong results everywhere we're launching it, although the U.S. is so far the strongest result that we've seen. Matt can talk a little bit more about the lapping effect on when we expect, as you can see, we believe that revenue growth will reach transaction growth as we work our way through these cohorts of adding new customers. And so the long-term investment potential for this is high. Yes. Thank you, Devin. And Darrin, thanks for the question. As you think about -- really, I think it's on a cohort basis. We launched and we talked about previously, middle of Q3, we launched the U.S. You've highlighted now for 2 quarters in a row, the great results we're starting to see from there. And obviously highlighted the overall new customer growth in digital space for the whole world. As you think about it from a cohort standpoint, we would expect this to start producing positive revenue growth in that couple of quarter standpoint within a year as you think about it. It does vary by region. Our teams are working very feverishly on looking at other ways to maximize it, but we're looking to also max by the number of customers. So I view it as positive within the year. Great to hear. Just a very quick follow-up. I mean, it's probably -- I'm probably the only one is going to ask about this, but other and the C2B segment looked like it performed better. Just -- I know some of that is the moving parts. Can you just quickly update on what the strength there was an that sustainable? Darrin, just a reminder, I didn't quite note before, but that area is largely made up of our biller business in the U.S. and Argentina as well as our money order business here in the U.S. Last quarter, it was muted results because of 2 things. One is we had some currency headwinds that we're experiencing down in Argentina as well as we rebalanced our -- we have a large investment portfolio that rolls up into that business, part of our money wear business that we rebalanced last quarter to take advantage of the current market conditions. Those are -- the currency has reverted back and is a tailwind now for us a bit. And then we also have a pretty large pickup from the rebalancing of our investment portfolio. We would expect it to be a strong underlying business as well as a pretty good result on the investment side for the foreseeable future in the rest of this year. I appreciate the call-out on Europe and CIS, which you've talked about previously, the loss of some large European agents besides the, say, Russia and Belarus headwinds. If we strip those out and think about Europe and CIS on a go-forward basis, perhaps normalize in mid-2023, early 2024, what does the transaction and revenue dynamics look like in such a large international region for you? You're the largest really outside of the U.S. So let me start, David, great to have you on the call. Thank you. And I'll let Matt pick up. We have a varying landscape in Europe. And so if you look at a country like Spain, we have a very strong performance there. Mainly because of the corridors out of Spain go to loco where we have strong market and strong brand. If you look at Central Europe to Africa that's been under pressure from competitive forces and for migratory results almost the entire year. So on a kind of country by country and quarter-by-quarter basis, we have a high degree of variability in Europe. If you strip out the impact of Russia, Belarus, and eventually impact of losing those 2 large agents, I believe we're approaching kind of flattish overall transaction trajectories. As Matt said, the back half of the year strength and growth of transactions and the beginning of the growth in returning to revenue neutrality, given the size and the competitive nature of the region. But again, it's highly variable by country and by corridor segment. Just to build on what Devin has talked about. I mean, I think you can get these numbers out there. But our overall transaction growth, including Russia, Belarus, is down 31% this quarter. That's an improvement of 1% versus last quarter, and it's a couple of hundred basis point improvement from the first half of the year. When you strip out Russia, Belarus, it actually got worse by about 100 basis points quarter-over-quarter, but that's because we lost an agent and about half of our decline this quarter was due to losing the agent. That's how you can think about the core business itself, is it starting to trend towards the right direction, making pretty meaningful improvement in the first half with the headwind we have on the lost agent here in Q4. Yes, the anniversary of it is in the middle of '24. The agent loss isn't going to happen until middle of this year, sometime. I wanted to ask you about the owned concept retail locations and just whether we should sort of think of your efforts there as the beginning of a longer-term shift to a more direct distribution model. I guess the question is sort of when you look out 5 years or so, should we expect there to be a great deal more direct distribution at some point, maybe even the majority of the distribution? So I would say no. The way we are looking at it is kind of a peer of efficacy and control. So at the very top of the pyramid, are the Western Union owned and managed locations. And in a given market, there'll just be a handful. So if we got to a couple of hundred in a region like Europe, that's going to be a lot. In LACA, we're kind of between Argentina, and we're at a couple of hundred and we'll add maybe 50 or 100 more over time. The next is this notion of branded exclusive with an aging partner, which we call concept stores. We seek particularly in markets like Europe, where the market is much more independent. We have -- as we highlighted some losses with our historic large exclusive agents, a desire to build out that model, I'll call it the Melody model, that I highlighted and help those agents expand on a branded and exclusive basis. Underneath that, we have our large strategic partners. I highlighted our Rite Aid renewal. We still have several very privileged post-office relationships around the world, which in general are branded and exclusive. And then under that, we have the large independent agent, many times nonexclusive networks. So we continue to want to make sure that we have access to Western Union products and services for every customer in every location and how we manage that pyramid depends on the nature of the customer base and the potential for us to control in those very high-volume very strategic locations and entirely owned in Western Union location. But I would not interpret that to be somehow we're shifting the fundamental mix and nature of both our distribution model and/or the economics of our distribution model. One follow-up for me. Can you talk about the monetization strategy for the digital wallet and how your thinking there is kind of evolving I'm not sure if there's a revenue and/or margin profile that is worthwhile talking about today. If there is, please enlighten us. But how do you think about that being a contributor over time in terms of monetization revenue profit? So the business case on the development and delivery of the wallet-based ecosystem entirely is based on increases in retention. Our ability to increase retention through a more interactive and account-based experience is the justification for the investment in the platform. And that's just around our core economics of international money transfer from the digital platform. Incrementally, over time, we expect to see some benefit from the value of interchange that comes from issuing debit cards, the value of prepaid that comes from linking that to a digital wallet or digital experience. the value of accelerating our bill payment business from mostly a retail footprint today into the digital ecosystem and the ability to bring foreign exchange services and multicurrency aspects to the digital wallet for people who want to buy and hold different kinds of currency. So we do see incremental revenue streams over time that will develop as we enroll a greater percentage of our digital customers in an account-based or wallet-based model. The only thing I'd add, just a reminder, 1% improvement in our retention, which is the largest driver of this, is about $30 million to $40 million benefit to us. Congratulations, Matt, on the CFO role. Just a question on pricing. Are you seeing -- are you expecting to have any other pricing actions to this year, either in your digital or your cash to cash business? So Rayna, we continue to optimize our prices. As you well know, we compete in 20,000 corridors, and we price on the basis of geography, corridor, customer segment and in some cases, even time of day. So our pricing is a very dynamic model, and we intend to and we'll continue to adjust that almost in real time accordingly around the world. So you can expect to continue to see us optimizing pricing to drive our business. It was interesting. One of our competitors called out on their most recent earnings call, the inefficacy of new customer offers. So clearly, someone's paying attention and listening and commenting on what we're doing. Our experience has been, and as I highlighted, the customers that we're acquiring with our new offers are resulting in a higher quality customer with greater near-term attention ability and greater second and third transaction timing than we saw when we were not offering promotional pricing offers for new customer acquisition. So we remain convinced that this is a strategy that can drive long-term value creation for Western Union shareholders and will return our digital business to customer growth, transaction growth and ultimately, revenue growth. And then can you just help us understand what needs to happen this year to get to your high end of your operating margin guidance of 21% versus the low end, that 19%? Rayna, this is Matt. And again, thank you very much for my congratulations. I'm very excited to be here at this iconic company. There's a lot of moving parts that could do that. It's hard to predict what will happen with the macroeconomic conditions, what will happen with our competitor situation. So I wouldn't want to speculate here on this call. Rayna, because I'm a CEO and not a CFO, the single greatest contributor to achieving the higher end of the margin would be above expectation growth. So this is a business model that has a moderate fixed cost base that if we are able through these programs that we're driving to be at the top end of our expected range that will help us have a better than bottom end of our range margin contribution. Growth would be elixir? Devin, I just want to make sure I understand that when you talk about the World Bank, I think you grew 5% last year and 2% this year. And then on this slide, we're talking about the C2C principal transaction on constant currency growing 4%. I just want to make sure I understand, are we growing then in line with the market? Or are we -- how do you think about share gains, share losses versus the market right now and where you want to be? I think it's quite clear given the overall market growth that we are a shared donor and have been for some significant period of time. As I have said publicly, much of the outsized growth from our competitors has been at the expense of Western Union. As we revitalize our go-to-market strategy as we reinvest in both our retail platform, our retail marketing and our new approach to branding. We anticipate to stem the donation of share to our competitors, and I believe we are seeing the evidence of that with -- if you look at app downloads in the fourth quarter, we saw significant share gains in app downloads in our digital business in North America, which would be proof point that we are no longer donating share, at least in that market. We aspire to be not only a non-share donor, but a share winner, but that's some point in the future. And the point I just want to make sure I got it on the principal per transaction that's been pretty darn consistent at 4%, it's just the steadiness of the market? That has been our experience and our customers have benefited from increased wages while suffering the consequences of high inflation. The net of that has been 4% larger transactions across our entire footprint. It obviously varies by geography and by corridor where some in some corridors are seeing greater, some quarters we're seeing less. But the net take for us is -- the business is fairly resilient in the face of moderate to significant economic headwinds around the world. My follow up. Just thinking once we comes to that positive branded digital growth is that coming normalize growth rate you guys thinking come at year or two once we make that turn. I will tell you what our aspiration is. Our aspiration is to get back to high single digit, low double digit revenue growth in our digital business, which we believe given our scale and the diversity of our markets will reliably enable us to outgrow the market and be a market winner in most of the important places of the world. Our next question comes to us from Andrew Schmidt from Citi. Our next question comes to us from Chris Zhong from Credit Suisse. Please ask your question. This is Chris Zhong at Credit Suisse. So the first one related to the critical produce transaction that prior mentioned, we've definitely been very strong growth going up 1 year to 2 year and 3 year constant currency basis. And wanted to zoom in a little bit on the underlying assumption for the revenue guide in 2023, where [Indiscernible] called out on the global macro outlook. But are you seeing the principal project transaction growth holding up in 2023? Or there's any direction probably have? And this is the first one. I'll follow up with the next one. Chris, this is Matt. There's lots of moving parts in our guidance. The price, there's principal, there's new customer acquisition. So I'm not going to comment on micro topics within our overall guidance. But we are confident that we can obtain our outlook we gave out this year on this call today as well as Investor Day. And for one of the factors to achieve your medium-term outlook, we're seeing some early days in your progress. It's up 36 basis points reduction in the attrition or just increasing in the retention. And I think previously you called out they have the source of attrition mainly due to pricing and transaction time per customer interaction. And can you just share maybe some of the thoughts on how much of the retention is coming from different sources, noticeably. It's probably going to be less pricing intentionally, but if your transactions shift incrementally towards digital? Is that also going to be a factor as well? So a couple of things embedded in there, Chris. Thanks for calling in today. The focus on retention really started in the second half of the year as we rolled out the Evolve 2025 strategy. So we were encouraged by the retention results that we got by focusing on it and believe that a continued focus can ultimately get us to our long-term aspiration of improving retention by 200 basis points a year. Secondly, some of the work that we have been doing, and remember, we have a complicated ecosystem of multiple generations of point-of-sale systems, including gateway applications for our large strategic agents in one of those, which we call WUPOS 2.0, we've been working hard on increasing transactional efficiency. And in the second half of the year, saw hundreds of basis points of improvement in transaction completion rates. And so it is incremental improvements than across the entire ecosystem to move transaction completion rates from something in the 80s to something in the '90s that can help us increase retention and drive the overall number. And that's just one example of many of the initiatives that we've put in place as part of our increased retention program. Sorry about that, the technical issues. I wanted to follow up on Tien-Tsin's question earlier on the operating margins first half versus second half. I'm just wondering if you could kind of talk through some of the moving pieces and kind of bridge first half to second half. The types of investments you guys are contemplating. Obviously, I know you made some pricing investments in the fourth quarter. But I guess, what specifically do you have visibility to investment sort of dropping off in the back half of the year to drive that operating leverage embedded in the guidance? Will, it's Matt. It's really consistent with what we talked about for Q4 here, just the completion of some of those initiatives. So we're very focused on continuing to roll out our wallet or ecosystem in a number of different countries. As Devin highlighted in the earlier part, we've got the U.S. and Brazil coming up quickly a couple more payers within Europe. So we've got a fair bit of investment there. We're also putting some investment into additional products that go with our ecosystem, things like prepaid, which we look to have go live this year as well. So it's things of that nature that we're really working on in the first half of the year and wrapping up things we started this side at year-end. And great to see the traction on the U.S. outbound branded digital customers. I was wondering if you could talk -- and you talked a lot about sort of increasing the lifetime value customer. How customer costs trended in the wake of some of these adjustments to your approach to pricing? And how do you see those kind of trending over the course of the year? So we are working hard to balance customer acquisition costs with customer lifetime value. And as I've talked about, we're getting that equation right for us is really important, and making sure that we're getting high return on all of our marketing dollars, which is part of the program we launched in the U.S. When we increased marketing spend in the fourth quarter, which I highlighted previously, part of that was in this kind of test and learn approach to say, where can we effectively apply dollars. And what we have found is application of dollars to things like social media, have a better return for us than applications to dollars like paid search. So we are honing the model as we roll out a more market competitive pricing for new customers to enable us then to apply the dollars to effectively manage CAC to lifetime value. And so I think we're still in the learning phase. We're making real progress, and we're seeing results that align with how we believe we can execute and continue to drive the digital new customer growth and ultimately transaction growth, which will lead to revenue growth throughout 2023, globally, in our branded digital business. I just want follow up on that last discussion. Could you talk about what you're seeing in terms of repeat usage and transactions around your promotional programs? I think the goal is to attract customers with that discount on the first transaction and then get back to more normal pricing on that second and third transaction. So what are you seeing in terms of that price sensitivity from customers on those later transactions? And any comments about their willingness to do that second, third or even fourth transaction or retention rates would be great. Ken, thanks for joining the call. It's always great to have you. As I highlighted, we are very, very indexed on repeat transaction performance from the new customer offers, right? And in many cases, the new customer offer is first transaction free. And so we are quite cautious to make sure that we are not offering a first transaction free for a customer that doesn't return. So we are highly focused on what we consider to be second and third transaction, which then create a pattern of repeat usage, which allows us to then measure ongoing retention. In the previously discussed remarks, I highlighted the September cohort, which is the most aged since we launched this program. That September cohort on 90-day retention, which would then include in most cases, a second if not a third transaction, has the highest retention of any 90-day cohort that we have in history. So we are seeing improved performance on second and third transaction from those new customer offers, and we are seeing improved retention of that cohort at least through the first 90 days, which gives us confidence that we're not acquiring junk customers. And is that retention then, is that -- I know I saw the slide that has, I think that cost 46 basis points and improved retention in 2022. Is it -- are we talking kind of levels of magnitude above that 46 basis points? Any context there would be helpful. So to clarify, the 46 basis points is retail retention, not digital retention. And as you know, on very large bases of customers, retention is measured in basis points. So when we talk about improvements, we're talking 50 basis points to 150 basis points of improvement whenever we see it with a goal of obviously getting to 200 points across the footprint in retail and similar expectations about what we might do in digital. So we're not talking 1,000 basis point retention improvements. If I could just squeeze one more in, just so I understand the impact of the roll-off of the agents I just want to make sure I have it right. I think the agent, the on roll off had a 2 percentage point impact in the quarter. Did that 2 percentage point headwind kind of roll through the next 3 quarters? And then, I guess, what's the expected size of the headwind from the next agent just so we can model it correctly? And then any offsetting factors on P&L, like does this help agent commission costs or anything like that would be helpful. Ken, this is Matt. So basically, we talked about this at Investor Day, each agent is about 1% of revenue. So the first one exited here at the beginning of Q4. So we'll lap that at the. The other agent we expect to part here in the middle of the quarter? Thank you for clarifying. And you can think about commission rates as being about a normal average we've talked about historically. I just wanted to ask a couple of follow-up questions. First, on that new cohort of customers, digital customers, and their high level of retention, as those customers go into their second and third transaction, et cetera, are they seeing changes in that promotional pricing? Or is that promotional pricing still in place for them. Just wondering kind of what they're looking at, they're judging the economics for themselves. Jamie, thanks. No, they are returning to what we now refer to as market-based pricing. So the first transaction is somewhere between 50% off and free and then they return to what we would consider to be market-based pricing for situation, that corridor, that time of day, that customer segment. So they are then paying what we would consider to be normal pricing on second and third transactions. And on some of your other Evolve 2025 initiatives and rolling out new products, et cetera, I know you're still kind of working through like what the economics are going to look like, et cetera. But in terms of goal posts, like what are the things that we should be tracking? I think you gave some metrics around new customers per month and some of the targets that you have. But are there other things that we should be paying attention to from an economic perspective or a revenue potential perspective on these that can help us assess how that's evolving? We look forward to providing more of that as time goes on. Right now, we are publicly tracking the growth in our customer base and in retention that the added value of either new products and/or an account-based structure can drive. And then if we see incremental benefit from the new products and services, we'll certainly want to share that, and we'll share that with you. We have no additional questions at this time. Thank you for joining the Western Union Fourth Quarter and Full Year 2022 Results Conference Call. We hope you have a great day.
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Good morning, and welcome to the 1-800-FLOWERS.COM Inc. Fiscal 2023 Second Quarter Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] And please note that this event is being recorded. I would now like to turn the conference over to Andy Milevoj, Senior Vice President of Investor Relations. Please go ahead. Good morning, and welcome to our fiscal 2023 second quarter earnings call. Joining us today are Chris McCann, CEO; Tom Hartnett, President; and Bill Shea, CFO. Before we begin the call, I'd like to remind you that some of the statements we make on today's call are covered by the Safe Harbor disclaimer contained in our press release and public documents. During this call, we will make forward-looking statements with predictions, projections and other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties, including those contained in our press release and public filings with the Securities and Exchange Commission. The company disclaims any obligation to update any of the forward-looking statements that may be made or discussed during this call. Additionally, we will discuss certain supplemental financial measures that were not prepared in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the tables of our earnings release. Our second quarter results reflect a successful holiday season and benefited from the strength of our food brands and improving gross margins. We did a good job projecting consumer demand for the quarter, particularly related to trends and sales curves. On a consolidated basis, revenue declined 4.8%. Our Gourmet Foods & Gift Baskets business had a solid quarter, with revenue being relatively flat, while revenue within our Consumer Floral & Gifts segment decreased 12%. This has been keeping with past trends in which consumers gravitate towards food gifting options from floral arrangements in challenging macroeconomic environments. Unlike a year ago, when there was an unprecedented pull-forward in holiday demand due to the global supply chain challenges, we had anticipated that customers would revert to their historical shopping patterns and shop much closer to the holidays, and that is what we experienced. Beginning in October, we witnessed a very promotional retail environment and those trends continued throughout the holiday period. Additionally, with some of our brands that offer a lower price point and appeal to a lower income customer, we noticed that customers appear to be more price sensitive and were waiting for deals. We strategically utilized promotional pricing throughout the holiday period to entice customers, while simultaneously reducing other offers, such as free shipping, that were not as impactful in the current economic environment. Moving forward to November, Black Friday and Cyber Monday were, once again, big days for us and represented a kick-off to the holiday shopping season. In fact, PersonalizationMall had its biggest revenue day ever on Cyber Monday. From now, we continue to see demand build throughout the month of December with some of our greatest volume days coming during the two weeks before Christmas. Customers traded up to higher value, higher price point assortments within our food business, with the largest gains coming in at price points that were over $100. We also saw customers gravitate towards our prepared meal offerings that make their lives and entertaining easier. Our heat and serve meals, appetizers and side dishes allow customers to spend less time in the kitchen and more time with family and friends. And our charcuterie and cheese assortments also saw a nice growth as more customers began to entertain for the holidays once again as compared to the past couple of years. All told, Harry & David set new records for this holiday season, including: its biggest sale day ever in December, breaking a record that was set in the pandemic year of 2020; its first $3 million Mobile Day, as more customers shifted from desktop and tablet into mobile; and record sales of our award-winning wines, all resulting in a record sales quarter for the brand, sustaining the growth that we have seen over the past few years. Cheryl's saw strong performance from the holiday assortment, which included the introduction of candy cane, maple syrup and cinnamon swirl cookies, helping offset softer everyday sales earlier in the quarter. And Wolferman's grew its e-commerce business in part benefiting [indiscernible] from a 6% increase in new customers. Turning to our floral business. We continue to leverage our strong assortment of products and brands to meet our customers' needs. We saw a strong growth in holiday plants that grew 10% over the prior-year period and various floral and sweets pairings that include offerings from 1-800-Flowers and Shari's Berries saw strong double-digit growth. However, as the floral business does not have the large spike at holiday, these successes were unable to offset the lower demand for everyday gifting throughout the quarter. Additionally, while our direct-to-consumer business across the enterprise remained fairly resilient to macroeconomic pressures this quarter, our B2B business was not immune. Our corporate gifting business saw demand soften as companies began looking for more opportunities to cut expenses. And as more employees shifted to hybrid work environments over the past year, companies began hosting holiday parties once again in lieu of corporate gifting. While corporate gifting remains under pressure today, it is a focus of ours and we see growth opportunities and market share gains in the future. Our second quarter performance also benefited from our marketing efforts. We are transforming our company from being a purely transactional e-commerce company towards developing deeper relationships with customers through content and community. Our focus is on inspiring our customers to give more and to build better and more meaningful relationships in their lives. We've built a company on knowing that people are naturally compelled to give, and it's no coincidence that we've found our best customers to be the ones who enjoy giving the most. Our initiatives include our weekly Celebrations Pulse email newsletters, our experiential programs, such as floral design classes and expanded content development across multiple social channels. Through these initiatives, we are focused on nurturing our relationship with existing customers, growing our multi-category customer cohort to increase their purchase frequency, and defining our company as the preferred destination for all of our customers' gifting needs. As could be expected, net sales per customer are highest amongst our multi-category customers, followed by our 1.4 million Celebrations Passport members. Turning to our margins. During the second quarter, as we anticipated, our margins improved on lower inbound freight costs and strategic pricing initiatives. As Bill will discuss further, we expect this trend to continue in the second half of this year and into next year. As these costs continue to moderate, we anticipate that our margins will return to the historical levels over the next few years. As such, we expect to see a substantial recovery in EBITDA. In summary, we anticipate that certain macro trends would help us and indeed they have. While they have not reverted to their pre-COVID levels, certain cost inputs continue to be favorable, which gives us confidence in our ability to improve margins in the future. Based on our second quarter performance, and in particular, our gross margin improvement and reduction in operating expenses, we are increasing our fiscal '23 adjusted EBITDA guidance to be in a range of $80 million to $85 million. As we look to the balance of the year, we are focused on executing for the upcoming holiday period. We expect the consumer to remain cautious in this environment and reduce their spend on everyday gifting occasions, while continuing to spend for the major holidays. Even in an uncertain environment, we are confident that customers see value in our unique and one-of-a-kind of gifts that make the perfect solution no matter who you are shopping for. As we look beyond Valentine's Day to the spring, we're focused on our Giving is the Gift campaign. From friends, family, teachers and caregivers, this is a great time to remind those in your life that you appreciate all that they do for you and your family or business. Before I turn it over to Bill for the financial review, I wanted to take a moment to highlight the newest addition to our family of brands. We are excited to welcome Things Remembered to our all-star roster. This is a perfect example of a tuck-in acquisition that enables us to further expand our leadership position and product offerings in the personalization category. Things Remembered is very complementary to PersonalizationMall and significantly grows the number and variety of personalized products that we can offer to our customers to help celebrate every occasion with personalized masterpieces. We acquired the Things Remembered brand and related IP, including their customer lists and certain assets, for approximately $5 million shortly after the second quarter ended. This addition perfectly illustrates how our e-commerce platform was built for rapid growth, as we seamlessly incorporate complementary brands onto our platform and grow them profitably. Thank you, Chris. As Chris highlighted, our second quarter performance was solid, benefiting from the resiliency of our Gourmet Foods & Gift Basket business. We were able to generate adjusted EBITDA of $131.4 million and offset the 4.8% revenue decline by improving gross margins and by managing our cost structure. Gross margin improvement was led by 170 basis point increase within our Gourmet Foods & Gift Baskets business, which benefited from our strategic pricing initiatives; lower year-over-year ocean freight costs that continue to trend favorably; a more stable labor market, which enabled us to reduce overtime pay; and our logistics optimization efforts that leverages our full distribution network to reduce shipping zones and deliver products closer to the recipients. Furthermore, our warehouse automation efforts have enabled us to meaningfully improve efficiencies. Our Hebron, Ohio facility is in the second year since we installed automation, and we processed over 1.8 million packages in December, increasing throughput by 8% over last year while reducing expenses. And, we completed our next phase of automation in our Atlanta, Georgia facility that enabled us to fulfill orders for multiple food brands and increase throughput by 42% for the month of December over last year. Longer-term, we believe that we will gradually restore our gross margins to their historical levels and leverage the significant top-line growth of the past few years to drive bottom-line results. You may recall that the Gourmet Foods & Gift Baskets business was the most impacted by the negative macro cost inputs for the past 18 months. Our Consumer Floral & Gifts segment was less impacted, and thus its recovery is subject to certain macro trends that have not yet improved. Now, let's review our key metrics for the second quarter. Total net revenues declined 4.8% to $897.9 million as compared to revenues of $943 million in the prior year. Gross profit margin for the quarter improved 90 basis points from 40.1% to 41%, driven by the aforementioned improvements in our Gourmet Foods & Gift Baskets business. Operating expenses were 28.1% of total sales as compared to 27.9% in the prior-year period. On a dollar basis, operating expenses declined $10.1 million, primarily reflecting lower marketing costs, as we shifted our advertising investments to lower cost, higher return on investment areas of the marketing funnel. As a result, our second quarter adjusted EBITDA was $131.4 million as compared with adjusted EBITDA of $133.1 million a year ago. Net income was $82.5 million or $1.27 per share, and adjusted net income was $82.7 million or $1.28 per share, compared with net income of $88.5 million or $1.34 per share and adjusted net income of $88.6 million or $1.34 per share in the prior-year period. Regarding our segment results. Our Gourmet Foods & Gift Baskets segment revenues decreased 0.4% to $588.4 million compared with $590.9 million in the prior year. Revenue benefitted from the resiliency of our consumer food gifting businesses, which helped mitigate some of the softness in our corporate gifting business. This segment's gross profit margin increased 170 basis points to 41% from 39.3%, benefiting from our strategic pricing initiatives, lower inbound transportation costs, improved labor availability and our automation efforts. This segment's contribution margin was $123.5 million compared with $110.5 million a year ago. In our Consumer Floral & Gifts segment, revenue decreased 12.1% to $277 million compared with $315.1 million in the prior-year period. This decline is reflective of the softness we have been experiencing in everyday gifting and a shift by our customers from floral gifts towards our gourmet food gifts during the holiday period. Gross profit margin decreased to 40.5% compared with 41.3% in the prior-year period, primarily due to higher fulfillment costs and outbound transportation costs. Segment contribution margin was $27.9 million compared with $38.2 million in the prior-year period. In our BloomNet segment, revenues for the quarter decreased 13.4% to $32.9 million compared with $37.9 million in the prior-year period. Profit margin of 42.2% was flat with the prior year. Segment contribution margin was $9.3 million compared with $11.9 million in the prior-year period. Turning to our balance sheet. Our cash and investment position was $189.7 million at the end of the second quarter. Inventory was $201.1 million and with inventory of $191.1 million at the end of last year's second quarter. In terms of debt, we had $152.8 million in term debt and no borrowings under our revolving credit facility. [Providing] (ph) guidance for fiscal 2023. This morning, we increased our fiscal 2023 guidance based on our second quarter performance. Before I share our views, it's important to note that the current macro economy is still highly unpredictable, making it difficult to forecast consumer behavior with any certainty in this environment. After growing revenues 77% over the last three fiscal years, we expect revenues to decline in the mid-single-digit range in fiscal 2023 on cautious consumer behavior. We expect to mitigate the impact of the revenue decline on our earnings through: our strategic pricing programs, a moderation of certain cost inputs, and the investments we have and continue to make in our business platform. As a result, we expect to continue to gradually improve gross margins and bottom-line results during the latter half of the current fiscal year. Based on these assumptions and our year-to-date performance, we now expect adjusted EBITDA to be in the range of $80 million to $85 million. We expect to generate more than $75 million in free cash flow in the current year, representing an improvement of more than $135 million as compared to a year ago as we continue to sell through our inventory balance. To recap our performance this quarter, we had a successful holiday season. However, consumers continue to be challenged by inflationary pressures. We believe that the macro environment will remain challenging throughout the remainder of our fiscal year and are proactively addressing these trends with compelling high-value bundle assortments that appeal to a wide variety of customers. Nonetheless, we remain very bullish about our long-term prospects. Our foundation built on our all-star family of brands is strong and positions us to perform well as the macro environment improves. The diversification of our portfolio helps mitigate and provides resiliency to seasonality. Our core customer remains loyal, and we continue to deepen our relationships with them through our innovative marketing and engagement efforts. This is what distinguishes us in the marketplace, because we care about nurturing our relationships with our customers. As I noted earlier, we built the company on knowing that people are naturally compelled to give, and it's no coincidence that we've found our best customers to be the ones who enjoy giving the most. A single thread runs through all the giving, it brings joy to everyone involved, and that's why we say, Giving is the Gift. We will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from Dan Kurnos with The Benchmark Company. Please go ahead. Great. Thanks. Good morning. Nice job on the bottom-line, guys, in the quarter. Couple of things for me, maybe just on some of the noise around mix here. You did talk about PMall having the strong Cyber Monday. Can you just talk how it did overall in the quarter? And I think in the past, we've kind of talked about some pricing [inelasticity] (ph) within PMall. On the gifting side, which we can keep separate for now, you've got some price uplift, but just in general, like either Consumer Floral or PMall, how are you thinking about kind of pricing and promotion activity given kind of the consumer backdrop right now as we go into Q1 with a bunch of excess inventory built up kind of all throughout e-comm? How are you thinking about that backdrop? Sure. Thanks, Dan. Good to hear from you. We're very happy with the quarter and the performance that we had, especially on how we managed the cost structure of the company throughout the quarter. So, thank you for that. As we look forward, from a PMall perspective, we were thrilled to see that Cyber Monday being a record day for PMall. Yes. PMall was down that mid-single digit kind of range from a top-line perspective. Again, it's seeing the same kind of trends we're seeing throughout the business and that every day is soft. It had a strong Cyber Monday, a little softness in the early part of December, and then a very strong finish. And Tom, what are we looking at really from the pricing initiatives from a PMall and Consumer Floral point of view as we look forward now? Yes. I mean -- good morning, Dan. It's Tom. Certainly, we talked about our strategic pricing initiatives on some of the -- our lower price point products, whether it'd be PersonalizationMall, Shari's, Cheryl's Cookies, those consumers where their household incomes are a little bit more challenged in this environment. We have seen the need to be promotional, but as Chris mentioned in his remarks, we've been able to pull away from some of the shipping discounts we've done in the past. So, we've been able to maintain margins pretty well on that. I mean -- and with Flowers -- and we're certainly blessed with our largest brands Harry & David and Flowers where we have a broad-ranging consumers, so many of them are in higher household demographic incomes, and that allows us to move customers up on value and pricing and take advantage of the bundles and create your own products that we have to increase prices to those consumers. And I think when you look at this past quarter, I think it's a good example there where through pricing initiatives -- strategic pricing initiatives as well as just merchandising mix and featuring more bundles and higher price point items, we were able to lift AOV by 6%. So, our average order was about $90, up around 6%. Probably half of that was due to the strategic pricing initiatives that we put in place, and about half of it is due to kind of mix. And seeing the more affluent consumer buying up and some of our bundles and higher priced items being very attractive. Got it. That's really helpful. Funny isn't it how we're going into recession and consumers now willing to pay for shipping and returns, whereas those were the things they wanted most free when things were better. Alternatively, you guys talked about record for Harry & David. And I think that, that is really important. Obviously, it's been a great brand for you guys. And the vast majority of the upside in order came from GFGB. So, Bill, just any incremental color on sort of Harry & David outperformance relative to the rest of GFGB? And then, you guys did this kind of exercise before, and Bill you touched on it a little bit in your prepared remarks, but it'd be really helpful to kind understand how much of the early action you guys took to avoid sort of the repeat of last year drove the margin upside versus how much was sort of your organic improvement from whether it's optimization or [what have you] (ph) versus kind of the lower input costs that are out of your control like shipping? Like, if you kind of parse that out for us, I think that would be super helpful. Well, first off, what drove the quarter certainly was the performance of our food brands, relatively flat from a top-line perspective. Harry & David is the biggest brand, and Harry & David performed the best of all from -- certainly from a top-line perspective, and kind of low single-digit growth year-over-year. We did make the investments in inventory to offset the supply chain challenges that we experienced last year. It's certainly made for more operational efficiencies that we had, because both having the inventory on hand and having access to labor, labor availability was there, allowed us to a much more efficient operation. So, that helped -- certainly helped -- was a component of the 170 basis point improvement in gross margins that we saw on the food brands. Okay. I'll follow-up with you more on that offline. The last one for me and I'll step away. I always ask you this, Chris, just kind of looking out ahead understanding that there's consumer uncertainty, but the way that you've oriented everything, the pricing initiatives, like good to get confidence on the margin side just from a revenue perspective. If things were more stable, I mean, how would you kind of view potential for top-line progress? And if you want to parse it out between sort of Consumer Floral versus Food, that would be helpful too. Thanks. Sure, Dan. I think, we have a lot of confidence as we look forward with our business, as I mentioned in our remarks. With the platform that we build, providing the operating leverage that we're showing, the benefits and the improvement we're seeing in OpEx spend, coupled with the gross margin improvement, really gives us some confidence as we go forward. And what we're doing is we're building off of the strength that we've built over the last couple of years. Bill mentioned in his comments that over the last two or three years, we've grown like 77%. We've doubled the size of our customer base. So, we're leveraging that capability to product catalog that we continue to expand and certainly with our newest acquisition moving deeper into the personalization category. So, as we look, even in a challenging environment going forward, we see -- as we stated, we see softness still in the everyday business and that's where customers are still pulling back a bit. But we have Valentine's Day holiday next week, 10 days, whatever it might be at this point. And so, we're seeing the consumers still come back for the holiday periods like that and then we move into the spring holidays of graduations and Mother's Day et cetera. So, we think we're in a really good position to finish out the year where we anticipated we would. Yes, thank you, and congrats on your solid quarter. A couple of questions. Can you talk about the tone of the market for Valentine's Day? Is it more competitive than years past? Are your competitors being more rational, less promotional? Or has the economic conditions warned it being promotional this time? Can you just kind of give me a tone of the market? I'll turn this to Tom to see if he could give you a tone of the market. Keep in mind that Valentine's is the last-minute holiday. And just as we saw our customers revert back during the Christmas holiday to pre-pandemic shopping trends and curves, we expect to see the same thing. So, the holiday is still in front of us. But, Tom, what are we seeing in the marketplace? Yes, I mean, it is early. I think in some cases we are seeing -- I'd say, it's always a competitive environment, but it's the same player. So, it's -- I think the same rules apply and we've been playing this out for many years. I'd say just on the uncertainty of the consumer, I'd say there's more focus on bottom of the funnel tactics that's what we would have expected, et cetera. So, obviously, our overall marketing strategies taking that into account. Got you. And can you talk a little bit about Things Remembered? I know it's a relatively small acquisition, but it seems reminiscent of Shari's Berries in that acquisition, which was very successful. Can you talk about the revenue opportunity you have there? And what type of margins you anticipate going forward? Well, I'll give you as much color as we can there, Michael. And you're right, it's a relatively small acquisition, but one that really demonstrates how we have the leverage of the platform that we've built and can bring acquisitions like that, then maybe [indiscernible] working as a standalone business, we can put them on our platform, inject some growth into them and manage them appropriately with the gross margin capabilities that we have as well as our OpEx capabilities. So, it's a good example of how we can do these tuck-in acquisitions as we move along. Yes. Certainly, from a product price point, Things Remembered is at a different tier of pricing than PersonalizationMall. And I think it is focused right now. We're looking at brand positioning very closely around so many of life's important occasions, whether it be weddings, anniversaries, religious, milestones, graduations. So, it fit the whole product catalog as we bring this to bear will benefit our personalization space. It also fits really well in our overall enterprise assortment and our customers. So, we feel good about that. And we have such a strong operations team at PersonalizationMall to be able to take all the operations that existed in Things Remembered and bring that into their facilities and lever that up. I guess just some color. With the transaction, we are getting over 1 million active e-mail -- e-commerce customers. So, we think that's going to be very leverageable. And it's early days, but we're bullish that we're going to be able to grow this revenue nicely. But as we're starting, we're creating a brand-new e-commerce site, which we'll be leveraging, obviously, our platforms. So, we're looking in the next couple of months to launch the brand again. And the key fact here, Michael, is, as I mentioned, similar to what we did with Shari's -- as you point out, similar to what we did with Shari's Berries, similar to what we did with [indiscernible] in the food stain, in the food space with Vital Choice, this gives us the ability to kind of land and expand in the personalization category. So, as we built and appended the personalization capabilities to our platform, now we're able to leverage that part of the platform and expand as well. And I think it's just consistent with our overall growth strategy, continued to get organic growth where we can at affordable cost and complemented with good M&A opportunities as we see these tuck-in opportunities. And when we see a larger opportunity like we did last with PersonalizationMall, we're in position to do that as well based on the strength of the business and the strength of the balance sheet that we have. Thanks for the color. The automation of their distribution facilities, is that all behind the company now or is that fully reflected in this last quarter? Michael, there will always be automation opportunities for us, but the big spend is behind us. As we've discussed, in the past with our capital, two years ago, we were at about $55 million. Last year, we were at $65 million. And those were higher than our historical averages. This year, we're bringing it back down to about $45 million. In that $45 million during the first half of this year, there was still the completion of our Atlanta, Georgia kind of major phase of automation there. So -- but there will always be projects that we have to continue to automate and improve our operations, whether it be in our distribution centers, whether it be in our service center, but just ways to improve our operations. Got you. And then just regarding capital allocation, will we see share buybacks? Or is the focus still debt reduction, or both? Or can you give us a flavor of what the capital allocation is there? Yes. I think first and foremost, we always look at how we can bring the best shareholder value. But as we've been discussing and we've had just the smaller acquisitions in the last couple of years, but strategic M&A is our first priority. We think the best way to bring shareholder value is to grow this business; so, M&A, CapEx where we see, investments in the business that we believe can either drive up operating performance or help just drive performance, debt repayments, and then stock buybacks are always a component of our capital allocation. Great. Thanks very much for taking my question, and congratulations on a nice holiday season. I wanted to ask about the trajectory of getting gross margin back to historical levels over the longer term. As you think about kind of what your gross margin will be in the future, how is that going to compare to historical levels in terms of the components within that, things like product margin, freight, labor? Do you anticipate it being a similar mix to what you had historically? Or is there going to be kind of a different way to get to the same number when things start to normalize for you? Alex, thanks for the question. First of all, I do think we've hit an inflection point with respect to gross margins. We anticipated that we would see stabilization of our margins in the second quarter and we achieved that. We got the 90 basis points improvement overall, 170 basis points improvement from our food brands. That was a combination of strategic pricing initiatives, the reduction in inbound freight costs, which continues to trend favorably for us, the improvement in labor availability, and as I mentioned before to Dan, just -- that just allowed for operating efficiency, and certainly automation that we have. I think over the -- we expect the second half of this year will going to continue to show improvement in gross margins year-over-year. Certainly, that's going to continue into fiscal '24 and beyond. As you point out, I think over the long term, we expect to get back to our gross margins. If you look over the 10 years prior to last year, give or take 50 basis points, and we were in that 42% gross margin range. And we anticipate getting back to that. That's going to be a combination of commodity costs coming back into their more normalized range. They're still very high. Inbound freight, we are already seeing significant drops in inbound freight. We haven't gotten the full benefit of that yet, because we bought that at higher levels. That still has to flush through the P&L, but we've got some benefit on that. Pricing initiatives, we have certain pricing initiatives that we've been able to it through, but as the economy improves and as the consumer comes back, we'll be able to do some of that. Labor, we're driving -- we're spending capital to drive labor out of our -- labor hours out of our model. But labor rates are high and they're not coming back. So, there will be a little bit of a mix shift because I think labor is high and labor rates are just 50% higher than they were a few years ago. Commodity costs are high today, those will come back down. Inbound freight will come back down. Outbound freight will not come back. Outbound freight will still be high. So, we have to drive other efficiencies through our operations to drive margins and -- as well as some pricing initiatives to offset some of the components that will not come back down to historical levels. All right. So, as you can see, we expect our gross margin -- as Bill just said, we expect our gross margin to improve over time back to historical levels. And then, now coupled with our OpEx management puts us in a strong position going forward. Yes. Hi. Thank you. Just on that point with the freight, can you just -- I think, you had said that freight costs were lower in the food business but higher in floral and gifts. So, I guess that's the difference between inbound and outbound freight. Can you just clarify that? And also, just with gasoline -- oil and gasoline prices being -- cost being lower, why wouldn't that kind of make the outbound freight lower as well? Yes. Inbound freight is down dramatically. And what we're paying on containers today is significantly below what we were paying a year ago. That hasn't fully flushed through the P&L, yet we saw -- certainly saw some benefit of that in Q2. We'll see more of that in the second year. And certainly, as we head into fiscal '24, as we replenish inventory, there will be even -- it will be even lower. It just impacts the food side of the business more inbound freight, because on floral, it's not as impacted as much by inbound freight as the food brands are. Outbound freight affects everybody. It affects the food brands, it affects PersonalizationMall, and it affects the 1-800-Flowers. From a fuel perspective, we're still paying a higher -- fuels off its high, but fuel surcharges in the second quarter were still higher than they were a year ago. So, again, off their highs of maybe March, April, but certainly still significantly higher than where they were in December of -- November and December of a year ago. So that was still a headwind as we went through the second -- as we went through the second quarter. Okay. Thank you. That's helpful. And then, I'm just curious about, like, some of these competitors that have been out there, and I know they're all small, but some of these small up and coming, I guess, mostly in the floral side that venture capital-backed type operations, have you seen any of them kind of go away because of the softness in this everyday gifting? Like, what have you seen in that kind of competitive landscape out there? Sure, Linda. I think over time -- as you've seen with us in the floral industry over time, if we go back a number of years, there seems to always be a few new entries that come in and wind up fading away, and we've seen that with a couple of businesses. Some of the startups out there now, I don't know their current status, but any business that's out there right now that needs to raise cash, I think, is in trouble. And if you're going to need to raise cash right now, you're going to pay dearly for it. So, I think that could, I'm not saying we have seen it yet, but that could hamper some of the competition we see on the floral side or on the food side as well, and even in personalization space for that matter, it's just kind of across category for us. So, we're not seeing -- as Tom said, Valentine's Day continues to be a competitive scenario. It's the same players we've seen in the last year. Nobody has come or gone really new in the past year. So, no real change on the competitive landscape. But I question their go-forward viability in this environment. And this will conclude our question-and-answer session. I'd like to turn the conference back over to Chris McCann for any closing remarks. As we stated, we had a very successful holiday season and we're well positioned -- as we've been saying, well positioned to a bigger, better, stronger company than we were pre-pandemic, and we're very bullish on the future outlook of the company. So, I thank you for your time. And again, a reminder, it's not too early to order your Valentine's orders, and we all have many Valentine's in our lives. So, we're here to help you if you need it. Thank you.
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EarningCall_689
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Ladies and gentlemen, good afternoon. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the 2U Inc. Fourth Quarter and Full Year 2022 Earnings Call. Todayâs call is being recorded. [Operator Instructions] Thank you. And I will now turn the conference over to Steve Virostek, Head of Investor Relations. You may begin. Thanks, Abby. Good afternoon, everyone and welcome to 2Uâs fourth quarter and full year 2022 earnings conference call. Joining me on the call this afternoon are Chip Paucek, our Co-Founder and Chief Executive Officer; and Paul Lalljie, our Chief Financial Officer. Following our prepared remarks, we will take questions. Our earnings press release and slide presentation are available on the Investor Relations website and a replay of this webcast will be made available later today. Statements made on this call may include forward-looking statements, including our financial and operating results, plans and objectives of management for future operations, including our strategic realignment plan, the integration of edX and transition to a platform company, anticipated trends for learners and university partners, and other matters. These statements are subject to risks, uncertainties and assumptions. Any forward-looking statements made on this call reflect our analysis as of today and we have no plans or duty to update them. Please refer to the earnings press release and to the risk factors described in the documents we filed with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2021 and other SEC filings for information on risks, uncertainties and assumptions that may cause our actual results to differ materially from those set forth in such statements. In addition, during todayâs call, we will discuss non-GAAP financial measures which we believe are useful as supplemental measures of 2Uâs performance. These non-GAAP measures should be considered in addition to and not a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and on the Investor Relations page of our website. Before handing the call to Chip, I am pleased to share that our plans for an Investor Day event on March 21 at the NASDAQ market site in New York. We are planning to provide additional details and insights about our strategy, business trends, financial performance and our roadmap for future value creation. Thanks, Steve. Executing our platform strategy drove meaningful profitability improvements across our business and itâs creating opportunities to accelerate our profitable growth trajectory. We concluded 2022 with strong results, including $58 million of adjusted EBITDA for the quarter or growth of 178%, beating our guidance by nearly $10 million. For the full year, we delivered $125 million of adjusted EBITDA or growth of 88%. In addition, unlevered free cash flow turned positive. These excellent results were made possible by our team, who answered the call after we made a midyear decision to accelerate our platform strategy and realign our company. Our Alternative Credentials segment is doing very well, delivering almost $400 million of revenue in 2022. This is driven primarily by boot camp growth of 18% versus the prior year, with contributions from both consumer and enterprise. We anticipate this growth will continue as more learners opt for shorter, less expensive and more career specific training to reach that next job, promotion or bump in salary. And we expect that continued growth will offset the near-term declines in the Degree business. Most notably, in 2023, we expect the Alt Cred segment to cross over into profitability for the first time after 6 years of building that business. This is a big deal. No more âempty calories.â Looking at the top line of our degree business for 2022, revenue slowed by 3% year-over-year to $572 million. We saw the near-term impact of our new marketing framework, which reduced unprofitable spend combined with a strong labor market that increased the opportunity cost of higher education. However, we remain focused on enabling great outcomes, delivering strong profitability and signing new degree programs. We believe that these new degree programs and a cooling labor market will setup the degree segment to return to top line growth in 2024. Client satisfaction is high and the response to the new flexible degree offering has been great. As a reminder, the flexible offering includes a lower revenue share for a different bundle of services, including very limited paid marketing and no CapEx for course build. We expect revenue per degree for those to be 15% to 20% on average of the revenue generated for our full degrees. However, these programs are designed to have minimal cash burn and similar profitability. For year-on-year comparisons, we launched four full degree programs in 2022 and began building a pipeline of new flexible degree offerings in the second half. We are selling both of these effectively, both full and flex with a greater focus on cash flow generation. While in 2022 and 2023, we launched or expect to launch a similar number of degree programs, 4 or 5 full degrees and a limited number of flex degrees. In 2024, we expect to increase that sizably, launching at least 7 new full degrees, 3 of which have already been signed and 25 flexible degrees. We believe this robust launch schedule will help us get the degree segment back to top line growth in 2024 and more momentum in 2025. Taking a broader look, itâs been just over a year since we combined the edX platform with the core capabilities of 2U, including our digital marketing expertise, scale and services. Fast forward to today and we are leveraging an industry-leading platform offering everything from degrees to boot camps to professional certificates to free courses, all in one place and easily accessible to millions of learners around the world regardless of where they are on their learning or career journey. The combination is generating tangible proof points. We are driving meaningful cost efficiencies, thanks to the power of the edX platform and our overall scale, which should create a sustainable marketing advantage long-term. More specifically, this means reducing paid marketing spend while growing organic inflow. On Slide 10 of the earnings deck, you will see that marketing and sales expense as a percent of revenue declined to 34% in the fourth quarter, the lowest itâs ever been. In 2022, we reduced paid marketing by $47 million when compared to 2021 and we generated revenue above our expectations despite lower marketing spend and a strong labor environment. Our organic lead generation from edX is strong, accounting for 37% of organic leads in the fourth quarter. The quality of organic leads provides confidence in the sustainability of our marketing efficiencies and our ability to leverage the power of the edX platform to drive enrollments. When it comes to learner growth and new content, we are gaining momentum. Put differently, we are in the early stages of igniting the flywheel or the premise that increasing high-quality content will attract more learners and more learners will drive more partners who want their content on the edX platform. To bring that to life our learner community increased by nearly 6 million during 2022 to 48 million at year end. 2 million learners joined in Q4 alone. On the content side, we are growing the catalog with the help of both new and existing partners. In 2022, we launched a dozen micro credentials and our partners added over 600 free online courses to the edX platform. We also added 16 members to edX during 2022, including the American Psychological Association, Baylor University, Oracle, Russell Sage College, the University of California Davis and Wesleyan University. We have some news for you. Pepperdine and Lehigh just joined and will be announced shortly. We are expanding our relationships with current partners to launch innovative in-demand offerings. A great example from last week is the disruptively priced Masters of Science in Artificial Intelligence with the University of Texas, Austin, a partner of edXâs for the last decade and a top 10 computer science school. This is a near perfect example of a well-timed, relevant and accessible program that addresses a large and growing skills gap in our workforce. Itâs also only $10,000 for the entire degree. As a real-time proxy for interest, within 48 hours of our announcement, we generated 3,400 organic or free leads all through edX. In addition to UT, this week, we are excited to have announced a new full degree with our longstanding partner, the University of North Carolina at Chapel Hill. We will be launching a Doctorate of Education in Organizational Leadership. We also have some news on this call. We have signed a contract to launch a new flexible degree with the University of California Davis, a Masters of Science in Management. Overall, we feel really good about our ability to grow our learner base and our ability to continue to enhance our platform with new high-quality content. We also remain focused on continuing to grow our enterprise business. We are seeing tremendous progress here. During 2022, enterprise revenue increased 86% versus the prior year, while securing new customers and building a pipeline of opportunities. We see a lot of potential here and are leaning heavily into this part of the business. Investors have high appetite here and we will unveil the full strategy at our upcoming Investor Day event in March. A quick note on the international front. As we look for ways to expand our geographic reach, we are implementing new tactics such as market-specific pricing for our offerings. In addition, we are excited about the potential for adding new content from new partners like Emeritus that appeal to learners outside the United States and Europe. Beginning with India, we will leverage their infrastructure and localization to generate high margin revenue. We will also continue to improve and differentiate the learner experience, drive platform innovation and deliver world-class outcomes proving that high-quality online education can be done well at scale. And finally, as promised, we are driving to higher and more sustainable profitability due to our new marketing framework, which leverages the high domain authority of edX, our strategic realignment completed last summer and ongoing cost discipline measures, such as managing headcount and third-party spend. Looking forward, we are excited about our plans and opportunities to advance the utility of the edX platform while creating both learner and shareholder value. Paul will cover the 2023 outlook in more detail, but the highlights are a range of $155 million to $160 million for adjusted EBITDA with positive EBITDA from our Alternative Credentials segment in the back half of the year and our first ever year of positive levered free cash flow. Platforms are the future of education. We are confident that our platform strategy is working and that we are well positioned to create value for learners, partners and shareholders. By executing our strategy, we are focused on driving higher profitability and delivering positive cash flow. My goal is to deliver positive EPS during 2024, a goal, I believe, is achievable given the positive leverage we are seeing in the business. Transformation isnât easy, but we are confident about whatâs ahead and look forward to sharing more in March at our Investor Day. Thanks, Chip and good afternoon everyone. As you have seen from our press release, we had a strong finish to the year, delivering revenue of $236 million and EBITDA of $58.4 million in the fourth quarter. Net loss came in at $11.8 million and free cash flow on a trailing 12-month basis was a positive $11.5 million. The significant improvements across all of our profitability measures demonstrate the early returns of our best-in-class platform and organizational realignment. Our team responded to a difficult macro environment and delivered, particularly in the second half of the year giving us the confidence to deliver strong profits, cash flows and outcomes for our partners in 2023. Today, I will discuss our results for both the quarter and the year. Then I will provide an update on our balance sheet and cash flow, including recent financing activities and conclude with our thoughts on our financial outlook for 2023. Now for a closer look at revenue. Revenue for the quarter totaled $236 million, down 3% from $243.6 million in the fourth quarter of 2021. For the full year, revenue grew 2% to $963.1 million from $945.7 million. Degree segment revenue decreased 10% to $137.1 million for the fourth quarter reflecting a 9% year-over-year decline in FCE enrollments, with average revenue per FCE remaining relatively flat. On a full year basis, Degree segment revenue decreased 3% to $571.6 million, driven by a 2% decrease in FCEs and average revenue per FCE. The Alternative Credentials segment continued to deliver strong revenue growth in the fourth quarter, with revenue increasing to $98.9 million, up 8%. FCEs for the quarter increased 15% and average revenue per FCEs declined 11% over the prior year. We continue to experience strong revenue growth from our boot camps, which grew 18% on a year-over-year basis on the strength of coding, cyber, web development and enterprise. Revenue from legacy edX offerings contributed $5.9 million for the quarter. Our exec ad revenue declined 11% year-over-year, driven by lower revenue per FCE due to geographical pricing strategies. On a full year basis, the Alternative Credentials segment revenue increased 11% to $391.5 million. Legacy edX offerings contributed $22 million and the remaining increase was driven by a 9% increase in FCEs. Turning to operating expenses, operating expense totaled $230.6 million for the quarter, a decrease of $62.7 million or 21% compared to last yearâs fourth quarter. This significant improvement was primarily driven by a $26.3 million decline in paid marketing expense and a $24.2 million reduction in personnel and related costs associated with headcount reduction and lower performance-based compensation. As Chip mentioned earlier, when we acquired edX, we emphasized the value creation potential from improved marketing and sales efficiency due to edXâs large global audience, a massive library of educational content and brands with consumer and Google credibility. We are beginning to see this pay off with an increasing percentage of organic leads coming from edX and these leases have a greater propensity to purchase, driving higher conversion rates. As a result, marketing and sales as a percent of revenue declined to 34% from 45% in the fourth quarter of 2021. Also at the time of acquisition, we identified enterprise as a key growth opportunity. And in 2022 we increased our enterprise revenue by 86% to $44.8 million. In the fourth quarter, enterprise revenue grew 183% on a year-over-year basis. Stock-based compensation expense for the quarter totaled $17.5 million, down $5.5 million or 24% from the fourth quarter of 2021, primarily due to headcount reductions. During the quarter, we recorded $4.1 million in restructuring charges related to the 2022 strategic realignment plan, bringing the total to $33.2 million for 2022. Turning to profitability measures. Adjusted EBITDA for the quarter increased 178% to $58.4 million, a margin of 25% compared to a margin of 9% for last yearâs fourth quarter. This significant increase in adjusted EBITDA was primarily the result of accelerating our platform strategy and executing the strategic realignment plan. Our fourth quarter adjusted EBITDA also benefited from the typical seasonal decline in marketing spend. Net loss for the quarter totaled $11.8 million, an improvement of $55.4 million from last year, primarily due to lower operating expense and lower transaction and integration expense. Segment profitability or adjusted EBITDA for the Degree segment came in at $60.5 million, a margin of 44% compared to $39.4 million in the fourth quarter of 2021. For our Alternative Credentials segment, segment loss or adjusted EBITDA loss came in at $2.1 million compared with a segment loss of $18.4 million in the fourth quarter of 2021. In light of this trend, we expect this segment to be profitable on an EBITDA basis for the full year 2023. Now for a discussion of the balance sheet and cash flow statement. We ended the year with cash and cash equivalents of $182.6 million, a decline of $2.6 million from the third quarter of 2022. And we delivered unlevered free cash flow of $11.5 million for the trailing 12 months ending December 31, 2022, an improvement of $45.4 million compared to the 12 months ending December 31, 2021. Gross debt at year end totaled $953.8 million, including $567 million of term loan and $380 million of senior convertible notes. In January, we significantly improved our credit profile by refinancing our term loan. We paid off a portion of our outstanding balance and extended the maturity date by 2 years. We used $104 million from the balance sheet and the proceeds from the issuance of new senior convertible notes to reduce the term loan by $187 million. After this transaction, we have gross debt of $914.2 million, including a $380 million term loan and $527 million of two tranches of senior convertible notes. On a steady-state basis, we expect cash interest savings from this transaction to be approximately $10 million per year. These financing transactions achieved three objectives. First, we reduced our secured debt to $380 million, a secured debt leverage ratio of 1.9x 2023 EBITDA guidance, a reduction of nearly one full turn. Second, we pushed out the near-term maturities of our debt. Nearly 60% of our total debt now matures in 2026 and beyond. And third, weâve put in place a revolving credit facility of $40 million to manage working capital. These activities enable us to focus on executing on our plan, and Iâm proud of the team for getting this transaction across the finish line in a difficult macro environment. We remain opportunistic with respect to further balance sheet optimization. Now for a discussion of the 2023 guidance. Our guidance for 2023 calls for adjusted EBITDA to range from $155 million to $160 million, representing growth of 26% at the midpoint. For revenue, which we view as an output for our model, we expect revenue to range from $985 million to $995 million, reflecting the market trends that Chip described. We expect net loss to range from $95 million to $90 million. Underlying our outlook is a change in the financial profile of our business as we expect Alternative Credentials revenue to grow to nearly half of the consolidated revenue and deliver positive adjusted EBITDA in 2023. We believe this change will provide flexibility in continuing, positioning our Degree business for accelerating profitability â profitable growth in 2024 and beyond as we add more programs, including flexible degrees and as macroeconomic factors move in our favor. Concerning revenue pacing for 2023, we expect sequential revenue growth every quarter, while year-over-year growth is expected to return in the second half. In addition, as we continue to focus on net loss for 2023, we expect to reduce stock-based compensation to $70 million compared to $80 million in 2022. We also expect capital expenditures of $65 million versus $75 million in 2022 and weighted average shares outstanding of 82 million. To conclude, the acceleration of our platform strategy and the strategic realignment plan in 2022 resulted in a nice finish to the year particularly in our profitability. This year, we expect to build on that success to deliver strong adjusted EBITDA, which is a growth of 26% and positive free cash flow as we set up 2024 for profitable top line growth. Thanks, Paul. Before we open it up to Q&A, Iâd like to take a quick moment to say how proud I am of the entire team for their unwavering focus and dedication in delivering outstanding results this year. Strategic realignments are never easy. The team not only delivered but did so while staying maniacally focused on what matters most, doing whatâs best for universities and their students. Maybe this is for Chip and Paul. As you think about the degree launch cadence, interesting to hear of the 7 to 8-degree â full degrees or sevenfold degrees and then 25 flex degrees. First, Chip, how do you expect sort of enrollments to trend or to progress on the new flex degrees given the attractive price point? And then for Paul, perhaps you can talk about sort of just to remind us on the investments upfront required to launch the flex degrees relative to the full? No problem, Ryan. So yes, flex is going incredibly well. We still have a good number of full and as you heard, we expect full to not quite double year-on-year once you get to â24, but going from 4 or 5 to 7, and we still have plenty of folks interested in that offering. Flex is a great response to the market. And we think that, that 25 is realistic. You heard me mention for the first time that we think itâs roughly 15% to 20% from the standpoint of what these programs will look like on a revenue basis, which you can apply on an enrollment basis. Weâre obviously not doing paid marketing in every one of those cases. Itâs notable that if you look at the flexible offering, while it starts at 35% and has a very limited amount of high intent marketing, mostly organic. If you add â if a client chooses to add paid marketing for an additional 15%, the programs will be a lot bigger. So TBD in terms of what percentage of overall flex, we will have the additional marketing in it. A lot of that depends on the desire of the school, interest in scaling the program. One of the great things about the flex offering is not every school wants to scale its programs. Many of the schools want to go online and offer high quality to their student base without scaling the program. And in the past, that would have been very problematic for 2U. And therefore, we wouldnât be able to launch those programs. And in this model, we can really work with the clients and allows us to just launch many more degrees. And we think over time that should get really attractive for the segment. As you know, with our Degree business, if it goes down or up, it takes time to feel it through the financials. So weâre excited about what that could mean for â24 growth. In addition to getting to 25%, and we do think, overall, the macro should start to favor Degrees more. Itâs notable that while our Degree business declined and we expect it to decline this year, if you look across the space, ours held up, we think, better than most. We think our Degree business is pretty resilient. So ultimately, being able to offer quality to our partners, high-quality outcomes to the learners, which is kind of table stakes for 2U and a model that ultimately gives greater flexibility to the university partner. We didnât announce it until whatever it was 6 months ago, and itâs very â creating a very attractive pipeline. So pretty strong. Yes. And Ryan, we refer to these as capital light, meaning very little from a launch perspective in comparison to the traditional launches that we had. From a CapEx perspective itâs almost non-existent. And then from a total cumulative cash to launch, weâre looking somewhere between $500,000 and $1 million depending on the program. Itâs closer to $500,000 for some and closer to $1 million for others. But the bottom line is it is not something that put a constraint in our resources as we think of launching a large number of these programs in any calendar year. It is something that we can definitely afford to do in the calendar year in large volumes, like, for example, 25 as we are targeting here. Thatâs super helpful color. I really appreciate it. Maybe just one more for me, Chip, on the Emeritus announcement, really interesting opportunities obviously drive new revenue streams outside the U.S. Just curious where youâre at in terms of getting the content on the edX platform? And how should we think about potential contributions to 2023 revenues from that relationship? Thanks. Weâre excited about it. Ashwin and his team have built a great company with infrastructure in that market that we donât have. And while in the past, we might have thought of launching actual sort of folks in that country, partnering with a company like Emeritus that has great payment options for learners and infrastructure makes a ton of sense for us. Now Ryan, everything takes time. So we do think this will build into something more meaningful as we go throughout the year and notable that as we bring in that revenue, we think it creates an opportunity for an improvement in margins. So we also have a couple of relationships like that, that are in play right now. And our plan is to talk about that strategy in a little bit more detail at Investor Day where we have more time to give you a greater amount of the story. Hello. You mentioned that the cash to launch a flex program to range from about $500,000 to $1 million. How much would you estimate full degree programs would cost to launch at this point? And how would that compare to prior launches before you embark on your overall restructuring and platform strategy. Yes. So currently, George, somewhere between $2.5 million to $5 million is our cumulative cash to launch a regular program. Of course, size matters when it comes to those, but $2.5 million to $5 million is a good ballpark at this time. And the two variables there, George, would be the content and some programs are more expensive than others. But the bigger variable interestingly is the marketing because as the program grows more quickly, it actually consumes more cash in the early stages, but it therefore generates a bigger number at steady state. So when we have something launched, it does really well. Now we do think, over time, edX probably changes that, too. So like the domain authority of edX allows us to generate high-quality content from an SEO perspective in a way that we just didnât have access to anything like that before. So we think that, thatâs a meaningful lever when you start thinking about the next 5 years. SEO takes time but over the next 3 to 5 years, we should be able to see a great opportunity to drive that down. But the faster a program scales the more cash it will burn in the short period. Weâre pretty excited about the response to the AI degree. Weâve never really seen anything quite like it, to be honest, it outpacing anything that weâve done in the past, including our Morehouse undergrad program. Got it. Thatâs helpful. The launch cadence for 2023, 2024 definitely is useful from a modeling perspective. As you think about a number of programs coming up for renewal, when do you expect the next big wave to hit and based on conversations youâve been having with your partners, is there any intention to shift along the spectrum of flex versus full degree offerings? In general, no, because if a program is today launched and itâs a program that we intend to renew, typically, that means that it had the benefit of larger marketing that comes with the full program model, and therefore, itâs at scale. And without that marketing, it will be more challenging to keep that program at a higher enrollment level. What you will see is we went through a period, George, it â and I know youâve been with us for a while, but for those investors that werenât, we went through a period where we had signed a lot of exclusive deals in our early history where we had offered exclusivity in various disciplines. And we figured out over time that we shouldnât have done that and that we needed to offer more programs in verticals because programs had greater geographic boundaries to them, even though you were online. That was not immediately obvious in the early days. So by signing exclusives, we had to go early into the contracts. So the 2U side, had to go to our clients and try to reopen the agreements to eliminate exclusivity. And in doing so, we came up with a model that worked quite well across our portfolio, and there were mild variations, but we would give schools small single-digit relief in the rev share in order to be able to go to a less exclusive or, in some cases, a non-exclusive basis. The reason I go there is that weâre generally through that. We have a limited amount of it that still exists. But for the most part, what youâre going to see now is a much more sort of routine renewal and we actually just signed one that we have not yet announced. We sort of like under the wire here. So that we will be able to get detail on shortly to everybody that looks â I think, looks much more like what youâre going to see. And in that case, itâs candidly just extending the program because the client is really happy with really no change. And so we will get greater detail on that shortly. We thought we might have it for this call, but we didnât quite make it in time to put a proper release on it. So the other thing I think youâll see rather than people transitioning from full to flex. And Iâm not saying that itâs not possible that there is one or two of those at some point. But youâll see more and more current partners wanting to launch new programs, in some cases, full, in some cases, flex. Back in the day when we only had the full model, we did not have an opportunity to work with every school at the university because in many cases, the university either didnât want to scale a particular school â school-by-school decisions matter. And so if the faculty at a particular school didnât want to scale, we really didnât have anything for them. Now we do. Or other cases where that particular brand may be mixed with that particular geography and discipline didnât allow us to scale a program. Whatâs great about flex is it works for all of that. So it really just allows us to aggregate more overall degree demand on our platform. So we think it sets up a quite positive out years with regard to degree. Hi, thank you. Congrats on the [indiscernible] and the UNC announcement. So it seems like a really nice additional wins with some of the largest institutions out there. So on that front I would love to get some detail on what trends youâre seeing between institutions, doing more to launch and support online programs themselves kind of in-house versus outsourcing the third-party providers like yourselves. Have you seen that change much looking back over the last couple of years? And does the trend look much different by type or, I guess, size of higher ed institutions? Yes. Thanks, Stephen. So the most common trend is related to course build. When we started the company, universities didnât have the capability of building online courses or launching online courses. And so that was 100% necessary to get a program online. And while we were very proud of our team that builds really high-quality content and itâs meaningful over time, more and more universities have developed capacity to do that. Thatâs part of the reason for the flexible model. We do think youâll see a good number of the core bundle with clinical placement or the core bundle with marketing and clinical placement and other â often not the course build â from the standpoint of the financials that is a net positive because it does lower the CapEx. And we are focused on getting to positive EPS. And as you know, the CapEx is part of that story. So from my standpoint, we see the flex innovation as simply opening new doors. And Iâd say thatâs the biggest trend. Steven, the only other thing I would say is this entire notion of sort of in-source and outsource is just way overplayed in various places. Itâs not really this â itâs more complicated than that. Like many of our best relationships, we work directly with the folks that you would argue are the in-source. So very commonly, weâve got great relationships with the universities, departments that are building a variety of capacity. So we had today an incredible day at headquarters where Iâm at in â right outside of Washington, D.C. and Maryland, where we had our social enterprise of boot camp partners. So our boot camp partners from ranging from University of Kansas to Colombia to all kinds of really great schools that are partnering with us and local workforce agencies to drive critical skills training for the country. And this kind of training canât be done without private partnerships â private-public partnerships. Itâs just not possible to do the scale. So we think weâre doing something really good for the world that we also think is a great business opportunity. And the reason I go there is, in many of these cases, that is working with the continuing ed component of the institution that very often also has some responsibility in this notion of in-source outsource. So I understand why folks ask about it. But overall, we feel like the interest in our revenue share-based model continues to increase. So we like what it means for the future of that part of the business. Got it. Very helpful. And then I wanted to ask about the enterprise detail you gave. It seems like growth there accelerated during the year, if I heard that correctly, that it grew 183% year-over-year in the fourth quarter. And I know itâs still somewhat small. But whatâs driving that acceleration? How are end market macro dynamics playing into that? Just any detail you can provide on the trend? Yes. So, might be the best example of something that because we were bringing together, I mean the edX acquisition included so many different angles. And I would tell you that enterprise, we are really getting our legs there. And we feel like itâs a huge opportunity going forward, will debut the full strategy at our Investor Day in March to give it the time that it needs that you really canât do on an earnings call. But we are adding new customers. There is a lot of reseller activity. There is a tremendous boot camp opportunity. The skills, training, combined with the support and the career engagement that we can provide is really part of what I think is a durable moat around the competition. And then what I mentioned earlier in terms of the social impact, if you look at like the UK, the United Kingdom Department of Education Skills Fund that we announced, I donât know how many months ago it was⦠September of last year. So, just you have got a variety of growth levers in enterprise in places where we are going to be able to really drive sort of a durable advantage to the competition. And then some places where our edX for enterprise offering just has incredibly high-quality courses that are known for rigor from 37 of the 50 best schools on Planet Earth and adding folks like Oracle and IBM and incredible corporate content. So, there is a lot more of that coming. We have been really pretty keen on the amount of content being added. And we just keep announcing it, and we feel like often maybe not getting enough attention. But ultimately, enterprise is a very significant growth lever for both â23 and â24 and helps us with the trough that we are going to see on the degree side simply from â as you move it up or down and our marketing spend did change on that side. It takes time to sort of see it move through the revenue. So, it sets us up nicely for â24 because you get degree back to a good place, and then you have got these growth levers of both enterprise and boot camp that are really meaningful. Hey. Good afternoon. This is Ryan Griffin on for Jeff. I was just wondering, it sounds like the edX platform is operating really efficiently. Are there any specific KPIs you can point us to, to help us kind of track how conversion has been going or maybe on the spend for those users acquired through the platform versus through other customer acquisition channels? Thank you. So, we â Ryan, we try not to get too in the weeds here. You will see that 37% of organic lead flow in the quarter came from edX. So, we do think thatâs a meaningful lever because ultimately, organic is the most powerful case by definition. We are not paying for that. And I do think getting sales and marketing to 34% in the quarter, that is a non-trivial accomplishment if you look at our history. So, we do think that the platform strategy allows us to ultimately define the long-term future of the company based on our own domain and our own domain authority. One of the challenges with these calls is we donât talk a ton about the learning going on, on the platform. But itâs important to note that like, since we bought it, we have added over 600 free courses to the platform also. So, like thatâs a big part of the story. This is a worldwide free platform for people to come in and change their lives. So, the percent of marketing is down and our CPL is just simply more efficient because of the edX platform. I mean paid marketing is down. We spent $26 point-something million less than paid marketing. And as you can see from the revenue trajectory, we are able to maintain that. And we are able to augment paid marketing with organic growth, so from a lead perspective. So, the overall high-level metrics are there. And we are trying to up-level that conversation, if you will, and not get too much into each of the inputs that get you to the overall level. Got it. Thank you. And just for a follow-up on the capital allocation front. Are there any other debt refinance catalysts you are looking at or maybe to reduce the term loan any further? I mean Ryan, look at it this way, we delivered what, $125 million of EBITDA in 2022. We are on a trajectory to deliver â pick a number, $157.5 million plus in 2023. We have the fundamentals as an organization to have optionality when it comes to capital markets. And we will continue to explore that. At the end of the day, we are very focused on optimizing our balance sheet, and we will make sure we continue to look for opportunities as we go through time. I donât know if that is in the near-term or when that is, but we are building the fundamentals to make sure that we can tap into the capital markets as appropriate and optimize our balance sheet. Great. Thank you for the question. If we look at EBITDA margins in the back half of this year, and I know there is some Q4 seasonality around lower marketing spend, but I think you were over 19%. So, I am wondering why EBITDA margins for 2023 goes down to 16% from these higher levels assuming that there is the continuation of that reduced paid marketing spend in the first half of 2023, which wasnât there in 2022. So, just wondering if you could give any context there maybe where â if you are investing into next year and where? So, Josh, let me put that into perspective a little bit. The third quarter of 2022 was a 14% EBITDA margin and in Q4 25%. And revenue in that back half of the year of 2022, letâs say, $468 million with EBITDA of about $91 million. Thatâs the 19% that you are referring to. And if you take the midpoint of our guidance of $157.5 million as a percentage of the midpoint on the revenue side, thatâs the 16%. Keep in mind, half of the back half number that you are talking about there, the Q4 numbers has seasonality associated with it. And when you are looking at the full number of 16% margin in 2023, that number encompasses a full cycle, meaning Q1, which is our tallest pen and then Q4, which is going to be lower seasonal marketing spend. But having said all of that, I mean at the end of the day, this is January, this is the beginning of the year. And there is an element of prudence when it comes to our guidance that we delivered here today. Remember, we are in a very complex macroeconomic environment. And we have to be prudent as we go through 2023. But you hit the nail on the head. And funny enough, we were prepared for that question by looking at the back half of the year margin, what does it mean from a run rate perspective and you can tell from the response here. Thatâs a very good observation on your part. Thanks. And I definitely appreciate that. You like to outperform EBITDA and embed some prudence in there. I guess my other question is just we talked about through some of the positives around top of funnel and efficiency from edX. Wondering if you could comment on any impacts you are seeing from the pullback in paid marketing spend to top of funnel or enrollment? Yes. Josh, I would take that one. We were â I mean obviously, when we did it, doing it the way we did it at sort of one moment in time, I did have some risk associated with it. I am very pleased to tell you that it worked out in each individual sort of product line to our liking effectively what we thought it would be. We are now spending marketing dollars based on positive contribution. We do think over time, as I mentioned, we will be able to get back to stronger growth, but we are just doing it carefully. So, ultimately, we â the marketing spend is simply a much more efficient spend and you really canât get there without the organic lead flow thatâs coming off the platform. I mean it is still â itâs still early days, and we have only owned it for a little over a year. And an example of the micro credentials, we do believe, if you look at those, there are good examples of those micro credentials in the edX portfolio driving significant enrollment into the original edX degrees. And so aligning that kind of content with a university partner is a non-trivial exercise. Itâs really hard to do. So, when you see announcements like our GW Doctorate, that was our first flex degree. And you start noticing all of the lead flow running through edX. What we need to do is align every lead to learner status and have effectively every lead be a learner and have an opportunity to change their life even if it means they are doing something free on the platform. That is the really significant opportunity. Josh, what that will do is that will not only increase the learner count, but it will get us to greater growth opportunities because, as you know, the vast majority of people that become a âleadâ do not convert into a degree or into a boot camp. And so aligning all of those together is really starting to work. It is somewhat early days, but you might even notice that today, the homepage of edX looks quite different than it did yesterday. So, itâs just a gradual process of continuing to drive greater efficiency, sort of greater commonality. And the more paid marketing that goes to edX and the edX funnel, the greater the opportunity for us to expose people to new programs that they werenât considering before. And we are now actually, for the first time, doing edX direct marketing for edX itself. We were not really able to do that with the exception of a very minor test we did way back when we first bought edX. Now, you are starting to see, on a cost basis, us get positive conversion for edX compared to the lifetime value of a customer. And we will talk about that in more detail in March. There is only so much you can cover on an earnings call. But we really like where it sits. Itâs a â we think this is the future of education. And so we feel like we are ahead of folks here. Hey guys. Thanks for taking the question. This is David Lustberg on for Brent. I wanted to ask, you guys had previously in the past, you said you were going to offer up rev share points to existing customers if they were going to reduce their cost of their programs. Just curious, has that gained any traction? Have you guys had any folks out there taking you up on that? A little bit, Dave. And I would be â I would love to tell you that we have had a lot. We are not exactly sure what investors thought of it. We didnât do it for investor purposes. We did it because we really believe that lower cost is better for the student and candidly better for 2U because these are not inelastic goods. So, as the price goes up, demand goes down and we unilaterally pay for that. So, we do think putting sort of our money where our mouth is in reducing the rev share in order to drive the cost down, we thought is a really good goal. It is happening. We donât have anything to announce yet, but we will have a couple. But these things take time. So, compared to flex, we made two announcements at the same time, sort of swapping rev share, we think itâs really important that the world understands that we are willing to do that and are excited to do it. And therefore, debunks that narrative. But compared to flex, we got a lot of interest in flex and not as much interest in lowering tuition. So, we have more work to do there. Got it. Thatâs helpful. And maybe just one more if I may. I wanted to double click a little bit on the enterprise. Really good growth from you guys, obviously, of the small base, I think roughly 5% of your total revenue today. Excited to hear more, it sounds like you guys got a lot to tell us at the Investor Day. But just thinking about the long-term perspective of this business, is this something that you expect could grow to a third or a half of your revenue over time? How are you guys thinking about the long-term contribution of enterprise? Hi Chip and Paul. How are you guys doing? Just maybe two on my end. Just like, I guess in general, I think previous kind of recessions or maybe â and this is where the labor market really deteriorated. I would imagine a lot of the incremental unemployed went to degree route. Are you seeing any change in I guess or do you expect a difference in the market led theory this time around, where these people would go degrees or maybe your Alt Cred segment? So Brett, I would say in the â if you look at the research, typically, job-oriented programs moved first. We have definitely seen that. So, our boot camps are doing very well. And important to remind everyone that we â with Gallup, we released a study that showed that there is a year one $11000-salary increase from the boot camps, also doing very well for people of color. So, like if the boot camps are a really good story, from an outcomes point of view. We do think that this will transfer to degree over time. Obviously, everyone is talking about the layoffs and itâs obviously, itâs not great for those companies. But the fact is, typically, the degree business, you would expect it to be countercyclical, but not necessarily to the economy as much as it is to the labor market. So, as the labor market has started to cool, we do think we will return to sort of more normalcy there. But I would also tell you that we do feel like we are now sort of operating at pre-COVID levels, like we are kind of through the entire COVID experience, which is also meaningful. So, we feel like we know what we are dealing with. So, as we get through the trough that we see from the marketing spend change, we think we get to a better place in â24 and â25. Thatâs helpful. And then maybe one for Paul on the Degree segment profitability. I thought 44% in the quarter was quite remarkable. I guess is that a seasonality in the fourth quarter as maybe there is just less overhead costs and marketing costs associated with it? And is there going to be a, I guess a margin headwind from the revenue mix shift that you are kind of alluding to next year as degreeâs revenue decline and AC segment increases? Well, a couple of things. First of all, the fourth quarter, absolutely seasonally lower marketing spend contributed significantly there. Secondly, marketing and sales, 34% of revenue, some of that contributed to the degree profitability. As we roll that forward into 2023, we are going to be spending more on launches. We are going to be spending more on new degree programs. So, as we look at that and we look at the trends that we are in and getting down the trough and coming out the back half of the year, we will see lower margins in the degree business. But I would say lower margin, itâs going to be higher than itâs been in prior years on an overall basis. I am talking about mid â high-20s to low-30s type stuff. I am not talking about numbers that are sub-20s or anything like that. So, itâs going to be very good margins. And at the same time, we have the alternative credential business thatâs going to become profitable and contribute to the margins on a total company basis. And keep in mind, what we are doing here is positioning us for 2024 top line growth overall and continued to increase profitability, so that we can get to net income positive, EPS positive in 2024. And to some extent, when you think of all of this from a total company perspective, the degree business is doing what itâs doing, the Alt Cred business is doing what itâs doing. But enterprise is a surprise, and itâs the big one that drops to the bottom line as we get into back half of 2023 into 2024. Good. I just want to thank everyone for joining us today. A reminder to stop by our Investor Day in New York on March 21, you can now register on our website. And if you have follow-up questions, please give a shout out to Investor Relations. Thank you.
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EarningCall_690
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Ladies and gentlemen, welcome to IRadimed Corporation Fourth Quarter and Full Year 2022 Financial Results Conference Call. Currently, all participants are in a listen-only mode. And at the end of the call, we will conduct a question-and-answer session. As a reminder, this call is being recorded today, February 2, 2023, and contains time-sensitive information that is accurate only as of today. Earlier, IRadimed released its financial results for the fourth quarter and full-year 2022. A copy of this press release announcing the company's earnings is available under the heading "News" on their website at iradimed.com. A press release copy was also furnished to the Securities and Exchange Commission on Form 8-K and can be found at sec.gov. This call is being broadcast live over the Internet on the company's website at iradimed.com and a replay of the call will be available on the website for the next 90 days. Some of the information in today's session will constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements focused on future performance, results, plans, and events and may include the company's expected future results. IRadimed reminds you that future results may differ materially from these forward-looking statements due to several risk factors. For a description of the relevant risks and uncertainties that may affect the company's business, please see the Risk Factors section of the company's most recent reports filed with the Securities and Exchange Commission, which may be obtained free from the SEC website at sec.gov. I would now like to turn the call over to Mr. Roger Susi, President and Chief Executive Officer of IRadimed Corporation. Mr. Susi, please go ahead. It's truly wonderful to report that once again IRadimed had yet another excellent quarter of revenue and earnings growth. As we reported in this morning's release Q4 2022 was our top revenue quarter ever and our sixth consecutive quarter record revenues. I'm also very pleased to announce today that as you may have seen; our Board of Directors has approved a special cash dividend of $1.05 per share. Allow me to take a short dive into the financial performance we have achieved. As reported in this morning's release, fourth quarter revenue was $14.9 million, a 25% increase over the fourth quarter last year, with GAAP diluted earnings per share for that fourth quarter of $0.29. For the full-year ended December 31, 2022, our revenue was $53.3 million, a 28% increase over the prior year ended in December 2021. GAAP diluted earnings per share for the full-year 2022 has come in at $1.02 per share, a 37% increase over the full-year in 2021. Our teams from sales to purchasing and production engineering to service regulatory to finance dealt not only with the challenges of delivering this 28% growth, but they did it in the face of continuing supply disruptions and regulatory challenges as well as worldwide tension. The sales team did an exceptional job this past year with bookings outstripping our fantastic 2022 shipment volume such that we enter 2023 with an even larger backlog than we started. Customer demand is strong for all the product lines and with the continuing problems of our competitor in the MR monitor space and the reported business directions, we feel very confident in continuing record revenue and earnings growth into 2023. Additionally, the strong backlog provides us excellent visibility and allows us to maneuver and reallocate resources as supply issues may arise. 2022 sales growth was well balanced and strong for both the pump and the monitor product lines, with an increasing number of new FMD products shipping as well, though; we will expect the monitor line growth to become a leading driver in 2023. Last quarter, as reported previously, we withdrew the 510(k) for our new 3870 MR IV pump. And we will refire it -- re-file it, excuse me, later this year. Although this was unfortunate and will lead to delay in it, of course, in the launch of this new pump, as you see IRadimed's growth has been and I firmly believe will remain extraordinary. Though, one door may have been closed temporarily, another has apparently opened. The MR monitor business is simply on fire and we expect 2023 to deliver revenue growth near 20% again. You shall hear more of this later and I would welcome any questions regarding details of either revenue or FDA issues in our Q&A session. As we announced a few weeks earlier, we expect to report revenue in 2023 of $61 million to $63 million, with GAAP diluted earnings per share of $1.10 to $1.20 and non-GAAP diluted earnings of $1.23 to $1.34. For the first quarter 2023, we expect to report revenues of $14.6 million to $14.9 million, with GAAP diluted earnings per share of $0.23 to $0.25 and non-GAAP diluted earnings per share of $0.26 to $0.28. Now I'd like to turn the call over to our relatively new now CFO, Jack Glenn, to review the financial results of the quarter. As in the past, our results are reported on a GAAP basis and a non-GAAP basis. You can find a description of our non-GAAP operating measures in this morning's earnings release and a reconciliation of these non-GAAP measures to the GAAP measure on the last page of today's release. As we reported earlier this morning, revenue in the fourth quarter of 2022 was $14.9 million, an increase of 25% compared to the fourth quarter of 2021. On a sequential basis, revenue grew 11% over Q3 of 2022. Domestic sales increased 28% to $12.2 million compared to $9.5 million in the fourth quarter of 2021. International sales increased 8% in the quarter to $2.6 million. Overall, domestic revenue accounted for 82% of total revenue for Q4 2022 compared to 80% for Q4 of 2021. Device revenue increased 23% to $9.8 million. This was driven by a 51% increase in monitor revenue as our sales team continued to execute and gain market share in the monitoring business. Revenue from disposables and services increased 32% to $4.5 million for the fourth quarter of 2022, while our maintenance contracts increased 17% to $595,000. The gross margin was 75.5% for the 2022 quarter compared to 77.9% for the 2021 quarter. For the full-year 2022, the gross margin was 77.4%. The big piece in gross margin for the quarter was primarily due to the higher input costs and variations in the product mix. Operating expenses were $7 million or 47% of revenue compared to $6.1 million or 52% of revenue for the fourth quarter of 2021. On a dollar basis, this increase is primarily due to higher sales commissions and sales activities, higher general and administrative expenses for additional headcount, and higher legal and professional expenses. As a result, income from operations grew 37% to $4.3 million for the fourth quarter of 2022. We recognized a tax expense during the fourth quarter of 2022 of approximately $1,031,000 compared to a tax benefit of approximately $779,000 in the fourth quarter of 2021. The tax benefit in the fourth quarter of 2021 was primarily due to a one-time benefit associated with stock-based compensation expense. On a GAAP basis, net income was $0.29 per diluted share compared to $0.31 for the 2021 quarter with the difference due to the tax benefit of Q4 in 2021. On a non-GAAP basis, adjusted income was $0.32 per diluted share for the 2022 fourth quarter compared to $0.33 for the fourth quarter of 2021. Cash from operations was $3 million for the three months that ended December 31, 2022, down from $3.4 million for the same period in 2021. For the three months ended December 31, 2022 and 2021, our free cash flow, a non-GAAP measure was $2.6 million and $3.2 million, respectively. Thank you. Good morning and congratulations on the strong results. I did have a couple of questions. First, perhaps I missed it, but did you give the average price of the pumps and monitors during the quarter? No, we didn't, Scott. And we've discussed internally, and we're not going to be giving the specific as we have in the past on the ASPs, unless there's any material change in it. There is -- the calculation can get quite complicated and also just from a competitive standpoint, but also just the calculation can vary quite a bit with the different types of product, the monitors and pumps, et cetera. But I can -- the ASPs in the quarter were solid, and there was no real difference from previous quarters. Okay. Thank you. That's helpful. And then disposables and services wasn't just strong, it was really strong, $1 million higher than we've seen before, often a number was a three in it. Could you tell me -- could you give any color on what happened? And more importantly, is whether that should continue or was an aberration or a trend, I guess? Well, maybe I'll jump in a little bit, then I'll let Jack follow-up. But it shows we were selling a lot of IV sets. So the disposables mainly are leading the way from the pump perspective with the sterile sets. But also, we've seen this electrode, which is the largest of the, let's say, accessory or disposable items that go with the monitor, the electrodes have been just running strong. As I said earlier, the monitors has been hugely successful since we launched it in this past year was just off the hook growth. And along with that, are going these electrodes. So -- and then we're selling maintenance quite well too. The maintenance sales had a -- they've been deemphasized a bit about two years ago with a change in sort of the ideology of commissioning, if you will, of that item. And we put that back. We sort of corrected that two years ago. And so you're seeing the sale of the extended maintenance kicking in and returning to and passing where it had been prior to that change two years ago. So you put all those together and yes, we're doing a great job with these accessory and maintenance items as well. So do we expect at this level to continue? With the continued growth of the monitor, that will keep pulling the electrode with -- along with it, the growth rate of the disposables is just right along with the pumps, and we had good growth with the pump this past year. So yes, I mean, we see it as sustainable generally. That's -- we would be surprised if it hit some sort of plateau at this point. Okay. Great. Thank you, Roger. And since I got you on the line, maybe could you give a little more color on the competitive landscape? I mean you talked about competitor problems in the monitor market. Just any kind of at least big picture idea of what you're seeing out there and how we should factor that into 2023 and beyond? Yes. Well, I don't know how many of you out there on the call had the chance to listen in on the recent Philips' earnings call that they had I believe Monday or to follow what they do. They don't break out where we compete with them in this MR monitor space is a rather tiny portion of what they do. But I think if you read what they were describing on their call Monday, you could see that they made it very clear that they're going to prune various items from their catalog and that they can't be everything to everyone any longer, and they're going to shoot for -- they're going to put their resources into high growth, large businesses that are scalable. So when I read those and hear those comments, I'd have to say that this line that we compete with them in, being MR patient monitoring, I don't think it checks any of those boxes. So -- and we've seen them reduce the sales force radically that they one-time had -- they had over 40 territories manned and now it's well under 20, we understand. So all of that, I think are tea leaves that are not too hard to read. And I would just suggest everyone have a glance at Philips' call. Okay. Thank you, Roger, for the color. That's helpful. Shifting to the income statement, gross margins, they've been somewhat variable between -- in a range between 76% and 80% or close to 80%. Second and third quarter were higher, first and fourth quarter were lower. I guess the question is, should I think about that as just the average of those numbers is a good number with variability throughout? Or do you think they're trending in one direction or another direction? No, I think you hit it. If you look back many, many quarters, we've been just in that range. And I think that range is a fairly tight range, plus or minus 1.5% or 2% around that centroid of that average; I think is a fairly tight grouping. And yes, so I don't expect that we will be able to break out of the high-end of that significantly and sustain it, but we won't fall out of that range either. So that's yes -- to answer your question, yes, I believe the average of what you're seeing in these last many quarters is the fact. Okay. Great. Thank you. And final question for Jack. Other income, it was -- it's starting to jump out at a positive 450, is that just higher interest rates for the cash balance or anything else going on there? Yes, yes, exactly right. That's what that is. Clearly, it's -- yes, with our cash and the higher interest rates that we are now seeing a nice interest income coming in on a quarterly basis. Thank you. One moment for our next question. And our next question coming from the line of Christopher Sakai with Singular Research. Your line is open. Hi, thank you, guys. This is Sean [ph] for Chris. I was wondering -- first of all congrats on the great results and the dividend announcement, very encouraging. I was wondering if you can give me some color on the trend of gross margins on disposables. Well, it's just pretty -- I mean it's just very steady. So yes, we're not seeing -- if your question is, are we seeing cost impacts, those plastic devices of PVC and polycarbonate and such. There have been increases in that sort of -- in those commodities, but it hasn't reflected by the time we mold those parts and turn them into what we turn them into, there's still pennies in the cost of the IV sets. So we don't see any -- we haven't had any negative impacts to the cost structure in the disposables. Okay. And given on the inflation and supply issues and all can we assume that you guys have been reasonably able to pass on those price increases of the inputs to your customers? Short answer is yes. We did that rather early, I guess, and the COVID hit. We started getting hit; this is year-and-a-half ago, at least six, seven quarters ago. We started seeing the component issues, electronic components and whatnot primarily, really, really giving us heartburn. And we were able to negotiate increase the prices for these key products, the pump and the monitor. Some of that -- because of the contracts and how long they take, some of those have become effective already. And some of them, though we negotiated them over a year ago, you'll be -- they're yet to come -- become effective still in these next six months. So yes, we've had price increases. Some have taken place and are reflected in our earnings and some have been negotiated in and aren't actually physically accountable for yet, but will be over the next two quarters. Great. And to an extent you can share with us the dynamic of disposable per device. I'm sure you track a rough color you can give how that is trending. That would be very helpful. So essentially, like one way to look at your revenue model is, there is a disposable revenue stream and there is devices. And you know, I know you don't divide it up by units, but if you can -- and maybe if you guys track it, disposables per device? Or any color you can give, which can give us some understanding on how it is trending? Like maybe more disposables are going out per device or less? Or it is mostly on the price, something if you can give us a color on that. Yes. I think -- well, I think Roger touched on some of this earlier when we look at the disposables and certainly, the growth there is correlating with the growth in both the pumps and the monitors. As a percentage of our sales, I think it's -- total sales has gone range somewhere around 20%, 25%, this last quarter, I think it was around 30%. So it is has shown some growth. But I think it's probably going to stay within that same range as a percentage of sales going forward, and again correlates pretty closely with our growth on the devices. I might add, IRadimed is a little bit different, though, we have a disposable that's a nice piece of revenue and it has a nice margin, unlike a lot of companies, they may build their business model around the disposable and offer the thing that uses the disposable, the razor, if you will, at not so great a margin. If you delve into our margins at that detail, these gross margins that we talked about a few minutes ago, these are the same, whether it's the device or the disposable. So I mean, that should tell you a lot more about our model. It's not quite maybe typical in that regard. Wonderful. And any color on in terms of further interactions you guys have had recently or over last six months with the providers in terms of their capital spending outlook. Things have changed a lot in the last two years or three years. So I was wondering, any color you can provide? Well, to us -- I mean, to us, it looks like I mean it looks pretty good. As you can see, we've been increasing our revenues at quite a fantastic rate. So I think in the lines we are in, in this niche market, maybe we're seeing CapEx expenditures are still quite healthy and enjoyable to us versus other markets that we don't play in. Maybe where I've heard things can be more snug as far as the expenditures of various facilities. So -- but I think you can see from what we do in our niche, we're still enjoying a pretty good look from our customers. Absolutely. So maybe one way to think for us is that things might look a little bit difficult or different for an average medical device provider, but considering your niche market, whatever capital constraints providers might or might not have, you guys are pretty much unaffected, right? Maybe that -- would you agree with that? Oh, yes. I would say that in our little pocket -- our little corner of the medical device universe, yes, we're a little immune to -- we haven't been impacted by the other areas that you may see being a bit more dampened by CapEx allocation. Yes. We're kind of under the radar there. Yes, right. Good place to be on that. And finally, right, finally, it also looks like you guys have been maybe under the radar is not the right word, but sort of unaffected by the supply chain issues and generally, the device industry has been facing, especially offshore and all looks like that also has not affected you guys or maybe not as much as some of the other players. Any comments on that or any color on that? Well, it might look that way. But I can tell you, we've had a lot of sweat and we've had some near misses. It hasn't been fun. That has been an everyday consideration at some point during really literally each day. But I'd say that with our size, and our margin, that helps, right? So we have seen components that we've just had to get I mean, we've gotten robbed on them. We've had I could think of hands full of components that were a $0.50 or $1 that we paid $20 for to get them. So we'll do it. We'll do it to keep ourselves moving. And we're very agile at also substitution of components. So the design is all done here. All the expertise is here. It's not scattered around the world, but larger companies tend to get as they grow and so it slows them down. They're not very agile at seeking alternative solutions as we can be. So you put all that together and yes, as I said earlier, thanks to materials -- our purchasing people and our manufacturing people and to a good extent, thanks to having a nice backlog where we can shift between different things throughout the quarter as we solve one problem and another one pops up in another product line. So yes, there's a lot of juggling going on, but we have managed to dodge it. And I will say, as you can probably read in the papers these days, supply chain issues are starting to fade back away. They're not increasing. And we've seen it -- we've seen ourselves starting to get deliveries of parts at the right price again where we've been in a waiting line for in some cases over a year. Yes, yes. So great, well, that kudos to execution and management here, considering there has been a lot of upheaval under the surface, but it looks like you have managed to keep the surface calm and deliver to your customers. So great. Thanks for the color. That's all I got. Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Susi for any closing remarks. Thank you, Operator. Well, we couldn't be more pleased to have had this opportunity to report such a strong gain for 2022 and to share our expectations for 2023. IRadimed is running very efficiently and its products are being adopted at an accelerating rate, with margins at levels of that many of our peers may envy. All company areas are growing, including new physical plant at a recently purchased site, which we are now designing to meet our continuing growth needs. With that, I look forward to reporting our future successes as the year progresses, and thank you all.
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EarningCall_691
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Good afternoon, and welcome to the Omnicom Fourth Quarter and Full Year 2022 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I'd like to introduce you to your host for today's conference, Senior Vice President of Investor Relations, Gregory Lundberg. Please go ahead. Thank you for joining our fourth quarter and full year 2022 earnings call. With me today are John Wren, Chairman and Chief Executive Officer; and Phil Angelastro, Executive Vice President and Chief Financial Officer. On our website, omnicomgroup.com., we've posted a press release along with the presentation covering the information we'll review today as well as a webcast of this call. An archived version will be available when today's call concludes. Before we start, I would like to remind everyone to read the forward-looking statements and non-GAAP financial and other information that we have included at the end of our investor presentation. Certain of the statements made today may constitute forward-looking statements, and these statements are our present expectations. Relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings, including our Form 10-K, which should be filed tomorrow. During the course of today's call, we will also discuss certain non-GAAP measures. You can find the reconciliation of these to the nearest comparable GAAP measures in the presentation materials. We'll begin the call with an overview of our business from John, then Phil will review our financial results for the quarter. And after our prepared remarks, we'll open up the lines for your questions. Thank you, Greg. Good afternoon, everyone, and thank you for joining us today for our fourth quarter and full year 2022 results. I'm pleased to report our fourth quarter performance was very strong on both the top and bottom lines, and we finished an outstanding year in 2022. We entered 2023 with a high level of confidence in our strategic and financial position while remaining cautious and being prepared for possible changes in the geopolitical and macroeconomic environment. For the fourth quarter, organic growth of 7.2% exceeded our expectations. Growth was broad-based across our disciplines, geographic regions and client sectors. We again saw a double-digit growth in our Precision Marketing, Public Relations and Experiential disciplines. Full year organic growth was 9.4%. Operating margin for the fourth quarter was 16.6%, an increase of 50 basis points compared to the prior year. For the full year, operating margin adjusted for certain non-GAAP items illustrated on Page 10 of our investor presentation was 15.4%, which is 40 basis points higher than our operating margin in 2021. Earnings per share for the quarter was $2.09, up 7.2% versus the fourth quarter of 2021. The negative currency impact on EPS of the strong U.S. dollar was approximately 6%. On a constant currency basis, EPS increased by approximately 13%. For the year, we generated over $1.7 billion in free cash flow and returned more than 65% to shareholders in dividends and share repurchases. Our liquidity and balance sheet remain very strong and continue to support our primary uses of cash, dividends, acquisitions and share repurchases. Our strong performance validates the growing role we play as clients increasingly turn to us for advice in navigating through a complex marketing and communications environment. We're also advising our clients on transforming their organizations by deploying new processes and marketing technology platforms that can provide more connected experiences for their consumers. During the quarter, we expanded and further strengthened our talent. At the time of our Q3 remarks, we had just appointed Andrea Lennon to the new role of Chief Client Officer. In the fourth quarter, we added two prominent leaders: Kathleen Saxton, previously of MediaLink, joined as Chief Marketing Officer; and Alex Hesz previously of adam&eve and DDB joined as Chief Strategy Officer. Andrea, Kathleen and Alex will strengthen our position in the marketplace, identify and pursue new business opportunities and work with our global client leaders and agencies to deliver innovative and transformational ideas to our clients. We're fortunate to be adding this team from a position of strength. We ended 2022 with significant new business wins and deepened our relationship with many of our enterprise-level clients. In the fourth quarter, L'Oréal named Omnicom Media Group, its U.S. media agency of record. This marked one of the biggest wins of 2022, with an estimated $1 billion in U.S. media billings as reported by COMvergence. L'Oréal selected OMG due to its steep specialization and integration of expertise, talent and technology to deliver modern marketing outcomes. Our recently launched commerce agency, Transact, along with our best-in-class analytics and insights team at Annalect, which supports the Omni operating system played instrumental roles in winning the L'Oréal business. Also on the media front, OMD secured a major win as it was named media agency of record for Burberry. The win includes an innovative and bespoke agency model created specifically for Burberry. Our Healthcare Group, which had 6.4% growth in the fourth quarter, won a significant new business pitch with Merck capping off the year in which it won one of our largest healthcare pitches of 2022. A key component of our new business success was driven by our e-commerce capabilities, an area where we've made and continue to make significant investments. We recently expanded our e-commerce capabilities through our partnership with Albertsons Media Collective, a retail media arm for the Albertsons Companies. This partnership will provide first-to-market solutions that will enable marketers to better target and measure ROI in the connected TV environments. Going forward, we plan to continue to invest in and expand our capabilities to solidify our position as best-in-class provider of retail, media and e-commerce services as well as in other high-growth areas such as Precision Marketing, Performance Media and Health. I want to thank our people around the world for helping us close out 2022 on such a positive note. It's your dedication and commitment and outstanding work that allows our agencies, clients and Omnicom to succeed. We entered 2023 in a very strong position, supported by our strong financial performance, new business wins and steady progress on our key strategic initiatives. We also continue to see strong demand for our services. Based on current market conditions, we're targeting 2023 organic revenue growth of 3% to 5% and expect our operating margin to be between 15% and 15.4%. At the same time, we remain extremely cautious of macroeconomic and geopolitical factors, including the ongoing war in the Ukraine, the economic risk posed by rising interest rates and higher inflation around the world. To be prepared, we continue to actively develop plans to respond to the headwinds from macro factors, and I'm confident we can manage through this economic cycle. And we have the leadership teams in place to minimize the impact on our top and bottom lines. Thanks, John. We're pleased to be closing 2022 with solid fourth quarter results, driven by strong organic revenue growth, operating profit growth and earnings per share growth. We finished the year with a healthy balance sheet and excellent liquidity. Our strong credit position and the operating flexibility of our business position us well for any macro uncertainty ahead. Please turn now to Slide 3, and we'll begin our review with a summary of the fourth quarter income statement. Reported total revenue in the fourth quarter was flat year-over-year at $3.9 billion with organic growth of 7.2%, offset by the negative impact of foreign currency translations and net disposition revenue in excess of acquisition revenue. Since most of our expenses are incurred in the local markets where our revenue is earned, foreign currency translation also reduced our operating expenses, which were flat versus last year. Reported operating profit for the fourth quarter increased 3.2%; and on a constant currency basis, it increased 8.4%. Moving down the income statement. Higher interest income again helped lower our net interest expense, which decreased by $18.5 million. Our tax rate of 26.5% was as expected. In 2023, despite the increasing interest rate environment, we currently expect interest expense to approximate 2022 levels and interest income to increase moderately in Q1 and Q2 of 2023 compared to the first half of 2022 and approximate 2022 levels in the second half of 2023. We also currently expect our effective book income tax rate in 2023 to be approximately 27%. The increase relative to our 2022 rate is primarily due to the UK tax rate which is scheduled to increase in April of 2023. Overall, our Q4 '22 net income rose 3.3% on a reported basis. Combined with the reduction in shares year-over-year, diluted EPS rose 7.2%. Without the headwind from negative foreign currency translation, diluted EPS for the quarter increased 13.3%. For a review of the full year, please turn to Slide 4, where we show certain non-GAAP adjustments to make the periods more comparable. None of these adjustments are new this quarter. They were discussed earlier this year and last year. For the year-to-date 2022 period, operating expenses and income taxes were impacted by charges in the first quarter arising from the effects of the war in Ukraine. For the year-to-date 2021 period, operating expenses benefited from a gain on sale of a subsidiary and both interest expense and income tax expense reflect the impact from the early extinguishment of debt in 2021. Continuing on Slide 4, similar to the quarterly results we just discussed. The strength in the dollar this year also impacted our year-to-date results. Foreign currency translation reduced revenues by 4.8%. Operating profit on a non-GAAP adjusted basis of $2.2 billion was up 2.3%. And without the headwind from negative foreign currency translation, it increased 6.8%. Non-GAAP adjusted diluted EPS of $6.93 rose 8.5%; or without the headwind from negative foreign currency translation, it increased 13.6%. Let's now go into some more detail on our results, beginning on Slide 5 with an analysis of the change in our revenue. As discussed, our organic growth was 7.2% for the quarter, and 9.4% year-to-date. The quarterly impact from foreign currency translation was negative 5.5%. It's worth noting that for financial reporting purposes, the U.S. dollar strengthened against the currencies of every country we operate in, except for Brazil when compared to Q4 of 2022. However, this impact was slightly less than it was in the third quarter. So it did move in the right direction. The impact of acquisition and disposition revenue was negative 1.4%, primarily reflecting the disposition of our businesses in Russia during the first quarter of 2022. Looking forward, foreign currency exchange rates stay where they were as of February 1, we estimate that the impact will reduce our revenue by approximately 3% in the first quarter and moderate for the remainder of 2023 to be approximately flat for the year. Based on deals completed to date, we expect the impact from net acquisitions and dispositions will result in a reduction of our revenue by approximately 1.5% in the first quarter, primarily resulting in the disposition of our businesses in Russia in the first quarter of 2022. Turning to Slide 6. For the quarter, we once again showed organic growth across all of our disciplines with the exception of execution and support as we expected. As you can see, performance in each of our other disciplines remained solid with double-digit organic growth in three of them. Advertising & Media, our largest category, posted 6% organic growth in the quarter, led by strong performance in our Media businesses. Precision Marketing continued its strong performance, 11.6% organic growth as clients continue to turn to us for digital transformation, digital customer experience and data analytics services. Although this growth rate moderated a bit relative to the third quarter, we're excited about the outlook, and we'll continue to invest in this space. Commerce & Brand Consulting was up 7.2% organically on the strength of our branding and design agencies. Experiential organic growth was a strong 17% where we saw more benefits than we expected from the FIFA World Cup and other year-end projects. Execution & Support, which we expected would be choppy in the second half, had a decline of 2.8% against the comp of 5.2% growth in last year's fourth quarter. Public Relations grew a strong 12.7% organically in the quarter, keeping up a double-digit trend, reflecting continued client demand across many industries and geographies, and including increased revenue of approximately $10 million, resulting from increased election spending in the U.S. in the second half of the year. And Healthcare delivered solid organic growth of 6.4%. Turning to Slide 7 for revenue by region. We're pleased to see continued positive growth globally. In the U.S., our 5.6% quarterly organic growth was led by Advertising & Media, Precision Marketing and Public Relations. International growth of 8.7% was also led by Advertising & Media and Precision Marketing and also saw the strong contribution from Experiential that I mentioned earlier. Regionally, we saw some expected slowdown compared to the first half of the year in the UK and Europe, but their organic growth of 10% and 5%, respectively, is still quite healthy. Asia Pacific also improved, led by China and also driven by most of our other markets in the region. Looking at revenue by industry sector on Slide 8. Relative to the fourth quarter of 2021, the mix of our client portfolio was broadly stable. Categories that moved year-over-year included an increase in exposure to pharma and health and a decrease in exposure to technology. Let's now turn to Slide 9 and look at our operating expenses for the quarter. For your reference Slide 17 in the appendix presents this on a constant currency basis. Our total expenses were essentially flat at $3.2 billion due primarily to the weakening of almost all foreign currencies against the U.S. dollar. Salary and related service costs decreased as we saw an increase related to organic revenue growth and additional headcount, offset by the effects of foreign currency translation. Third-party service costs increased due to an increase in organic revenue. Occupancy and other costs increased primarily due to some growth in general office expenses as our workforce returns to the office, partially offset by lower rents. On the topic of rent, you may have seen in January that we moved the Madison Avenue headquarters for TBWA to a location that houses other Omnicom agencies. It is an open, modern and collaborative space with an efficient design. This is another example of the rationalization of our rooftops, which we expect will continue in the future. SG&A expenses were down year-over-year due to lower professional fees, lower marketing-related costs and reductions from the effects of foreign currency translations. Turning to Slide 10. Our fourth quarter operating profit was $643 million, a 3.2% increase from last year, net of a reduction of $32.3 million of the impact of foreign currency translations. Our operating profit margin reached 16.6% on total revenue compared to last year's margin of 16.1%. Please turn now to Slide 11 for our cash flow performance on a full year basis. We define free cash flow as net cash provided by operating activities, excluding changes in operating capital. Free cash flow for the year was approximately $1.8 billion, flat compared to last year. Regarding our uses of cash, we used $581 million of cash to pay dividends to common shareholders and another $80 million for dividends to non-controlling interest shareholders. Capital expenditures of $78 million were at normal levels. Acquisition spend, net of dispositions and other items was $330 million. And lastly, our net stock repurchases for the year were $594 million, at the high end of our expectations of $500 million to $600 million. In 2023, we expect that we will also repurchase shares within this historical range. Regarding the changes in our operating capital for the year, which resulted in a use of cash of approximately $840 million, the principal factors that caused this reduction included: a reduction in billings in 2022 resulting from certain client losses in 2021; disposition of our businesses in Russia, including cash for operations in Q1 of 2022; disposition of our specialty media business in 2021; impacts from increased client activity related to the reopening in China at the end of the fourth quarter; and timing differences compared to the prior year; and cash collections and cash payments at year-end. As we look forward, we expect change in operating capital to be a source of cash again for fiscal year 2023. Slide 12 is an overview of our credit, liquidity and debt maturities. During the quarter, the impact of foreign exchange rates on our euro and sterling denominated debt caused the book value of our outstanding debt to decrease to $5.6 billion from $5.7 billion as of December 31, 2021. There were no changes in outstanding balances during the quarter and our $2.5 billion revolving credit facility, which backstops our $2 billion U.S. commercial paper program, remains undrawn. Our cash and cash equivalents were $4.3 billion at year-end. The reduction relative to year-end 2021 is due primarily to the changes in operating capital that I just discussed as well as the effect of foreign exchange rate changes, which reduced our cash balance by $219 million for the year. Turning to Slide 13. Our operating capital discipline consistently drives above-average returns on both invested capital and equity. For 12 months ended December 31, 2022, we generated a solid return on invested capital of 28% and a strong return on equity of 40%. The strength of our business delivers attractive returns on a relative basis in both strong and weaker macroeconomic environments. In closing, as 2023 unfolds, we are prepared, as always, for an uncertain business environment. We have a strong track record of providing attractive returns through dividends and share repurchases while maintaining a strong balance sheet and managing our business through challenging market conditions and we will do so while continuing to invest in our strategic future growth. So John, maybe to start off with, you said you entered 2023 with a lot of confidence, and you're also being cautious and that caution certainly served you well last year as the macro really got worse throughout the year. You all did an impressive job of setting achievable targets. So how should we think about the amount of kind of healthy caution that's in this guidance? And maybe related to that, as you came through the fourth quarter and into January, did you see trends that were either improving or deteriorating on a sequential basis to kind of set you up for how you're looking at the rest of the year? Okay. There's a couple of questions in there. Let me start with first with the guidance. In the guidance that we gave you, I'm going to remind everybody, we're five weeks into the year. 3-plus percent, I'm extremely comfortable about. There's a lot of reasons for that. There are some puts and takes, depending upon the industry that clients are in. But on the whole, we feel very good, our client base and what their planned spending is for the forthcoming future as far as we can see it. And then in 2022, we entered the year challenged by facing some losses from '21, which we're not up against in the first quarter. And as well as Russia as to previously mentioned. But more importantly, if you look at media wins, for instance, using the only reliable outside source, which I believe is convergence, you'll find that on a net billings basis, Omnicom won far more business in '22 than any of our competitors. So the combination of stability in our client base, those new business wins, which will start to contribute for the most part in and around April. But April and for the rest of the year, I'm extremely comfortable. We'll know more, obviously, as we get a little bit further into the year and have -- continue to have conversations about stretch plans with our operating divisions. But -- so that's that. In terms of the month -- I think the second one was the month of January. So we don't -- we typically don't place a lot of emphasis on one month in any quarter. But we didn't see anything in terms of January's results that would cause us to change the commentary John just laid out. And Phil, maybe if I could just follow up on the margin guidance. Could you just confirm if that's EBITDA or operating profit, and I know you had the $113 million adjustment in '22. So what would be the comparable number for 2022 versus the 15% to 15.4%? Sure. So the number without the charge for Russia, which was about $113 million, is 15.4%. That's an operating margin percentage. Operating profit divided by revenue. So that's the guidance, 15% to 15.4% operating profit. Phil, just to follow up on the margin guide. I think we're generally conditioned to see organic growth at the level that you guided to kind of filtering down the margin expansion. So wondering if you could kind of speak to the puts and takes of the margin guide, any cost pressure that's potentially offsetting any gains that you might get from the incremental growth. Sure. I think given the -- some of the uncertainty of the macro and business conditions currently, we certainly plan the business to align our cost structures with our expected revenues as we know them. We always have done that. We're somewhat conservative about how we do it because we don't want to be relying on plans that have unsupported new business assumptions where we maintain a cost structure that isn't sustainable. It isn't effective and efficient in achieving our margin objectives. So we, like everyone else, have experienced some wage pressures. But there's a number of other initiatives we've been pursuing. We're going to continue to pursue around outsourcing, in offshoring and automation, and we're pretty comfortable with the margin targets that we've laid out. But in terms of the general macro, there are some things that may be out of our control so we've given the guidance which is 15% to 15.4%. Embedded -- if I could just add one thing to that, embedded in that and we're not always successful, but we have added a lot more success than I would have hoped for and going back to clients and getting increases which will help mitigate that issue. And we've also gotten a lot more sophisticated as we've gone through a couple of these recessions or [indiscernible] in that if clients are not willing to give us any smaller, what we've been able to do is to increase the length of our contracts with those clients, therefore, increasing the stability of our revenue forecast. John, you also made in your prepared remarks, kind of e-commerce capability as playing a role in winning new business. Just wondering if you could speak to that and maybe the increasing role retail media is playing in terms of client allocation? Yes. At this point, selling client products and what COVID did for online sales is never going backwards. It's only going to further increase as we move further into the future. Mergers like Krogers and Albertsons will set up a third competitor to the Walmarts and the Targets that are out there as well as the Amazons. Budgets at sales departments traditionally had to motivate those stores to feature those products are, in essence, becoming types of media budgets. And there's a lot of overlap and convergence in terms of the skills that you need. Having said that, there are some very special skills that you need to focus on retail and sales at that moment of notice or when you get the customers' attention. We've looked at seeing if there is much to acquire throughout '21 and '22. But at the same time, because we were a bit hesitant, we started building it and so we've been building it for well over 2.5 years. And I think if you ask us or any of our competitors, every media request for a bid for the last several years, you have to come in and demonstrate to that potential client the strength of your e-commerce capabilities. So it's something that we are focused on, remain focused on, and we think is going to play a very important role in future business, not only in '23, but beyond. John, you talked about the strength and the fill in the media business. Advertising and Media had another nice quarter, similar growth last quarter and you called out media strength. And it's interesting because if we look at the -- whether it's TV or digital advertising, things got pretty bleak in the back half of last year. So it's clearly separation here. Could you take us inside of the advertising and media discipline at Omnicom and sort of help us understand the drivers of that continued growth in the business. It doesn't sound like new business wins really were a factor in last year's results. I just want to make sure I got that right. And then I had a follow-up for Phil. Let me start off, media wins, creative wins as well as media wins as well as Precision Marketing wins all contributed to the performance that we had last year. And going into last year, we were still cycling on a couple of account losses that we had, had previously. So new business did have an impact in getting us to where we were in 2022. That strength of batting above -- at a very high average and above our weight because I think we deserve every win we got. But there was quite a bit of activity at the end-ish second half, end-ish last four months of last year. And we were very successful with it. And we continue to be successful as we go into this year on things that we announced. And we don't have a crystal ball, as Phil said earlier, but we do have some sight in terms of accounts that are stable because we have multiyear contracts and accounts that people have got into review, maybe not become public yet or not. And we're not in a defensive mode, and it's already February. We're still -- and we're on our front foot, and we continue to be on our front foot. So I'm very comfortable that the wins that we had in the latter part of last year will be contributing starting in the second quarter of this year, and that'll benefit the rest of '23. And I'm also confident in the teams that we have answering these briefs and the collaboration that is not just media or just creative or just precision marketing but our holistic approach is responding to the clients' business needs. In my reference in my first answer, to convergence for media, in truth, that's the only third party that accurately accumulates and follows wins and losses, but they only do it in the media sector. There are a heck of a lot of wins in all the other areas of our business as demonstrated in the growth areas that you saw with the exception of COVID closing China and some other headwinds had on our execution business. But those should even -- they haven't lightened up just quite yet but they will. In truth, China opened up extraordinarily well in that area. In the month of December, we weren't prepared to handle all the demand that there was in December. So I'm bullish on where that particular business can be as we get further and further into the year, contributing to the strength that we have across all of our other areas. I would just add, Ben, that when we talk about growth and in this case, growth in media, it isn't just new business wins. It's growth of existing clients, which all of our three global brands when you look at their full year numbers performed quite well in terms of growing their businesses, and there isn't a direct correlation necessarily between the media industry and/or the pricing of media and our revenue streams. I think the more complexity there is in that landscape, and I think it's clear. It's a much more complex landscape today than even just a few years back. Retail media being one of those examples, the more complexity, the more in demand our services are. Got it. No, that's helpful, Phil. And then maybe just -- I don't know if there's a connection between the new business wins and your margin target. So I didn't totally understand your answer earlier on why we're not -- why margins would be flat to down in a year with this much top line. Is there some staffing up ahead of new business coming on, that's part of that. Is there anything structural change? Like if you continue to put up 3% to 5% growth in '24 and beyond, I think we should see margin expansion, but want to make sure there's nothing we're missing. I think it's the first week in February, as John had said. And I think if we were sitting here 12 months ago, looking out at 2022, it was a very different macro outlook than it is today in 2023. And given that uncertainty, we expect there's going to be some challenges that we're going to have to manage through. And we expect to do it successfully, and we're not going to be overly optimistic in terms of our guidance at this point. Yes. I mean the only other thing I would add is that when we issue our K, we'll probably be -- I'm sure we'll be talking about our headcount. Our headcount definitely went up in '22. It went up throughout the year. So we are looking at a full year's cost for those incremental employees right now. It's hard to really predict what's going to happen in the payroll environment because we're going to start to insist, you'll see some reports that we are consistently bringing people back at least three days a week. That hasn't been -- that will be finished and completed but way before the end of this quarter. And there are costs associated with those people coming back that we haven't necessarily had to bear as we were working remotely in the past. So we're being a bit cautious, but I think we're being very sensible. And with the Fed raising interest rates as well as some of the other challenges that are going on with the war, there are uncertainties out there. So we plan for what we know. That's not what we're hoping for. I mean we will do everything in our power to reasonably control our costs while attracting the best and brightest people that are out there in the marketplace. And we will get some relief with some of the challenges that the tech companies are going through, but we haven't seen the full impact of that yet. One for John and one for Phil, for both you guys. One of the challenges we have is trying to figure out what's normal, right? We had '21 lapping '20 and '22 is a bit of a recovery year too, the growth was extraordinary 9%. When you look at your revenue buckets, what businesses do you think are expecting to slow, right? Is there a biggest kind of normalization? And in your forecast 3%, 5%, is there just some acknowledgment that maybe the '22 growth rate is a bit of a catch-up? Or anything you help on looking at kind of the normalization of growth. I'm looking at '22 and maybe Experiential, maybe there are some places that were caught up. And then Phil, can you remind me a bit of your currency and where it's moving. Is that a positive or negative for margin? I know it's translation effect, but is there kind of a bogey on margin due to where currencies move into where it could possibly go to? When we look at revenue, when we look at our clients, we look at what their business needs are in terms of selling their products. So we are most interested in share of wallet as opposed to individual expertise or crafts within the marketing experience. So -- and we've gotten better and better at this, we're on our front foot. So we're not only answering the briefs that the client isn't necessarily putting to us, we're not just answering questions. We're taking a look at their business, their sector and trying to be helpful as a partner to them in growing their businesses. So we don't really make the distinctions other than what the accounting systems spew out is relevant to me. And in today's environment, that marketing funnel continues to collapse and there's a lot of overlap between the skills or the areas in which we call out for historic purposes. I started off in an earlier answer, explaining how retail e-commerce type of spending and media spending are overlapping -- almost completely overlapping today. Not every client's organization has separated the responsibility for those two areas just yet. But in essence, all those costs in all those different areas are being spent to get a great ROI and to move the client's product. And that's where our real focus is. On the FX front or the currency front and margins, there really hasn't been much of an impact on our margins from a currency perspective, maybe 10 basis points plus or minus each quarter this year or less than 10 basis points. And that's typical when most currencies are headed in the same direction relative to the dollar. So the costs are coming down. The revenues are coming down roughly in proportion to the change in the currency because the local currencies are naturally hedged. So unless we get a big swing in a particular currency where the revenue drivers for Omnicom are, there's a big -- a larger change or a larger proportion of revenue coming from a market where we have an overly high margin or a lower margin than our average, we typically don't get margin swings caused by currency because of the natural hedge of our people are located in the same markets as revenue is generated. So it's a natural hedging effect for the vast majority of our business that doesn't have any impact on margins. Okay. And so I can ask one more. I don't think you quantified what the hit is going to be this year to divest into acquisitions to total revenues. I might have missed that. We got the first quarter, but what's your aspect of the year of the revenue changes from divestments? Right now, we're going to kind of cycle on Russia after the first quarter. That was the main disposition that's still out there. And we'd expect the number for the rest of the year based on deals that are actually closed to be small, kind of close to a push because we don't have any sizable acquisitions or dispositions that are contributing as of now. We expect that to change if we can get some acquisitions done. But I think for the balance of the year, it's going to be flat after the first quarter. I actually wanted to ask you a question about acquisitions and divestitures, too. If I look back several years, you've got six or seven years' worth of dispositions, not acquisitions. And if I go back even to about 10 years ago, you were kind of at about zero acquisition disposition for a number of years now. So you used to be a more acquisitive company. You've clearly been clearing out some of the businesses that have not been working and focusing on organic growth. I just wonder if there might be more opportunities to go for more acquisitions. You're not going to call what you might do in Q2, for example, but is this a more acquisitive environment emerging for you? And if so, what kinds of things might you look at? I think we outlined pretty much there. What the areas that we're most interested in, which I think I called out as being e-commerce, geographic expansion and skill expansion of our precision marketing group and our very strong healthcare group. So those are areas that we're constantly scraping the market, talking to everybody, we have an entire group that's dedicated to that in terms of mergers. I think this is a generalization. So making a general statement, it's not 100% true, but it's mostly true. And that is, I think, would be what the Fed has done in increasing interest rates, which I believe is pretty permanent. I don't think sellers have quite absorbed that yet in bringing the pricing in line to what any reasonable business person would anticipate as a terminal rate for buying an enterprise. But we continue to negotiate and most of the deals that we've been able to do have been strategic in nature, and they have to be good family members because they have to be able to operate in the environment that Omnicom operates in. You're correct in making -- calling out the fact that we have divested today, we're constantly reviewing the portfolio and also constantly talking to people through our M&A group who are doing roll-ups in certain areas where we've become aware of that, and we have to make decisions that, gee, this company has value to us now but are we going to double down and support it to compete with what we anticipate those roll up is going to be able to accomplish? Or are we going to just take a healthy profit and return it to our shareholders. And that's what we've elected to do over the course of the last five years. And where an acquisition has become fall short of our standards or we deemed to be too expensive, we've not been shy and we spend a lot of money each year investing in building those businesses which are reflected in lowering our margins in many ways. If we were running the business for any short period of time, you could stop some of those investments and increase your margins temporarily but it will hurt long-term growth. So we are constantly looking at the present, learning hopefully from mistakes of the past, but it also with a keen awareness about where our expertise is and where it should continue to be. If I could maybe ask one more. There's been a lot of discussion this week about AI and this ChatGPT functionality that Microsoft has been investing in. And of course -- was it last week, the week before that, we had the DOJ lawsuit against Google. These are huge topics. I don't expect a precise answer, but just wondering if you have any initial thoughts on how these developments may affect your business in the ad market as a whole? Sure. We ourselves not shy, but found that interesting. We're constantly looking as a group that is looking to automate part of the functions that we perform on a regular basis. And those are some of the investments that I alluded to. When I first became aware of chat, the first phone call I made was to the Head of PR and as I said, using historic performance, I want to test this product and see, it is good yet as it pretends to be and given an analysis from the people on the ground doing those type of tests as to how they viewed it. And they came back very positively. It's a good product. It's not a perfect product. I think when Microsoft really integrates it into its system, it will be able to ramp up, so it doesn't crash just right now, it has a lot of people trying to play with it and use a lot of whatever is available hosting capabilities are. But in general, I probably would have given you a different answer two years ago than I will right now. All of the automation that we're looking at enhances the capabilities and makes the job easier for our best and brightest people. And it eliminates a lot of the otherwise mundane projects or activities that we also get paid for. So net-net-net, not everybody will love it. We'll be embracing it as quickly as we possibly can because we think it's good for our smartest people, and therefore, it will be good for what the work they do on behalf of our clients. So I'm looking forward to it. And I'm looking forward to Microsoft getting behind it and making it something that is on everybody's desktop. I don't want to take away from the results you guys put up because they are very good, and I heard what you said about account wins and we can all see the numbers. But your competitors are also doing remarkably well recently. And when I listen to the words you guys used to describe why there are all these tailwinds, whether it's e-commerce or connected TV or digital transformation. At least to my layman's here, it feels like those things have been going on as sort of trends for the last five years and yet all the holding companies are putting up great numbers sort of post COVID. And so I'm still I feel like I'm missing the thread in terms of what's really caused your growth and your peers' growth to accelerate so much. So if you were just going to convey this to an institutional investor, and you said, if you buy Omnicom stock, you are net long what -- your just two or three things that we'd all understand exactly what's happening that's causing clients to use your services so much more than they were in the past. The best answer is the complexity of the marketplace and the complexity of marketing itself. The whole customer journey has changed. Technology has changed that, a lot of things which didnât in fact exist in the Internet marketing companies existed in 1997 when I first made my first investments in them, but they weren't really perfected into social media and into Instagram and other things until the period in which you're talking about. So if I had to sum it up in two words, and I can go deeper, if you'd like, it's businesses requirements to transform themselves in a digital environment and the complexity that brings and the reason I believe the sector is benefiting is, for the most part, not everybody, and I hope to be at the head of the pack. But I'm happy that my competitor is doing well as well. We've changed our product and our approach to be responsive to those client requirements caused by those two broad categories. My first question, John, on pricing. Historically, this industry might not have had great pricing power on a like-for- like basis. I'm wondering if you could help us here how we think about -- how you're thinking about pricing for this year. Do you have more pricing power in this higher inflation environment? Should we? Yes. Are we speaking to our clients about that? Yes. Do they understand that the best and brightest people that are servicing them can demand more because of the inflationary periods that we're all living through? Yes. I think I tried to -- I quickly read over this in an earlier answer but we've had some very good success in going to clients and getting increases in our pricing. Not everything we want by any standard, but getting that movement and that recognition. And clients who themselves are facing difficult times and there really are more difficult times, are really maybe not in a position to give us the level of increase that we want but we didn't stop there even and say, well, guess what, in the past, you've been able to fire us and give us six months' notice. We want to extend our contract to be a 36-month contract before you could possibly review it, hoping that you don't at the end of 36 months either. But in getting that, in lieu of a price increase, we're able to add stability to our revenue base. So we are benefiting. One is more measurable than another. But -- and the reason for that is because I think our product alignment is correct in terms of what the market needs are and I think our clients respect the intelligence and the sophistication of the people that we have servicing them on their accounts. And my second question, John, for 2023, what industry sectors are you most bullish about when you compare it to that 3% to 5% initial organic revenue growth outlook for this year? Is it healthcare, travel, retail, what would you point to, please? Well, the one that I can point to with real confidence is healthcare. I think they're increasingly new discoveries, new products all the time in the healthcare area. I'm confident that everybody on the planet is going to have to eat food and drink beverages. So that sector of our business, I'm comfortable with. Our tech sector I think we're going to suffer, get a little pain there, and we planned to quarter because of the payment those -- some of those companies are going through. But they'll reinvent themselves very, very quickly, and I'm very happy to have them as clients, even if they're facing challenges. In the auto sector, I think two interesting things are going on and clients have to continue to market in order to address this. One is there hasn't been a lot of new product in the past three years because the supply chain problems which have now been, for the most part, solved by most major car manufacturers. And the second thing, which clients have to continue to bring their brands and promote their brands in order to be participants in this area is electric cars and the requirements of that to show progress in their product. So travel, I'm not going to comment. I can speak for the red household, nobody shied away from it, but I don't know that much about anything else. Our clients are bullish. But everybody -- every CEO that I speak to truly believes in their products, believes in their future and is cautious and appropriately cautious about the financial conditions of central banks and the Fed and where interest costs are going to go. So hopefully, that answers your question. That's about the best I can do. Thank you all for joining us on the call today. We appreciate you taking the time, and I will talk to you again soon. That does conclude our conference for today. Thank you for your participation and for using AT&T Conferencing Service. You may now disconnect.
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EarningCall_692
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Hello and welcome to the Landmark Bancorp Q4 Earnings Call. My name is Elliott and I'll be coordinating your call today. [Operator Instructions] I now would like to hand over to Michael Scheopner President and CEO. The floor is yours. Please go ahead. Good morning. Thank you for joining our call today to discuss Landmark's earnings and results of operations for the fourth quarter and fiscal year end 2022. Joining the call with me to discuss various aspects of our fourth quarter performance is Mark Herpich, Chief Financial Officer of the company and the company's Chief Credit Officer Raymond McLanahan. Before we get started, I would like to remind our listeners that some of the information we will be providing today falls under the guidelines for forward-looking statements as defined by the Securities and Exchange Commission. As part of these guidelines, I must point out that any statements made during this presentation that discuss our hopes, beliefs, expectations, or predictions of the future, our forward looking statements, and our actual results could differ materially from those expressed. Additional information on these factors is included from time to time in our 10-K and 10-Q filings, which can be obtained by contacting the company or the SEC. Landmark reported net earnings of $1.2 million during the fourth quarter of 2022. For the year ended December 31, 2022 net earnings totaled $9.9 million and resulted in earnings per share on a fully diluted basis of $1.88. The return on average assets in 2022 was 0.73%, and the return on average equity was 8.25%. The financial results for 2022 included significant non-recurring expenses, especially in the fourth quarter associated with the acquisition of Freedom bank shares, which was completed at the opening of business on October 1, 2022. Mark will provide additional detail related to these expenses and the impact that they had on our financial metrics later in this call. I am pleased to report that the integration of our Freedom acquisition has gone very smoothly this past quarter. Further data processing integrations scheduled for late first quarter 2023 will provide new opportunities for future operational efficiencies. We continue to see strong loan growth during the fourth quarter along with solid growth and net interest income, compared to the third quarter of 2022 and excluding the $118 million of acquired Freedom bank loans total gross loans increased by nearly $21 million, while net interest income grew by over 30% compared to the prior quarter. Credit quality continues to remain very strong this quarter as net loan charge offs, non-accrual loans and delinquencies remained low. The allowance for loan losses totaled $8.8 million at December 31, 2022. We believe Landmark's risk management practices, liquidity and capital strength continue to position us well to meet the financial needs of families and businesses in our markets. During the fourth quarter, our company distributed a 5% stock dividend representing the 22nd consecutive year that we have done and we also paid a cash dividend of $0.20 per share when adjusted for the 5% stock dividend. I'm pleased to report that our board of directors has declared a cash dividend of $0.21 per share to be paid March 1, 2023 to shareholders of record as of February 15, 2023. This represents the 86th consecutive quarterly cash dividend since the company's formation in 2001. Thanks, Michael. And good morning to everyone. Michael has already alluded to our financial performance in 2022 with solid growth in both our loans and net interest income. And now I'd like to discuss various aspects comprising our fourth quarter 2022 results, which were significantly impacted by closing on the Freedom bank acquisition effective October 1. As a reminder, the acquisition of Freedom bank brought loans of $118 million and deposits of $150.4 million onto our balance sheet as of October 1. Net income of $1.2 million in the fourth quarter of 2022 was lower than the third quarter 2022 earnings of $2.5 million and the prior year fourth quarter net earnings of $3.1 million. These declines and net income were driven substantially by the acquisition cost incurred with the Freedom acquisition mostly during the fourth quarter. Excluding the $3 million in acquisition costs this quarter adjusted net income for the fourth quarter of 2022 would have been $3.5 million while our fourth quarter adjusted return on average assets and average equity adjusted for these acquisition costs would have been 0.92% and 13.04% respectively. The exclusion of these acquisition costs as a non-GAAP financial measure that provides a more comparable analysis of related quarterly results. Also weâve recognized $750,000 loss on the sale of some of our lowest yielding investments that we strategically sold this quarter, which compares to a similar loss of $353,000 in the third quarter of 2022. The fourth quarter income statement showed continued growth in net interest income as our assets continue to increase along with our net interest margin. Organic loan growth this quarter excluding the $118 million of loans from the Freedom acquisition increased $20.8 million or an annualized rate of 11.6%, as the loan demand remained very strong. In the fourth quarter of 2022, net interest income totaled $11.9 million, an increase of $2.4 million compared to the third quarter of 2022, due primarily to the acquisition of Freedom bank, but also due to ongoing growth in both loans and investments securities balances and higher interest rates. Total interest income on loans increased $3.1 million this quarter and the yields on the loan portfolio increased to 5.29%. Interest income on investment securities increased $579,000 this quarter compared to the third quarter of 2022 due to a growth in average investment balances of $10.2 million along with increased yield. The yield on investment securities totaled 2.56% in the current quarter compared to 2.18% in the prior quarter and 1.77% in the fourth quarter of 2021. We were able to take advantage of the rising rates environment during the fourth quarter and invest in longer term municipal and mortgage backed securities. This growth was offset by the sale of $12.4 million of low yielding investments near the end of the quarter. Interest costs on interest bearing deposits have increased but remain low this quarter totaling 68 basis points compared to 39 basis points since last quarter and 12 basis points in the fourth quarter 2021. Interest expense on total deposits increased $681,000 from the third quarter due to higher rates and an increase in average balances of $67.5 million in interest bearing deposits. Interest expense on borrowings increased this quarter due to higher short term rates and average balances. Landmark's net interest margin on a tax equivalent basis increased to 3.53% in the fourth quarter of 2022 as compared to 3.21% in the third quarter of 2022. The average tax equivalent yield on the loan portfolio increased this quarter to 5.29% compared to 4.63% in the prior quarter. And based on our analysis of the economic environment and taking into account that the loans acquired from Freedom bank were accounted for its fair value we determined that no provision to the allowance for loan losses was warranted in the fourth quarter of 2022 as compared to a provision of 500,000 in the third quarter of 2022. At December 31, 2022, the ratio of our loan loss reserves to gross loans was 1.03%. Non-interest income totaled $2.8 million this quarter, decreasing $717,000 compared to the third quarter of 2022 while declining by $1.8 million in comparison to the fourth quarter last year. The decrease from the third quarter of this year was due in part to the $750,000 loss on the sale of our lower yielding investments securities as compared to the prior quarter and was also impacted by $632,000 decline in gains on sales of mortgage loans. The decline in non-interest income in comparison to the prior year is mainly due to a decrease of $1.4 million and gains on sales of residential mortgage loans. Higher interest rates coupled with lower housing inventories continue to flow purchase and refinancing activities as compared to 2021 when mortgage activity was extremely strong. However, we did see growth in new loan originations of adjustable rate mortgages and these are loans we normally keep in our loan portfolio instead of selling. Moving to non-interest expense for the third quarter of 2022, it totaled $14 million or an increase of $4.5 million over the prior quarter and was $4.4 million higher than the same period last year. The increase in non-interest expense over the third quarter of 2022 was driven primarily by the acquisition costs of $3 million associated with Freedom Bank, as compared to the $134,000 of acquisition costs in the third quarter. Increased costs for compensation and benefits, occupancy and equipment and other non-interest expenses were primarily associated with the cost of operating the new Freedom branch weâve acquired. Additionally, amortization expense increased due to the core deposits in tangible recorded with the Freedom acquisition. This quarter we recorded a tax benefit of $466,000 related to some previously unrecognized tax benefits compared to tax expense of $522,000 in the prior quarter and $1 million in the fourth quarter of last year. Loan growth continued strong this quarter as gross loans excluding the $118 million of loans acquired in the Freedom bank acquisition increased $20.8 million during the fourth quarter representing an annualized growth rate of 11.6%. Deposits totaled $1.3 billion at December 31 and increased by $183.5 million during this quarter of which $150.4 million resulted from the assumption of Freedom deposit portfolio. Our loan to deposit ratio totaled 65% at year end and still remains low giving us plenty of opportunities to fund the loan growth. Stockholdersâ equity increased to $111.4 million at December 31, 2022 and our book value increased to $21.38 per share. The increase in stockholdersâ equity was due primarily to a decline in the unrealized losses on our investments securities portfolio which was impacted by a decline in intermediate and longer term interest rates. Our consolidated and bank regulatory capitals as of December 31, 2022 are very strong and exceed the regulatory levels considered well capitalized. The bank's leverage ratio was 8.6% at December 31, 2022 while the total risk based capital ratio was 14%. Thank you, Mark, and good morning to everyone. Gross loans outstanding as of December 31, 2022 totaled $850.2 million, an increase of $138.9 million from the previous quarter. As mentioned previously, this growth was largely due to the acquisition of Freedom bank shares, but also reflected strong demand for our core lending products which grew by 11.6% this quarter. We experienced solid growth in our one to four family residential, real estate, commercial real estate and commercial loan portfolios. one-to-four family was up $31.5 million. Commercial real estate was up $75.4 million. Our commercial portfolio was up $28.8 million and construction loans were up $4.6 million this quarter. We remained focused on growing our commercial and commercial real estate portfolios. Moreover, we are excited about the opportunities not only in our expanded Kansas City Metro Area market, but in all of our markets across Kansas. The assimilation of the Freedom bank lending team has been a smooth transition as our cultures and lending philosophies are very similar and complementary. Turning quickly to credit quality. Credit quality within the portfolio remain strong. Non-performing loans which primarily consists of non-accrual loans and accruing loans greater than 90 days past due totaled $3.3 million or 0.39% of gross loans as of December 31, 2022. Total foreclosed real estate decreased to $934,000 and we continue to actively pursue the sale of all foreclosed real estate. Another indicator that we monitor as part of our credit risk management efforts is the level of loans past due between 30 and 89 days. The level of past due loan between 30 and 89 days still accruing interest remains low and was only 0.09% of gross loans this quarter. We recorded net loan charge offs of $67,000 during the fourth quarter of 2022 compared to net loan recoveries of $9,000 during the fourth quarter of 2021. We're very pleased with our strong and improving asset quality numbers and as you can tell from these numbers, we remain focused on maintaining solid asset quality metrics. Our allowance for loan and lease losses ended the quarter at 1.03% of gross loans. [indiscernible] to the current economic landscape in Kansas, it remains healthy. The preliminary seasonally adjusted unemployment rate for Kansas as of December 31 was 2.9% according to the Bureau of Labor Statistics and looking at a year ago the Kansas unemployment rate was 2.8%. The Kansas Association of Realtors reported home prices in Kansas have increased 5.1% compared to the same period last year. Sales volumes in Kansas fell by 32.1% in December of 2022 compared to last year. The Kansas Association of Realtors President commented that even though demand has slowed, it will still be a seller's market as we enter this new year. Turning to our Ag economy. Dry soil conditions remain persistent in Kansas. The most recent USDA crop conditions report rated topsoil moisture is very short. Additionally, winter wheat crop conditions were rated as poor and very poor. We received some precipitation in Kansas recently, but we continue to monitor our crop conditions across the state. Thanks, Raymond and I also want to thank Mark for your earlier comments. Before we go to questions I want to summarize by saying we are pleased with our performance for 2022 with our strong loan growth, our solid credit quality and our improved net interest margin. I also want to express my thanks and appreciation to all of the associates at Landmark National Bank. Their daily focused on executing our strategies, delivering extraordinary service to our clients and communities and carrying out our company vision that everyone starts as a customer and leaves us a friend is the key to our success. Good morning, guys. How are you? Nice quarter. Could you discuss just how quickly you're being forced to raise deposit rates? And just anecdotally, how are you dealing with those multimillion dollar depositors who are in your money markets on a one and a quarter and they're coming back to and want a better deal? You bring them up to 3% or 4% quickly? Thank you. Thanks, Ross. And I appreciate your interest in the company. From the standpoint of strategies with respect to managing those interest rate increases on deposit customers. I mean, we do focus on the relationship that we have with those clients and we try to manage those remain competitive. It was a general focus. Both our commercial banking and our retail teams continue to be focused on generating core deposits that are operating accounts for our commercial customers and in the personal accounts for our retail customers. And those are a little, we have a little less pressure, I guess, with respect to pricing demands on those accounts. But just in a general phrase Ross, if we manage those one off request for an increase in the interest rates really on a relationship basis. Sorry, as a follow up, do you think you're going to continue to see continued pressure on the margin, assuming they raise rates another 50 or 70 basis points over the next six months? And could you just refresh us off of what base and how accretive is the Freedom deal plan to be? Thank you. Yes Mike. I think that the interest cost pressures will impact us. I still feel like we've got some room to move up on the repricing of our loan portfolio as well as we continue to go through our renewal processes and resetting interest rates. So the interest costs that we've been seeing so far been largely on the one off and dealing with our larger depositors and/or municipal funds that are tied to indices. We've been a little slow as most banks are probably in raising up the base cost of our CDs and money market and savings accounts. But I think we're still hopeful and projecting out that we're going to see some net interest margin improvements for a couple more quarters here Ross. I guess Ross with respect to the Freedom modeling, as we looked at the modeling of that transaction, we do forecast that to be accretive out of the gate. We are a little bit delayed in some of the efficiencies associated with the acquisition because of [still] pending core processing computer conversion scheduled late this quarter. And so I would anticipate that the positive-- accretive impact earnings will be recognized as we migrate later on into the year following that computer conversion and our ability then to incorporate some additional efficiencies during that time. Have you specified how accretive specifically it will be and if so, what $2 some odd base are we just talk about? We haven't published any information yet on the accretive. I didn't quite catch the $2 question there. Was it -- you mentioned maybe the cut out just a little bit, but we haven't put out any public information on what our projected earnings per share are for 2023 year. Okay, all right. I really appreciate time guys. Good luck in and don't get overwhelmed with reasons positive rates. Thank you. Thank you and I do want to thank you everyone for participating in today's earnings call. I truly do appreciate your continued support and the confidence that you've shown in our company. And I look forward to sharing news related to our first quarter in 2023 results at our next earnings conference call. Thank you.
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EarningCall_693
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Good day, ladies and gentlemen, and welcome to The Clorox Company Second Quarter Fiscal Year 2023 Earnings Release Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Ms. Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Ms. Burhan, you may begin your conference. Thank you, Jen. Good afternoon, and thank you for joining us. On the call with me today are Linda Rendle, our CEO; and Kevin Jacobsen, our CFO. I hope everyone has had a chance to review our earnings release and prepared remarks, both of which are available on our website. In just a moment, Linda will share a few opening comments, and then we'll take your questions. During this call, we may make forward-looking statements, including about our fiscal 2023 outlook. These statements are based on management's current expectations, but may differ from actual results or outcomes. In addition, we may refer to certain non-GAAP financial measures. Please refer to the Forward-Looking Statements section, which identifies various factors that could affect such forward-looking statements which has been filed with the SEC. In addition, please refer to the Non-GAAP Financial Information section of our earnings release and the supplemental financial schedules in the Investor Relations section of our website for a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures. Hello, everyone, and thank you for joining us. As I mentioned in our prepared remarks, despite persistent macroeconomic headwinds, we delivered better-than-expected Q2 results, with organic sales growth in three of four segments: gross margin expansion, and double-digit earnings growth. Our performance reflects the strength and superior value of our brands, strong execution across a broad set of actions and the benefit of some timing shifts. As a result, we've updated our full year outlook. During the quarter, we made good progress through building margin, driving top line momentum and executing against our Ignite strategy to strengthen our advantages and accelerate profitable growth for the long term. This includes advancing our innovation pipeline delivering cost savings and taking additional cost-justified pricing actions while maintaining record high consumer value superiority. Overall, we feel good about our progress, but we're relentlessly driving additional improvements as we continue to invest in our brands, categories and capabilities. Looking ahead, we expect the operating environment to remain volatile and challenging, and we'll continue using all the levers under our control while protecting the value proposition of our products to recover margin and drive long-term growth for our brands and categories. We are confident that our leading product portfolio in essential categories, coupled with our proactive actions, will enable us to navigate this environment and return to more consistent profitable growth over time. Thanks, operator, and good afternoon, everyone. So maybe just to start, when we think about the 2Q performance, and I know you outlined a few things on the script, but just from our perspective, plus 4% organic versus the original guidance of down low single digits and kind of gross margin coming in at 200 basis points or so above the midpoint of your outlook. It's a decent amount of upside versus what you were expecting? So can you maybe just help us understand where were the biggest surprises versus your forecast for those two items? Sure. Thanks, Peter. The first thing that I would just start with, and I'll hand it over to Kevin to walk through the quarter in a bit more detail. We're doing exactly what we said we were going to do. We are maintaining top line momentum, which came in better than we expected, and Kevin will walk you through those factors while also doing the hard work to improve margins. And so from that perspective, we're feeling good about that balance. We're going to continue to be focused on it for the year. And Kevin, why don't you take him through the details of how the quarter should go. Sure. Hey, Peter, I would say in terms of the strength of the quarter, if I think about the top line, as Linda said, really good strong fundamentals on the business. We saw consumption up 6%. We held share in track channels in the U.S. We continue to grow shares internationally. We delivered a record cost savings for the quarter. In fact, we had to go back and look, this is the strongest quarter we've had in the last 10 years. So really great execution by our team. Another area I'd highlight is we hit a record case fill rate since the pandemic has begun. And so our team continues to make very good progress, improving our supply chain operations in spite of the ongoing disruptions we're dealing with. And so I'd say from a business fundamentals perspective, the team has done really good work this quarter. And then I'd also say, and you saw in our prepared remarks, we've had some benefit from some timing shifts. One we call out is cold and flu season. We saw the season start earlier than we anticipated, and we think it's peaked in our Q2. Typically, you see cold and flu season peak or in the January, February timeframe, which is our Q3, so we think that's pulled forward into Q2, some of our shipments for cleaning and disinfecting products. We also had a little bit of merchant timing shifts, and that's pretty typical moving between quarters that it won't have any impact on the year, but provided some benefit to the quarter. And then lastly, as I said, cost savings, while it was certainly a record quarter, and we're on track for the full year to have a very strong year. The team was able to pull forward some of that benefit. And so collectively, the good strong fundamentals of the business plus a little bit of timing benefit were the primary drivers of the really strong performance in the quarter. Got it. That's helpful. And then maybe just a bigger picture question on the gross margin front. And you've obviously have made some great strides here past this quarter specifically. Kevin, I would just be curious if you could comment on how we should be really thinking about gross margin progression for the next 18 months or so in the context of what we are seeing today, given the 40% exit rate, just assume that you could have substantial margin expansion on top of the 37% that you are guiding to for this, if we should expect sequential improvement from the 40% into the first half of next year. So just any thoughts on kind of the margin recovery, how we should be kind of thinking about gross margin expansion over the next 18 months or so? Yes, Peter, what I'd say is I'm not going to provide an outlook for our fiscal year '24 today. I'm going to resist doing that, because there is so much volatility right now, we want to get low further into this year, finish the plans. We are just trying to develop our plans for next year right now. So itâs a little premature to talk about that. But what I would say is we feel very good about the progress we are making. As you folks know, we believe this quarter was an intersection point for us where weâve returned to gross margin expansion, we have done that. That you saw in our prepared remarks. We expect to build on that in Q3, looking to get to 200 basis points to 300 basis points of additional expansion, then continue in Q4. And as you think forward beyond fiscal year '23 at very high level, you should expect us to continue to prioritize what we are doing right now which is maintaining our top line momentum and making the investments necessary to do that. We are continuing to work to rebuild margins and we said that will take some time as that work is underway, and then we're going to continue to drive our strategic initiatives, our digital transformations, our streamlined operating model. Those will continue to be our priorities. But we'll give you a better feel for that as we get closer to fiscal year '24. Just a clarification on gross margins. You came in better than expected in both Q1 and Q2. Is there some offset in the back half of the year as we think about full year guidance not changing? Or is it more conservatism just given the volatility out there? And then secondly, you took some pricing in December. Any initial thoughts on competitive response if you're seeing any big pushbacks from retailers probably too early to judge consumer demand, but any thoughts on that front would be helpful also just relative to the December increases? Sure. And let me start on gross margin and then Linda can comment on pricing. As it relates to gross margin, as you said, we did overdeliver our expectations for Q2. We came into the quarter targeting a 100 basis point to 200 basis point improvement. We delivered a little over 300. If you look at the drivers of that over delivery, I'd point to two items. The first is less operating deleveraging. So because of the very strong top line performance and it exceeded our expectations volume was only down 10% for the quarter. We had anticipated it to be down more, and we're expecting more deleveraging. So we see the benefit of that item, which tends to be discrete in the quarter. And then we did have some benefit of pulling cost savings forward. Now we remain on track to have a very good year. We're not changing our full year view of cost savings, but the team did some nice work pulling some of those projects in early and I'm always happy to get cost savings projects started early, but that was a benefit as well that will have a bit of an impact on the back half of the year. And so I think this is a balanced forecast for gross margins where you continue to believe we'll get to about 38% in the full year. And Dara, you made this comment, and I agree, it's still an environment with lower visibility and quite a bit of volatility. And so I want to see how this fourth round of pricing plays out. It's a little early for us to read, I want to get another quarter under our belt and see how that's playing out. And I think we'll have a better perspective on the full year. But with that, let me turn it over to Linda to talk a little bit more about pricing. Yes. As Kevin just mentioned, we executed that fourth round of pricing in early December. And as Kevin noted, it's too early to determine, from a consumer perspective, the reaction I would say, to date, everything looks in line with our expectations from an elasticity perspective. But again, too early, we haven't had a full purchase cycle yet, and it's still being reflected in the market. As it relates to competition, we did say in this price increase we led for the most part on this round of pricing. And while we've seen some category movement in pricing, there are other categories we have not seen competitors move in. yet. And we're watching that really, really closely to see what that's going to look like and prepare -- we're prepared to react. If our price gaps get out of line, or we're seeing a consumer reaction, not in line with our expectations given the full category hasn't moved. So too early yet to judge that. But it is true that some categories we have not seen competition move subsequent to our So I wanted to go back to the top line outlook improvement. So I think that probably, as you mentioned, is a function of price elasticity or maybe the pull forward of shipments at this point. And is that the reason why you also did not raise guidance as much as you could have given the beat? Is that something that perhaps the retailers took more shipments ahead of the price increase in December? And therefore, you can see some of that pull forward corrected in the third quarter fiscal. Is that how we should be thinking? Andrea, I would say, overall, I feel very good about where we're at from a top line perspective. And as you saw, we narrowed our range and we moved it to the top half of our range from an organic perspective, we're now targeting flat to up 3%. If you look at our performance through the first half of the year, organic sales growth is a little over 0.5%. So that success suggests much stronger performance in the back half of the year. And so the outlook, I think, really reflects a good start to the year, but it would project acceleration in the back half of the year in terms of organic sales growth, really driven by, again, good strength in the business plus the ongoing impact of the pricing actions we're taking. I think if you look at the range right now, you can do the math, it would suggest the back half would be anywhere from flat to up 5% on an organic basis. And we've got still a fairly wide range in the back half of the year. And I think that reflects exactly what Linda was just talking about. There is some uncertainty about how this fourth round of pricing will go. And so we think it's appropriate to maintain a bit wider range until we see exactly how about the consumers react to this round of pricing as well as what we see from other manufacturers in terms of if they choose to follow or not. And with the fourth quarter price increase, just a fine point -- I'm sorry, the December price increase, the fourth round, can you remind us again how much would be the average pricing that you're getting to the beginning of the third quarter, as we enter the third quarter? Yes. This fourth round was a bit more moderate than we had taken in July, if you recall, July was the largest of the four price increases. This one was around mid-single digits and fairly broad across the portfolio, but more moderate than we had taken in the past. And again, too early to judge on what the pricing looks like and what the impacts are. But this one was definitely more moderate than what we saw in July. And if you look at July, the elasticities are exactly in line with our expectations across categories. So we would expect our models to continue to hold in December, but it's dynamic out there and consumers are certainly facing a lot of inflation in their broader basket. So we're watching it closely. That's helpful. The -- so the mid-single digits plus a high single, like in general, like on average, you're probably running around mid-teens. And then so that implies in the midpoint of the range if the 0 to 5, you're looking at 2.5%, you're probably looking at elasticities running around 12, 13. Is that the way your model now calls for the second half? Yes. Andrea, what I would say in terms of elasticities, our expectation is elasticities for this December around or pricing would be very similar to what we saw in July, which is consistent with our historical levels of elasticities, you might remember in the first few rounds, we were seeing lower elasticities than historical levels. Consumers were less price sensitive. But now that's really reverted back to historical level elasticity. And then I would say on the back half, be a little careful because we do have some shifting as we talk about between quarters. I think maybe a better way to look at that if you try to take out the noise of some volume shifting between Q2 and Q3, Q2, we had 4% organic sales growth. You saw in my prepared remarks, you may have seen, we're projecting 2% to 3% growth organic sales growth in Q3. Over that six-month period, we're looking at organic sales growth a little over 3%. And so clearly, an acceleration of where we've been based on the fundamentals of the business we're talking about. But consumers continue to be resilient. Our categories have been shown to be resilient to date, and I think that's reflected in raising our outlook. Yes, Andrea, we don't comment on specifically on elasticities. And as you can imagine, they're quite different by category, by geography. And so it's something we don't comment publicly on the elasticities of the brands. Everybody. Good afternoon, evening for us. Can you talk a bit about supply and about inventory? Maybe just a little bit more on your ability to supply through your various maybe digging into the categories a little bit? And then how do you feel about trade inventories as well as maybe inventories in the pantries? Sure. Thanks, Kaumil, for the question. On supply, I would say the supply chain, we're definitely seeing improvements from the disruptions we're dealing with over the last year or two. It continues to normalize, and that certainly helped benefit our inventory levels. So as you know, we have raised safety stocks to try to help manage the supply chain disruptions we're dealing with and create less impact to our ability to ship product to our retailers. As the supply chain is normalizing, we are able to go back and reduce the safety stock levels. And so as an example, in Q2, this is a fourth straight quarter that we've been able to reduce the inventory levels. I think year-over-year, we pulled another 4 days out of inventory on hand, and that's really a reflection of an improving supply chain. And you heard my earlier comment. One example of that is we've hit the highest case fill rate we've been able to deliver since the pandemic began. Now we've done that through some very good work by our team. But I would tell you, we are still dealing with intermittent supply chain disruptions. And I'm sure you'll remember last quarter, we talked about a few disruptions on our Glad and our Burt's Bees business. So that continues to occur. But it's certainly starting to normalize, and we're seeing less disruptions than we did a few years ago. And so that's allowed us to continue to work to optimize our supply chain. And one of those elements is reducing inventory levels. And then from a retailer perspective, the only place we saw some change in retailer inventory levels was on our Brita business in Q2. So we did see a little bit of a reduction in retail inventories on that business. Nothing else to speak of. And I would tell you in our outlook, we're not anticipating any additional material changes to retail inventories. That always goes on every quarter, you'll see some noise, but nothing that we think has any meaningful impact on our outlook, and that's what's assumed right now. And then maybe I know, Linda, do you want to talk about consumer pantry levels? Yes. What we're seeing is very similar to what Kevin highlighted just in retail. We are not seeing significant pantry loading by consumers or changes in behavior as it relates to the pantry. What we are seeing, and I think we'll highlight it and public some discussion around what's going on with pricing on the consumer, we are seeing consumers continue to drive value-seeking behaviors given what they're facing. So we're seeing some purchase cycles extend as people try to make products work longer for them, they're purchasing different sizes. So that's changing the purchase cycle. But that's largely in line with what we would expect from the elasticity impact that's in line with our expectations. And we're not seeing any other consumer behavior that's abnormal outside of that normal elasticity impact. Okay. Got it. So I guess if supply chains in more of a normal place, inventories are at a normal place both at retail and consumer, you now have a higher top line outlook. That's in more of a normalized zone then. Is that fair to say where some of those puts and takes over the last couple of years are behind us? I wouldn't say normalized, Kaumil. I think that's probably overstating it. We are still dealing with supply chain disruptions. I would just say the frequency of those disruptions has definitely gone down. But I would not say we're -- I wouldn't describe it as a normal environment. We're still dealing with a number of challenges on a regular basis. But certainly, it's a lower frequency. And we were just talking last quarter about several of those that we're still working to resolve, mostly behind us. And I would expect we'll see more disruptions going forward. I don't believe we're in a position not to expect that. And so that's probably the way I would better describe it than we're in a normal environment. I wanted to follow up on the supply chain dynamics in the context of your gross margin outlook for Q3. I -- and I guess it's similar the delivery in Q2 with why it should be potentially a lot better, right? Unless productivity gets worse, you have pricing, which is going to remain strong, raw materials probably get sequentially better. You just were talking about manufacturing and logistics, which sounds like it should get better. And then from a volume standpoint, you're going to be tracking similar to what you just did in Q2. And so why is the -- maybe like the other, why is the operating deleverage so much worse in Q3? Or maybe like what am I missing? What gets worse sequentially? Yes, Chris, thank you for the question. And I agree. We do expect gross margin will get better in Q3. If you look at what we provided in the prepared remarks, we're looking at a gross margin of 38% to 39%. So I think a very nice improvement for where we land in Q2 at just a little over 36%. You may also recall, we don't use spot rates when we develop our outlooks, we use forward curve. So our outlook is always anticipated, declining commodity costs as we move through the year. That's not a change in assumption for us. The only other item I would highlight is we will likely see more volume deleveraging in Q3 versus Q2 because keep in mind now, we have the fourth round of pricing that went into effect in December. It had no meaningful impact on the second quarter. You'll start to see the impact of that in the third quarter, which means I would expect a bit more volume decline in Q3 than versus what we saw in Q2 as you now have 1 more round in pricing and the elasticities associated with that round of pricing. So a little bit more volume deleveraging, but in spite of that, we're going to continue to drive nice benefits from pricing, cost savings. And as a result, I expect to continue to make very nice sequential progress. It will be up, we believe, up 200 basis points to 300 basis points versus Q2. And that keeps us very much on track for getting back to about 40% by the fourth quarter. Okay. Got it. And then just to confirm that volume that you're talking about, that's a lot of that health and wellness segment just given timing of cold and flu. No, the volume deleveraging will be based on the pricing. And as Linda mentioned, the pricing is pretty broad- based across our portfolio. So as we take our fourth round of pricing, there will be an element of volume deleveraging because of the elasticities on those price increases, that will impact the third quarter. But I think the other point you're making also keep in mind, we're lapping the Omicron variant from Q3 of last year. So that will have an impact on our cleaning and disinfecting business as we've got a more difficult comp on that business. So I think really a combination of both those items, you'll see that play out in our volume projections for Q3. Okay. All right. Great. Just one quick follow-up still on the gross margin front. This was a nice sequential improvement in the manufacturing and logistics clients, certainly relative to where we were, right? And so, have we reached the end of this headwind? Can we start thinking about manufacturing and logistics normalization and maybe even it turns to a tailwind for your gross margins at some point in the back half of next year and certainly as we get into fiscal '24, it does seem like some easing in this line item could be an unlock something which you don't necessarily have to roll over, but we're looking at freight rates rolling over. And again, just the normalization of this line item, it seems like a good development. So I wonder how sticky you think this is. And candidly, whether this line item will ever actually become a tailwind for you or is it just costs are higher and it's likely to remain inflationary over the medium term horizon? Yes, sure, Chris. I would say, as it relates to manufacturing and logistics, our expectation is it will continue to be a headwind this entire year. So we think it's, as you saw in our remarks, $400 million of supply chain inflation. About half of that is in commodities. The other half is in manufacturing and logistics. Now we do think it moderates as we move through the year. And so we think each quarter, it will be less of a hit than the previous quarter, but it will be inflationary for the entire year, and that's factored into our outlook. And as it relates to the medium to longer term, as I mentioned, we're going to hold off on making any comments on fiscal year '24. It's just a little too early for us to do that. But at least this year, you should assume it will continue to be inflationary, but moderating as we move through the quarters. Two quick questions. I guess, logistics and manufacturing now off the table. But in cleaning, you guys mentioned that Professional is still lagging. And I think you cited in there, one driver is office occupancy, which seems odd. It seems like we're deep enough into COVID, where office occupancy is actually going the other way. So can you unpack a bit more of the headwinds on the professional business in cleaning? Sure. Jason, there was really two factors in Professional. One, which is a more midterm issue and then one that was a very short-term issue that affected professional last quarter. And I'll start with that one, which was our Pine-Sol recall and that impacted Professional. We have a fairly large business in Pine-Sol in Professional, and we'd expect as we bring that distribution back, that just to be a short-term impact. As you look at the medium term, though, office occupancy is still down significantly as return to office has been delayed, and we've all seen the press on how hard it's been to get people to come back into the office to the degree that we thought we would. So that continues to be a headwind to the business. We're looking at other avenues to grow the business beyond just that, looking at our portfolio broadly and innovation. And we continue to have conviction that our professional business will be a growth driver for us in the future. And it's good to see it start to be a bit more normalized than it was in the past, but we are still dealing with that headwind. Okay. Okay. And Kevin, I've had a lot of debate with investors recently around sort of normalized earnings. I think probably everyone's having that date. But one key point of it really does rest at gross profit. And I know you aspire to get back to historical gross margins in time. But one way we're looking at it is around unit economics with the notion that gross profit per unit is probably a more reasonable near-term target of what a normalized gross profit would look like. What, if any, holes do you see in that thought process? And if you think gross profit per unit should be a lot higher than it was in fiscal '19, can you give us an understanding of better explanation of kind of why and maybe where you might be able to achieve that? Jason, I would say we aspire to do both. I mean you start by rebuilding gross profit and ultimately rebuild gross margin over time. For us, it will be the same drivers we've talked about. We're going to continue to execute the pricing actions that we've taken. And as we've said, we don't have any additional plans to take further pricing this fiscal year based on our cost forecast. But we'll continue to drive pricing. We'll continue to drive cost savings and supply chain optimization. That's the way that we think puts us in a position to first recover gross profit and then ultimately keep going to recover gross margin Typically, I'd say in a normal environment, the work we do on cost savings is enough to offset a normalized level of inflation and allow us to build margins over time. And that allows us to continue to invest in our brands and continue to set the company have to deliver value over the long term. Obviously, we're dealing with a very unique environment right now with the unprecedented level of cost inflation. And so that's why we're leaning into pricing. I'd like to believe over time as we get to a normalized environment, as you described, we get back to more of our consistent model where we're really driving cost savings, and that's allowing us to offset inflation and build margin over time, but we're not in that environment right now. So we're leaning more aggressively into pricing. But I think ultimately, it's always both. We start by rebuilding gross profit and then we ultimately work to rebuild gross margin over time. Great. Question for both of you really on investment spending. I guess, sort of what I'm trying to connect the dots here. So you're still targeting 10% of sales for the year. You're about 9% in the first half. Kevin, I think you mentioned so that implies actually an acceleration in the back half of the year. Can you guys comment for a moment, I guess, on destinations for the spend? Number two, why we would not expect to see a little bit more of an acceleration, if that's the case, why not more of sort of an immediate top line payback and understanding that some of this is sort of more longer term in nature? Could be great to get your thoughts on that. And then the third piece, because I think kind of coming away from the call, there's going to be, I suspect, a view that the gross margin guidance may be a little bit conservative given the strong performance in the front half of the fiscal year. What's your feeling on potential reinvestment? Understanding it's along still there's still ways to get back to where you'd like to from a gross margin perspective. But how are you feeling about potential reinvestment this year could you exceed on your gross margin guidance? What's the likelihood that you would sort of lean in here and reinvest given some of the promising signs you've seen on the top line. Kevin, on the investment spending piece, incredibly important. We're seeing good consumer and category resilience. We're happy that we are maintaining share in an environment where we are aggressively going after rebuilding margin. And you all know that's exactly what we've targeted. We want to keep our top line momentum while rebuilding margins at the same time. And that's how we're approaching investments. We're making the right short-term investments to do that, but we're also not taking our eye off the long term and continuing to invest in those things that are going to make us a stronger company, like our digital transformation and like our op model. So that's what we're focused on. It just happens to be the shape of spending to have less in the front half of the year versus the back half given our plans, but that's just the shape of the investment, and we still are targeting 10% from an advertising and sales promotion perspective, still continuing to invest in innovation that's been going well for us. And overall, going to continue to focus that investment on our brands. What I will say, though, is we're watching our categories incredibly closely right now. And the most important thing that we do is continue to deliver superior value to our consumers. And right now, we're really happy to say, among all that pricing that we took strong double digits, we've maintained our record high superiority rating of 76%. We were in the 50% range a few years ago. And that combination gives us the confidence to continue to invest. But if we see a change in that, where consumers are reacting in a different way or if we don't see competition follow on price increases, we are ready with backup plans that we can activate very, very quickly to make adjustments to that. And if we need to make additional investments, we will to support the value spirit of our brands. But we feel we have that balance right, right now. That played out in Q2 behind the good balance we had in top line and bottom line. But that's how we're thinking about it overall, and we'll continue to take a proactive approach of adjusting if we need to. I appreciate the color. If I could just one very quick follow-up, and I think you kind of touched on this a little bit. Are you starting to hear from retailers at all just given some of the moderation in commodities that they'd like to see more on deal here, more trade promotion because it hasn't moved up I think looking at the scanner data on a 4, 12-week basis, we haven't seen it move up a lot. And we know that some of the categories you play in, historically have been heavily promoted categories. I don't want to assess it as a risk, but is that sort of coming up that some of this pricing you're going to take you going to have to go back on deal? And then I'll pass it on. Kevin, what you're seeing in the latest data is what we see from a Q2 perspective in that promotion is still below where it was pre-pandemic across our categories. It's higher than it was a year ago in our categories, but definitely lower than pre-pandemic, and what we're hearing from retailers, which you would expect, is how do we continue to keep our categories healthy. So it's not a discussion on promotion necessarily. It's a discussion on how we have the right set for -- with the right distribution for our products. How we can lean into innovation and drive value from a market basket perspective from a retailer perspective. But we are not hearing in a normal amount of level of interest in promotion because they know that's not usually the right way to drive the category we want to use promotion very strategically in times of the year where we can ensure that consumers like back- to-school, for example, or cold and flu, where we know people are looking for our products, and we can introduce them to innovation or remind them to buy. So those conversations continue to be really constructive and we're mutually focused on ensuring the categories are healthy and doing it the right way. Great. First thing I wanted to ask about was the performance in household because the volume growth was pretty striking. So just curious if you could tell us a little bit more about which of the businesses had volumes up? And if there was any of the merchandising attached to that? Or kind of what was going on there because, again, to see volume up with pricing as strong as it is, is pretty notable? Hi, Lauren, yes, I'm happy to answer the question on households. As you saw, we had 9% growth in the segment. From a volume perspective, really Litter was the star of the group. We had a double-digit growth in that business. And we continue to see very strong category growth. As you know, we've talked about it before. Strong pet adoption during the pandemic, that's continued to fuel that category. And then we've continued to see very strong performance in that business. And so we are seeing -- in spite of the pricing we've taken, we are still growing volume in that business more than offsetting the elasticity impact. Okay. Great. And then also just on the pricing, sort of which of you had mentioned that pricing really had very little impact on the second quarter given the timing that went into the market and some of it is still showing up on shelves. So as we think about modeling forward, you spoke to seeing more volume pressure, but should we also see pricing accelerating versus what's already in the financials in the second quarter? Yes, Lauren, I think you'll have two impacts. Now we're starting to lap the first round of pricing we took last year. So you're starting to see some of that first run of pricing drop off as we get into the back half of our fiscal year, and is being replaced with his fourth round. So it's not as clean as another round of pricing being added. I think in aggregate, this fourth round was larger than our first round. So in aggregate, you'll see a little bit more benefit from pricing, and you see a little larger hit in terms of the impact to volume from elasticities. Okay. All right. That's great. And yes. And then just a final question, which would be -- thought it was interesting the way the prepared remarks were written about rebuilding household penetration. So knowing that you don't typically expect a lot of revenue growth when you take pricing and everything is kind of going according to plan, but I was curious what categories kind of warrant that extra attention with -- specifically with regard to rebuilding household penetration? And what if anything you can tell us about plans to do that? Yes, Lauren, this is a fundamental thing we're really focused on. And one of the trade-offs you do when you take the level of pricing that we're taking in the categories is you trade off some household penetration in the short term in order to do that. And while we're still in nine out of 10 households and have very strong household penetrations across our category and in most cases, are performing better than the category is in household penetration. This is one of the trade-offs that we're making. And I think it's the right trade-off given the fact that we need to both maintain top line momentum and rebuild margins. But that being said, household penetration is incredibly important to us and the health of our business over the long term, and we are committed to regrowing that over time. And typically, what we see in price increases, you see some volume loss initially as consumers adjust their behavior. You begin to rebuild that over time. So our first focus on household penetration will be rebuilding volumes over the mid to long term. And we will do that by continuing to invest in innovation, having strong levels of investment in our brand as we're going to have 10% spending in [A&SP] this year and continuing to make the right long-term digital investments to support brand building, et cetera. One note, we were really proud of. We had our highest ROI marketing in this last period due to the personalization efforts that we've taken out. So we haven't talked a lot about that, but that's working, and it's allowing our money to work harder and will allow us to help us focus on growing household penetration over time. So what I would -- just again, to say this is a wide-eyed open trade-off that we are making in household penetration, but it's something that as we rebuild volumes, we would expect to rebound over time. And what's key to that is continuing to invest in our brands. I wanted to ask you about Glad and Burt, where things stand there? Particularly with Glad, given the particularly strong performance in household, how much that contributed, if Glad continues to be an issue. And then with Burt's, where do we stand with respect to some of the supply chain challenges there? Sure. Glad was a business we were up in sales this quarter. We actually grew share from a trash perspective. So we're really pleased with the performance of Glad through multiple rounds of pricing we're seeing strong performance in the market, and that's really behind our innovation program that we've spent a lot of time talking about, whether it be the addition of colors and sense, our focus on value there. Our work on distribution across the retailer base is paying off, and we feel good about where that business is from a trash perspective. And then from a Burt's perspective, we did share that we had a supply disruption that happened -- and we believe we'll be able to work through it through Q3, and that continues to be the case. We made good progress on it in Q2 and we're able to support some strong holiday promotions and sales that led to growth on that business, but we still have some work to do, and we intend to be through that by the end of this quarter. Right. And then just following up. I know you mentioned a couple of times too early to read too much into the December pricing. But just overall, are you seeing any bifurcation as far as pack sizes or willingness to stay with branded versus private label with high-end consumers versus well in? And I imagine that as the year progressed -- so I don't think you have so far, but as the year progresses, how much of that is embedded into sort of some conservatism on the outlook? Because it seems like the consumer is still sticking with you, but just curious if you see anything that would give you a reason for some caution as the year progresses? Sure. As we've said, it really is too early to judge December's price increase at this point. But maybe I'll speak Olivia to the broader sets of price increases and just what we're seeing on average and what we continue to expect to happen as December gets fully reflected in the marketplace. We are seeing consumers and our categories remain resilient. And you can see that just in the strong consumption that you see in [MULO] right now. Consumers are reacting favorably. And I think this is really due to the fact that we're in essential categories. These brands play a role in consumers every day, routines, and we're continuing to see them favor value. That's what we've always focused on with our brands. They're looking for superior value, not necessarily the lowest price. And with our superiority rating, I mentioned earlier of 76% consumers continue to feel that our brands are the best value and they're voting for them in store. And with that, we are seeing value-seeking behavior though within our own brands. So people want to stay with a Clorox Company branded product. And so they're trading within our portfolio, and we've seen that over the last number of price increases. Some consumers are choosing to buy opening price points because perhaps that day, their wallet, they have a limited amount of money they can spend in the category or they're looking for the very, very best value on a price per use basis and so they're trading up to larger sizes, or maybe they're trading within our cleaning portfolio between a dilutable and a spray cleaner, in order to get the value equation right for them. And the good news is we have offerings to meet their needs there. And that's what we're really focused on with retailers, ensuring we have the right distribution to meet those needs as consumers continue to look for the best value within our portfolio. And I think we're going to continue to see that happen. As it relates to private label, we're not seeing any meaningful trade down in our categories to private label. And again, we maintain share amid four price increases. So that is playing out. But I'll tell you we're watching it really closely. This -- it looks like it's going to continue to get tougher for the consumer in aggregate. And so we're looking particularly as that fourth round is implemented and particularly in categories where we have higher private label penetration to ensure that we have that right value. And I also mentioned earlier, we haven't seen some competitors reflecting additional price increase as we did in December. And so we're watching our gaps really closely in those categories as well to ensure that we are continuing to offer superior value. And we will make adjustments. We are ready to, if we need to, to protect the value of those brands. But at the moment, category and consumer is resilient. Our brands are very resilient, maintaining share, and we're going to continue to activate our plans on innovation and investment to keep them healthy. I wanted to double-click on the timing factors and the household volume growth of 3%. If you look at the scan data, it shows a double-digit decline. So if you can help us understand how much stronger pet food, pet litter business was in the quarter and whether there was a channel shift there. And then I have a question more philosophically to Linda when it comes to the health and wellness business? Javier, let me see if I answer your question on shifting. So as we mentioned, in Q2, we had some benefit of shifting of some merchant activity. And as I said, that pretty typical that you'll see some -- events shift between quarters out of Q3 into Q2, and that was across a number of businesses. And then more specifically, we're seeing the benefit of an early start to cold flu season in Q2 as it relates to our health and wellness portfolio. But maybe say a little bit more on what your questions. I'm not sure that gets to the question you're answering. No. It's a little bit more of a follow-up on Lauren's question when it comes to did the job being household and the categories that you've referred to being the shift in was health and wellness, and they were down 19%, at the real jump was in household, and we don't see that in retail. So if you can help us -- if you can give color there and help us understand the disconnect between what we see in retail and what you just reported? Yes, I'll jump in on that one, Javier. So you are noting a few categories that have very strong untracked channel performance. And particularly in litter, our business in club, that was due to some strong merchandising activity we had and actually some of the shift that we experienced from Q3 into Q2. So that's what you're seeing the difference between the track channels and what we're talking about from a volume and sales performance in household. Very helpful, Linda. And then basically curious, how you go about answering this question with consumer research. You have health and wellness down 19% is lapping down 18% from a year ago volumes. How you see normalization play out? Do you see people cleaning more as they were during the pandemic, cleanliness and if they are cleaning less, how much many other quarters you feel that volumes are going to be down in health and wellness? . Yes. This is a category that certainly has had the biggest swings as consumers change their behavior as we went through the height of the pandemic, and we're still lapping. We're still normalizing, given Omicron happened last Q3, and we're in the process of lapping that right now. What I would say is if you look at this last Q2 versus pre-pandemic, our volumes are still higher. So in aggregate, people are still cleaning more. And certainly, we're still normalizing consumer behavior. And then we had a very abnormal cold and flu season this year. It happens earlier, it happened in December from a peak perspective, it usually happens in January and February. So there's a lot of dynamics in play here around normalization. But what we see is still a business that has great opportunity to grow and be an outsized contributor to the company given people they care about cleaning and disinfecting as part of keeping them well. But we're going to be normalizing as we get through this and consumers continue to adjust their behavior. And hopefully, we'll get into a more normalized cycle where cold and flu normalizes, and we're seeing a more normalized impact from COVID, but we're not quite there yet. And as we look at the volume loss, that's really due to that bad factor around normalization, but also the pricing that we have, and it's in line with our expectations. So as we look at that, that just gives us conviction because itâs about what we expected it to be. And then as we move forward, we'll continue to adjust as consumers adjust. But it's the same thing we're focusing on innovation in those categories where we can make the job easier for them. We're continuing to invest to help people to understand different ways to keep themselves well, whether that be in a professional setting or at home. But we feel really good about the health names business overall. It's just going to be bumpy until we get back to a normalized environment. I just wanted to follow up on the cost side. You're still seeing cost inflation, but you noted in your prepared remarks that cost inflation has moderated slightly on a sequential basis, even though it's still higher year-over- year. I was wondering if you can give some more color on which inputs are moderating and how quickly those are coming down versus the ones that are still headwind. And then could you also remind us how quickly you expect some of your raw materials to come down in your P&L relative to when you see spot prices for those raw materials decline. Sure. As it relates to the cost environment, and you said it correctly, we are seeing moderating cost increase. Now as I said, we anticipate it's going to be inflationary all year long, but that year-over-year increase will moderate as we move through the year. As I look at specific commodities, we have anticipated resin would be a cost tailwind, so a lower year-over-year cost for resin. That's something we assumed at the beginning of the year, and that continues to play out that we are seeing resin prices favorable year-over-year. But that's being offset by -- we're seeing increases in most of our other buys outside of resin, so soybean oil, linerboard, chemicals, solvents, substrate. Most of the other key buys that we are purchasing, we are seeing cost increases on a year- over-year basis, and we expect that to continue throughout the year. So that's generally how it's playing out. What I would tell you, when you talk about what that moderation is, I think you can see it when you look at just the first half results. If I look at Q1, commodities were a 330 basis point hit to gross margin. In Q2, they're a 240 basis point hit. So that's exactly what we're describing. Still a headwind, but a lower hit each quarter. I would expect that to continue to play out that we'll see a declining impact from commodity costs as we move through the year. But again, we're looking at $400 million for the total inflation, resin being favorable. Most of our other buys continue to be unfavorable on a year-over-year basis. And just could you remind us how quickly you would expect the cost to come down in your P&L just relative to when we see those spot prices coming down? Yes, I'm sorry, you would ask that question. Well, it really varies by commodities. In some cases, we hedge. And so in those cases, you may have nine to 18 months before we see the impact of a changing commodity environment play through our cost structure. In other cases, we have contractual relationships with our suppliers that delays those changes. So it's really hard to give you an enterprise answer how quickly that plays through. It is a commodity-by-commodity discussion based on how we set up those relationships with our suppliers. On the household penetration topic, I guess the question is how much recovery at this point is anticipated within the remainder of your outlook for fiscal '23. Is that something you expect to see some sequential progress rebuilding in the next few months and quarters? Or is that more of a fiscal '24 and beyond objective? Yes, Steve, on household penetration, that is definitely a more mid- to long-term goal for us to get back to household penetration given the fact that the December price increase is just starting to take a hole now, we would expect to have to go through an entire cycle of that. And we haven't even lapped the July price increase, which was our big one coming up here. So that will be something that we're focused on now to ensure that we are investing and that we're keeping as many consumers in as we possibly can. But that work will be rebuilding over '24 and beyond. Yes. Okay. I mean is there an assumption that you -- you may go backwards sort of as we get into calendar '23 before you go forward again? Or is it more holdable line? Yes. I think that's very possible, Steve, based on the fact that we just took that pricing, we could see a bit more of a reduction in household penetration. And again, we think that is the right trade-off to make to get that balance right between top line and bottom line. But yes, it's possible as we go through we could see some additional household penetration erosion. Okay. Okay. And then you talked about promotional intensity in the category. And right now, it seems pretty rational benign, constructive. I guess is there at all in the base plan, an element of increased promotion as you go through the next couple of quarters? Or is that also more steady state as a base case? The base case is more steady state, Steve. As we talk about promotions being a more strategic part of our portfolio than something that we just do to drive volume on a quarterly basis. That's the approach that we're taking for the back half of the year. We have good innovation plans. We want to make sure that we hit consumers on key pulse periods to remind them about the category and the value that we drive. So that's our approach. Again, being what it is, we will look to ensure that we have the right value and that we are competitive. And so if there were to be a change in what we're seeing in the category today, which is slightly higher, like I said earlier, promotion than last year, but still less than in pandemic, we could potentially adjust our plans and we're ready to do that. But we would expect just a more normalized promo environment. That's how we're treating it for the back half, and that's what we've seen so far in Q2. Okay. Okay. And the last question, on the one hand, there's definitely a really good news story here in terms of the pricing momentum you've gotten and sort of the gap between price and it's building relative to the cost trend and the gross margin rebuild. On the other hand, you've mentioned a couple of times to me just the price gaps that you're watching, whether private label or branded price gaps and just the sort of consumer resiliency post this fourth wave of pricing. I guess can you give us a better sense of what the mile markers are for you in terms of -- is it just the gaps that you're seeing, but you have widened out. Is there a time period where we just don't want to see those gaps but why for that long? Is it value share? Is it volume share? Is it those household penetration metrics? I mean I'm sure it's a mosaic of all those things and probably some others, but just give us a little sense of kind of -- if there are more important indicators in there, that would be helpful, just the way you're thinking about it? Yes, you got it right on mosaic, Steve. That's exactly it, which is we're taking a combination of all of those factors as we're deciding if we need to adjust our plans or not. And really primarily what we're looking at is consumer reaction to our brands, and we're looking very closely at any changes that would be outside of what we expect given the elasticities that we have in market. And then we would make corresponding plans, and we're looking at competitors to see are they doing something different? Are they promoting more heavily? Or are they looking at a certain pack size that would make us adjust our plans. Those are the two primary factors we're looking at in the very, very short term. And then, of course, as we look over months and quarters, we're looking at share, and we're really happy that we maintained share this quarter given the fourth round of pricing. But that's the other thing we're watching. There's too much of a slide in share? Is that trade-off not worth it? Et cetera. So we're looking at all of it. But to start, we're looking at that gap, we're looking at consumer behavior by category to say is it different than our expectations and then adjusting from there. Thank you, everyone. We'll see you at CAGNY later this month and look forward to updating you on our progress in May. Please stay well.
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Greetings. Welcome to the Quantum Corporation's Third Quarter Fiscal 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. Good afternoon and thank you for joining today's call to discuss Quantum's third quarter fiscal year 2023 financial results. I'm Brian Cabrera, Quantum's Chief Administrative Officer. Joining me today are Jamie Lerner, our Chairman and CEO; and Ken Gianella, our CFO. This afternoon, we issued a press release which you can access under the Investor Relations section of our website at www.quantum.com. We are using a slide presentation in conjunction with today's call, also accessible under the same section of our website. During today's call, our comments may include forward-looking statements. All statements other than statements of historical facts should be viewed as forward-looking. These statements include any projections of revenue, margins, expenses, adjusted EBITDA, adjusted net income, cash flows, or other financial items. These statements may also concern the expected development, performance, and market share or competitive performance of our products or services. All forward-looking statements are based on information available to Quantum as of today's date. We advise caution in relying on these statements as they involve known and unknown risks and uncertainties we refer to as risk factors. Risk factors may cause our actual results to differ materially from those implied by the forward-looking statements, including unexpected changes in our business. We include detailed information about these and additional risk factors under the sections labeled the Risk Factors in our quarterly report on Form 10-Q and annual report on Form 10-K, which we file with the Securities and Exchange Commission. We do not intend to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, except of course, as we are required by applicable law. Please note that our press release and the management statements we make during today's call will include certain financial information in GAAP and non-GAAP measures. We include definitions and reconciliations of GAAP to non-GAAP items in our press release. If you are unable to listen to the entire call at this time, we will make a recording available for at least 90 days in the Investor Relations section of our website. Thank you, Brian and thank you all for joining us today. Earlier today we announced our results for our third quarter of fiscal 2023 with revenue results that exceeded the high end of guidance and a significant year-on-year improvement in our operational performance. Turning to slide three, here's a brief overview of the results from the quarter. We finished the quarter with $111.2 million in revenue, which is above the preliminary results we announced in January and represents an increase of 17% year-over-year, and also the highest quarterly revenue results since I joined the company. Gross margin improved sequentially to approximately 36%. Adjusted EBITDA increased sequentially and year-over-year to $6.3 million, driven by improved product mix and lower operating expenses. And we exited the quarter with approximately $15 million of shippable backlog, which is within the range we expect to maintain going forward. Now turning to slide four, I would like to share some operational insights from the quarter. We delivered year-on-year revenue growth in almost all segments of our business, including another strong quarter of hyperscale tape sales. We still see several high pockets of supply constraints, but see promising signs as the supply chain for tape drives and other components continues to improve. Inflationary costs remain elevated in most cases, but as lead-times come down and the market improves, we are cautiously optimistic. Next, I would like to give an update on the rest of our portfolio. We had a strong quarter in our video surveillance business and although that market is characterized by large deals and long sales cycles, we're encouraged by the traction we have seen since we acquired the PIVOT 3 surveillance business last year. We continue to be recognized for our technical innovation and in December, we were acknowledged with three more surveillance industry awards. We also saw positive year-on-year growth with our data protection business in all three geographies and enterprise IT departments continue to invest in their data protection infrastructure, and strengthening cybersecurity. Turning to slide five, I would like to give you an update on our transformation progress. Our end-to-end portfolio is really coming together, it is resonating with customers and partners, and our customers want to do more with Quantum. As we introduce new products and convert and expand our customer base, we will continue to grow recurring software revenue as we laid out during our Investor Day in November. One of our key strategies to drive growth is to expand our selling motion from point products to selling end-to-end solutions within large organizations. I'm encouraged by the evidence of early success we're seeing with this model, particularly in Europe and Asia. I would characterize those recent regions as being approximately a year ahead of our North American business in terms of their ability to sell the whole portfolio. As I stated in the past, growing our software and systems business in North America will be a key driver for both future revenue growth and improved gross margins. We have made investments in the North American sales teams to drive growth in historically strong segments for us, such as media and entertainment, and the US Federal Government. Over the past year, we have also invested in the infrastructure and tools to end our enterprise selling capabilities and broaden our footprint in large accounts. While I anticipate this transformation to continue into fiscal 2024, we are pleased with the progress we are making. We are also continuing to --. We are introducing new software features of tire port portfolio. And we have begun briefing key customers and industry analysts on the next generation storage software that we mentioned at our Investor Day. So far, the feedback has been very positive and we'd expect to begin early access trials this quarter in advance of announcing publicly in the first half of next fiscal year. This new product will further strengthen and differentiate our portfolio and allow us to participate in some of the fastest growing segments in data storage. We'll be able to talk more about this exciting new offering in the near future. Turning to slide six, I would now like to introduce our new CFO, Ken Gianella. Ken joined Quantum on January 12th as our Chief Financial Officer and succeed Mike Dodson. I'd like to take a moment to thank Mike and acknowledge the transformational work he accomplished at Quantum as well as his financial leadership through a very challenging period. Mike will remain with the company in an advisory role until August. Ken has extensive financial and operational experience at technology companies. And his background makes him well suited to help lead us through the next phase of our strategic priorities, which include driving EBITDA expansion, delivering consistent operating results, and delivering improved value to our shareholders. Thank you, Jamie. It's a pleasure to be on the call today and I'm extremely excited to be here at Quantum and for the opportunity that lies ahead as we advance the strategy that you, Mike, and the rest of the leadership team started. With that, let's get into it. Please turn to slide seven and I'll provide an overview of the financial results for our fiscal third quarter. As previously highlighted by Jamie, revenue increased 12% sequentially in 17% year-over-year to approximately $111 million, which was above the preliminary results were announced in early January. This also represented the highest quarterly revenue in the last five years. Earnings per share improved over 89% year-on-year to a $0.02 per share loss on a combination of improved operational performance and lower operational expenses, which were down 9% year-on-year. Both GAAP operating income and adjusted EBITDA were the highest since fiscal 2021. Looking at other metrics in Q3, shippable backlog at quarter end decreased to approximately $15 million from $20 million last quarter as supply constraints improved. As we are cautiously optimistic about the improving supply chain situation, we expect to maintain shippable backlog in a range of $10 million to $15 million going forward. Active subscription software's annual recurring revenue or ARR increased approximately 20% sequentially and approximately 84% year-over-year to $11.2 million on over 660 cumulative active customers as our subscription software continues to gain traction. Now, turning to slide eight, I would like to break down this quarter's revenue results. Primary storage revenue was up 1% compared to prior year and up 42% sequentially to $14 million. Contributing to the sequential growth in primary storage was a solid uptick in both our StorNext File storage software and PIVOT 3 video surveillance solutions. As with the last few quarters, the biggest mover continues to be our secondary storage systems, with revenue increasing 66% year-over-year and 15% sequentially to $50.7 million or 44% of total revenue as we saw strong orders from both our enterprise and hyperscale customers. Next, turning to devices and media. While there were some sequential improvement, revenue was down approximately $3 million or 24% year-over-year, primarily due to less global demand for tape cartridges in the period. Turning to our services business, the revenue was essentially flat year-over-year. The results reflect year-over-year growth in ARR, driven by new active subscriptions, by a continued decline in support renewal revenue due to end of support life on legacy products. We anticipate services revenue will be maintained around this level in the near-term. And finally, royalties declined year-on-year as we saw less global demand for tape cartridges. Now turning to slide nine. Let's review our third quarter fiscal 2023 GAAP results. GAAP net loss in the third quarter was $2.2 million or a loss of $0.02 per share compared to a net loss of $11.1 million or a loss of $0.19 per share in the prior year third quarter. This improvement was driven by significantly higher revenues and lower operating expenses due to prior restructuring actions and other cost controls. Now, please turn to slide 10 for non-GAAP metrics. Non-GAAP gross margin was 36% compared with 37.3%in the prior year and 35.4% sequentially, both driven primarily by product mix. With the significant revenue contribution from lower-margin hyperscale sales, this product mix largely offsets the cost reduction initiatives and other favorable pricing actions taken over the last year. As Jamie mentioned, sales and product mix improvements are a top priority in support of expanding gross margins and driving increased EBITDA. On a non-GAAP basis, operating expenses decreased approximately 5% year-over-year to $34.5 million in the third quarter due to cost controls and a traditionally lower end of calendar year costs. We expect operating expenses to be approximately $1 million higher in the fourth quarter due to end of year commissions, seasonally higher payroll taxes and other inflationary pressures. Non-GAAP adjusted net income in the third quarter was $1.6 million or $0.02 per diluted share compared to an adjusted net loss of $4.6 million or a loss of $0.08 per share in the prior year. The significant year-over-year improvement in both bottom line results reflects the company's previously implemented cost reduction actions, combined with strong topline growth. And finally, adjusted EBITDA increased to $6.3 million compared with $758,000 in the prior year. The improving EBITDA for the quarter is a combination of achieving scale at higher revenue levels, improving product mix and continuing to implement cost controls. Now please turn to slide 11, where I'll give an overview of our debt and liquidity at the end of December. Outstanding debt split between term and our revolver was $103.6 million, slightly down from prior year levels. Cash and equivalents at the end of the third quarter were $26 million compared with $4 million a year ago. Our net debt position of $77.6 million gives us a street net leverage of seven times our trailing 12-month adjusted EBITDA. When looking at our bank calculation, there are a few adjustments to the trailing 12-month adjusted EBITDA calculation, such as FX and inventory provisions, which give us a bank net leverage of 4.6 times. All of these factors put us in a good place heading into the fourth quarter. Turning to other liquidity metrics. Interest expense in the third quarter was $2.7 million compared with $2.4 million in the prior year. Adjusted working capital was approximately $73 million, up year-over-year and sequentially on higher inventory receipts at the end of the quarter. And finally, we would like to work down our DIO numbers over the next few quarters, but overall, cash conversion metrics remain strong. Now, please turn to slide 12 for a look at the company's fiscal fourth quarter guidance. First, we anticipate total revenue in the fourth quarter to be $102 million, plus or minus $2 million. At a midpoint, this would equate to a year-over-year growth of approximately 7%. The expected sequential decrease from the third quarter primarily reflects seasonality experienced at the beginning of the calendar year. This is combined with the expected normalization of shippable backlog in the supply chain going forward. We expect non-GAAP adjusted net loss per share to be $0.04 plus or minus $0.02 per share based on an estimated 93.3 million shares outstanding. Adjusted EBITDA for the fourth quarter is expected to be approximately $0.5 million. To give some color on the non-GAAP EPS and adjusted EBITDA guide, there are a few factors I would like to highlight. For the fiscal fourth quarter, we anticipate a two to three-point reduction in gross margin sequentially due to product mix that will temporarily impact our performance this quarter. This is combined with the previously discussed operating expense factoring in such as end of year commissions and other inflationary increases that will have a near-term impact to our results. Looking forward, we do anticipate margins and EBITDA to bounce back as we take actions to improve in future quarters. Before turning the call back to Jamie, I want to emphasize that although I've been here a few weeks, I've hit the ground running. In conjunction with Jamie and our executive team, we are actively exploring ways to accelerate our operational plan with margin expansion, improving profitability with product and structural cost initiatives, and looking to accelerate growth and innovation with the introduction of new software, products, and services in the coming year. Thank you for your time, and I look forward to meeting you all soon. With that, I'll now hand the call back to Jamie for closing remarks. Thanks Ken. We had a great quarter, and we're constructive on the progress we're making. While not always a straight line, I'm really encouraged by the direction and improvements to our sales model by the recovery in the supply chain and our development of an end-to-end portfolio and upcoming new product introductions. As Ken mentioned, while we are cautiously optimistic heading into this new year, we're not standing still. We are actively working to increase margins and profitability, looking to accelerate efforts to drive cost out of our operations, and we'll continue our innovation to remain a global leader in managing and storing unstructured data. Thank you for taking my question Jamie, maybe starting with the progress you're seeing on the sales front. You highlighted pretty strong results in Asia and Europe. How do you see those types of patterns being replicated in North America, like what are you focusing on nearer term? Yes. The model is based on deploying sales resources into our highest margin end markets. And that has traditionally been large enterprise, certain segments of media and entertainment, and large federal governments. And so, what we've been doing is going into the largest geographies, going after the largest companies and also going after segments of, again, a government business, public sector business that have traditionally been very successful for us. So, it's really been about going to where the margin is. Okay. Thank you. And maybe digging into the seasonality you're seeing, when you maybe look further in the year, what kind of patterns should we anticipate, given the visibility you have right now? I would expect we have a pretty well-worn pattern that's played out for quite a few years. So, I would expect us -- and some of those patterns, we came off of a little bit with upheaval from supply chain or upheaval from the pandemic, but we see ourselves returning to more of the Quantum classic seasonality with kind of a softer Q4 and then it's building up for our strongest quarter being Q3. Thank you. And then maybe just 1 more question for you, Ken, and congratulations on joining Quantum. So, when you look at product mix, can you kind of give us a sense of how you see that progressing from a margin perspective through the year? Yes. Thank you, George. Well, one of the things that we wanted to focus on with this Q4 is going to be a bit of an anomaly with what we saw the growth coming back with. If you look at the work that we've done over the prior year, we had a lot of work on margin improvement and fixing that mix. But this quarter coming up, Q4, we see particularly large volume of hyperscale, coupled with a unique customer deal that we had to be a little bit aggressive on because we wanted a real good proof point in the healthcare space, particularly genomics, to be more precise. And gaining that proof point in a sector that has a lot of unstructured data, modeling management of large quantities of that unstructured data was important for us to grab. And so, we got a little bit ahead on the pricing than where we saw our cost downs coming on that product set. But we think that's going to start normalizing heading into Q1 and into the rest of the 2024 fiscal year. So, I think you're going to start seeing that normalize. As Jamie said, we're seeing progress within -- across the geos, particularly in our primary storage space. We see that continuing into the new year and that's really where we feel more comfortable with the strength on the margins. Thank you. Our next questions come from the line of Craig Ellis with B. Riley Securities. Please proceed with your question. Yes, thanks for taking the question. Jamie, congratulations on the five-year high quarterly revenues and Ken welcome to the team. I look forward to working with you. So, I'll start with a clarification just on the quarter's revenue upside versus initial guidance. Can you give us some further color on where that came from more on the hyperscale side, the enterprise side? And then what was the linearity of the strength to the quarter, pretty steady or was it more backend loaded? Well, I'll start with that. It came a little bit more back end, but the first thing we saw was strength in the supply chain coming back. So, having that kind of loosen up gave us the ability to fulfill more demand, particularly within the hyperscale side of things. The linearity side, it's we tend to be to month one month two, a little bit lighter, with month three coming on strong, and that linearity kind of held true to it. But we were able to fulfill a little bit more demand, because the free up of the supply chain allowed us to ship some more of that pent up demand and backlog. Got it? And, Jamie, I think when we spoke three months ago, one of the things you were looking for is that for some of the sales changes you're making to really help accelerate primaries storage, and is that what you're seeing and with the strength in Europe and Asia, because headline primary was pretty flattish, but just walk us through the impact you're getting, as you make some of the adjustments to the sales team. Yes, I mean, I wouldn't over rotate on primary, and that we can achieve the same or even stronger margins in secondary. The DSI product is our highest margin product, active scale is also often sold software only as you know, north of 80% margin. So there's a lot of margin in the secondary products. And there's a lot of products in secondary that are beyond just, take hardware. But what we're seeing, and what we're most focused on, is the ability to sell the whole portfolio. So, we have a lot of historic accounts that bought a product from us. And what we're seeing through the new sales teams, the new sales training, and the new sales incentives, is going into our accounts and selling them a primary product, store next door surveillance, selling them secondary products, selling the management software, selling multiple products, and often those products as a solution where we combine multiple products to solve a business problem or solve a management initiative. And, I think that's been going well in Europe and Asia. And, the teams who were set it about a year behind in North America, but I'm seeing the pipeline, the initial deals, and I think that's going to flow right through North America and have a pretty it should have a meaningful impact on our margins as that, as we roll through this, predominantly the US Sales Team. Got it. And related to that, and selling the solution as subscription adds new customers or about 100 in the quarter looks like that was about the third consecutive quarter, getting that many new customers on subscription. What should we think through calendar 2023 for new customer adds to the program? Should it click along around 100 a quarter or do you see an inflection coming? And if so, what's the catalyst? So not giving an exact number. We're really pleased about how we're seeing the active subscription sales going. I think the thing to highlight to everybody out there is that the product set that we started with for the first set really only touches about 30% of our installed base. So focusing with these initial set of sales and these initial set of products, we're really pleased with where the product is going, and we'd expect to continue to see strong growth and momentum there because we're going to be focusing on this and trying to acquire as our customers. And more importantly, our sales channel becomes more comfortable with the selling motions around this new product set versus just a point sale. Got it. That installed base scoping is good context. And lastly, regarding the gross margin outlook, the decline of about 250 basis points to around 33.5%. How much of that is the big healthcare deal that you flagged versus other things? And is the recovery back north of 35% and towards 40%, really just working that through? Are there new initiatives that you and the team are executing? And if so, what are they and when do you expect to get a payoff from them? Predominantly, the headwind was this large deal that we were talking about. But I don't want to downplay the other work that we're doing to continue that rotation and the margin back up. There's a lot of things that we have on deck that even in my short time here, people have been really active in showing the game plan of how we get there of making sure that we're very focused on manufacturing and our services team. As we highlighted before, there's been a pretty steady decline within the services business with our legacy side of the business as we rotate away from these end-of-life older products. That starts bleeding off, and we're really doing a job of rationalizing how that team looks to service that base, but then also leaning into the active subscriptions to continue to fill that growth. So I think you're going to start seeing that help in 2024 going forward as well as some of these actions we're taking in cost downs of products and narrowing that product portfolio to be more effective and efficient. So it's not just the one customer flushing through deal, I think there's going to be other factors involved in a lot of self-help that is going to get us to where we need to be going forward. Thank you. Our next questions come from the line of Nehal Chokshi with Northland Capital Markets. Please proceed with your question. Thank you. Congratulations on strong results, both on the top and bottom line. Jamie, you're talking about the progress you're making with solutions selling and note that APAC is ahead of North America. Why are they ahead? They started earlier. They were smaller geographies that were less of a risk to our business. So we consciously said, look, let's start there. North America is such an important part of our revenue engine. It's just kind of an unsafe place to experiment with. So, Asia and parts of Europe, we could do some trials of these new models with a much lower -- it's a lower risk. And so we started there, had some really good success in Australia, some good access across Korea and have been having a lot of success in France, Germany, England, and now we're sweeping that across North America. What are the metrics that you're looking at in these smaller geos in APAC that tells you this is indeed working well? Yes. We look for a couple signs. One is, are there multiple product families on a single quote versus â instead of just selling moviemaking or just selling video surveillance, are you able to sell multiple product families, high-speed storage, archive storage, surveillance storage all part of a single deal. So multiple product families. The second thing you'd expect with multiple product families is a larger ASP. And lastly, because you're solving a business problem versus selling terabytes capacity or terabytes, you'd expect to get a higher margin when you're solving a business problem. So that's really the trifecta is multiple product families on one quote, higher ASP and higher margins. Which I'll just add in, Jamie, that goes to the higher contribution per rep. So you have the body out there that is up-selling multiple products and solutions, and you're getting more yield per rep. And with that, a lot of that run rate business where we sell a single product, we're not walking away from that business. But instead of having an outside sales rep with a very high comp plan, selling a run rate product, we're pushing more of that to the channel and more of that to our inside sales organization. So, the transactional part of our business, we're doing that more cost effectively and focusing the most skilled, experienced and expensive part of our selling engine to a multiproduct family sale versus a transactional sale. That's a great color. What are -- what is the actual uplift you're seeing in terms of ASP and margin in the small geos? Yes. I mean, we're not putting those metrics into our package of metrics at this time, but we are seeing ASPs going up. We are seeing relevance go up. And I would measure that in the number of CIOs that are meeting with us, when we're a transactional vendor versus you're helping them solve one of their top initiatives, I just think we're seeing more relevance. We're getting more time. We're getting more mind share. And I have visibility into the quotes that we're putting out in the future and I'm seeing the quotes get bigger. And another sign of it working is when you're solving a business problem, you can't win with a quote. You have to write a proposal and describe what you're doing, describe how you're going to change their business or help their business. And it's amazing how many more proposals we're putting out than where we used to just kind of drop a quote and you're basically winning on price or winning on availability of materials. Now, we're winning on the merits of the solution and the uniqueness of the solution. And that's -- it's taken a number of years to get here, but we really have the portfolio now where we can assemble highly differentiated proposals versus cost-effective quotes. Okay. Great. And then, Ken, this is a much tighter range of revenue guidance and what I think we've typically been seeing over the past four or six quarters. Is this one of the philosophies that you're bringing to the table or is this just simply a reflection of better visibility? A little bit of both, right? I mean I think, number one, it's important to -- we want to send a signal to our investor base that as we look down the road, this is what we have a feel for. But also more importantly, we didn't want to put such a large range out there that it would skew people's thoughts because, again, great quarter we had in Q3. But the seasonality that we saw coming into this quarter, we really wanted to send a signal that we had visibility into the range, and we didn't want people to get ahead of themselves of -- on the numbers. So that's the reason why we put a little bit of a tighter range this time. As we go into the New Year, we're going to be looking at as we get more visibility, some other metrics and way to give you guys a little bit more of a near-term view, not just a quarter view of what we're thinking and where we're going. And as I work with the team and Jamie, we're going to see where we can expand some of that visibility for you all in the future. Okay. Great. And then any early thoughts on fiscal year 2024? It looks like based on what you're guiding to here, you've been excluding the train of backlog you've had probably about 5% year-over-year growth in demand here. Is that how we should be thinking about for fiscal year 2024 or is a different framework we should think about here? Well, I appreciate the effort, but we're not guiding 2024, but we did want to give people a view on a couple of key metrics that were slightly down this quarter that we don't believe that, that is going to be a trend going forward, particularly on the margin side of it. So I think we'll give you guys the 2024 guidance in a couple of months here. Yes. I mean, I know a lot of my peers are signaling slowdowns and conservativeness and I don't want to second guess them. We're guiding up 7% year-on-year, right? So we're guiding the strongest revenue quarter in quite a few years in our Q4. So we're not guiding to signaling we're seeing a big slowdown. I mean, I don't -- and that may just be a reflection of the segments we play in. I mean, our biggest segment is secondary storage, which is protecting and backing up data. And I don't think that correlates to global economies, meaning if the economy is doing poorly, people don't say, well, I guess, we're not going to back up our data. You're still going to back up and protect your data. So the trend we're dealing with is less of a macroeconomic trend. It's a trend that the world is creating more data, regardless of what the economy does, and the data needs to be protected and backed up. I do think the moviemaking industry is seeing a recovery, and they're making just as many movies as they did in the past. I think ransomware, whether there's a good economy or a poor economy, I think people are spending money to protect against ransomware. So the segments that we play in predominantly do not seem to be negatively affected the way laptops and other parts of -- other segments are being impacted. So right now, our guide does not guide to seeing major negative macroeconomic trends. Yes, I had a question regarding the guidance. If I go back the past couple of years, the sequential revenue Q3 to Q4 last year, we were flat. The year prior to that, we were down about $6 million sequentially. I understand there's seasonality, but it seems like a pretty dramatic step down Q3 to Q4. Would you care to comment on that? So I think the prior flat, I'll start with more supply chain driven than anything. I think the other step down, if you will, going back to what this current quarter looked at, the supply chain loosening back up allowed us to fulfill a little bit more of that hyperscale demand, which had a little bit of elevation in the quarter. I go back to what Jamie said, though, a 7% year-on-year number. And if you look, it's the strongest Q4 that we've had in several years, even before the supply chain impacting it, that we think it's a strong indication heading into 2024. So really, the supply -- the outperformance in Q3, you're saying that supply chain loosening helps or created kind of a bigger starting point. Okay. Yes. And then -- just again, the sequential guide on the adjusted EBITDA also seems -- I know we're talking about the product mix, taking roughly 2.5% out of that $102 million midpoint guide another $1 million for the OpEx higher, but that still seems -- the $0.5 million of adjusted EBITDA seems like a pretty dramatic step down. Is that conservatism that you're kind of baking in there just from the $6.3 million and the $0.5 million seems dramatic? I think mix has a lot to do with it. So if you start with your top line and looking at what you're shipping out there, the mix with the hyperscale plus this one customer, that's a lot of fall-through to EBITDA that was an impact. We were purposely mindful to also point out the OpEx increase with the commissions and the other end of year elements. We are seeing some inflationary pieces where the OpEx run rate will probably be more around that 35%, 36% range going forward with some of that inflationary and merit pressures going forward. So you take the $1 million from the OpEx piece that we called out, give or take, and then you call out the points of margin, that's about two to three plus of EBITDA that fell off. Okay. And then royalty continues to dwindle here. I think on a year-on-year basis, I'm looking at -- if I just replicate what you did in Q3 into Q4 would be off about 20%. I know you're not guiding at the product line, but just at a high level, is this the new normal? Should we anticipate continued erosion on the royalty? Yes. I think it's probably safe to say, I think we were at $2.8 million. I think $2.8 million is the new normal. And none of us have a crystal ball, but I'd say unless something changes, I think running around $2.8 million is about right for your model. There are no further questions at this time. I would now like to hand the call back over to Jamie Lerner for any closing comments. Thanks, everyone, for joining us today. We're pleased with the results and have a lot of work in front of us, but it's great to have Ken on Board and have some fresh legs here, and we're excited about Q4 and entering the New Year. So thanks, everyone. Thanks for joining. Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
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Greetings, and welcome to the Magellan Midstream Partners Fourth Quarter Earnings Conference Call. During the presentation, all participants will be in a listen only mode. Later we will conduct a question-and-answer session [Operator Instructions]. As a reminder, this conference is being recorded, Thursday, February 2, 2023. Hello, and thank you for joining us today to discuss Magellan's fourth quarter financial results and perhaps even more of interest, our outlook for the new year. Before getting started, we must remind you that management will be making forward-looking statements as defined by the Securities and Exchange Commission. Such statements are based on our current judgments regarding the factors that could impact the future performance of Magellan but actual outcomes could be materially different. You should review the risk factors and other information discussed in our filings with the SEC and form your own opinions about Magellan's future performance. Magellan wrapped up the year with another solid quarter supported by record refined products transportation volumes and financial results that exceeded our expectations, excluding a noncash impairment taken in the quarter. During 2022, we delivered over $1.3 billion of value to our investors via opportunistic equity repurchases and Magellan's attractive cash distribution, marking 21 years of continuous annual distribution growth. I will now turn the call over to our CFO, Jeff Holman, to review our fourth quarter financial results versus the year ago period. Then I'll be back to discuss our annual guidance for 2023 before answering your questions. Thanks, Aaron. First, I'll note, as usual, that I'll be making references to certain non-GAAP financial metrics, including operating margin, distributable cash flow or DCF and free cash flow, and we've included exhibits to our earnings release that reconcile these metrics to their nearest GAAP measures. Earlier this morning, we reported fourth quarter net income of $187 million compared to $244 million in fourth quarter of 2021. These results include the $58 million impairment of our investment in the Double Eagle Pipeline joint venture. Adjusted earnings per unit for the quarter, which excludes the impact of commodity related mark to market adjustments, was $1.06. Excluding the $0.28 negative impact of the Double Eagle impairment, adjusted earnings per unit was $1.34, exceeding our guidance of $1.22. DCF for the quarter increased to $345 million, up $48 million from last year while free cash flow for the quarter was $324 million, resulting in free cash flow after distributions of $109 million. For the full year 2022, DCF was $1.128 billion, an increase of $10 million from 2021. DCF per unit in 2022 was $5.46, about 6% higher than in 2021. This per unit perspective reflects the significant impact of our buyback program and highlights our ability to deliver per unit growth in excess of the underlying DCF growth that our business experiences. Full year free cash flow for 2022 was $1.486 billion, resulting in free cash flow after distributions of $660 million for the year. A detailed description of quarter-over-quarter variances is available in the earnings release. So as usual, I'll just touch on a few highlights. Starting with refined products. Fourth quarter operating margin of $303 million was essentially flat with fourth quarter 2021. Record quarterly transportation volumes and higher average transportation rates from our core fee based transportation and terminaling activities offset unfavorable mark to market adjustments on our commodity hedges. Higher rates were driven primarily by the midyear 2022 increase in our tariffs of about 6% on average. In addition, rates in the current period continued to benefit from more long haul shipments, which move at higher rates. Similar to the third quarter, the increase in long haul shipments was driven largely by our customers using the extensive connectivity of our system to satisfy market demand in areas along our network that continued to be impacted by refinery outages. Operating expenses for the refined segment increased about $6 million versus the prior year period, primarily due to less favorable product overages, which reduced operating expense as well as higher power costs, primarily as a result of the increase in long haul movements just mentioned. These unfavorable expense items were partially offset by a favorable property tax true-up in the current quarter. Product margin decreased between periods as favorable results from our gas liquids blending activities, which saw both higher margins and higher sales volume were more than offset by the recognition of additional unrealized losses on commodity hedges in fourth quarter 2022. Our realized blending margins increased year-over-year to about $0.55 per gallon versus closer to $0.45 per gallon in the prior year period. Turning to our crude oil business. Fourth quarter operating margin increased to $128 million, nearly 24% higher than in the '21 period. Longhorn volumes averaged just over 245,000 barrels per day, slightly down from 250,000 in the fourth quarter of 2021 due to lower marketing affiliate shipments, partially offset by higher committed volumes. Longhorn revenue actually increased overall as the margin we earn on committed barrels is currently higher than the margin we realized on marketing affiliate variables. Volumes on our Houston distribution system increased versus the prior year period in part due to higher tariff shipments resulting from a new pipeline connection in 2022. These shipments move at a lower rate than long haul volumes, so this increased HTS activity resulted in a lower average rate for the segment overall. In addition, terminal throughput fees increased, partially as a result of more customers electing to move barrels and our simplified pricing structure for our services within the Houston area, as well as higher dock activity in the quarter driven by the recent increase in export demand. Crude oil product margin increased versus the prior year period as we again benefited from additional crude oil marketing opportunities. As we noted on our call last quarter, these opportunities involve different factors, such as quality or location differentials and are less ratable than our core transportation and terminaling business, but provide low risk returns that we continue to pursue when available. Moving on to our crude oil joint ventures. BridgeTex volumes were nearly 270,000 barrels per day in the fourth quarter of '22, down from nearly 300,000 barrels per day in 2021, and Saddlehorn volumes averaged nearly 230,000 barrels per day, slightly lower than 235,000 barrels per day in the '21 period. For both of these pipelines, the decrease in volume is primarily due to the timing of when our committed shippers utilize our services and emphasizes the importance of take-or-pay commitments from quality counterparties to ensure we get paid regardless of our customersâ short term logistics decisions. From an equity earnings perspective, we want to again recognize additional deficiency revenue for both the BridgeTex and Double Eagle pipelines, resulting in an increase in equity earnings for the segment. It's worth noting that although this recognition of deficiency revenue results in higher equity earnings, the associated cash payments were already received from customers in prior periods, and our proportionate share of those payments were distributed to us by our joint ventures and recognized by us as DCF at that time. Moving beyond the individual segments, there are just a few other items I'd like to highlight from our quarterly results. Depreciation, amortization and impairment expense increased primarily due to the previously mentioned impairment of our investment in Double Eagle. You'll recall that the Double Eagle pipeline, which delivers condensate from the Eagle Ford basin directly to Corpus and indirectly to Houston through a connection to a third party pipeline was backed by long-term customer commitments when it began operations nearly 10 years ago. Those initial contracts expire later this year and our customers did not provide notice of their intention to extend their commitments as provided for in those contracts. Further, those customers have consistently shipped below the commitment levels and consequently paid deficiency payments, while current market rates for transportation out of the Eagle Ford are significantly lower than the rates provided for in their expiring contracts. As a result, we recorded an impairment of our investment in Double Eagle during the fourth quarter. Finally, as everyone will remember, we sold our independent terminals in June, which, of course, resulted in lower income from discontinued operations in the current period. Moving on to capital allocation, balance sheet metrics and liquidity. First, in terms of liquidity, we continue to have our $1 billion credit facility available with the maturity of most of those commitments under that facility extended to 2027 during the fourth quarter. As of December 31st, the face value of our long term debt was still about $5 billion with $32 million of commercial paper outstanding. The weighted average interest rate on our debt remains about 4.4% with our next bond maturity in 2025. And as a reminder, essentially all of our interest rates remain fixed, other than that small amount of commercial paper borrowings. Our leverage ratio at the end of the quarter was 3.2 times for compliance purposes, which incorporates the gain we realized on the sale of our independent terminals. Excluding that gain, leverage would have been about 3.6 times. As for capital allocation, our story hasn't changed. We continue to believe it is important for us to execute a balanced capital allocation strategy using a combination of capital investments, cash distributions and equity repurchases, all while remaining committed to the financial discipline we are known for. We continue to execute on our buyback strategy during the quarter, repurchasing 1.9 million units at an average price of about $50 per unit for a total spend of $95 million. For the full year 2022, we invested $472 million in unit repurchases, bringing the total since inception to nearly $1.3 billion. We continue to see unit repurchases as an important focus of our ongoing capital allocation efforts and we continue to expect free cash flow after distributions to generally be used to repurchase our equity. But as we are always careful to note, the timing, price and volume of any unit repurchases will depend on a number of factors, including expected expansion capital spending, available free cash flow, balance sheet metrics, legal and regulatory requirements, as well as market conditions and the trading price of our equity. And of course, we remain committed to a strong balance sheet and our longstanding 4 times leverage limit. Thanks, Jeff. Turning to our outlook for the new year. This morning, we announced DCF guidance of $1.18 billion for 2023, which is about 4.5% higher than our 2022 results. I'd like to spend a few moments walking you through the key assumptions used to develop our 2023 guidance to help you better understand how we're thinking about the new year. Starting with our refined products segment, which comprises about 70% of our operating margin. We expect refined product shipments to be about 1% higher than the record annual volume moved in 2022 due to continued stable demand and contributions from small system expansions, including the expansion of our pipeline between Kansas and Colorado, which will come online in the first quarter of the year. As discussed last quarter, we believe that most of our markets have essentially returned to their pre-pandemic levels while a few outliers in our larger metropolitan markets such as Kansas City and Minneapolis, remained slightly lower. It's still not clear to us if these outlier markets will return to historical demand or if they are now at their new normal. These estimates assume drilling activity remains robust and that our nation's economy does not slow notably. Both of which impact our diesel fuel demand. While not a part of our 2023 guidance, our current project to increase pipeline capabilities to El Paso is underway and expected to become operational in early 2024, which should contribute to volume growth next year. The other key metric for our refined products pipeline system is the average tariff we charge. In our current forecast assumes we increase our refined products rates by an all-in average of approximately 8% on July 1st. For those who have been tracking the producer price index, you're aware that the change in PPI is currently estimated to be an increase of approximately 13.5% based on the preliminary results through December of 2022. We've indicated to the investment community over the last few quarters our intention to be very thoughtful in our approach to tariff increases this year due to the unprecedented level of the allowable increase. Should we decide to not take the full allowed index within the 30% of our markets subject to the FERC index, we will retain the ability to make up the difference in the future period. The other 70% of our refined products markets not subject to the index will be adjusted according to market conditions. We have not finalized our decisions that we will take effect on July 1st and do not plan to break out the components of the 8% all-in average assumed in our guidance today, but we'll provide more detail later in the year once we finalize our rate decisions. For reference, every 1% change in either total transportation volume or the average tariff for our refined products pipeline system impacts DCF by approximately $10 million on a full year basis. Specific to our commodity activities, we have continued to make significant progress hedging our gas liquids blending with 70% of our 2023 blending now hedged. Between the margins we have already hedged and last week's forward curve for the unhedged volume, we currently forecast an average blending margin of about $0.60 per gallon for the year, which compares favorably to our 2022 results of $0.50 per gallon and our five year average margin, which is closer to $0.45 per gallon. Breaking down our '23 estimates further, we have nearly 90% of spring activity hedged at expected margins of $0.70 per gallon and 40% of fall blending hedged with margins closer to $0.50. Our estimates for 2023 blending incorporate RIN costs of nearly $0.20 per gallon due to the ongoing high pricing environment for RINs. We also continue to pay close attention to moves in the basis differential between our NYMEX based hedges and the price of gasoline we sell in the markets located along our pipeline system in the middle of the country. Our projections currently include an average basis differential of a negative $0.10 per gallon, which is about double historical levels but $0.05 better than the average basis differential experienced in 2022. Moving to our crude oil segment, which comprises the remaining 30% of our operating margin. We expect volumes on our wholly owned pipelines to increase about 20% over 2022 results, primarily related to the full year impact of higher shipments on our Houston distribution system from a recent pipeline connection. We also expect Longhorn pipeline shipments to increase, averaging approximately 245,000 barrels per day compared to 230,000 barrels per day in 2022. As discussed last quarter, we recently added a new third party commitment to Longhorn, resulting in approximately 80% of the pipe's 275,000 barrel per day capacity being committed at this point with an average remaining life of six years. Similar to 2022, shipments on our joint venture pipelines are expected to be lower than commitment levels and customers will be paying deficiency payments as a result. Specific to BridgeTex, we expect shipments to average around 215,000 barrels per day during 2023, about 40,000 barrels per day lower than 2022 average annual volume with even lower shipments during the first quarter based on recent customer activity. At this point, BridgeTex has commitments for nearly 65% of the pipeline's 440,000 barrels per day of capacity with an average remaining life of three years with a few small commitments expiring last month. For Saddlehorn, we expect to move about 220,000 barrels per day during 2023, which is similar to 2022 shipments. Saddlehorn currently has commitments for approximately 80% of the pipelineâs 290,000 barrel per day capacity with an average remaining life of four years. We expect storage revenues to be lower in 2023 for both our refined products and crude oil storage assets, a theme we saw during 2022 as well. Although we generally target longer term contracts for our storage business that are somewhat agnostic to short term price movements, the ongoing backward dated pricing curve has made it more difficult to renew expiring contracts. Further, the $20 million contribution we received from the independent terminals during 2022 will not repeat following our sale of those assets in June of last year. On the expense side, we've discussed in the past that Magellan kicked off an optimization initiative several years ago to identify efficiency opportunities throughout the organization. This initiative has served us well to ensure that we are operating as efficiently as possible especially considering the current inflationary environment while safeguarding the integrity of our assets. With the benefit of these optimization efforts, as well as a few onetime costs we don't expect to recur again in the new year, we currently expect total cash expenses to increase by about 2% in 2023. Concerning maintenance capital, we expect to spend around $90 million during 2023, which is 10% above last year's actuals but not out of the normal range for our company. The higher annual estimate is simply based on the timing of specific project work with nearly $10 million in 2023 related to large onetime projects associated with a pipeline relocation and an electrical upgrade. Safe and reliable operations are critical to our success, and we spend significant time and effort each year to ensure the integrity of our assets and to protect the communities where we live and work. In fact, consistent with recent years, we expect to spend in excess of $200 million on maintenance and integrity work in 2023, considering both capital and expense projects. As an aside, we also mentioned in today's earnings release that our guidance assumes an average crude oil price of $80 per barrel for the year, which is consistent with recent futures pricing. For sensitivity purposes, we currently estimate that each $10 change in the price of crude oil will impact our DCF by approximately $35 million in 2023, primarily related to our unhedged gas liquids blending activities and the value of our pipeline tender deductions and product overages. In summary, all of these key assumptions build up to our DCF guidance of $1.18 billion for 2023. Coupled with our currently planned 1% annual distribution growth, we expect distribution coverage of 1.38 times, resulting in more than $215 million of free cash flow after distributions that can be used to reinvest in the business, buyback equity or otherwise create additional value for our investors. Magellan remains committed to a balanced capital allocation approach. We continue to see opportunity to create value through repurchasing units, but distributions will remain an important component of our capital allocation plans. We plan to increase our annual distribution by 1% this year, similar to the past two years, which results in a yield of nearly 8% based on recent MMP trading prices. While we're not providing specific financial guidance beyond 2023 at this time, we expect DCF to continue to grow modestly over the next few years. Combining this modest underlying growth with our expectation to continue to repurchase units results in even higher growth potential for our distributable cash flow per unit as we have seen in recent years. For example, our DCF grew at an average annual rate of just under 4% between 2020 and 2022, while our DCF per unit grew at an annual average rate of just over 8% during the same period. This example, we believe, demonstrates the power in our capital allocation approach and our ability to create long term value for our investors through a healthy current distribution combined with the potential for capital appreciation as DCF per unit increases. Moving on to expansion capital. We remain intent on developing attractive investments to create future value for our company. We currently expect to spend approximately $110 million in 2023 and $40 million in 2024 on expansion capital projects already underway. As you probably know, the largest project included in this spending profile related to the expansion of our refined products pipeline to El Paso, which as mentioned earlier, is expected to be operational in 2024. We continue to assess new opportunities to enhance Magellan's footprint and expect to find incremental projects that leverage the flexibility of our extensive network, most likely around filling logistical gaps that may arise between market demand and available supply. You may recall that we've generally estimated around $100 million of expansion capital spending per year as a reasonable assumption for potential projects. As just noted, we're already planning to spend above that level for 2023. So depending on how successful we are in identifying near term new projects, a number closer to $150 million as a reasonable placeholder for this year. Even though we were aggressively pursuing additional projects to grow our DCF, we also remain committed to Magellan's consistent disciplined investment approach. Quite simply, if the set of projects that meet or exceed our 6 times to 8 times EBITDA multiple thresholds remain relatively low. We intend to stay patient for the right opportunities and believe additional long term value is achievable through continued optimization of our existing assets and utilization of our other capital allocation tools. And Aaron, I just wanted to unpack that 8% refined products tariffs, understanding that you're not giving the exact breakdown at this point. But just the way the math has to work given the 70-30 split between your competitive rates and your FERC index rates. Either you would be increasing close to the ceiling rate for your FERC rates or you would be increasing higher than that mid single digit clip that you've been doing for some time on the competitive rate. And I'm just wondering, have you gone through the process of talking with your major customers and just the price discovery process of what they're willing to bear. And if you are willing to lean more aggressively on the competitive rates, are you confident that you wouldn't be giving up some market share with this big increase? And as I said in my comments, we haven't made any final decisions about what we're going to do on July 1st or for July 1st, I should say. But the 8% all-in rate, we think, is a good placeholder as we see things right now. And if you think about it in terms of we're always talking to our customers, we have a good feel for what's going on in the markets, but we do very much a market by market buildup of what we think is a rate increase that wouldn't result in market share loss, frankly. That's what we're trying to manage a little bit is make sure that we're increasing our rates, which in any event are going to be healthy. There are going to be healthy rate increases. But we are trying to make sure that we don't push the envelope in such a way that we think that there's a risk of losing market share. So that's the sensitivity that we have. If you look at that 8% all-in rate, we think that the combination of index and market rates that we may end up charging, which we think would reflect that 8% as we sit here today, we don't think we're running that risk. And what's most likely to happen is our indexed markets will likely go up at a higher rate than our market based rates, but they're both going to be healthy. And then turning to the butane blending piece. As we think about the building blocks for the basis assumption of negative $0.10 for the year, clearly, January has been more favorable to our butane blending business than the fourth quarter. But we have several things going on. Clearly, there's a lot of planned and unplanned downtime at the refineries in the Mid-Con, which helps you. But [indiscernible] is set to go down sometime this quarter. So how should we think about the evolution of basis throughout the spring planting season? Well, we think it's going to remain volatile. That's the simple answer to that. And you highlighted many of the reasons why we think it's going to remain volatile. If you look at our expectations of negative $0.10 for 2023, we think that's a reasonable assumption for sort of if you look through the whole year. Last year, we saw some bases really go our way and actually traded a positive, not a negative. We think that event could happen again this year. It's hard to predict, but we just see a lot of volatility around it. So when we chose the minus $0.10, it was looking at the future markets and where we're seeing them sort of sitting but it was also just considering the volatility in both directions that can happen. So we just try to pick a reasonable number. We think there's a good chance it's going to be a little better this year than what we experienced last year. But in any event, it's still elevated versus where it has historically traded by a pretty substantial margin. So it's just us using our best estimate on what we see the full year turning out to look like, which we -- or forecasting it to be slightly better than last year, but certainly not as good as it has been historically. On capital allocation, I'm just wondering if you've given thought to to raising the pace of distribution growth? I mean, EBITDA is going to be up -- projected to be up 4% this year, but you're only growing the distribution 1%. So it seems like there's an active decision here not to grow distributions in line with cash flow growth. And I know you're doing buybacks but I guess at what point would you consider accelerating distribution growth? Yes, it's an interesting question and we think about it, I think, fairly simply. The first thing I want to mention is we view a healthy distribution an important part of our overall value proposition. So for us, it's really a question about what do you do incrementally from where you're at, to your point, growing the distribution faster or emphasizing buybacks. That's really the decision point that we have to make. And for us, it seems like adding materially to an already attractive distribution at spreads that are still to treasury is still wider than we think they should be. And we compare doing that to the opportunity to buy back units and when we compare the two, which one of those do we think will create the most long-term value for our investors long term. And as we sit here right now, we still think buybacks make the most sense for us. The key I would make is that's true right now. We've always tried to say things can change depending on what's happening and where we see the best place to add value. So it's important that we see both of them being very important. And if we look marginally right now, we see opportunity in our unit price. And as long as we see that opportunity, that's where we're going to focus. But it's not set in stone, that's just where we are right now. And then I think you mentioned that you're getting higher rates on contracted capacity on Longhorn versus the marketing margin. So I'm just wondering if there's plans to contract that small remaining piece of open capacity on Longhorn in 2023 or leave that open and contract it later when things potentially tighten? And I think some of that difference. Well, first of all, if we have a counterparty that wants to pay us an attractive rate, as you look through time, we're interested in talking about that. And it's very counterparty specific. As I've mentioned in the past, people take different views of how much term they want to think about, how do they feel about capacity and different producers and customers have different motivations to either want to just sort of ride the spot market, so to speak or whether or not they want to make commitment for term to have surety of export out of the basin. So if we have counterparties out there that want to come up with a fair rate with some term on it, we'll certainly consider it. So one of the reasons why the commitments are typically at higher rates is those are with customers that are taking a longer term view and they're wanting to have term and we're looking at that saying, if we're going to look at this over a longer period of time, we need to make sure the rate is fair. On the marketing side of the business, that's much more of what's happening today, much more of a spot market. So you don't see that same term structure necessarily in the optimization that we're trying to do with the spot movements in our marketing affiliate. So thereâs just a little bit of difference in perspective and the types of customers that are interested in working through our marketing affiliate, and those that want to make sure they've got capacity out of the basin. And when you take those two different perspectives, you have different price sensitivities to both of them with the ones wanting term typically willing to pay a little more for that as a result. So does that answer your question, Praneeth? Just wanted to come in on oil product margin a little bit more, if you might be able to dive in as far as what specific activities benefited 4Q? And do you see them repeating in 2023 and is that factored into the guidance? So as we said, I'm trying to not be super specific because more specific we are the less opportunity we're probably going to have, and I think it's pretty much that simple. But the broad bucket, it was pretty broad, really, it's quality differentials and it's locational differentials. And those are where the opportunities are, and we do expect them to continue. We can't predict the level but we expect to continue to find opportunities. But just to hopefully make this answer a little more satisfying, if you look at 2022, our accrued marketing activities contributed, call it, $25 million, $30 million, and we are -- in our guidance basically assuming we'll find a similar level of opportunities next year. And then just want to pivot towards the CapEx. I think you said $150 million might be a reasonable placeholder there. I'm just wondering, I guess, the suite of potential growth project opportunities as you see it now. Would you say that's kind of more or less than where it's been maybe earlier in 2022? Just trying to see, I guess, how that could be -- the growth opportunity as you see it might be evolving over time? Well, I would say generally, the potential for investment opportunities for us. I would say today is probably, I mean, more optimistic today than it was even a year ago. And a lot of that really has to do with our customers and what they're seeing and what they're trying to accomplish in the conversations we're having. I would not describe it as saying that we're going to a completely new environment and we're going back to the high levels that we saw in the recent past, I don't see that but I do see some more optimism. And we have customers that certainly have some objectives that we can help them with. So I'm certainly more optimistic as I sit here today than I was a year ago, but we're not in a totally different ZIP code. So the $150 million this year was really driven by, we're already spending in excess of $100 million in what we've already committed a really good projects and we expect to find a few more things to do this year. So we wanted to at least give you some idea of the magnitude of that. So does that answer your question? Yes, thatâs very helpful. And just if I could ask a quick bonus around one, if I could. Just if you had any opinion about the delta we're seeing in the weekly versus monthly EIA product demand numbers and how if that impacts Magellan? I really don't have an opinion on it. We are focused on really what our customers are doing. And I just don't have a direct opinion on it. I want to go back to the guidance, and I'll try and keep it broad. We kind of looked over the last five or six years or so, and it looks like you guys have beaten your initial guidance every single year other than 2020, and I think there's a pretty good reason to give you a pass on that one. But from an outsider's perspective, it would seem like you all take a pretty conservative approach to guidance. So I guess I'm just curious, as you think about the guidance and maybe where some potential sources of upside surprise could be, anything you can kind of highlight? Maybe another way of asking is, what's not in the guidance? Well, I mean, a couple of things I would highlight. Everything that we foresee or expect, we've tried to reflect in this guidance. For example, the basis differential we just talked about, we tried to give you really clear guidance of what we assume there. We're assuming it's better than it was last year, but it's still not as great as it was historically. We think that's going to hold. But we'll see how the year plays out on a volatility around basis. So that's one area. Commodity prices, what's going to happen with crude oil prices? We're using an $80 strip basically for the year. Could they be better or worse? That's an area we tried to give you some sensitivities around that based on what's left to be unhedged and our tenders in our product. So that's an area that, depending on what commodity prices do in either direction that could influence where we end up. The long haul shipments, we do have some expectation that we're going to continue to get some longer haul shipments. We've got a heavy slate of refinery maintenance is sort of expected in the first part of the year, we generally benefit. But then there's the whole element of unexpected, unplanned outages and refineries have been running really hard for a very long time and we've seen a higher level of unplanned outages, frankly. And to the extent we have unplanned outages, that's usually a good thing for us. And it's difficult for us to predict what those unplanned outages are going to do. But if we start seeing a lot of unplanned outages, we would expect on average to benefit from that. So we've tried to take into account what we can see on outages, but the unplanned outages are just very difficult to predict. It depends on where it happens, how long it happens, the nature of the outage itself. So it's difficult to predict that that's something that could traditionally be good for us. So I think it's really that simple. It's what happens with unplanned outages, what happens with the actual commodity markets, basis differential. And outside of those, we've really tried to provide the guidance that reflects what we think is going to happen this year. Second question is on storage. I guess I'm just curious, how would you characterize directionally how that market's been moving maybe since the last year? I know pretty subdued here, but just curious what's going to take to see the economics improve there? Is it really just a function of the futures curve at this point or is there something structural that could occur to kind of get that moving higher? At the end of the day, I think on the margin, it's the structure of the curve itself. I mean the reality is right now, when we go talk to the market about wanting to take storage, the forward curve is really difficult for those that are looking at future prices in order to justify taking stores. So I think the futures and the shape of the curve will have to move more back into a contango before we see what I would consider a market difference. Now there are some operational things. Exports wanting to lead the Gulf Coast, the continued growth in our HOU contract. There are some things that can create demand for our storage that could help us. But I think those are going to be overshadowed by just the overall forward market structure in terms of for things to really turn and look a lot, lot better for the storage market, we think that's what has to happen. With that said, we've had some left renewing some contracts at some rates that we think were pretty attractive. But those are being done for what I'm going to say, more operational and logistical purposes, more so than just an idea of I'm going to take storage out and the price is going to be higher tomorrow. We do have a set of customers that are less sensitive to that forward curve. But again, to change the real direction of the storage business, we'll need to see the forward curve improve, but it doesn't mean we're lacking some opportunities to do a little better. And to your point [Multiple Speakers] is it the same now as it was last year? It feels about the same. Some days feel a little better, some days don't. but it feels generally about the same. First, just thank you for all the disclosure. And Aaron, when you lay these things out, the transparency really is top notch versus your peers and actually remove some of the questions we all have. So first, I wanted to start on -- just a follow-up on distribution growth. So I get the logic of the buybacks and growing DCF per unit. What's a little interesting is your peers are doing the opposite, so they're growing distributions faster, especially the [MLP] peers doing less on buybacks, especially as the stocks have moved higher. So I'm curious if what the peers are doing weighs at all into your thinking on capital allocation over time as you're competing for investor dollars, or are you more focused just on what makes sense for Magellan economically? Well, first of all, thanks for the compliment on the transparency. We try, and I think we're successful most of the time. So I do appreciate that being recognized. Now to your question about distribution growth, just to be brutally frank, we don't think a lot about what our peers are doing in terms of their distribution growth and their buybacks because we're not running their company, we're not responsible for their company, they are, and they need to make their decisions based on what they see about their company. So we focus on what we're trying to accomplish and what we see happening with our company. And we think it's going to be really powerful to have a really healthy distribution. I mean it's an almost 8% yield. We've never cut it and we've always grown it for 21 years, and that's important. And then when you compare that to our ability to drive what we think could be significant capital appreciation, if we grow our DCF per unit, you put that together, and we think we've got a really powerful value proposition for our company. Other people may view their value proposition and what they're trying to accomplish differently. So we're certainly aware of what others are doing but it doesn't influence how we're trying to run our company. Second one, just a clarification, the oil sensitivity. So $10 per barrel change is $35 million. Is that holding all other variables like butane costs constant or it's making an adjustment there in line with oil? That's an overall cash flow sensitivity to a $10 change. So it's not holding everything constant as a result, it's letting everything sort of flow through as it would flow through. But it's very much a sensitivity, and Keith meant to be, what I would say, a barometer or thumb in the year than it is meant to be an exact number, but that's the magnitude of an impact of a $10 change overall. The one thing I would highlight though is that we are considering the hedges we already have in place. So that sensitivity only applies to the things that we have yet to hedge in our tenders, and then also our product overages, which we collect those throughout the year. And so that's what the difference is, unhedged butane and blending, tenders and product and a $10 change. So we have taken into account the hedges already in place. I wanted to start maybe on the crude pipelines. We've seen, obviously, Permian overall kind of built from over from a top-down perspective. Corpus lines getting a little bit tighter, though, given the export pull. I'd just be curious, if you think we start to see maybe any benefits for the Houston bound pipes as Corpus starts to fill up or really, if that's more of a kind of '24 or '25 story? Really just trying to think about how you're thinking about those two markets and how the pipeline directions interact in 2023? So I think you've summarized the current situation pretty well. There's certainly a pull through Corpus for export purposes. And those pipes as a result are becoming more full, which should lead to barrels flowing over into the Houston pipes as production in the Permian continues to grow. So we think that's a positive setup. If you actually look at where you might see that playing out or that expectation playing out is in the differential between Midland and Houston. If you look at the forward curves, it would all point to increasing differentials, that's good for pipes. But the timeframe for that is, when you look at the forward curve, it's in that '24 to '26 sort of time frame. So I think that aligns with the statement made in your question. So I think it's probably a little bit further down the road, more of the next year or slightly beyond before I think we start really seeing how that's going to play out. But in the meantime, we've got really good contracts, so we're insulated along the way. But I think you're out in that '24 to '26 time frame, itâs going to depend on what production does and then what happens with export pull ultimately. Maybe one probably smaller micro question. Just on the Double Eagle impairment, obviously, the overall number is small. Can you just talk about maybe what the financial impact on that kind of EBITDA basis could be? So if you look at this year, we're expecting distributions of around $10 million for Double Eagle this year. It's a partial year because it expires later in the year based on our assumptions, but it's about $10 million. Historically, it's been closer to 15% on a full year basis. I wanted to ask a little bit more about the assumptions in guidance. I think historically, Magellan hasn't assumed much in terms of like product dislocations between markets within the guidance. So I'm just wondering, do you have better visibility today than maybe in years past or just maybe a more aggressive approach? When you say product dislocation, just help me with exactly what you mean, do you mean price dislocation, do you mean inventory⦠That's been an area that's always been difficult for us to predict, whether it's planned or unplanned. Refiners are typically pretty tied to the vest about when they plan to be down. So what's happening is we've just seen a more consistent longer haul barrel and certainly when planned maintenance happens. So it just becomes a little easier for us to have an expectation that we're going to get some benefit from that on those planned outages. So that's really all it is. We're just getting a little bit of visibility, a little more of a track record of seeing how it plays out. And when you combine that for this year, just a higher maintenance cycle for the refineries, we think that we're going to benefit from that. And we've included some of that into our guidance. And as I said previously, the unplanned part is what's really difficult to predict. So we really don't have anything in the guidance that says we're planning X percent of unplanned, we don't have that. But to the extent we can see turnarounds, we are trying to include some of that. So it's probably less about visibility towards it, more so than it is a track record of us seeing it more consistently is what I would say. And then one more on the on the guidance. I was wondering if you made any like methodological adjustments, or if the provided sensitivities was just additional disclosure that you all wanted because I don't think you've provided that in the past? We have provided different sensitivities, or I should say we've tried to provide some sensitivities, especially around commodities and crude prices. So that's not new for us. And there's really no methodology change in how we think about guidance. We're looking at it the same way. Again, the changes will be to the extent, for instance, on the longer haul pipe movement, because we assume we have more of a track record of seeing it, we've got some of that in it. But there isn't any methodological change in how we're producing guidance or thinking about guidance and the sensitivities aren't new. In previous years, you've talked about the July 1 step up, but then also talked about due to mix shift headline number that you kind of print on tariff basis for the refined products segment may be lower than that. Just wondering if you're seeing any of that dynamic as you look out to '23, understanding it's hard to predict planned and unplanned maintenance? And then I guess just also thinking about the higher than average rate increase planned here in July, however, it's allocated between competitive and index markets. Assuming maybe another high number in '24, is there a point at which you start becoming concerned about over earning risk as it relates to -- I know the Page 700 has pros and cons, but over earning on that, if we get a couple of years of these mid to high single digit growth rates on the tariffs? I wouldn't say that we worry about it, but it is something that we're aware of. I mean we certainly are aware of the calculations in the Page 700 and we try and be sensitive to them. At the end of the day, we'll make our rate decisions considering what that says. But if we run a really good price, take really good care of our customers and you look at what our rates are as a percentage of the overall, the mix of things, it's not that material in the grand scheme of things. So as long as we're thoughtful -- and I'm not worried about over-earning, but it's something that we have to be aware of, obviously. And maybe if I could fit one more. And you talked about how some of your markets are still below 2019 levels, and this maybe the new normal. But I guess any kind of sensitivity with respect to if certain markets did kind of get back to 2019, what upside could that be to volumes, whether it happens in '23, '24, 2030, whatever it is? How material would that be to your existing system volumes? I really -- first of all, I don't think it's going to be material one way or the other. So if you're using that 1% sensitivity that we gave you, it's probably within that bound with the rate and/or the volume, itâs probably within those bounds. But I don't have that specific sensitivity right in front of me. Itâs just going to depend on the different components. Is it multiple metro areas, do they come all the way back, a part of the way back and there's infinite kind of varieties there. So it's⦠And the thing I would highlight is I don't want to sort of sound overly pessimistic on those metropolitan areas. It's not like they're drastically different from where they were in 2019. They're just down a little bit. But the reality is we would have expected them to come back and they just haven't. and we're trying to make everyone aware of that, but it's not drastically different. Well, thank you for your time today. We're pleased with the solid results generated by Magellan in 2022 and look forward to an even stronger financial performance in the year ahead. We remain committed to running our business responsibly, while maintaining our proven financial discipline and balanced capital allocation strategy to maximize long term value for our investors. On behalf of our company, we appreciate your continued support and hope you have a nice day. Thank you. This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you, and have a good day.
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EarningCall_696
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Good afternoon, and welcome to DoubleDown's Earnings Conference Call for the Financial Results for the Fourth Quarter and Full Year Ended December 31, 2022. My name is Victor, and I will be your operator this afternoon. Prior to this call, DoubleDown issued its unaudited financial results for the fourth quarter and full year 2022 and a press release, a copy of which has been furnished in a report on Form 6-K filed with the SEC and is available in the Investor Relations section of the company's website at www.doubledowninteractive.com. You can find a link to the Investor Relations section at the top of the home page. Joining us on today's call are DoubleDown's CEO, Mr. In Keuk Kim; and its CFO, Mr. Joe Sigrist. Following their remarks, we will open the call for questions. Thank you. Before management begins their formal remarks, we need to remind everyone that some of management's comments today will be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended, and we hereby claim the protection of the Safe Harbor provisions of the Private Securities Litigation Reform Act of1995. Forward-looking statements are statements about future events and include expectations and projections not present or historical facts and can be identified by the use of words such as may, might, will, expect, assume, believe, intend, estimate, continue, should, anticipate or other similar terms. Forward-looking statements include, and are not limited to, those regarding the company's future plans, mergers and acquisition strategy, strategic and financial objectives, expected performance and financial outlook. Forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially and adversely from what the company expects. Therefore, you should exercise caution in interpreting and relying on them. We refer you to DoubleDown's annual report on Form 20-F filed with the SEC on April 4, 2022, and other SEC filings for a more detailed discussion of the risks that could impact future operating results and financial condition. These forward-looking statements are made only as of the date of this call. The company does not undertake and expressly disclaims any obligation to update or alter the forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. During the call, management will discuss non-GAAP measures, which are believed by the management to be useful in evaluating the company's operating performance. These measures should not be considered superior to, in isolation or as a substitute for the financial results prepared in accordance with GAAP. A full reconciliation of these measures to the most directly comparable GAAP measure is available in the earnings release and on our Form 6-K filed with the SEC prior to this call. I would like to remind everyone that this call is being recorded and will be made available for replay via a link in the Investor Relations section of DoubleDown's website. Thank you, Jeff. Good afternoon, everyone. Thank you for joining us on the earnings call for our fourth quarter and full year 2022 financial results. We had another solid quarter as we finished the first quarter with strong cash flow generation of $29.1 million, when excluding a $50 million payment associated with the Benson settlement, and an adjusted EBITDA margin of over 30%, which has continued to demonstrate the effectiveness of our high-margin, capital-light business model. During 2022, we were able to achieve our full year revenue of $321 million, representing an increase of over 17% compared to full year 2019 revenue, the most recent prepandemic comparable period. We believe, our proven ability to maintain our revenue above the pre-COVID level is a validation of our success in capturing and retaining growth in our customer base and player handing over the past several years. In addition to maintaining a strong base business in social casino, we also recently announced our accounting entry into the iGaming space in Europe with our planned position of SuprNation which we announced last month. SuprNation is a European-based iGaming company that provides differentiated online casino gaming experiences. We entered into a purchase agreement to acquire the business for approximately $35 million in cash, subject to certain closing assessments with closing expected during the second quarter of 2023. SuprNation generated estimated revenue of a $10.3 million in the first nine months of 2022. We were impressed by their game development in particular, their flash title us.com which offers real money gaming with unique peer-to-peer gamification and social features that we believe will improve monetization and engagement. The acquisition of SuprNation is a key strategic move for us as we diversify our revenue streams into new geographies and gaming subsectors for which we can still leverage our core competency, basically, our deep online game experience, marketing and customer acquisition capabilities and the development of engagement -- engaging gaming experience, for our loyal customers. We look forward to working with the SuprNation team to quickly initiate projects to capture synergy and growth opportunities once the execution is closed. Currently, SuprNation's largest markets are Sweden and Great Britain, although it also maintains licenses in [indiscernible]. After closing, we intend to continue to support SuprNation in its existing markets, and we may also evaluate additional strategic expansions into other regulated gaming jurisdiction. Additionally, we have been focused on our own app development and DoubleDown, as we recently initiated the soft branch of our use pinning gaming app following its recent open better period, spanning space has both single and non-casino elements. So we believe it can be an engaging game both for our existing customer base, as well as new customers. Looking further ahead, we plan for additional launches of new games in 2023, while continuing our lengthy track record of positive cash generation based on our strength in social casino. Now, I will turn it over to our CFO, Joe Sigrist to walk you through our financial before providing my closing remarks. Joe? Thank you, I.K., and good afternoon, everyone. Our revenues for the fourth quarter of 2022 decreased 12% to $76.2 million from the prior year period. For the full year of 2022, revenue also decreased 12% to $321.0 million. These decreases were primarily due to the further normalization of player activities after the lifting of stay-at-home orders and other COVID-related restrictions compared to the prior year as well as changes in player behaviors relating to inflation and global economic concerns during 2022. Despite this revenue decrease, we still generated very healthy key monetization metrics. Specifically, average revenue per daily active user or ARPDAU, increased from $0.96 in Q4 2021 to $0.98 in Q4 2022. And ARPDAU for the full year 2022 stayed consistent at $0.97 compared to the full year 2021. Average monthly revenue per payer increased from $216 in Q4 2021 to $227 in Q4 2022. And average monthly revenue per payer for the full year 2022 increased to $226, compared to $218 for the full year 2021. Lastly, payer conversion ratio, which is the percentage of players who pay DoubleDown, was down slightly from 5.5% in Q4 2021 to 5.4% in Q4 2022. For the full year 2022, payer conversion ratio decreased to 5.3% from 5.7% in 2021. Total operating expenses increased from $62.7 million in the fourth quarter of 2021 to $321.4 million in the fourth quarter of 2022. The increase was due primarily to a $269.9 million non-cash impairment of goodwill. This impairment was made in accordance with US GAAP, which requires us to regularly evaluate the value we ascribe to the goodwill on our balance sheet. The non-cash goodwill impairment was a result of the decrease in the market price of our ADSs in 2022. It is important to note that this impairment is purely driven by accounting principles is non-cash and has no fundamental impact to our business. The overall increase in fourth quarter 2022 operating expenses was partially offset by lower cost of revenues and decreased marketing expenditures. Excluding the one-time goodwill impairment charge, operating costs for the fourth quarter would have decreased to $51.5 million, primarily due to lower cost of revenues and decreased marketing expenditures. For the full year 2022, total operating expenses were $634.9 million, an increase from $264.5 million in the prior year period. The increase was primarily driven by the non-cash goodwill impairment I previously mentioned, along with a charge of $141.75 million, reflecting the incremental charge in 2022 associated with the agreement in principle to settle the Benson class action complaint and associated proceedings. As many of you know, DoubleDown agreed to contribute $145.25 million in the settlement of the Benson case, which was announced on August 29th of last year. Excluding these one-time non-recurring charges, operating expenses in 2022 would have decreased to $233.3 million primarily due to lower cost of revenues decreased marketing expenditures and lower depreciation and amortization expenses. Sales and marketing expenses for the fourth quarter of 2022 were $16.9 million, a 23% reduction compared to Q4 2021. You may recall that in Q4 2021, we ramped up spending for Undead World: Hero Survival, but have since reduced investment on that title. For the full year 2022, sales and marketing expenses were $71.9 million compared to sales and marketing expenses of $78.8 million for full year 2021. It is also worth noting that depreciation and amortization expenses in Q4 2022 were $50,000 compared to $2.2 million in Q4 2021 and were $3.8 million for the full year 2022 compared to $17.9 million for the full year 2021. The decreases were due to the completed amortization of certain identifiable intangible assets for which we use purchase price allocation at the time of the 2017 DoubleDown Interactive acquisition. We recorded a net loss of $194.4 million for the fourth quarter of 2022 or a loss of $78.47 per diluted share and $3.92 per ADS compared to a net income of $17.4 million or $7.04 per diluted share and $0.35 per ADS in the fourth quarter of 2021. The decrease is due almost entirely to the non-cash Goodwill impairment. For the full year of Net income decreased to a loss of $234.0 million or a loss of $94.43 per diluted share and $4.72 per ADS compared to a net income of $78.1 million or $33.91 per diluted share and $1.70 per ADS for the full year 2021. The decrease is due almost entirely to the non-cash Goodwill impairment and the Benson accrual. Adjusted EBITDA for the fourth quarter of 2022 was $24.7 million, compared to $25.8 million for the prior year quarter. Adjusted EBITDA margin was 32.4% for Q4 2022. And representing an improvement from 29.9% in Q4 2021. The decrease in adjusted EBITDA was primarily due to lower revenue in the fourth quarter of 2022 and with a higher adjusted EBITDA margin attributable to lower marketing expenditures. For the full-year of 2022, adjusted EBITDA decreased to $101.6 million compared to 2021 at approximately $120.1 million. 2022 full year adjusted EBITDA margin was 31.6%, a reduction from 33.1% for full year 2021. Adjusted EBITDA and adjusted EBITDA margin are non-GAAP measures, which we believe are useful in evaluating our operating performance, especially given the non-cash impairment in Goodwill that has effective traditionally used metrics for valuation valuations like net income. A full reconciliation of these measures to the most directly comparable GAAP measure is available in the earnings release. Net cash flows used in operations were $20.8 million for the fourth quarter of 2022 compared to net cash flows generated from operations of $20.6 million in the prior year period. The change is entirely the result of the $50 million payment we made during the fourth quarter of 2022 towards the Benson settlement. Excluding this payment, we generated $29.1 million in net cash flows from operations in the quarter. You will notice that the loss contingency line item on our balance sheet associated with the Benson settlement had a corresponding decrease associated with this payment compared to that of the third quarter 2022. For the full year, net cash flows from operations were $50.8 million compared to net cash flows from operations of $96.1 million for full year 2021. The year-over-year decrease is again due to the $50 million payment towards the Benson settlement. Excluding the $50 million payment towards the Benson settlement, net cash flows from operations in 2022 were $100.8 million. And we did not incur any material capital expenditures during the year. Finally, turning to our balance sheet. At the end of 2022, we had $285.2 million in cash, cash equivalents and short-term investments compared to $242.1 million at the end of 2021. The increase in our cash position was primarily due to net cash flows generated from operations during the year, partially offset by the payment made for the Benson settlement. Our total debt at the end of 2022 was $39.5 million. Thank you, Joe. Looking ahead, we are eagerly working towards a full global launch of Spinning in Space in the coming weeks, as we execute on our strategy to provide compelling and innovative gaming options for our players. It is also important to remember that the development of our pipeline of new titles outside of the social casino segment and continued reinvestment into our flagship DoubleDown casino app to introduce new meta features and slot games are accomplished within our existing R&D budget during 2022. We are also excited to close and integrate the SuprNation acquisition as we enter a new growth market and expand DoubleDown's reach. We see strong synergy opportunities between the two companies, as we bring our leading online gaming experience and track record to the compelling games the SuprNation team has developed to establish a solid presence in their core markets. While this acquisition will provide us with new growth opportunities, we will continue to look for other M&A opportunities that can provide exposure to other growing gaming segments, diversify our business outside social casino and strengthen our overall company. We will continue to evaluate acquisition targets that have strong synergy potential, where we can leverage our existing technology platform and strength and experiencing product development, marketing user acquisition and live operations while maintaining an attractive financial model. We ended 2022 in a strong financial position of over $150 million in cash, cash equivalents and short-term investments, net of debt and the accrual on our balance sheet associated with our Benson Case action settlement. We believe DoubleDown continues to offer an attractive business model with a capital-light and flexible cost structure that is largely correlated to revenue or discretionary. We have high adjusted EBITDA margins, and we have tenured and dedicated customer base that provides healthy visibility into long-term recurring revenue. We are in a strong position to remain a leading gaming company that generated strong margins, positive cash flow and keeps low debt. We are now happy to take your questions. Operator? Thank you. [Operator Instructions] Our first question will come from the line of David Bain from B. Riley. Your line is open. Great. Thanks so much and very nice EBITDA and free cash flow results, quarterly navigation, as always. I guess my first question would be kind of a multi-part question on one topic. But I'm really hoping you could expand the Super Nation strategy and impact the strategy, maybe touch on some of the content synergies from both the top line and cost perspective as an operator now? And what specific expertise maybe you can bring in so also the real money wagering market to help customer acquisition? And if one of those licensed markets or regulated markets, IK that you mentioned would be the US? I would maybe start by saying that Super Nation has a really compelling business by themselves. And that was really actually very important to us. We're really excited about bringing the synergies and leverage the expertise and the capabilities that we have to make it even better. But I want to start by saying that their business right now in Western Europe and particularly the strength in in Sweden and the UK is actually quite strong. Where we think we can leverage the benefits of DoubleDown towards them are well, there are several fold. First, as you mentioned, content is king for slot-based apps, whether theyâd be real money gaming or social casino. We have a very long history of choosing and developing our own slot games to really excite players. Super Nation has done that as well, as they have partnered with several of the B2B players in iGaming content. We think that there are great opportunity for us to take the several dozen games that we've developed ourselves and including games that we can source through DoubleU that we can also bring to bear in their business. And of course, if they are the games that we develop ourselves, there is a significant benefit from a reduction, reduction in cost of revenue, reduction or elimination of royalties, specifically for those games. So we're excited to start working with them as soon as possible, which is when the deal closes, to look into that further. Relative to technology, they have a very thin engineering team, as you might expect for a company of their size. And we have very capable, very experienced engineers especially back office and server side engineers that we can bring to bear and we think quite quickly into the equation for them. And we're looking forward to determining exactly where and how we can do that, as we get closer to closing the deal. And then finally, from a marketing standpoint, not unlike our business, marketing is the number one cost of iGaming, just like Social Casino. And we have a lot of experience there. And we are really excited about, especially having experience on the performance marketing side, our ability to have them benefit from what we know and what we can bring on that side. Awesome. And I'm sorry, just as part of that question, just on the U.S. eventually perhaps. And I assume the focus will also sort of continue to be on EBITDA with that acquisition relative to kind of what we've seen in the U.S.? I mean, I know it's a more mature market that you're entering, but which is great from that perspective, I just wanted to confirm that. And then if I could, I just had one follow-up. Sure. Well, I'd say that before we, -- I mean, the U.S. is obviously something that's out there. But before we really would even consider the entering into the U.S., there are opportunities in other jurisdictions in Western Europe and other parts of the world that would be potentially, I guess, lower-hanging fruit or maybe specifically less costly than entering the U.S. market. Who knows what will happen down the road. But to your point, I mean, we're always focused on growing revenue with an eye on, profitability in our EBITDA and EBITDA margin. And that doesn't necessarily match with quick entry into the U.S. But there are other opportunities within Europe and as I said, other parts of the world. And by the way, including growing their market share just in Sweden and U.K., we're -- they've done very well, but they're still a small player relative to some of the big iGaming providers? Awesome. Okay. And then the last one, I'm sorry. The extraordinary general meeting that you held during the fourth quarter to reclassify which is $260 million on your balance sheet. What does that structurally allow for or what does that change? And I asked this in relation to, how we're viewing capital return optionality to shareholders at this point in terms of either buybacks or dividends? Sure. Yeah. Thanks, Dave. So as per Korean law, the ability for a Korean company of which, of course, we are to provide a return to shareholders, whether it be a dividend or stock buyback is calculated on ensuring there's enough retained earnings based on -- and this is the important part, the stand-alone Korean-only balance sheet. And so when we had it in last year, we looked into this and you've got the experts involved, the calculation of the Korean-only balance sheet was determined to not have, well, frankly, enough retained earnings for us to have any flexibility on shareholder returns if the Board chose to do that. And that's why we made that reclassification. One moment for our next question. Our next question will come from the line of Aaron Lee from Macquarie. Your line is open. Hi. Thanks for taking my question. As you noted, your margins expanded to over 32% in the quarter, which I think is a good example of the flexibility in your business. How should we think about margins in 2023, just thinking about any growth investments, UA support for new launches and the Super Nation integration? Can you maintain margins in the 30%-plus level you've been running at for the last few years? Thanks, Aaron. Nice to talk to you. There's a number of factors that we look at as we balance the desire, as I mentioned earlier, to maintain our profitability with the desire, of course, to grow. And we also recognize that -- as I mentioned also earlier, the biggest cost to a social casino company to a gaming company is the sales and marketing, is the acquisition of new users. And so as we launch new apps, we will obviously be investing in those apps. And so I would expect that we will spend somewhat more in sales and marketing in the fact that we would be investing in those new apps. However, two things that I think you can balance relative to that comment. The first is that we believe we can even be more efficient in how we invest in sales and marketing for DoubleDown casino. So we believe we have an opportunity, especially as we continue to look at our ROAs and look at our various channels that are used to acquire new users that we can be more efficient on the DDC, on the DoubleDown casino side to help offset as you will what we will be investing in new apps. And secondly, I will say that we learned from the launch of Undead World and that we believe that we can be more strategic and more efficient in how we -- even at the outset of launching a new app, how we can invest to get new users in a way that doesn't overly impact our profitability even -- as I said, even at the beginning of the launch. So I think from a sales and marketing standpoint, we're very focused on efficiency, effectiveness and managing ROAs. And that, I think, will allow us to continue to deliver the EBITDA margins that people expect from us. Great. And that's helpful. And I know you guys aren't giving guidance, but any high level thoughts just in terms of the market competition and growth in the year ahead? And should we expect to see a continuation of some of the trends we've seen over the past few years of declining DAUs, but growing ARPDAU or could we possibly see some user growth as well? Thanks. Sure. Well, I think there certainly has not been a lot of change in the last several quarters as far as the competitive landscape. And the social casino market, as we all know, has been maturing over the last several quarters, even in the post-COVID period. So we expect to continue to do very, very well in managing our very sticky user base and maintaining our players as players. But as always, most importantly, maintaining our payers as payers and continuing to, if at all possible, grow monthly average revenue per payer, which we've been really fortunate to be able to do over the last several quarters. And so we will, first and foremost, can focus on taking care of our existing payers and through our user acquisition activity, acquiring new players, but most importantly, new payers. Got you. Perfect. Thanks, Joe. And congrats on the quarter and congrats on SuprNation, looking forward to see you guys doing that well. Thank you. [Operator Instructions] One moment for our next question. Our next question comes from the line of Greg Gibas from Northland Capital. Your line is open. Hey, good afternoon, In Keuk and Joe. Thanks for taking the questions. I was wondering if you could maybe rank and discuss the European markets where SuprNation operates right now and maybe where you see the greatest opportunities for growth there, whether it's further penetrating existing markets or entering new ones? Sure, Greg. Thanks. It's good to talk to you. So as I mentioned, right now, Sweden and Great Britain are their largest markets. And they, as In Keuk mentioned, hold licenses elsewhere. As far as growth of some of in Western Europe in addition to Sweden and Great Britain, I mean there are some large markets and each of these markets -- this is not like Social Casino, where you launch an app and you're in 200-plus countries because of the app stores the next day. It's definitely by jurisdiction, by the laws and the policies associated with those jurisdictions. So we're still very excited, they are still very excited about growth in those two main markets that they have. And if you look at larger markets that are potentially enterable within a reasonable period of time in Western Europe, Italy is a large market. There are other markets that we could enter. I don't want to make a prediction or get too far into what's next discussion because we do need to focus them on what they're doing right now, first and foremost, work on the synergies that we believe they could benefit from. And then in the course of those discussions, we certainly will talk about new markets and new jurisdictions. Got it. Very helpful. And if I could maybe just follow-up on expectations outside of the core social casino or what it means to the model. I think you said it was $18 million or so in revenue for SuprNation in the first nine months of 2022. Is that a good run rate to use going forward? And then second, on Spinning in Space, I think IK said release time frame, upcoming weeks here. What are maybe your financial expectations of that game? Yes. Well, as far as the run rate, I think you can annualize the run rate, and that's probably a good estimation at this point. I will say that as it relates to close of the deal, we're still -- it's a process. As you know, regulators where they hold licenses today need to approve the deal. So, it's not a quick close. We're expecting aQ2 close, but it would certainly be towards -- right now, we're thinking towards the end of Q2, so -- for your model, let's say. As it relates to growth in other areas, I mean, I think that the Spinning in Space soft launch just happened early last week based on a successful open beta period in January. And it's early days, but we like what we see relative to the app, and there's definitely interest in this kind of app. It's kind of hybrid, social casino/journey progression, achievements-type app. And so we're excited about seeing how it grows. And then as IK mentioned, we do have other apps that we -- nothing that we'll discuss -- be able to discuss today, but we do have other apps that are teed up for launch in 2023. Thank you. And at this time, this concludes our question-and-answer session. I'd now like to turn the callback over to Mr. Sigrist. Victor, thanks very much, and thank you for joining our call today and your interest in DoubleDown. We look forward to sharing our future updates as we continue to innovate and grow within the global digital gaming industry, and have a great rest of your day.
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Greetings. I am Peter Kweon, the Head of IR at KBFG. We will now begin the 2022 Annual Business Results Presentation. I would like to express my deepest gratitude to everyone for participating today. We have here with us our group CFO and SEVP, Scott YH Seo, as well as other members from our group management. We will first hear the 2022 annual major financial highlights from our CFO and SEVP, and then have a Q&A session. Before looking at the details of the income statement, I will briefly run through the highlights of business performance and key indicators of the group. KBFG's FY '22 net profit was KRW4,413.3 billion, flat year-over-year but has underperformed market expectations or the consensus estimates of the analysts. EPS for '22 was KRW11,002, down 1.2% year-over-year, and ROE on common stock basis was 9.9%. As a CFO, it's regretful to have to announce results that fall short of expectations of shareholders and investors. Biggest reason why we fell short of market expectations in '22 net profit is due to preemptive provisioning based on conservative FLC, forward-looking criteria. For three years up to '22 with the outbreak and spread of COVID-19 and living with COVID, experiences which no one expected drove sense of instability and brought uncertainties to global economy and the financial markets, which heightened concerns. We expect macro uncertainties to grow this year globally and the signals for recession in the domestic economy across consumption, investment and exports are becoming more visible, building on the concern over rise in delinquency ratio and NPL ratio. At KBFG, to thoroughly prepare against such event, we adopted a more conservative FLC future -- forward-looking criteria versus previous years. Preemptive provisions for domestic operations in '22, reflecting conservative FLC, was KRW242 billion, up more than 30% year-over-year. This is to secure ample room if and when credit risks heighten. Next, provisions for overseas banks who we acquired that we set aside in Q4 on a consolidated basis was KRW570 billion and was KRW382 billion on an equity holding basis. Although local supervisors continue to operate COVID-19-related forbearance program to prepare for possible deterioration once the program ends, KBFG decided to provision preemptively based on our own credit assessment principles. This additional provisioning done for domestic and overseas was under a conservative approach to enhance forward-looking projections, and as such, there will not be such a large-scale provisioning for overseas operations in the future. If such preemptive provisioning was absent, [2020] (ph) group net profit would have been KRW4.971 trillion, which is on par or above market expectations. Common equity-based ROE would have been 11.1%, highest ever in the past decade. This level of earnings for the group has yet again proven our solid fundamentals even under difficult and uncertain financial market and the overall economy. Drag from securities and trading has been offset by stronger performances from traditional lending and deposit taking of the bank and the P&C insurance business. Q4 consolidated net profit was KRW385.4 billion. Net profit saw a big decline Q-on-Q due to seasonal one-off factors, including ERP and preemptive and additional provisioning, but excluding such impact, on a running basis, net profit reported around KRW1.2 trillion keeping to our solid earnings capacity. Next, group's 2022 credit cost on a consolidated basis was 43 basis points against total loans. On preemptive provisioning for domestic and overseas, group credit cost showed steep rise in '22, but excluding this impact, credit cost on a recurring basis reported 26 basis points, staying within a steady level. Also, NPL coverage ratio as of end of '22 on a domestic operations basis was up 7 percentage points year-to-date to 216%. Considering industry top NPL coverage, I believe KBFG has sufficient buffer to fend off possible domestic and global uncertainties that may emerge in the future. Lastly, KBFG's BoD today approved a resolution to increase shareholder return rate up by 7 percentage points versus last year to 33%. In more detail, '22 cash dividend payout ratio was decided at 26%. On top of which, there will be KRW300 billion of share buyback and cancellation. Also, including KRW1,500 of quarterly dividend already paid out, EPS for FY '22 was KRW2,951, marginally up from KRW2,941 last year. We will start buying treasury shares starting tomorrow, and it will last for three months. And immediately following the end of that period, those treasury shares will be canceled. I will go into more details on the capital management plan, including dividend policy on the very last page of the presentation. Next, I will go into more detail on each of the line items. FY '22 group's net interest income was KRW11,381.4 billion, up 18.9% year-on-year, while Q4 was KRW3,042.2 billion, up 5% Q-on-Q, driving performance improvement backed by solid loan growth and repricing of the loan book on rise in interest rates, which continue to drive up NIM. Next, group's net fee and commission income for FY '22 was around KRW3.3 trillion. On depressed stock market, trading volume fell, driving down brokerage fee income from the securities business by 45% year-over-year. And on sluggish financial product sales, the bank's trust and fund sales also posted a decline, bringing a 0.4% year-over-year decline. However, despite difficult operational backdrop, both internal and external, thanks to the group's continuing efforts behind business diversification and stronger competitiveness, fee and commission income has been above KRW3 trillion for two consecutive years, attesting to robust earnings capacity. Group's IB fee income was up around 18% year-over-year, further broadening its market dominance. Net fee commission income for the fourth quarter was KRW717.9 billion. On the back of deepening down trend in trading volume, brokerage fee income fell, and due to seasonal volatilities, IB fee income also contracted, lowering Q4 number down by approximately 12% Q-on-Q. Next is other operating profit. Group's other operating profit for FY '22 was KRW309.6 billion, showing a significant year-over-year decline, overall displaying underperformance. This is because of steep rate hikes. There were greater losses from bond investment. While due to FX rise and stock market declines, there was underperformance from securities and derivatives and FX. However, other operating profit for Q4 was at KRW196.3 billion, which is an improvement by a large margin versus last year. This is despite around KRW93 billion of valuation losses from securities investment. And on falling $1 exchange rate and bond yield, the bank saw a large improvement in securities and derivative FX-related earnings of around KRW425.5 billion Q-on-Q and base effect from insurance subsidiaries subpar performance due to previous quarter's seasonality has been removed, while loss ratio of non-life business improved, driving up insurance income by around 34% Q-on-Q. Next, I will cover group G&A expenses. 2022 G&A expenses posted around KRW7,537.8 billion. This was an increase of about 4.7% compared to the previous year. And despite the increase in the size and cost of ERP in a situation where the group's digitalization-related investment is expanding, thanks to company-wide cost management efforts and efforts to improve the efficiency of the workforce structure, training is being well managed. On the other hand, Q4 G&A expenses posted KRW2,357.7 billion, and due to seasonal factors, including around KRW316 billion [of ERP] (ph) costs, it decreased significantly Q-o-Q. The following is the group provision for credit losses. 2022 Q4 group's consolidated provision for credit losses amounted to KRW1,060.7 billion, a significant increase compared to the previous quarter. As mentioned earlier, this was on the back of preemptive large-scale additional provisioning. And excluding this, provisioning amount on a recurring level posted around a KRW370 billion level. On the other hand, the amount of provision for credit losses on a consolidated basis in 2022 posted KRW1,835.9 billion, excluding one-off items such as preemptive accumulation of additional loan loss provisions on a recurring basis has posted about KRW1.1 trillion. On the next page, I will cover key financial indicators. First, the group profitability in the upper left corner. As mentioned earlier, the group ROE in 2022 posted 9.9%. Next, looking at the bank loans in won growth graph in the middle, as of end 2022, bank loans in won posted KRW329 trillion, an increase by 3.1% YTD and maintained a similar level compared to late September. Among the loans, corporate loans posted KRW163 trillion and SME, SOHO and large corporate loans all had balanced growth. And on the back of this, it grew 9.4% YTD and realized a sound growth trend. On the other hand, corporate loans decreased slightly by 0.2% compared to the end of September, and this was due to decrease in SOHO loan demand due to rising loan interest rates and economic slowdown and also due to overall year-end debt recovery increased, including large corporations. On the other hand, household loans recorded KRW166 trillion, and due to steep rise in loan interest rates and influence of loan regulations, it decreased by about 2.4% YTD, centering on unsecured loans. However, with a 0.2% growth Q-on-Q, there was a slight stabilization of household loans, which have been declining throughout the year, and in particular, housing loans due to increased real demand just in Q4 increased by about KRW1.7 trillion. Next, I will cover the net interest margin. 2022 Q4 group and bank NIM recorded 1.99% and 1.77%, respectively, and improved by 1 bp Q-o-Q. Bank NIM due to increase in core deposits and increase in term deposits led to funding cost burden increase, and had a limited expansion until Q3 of the previous year, but with the still continued loan asset repricing effect the overall improvement trend is continuing. On the other hand, regarding group and bank 2022 annual NIM with steady loan asset repricing reflecting interest rate increase as a result of profitability centered loan portfolio management and efforts to enhance managed asset yields, there was a 13 bp and 15 bp sizable increase Y-o-Y, respectively, and led the group's interest income expansion. Let's go to the next page. First, I will cover group cost efficiency. 2022 group CIR recorded 50.2%. And despite the expansion of the group's ERP volume on the back of solid growth in core earnings, there was only a slight increase Y-o-Y. Recurring CIR is being managed at a stable level at 46.7%, excluding one-off items, including ERP and digitalization costs. Going forward, we will continue to strengthen our top-line profit generation capabilities. And through group-wide cost management efforts, we will further improve the group's cost efficiency. Finally, I would like to cover the group's capital ratio. As the end of 2022, group's BIS ratio posted 16.16%. CET1 ratio recorded 13.25% and we are maintaining the industry's highest level robust capital adequacy against economic slowdown and macro uncertainty. In particular, for the BIS ratio, despite the corporate loan center growth, rise in exchange rate and stock price decline leading to RWA increase, on the back of capital management efforts, including hybrid bond issuance and flexible positioning strategy, rose 39 bp YTD. On this page, I would like to cover KB Financial Group's mid- to long-term capital management plan. The domestic financial market in 2022 had a rapid change in the macro environment, including steep rise in the key interest rate, sharp rise in $1 exchange rate and expansion of global inflation. In the industry overall, there was greater interest and concern about loss absorption capability against the economic shock, in other words, capital ratio and adequacy. Accordingly, KB Financial Group, while increasing the group's capital ratio and managing it at a stable level to respond to economic shocks that may occur in the future, we'll expand shareholder value and pursue a continuous shareholder return policy. And to this end, we established a mid- to long-term capital management plan for the group. To this end, in early December 2022, after deriving KB Financial Group's optimal capital structure based on robust capital capability and abundant liquidity, our management plan was established. After this through in-depth consideration and sufficient discussion between the management and the BoD, we came out with a capital management plan that takes into account complex factors, including appropriate capital ratio, asset growth rate and shareholder return policy. Please look at the right side of the page, and I will explain in detail about our mid- to long-term capital management plan. First, our CET1 ratio maintenance target is 13%. This will not only meet the 10.5% regulatory capital ratio or RRP basis, but also as a result of the stress test reflecting a conservative scenario at the level of the IMF financial crisis, we found that if the group maintained a CET ratio of 13%, the group will secure a total of 250 bp management buffer. Secondly, KB Financial Group will pursue group's growth strategy from the perspective of shareholder value. Therefore, system growth, such as the nominal GDP growth rate, will be used as the basic benchmark, and we will pursue flexible capital allocation and asset growth strategies considering macroeconomic, regulatory environment and business objectives. In addition, with efficient asset management, we will make efforts to improve ROA and PBR in parallel. Thirdly, after achieving the aforementioned asset growth target, if exceeding target CET1 ratio of 13%, as long as there are no changes in the supervisory regulatory environment or financial market volatility or special reason for the business purpose of the company, our principal will be to actively return to our shareholders. Fourth, KB Financial Group, based on solid fundamentals and industry highest level capital strength while maintaining the cash dividend payout ratio and amount at a stable level, we'll utilize various shareholder return tools such as share buyback and cancellations and gradually increase our total shareholder return ratio. In order to continuously expand shareholder value and stability of dividends must be secured along with the expansion of shareholder return ratio, each year, we plan to maintain at least the same level of DPS at the minimum at the same level as the previous year and gradually increase it so that we can provide stable payout to our shareholders. If KBFG's valuations, absolute and relative discounted transactions continue, we will actively implement share buyback and cancellations. Finally, KB Financial Group will do our best to play our role as Korea's representative financial institution and do our best to harmonize this with shareholder interest. As previously mentioned, KB Financial Group subsidiaries, including our bank, is the most important source of liquidity for economic entities, and we believe that proportion of the role of KB Financial Group occupies in maintaining the stability of the domestic financial system is by no means small. Accordingly, KBFG as Korea's representative financial institution at a time when the [unique] (ph) functions and roles of financial institutions are needed, including stability of the domestic financial system and soft landing of economic entities in response to economic fluctuations, we will comprehensively review all interest, including shareholders and stakeholders and implement our capital policy. For the stability of the social system, we plan to faithfully fulfill the role of the group at a time when it is needed. And to this end, we plan to have our sustainable growth in parallel with the expansion of shareholder profits. Through the group's mid- to long-term capital management plan, I have covered so far, going forward, we believe that we have come up with a framework, which has developed a level further to implement a more sophisticated capital management and advanced capital policies. We promise you that we will more faithfully implement and develop this further to more solidify the group's sustainable growth, and at the same time, do our best to implement the industry's leading shareholder return policy. We will do our best. From the next page, there is detailed data regarding the business performance I have covered so far, and please refer to it, if needed. With this, I will conclude my report on 2022 business performance report of KBFG. Thank you for your attention. Thank you very much for taking my question. My first question relates to your shareholder return policy. You did provide us with the detail, but I still do have a couple of items that I want to clarify. In terms of the total shareholder return rate, what is your target? And how do you break that between dividend and share buyback? I would like to understand how you're going to balance between the two. And you've been paying out on a quarterly basis, and I am wondering what your plans are, quarterly dividend or year-end dividend payout? Would there be any change in your dividend payout policies? Would like to understand that in more detail. And also last year, if my memory is correct, there was no shareholder buyback, but I believe that going forward, you will be quite aggressive in share buyback and cancellation. And you talked about CET1 ratio of target of 13% and excess capital, you would use aggressively to pay dividend. But when you achieve CET 13%, one-third, about KRW12 billion of share buyback was announced by J.P. So, I'm just wondering whether you would move very aggressively and actively in actually paying out your dividend. And I would like to understand the shares, did you buy back, how would you use them? Some of the global companies rather than canceling them, they would use it to compensate their executives and employees. I would like to understand what your plans are with regards to that practice. Thank you. Thank you very much for the question. That is a quite difficult question to tackle. As I presented at the beginning, we came up with the mid- to long-term capital management plan. And I can tell you for certain that this was not attributable to any outside drivers, but we felt that internally, it was necessary for us to really provide a strong commitment to the market. I just wanted to preface this answer with that. If you look at capital management, we look towards advanced countries, U.S., Japan, Singapore and Australia. There are multiple number of countries that we looked into. We studied them and we adopted them as our benchmark. But as you would appreciate, when we need to talk about the dividend payout, we need to first start off with our target CET1 ratio. We also need assumptions on growth. And thirdly, with regards to the excess capital, we need to have a principle and discipline in place. At this point in time, last year, our group's ROE on a common equity basis, was 9.9%. Now, for this year, if the nominal GDP growth rate for '23 was assumed at 5% -- this is just for illustrative purposes, let me remind you. Now, so if nominal GDP growth was 5%, if there's 5% asset growth for the group, then in 2023, we would reach ROE of 9.9%. So, under this capacity, this means that we cannot increase our payout ratio to 50%. It is just simple arithmetic, so you would understand this. So, based on our basic capital plan, through asset growth, increasing leverage and increasing ROE rather than taking that approach, what I want to emphasize that we would like to increase ROA continuously. And the way we could do that is a steady credit cost and SG&A, strong control over G&A, and noninterest income increase, that's the way for us to increase the ROE. You'd mentioned J.P. Morgan of U.S. For us to pay our dividends like J.P. Morgan, basically, ROE or ROA would have to rise significantly from where we are today. Our CET1 ratio target, if we meet that 13% target and as the biggest financial company, if we achieve the asset growth up to our potential, basically, our principal and discipline of paying back to the shareholders whatever is left in terms of excess capital is a strong commitment. Just want to emphasize it as well. And then you asked about how we will be paying out, in terms of our quarterly payout plan. We have no plan to change that. Just as we've done in 2022, it will be done in the same manner. Third question relating to the treasury shares. We bought -- we mentioned that we will buy KRW300 billion of treasury shares and immediately cancel them. If you look at treasury shares, when you purchase, the market principle is that you should cancel immediately. When we return back to our shareholders, and this will be an element that we will put a lot of interest in. And as I also previously mentioned, for shareholder return and shareholder value, returning back to shareholders is very important. But our price to book or price to earnings at this point is very much at the lower level. Under that situation, share buyback and share cancellation is something that we are planning to progressively expand going forward. Thank you very much for this opportunity for me to ask questions. And I would like to ask about provisioning for your overseas subsidiaries. And I know that related to Bukopin, probably the provision is for that. And I think you mentioned this briefly. And can you tell us about the operations? And regarding the provisioning, if it will not be burden for the future if it's already sufficient at this level? And I know that you are working to normalize the operations of this bank. And when do you think this bank will add to your earnings to the group? Are there other overseas subsidiaries that you can tell us about that may lead to these types of provisioning or losses? Or are there any positive movements for overseas subsidiaries? If you can answer that, it will be helpful. And in 2023 guidance, I would like to ask you questions, because looking at your book compared to your competitors, regarding your loan growth or others, it seems that it's a bit lower. So, can you tell us about 2023 guidance, NIM and loan growth and credit cost guidance and your bottom-line, what kind of growth that you are envisaging based on your guidance for 2023? Thank you very much for you questions. And regarding Bukopin, I would like to explain a bit more about the situation. I'm the CFO, so maybe I can explain about the financials. And from KBFG, we can hear about the situation more from our CGSO, Cho Nam Hoon. Regarding Bukopin, to explain the situation, in 2018, in July, Indonesia's mid to large bank, Bukopin shares were acquired. And in July of 2020, we had -- and in September, we had third-party allotment of capital increase. So, we have about 67% of shares as of now, and we are the largest shareholder. The reason why we decided to acquire Bukopin because we paid attention to the possibility potential of Indonesia, it is because they have a very high economic growth rate. Compared to other countries, they have very strong internal demand economic structure and abundant resources and a middle-class increase. They have a very large population of 270 million. And we found that they have a lower utilization rate of financial service. So, we found that it's a very attractive market. And we tried to enter into the local market very quickly through acquiring the shares of Bukopin Bank. And by acquiring this mid to long -- mid to large bank with a large customer structure with very vast sales operations, we believe that we could have a differentiated move compared to other Korean banks that were pursuing organic growth. However, Bukopin Bank after -- although we made many efforts to turn around Bukopin Bank, there was the COVID-19 situation that became prolonged, and the top-line growth that we had thought of in the beginning was actually delayed. And there was the NPLs of the loans, so it went against our expectations in 2021 in November. There was the third-party allotment of capital increase. So, there was about KRW390 billion of the burden, and we had KRW640 billion of capital increase that we have determined as of now. And until now currently, we have three rounds of investment after getting the shares and total IDR, KRW982.2 billion, which is about KRW790 billion actually that we had invested as shares and the net asset value of Bukopin is IDR11.6 billion. And we had very conservative provisioning for Bukopin. So, I would like to emphasize that and for the Indonesian regulatory authorities, you can see the growth NPL ratios of Bukopin is 6.2% and NPR is KRW2.8 trillion. And on a consolidated basis as of end 2022, the total provision is KRW57 billion -- KRW570 billion and compared to the NPL, you can see that provisioning is much higher than this amount. So that is why this is very preemptive provisioning that we have implemented. For the additional provisioning this year, we believe that it is sufficient enough to absorb the future NPLs. So, we believe that we will not have more provisioning against future losses. And we believe that this will be the year 2023 to cut our ties with these NPLs so that we will not have any additional burden because of this. I am Global Strategy Head, Cho Nam Hoon. Regarding Bukopin and when it can add to the earnings of our group, well, because this is not normalized as of now, so we believe that we will need a bit more time for it to become normalized. And we are managing this situation with a long-term perspective. And as was mentioned by our CFO previously, compared to what we had planned, it is true that we have been delayed for two to three years for the normalization of Bukopin. And I am quite prudent -- but because we had sizable provisioning this year, although it has not been normalized yet, I think prudently, we can estimate that by 2026, we can have -- 2025, actually where we can make a profit. And we believe that by 2026, it can add to our ROE, at least not work against our ROE, and we are doing our best to faithfully implement our plans for normalization. And for our other subsidiaries, for 2022, there was Cambodia PRASAC that we had acquired another bank, and there's also other overseas subsidiaries that we had acquired and established. Then they are being managed well for asset quality. And for their earnings actually, they are actually quite positive even going over our expectations. So, it is not a burden to us in our earnings. And we believe that the contribution they can make to our earnings will become very positive going forward. Thank you very much. I am [Kim Sung Hyun] (ph), the CFO of the bank. And for loan growth, I would like to answer your question. In Q4, for the household loans, there was KRW0.4 trillion growth -- KRW0.2 trillion growth and strategically in Q4, there were securities KRW9.9 trillion growth. And for this year, I would like to comment on loan growth rate. 3% to 4% that we are estimating as an outlook, but we do have the interest rate burden we are seeing a lot of the repayment of the loans, and there is the special program loan situation and corporate loan market is stabilizing. So, we believe that large core demand will stabilize. So, we believe that going forward, the loan growth -- loan book growth will be a bit lower than expected, but we will do our best to meet the real demand in the market. And we are focusing more on profitability and asset quality on high-quality loans rather than just size --growth based on size. Thank you very much. Just to add to that answer, for our capital management plan, I mentioned that for the asset growth, well it will follow system growth for the midterm plans. And regarding the guidance for 2023 that you asked about, well, in principle, we don't give our net earnings guidance NP guidance, but what I can comment on is that with IFRS 17 change for accounting and when this macro situation continues and taking into account our preemptive provisioning, then 2023 earnings guidance will be quite positive. And when we have these earnings releases related to Bukopin preemptive provisioning and FLC preemptive provisioning, if excluding that, then it would have been KRW4.9 trillion of additional of these earnings. So, we believe that this will become sufficient guidance for 2023. Thank you. Hi. Thank you for taking my questions. I have a follow-up on capital return. So, it's really around -- you mentioned that 2023 profit will still be very good and, to loan growth, it's relatively subdued. I just wanted to [plug] (ph) those numbers together and given your CET1 ratio already ahead of a 13% target, so is it possible that the payout ratio, including buybacks, is going to be materially higher than what you have for this year, so probably somewhere around 40% or even 50% range? Thank you. Yes, once again, from a mid- to long-term capital management plan, we have a very detailed plan laid out. But as I mentioned before, our principle once again is not to give out a specific number in terms of the payout ratio target. But as you've mentioned, once we achieve the net profit target internally and once we have enough of the capital ratio, as mentioned under the mid- to long-term capital management plan, our clear principle that we shared with you previously is something that we will faithfully comply with. Thank you for the opportunity. I have three questions. The first question could be a detailed question, and you mentioned towards a target and you told us about excess return -- excess capital return. And I believe that it can be finalized at the end of the year. And like today, we will see the earnings finalized at the end of February, and you mentioned that you will have share buyback from tomorrow. So, do you think this will be the schedule going forward if you have the cancellation of the shares? So, after the end of the year when everything is finalized, so at the end of the financial year, so it will be included in the previous year's shareholder return? And at the end of the year, if you did not reach 13% CET1 ratio, then it will be hard to expect your buyback? But could we also expect more dividends in this situation? And regarding the credit risk, I know that you have seen some provisioning. So, can you tell us about your plans for the CET1 ratio, taking these factors into consideration? Thank you very much. Thank you for various questions, and I would like to answer those questions. We mentioned our mid capital management and dividend plan and maybe I was not clear enough, so I would like to emphasize this once again. For cash dividends, compared to the past -- compared to the previous year, our principle is not to actually have at a level lower than the previous year. So that is our principle. And secondly, for shareholder return that you aforementioned, for a share buyback, as was mentioned in your question, for the KRW300 billion of these shares, well, this will be included in the 2022 TSR, total shareholder return, and there is government-initiated dividend related change for the dividends. And when this is confirmed, then of course, we will include that if the change is confirmed. So, we will communicate with the bank regarding this. And for the Basel III credit risk, well, I would like to ask our group CRO, Cheal Soo Choi, to answer that question. Yes, regarding Basel III, I would like to answer your question for the credit risk. I'm the CRO. And we have actually implemented that already. And for this year, for Basel III, there's market risk and operational risk that we will implement. And for market risks on sensitivity and for operational alerts, there are some multiples -- internal multiples that we will use. And for the numbers, well, we will need to divide that in March. But I think, although I cannot mention the numbers as of now for PI ratio or CET1 ratio, we believe that it will have a positive impact. And we believe that the results will probably be similar to what we have been expecting. We do not have any more questions waiting in the queue, but give us one moment. Yes, we have one question from CLSA. Please go ahead with your question. Can you hear me okay? My name is Shim Jongmin from CLSA. Thank you for taking my questions. I have one question relating to domestic economic outlook. I would like to understand what the executives take is on the future outlook of the domestic market. We hear these days a lot about the real estate market, and SOHO loans in the past have grown quite steeply. And so, there's a concern relating to the real estate-related or mortgage-related loans. But is it okay for us to interpret that you are well prepared against such domestic economic recessions? Are there any areas where you are overly concerned about in terms of the domestic market? Allow me to respond to that question. With the very high rate cycle, we are clearly aware of heightened uncertainty. So, we do have concerns. We are mindful of the asset quality, of course. As our CFO has mentioned, we've been very conservative. And based on our forward-looking criteria, we have provisioned significantly. Even aside from Bukopin, we've applied a lot of stress on our economic scenario based on which we've provisioned for the reserve. And also, our asset quality management through our portfolio has always been the range that we have we have been foreseeing. And so, once again, with ample amount of provisions, we will do our best to focus on asset quality management. On some of the areas where there may be more concern compared to the past, as long as we put in corporate-wide effort, we believe that we will be able to keep that under control. And come end of the year, I believe that our outlook and projection will more or less materialize. And so, in terms of loan policy and managing the overall portfolio, we believe that we will have ample capability to be able to manage the issues. Thank you. Yes. Thank you for this opportunity. I just have one question. Well, based on your NIM and your outlook, can you tell us about the situation? What is the NIM outlook? Thank you for the question. Continuing from the previous year to this year, we have seen core deposits that are going down and the interest rate hike cycle, well, there are expectations that this will end. So, it has been already implemented into the market preemptively, and we are seeing the spread going down. So, it seems that we will have a difficulty in having a great NIM hike. However, with the key rate increase, we have some loan repricing that we can have. So, on a Y-o-Y basis, we can have a slight increase that we can expect for the NIM in 2023. Thank you. We do not have any further questions that's waiting in line, but just bear with us one moment before we close. While preparing for the earnings presentation, we believe there will be a lot of interest regarding the mid- to long-term capital management plan, additional provisioning, and we had this opportunity to discuss quite a bit about these items. As I would think that in terms of the financial performance itself, there won't be too many questions as they are quite clear in and of themselves. But we will still wait just a couple more seconds. With no further questions being submitted, we would like to now close the earnings presentation of KBFG. Thank you very much.
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Good morning, and welcome to the Regal Rexnord Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. Great. Thank you, Andrea. Good morning, and welcome to Regal Rexnordâs fourth quarter 2022 earnings conference call. Joining me today are Louis Pinkham, our Chief Executive Officer; and Rob Rehard, our Vice President and Chief Financial Officer. Before turning the call over to Louis, Iâd like to remind you that the statements made in this conference call that are not historic in nature are forward-looking statements. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results, and actual results could differ materially from those expressed or implied in forward-looking statements. For a list of factors that could cause actual results to differ materially from projected results, please refer to todayâs earnings release and our SEC filings. On slide 3, we state that we are presenting certain non-GAAP financial measures in this presentation. We believe that these are useful financial measures to provide you with additional insight into our operating performance and for helping investors understand and compare our operating results across accounting periods and in the same manner as management. Please see this slide for information regarding these non-GAAP financial measures, and please see the appendix for reconciliations of these measures to the most comparable measures in accordance with GAAP. Turning to slide 4. Let me briefly review the agenda for todayâs call. Louis will lead off with his opening comments, Rob Rehard will then provide our fourth quarter financial results in more detail and discuss our 2023 guidance. We will then move to Q&A, after which, Louis will have some closing remarks. Great. Thanks, Rob, and good morning, everyone. Thanks for joining us to discuss our fourth quarter earnings, and to get an update on our business, and thank you for your continued interest in Regal Rexnord. Last night, we reported strong results that evidence our transformation continues to gain traction. Organic sales growth of slightly over 4% for the enterprise reflects continued share gains and strong price discipline even as some of our end markets slowed. This share, we are gaining continues to be supported by our digital and e-commerce investments, new products and competitive service levels. This fourth quarter was also the eighth in a row of being price/cost positive, which, along with sizable M&A synergies, NPD mix-up and our ongoing 80/20 and lean efforts, drove 300 basis points of adjusted EBITDA margin expansion versus the prior year period. I was also pleased to see our cash flow performance improve in the fourth quarter, resulting in cash flow conversion of 165%. Despite this strong finish, we did fall short of what arguably was an ambitious goal for the year. While the supply chain is improving, during the quarter, it did continue to contain us while making it costlier to maintain high service levels for our most valuable Quant 1 [ph] customers. In aggregate, a very strong finish to 2022. I think it is also important to acknowledge the first full year of Regal Rexnord as we continue to manage our portfolio and drive significant shareholder value. Sales were up 37% versus 2021, with organic sales up 9% year-over-year. Adjusted EBITDA reached more than $1.1 billion. We achieved 33% adjusted gross margins, right on track to our plans, and adjusted EBITDA margins improved 230 basis points from 19% to 21.3%. Solid overall results. And for this strong execution, pursued with a sense of urgency as well as continued adherence to our Regal Rexnord values, I want to say a sincere thank you to our Regal Rexnord associates around the world. Now, I do want to take a moment and comment a bit further on cash flow because I am increasingly optimistic about our cash flow outlook. In addition to the EBITDA growth we expect in 2023, plus strong gains over the forecast period, we also see a significant opportunity to reduce working capital and especially inventory, both as the supply chain continues to improve and as we further mature our 80/20 and lean efforts. Our teams are becoming more disciplined about how they manage working capital. Some of this is happening through IT and logistics investments, such as a new global freight scheduling software, some is occurring through our M&A synergies. In addition, I am excited to announce that we added a new member to my leadership team, our Vice President of Strategic Sourcing, who is bringing over two decades of global sourcing and supply chain experience to Regal Rexnord, and who, I am confident, will help us improve our working capital performance, continue to expand our gross margins by lowering our input costs and enhance the service level improvements that are helping us gain market share by reducing our lead times. In the spirit of what gets measured gets done, we are complementing this stepped-up focus on cash flow by making working capital performance and resulting free cash flow a larger component of our leadershipâs 2023 compensation, creating a stronger link between incentives and targeted performance. Cash flow is a critical driver of our value. But it becomes even more critical in the context of the leverage weâve added to fund the Altra transaction, and I can assure you that my team and I will be over managing it. Turning to orders. We did see further pressure in the quarter, with daily organic orders down just over 10% on an FX-neutral basis. This was not a surprise directionally given softening macro indicators such as U.S. and non-U.S. PMIs, and what some of our large HVAC customers have been indicating on destocking. But, it was weaker than we anticipated in terms of magnitude as we entered Q4, particularly in residential HVAC. We do expect order weakness to persist in early 2023, especially in the first quarter when we face a tough compare. And with supply chain improvements, plus heightened macro caution, our customers are likely reducing their stocking levels further. That said, we remain cautiously optimistic about our top line prospects. Not only do we have a diverse set of end market with balanced early, mid- and late cycle exposures, but we continue to have an elevated backlog, still up nearly 50% versus early 2021 levels. And we expect significant tailwinds from new product launches in 2023. As a reminder, we aim to double our product vitality in the 2023 to 2025 time frame. We also have sizable self-help tailwinds from Rexnord PMC and Arrowhead synergies, both on cost and revenue, and then anticipate significant M&A synergy upside once we close Altra. Rob will provide further detail on all the moving parts plus our 2023 expectations for growth, margins and earnings in his section. But the bottom line is that our focus in 2023 and beyond remains on controllable execution between our ample backlog, helping new product pipeline, current and expected M&A synergies and significant ongoing 80/20 and lean initiatives, we have a tremendous opportunity to create value for our key stakeholders, our customers, our associates and our shareholders. And we believe this to be the case regardless of what the macro does. Shifting focus a bit. Iâd like to provide an update on where we are with the Altra transaction. Since announcing the acquisition on October 27th of last year, we secured financing for the transaction, saw approval of the deal by Altra shareholders and made nice progress on the regulatory front. We were very pleased with our early January financing activities, which involved raising $4.7 billion in, 3-, 5-, 7- and 10-year unsecured notes. The offering was greater than 4 times oversubscribed, which helped us achieve interest rates that were over 100 basis points lower than assumed when we announced the transaction. On the regulatory front, the waiting period on our U.S. HSR filing ended on January 12th, and a simplified regulatory review process was initiated in China in mid-January. China and other jurisdictional reviews remain in process, and we continue to expect that we will close the transaction in the first half of this year. We remain extremely excited about adding Altra to our Regal Rexnord team. We see tremendous opportunities to drive material cost and revenue synergies through this combination and create meaningful benefits for all of our key stakeholders. One of the many growth opportunities we envision with Altra is enhancing our industrial powertrain offering by adding certain capabilities that we lack, such as clutches, and expanding narrower parts of the offering, such as brakes. Meanwhile, our current powertrain team continues to see great momentum in the market. As a reminder, this cross-segment, cross-functional team is dedicated to selling integrated industrial powertrain solution, and its focused efforts are driving strong momentum selling these highly differentiated subsystems. Pictured on this slide is a recent powertrain win. In this case, our Regal Rexnord powertrains are running clarifying tanks that are critical components of a large municipal water treatment facility. Our content includes Marathon Motors, Rex and Hub City gearboxes, Falk couplings and Rexnord bearings, in addition to providing custom fabricated baseplates and bearing pedestals. In aggregate, a 7-figure project win for the powertrain team. What the customer needed and we were able to provide, is; first, integrated solution; and second, a solution that enhanced durability and energy efficiency. For our customer, this installation is over a $100 million project. So, they were eager to lean on Regal Rexnordâs application and powertrain expertise to provide these subsystems, plus commissioning so they could free up time to focus on other aspects of the project. In other words, we made it easier for our customer, and, at the same time, optimize the subsystemâs efficiency and durability. On top of that, our team brought this highly customized solution together with best-in-class lead times, doing our part to help keep the broader project on schedule. What we love about these differentiated subsystem sales is that conversations with the customer are more strategic, more focused on our technical capabilities and on efficiency, making this powertrain subsystem an absolute win-win for the customer and for Regal Rexnord, plus this win tees up other project opportunities and a strong MRO funnel for the future. And so congratulations to our powertrain team for acting with urgency to deliver this great result. And with that, Iâll now turn the call over to Rob to take you through our fourth quarter performance in more detail. Iâll begin by also thanking our global team for their strong execution, including delivering a very strong finish to 2022 in what remain a challenging operating environment. Now, letâs turn to our fourth quarter segment financial performance. Starting with our Motion Control Solutions segment, or MCS, organic sales in the fourth quarter were up 9.4% from the prior year. The result reflects broad-based growth, but with particular strength in the general industrial, energy, metals and mining, and aerospace end markets, partially offset by weakness in alternative energy, including lapping project activity in the China wind market. Adjusted EBITDA margin in the quarter for MCS was 27.8%, up 300 basis points compared to the prior year, primarily due to merger synergies and volume growth, partially offset by nonmaterial inflation, supply chain frictions, mix and FX headwinds. Orders in MCS for the quarter were down 7% on a daily FX neutral basis. In January, book-to-bill tracked at roughly 1.2. Turning to Climate Solutions. Organic sales in the fourth quarter were down 10.7% from the prior year. The decline was driven by global end market volume headwinds, particularly in the North America residential HVAC market as large HVAC OEMs took significant actions to reduce inventories. These market volume headwinds were partially offset by pockets of share gain. To put Climateâs fourth quarter top line results in context, the U.S. residential HVAC business faced tough comparisons, including 15% growth in the prior year quarter and a two-year stacked growth rate of nearly 40%. While some top line pressure in the -- while some top line pressure in the face of these difficult comparisons was anticipated, the headwinds in the quarter from OEM destocking activity were more severe than we expected. We believe a weaker macro outlook, plus temporary near-term uncertainty around how the January 1st implementation of the new U.S. energy efficiency regulations would impact regional channel inventory levels, prompted a more cautious stance from our HVAC OEM customers. This dynamic likely continues to weigh on the first quarter as well, but we are cautiously optimistic that weâll see improving conditions thereafter. The adjusted EBITDA margin in the quarter for Climate was 18.5%. While there was pressure on Climateâs EBITDA margins in the fourth quarter due to lower volumes and headwinds related to material inflation, nonmaterial inflation, supply chain disruptions and currency, the segment did realize a benefit related to the capitalization of freight variances that will unwind in the first quarter of 2023. We continue to see a path back to margins in the high-teens to low-20s during 2023, though most of the improvement is likely to occur after the first quarter. Expected drivers of the forecast improvement include: one, launching mix positive new products, in particular, our Frontier compressor drive; two, mix tailwinds related to new U.S. minimum efficiency standards, or SEER ratings, which should drive greater demand for electronic -- for our electronic variable speed motors; and three, significant productivity and restructuring initiatives, many tied to maturing 80/20 and lean efforts. Turning to orders. Orders in Climate for the fourth quarter were down 22% on a daily FX-neutral basis. Book-to-bill in January is tracking at roughly 1.2. Turning to Commercial Systems. Organic sales in the fourth quarter were up 5.6% from the prior year. Growth in the quarter reflects strong performance in North America general industrial and the large commercial HVAC markets, partially offset by headwinds in China. The strength we are seeing in general industrial continues to reflect meaningful share gains tied to investments we are making in digital and the e-commerce channel initiative. The adjusted EBITDA margin in the fourth quarter for Commercial Systems was 17.6%, up 510 basis points compared to the prior year, reflecting some moderation in freight costs along with strong execution of our 80/20 and lean initiatives, partially offset by commodity and other nonmaterial product cost inflation. Shifting to orders. Segment orders for the fourth quarter were down 17% on a daily FX-neutral basis, or down 10%, excluding orders in pool, which continued to actively rightsize inventory during the quarter. Looking to January, book-to-bill tracked at roughly 0.95. In Industrial Systems, organic sales in the fourth quarter were up 9.7% versus the prior year. Principal drivers include volume growth, largely tied to share recapture stemming from improved operating performance and service levels, along with end market strength in general industrial and data center. As expected, the business did see some weakening in China, which tempered the segmentâs growth. The adjusted EBITDA margin in the quarter for Industrial was 12.2%, an increase of 650 basis points versus the prior year period. We continue to be extremely pleased with the performance at Industrial, which we feel is on a sustainable path. Orders in Industrial for the quarter were down 5% on a daily FX-neutral basis. In January, book-to-bill was 1.0. On the following slide, we highlight some key financial metrics for your review. A couple of notable highlights. First, on the right side of this page, youâll see we ended the quarter with a net debt to adjusted EBITDA ratio of 1.2 times. Second, our free cash flow in the quarter was $169 million, which equates to a conversion rate of roughly 165%. Our team did a great job improving free cash flow performance in the quarter. And while the result left a shy of our full year conversion target, we see significant opportunities to augment our cash flows in 2023, in particular, by lowering inventories as the supply chain improves. As we stated previously, our focus will continue to be on paying down debt with the improving cash generation. Moving to the outlook, and please note that all of our adjusted earnings guidance excludes any impacts related to Altra. Letâs start with the top line. We defined our top line forecast by considering several factors: One, a weakening demand environment evident in our order rates; our record backlog; three, pricing dynamics; and four, continued success with our outgrowth initiatives, including expected new product launches, service level improvement and e-commerce and digital investments. To help illustrate how weâre thinking about market impacts in 2023, weâve included a table on this slide detailing our principal end markets and our current views on how each is likely to grow this year. As noted in the table, the weighted average of our underlying end market growth assumptions is a 3.5% decline in 2023. Beyond what end markets may be doing, we expect to deliver outgrowth of roughly 2 points, which equates to outperform in these markets by a little better than 50%. Our top line modeling also embeds a slightly positive impact from price, along with a modest headwind from currency, which brings our overall sales growth expectation to down roughly 1% at the midpoint of our range. At the EBITDA line, we anticipate delivering margin expansion of 50 to 70 basis points at the midpoint. Note that margin gains will likely be weighted to the back half of the year, with only modest improvements expected in the first half due to continued, albeit moderating supply chain challenges. Before leaving margins, a word on commodity inflation. While we saw prices of our principal commodities, steel, copper and aluminum, decline through the second half of last year, we are starting to see those prices moderate slightly higher coming out of January on a sequential basis. Our outlook assumes relatively neutral commodity costs in 2023 relative to the way we finished 2022. We also assume that we will remain at least price/cost neutral and likely slightly positive throughout 2023. Moving further down the income statement, we factor below the line items as detailed later in this presentation to arrive at a range for projected adjusted earnings per share of $10.05 and $10.85, or $10.45 at the midpoint. I will highlight that we have nearly $0.50 of incremental year-over-year net interest expense embedded in our estimates, which reflects higher benchmark interest rates. To be clear, our net interest expense guidance excludes any new acquisition-related financing costs, and is aligned with the interest expense on our current business that we saw in the fourth quarter of â22. In summary, we are choosing to air on the side of caution here as we start the year, but our confidence in the business remains extremely strong. We have line of sight to additional margin upside through our M&A synergy efforts, disciplined cost savings initiatives and a continued focus on 80/20 and lean. We are also gaining traction with our growth initiatives, especially our industrial powertrain cross-segment initiative, and we remain on track to double our new product vitality over the next three years, which is also expected to benefit our margins through higher mix. On this slide, as I referenced earlier, we provide some modeling items that should be helpful as you build out the income statement below the EBITDA line and model free cash flow. Again, our $105 million of guided interest expense is for our current business only and excludes all Altra-related impacts. Iâll wrap up by saying that on the whole, we are very pleased with the Q4 results and our teamâs ability to execute in what remained a challenging environment. While the macro outlook remains uncertain, our outlook for the company remains very positive, considering the tremendous amount of self-help we have in front of us on growth, margin and cash flow. Thanks for the first question. I appreciate it. Good morning, everyone. So, first of all, congratulations on the financing for the deal. It looks like good terms there. But in terms of the down 2% organic, I think thatâs the number youâre keen on here, down 1.5%, 2%. How does that look through the year? And Iâm just -- obviously, weâre cognizant of the challenges in 1Q, but any help on the phasing of that down low single digits would be helpful? Sure. Thanks for the question. Let me do it this way. Let me give you the full -- Iâll give you a guidance by -- for the full company and the way that should work, but -- and kind of how weâre expecting that to phase. But let me start by just giving you some segment guidance, and then what Iâll do is Iâm going to give you the full year, and then Iâm going to give you a little bit of direction on Q1 as the first half of the year, we expect to be relatively slow or slower, especially in Q1 and then more of the improvement coming in the back half. So starting with -- by segment, and Iâll start with the top line, and Iâll start by each segment, Climateâs first. And for each one of these, the way I would look at this is, Iâll give you the expectation thatâs embedded in our midpoint and then just plus or minus 200 basis points in the range. So, Climate down mid-single-digit; Commercial down mid-single-digits; Industrial up high-single-digit; and MCS up low-single-digit. So overall, down about 1% at the midpoint, again, plus or minus 200 basis points for the range. Now, before I get into Q1, let me also just finish this section up by giving you a bit on EBITDA margins. So, Iâll use â22 as a jump-off point to full year â22. For Climate, margins up 0.5 point, give or take; Commercial, margins roughly flat to up slightly; Industrial, margins up as much as 0.5 point; and MCS margins up between 50 and 100 basis points. Now, Iâm going to skip back to Q1 because it is unique. Similar to last year, where we had an outsized benefit of the cost roll, which was positive to the first quarter, this year, weâre seeing the opposite effect, right? Weâre seeing deflation, so itâs an expense versus income in the prior year. So with that being said, let me first start with top line. And Iâm going to give you these numbers -- these expectations, and think of this as more sequential to fourth quarter. For Climate, flat; Commercial, roughly down high single digit; Industrial, up high single digit; and MCF, down low single digit, again, sequential and also overall Regal Rexnord level down low single digits. So now let me move to -- similar to what I did on the full year, let me give you the directional guidance on EBITDA margins. So for Climate, and this is again sequential, to be clear, roughly down 5 points; Commercial, roughly down 3 points; Industrial, roughly down 2.5 points; and MCF, roughly flat. So overall, we expect to be down roughly 1.5 to 2 points. So again, first half, expect more pressure, especially in Q1 and more improvement in the back half. Hopefully, that is fairly comprehensive. Yes. The answer was a lot better than my question, for sure. But weâll kind of process this and come back offline. My follow-up question is on the Altra deal. The HSR waiting period over, is that equivalent to effectively getting sign-off from the -- on that deal? And is there a possibility this deal could close this start of the quarter? Because I know you said first half, but does that -- need to be one key close here? Yes. So Nigel, this is Louis. First of all, with regards to HSR, itâs a review process and the review process expired on January 12th. And so, thatâs the process. Specific to could this close in first quarter, potentially unlikely. We still have -- and regulatory really is the only outstanding item at this point, of course, because we had good success in the financing and U.S. HSR should be behind us. But we also have behind us Turkey, U.K. and Australia, however, still pending is EU and China. And as I said in my prepared remarks, China accepted a short form in mid-January. So, thereâs typically a 30-day period from that. We also received FDI approvals from Czech Republic, Italy and the UK, and outstanding from Australia and Denmark, France and Germany. So really still on track with what we expected, we believe, first half. And so certainly, Iâm giving you my thoughts that itâs likely second quarter, but weâll see. So just a clarification on all that detail, Rob, you gave. When you think about the underlying dynamics from an end market perspective, is the expectation that the -- what is the expectation for those end markets front half versus back half at a high level? Obviously, I appreciate all the finite detail in there, but just maybe bring it a little higher level and just talk about the broad-based expectations for the underlying dynamics as you work through the year, and whatâs embedded in guidance that way? Sure, Mike. And Iâll take this one. What we like about our portfolio is a very balanced early, mid and late cycle exposure. No question, weâre seeing slowing in that early cycle. Anything consumer-related is being slowing. And so residential HVAC, weâre thinking likely down high-single, low-double digit for 2023 and more weighted to the first half; pool down. Now pool -- residential HVAC is about 15% of Regal. Pool is only about 2% to 3%, but thatâs going to be about the same type of profile. Anything thatâs a little later cycle, though, weâre seeing acceleration bluntly. Aerospace is quite strong. We expect solar, alternative energy to be strong. And then kind of relatively flat would be the commercial space, hospitality, power gen. And we still feel pretty good about non-res construction. Thereâs some -- a little bit of noise in some of the indicators, but non-res construction should be pretty strong in this first half as well. So, I hope that helps, Mike? Yes. So basically, it seems like youâre saying, from a seasonal perspective, youâre going to get a lot of variance by end market, but youâre not expecting acceleration in any of kind of the shorter cycle, earlier cycle type things in the area where you might see a little bit of that extra strength of these longer-cycle things. So, not assuming some sort of recovery in the year in the areas where thereâs a little bit of stress thatâs being seen in the short term, correct? I would tell you, resi HVAC later -- fourth quarter of the year is we would expect it to see a little bit of a rebound. But otherwise, no, I think youâre off right on. We donât really see a lot of seasonality, though, Mike. I wouldnât reference this -- seasonality. But when you think about it -- a couple of other things Iâd just provide you. When you think about the strength of our backlog, up 45%, when you think about the comps, the stacking of orders for both our commercial and climate business has a 30% stack in fourth quarter. So, we werenât so surprised about orders being down in fourth quarter in those two segments. Overall, though, weâre forecasting, our viewpoint is our backlog will likely drop as the year progresses. The first half of the year, orders will be down high-single-digit, low-double-digit levels and starting to recover in third and fourth quarter. Thatâs very great context. And then, a follow-up is just on the success youâre having on new product side. Maybe talk about how the market is receiving some of the initiatives youâre putting out there and the confidence, I suppose, in that end market outperformance remains high. So any help on that side would be great. Yes. Our confidence remains quite high. Really, the only thing thatâs going to slow us down is the supply chain. And whenever you launch a new product, it takes a little bit longer and itâs a little tougher. Electronics continues to be a bit of a constraint for us. But, we have a partner OEM in our compressor drive. And so, we can accelerate that as fast as I can produce it. We have a partner OEM in our global motor impeller solution, a COPRA solution, where our partner OEM would take more than I can, capacity get out the door. Itâs a great product. Itâs a smaller footprint. Itâs more energy efficient than anything in the marketplace. This aligns very well with how we think about our subsystem solutions and driving differentiation to solve our customersâ problem. We come out with other products in the portfolio all around that approach. And so I feel our teams have done a great job over the last few years of developing a robust product road map. And weâre seeing launches come out that should help us overachieve market, and thatâs why weâre pretty confident in that 300 -- 250, 300 basis points of beat to market. Thanks. Good morning. And I appreciate all the detail. Curious about some of the book-to-bills in January with the 1.2s at MCS and Climate. I think Climateâs just kind of a wonky, denominator moving around quite a bit there. But maybe the MCS there speaks to some particular strength. Curious if you could comment on that. We saw a little bit more strength in our order rates at MCS than we anticipated in January. Youâre spot on. Aerospace is strong. Thereâs no question. We get larger blanket orders there. Weâve got a large order in January. We got a large order as well in solar in January. So, I think if you take those out, overall, itâs not a big surprise that book bill. The other -- on Climate, just clearly, youâre right, it is a little wonky. The other wonkiness is that we did shut down the facility the 1st week of January, given the demand levels, and we thought -- the facilities, I should say. We thought that was the most efficient manner to manage the order rates. And so, thatâs why itâs 1.2 book bill. Okay. Great. And then, Louis, you mentioned early in the pitch about significant upside to the synergies once closed Altra. I think that comment ties to the relative progress towards the original $160 million target? No, it really ties to simply that once we close, weâll have access to that $160 million target. I wasnât referencing yet that we have line of sight to anything significantly more than that. Of course, we have not come out with growth synergies, which we are really bullish about with this transaction, and we wonât come out with until probably 6 to 9 months after we close, but thatâs the whole reason why weâre doing Altra is to drive the accelerated growth for Regal. Weâre very pleased with our growth synergies out of the MCS PMC transaction of last year. They achieved north of $25 million, which was right on track of what we were looking for. So, right now, though, nothing more to guide on synergies. Yes, itâs $50 million incremental. Some of that is carryover and then plus new. So, itâs about $20 million of carryover and $30 million of new. Hi. This is Matthew Shaffer [ph] on for Julian Mitchell. My first question would be on China. You guys cited some pressures in Commercial and Industrial in the quarter. Can you maybe flesh out your expectations for China in 2023? Yes, happy to. Yes, definitely, there was some pressure. I think our teamâs performed extremely well, though. And you see it in the results of Q4, even given the fact that we did have some operational pressure in Q4 and orders slowed. Now, we do not expect -- and by the way, all of our operations are fully operational at this point in China. Supply chains are a little bit still constrained, but we expect a nice rebound coming out of Chinese New Year. And although weâre not forecasting a lot of strength in China in â23, I think it could surprise. Right now, itâs relatively flat year-over-year is our forecast. I think it could surprise China, always surprises me on the upside. Okay. Thank you. And then just one on pricing, you guys donât give much price disclosure, but are you still expecting to hold or grow price in 2023. And then what gives management the confidence that you guys will be able to do it potentially if there is more deflationary environment? Yes. Matthew, this is Rob. Thanks. So absolutely, we do believe that we can be price/cost positive, slightly positive, and thatâs basically embedded in our guide and what we had assumed. You asked about what gives us confidence? Well, first of all, the fourth quarter was the 21st quarter of being at least price/cost neutral, and the eighth quarter where weâve been price/cost positive, despite the challenging environment that weâre in. So weâve got a really strong track record of holding on to price. If you go back and, historically, youâll see that weâve been able to do that, especially in distribution and the aftermarket side. Remember, this is all net of MPF that Iâm talking about here. Weâve got a -- two-way material price formula is on about 20% of our business. So thatâs working in the other direction on us right now, but rollover, certainly our carryover benefits from price moving into â23 is the other side that helps offset some of that impact. So hopefully, that helps. Thanks for all the detail. That was really helpful. The one thing I want to zero in on is climate, because I know you had some noise in the margins this year. And I think youâre saying, for the full year, revenue down mid-single digits, margins up 50 bps, but your 1Q margin is down pretty substantially sequentially and year-on-year. So, Iâm just trying to understand kind of in a decline market and the tough 1Q, kind of how you get margins up on a full year basis? Yes. So first of all, the margin drivers on a full year basis are -- obviously, youâve got the volume piece go in one direction. But then weâve got new product development, like the new Frontier product that I mentioned in my prepared remarks. And then we still anticipate weâll be price/cost positive despite the fact that the MPFs are moving in a downward direction. And so for the -- from a full year perspective, we absolutely have line of sight to see in those margins up that 0.5 point give or take. I mean, that is absolutely where weâre modeling at this point. Remember, also, Jeff, weâre going to start the year a bit conservative here. And so we think there could be additional opportunity here for Climate as we move through the year. Jeff, Iâll add a couple of more things and Robâs spot on. When you think about â22, we did a lot to service our customer in â22, and our supply chains are balancing out. And so, weâre not going to have as much of that headwind around spot buys and premium freight. And just bluntly, weâre continuing to drive 80/20 and lean that is helping us in being more productive and more efficient. And so, overall, the challenge of Q1 is really just to compare year-over-year in the cost roll. We believe Climate will strengthen as the year progresses. And one more point, and I failed to mention this is that when youâre dealing with the MPS and they move in a downward direction, it does help your margin rate as you move through the year. So just one other point, I think. Okay. Thatâs great color. Maybe just maybe two quick ones in. One, I appreciate the free cash flow comment and targets. Maybe just speak to what you think free cash flow conversion can be as you work on that working capital? What you think the source from all the working capital build was in â22 can be in â23? And then just any update on what youâre thinking about Altra accretion for 2023, just given the much favorable interest costs that you got? Thanks. Sure. So, Iâll take those in order. First, we -- when it comes to free cash flow and trade working capital and where we expect to see a significant source of cash as we move into â23 is going to be in inventory. And that, as weâve said, as the supply chain normalizes. And we estimate that that -- in 2023, we estimate that somewhere in the range of $150 million to $200 million of -- as a source in â23. And then, as we move forward into â24, another $100 million, again, as we have this elevated inventory level and that supply chain starts to normalize. So, $250 million, $300 million range over the next 18 to 24 months is how weâre thinking about it. We know the timing is a bit out of our control, but those are the levels that weâre talking about at this point and feel very confident in our ability to execute on that based on the way that we manage the business for sure. Letâs talk about accretion now. So, we see, based on the -- we had originally modeled, as we mentioned, rates, interest rates on an average of about 7.5% on the bonds, and weâre now roughly at 6.2% on a weighted basis. So that 130 basis points certainly helps in terms of the interest expense that weâll be seeing flow through the business and that absolutely impacts accretion. And so, we expect the next 12 months, post close, to be -- the accretion to be around 8%, and itâs up about -- from about 4% at announcement. And then certainly, a 2024 estimate at this time somewhere in the mid-teens. So, hopefully, that helps. Thanks for taking the question and for all the details so far this morning. I guess, thinking about the sales comments and you provided some market commentary, some of your organic commentary. I guess, baked into that organic outlook, how should be thinking about backlog burn, kind of whatâs baked in versus what could be upside, some the risk of cancellations? Any comment on kind of how the backlog fits into that guidance outlook would be great. Yes. So, good morning, Chris, and thanks for your comments. We are expecting a burn down of our backlog in order to achieve those numbers. Now, Iâll tell you, orders were slightly stronger in January than what our modeling is for that burn down of backlog. Now, itâs one month. Weâre going to be measured in our approach here, but we can achieve our guidance with a mid-teens reduction in orders in the first half and an improvement in the second half, and we can meet our guidance through the backlog. And so, thatâs how weâre modeling it right now. If orders are a little bit stronger, then thatâs going to give us a little bit more strength. Got it. Understood. And then, just to put a point from the destocking commentary, it seems like that was focused specifically on climate and HVAC, again, given the order strength and backlog numbers for MCS. Thereâs no destocking going on in industrial or the motion control business right now, correct? It just seems like, again, your major distributors were all kind of building inventory still. Just maybe some comments on how you see channel inventory on more of the industrial and MCS businesses would be great. Yes. I think thatâs probably about right. We see visibility through our distribution partners, their sales out, and they still seem to be fairly strong. We do not see destocking. The shorter-cycle products, the early-cycle products, bearings is an indicator and perhaps thatâs a little bit slower. But overall, like I said, we were pretty pleased with our MCS order rates in January. And so, I think youâre spot on. Weâre not seeing destocking in industrial, nor are we seeing destocking in MCS. I would throw pool into your -- where we are absolutely seeing destocking, and we expected it, but itâs significant, and then, like you said, residential HVAC. This concludes our question-and-answer session. I would like to turn the conference back over to Louis Pinkham for any closing remarks. Thank you, operator. And thanks to our investors and analysts for joining us today. In summary, the Regal Rexnord team is continuing to deliver very strong performance. While we are taking a measured approach to our 2023 guidance as we head into a period of weaker macro activity, I am confident that our Regal Rexnord team can continue to create value for our customers and shareholders and open up attractive new opportunities for our associates, all by focusing on our controllable execution. We are fortunate in having so many value-creating opportunities to pursue, a clear path to higher outgrowth, plus material margin and free cash flow upside. With the highly anticipated addition of Altra, our opportunity set becomes even wider. So much to be excited about at Regal Rexnord. Thank you again for joining us today, and thank you for your interest in Regal. Have a good day.
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EarningCall_699
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Good afternoon, and thank you for joining today's fourth quarter 2022 conference call. As you read our earnings press release and as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control and which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in our earnings press release, those described in our annual report on Form 10-K for fiscal 2021 and those described in subsequent filings with the SEC. You should consider all forward-looking statements in light of those and other risks and uncertainties. Additionally, we will be providing certain non-GAAP financial measures during this conference call. Our earnings press release and the financial supplement posted to our IR website today, each provide a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures. On the call with me today are Jeff Andreson, our CEO; and Larry Sparks, our CFO. Jeff will begin with an update on our business and a review of our results and outlook, and then Larry will provide additional details of our fourth quarter results and first quarter guidance. After the prepared remarks, we will open the line for questions. Q4 revenues of $302 million, moderating 15% from our record third quarter. As we indicated in our January 10 preannouncement, we witnessed further weakening in customer demand in the last month of the quarter. So while we had previously expected to report a decline in sales for both Q4, as well as the current quarter, our actual results and current forecasts indicate quarter-over-quarter declines that are modestly higher than what we were expecting a quarter ago. Not surprisingly, this change in the near-term business environment has been echoed by leading equipment OEMs, with significantly reduced shipment levels and build plans expected for the March quarter. The current expectation is that following the first quarter decline, industry shipments should stabilize somewhat and we should see a relatively balanced WFE demand environment between the first and the second half of 2023. As we reflect on 2022, which was a record year for WFE, we reported strong year-over-year revenue growth, expanding gross margins and record earnings, all while navigating through a highly dynamic and often challenging business environment. We grew revenues by 17%, which represented organic growth of more than 10% in addition to the full year impact of the acquisition of IMG. This compares to overall WFE growth in the high single digits. On the last quarter's call, we discussed the softening business environment expected for 2023 and the drivers for our revenue that should result in our continued outperformance versus WFE in the coming year. In particular, we discussed our reduced exposure to the memory market, our increased exposure to EUV lithography and our expectations to continue gaining market share and winning new product evaluations. All three of these drivers continue to be very much intact today. First, we continue to estimate that our exposure to the memory market fell to below 40% of our revenues in 2022. Current expectations are that memory WFE could be down as much as 50% this year, which is higher than we expected a quarter ago. As a result, even though foundry and logic capital spending is expected to hold up better than memory this year, the worsening memory market has certainly led to overall cuts and revenue expectations for 2023. Next, we continue to forecast growth in the part of our business that is tied to EUV. The WFE market is currently experiencing an unprecedented bifurcation and outlooks between lithography and the other major segments of WFE, such as etch, deposition and process control. For example, within the overall WFE outlook calling for a year-over-year decline of 20% or more, revenues in the lithography segment are expected to increase by 25%. This means that the rest of the market or non-litho is expected to be down in the range of 25% to 30%. And while we steadily increased our share of lithography market over the past several years, it continues to represent less than 10% of our revenues, and therefore, the majority of our revenues will be impacted closer to the 25% to 30% range declines that are expected for non-litho WFE. We continue to expect three primary offsets to this forecast that can help add some resilience to our revenue performance in 2023. The first is clearly the continued growth expected in our gas delivery business serving the EUV lithography market. The second is the portion of our revenues from the IMG acquisition that is independent from the semiconductor industry. While a small piece of our overall revenues today, the IMG sales forecast to areas such as medical, industrial and aerospace are holding up better than WFE in 2023. And lastly, we continue to expect to benefit from success in gaining market share and winning new product evaluations. Before providing an update on our share gain initiatives, I'll also add a fourth potential offset, which is that our revenues tend to recover more sharply when industry spending rebounds. Current expectations call for a bottoming in non-litho WFE shipments around midyear, followed by the beginning of a recovery. Depending on the slope of the recovery, we could see a material improvement in customer demand towards year-end, and that would, therefore, be a fourth offset to the 25% range declines expected this year, which brings me to an update on our share gain initiatives. Historically, we have taken advantage of these slowdowns in industry demand to drive market share gains as our customers are able to focus more resources into new product evaluations and qualification. Our areas of focus remain: qualifying more of our internally developed machining components. We have several opportunities that we are quoting this quarter and hope to see first revenues in the second half once qualified, leveraging our global weldment footprint to gain additional share. Qualifying our next-generation gas panel, we expect to ship a third qualification unit by midyear and qualifying our chemical delivery systems as well as developing new components that address this market. Beyond these, we are continuing to work with the customer on a gas delivery solution that serves the growing silicon carbide market and expect to deliver our first unit for qualification on late Q1. So our focus turns to the expected spending environment over the next several quarters in our ability to manage our variable operating model to adjust to lower levels of WFE demand. We have executed reductions in our workforce to align to the business volumes we expect in 2023 across our global footprint. We have always maintained good discipline on operating expenses, and we'll continue to invest in our R&D programs and optimization of our capacity to ensure we can support the future growth in the business. In 2023, these continued investments will, by definition, result in a more limited reduction in operating expenses as compared to the levels of revenue decline, as Larry will discuss later. We are an essential part of our customers' growth plans as we look beyond this current downturn. And just as they will continue to invest for the future, we will as well, which in turn will drive strong operating leverage as we come out of this temporarily weak business environment. In the meantime, we are confident that we will show solid financial results and strong cash flow performance during 2023, which, by the way, is expected to be the third largest WFE year in our industry's history. Thanks, Jeff. First, I would like to remind you that the P&L metrics discussed today are non-GAAP measures. These measures exclude the impact of share-based compensation expense, amortization of acquired intangible assets, nonrecurring charges and discrete tax items and adjustments. There is a very helpful schedule summarizing our GAAP and non-GAAP financial results, including the individual line items for non-GAAP operating expenses, such as R&D and SG&A, in the Investors section of our website for reference during this conference call. Fourth quarter revenues were $302 million, up 5% from Q4 of last year and down 15% from our record third quarter. Even though revenues declined more than expected, gross margin of 16.7% represents flow-through of approximately 25% on the revenue volumes compared to Q3, which is consistent with our expectations going into the quarter. Q4 operating expenses were $23.4 million, slightly higher than forecast, primarily due to an increase in R&D investments in support of our new products. The resulting operating margin was 8.9%. As a result of higher interest rates, interest expense increased to $4.2 million in line with our expectations while our effective tax rate was lower than expectations at 7%, reflecting the revised full year effective rate of 9%. The resulting EPS for Q4 was $0.72. Now I will turn to the balance sheet. As expected, cash conversion of working capital improved again in the fourth quarter, and we generated $32 million of free cash flow. Cash from operating activities was $39 million and CapEx for the quarter was $7 million. Cash flow from operations benefited from a $47 million decline in accounts receivable and receivables DSO were 41 days compared to 47 in Q3. Inventories were $284 million at year-end, $7 million lower than Q3 with turns of $3.5 million. Total cash was $86 million at quarter end, up $30 million from Q3. And total debt was $303 million, down about $2 million from Q3. Now I will turn to our first quarter guidance. With revenue guidance in the range of $210 million to $240 million, our Q1 earnings guidance is $0.19 to $0.37 per share. The midpoint of revenue guidance at $225 million reflects about a 25% decline from Q4. At this revenue level, we are expecting gross margins in the range of 15.5% to 16%, which incorporates our recent new and previous cost reduction action. The result is an improvement in flow-through on the lower revenue volumes to about 20% compared to 25% in Q4. At this time, we expect operating expenses to decline to approximately $21.7 million in Q1 through a combination of headcount and other controllable spending reductions. We will continue to maintain our R&D investments in support of new product programs with the majority of the quarter-over-quarter spending reduction coming from G&A. We will continue to invest in new product programs and critical IT infrastructure, and currently expect our quarterly OpEx run rate to remain around $21.5 million to $22 million for the balance of the year. We expect our interest expense will be $4.9 million in the first quarter, reflecting the continued increases in interest rates. Our tax rate in Q1 is expected to be 10%, and we estimate our fully diluted share count to be approximately $29.4 million. Thank you. We will now be conducting a question-and-answer session [Operator Instructions] And the first question comes from the line of Brian Chin with Stifel. Please proceed with your question. Great. Good afternoon. And thanks for allowing me to ask a few questions. Maybe, Jeff, just to kick things off, it sounds like â and just correct me if I'm wrong here, but it sounds like you said maybe revenue could drift a little bit lower in Q2 in terms of that midyear commentary about shipments, maybe bottoming. Can you give a sense of â that's roughly accurate percentage-wise, how closer are we to maybe the trough here in Q1 relative to maybe what you think in Q2? And then can you also wrap that around how you would characterize your customers' inventory levels relative to other slowdowns and kind of whether you think your shipments trend at this point pretty much in line with theirs. Yes, good question. So at this stage, and I think given our visibility, we kind of see the two quarters relatively the same, I would say, if we â it depends on what was in Q1. If things pull forward, then maybe it moderates down. If things flatten a little, maybe it moderates up or something. But we see them pretty similar right now. So we see the first half is the low point. And whether I can call it Q1 or Q2 exactly now I can't, but I think they're very close and very similar. Customer inventory. I would say when you look at gas panels, I'd say it's pretty muted. Most of that, we were kind of chasing demand to some degree and staying up and close. Most of the impact will be in the component side. And as I have said in the last conference we attended in general in the last call is that we think that will be less of an impact than we saw in the 2018 downturn, I think, it took a while for the component business. I would say part of our miss this quarter where we preannounced some of that was in the components being more soft. And so we've already seen some of that, but I don't think it will be the depths we've seen before. So our customers probably will do some inventory adjustments, as you guys can see their inventory levels. But I think it will be a less impact than we saw in the last one. Okay, that's helpful. And then, Jeff, I think in your remarks, you referenced, I guess, some optionality whereby revenue could pick up prior to year-end. What are you looking at that provide some optimism here? Is it more memory, advanced logic foundry, trailing edge focused? Or were you commenting more in reference to visibility you have into company-specific span expansion initiatives? Well, what I would say is the comment was largely around if we're going to see 2024, and I would say most people think that will be up today, well, we're ahead of that when it comes to providing our components, have the longest lead time in what we deliver. And then as you know, our gas delivery and chemical delivery usually is kind of leading by about a month. So we'll see it a little sooner, and that's what it's meant to say. So depending on when we see the uptick, we should see a quicker reaction than maybe our customers' revenue shift. Maybe one last thing for Larry real quick. Clearly, strong cash flow generation in Q4 and receivables came way down. Do you think inventories â can we look for inventories to come down and continue to generate pretty good working capital cash flow here even with the step down in revenue in Q1? Yes, that's our expectation over the next couple of quarters is to drive that inventory down. It came down a little bit in Q4, but we expect that to come down more significantly in the next couple of quarters. Hey, guys. Just wanted to ask relative to last quarter. You sort of talked about the ability to outperform WFE by about five points. It sounds like on this call, you're saying, hey, maybe you don't outperform all of WFE because the strength in lithography, but it still sounds like you're confident in outperforming the nonlitho WFE of down 25% to 30%. So, if we're thinking about the year, would I be correct in thinking that something in the down 20%, 25% would be the right ballpark based on where you sit today? Well, I'd say we see the market down 20% to 25%. So, maybe when I talked about the outperformance of 5%, it's really around â that includes the EUV lithography performance, market share gains in that. So, it depends on where the market ends up, but we think we'll be about five percentage points better based on some of that, the IMG side of the business that isn't floating down and things like that. Sorry, Jeff. I just want to make sure I'm very clear. You still think you can outperform total WFE by five points? Or do you think it's the nonlitho portion of WFE? No. No. Thank you for the clarification. And then the second question, Larry, you had mentioned seeing a 20% fall-through in the March quarter versus previous expectations of a 25% fall-through on incremental revenue. Do you expect that 20% fall-through to continue into future quarters? Or does that 20% fall through really reflects some of the cost reduction activities? And then as we get into the second quarter and beyond, we should sort of think about going back to that 25% fall-through whether revs are up or down in subsequent quarters? Well, I think the â as we said before, we started at 25%. We have a little bit â about between 20% and 25% depends on product mix and some of our share gains, so I'd say we're probably somewhere in between 20% to 25%. 2020 really does reflect a bottoming out of some of our product mix, and then we did some pretty significant cost reductions starting in the quarter that we're going to see come to kind of full benefit this quarter if that helps. It does. And then last for me, Larry or Jeff, can you talk about the company's plans to perhaps get more aggressive on debt paydowns, interest expense is almost at $5 million a quarter, and it feels like we may have another one or two rate hikes still to go. Do you think with the strong cash flow generation that you'll be more aggressive with debt paydown over the next couple of quarters? Yes. I think that right now is kind of our primary plan. As we generate cash, we know where we can run our business at. You guys have seen it. And so as we start to generate cash and pull that inventory down, we're going to pay off some of the debt along the way. Yes. Thanks for taking my question and appreciate all the color so far. I wanted to just follow up on some of the dynamics that are going on in the business in the very near-term. Jeff, I think you mentioned that one of the things that you were seeing is relative strength in gas delivery and EUV. So as we think about the way the segments are performing, is it fair to think that gas delivery would be performing relatively well versus some of the other segments? Or how do we think about the gives and takes across gas delivery, chemical delivery, weldments and precision machining? Okay. I'll take in one piece at a time. I think with EUV, we clearly expect a pretty significant growth year for us, largely aligned with comments that our customers made. Gas delivery, I think, will have less of any kind of inventory adjustment. So I would say our components will probably drop down early and then recover a little quicker in the back. So it's a bit of a mixture of different types of business and stuff. But I think in general, we'd see the second half, we'd hope to see our components business grow because that's where a lot of focus of our share gains are at, and maybe in the front half, gas will perform better than the other segments of the business. Got it. And then on the â just staff management, staff planning, Larry. Did you say that you put through the more SG&A-focused reductions already? And is that in the first quarter's OpEx guide? Is there anything left to do? And are you saying that you're happy with where staffing is on the manufacturing side, and that will just be steady here at current levels as we go through the trial? Yes. I think we're pretty much done. We did some of this late in December time frame and then very early January, so we're pretty complete regarding the personnel actions. And we've not only just people impacts, but mandatory shutdowns and overtime reductions. And so I'd say the majority of that is showing up in the Q1 results both on the cost of sales side and on the OpEx side as well. Late in the year we began kind of the rightsizing with temporaries and things like that. We did have to impact some RFTs in early January, unfortunately. But we've largely rightsized them to a large degree to reflect kind of the revenue with some potential burst capacity in our manufacturing operations. And then in OpEx, as Larry always reminds us is we're pretty OpEx light. We're not very extravagant that way, but given the run rate that Larry put in his comments you'd see that's around a 5% year-over-year kind of target reduction. And we've got those plans in place. Got it. And Larry, I typically think of gross margin having the highest correlation to volume, and you've been clear with the revenue guidance for the quarter. And Jeff noted that 1Q, 2Q, we might bounce up or down a little bit, but that looks like a bottom. The question is, as we think about the contour of gross margin through the year, is there anything happening from a one-off basis that would impact how we think about the gives and takes, either from the first quarter to the second quarter or beyond just a potential volume benefit, things that could happen in the back half of the year? I think if you look at Q1 to Q2 and assuming revenue is fairly consistent and assuming the product mix between gas and the components business, we wouldn't see much of a change between what we've guided in Q1 and what we would expect in Q2. I think what happens in the second half, one of the benefits, and Jeff mentioned this is that we do expect to drive a lot of share gains, primarily in the components business with some of the new product wins and some of the things that were in the qualifications now. So we would expect that the component mix of our business would improve and the fact that some of the inventory impacts that we saw in the fourth quarter and kind of early in this year would moderate some. So we do expect a little bit of a tailwind when it comes to margin going to the back half of this year. That's helpful. And then just clarifying that new product win point either for you or Jeff, can you just put some context around how material the wins are that you're seeing now that could start to impact the business in the second half of the year relative to prior years? Any context on, where the shakes out top of the list or bottom of the list would be helpful? Thank you. Yes. I'll give you without being too specific. I mean, obviously, we're trying to focus on machine components and things like that, and that's usually in kind of the high 30%, low 40% gross margin. So if you look at the outperformance we were talking about, I'll call it, largely in the nonlitho area, a lot of that is focused around that particular area. There is some incremental I'd call it subassembly and gas that we can probably pick up but largely focused on getting new components qualified in the second half. And that will â that like Larry said, that's a strong tailwind for us. When we see that side of the business grow, the incremental flow-through is much higher than what we've seen on the average going down, so. Yes. Thanks for taking my question. I was wondering you gave us an assortment of reasons why your non-core businesses could uptick, I guess, in the back half of the year. Could you perhaps rank order what you think the â I think you gave us four reasons. What do you think are â what is the biggest to largest opportunities of those offsets that you talked about? Yes. I would say probably in rank order without sizing them specifically, obviously, we have the EUV growth that's different than the overall WFE growth. We also have incremental market share wins largely around â the next biggest one will probably be around qualifying components. And then kind of bringing up the end is probably more around the chemical delivery. Okay. And I've asked this question in the past, and I'll just ask it again just sort of fresh commentary. As far as the new gas panel product goes you talked about, I think, shipping another evaluation system in the middle of this calendar year. When would you expect the product to start to generate some significant revenue? And is this something that your customers will easily adopt? Or it's just â once you have a new product that's improved with your own components, does it take a lot longer to get into production? I'm just looking for timing? Yes. I would say I'm going to answer it in two pieces, a fully kind of integrated gas panel, which has the bulk of our components on there. These are the two evals we have out there. The earliest I would probably expect one to be qualified and start to get on a platform of any significance would be late in the year. But the other one kind of following behind that. The midyear one will probably take up to a year. And then having said that, as we've talked in the past, components that we're putting on there can be also integrated into existing gas delivery. Those I would say some of those qualifications are done, and we'll start to implement some of those in the first half of the year, and there's more that we're working on to try and implement and qualify, as I said in my prepared comments for the second half of the year. So that's kind of how we see revenues associated with those big moving pieces. Okay. Final thing for me is you talked about a second half recovery for the industry. I'm assuming you're getting that feedback from your customers. Are there any other â I guess the simple question is, what gives you confidence that we will see a second half ramp? And that's it for me. Thanks. Yes. Well, I mean, I think it's the slope of the recovery. I think what we're trying to indicate is that we kind of â we see the bottom being the first half and how big the second half of the year will probably, for us, at least be contingent on how the market recovers in overall. But we do see a modestly up back half from the front half today. All right. This is Robert Mertens on behalf of Krish. Thanks for taking my questions. Just first, in terms of scenario this year of WFE contracting, say, the 20%, 30%. And I know you have the EUV portion of the business. Just how would you sort of frame inventory drawdown by customers? I'm just trying to make sure that I have the right numbers in terms of how you view your business versus the overall WFE market? I think we've talked about the â you're going to have to talk about them in lithography and nonlithography segments. And we're going to see a fairly healthy percentage growth in EUV. And in relation to inventory, I don't know if you're talking about the deferreds that have been talked about that one of our customers are not, my comments will be really around system shipments. The other side of that is the nonlitho WFE, this again we've talked about outperforming on the downside by going down about 5 percentage points less than the overall market for the reasons we've talked about on the call. From a customer-specific inventory, they will rightsize their component inventory. We've already seen some of those effects. My belief is that, that will be largely done in the first quarter and really occurred late in the fourth quarter as well. But it may roll a little bit into the second quarter, it's hard to tell at this point. Gas panel inventory is not generally hung up between two quarters and two years. But there's always a little bit when you have these sharp downturns. So I don't know if that answered all your questions, Robert. No, that's definitely helpful. And then maybe just another one around your earlier pre-announcement, just when you start experiencing the incremental weakness in the quarter, and was it right to say that, that was primarily in the components portion of the business? No. We saw â I would say it's largely tied to just the memory softness. Most of what we saw was memory, but not 100% of it. Components was a fair chunk of it, but the gas panels also saw reduction for sure. Thank you for taking my question. I've just two quick questions. First, so any update on the supply chain constraints. I remember last quarter we saw much improvement but still have some overhang. Just wondering how â are those challenges are now completely behind? And is any implication to the, of course, marketing or the ability to deliver things like that? Thank you. No, I'd say the supply chain has been pretty good position right now or health. It's not â it's never perfect. So there still are pockets that we're working, but I would say those are things that we're working out months in advance looking ahead. But I'd say largely the component suppliers to us are performing pretty well, given the downtick in demand, there's plenty of capacity out there. So we're not seeing much in the way of supply chain. And so it's not going to be something that necessarily we can see impacting us today. Got it. And then a follow-up on the next-generation gas panel product. So first, I think you mentioned the third tool is expected to deliver by midyear. And any color around whether it's existing customer or new customer, and what type of application are useful? And then I think for the first Q â previous first Q, it seems like it could start to see the follow-on order in 2024. So I just wondered, like how much the revenue opportunity could be in 2024 for the next-generation gas panel? Hans, good question. We've said that the â of the first two, one is a new customer and one is an existing customer. The third one would also be to an existing customer. The timing and the size, I mean, our gas panel business is fairly significant. It's hard for me to put a number on it at this stage until we actually know what we're going to be qualified on. We do know the application. Unfortunately, I can't share that on a conference call. But the opportunities will be measured in tens of millions of dollars by platform if we win a whole platform on an annual basis. Thank you. At this time, we have reached the end of the question-and-answer session. And I would like to turn the call back over to Jeff Andreson for closing comments. Thank you for joining us on our call this quarter. I'd like to thank our employees, suppliers and customers for their ongoing dedication and support as we continue to navigate this highly dynamic business environment. Our upcoming investor activities include the Susquehanna Technology Conference being held virtually on March 3rd. We also look forward to our next quarterly earnings call scheduled for early May.
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